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Chico’s Q1 Sales Tumble 45%, But Says Inventory Hustle Pays Off

Though Chico’s FAS was attempting to reform its supply chain and navigate the onslaught of tariffs prior to coronavirus lockdowns, now the women’s wear and accessories retailer is planning to close up to 60 stores in the current fiscal year.

In a Nutshell: In April, Chico’s said it believed the smaller size of its stores and their predominant location in shopping plazas with easy drive-up access—versus larger, enclosed and crowded shopping malls—offered an advantage when reopening began on May 4, and in encouraging consumers to shop.

As of June 10, Chico’s had reopened nearly two-thirds of stores, with plans to reach 80 percent by June 12.

However, following the closure of the 1,341 boutiques it operates in North America and the subsequent loss of revenue in Q1, Chico’s said it will be trimming its store count and re-evaluating “each location’s future viability.”

The retailer has closed 84 stores over the last year, a net loss of 78 stores, and plans to close between 50 and 60 stores in fiscal 2020. It’s mulling additional closures in the coming fiscal year.

As Chico’s reopens brick and mortar, it has added new BOPIS, curbside pickup and shop-by-appointment services to encourage consumers to re-engage with stores while maintaining proper social distancing. In addition, the retailer now cleans stores more deeply and regularly and ensures clothing racks are spaced to promote social distancing. It has also modified fitting rooms and provides hand sanitizer to consumers and employees.

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In terms of inventory, Chico’s has reduced its future merchandise receipts to match a conservative demand forecast and is working with suppliers and vendors to extend payment terms and reduce operating costs.

Inventory reserves at the end of the first quarter equaled $273.1 million compared to $242.4 million in the year-ago period.

“As we look to the second quarter and the balance of 2020, we believe we will be competitively stronger because of the measures we’ve taken to liquidate our prior season inventory and remove it from our stores and distribution centers,” Chico’s FAS incoming CEO and president-elect Molly Langenstein said in a statement.

The company also suspended rent payments in April and is working with landlords and a third-party to restructure its lease portfolio in search of rent reductions, abatements and concessions.

Sales: First-quarter net sales totaled $280.3 million, a 45.9 percent drop from $517.7 million in the comparable period and below Wall Street’s $324.6 million estimate.

During the first four weeks of the year, Chico’s comparable sales were up 2.7 percent, building on last year’s fourth-quarter momentum.

“The company’s digital sales remain strong as we continue to leverage our digital platform, enhanced by our proprietary digital styling software, Style Connect, that enables us to communicate directly with the majority of our customers to drive the digital business,” Chico’s said. “Digital sales in the first quarter exceeded the same period last year, and we posted a double-digit increase in April.”

Gross margin in the first quarter was negative $11.1 million or a loss of 4 percent of net sales, falling from a gain of $190.8 million or 35.9 percent of net sales in the comparable period.

Impacts including $43.1 million in inventory write-offs and $20.9 million in store impairments, carried over from the previous quarter, further eroded first-quarter margins.

Earnings: Net losses totaled $178.3 million, or $1.55 loss per diluted share, compared to net income of $2.0 million, or $0.02 earnings per diluted share, in the comparable period.

Quarterly impairment charges reached $1.17, including a 23 cent loss from inventory write-offs.

CEO’s Take: “We are encouraged by our strong store re-openings and the accelerated demand in our digital channels, which demonstrate our customers’ loyalty to our brands,” Langenstein said. “As a result of the product changes we made in the second half of 2019, we are well-positioned to capitalize on the growth opportunities ahead.”