The turnaround at Chico’s FAS Inc. seems to have legs.
The company on Tuesday posted an earnings surprise, helped by new product enhancements and full-price selling that gave the specialty retailer its best third-quarter performance since 2016.
In a Nutshell: “We achieved another great quarter and the momentum continues,” Molly Langenstein, CEO and president, told Wall Street analysts in a conference call on Tuesday. “Third-quarter earnings per share of 15 cents represents the company’s best third-quarter performance since 2016 and demonstrates the extraordinary progress we continue to make in our turnaround strategy.”
She said the return to third-quarter profitability was driven by healthy year-over-year comparable-sales growth and meaningful gross margin expansion. The CEO noted that the company has been enhancing its personalization to drive engagement and conversion. She added that giving them the option of Afterpay to pay for purchases in installments has proven to be a terrific sales driver.
“We continue to allocate more resources to digital, digital storytelling, influencers and other social efforts,” Langenstein said, noting that the apparel brands in the quarter had over “2.3 million views” that include social selling and live videos. “We continue to acquire new customers, with the customer count up nearly 8 percent from the prior year third quarter, and their average age continues to trend younger than existing customers.”
The CEO said stores continue to play a key role, particularly since “digital sales are higher in markets where we have a strong retail presence.” The company so far has opened 64 Soma shop-in-shops inside Chico’s doors, helping to drive new customers to both brands, and plans to open nine more in the fourth quarter.
Managing the supply chain for all brands has resulted in improved AURs, (average unite retail) and the “spend per customer is at a four-year high in all three brands” as shoppers respond to better quality fabrications, the CEO said. She noted that the company has also focused closely on inventory levels at its two apparel brands following years of heavy promotion as it reset the business.
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“We wanted to have scarcity,” Langenstein said. “That does not mean that the inventory levels that we ended with in Q3 is exactly where we wanted to be.” She said some of the inventory slides were due to challenges with its Vietnam factories. Now that the factories have opened up again, the delays in order receipts have actually helped sales since orders coming at different times are helping to create newness on the floor sets each time customers visit the stores.
While the absence of delayed shipments would have allowed the company to do more business in the quarter, Langenstein emphasized that the “supply chain did not materially limit our ability to be able to meet customer demand.”
As for higher raw material costs and pricing, Langenstein said putting better quality fabrics into garments and having more novelty gave the company “more room to be able to have leeway with those certain items versus maybe price pressure on commoditized categories and items which, quite honestly, are not a big part of the business anymore.”
“Our Q3 momentum has carried over into Q4 and we are pleased with the performance that we’ve seen throughout November in both stores and online, inclusive of this past holiday week,” Langenstein said.
Net Sales: Total net sales for the three months ended Oct. 3 rose 29.1 percent to $453.6 million from $351.4 million a year ago. Total company comparable sales for the quarter rose 27.9 percent from a year ago.
By banner, net sales rose 24 percent to $203.5 million from $163.8 million at Chico’s, with comparable sales up 23.3 percent from last year. Sales were up 33 percent to $138.2 million from $104 million at White House|Black Market, as comp sales rose 33.4 percent. Net sales grew 34 percent to $112 million from $83.5 million at Soma, the specialty retailer’s intimates brand, which saw a comp sales increase of 30.2 percent.
According to the CEO, denim and a new pants collection were big hits at Chico’s, which saw women pairing them with woven tops, sweaters and no-iron shirts. “She’s responding to our elevated fabrics and new comfort features in bottoms,” Langenstein said. Elevated styling is helping sales at White House|Black Market, which also saw denim nearly doubling for the quarter as the consumer is pairing the bottoms with three new key White House|Black Market jackets. Soma continues to gain traction, and Langenstein said it is “well-positioned to continue capturing additional market share on our journey to becoming a billion-dollar brand.”
Inventories at the end of the quarter were $277.7 million versus $256.5 million a year ago, and slightly above the same fiscal 2019 third quarter of $277.5 million. The company also noted that the gross margin rate for the quarter was 40.7 percent, versus 22 percent a year ago. The improvement reflects in part less promotional activity and higher full-price sales, partially offset by increases in raw materials and freight costs.
For the nine months, net sales spiked 40 percent to $1.31 billion from $937.9 million. By banner, sales grew 38 percent to $601.9 million at Chico’s, were up 35 percent to $364.3 million at White House|Black Market, and jumped 49 percent to $347.5 million at Soma.
Earnings: The company posted net income of $18.2 million, or 15 cents a diluted share, against a net loss of $55.9 million, or 48 cents, a year ago.
Wall Street was expecting an adjusted diluted loss per share of 2 cents on revenue of $426.1 million.
For the fourth quarter, the company expects net sales in the range of $495 million to $510 million, earnings per diluted share of between 0 cents to 5 cents, and a gross margin rate of 33 percent to 34.5 percent.
For the nine months, net income was $35.5 million, or 29 cents a diluted share, against a net loss of $281 million, or $2.43 a share, in the same year-ago period.
CEO’s Take: “Each quarter this fiscal year, our momentum and results have become proof points that our turnaround strategy is working. We are a digital-first, customer-led company with a clear path for profitable growth. We have three unique brands, each with their own opportunities for expanding their customer bases, market share and sales,” Langenstein said. “We continue to improve our operating performance, strengthen our balance sheet and build our payment infrastructure. We are poised to generate shareholder value over the long term, and have an exciting future ahead.”