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Chico’s Raises Guidance After Strong Q2

Chico’s FAS Inc. bucked the second quarter retail earnings trend this season by beating Wall Street estimates and raising guidance to boot.

In a Nutshell: Chico’s attention on product and innovation helped grow second quarter earnings and revenues, boosted by a reduction in promotional activity, more full-priced sales and higher average unit retail (AUR).

At the retailer’s core Chico’s brand, customers’ return to travel and entertaining saw them gravitate toward the “higher-quality product and fashion newness,” CEO Molly Langenstein said. “Customers responded enthusiastically to our product innovation and elevated fashion, including dresses, pants and denim, woven shirts, and our Zenergy and Travelers collection.”

“At White House Black Market, customers responded to our versatile dressing, seasonal fabric and product innovation to meet for work-from-anywhere and return-to-occasion wear,” Langenstein said. Items such as dressed, jackets, woven, pants and premium denim did well in the quarter. And she said that at both Chico’s and White House Black Market, customers bought “coordinating outfits and accessories instead of single items.”

Although sales at Soma slipped, that was due to the slowdown in lounge and cozy—the categories that did well during the Covid pandemic. Core offerings help Soma to be “competitively positioned” to capture market share over time, Langenstein said. In addition, the brand continues to outpace the market in nonsport bras and panties for the trailing 12 months, she said, citing NPD data.

“We are chasing the categories customers are overwhelmingly responding to, and we are well-positioned with replenishment inventory to drive growth,” Langenstein said of the Soma business. Digital sales grew by double digits, outpacing store sales. Three new standalone Soma stores opened during the quarter, and there are plans to open over 20 more doors this year.

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According to Langenstein, the per-customer spend rose from a year ago, and new customers are trending younger. She said physical stores serve as venues to introduce the brand, and connect customers with stylists and bra specialists. Digital provides a community hub where content can teach and inspire, while social ambassadors are adept in both channels. Multi-channel customers spend about 17 percent more, and are three times more valuable than a single-channel shoppers, Langenstein said.

Limited edition online capsules are helping to drive frequency. Digital styling tools like StyleConnect and MyCloset drive sales and grow customer engagement. Moreover, mobile apps are exceeding expectations, with downloads and engagement growing month over month, Langenstein said, noting sales from the app are “over 25 percent higher than the site average and conversion is more than 10 times the site average.” In addition, the newly launched loyalty programs are increasing shopper frequency, as well as helping to add new customers.

Langenstein said Leana Les will join Chico’s in September as senior vice president of marketing. Turnover is relatively low compared to the industry at large. “Right now, today, we are staffed at a little more than 96 percent of our stores,” she added.

Net Sales: Total net sales for the three months ended July 30 grew 18.4 percent to $558.7 million from $472.1 million. Comparable sales rose 19.5 percent, partially offset by 26 store closures since the end of the same year-ago quarter. Chico’s said the comp sales improvement was due to an increase in transaction count and higher average dollar sale.

By brand, sales at Chico’s grew 27 percent to $281.8 million on a comps gain of 29.7 percent, while White House Black Market was up 30 percent to $158.6 million as comps grew 31.9 percent. Sales at Soma fell 8 percent to $118.4 million, while comps fell 9.2 percent.

Inventories totaled $338.8 million from $202.1 million in the year-ago quarter, on receipts coming in 10 weeks earlier to get ahead of any supply chain disruptions. Langenstein said the company is focusing on “constantly improving our sourcing, logistics and operational processes to help drive efficiencies and lower costs.” And air costs for the quarter were 85 percent lower than last year, helping to halve overall freight costs.

Chief financial officer PJ Guido said Chico’s expects to end 2022 with lower inventory levels than last year, and doesn’t expect any material markdown or margin risk in the back half of the year. The company will close 30 stores instead of the 40 originally earmarked, thanks to improving profits

For the six months, total net sales grew 28 percent to $1.1 billion from $860.0 million. By brand, sales at Chico’s rose 37 percent to $546.243, while White House Black Market was up 45 percent to $327.6 million. Soma sales fell 4 percent to $225.8 million.

Earnings: Net income rose 60 percent to $42 million, or 34 cents a diluted share, from $26.2 million, or 21 cents, a year ago.

Wall Street was expecting adjusted diluted earnings per share (EPS) of 25 cents on revenue of $543.9 million.

For the third quarter, the company guided total net sales to between $495 million to $510 million, with diluted EPS at between 11 cents to 14 cents.

For the full fiscal year 2022, total net sales was forecasted at between $2.14 billion to $2.17 billion, and diluted EPS at between 79 cents to 87 cents.

For the six months, net income more than quadrupled to $76.9 million or 62 cents a diluted share, from $17.3 million, or 14 cents, in the year-ago period.

CEO’s Take: “Six months into our three-year strategic growth plan, we are pleased with the considerable progress to date and are confident in our ability to achieve our long-term goals,” Langenstein said.