Chico’s said managing its air and ocean freight mix resulted in favorable year-over-year expense savings that accrued to gross margin.
In a Nutshell: Chico’s FAS Inc., in reporting third quarter financial results, said the period was highlighted by a “powerful portfolio performance” led by the company’s apparel brands, Chico’s and White House Black Market, which saw comparable sales grow 28.8 percent and 17 percent, respectively, versus last year’s third quarter.
Speaking on the conference call with analysts, Molly Langenstein, CEO and president, said at Chico’s and White House Black Market, customers bought complete outfits and accessories instead of single items. At Chico’s, customers responded “enthusiastically to our product innovation and fashion,” including in tops, knits, wovens and sweaters, pants and denim, jackets, dresses, jewelry, and shoes.
At White House Black Market, versatile tailoring and feminine details in seasonless fabric drove the business in key categories. Customers responded to newness in tops and sweaters and in woven, bottoms and premium denim dresses and jackets.
Soma performance improved in the quarter, with particular strength in foundations. Langenstein added that the company continues to make investments in cutting-edge product innovation, and welcomed Chris Munnelly as senior vice president of merchandising and design at Soma “to help guide the evolution and maximize the potential of this dynamic brand.”
The company said it continued to elevate its marketing, focusing more resources on digital. Strategic marketing efforts continue to drive more customers to the company’s brands, with total year-over-year customer count up high-single digits, spend per customer up over last year’s third quarter and the average age of new customers continuing to trend younger.
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The company said its outlook for the fourth quarter was for net sales of $535 million to $555 million, with a gross margin rate as a percent of net sales of 35.4 percent to 35.8 percent. Earnings per diluted share of 7 cents to 10 cents was forecast.
For the full year, net sales of $2.15 billion to $2.17 billion was projected, on a gross margin rate as a percent of net sales of 39.2 percent to 39.3 percent. Earnings per diluted share of 89 cents to 92 cents was forecast.
In the third quarter, inventories totaled $304.1 million compared to $277.7 million at the end of last year’s third quarter. The $26.4 million, or 9.5 percent, increase mainly reflected early holiday receipts, alignment of on-hand inventories with higher consumer demand, strategic investments in basics and higher average unit costs.
Sales, general and administrative (SG&A) costs was $175.8 million, or 33.9 percent of net sales, compared to $162.5 million, or 35.8 percent of net sales, a year earlier, primarily reflecting ongoing expense management and the impact of $3.9 million in pre-tax litigation settlement charges in last year’s third quarter.
At the end of the third quarter, cash and marketable securities totaled $140.7 million compared to $137.5 million at the end of last year’s third quarter. Debt at the end of the quarter was $69 million compared to $99 million at the end of last year’s third quarter, reflecting a principal payment of $30 million in the third quarter.
“We are currently forecasting that we will sustain healthy gross margins through full price selling, product mix, occupancy leverage and supply chain cost management, and believe we are well down the path to reach our annual margin target of 40 percent by 2024,” PJ Guido, chief financial officer, said on a call with analysts. “Continued full price selling and strategic price adjustments will continue to support higher AURs. Managing our air, ocean freight mix has resulted in favorable year-over-year expense, which is accruing to gross margin, and we are actively managing our inventory to fulfill higher demand and support a strong finish to another great year.”
Sales: Net sales for the third quarter ended Oct. 29 increased 14.3 percent to $518.3 million compared to $453.6 million in last year’s period.
This improvement primarily reflects a comparable sales increase of 16.5 percent, partially offset by 18 permanent net store closures since last year’s third quarter. The comp sales gain was driven by an increase in transaction count, partially offset by a decrease in average dollar sale.
Earnings: For the third quarter, the company reported net income of $24.6 million, or 20 cents per diluted share, compared to net income of $18.2 million, or 15 cents per diluted share, for last year’s third quarter, which included $3.9 million in after-tax legal settlement charges.
Gross margin was $207.4 million, or 40 percent of net sales, compared to $184.4 million, or 40.7 percent of net sales, in last year’s third quarter. The 70 basis point decrease in gross margin rate primarily reflects higher raw material costs, partially offset by freight costs, occupancy leverage and higher average unit retail.
CEO’s Take: Langenstein said: “Our robust momentum continued into the back half of the year. We posted another quarter of outstanding operating income and EPS performance, resulting from continued strong store and digital sales growth and solid expense leverage. The power of our portfolio of three unique brands and execution of our strategic pillars of being customer led, product obsessed, digital first and operationally excellent are driving our performance.”
“Apparel was once again the leading performer for the quarter, with Chico’s posting a 29 percent comparable sales increase and White House Black Market generating a 17 percent comparable sales gain,” Langenstein added. “Customers responded to our elevated fashion and product offerings across our apparel categories.”