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Chico’s CEO Molly Langenstein Talks Q1 ‘Euphoria,’ Port Problems and ‘Optimistic’ Fashion

Chico’s FAS CEO Molly Langenstein isn’t so sure that the “euphoria” of Q1, when the specialty retailer beat Wall Street estimates, will be sustainable, given that “every single leg of the supply chain” has faced “some kind of issue along the way,” she told investors and analysts Tuesday. Still, the executive highlighted Chico’s “tremendous” first-quarter turnaround progress, which she hopes will keep an activist investor at bay.

In a Nutshell: Langenstein said Chico’s numbers for the quarter signal the “power of our three unique brands and being a digital-first, customer-led company,” noting “significant improvements” in product, marketing and therefore full-price selling across all three of the Soma intimates, White House Black Market and eponymous Chico’s brands.

However, Langenstein has a gimlet view of what lies ahead. “We are not fully out of Covid,” she told Wall Street, emphasizing the “headwinds” that have plagued Chico’s supply chain and the “problems to overcome.”

The company, she said, has “done several things” to “mitigate” cost pressures relating to sourcing, production, logistics fulfillment and an ongoing labor crunch. Beyond expanding Chico’s third-party footprint, the retailer has not only identified alternative port strategies but also adjusted its product lifecycle calendar by up to four weeks to manage these new challenges, Langenstein said.

“We are also shifting to air when it’s critical,” she said, and “are partnering with suppliers for alternative countries of production.” Chico’s is also “continuing to keep our inventories lean, so the regular price continues to drive solid gross margin to absorb these escalating operating costs,” she added.

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Chico’s has worked hard to clean up delivery delays in the fourth quarter, which were unrelated to factory operations, she said. Factories and deliveries have been on time in Q1 into Q2, she added.

“It’s all been on vessel capacity, vessel sailing times, port delays, the lack of chassis and in the U.S. to be able to get trucks to our [distribution center],” Langenstein said, adding, “every single leg of the supply chain, post our suppliers, has had some kind of issue along the way.” Though Chico’s believes it has a “very strong hold on the supply chain moving forward,” she said, “there [are] still a lot of headwinds” buffeting “every single function of stuff that’s coming into the port.”

Chico’s has taken steps to leave its overly promotional habits in the past, with Langenstein describing the company’s newly “disciplined” approach to managing apparel margins. Rather than calling for inventory-wide promotions, today Chico’s applies item-specific markdowns for a “dramatic reduction” in discounts, she said.

Langenstein said Chico’s isn’t so sure if the “euphoria in Q1” is sustainable, which is why the company believes “being disciplined is the right approach as we move forward.” However, April and May’s results indicate “that the margin should continue to be very healthy, as it relates back to historical highs,” she said.

Consumers are responding to fashion that exudes “optimism and excitement” through “color, print and novelty,” Langenstein said.

Wovens, dresses, denim pants and shorts perform well for both Chico’s and White House Black Market. Products created with new high-performance fabrics, like antimicrobial pants or comfort-driven bottoms, are also resonating. The company has steadily invested in Soma’s size-intensive business, which will have 47 of the intimates stores open by mid-June.

Over the next three years, about 60 percent of the company’s store leases are coming up for renewal. “We anticipate closing 13 to 16 percent of our remaining store fleet, over the next three years, with 40 to 45 of those closures occurring in Fiscal 21,” Langenstein said, noting that standalone boutiques outperform locations in regional enclosed malls by roughly 7 percentage points. Most of the company’s closures will be mall-based locations and largely affect the Chico’s and White House Black Market banners.

Langenstein addressed Barington Capital Management’s activist overtures, stressing Chico’s commitment to “making all appropriate actions to improve performance and drive shareholder value.”

The company, she added, “look[s] forward to continuing to engage with our shareholders to discuss our progress our turnaround is on track, and we are uniquely positioned to build on our first quarter momentum, improve our operating performance and generate shareholder value over the long term. We have an exciting future ahead.”

Net Sales: For the three months ended May 1, net sales rose 38 percent to $388.0 million from $280.3 million a year ago, reflecting temporary store closures in the year-ago quarter, partially offset by 39 net permanent store closures since last year’s Q1. Total comparable sales for the quarter versus Q1 of 2019 were down 21.7 percent. Soma’s comparable sales climbed 39.3 percent, while Chico’s and White House Black Market were down 32.9 percent.

By nameplate, Chico’s sales jumped 35 percent to $177.0 million from $131.4 million. White House Black Market saw sales rise 24 percent to $104.0 million from $83.9 million. Sales at Soma spiked 65 percent to $106.9 million from $64.9 million.

For the 12 months ended April 2021, Soma saw growth that outperformed the American apparel market, was in the top ten brands for non-sport bras and panties and numbered in the top five brands in sleepwear, the company said, citing NPD data. “We believe this is compelling evidence Soma is well positioned and on track to accelerate market share gains,” it added.

The company believes Chico’s and White House Black Market are benefiting from improvements in style and quality. “We’ve embraced the comfort culture and developed innovative fabrics and technology to provide comfort features. The bottoms business in both apparel brands was strong. Inventories are lean and demand outpaced supply. Inventory productivity is high, strategically fueling more full price sales,” it said.

Smarter marketing efforts with digital storytelling, social influencers and organic social strategies fuel the acquisition of new, younger customers across all three brands.

At the end of Q1, inventories totaled $209.7 million versus $273.1 million at the end of the same year-ago quarter.

“This $63.5 million, or 23.2 percent, decrease primarily reflects conservative inventory management to better align inventory and assortments with consumer demand,” Chico’s said.

Gross margin in the quarter was $126.8 million, or 32.7 percent of net sales.

Earnings: The company substantially narrowed its first-quarter loss to $8.9 million or 8 cents a diluted share, from a net loss of $178.3 million, or $1.55, in the year-ago quarter.

Wall Street was expecting a net loss of 17 cents a share on revenue of $320.65 million.

The company reported ending the quarter with cash and marketable securities that totaled $102.4 million, versus $117.6 million in the year-ago period. Debt for the same period remained unchanged at $149.0 million from the end of last year’s Q1. The current quarter-end total decreased by $7.0 million from the prior fourth quarter, due to rent and other liability settlements and acceleration of vendor payments, partially offset by an improvement in other cash flow components.

For fiscal year 2021, Chico’s said it expects consolidated year-over-year net sales to rise between 28 percent to 34 percent, and gross margin rates to improve 18 to 20 percentage points over fiscal 2020.

Chief financial officer David M. Oliver said Chico’s anticipates building cash throughout Fiscal 2021, pointing to rent breaks and extended vendor payment terms implemented last year.

CEO’s Take: “Our turnaround is on track, and we are uniquely positioned to build on our first quarter momentum, improving our operating performance and generating shareholder value over the long term. We have an exciting future ahead,” Langenstein said.