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Will Chico’s Pivot to Casual Clothing Curtail Bottom-Line Losses?

Chico’s FAS Inc. posted a wider second-quarter loss from year-ago figures, although the quarter was sequentially better that the prior three-month period. And while the women’s wear retailer has shifted fourth-quarter offerings to chase the consumer trend toward on clothing that’s cozy, casual and comfortable, there’s no telling how shoppers will respond to a brand better known for office-friendly offerings. Plus, questions remain over how holiday traffic will shake out.

In a Nutshell: “Our core strengths—three distinctive brands with new product being well received, a strong digital platform, a differentiated real estate portfolio, our loyal customer base and solid balance sheet—position us for success,” president and CEO Molly Langenstein said. “We are taking advantage of this unprecedented period by capitalizing on these strengths and staying laser focused on continuing our successful turnaround strategy, including accelerating digital growth.”

Langenstein told Wall Street that the Chico’s team was finalizing fall orders in March when the coronavirus outbreak hit, and was in the “middle of development for Q4. One hundred percent of Q4 is influenced by the new behavior of customers. We were 100 percent able to make adjustments for Q4.” That translated to reductions in special occasion and career wear categories, and strengthening casual lines.

“We’ve already in Q4 laid out significant changes in casual, cozy and comfort,” Langenstein said.

“The customer sentiment has not changed since May,” she said, claiming that shoppers are eager to get back to Chico’s stores although she is following COVID trends. By that, Langenstein said store traffic depends on the number of coronavirus cases in the area surrounding a store. “The sentiment of our customers shopping really follows COVID,” she said. For example, traffic improved in July, but then slumped in states such as California, Texas and Florida, where Chico’s stores are clustered and infections surged. Langenstein said Chico’s has seen a 10-point improvement in open lifestyle centers and strip malls, versus sales and traffic patterns at closed malls.

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The women’s fashion chain has been leaning on its digital operations for all three brands, and has “dissected” and “overlaid” current customer data versus last year’s data to understand changes in shopping behavior and added contactless options, such as curbside pick up, and a shop by appointment feature. It’s also looking at how to offset potentially higher shipping costs for holiday, and is still negotiating rent reductions and concessions with landlords.

“Overall, while the company had shown impressive sequential improvements to positive comps across all three brands under new management just as COVID struck, we now see further rapid brand evolution as necessary and more difficult in the current environment given the perception of [White House Black Market] and Chico’s as more wear-to-work [and] occasion wear brands in what looks to be a competitive and promotional channel for the foreseeable future,” Dana Telsey, chief investment officer at Telsey Advisory Group, said.

David M. Oliver, senior vice president finance, controller and interim chief financial officer, told analysts Chico’s expects its stores to be open in the back half of the year, except for hot spots. He also said the company would probably close more stores, based on landlord discussion. Remaining stores, he added, have “higher profitability standards,” achieved either through increased sales per door or a renegotiation of the rent structure for that location.

Net Sales: Total net sals fell 39.8 percent to $306.2 million from $508.4 million, which the company said represented a 9.2 percent improvement from the first quarter that was helped by strong digital sales and store reopenings.

By brand, sales at the core Chico’s concept fell 48.1 percent to $139.6 million, while White House Black Market was down 41.2 percent to $82.3 million. The intimates brand Soma posted a 15.3 percent decline in sales to $84.3 million, and remains the company’s strongest brand concept.

Chico's FAS pivots to casual, cozy and comfort, but is that enough to curtail losses at brands better known for career and occasions wear?
The company will know in Q4 if customers who shop White House Black Market for career and occasion wear will be receptive to its new casual offerings. Courtesy Photo

Gross margin as a percentage of sales was 14.6 percent in the quarter, versus 33.2 percent in the year-ago period. The lower percentage in part reflected some store closures in the second quarter, as well as a pre-tax inventory write-off of 4 percent of net sales.

At the end of the second quarter, inventories totaled $235.8 million, compared with $227.7 million. Oliver noted that the company believes it entered the third quarter with inventory in line with expectations for the back half of the year.

Earnings: The net loss grew to $46.8 million, or 40 cents a diluted share, versus a net loss of $2.3 million, or 2 cents, in the year-ago quarter.

Wall Street was expecting an adjusted diluted loss of $0.25 a share on revenue of $346.2 million.

While the net loss grew year-over-year in the quarter, it was an improvement from the first quarter net loss of $178 million due to the temporary shutdown of stores when the COVID-19 pandemic hit the U.S. in March. Chico’s began contactless pickup at select strip malls at the start of May, but most of its stores didn’t fully open until late May.

CEO’s Take: “Store and digital conversion rates improved in the second quarter, providing an indicator that our product changes to comfort, casual and easy-care fabrics are resonating with customers, giving us confidence our financial and product initiatives combined with relentless customer focus have positioned us to emerge a stronger company,” Langenstein said.