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Chico’s Shifts Vendor Base and Sourcing to Speed Up its Supply Chain

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Chico’s FAS Inc. made some shifts in priorities during the first quarter, and said it is making progress on its search for a new chief executive officer. One key initiative for the business, has been changing it’s sourcing and supply chain processes, including reduction in its vendor base and digitizing operations.

In a Nutshell: Bonnie Brooks, interim CEO and president, said, “Actions are now underway across all brands with a focus on three distinct areas that will positively impact our results.”

According to Brooks, those three areas include “driving stronger sales through improved product and marketing; optimizing the customer journey by simplifying, digitizing and extending our unique and personalized service; and transforming our sourcing and supply chain operations to increase product speed to market and improve quality.”

In her comments to Wall Street analysts during a conference call Tuesday, Brooks said on the supply chain side, the company is working to “fully digitize our end-to-end operations [for a] seamless integration from vendor through fulfillment to customer.” Chico’s is also in the middle of a full network study to optimize its distribution network, as well as evaluate alternatives.

For sourcing, the company is working on elevating product, styling and quality. To meet that focus, Brooks said Chico’s has been working on consolidating its vendor base “for both product consistency, speed and volume advantages that we have not had in our business today.”

Last year the company reduced its vendor base by nearly 25 percent, and Brooks said there’s opportunity for even more consolidation. The interim CEO also said the company has been reducing its “China manufacturing concentration.” In the last year, the reduction was about 20 percent, and the company will continue to reduce its exposure by diversifying to other countries.

So far, Chico’s has seen minimal impact from the 25 percent duty that so far has been imposed on Chinese imports, though Brooks anticipates a significant impact if the proposed 25 percent tariff on the fourth tranche–the one impacting apparel, footwear and some textiles–does go into effect.

“We are working on mitigating strategies, including engaging with our vendors on cost-sharing agreements and managing and adjusting our forward buys and product pricing,” Brooks told analysts.

As for updates on merchandising, Brooks said, “I’ve been intimately involved with our brand presidents to review, revise and distort our product for required depth and designing marketing plans for the back half of the year to ensure we execute and drive sales.” She also noted that the company is doing more testing before the requisite merchandise approvals, and that it has already adjusted assortments where it can for the third quarter.

Karen McKibbin became the new brand president of Chico’s on April 1. The company is also searching for a new head merchant for its White House Black market brand. In the meantime, Kim Roy, who joined the board in February and was most recently at Ralph Lauren, has been working with Brooks and the brands to help with product and merchandising. And at intimates concept Soma, the company is working on new product launches, as well as testing new value sets for gifting and sleepwear.

Net Sales: Net sales rose 7.8 percent to $517.7 million from $561.8 million for the first quarter ended May 4. Comparable sales on a consolidated basis were down 7 percent.

The company’s core Chico’s brand, representing 53.4 percent of total sales, slipped 8.1 percent to $276.7 million, on a comp decrease of 7.8 percent. White House Black market, the company’s second largest concept, which represents 31.1 percent of total sales, saw its sales decline by 11.9 percent to $160.9 million, on a comps decline of 10 percent. Soma, which represents 15.5 percent of total sales, was the bright spot for the quarter. The brand posted a 2.4 percent sales increase to $80.1 million, and a comp gain of 3.4 percent.

The company said gross margin was $190.8 million, or 36.9 percent of net sales, and noted that the 350-basis point decrease was due primarily to product liquidations, charges connected to its omnichannel programs, and accelerated depreciation related to its retail fleet optimization plan that was disclosed in the fourth quarter of 2018.

Earnings: The company posted net income of $2.0 million, or 2 cents a diluted share, from net income of $29.0 million, or 23 cents, in the year-ago quarter. On an adjusted basis, diluted earnings per share was 5 cents for the quarter on net income of $5.6 million.

Wall Street was expecting adjusted diluted EPS of 3 cents on revenues of $518.3 million.

The company’s full year fiscal 2019 guidance includes a low-to-mid-single digit decline in total net sales and consolidated comparable sales. Chico’s also said it “expects stronger sales trends across all brands in the second half of the year, as key initiatives gain traction.”

CEO’s Take: Brooks said of the changes so far: “Having led successful turnarounds at other major apparel retailers, I am confident that our action steps on the path forward are the ones needed to deliver our plans.”

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