Chico’s FAS(CHS) - 2024 Q3 - Quarterly Report

PART I Financial Statements This section presents the unaudited condensed consolidated financial statements, including income, balance sheets, cash flows, and notes, for the periods ended October 28, 2023, and October 29, 2022 Condensed Consolidated Statements of Income The income statements show a decrease in net sales and net income for the thirteen-week period, while the thirty-nine-week period saw a slight increase in net income despite lower sales Income Statement Highlights (Thirteen Weeks Ended) | Metric | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | | :--- | :--- | :--- | | Net Sales | $505,126 | $518,332 | | Gross Profit | $196,449 | $207,440 | | Income from Operations | $10,529 | $31,599 | | Net Income | $5,040 | $24,619 | | Diluted EPS | $0.04 | $0.20 | Income Statement Highlights (Thirty-Nine Weeks Ended) | Metric | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | | :--- | :--- | :--- | | Net Sales | $1,584,995 | $1,617,967 | | Gross Profit | $638,358 | $655,519 | | Income from Operations | $110,409 | $135,223 | | Net Income | $104,270 | $101,512 | | Diluted EPS | $0.85 | $0.82 | Condensed Consolidated Balance Sheets The balance sheets show a strong liquidity position with reduced long-term debt and increased shareholders' equity as of October 28, 2023 Balance Sheet Summary (as of October 28, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Assets | | | Cash and cash equivalents | $101,944 | | Inventories | $342,721 | | Total Current Assets | $529,634 | | Total Assets | $1,264,715 | | Liabilities & Equity | | | Total Current Liabilities | $442,341 | | Long-term debt | $24,000 | | Total Liabilities | $842,120 | | Total Shareholders' Equity | $422,595 | Condensed Consolidated Statements of Cash Flows Cash flow statements indicate a decrease in net cash from operating activities for the thirty-nine-week period, with significant cash used in financing activities Cash Flow Summary (Thirty-Nine Weeks Ended) | Activity | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $35,518 | $83,631 | | Net cash used in investing activities | ($35,435) | ($41,728) | | Net cash used in financing activities | ($51,516) | ($39,282) | | Net (decrease) increase in cash | ($51,433) | $2,621 | Notes to Condensed Consolidated Financial Statements The notes provide details on significant accounting policies, including the pending merger agreement, debt facilities, and a new supplier finance program - On September 27, 2023, the Company entered into a Merger Agreement to be acquired by Daphne Parent LLC for $7.60 per share in cash. The transaction is expected to close by the end of the first calendar quarter of 2024[98][100] - As of October 28, 2023, the company had $24.0 million in net borrowings outstanding under its Credit Agreement, with an available additional borrowing capacity of approximately $265.1 million[147] - The company initiated a supplier financing program in Q3 2023. As of October 28, 2023, the outstanding payment obligation under this program was $2.2 million[149] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial performance, strategic pillars, and solid financial condition, noting the withdrawal of the fiscal 2023 outlook due to the pending merger - The company's growth strategy is focused on four pillars: (1) customer led, (2) product obsessed, (3) digital first, and (4) operationally excellent[171] - Due to the pending acquisition by Sycamore Partners, the Company is not providing a financial outlook and has withdrawn its previously issued outlook for fiscal 2023[164] - The company ended the third quarter with $126.6 million in cash and marketable securities, total liquidity of $361.7 million, and $24.0 million in long-term debt[160] Results of Operations Third-quarter net sales and gross margin decreased due to lower comparable sales and higher occupancy costs, with merger-related costs impacting profitability Net Sales by Brand (Thirteen Weeks Ended) | Brand | Q3 2023 (in millions) | % of Total Sales | | :--- | :--- | :--- | | Chico's | $252 | 49.9% | | WHBM | $148 | 29.2% | | Soma | $105 | 20.9% | | Total | $505 | 100.0% | Comparable Sales Growth (Thirteen Weeks Ended) | Brand | Q3 2023 vs Q3 2022 | | :--- | :--- | | Chico's | 0.0% | | WHBM | (6.7)% | | Soma | (3.1)% | | Total Company | (2.7)% | - Q3 Gross margin decreased by 110 basis points to 38.9%, primarily due to higher occupancy costs and deleverage on lower sales[190] - Q3 SG&A expenses increased as a percentage of sales to 35.4% from 33.9% in the prior year, driven by higher marketing and store operating expenses[177][4] Liquidity and Capital Resources The company maintains strong liquidity with reduced long-term debt, increased inventories for holiday sales, and a net closure of 13 stores year-to-date Key Balance Sheet and Cash Flow Items | Metric | Oct 28, 2023 (in millions) | Change from Prior Year Period | | :--- | :--- | :--- | | Cash and Marketable Securities | $126.6 | Decreased from $140.7 | | Long-Term Debt | $24.0 | Decreased from $69.0 | | Inventories | $342.7 | Increased 12.7% | | YTD Net Cash from Operations | $35.5 | Decreased from $83.6 | - Net cash used in financing activities for the YTD period was $51.5 million, reflecting $19.8 million in share repurchases and debt repayments[13] - The company closed a net of 13 underperforming locations during the first thirty-nine weeks of 2023, ending the quarter with 1,256 boutiques. It also operates 58 international franchise locations[16] Quantitative and Qualitative Disclosures About Market Risk The company's market risk remains consistent, primarily exposed to interest rate changes on its Credit Agreement and marketable securities portfolio - The company is exposed to interest rate risk through its Credit Agreement. A hypothetical 100 basis point increase in interest rates would increase interest expense by about $0.8 million over the loan's remaining term[21] - The marketable securities portfolio as of October 28, 2023, consisted of $22.2 million of securities with maturities within one year and $2.5 million with maturities over one year, all classified as available-for-sale[21] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that as of the end of the period, the company's disclosure controls and procedures were effective in providing reasonable assurance[22] - No changes in internal controls over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[23] PART II – OTHER INFORMATION Legal Proceedings The company is not currently involved in any material legal proceedings beyond those arising in the normal course of business - The company is not party to any material legal proceedings outside of the normal course of business[150][24] Risk Factors This section highlights material risks, primarily focusing on the potential impacts and uncertainties associated with the pending merger agreement - The pendency of the Merger exposes the business to risks such as difficulty maintaining customer/partner relationships, retaining key personnel, and management distraction[47] - There is a risk that the Merger may not be completed in the expected timeframe, or at all, which could negatively impact the stock price and result in significant unbenefited costs[48] - Potential shareholder litigation related to the pending Merger could delay or prevent its closing and lead to significant costs[28] Issuer Purchases of Equity Securities The company repurchased shares for employee tax obligations and authorized a new $100 million share repurchase program, with the full amount remaining available - In June 2023, the Company authorized a new $100 million share repurchase program, cancelling the remaining $35.4 million from the prior program. As of October 28, 2023, $100 million remains available[201] Share Purchases (Three Months Ended Oct 28, 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jul 30 - Aug 26, 2023 | 100,420 | $5.37 | | Aug 27 - Sep 30, 2023 | 5,845 | $5.04 | | Oct 1 - Oct 28, 2023 | 14,697 | $7.49 | | Total | 120,962 | $5.61 | Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the third quarter of 2023 - No directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the third quarter of 2023[61] Exhibits This section lists the exhibits filed with the Form 10-Q, including the Merger Agreement, employee stock plan amendments, and CEO/CFO certifications - Filed exhibits include the Agreement and Plan of Merger (Exhibit 2.1), an amendment to the Employee Stock Purchase Plan (Exhibit 10.1), and CEO/CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2)[57]