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Chico’s Cites Sourcing Improvements Even as Tariffs Bite Margins

Scoring its first quarter of positive comparable sales for all of three of its brands in five years, Chico’s also narrowed its fourth-quarter loss.

In a Nutshell: Chico’s FAS Inc., a women’s apparel company, said the fourth quarter served to highlight progress executing on key strategic priorities.

These include driving stronger sales through improved product and marketing, and optimizing the customer journey by simplifying, digitizing and extending the company’s personalized service. Transforming sourcing and supply chain operations to increase product speed to market and improve quality are also priorities.

Chico’s reported positive comparable sales in the 13 weeks through Feb. 1, reflecting strong progress in its assortment and improvements in quality, design and newness, as well as elevated marketing. Its White House Black Market division reported positive comparable sales enabled by the ability to quickly edit the assortment and bring in new product.

Intimates brand Soma delivered its sixth consecutive quarter of positive comparable sales, driven by a strong response to its holiday offering, including record-breaking sales during peak holiday period.

The company said it continues to focus on reducing its overall China penetration and diversifying the country of origin mix, which are tracking ahead of schedule. The retailer is also making significant progress in securing partnerships with key vendors to create a leaner, more efficient supply chain.

Chico’s also issued its outlook for fiscal 2020, which includes the incremental impact of tariffs, while excluding fiscal 2019 net charges related to its retail fleet optimization plan and the impact of severance and other related net charges. The outlook for both the first quarter and fiscal year excludes the potential impact related to the coronavirus. In addition, the company expects any incremental tariff impacts to be largely offset by sourcing initiatives.

For the fiscal 2020 first quarter compared to the prior year, the company anticipates a low single-digit increase in total net sales and consolidated comparable sales, reflecting continued progress and momentum in the business. The company expects gross margin as a percent of net sales to increase approximately 20 to 40 basis points, due primarily to strategic reductions in promotional depth as well as leverage of fixed costs on higher sales.

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For fiscal 2020 compared to fiscal 2019, Chico’s anticipates a low single-digit increase in total net sales and consolidated comparable sales. The company expects gross margin as a percent of net sales to increase approximately 50 to 100 basis points, due primarily to strategic reductions in promotional depth as well as leverage of fixed costs on higher sales.

SG&A expenses are expected to increase by approximately $10 million, reflecting investments in marketing and a return to target incentive compensation levels, partially offset by ongoing cost management.

Capital and cloud-based expenditures are expected to be approximately $45 million to $50 million, primarily driven by technology enhancements and targeted reinvestments in stores.

Sales: Net sales for the fourth quarter ended Feb. 1 were up 0.4 percent to $527.1 million compared to $524.7 million in the year-ago period. The gain reflected a comparable sales improvement of 2.2 percent, partially offset by the impact of 77 net store closures since last year’s fourth quarter. The comparable sales improvement was driven by higher average dollar sale and an increase in transaction count.

For fiscal 2019, net sales fell 4.4 percent to $2 billion compared to $2.1 billion in fiscal 2018. This decrease reflected a comparable sales decline of 3.4 percent, as well as the impact of the store closures.

Earnings: In the fourth quarter, the company reported a net loss of $4.3 million, or 4 cents loss per diluted share, compared to a net loss of $16.6 million, or 14 cents loss per diluted share for the 13 weeks ended Feb. 2, 2019.

For the full fiscal year, Chico’s reported a net loss of $12.8 million, or 11 cents loss per diluted share, compared to net income of $35.6 million, or 28 cents earnings per diluted share, for year ended Feb. 2, 2019.

Gross margin in the fourth quarter was $171.4 million, or 32.5 percent of net sales, compared to $158.7 million, or 30.2 percent of net sales, in last year’s fourth quarter. This 230-basis point increase was primarily attributable to a 180-basis point favorable net impact resulting from lower impairment and accelerated depreciation charges related to retail fleet optimization plans, combined with a 150-basis point improvement in occupancy and omnichannel program costs as a percent of sales, partially offset by an approximate 100-basis point impact of incremental tariffs on maintained margin.

CEO’s Take: Bonnie Brooks, CEO and president of Chico’s, said: “We are extremely pleased with the significant sequential turnaround in our business, resulting in our first quarter of positive comparable sales for all three brands since the fourth quarter of 2014. Our strong performance can be primarily attributed to our disciplined focus on driving sales through improved and elevated product aligned more closely to our customer’s expectations.”

“In Q4, we continued to deliver on each of our strategic priorities, with a renewed rigor and relentless attention to every detail of operating our businesses,” Brooks added. “We are especially pleased with both our significant digital growth and frontline growth, as we continue to work towards delivering our unique and personal service through all channels of the company.”