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Chico’s Cuts Down on Sourcing Agents, Bumps Store Closures to Possibly 330

Chico’s FAS is leaning on its Soma brand to help effect a turnaround in 2021, with the women’s fashion retailer aiming to roll out “store-in-store” concepts for the intimates and loungewear brand in 50 Chico’s boutiques. Soma was by far the best performer of the three brands in the fourth quarter, pulling off 16 percent revenue growth while the namesake Chico’s brand declined 34.4 percent and White House Black Market dropped 36 percent amid sagging demand for dressier fare.

Across all brands, Chico’s FAS is expanding on its prior commitment to close 250 stores across brands, setting a new target of as many as 330 closures. The company will now shutter approximately 13 and 16 percent of its remaining 1,302 stores in the U.S. over the next three fiscal years, with 40 to 45 of these closures occurring in fiscal 2021.

The “vast majority” of the closures will be mall-based Chico’s and White House Black Market stores, according to Chico’s FAS president and CEO Molly Langenstein. The retailer already shuttered 40 underperforming locations last year.

 In a Nutshell: The fashion retailer’s physical changes come as it has made significant investments in digital since the start of the Covid-19 pandemic. In October alone, the company partnered with CRM platfom Salesforce, “buy now, pay later” platform Afterpay and content management system Contentstack to modernize and personalize the digital experience for its customers while boosting customer lifetime value.

And just ahead of the holiday season, Chico’s partnered with last-mile delivery platform Roadie to bring same-day delivery to most of its customers.

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If expanding digital capabilities is one major go-forward goal for Chico’s FAS, then shifting priorities to build out a more efficient, cost-effective supply chain is another.

We will continue to improve our sourcing, logistics and operational processes to drive efficiencies and speed and lower cost,” Langenstein said in the company’s fourth-quarter earnings call Tuesday. “We have teams focusing on a wider range of areas from further diversifying the supply chain, lowering dependence on sourcing agents, increasing the use of 3D design, and streamlining outbound shipping and ship-from-store processes, just to name a few. Over the last year, we have reduced our supplier base by 20 percent. Agents currently represent 32 percent of the business, and we expect to lower that to about 18 percent by 2022.”

A big part of the efficiency push so far has come through stricter inventory management. Fiscal year-end inventories totaled $204 million compared to $246.7 million at the end of fiscal 2019, a $42.8 million decrease, or 17.3 percent, primarily reflecting inventory and assortments better aligned to consumer demand. Apparel inventories are down over 20 percent, Langenstein said.

Maintaining stringent inventory control appears to be a major priority for Chico’s going into 2121, with upcoming first quarter inventories expecting to be 30 percent lower compared to last year. However, Soma inventories will increase more than 30 percent as demand for the intimates and loungewear brand has continued to increase.

When looking at the company’s most recent gross margins, it’s easy to see why Chico’s is tightening the reins with inventory management. Gross margin took a major plunge in the fourth quarter to $73.3 million, or 19 percent of net sales, compared to $171.4 million, or 32.5 percent of net sales, the prior year’s fourth quarter. The year-over-year decrease primarily reflects lower maintained margin in the company’s apparel brands and the deleveraging of fixed store occupancy costs.

David Oliver, interim chief financial officer and senior vice president, controller at Chico’s FAS, also pointed to both promotional activity and shipping costs as factors impacting margins.

“Like other retailers, we are incurring higher shipping prices, with the increased market demand for shipping as more consumers pivot to shopping online and the port delays,” Oliver said in the call. “More specifically, when you look at the fourth quarter, the port delays have required us to flip some goods to air from vessels to meet demand. The combined increase of those escalating costs in the fourth quarter was approximately $7 million. But we are taking action to mitigate the impact of that moving forward, but do expect our shipping cost in fiscal ’21 to remain higher.”

Langenstein said that both the leaner inventory and reduced promotional activity for apparel sales will help improve upcoming gross margins.

To close the year, Chico’s FAS obtained landlord commitments of $65 million in rent abatements and reductions.

In total, the retailer’s cost structure reductions resulting in approximately $235 million of annual savings in fiscal 2020, or 23 percent greater than its original plan. The cost savings realized in fiscal 2020 are expected to be maintained in fiscal 2021.

Chico’s FAS extended its credit facility to $300 million and ended the year with $109.4 million of cash and cash equivalents, compared to $127.9 million at the end of 2018. Total debt at Chico’s was $149 million, remaining unchanged from the end of the first quarter of fiscal 2020.

Given the ongoing market disruption caused by the pandemic, Chico’s FAS did not provide specific fiscal 2021 first-quarter or full-year financial guidance.

However, the company addressed consolidated sales trends, noting that the first half of the year was expected to be largely in line with reported fiscal 2020 results. By brand, the company expects continued strong performance at Soma, with performance at Chico’s and White House Black Market “consistent with market expectations.”

Net Sales: For the fourth quarter, net sales were $386.2 million, down 26.7 percent compared to $527.1 million in last year’s fourth quarter. The decline reflects a comparable sales decline of 24.9 percent when including the impact of 39 net permanent store closures and the partial offsetting of “double-digit growth” in digital sales.

The comparable sales decline was driven by a decrease in transaction count due to declines in in-store traffic and lower average dollar sale.

Soma’s comparable sales increased 15.2 percent, with digital sales jumping 68.6 percent compared to the prior year’s fourth quarter. The Chico’s brand saw sales dip 34.4 percent, while White House Black Market dropped 36 percent.

For fiscal 2020, net sales were $1.3 billion, declining 35 percent from $2 billion in fiscal 2019. Chico’s FAS did not provide comparable sales figures for fiscal 2020.

Net Earnings: For the fourth quarter, Chico’s FAS reported a net loss of $79.1 million, or a 68 cents loss per diluted share, compared to a net loss of $4.3 million, or a 4-cent loss per diluted share. The loss includes $35.9 million, or 32 cents per share, in significant after-tax non-cash charges.

For fiscal 2020, Chico’s FAS reported a net loss of $360.1 million, or a $3.11 per diluted share loss, compared to a net loss of $12.8 million, or an 11-cent loss per diluted share. The net loss for the year includes $199.6 million, or $1.73 per share, in significant after-tax non-cash charges.

CEO’s Take: “We’ve had no cancellations from our suppliers,” Langenstein said in response to a question on late deliveries. “We paid a little bit of a premium for vessel space and cargo space in order to ensure our consistency of getting goods to the U.S. The delays have been consistently out of the L.A. port. We’re now starting to feel a little bit of delays out of the Savannah port as well. We’ve made decisions where we’ve needed to drive sales on flipping from vessel to air, mostly, in particular, in the Soma brand. And we’ve adjusted floor sets and marketing based upon some of the delays that we’ve experienced.”