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Chico’s Works to Mitigate Tariffs Amid Supply Chain Transformation

Chico’s FAS Inc. still has a lot of work to do at its core Chico’s brand, and especially at its White House Black Market business.

The highlight for the company in its most recent quarter was intimates brand Soma, which saw comparable sales growth of 10.9 percent. Alongside that growth, Chico’s continues to make progress on increasing product speed to market as it focuses on transforming its sourcing and supply chain operations.

In a Nutshell: Chico’s reworked its organizational team in the second quarter, with Bonnie Brooks as the new chief executive officer and president of the company and Molly Langenstein as president of the apparel group, leading Chico’s and White House Black Market. Mary van Praag continues as president of the intimates group, leading the Soma and TellTale lines.

The company said comparable sales improved sequentially at Chico’s, helped by momentum in key items and better in-stock positions. At White House Black Market, comp sales were lower sequentially compared to the first quarter, but the company said sales trends for the first fall assortment shipment have improved. Chico’s expects the performance of the brand to “gradually improve throughout the fall and holiday seasons.”

The company has continued to make progress on its initiatives, including transforming sourcing and supply chain operations to increase product speed to market and improve quality. Brooks told Wall Street investors in a morning conference call that the company has completed its baseline network study for end-to-end supply chain operations and that it is now evaluating the best option for the “most efficient distribution network.”

Our goal is to drive efficiency and strengthen our ability to deliver new product at a higher frequency, better quality and lower cost,” Brooks said.

The company is working to consolidate its vendor base to better support its supply chain strategy, and Brooks said over the next 18 months the company will “significantly reduce our base to a key set of top vendors. We will supplement that with a subset of smaller niche vendors to support us where we have unique needs.” The company decreased its vendor base at the end of 2018 by 25 percent, and expects to decrease it by another 25 percent at the end of 2019, the CEO said.

“As we reach scale with key vendors, we will have stronger partnerships, a greater control over product quality and the ability to achieve better terms and lower cost,” she said.

The company is also on a “fast track” to reduce its exposure to China, and is shifting more of its sourcing to Vietnam, Indonesia and India, Brooks said.

According to Janine Stichter, equity analyst at Jefferies Equity Research, Chico’s still “sources 40 percent of goods from China, and targets low 30s within the next 18 months.” Stichter has a “Hold” rating on shares of Chico’s, noting that even though there’s been some progress, the company is working on a turnaround “against a challenged apparel backdrop.”

Separately, Todd E. Vogensen, the company’s chief financial officer, said during the investor call that while Chico’s anticipates being impacted by the Tranche 4 tariffs planned for Sept. 1, it has also “taken advantage of air shipping to receive goods before Sept. 1. And we’ve taken advantage of working with our vendors on cost sharing opportunities to mitigate our exposure.”

Because the situation is “fluid,” Vogensen said it would be difficult to determine exactly what the tariff impact would be.

“Lord knows things change quickly. But based on what we know now, if the 15 percent does come into being and it is on Sept. 1, as you know, we have 40 percent of our goods coming through China, so our unmitigated exposure is fairly significant for us. It would be over $15 million. But with the mitigation that we are getting from our vendors and then even without counting the other things we’re working on, [we would] conservatively expect our exposure to be in the $5 million to $7 million range, and we’d give much better, I think, more confident guidance as we go into Q3,” the CFO said, explaining the tariff exposure for the balance of 2019.

Net Sales: For the three months ended Aug. 3, total net sales fell 6.7 percent to $508.4 million from $544.7 million. Included in the tally was a 7.2 percent decline in sales at the core Chico’s brand to $268.9 million and a 17.2 percent drop in sales at White House Black Market. The company’s Soma brand was the star in the quarter, raking in a 12 percent gain in sales to $99.6 million.

Comparable sales at Soma were up 10.9 percent, representing its best comp sales performance in four years. Comp sales at the other two brands saw declines, down 5.6 percent at Chico’s and 16.1 percent at White House Black market. That combination gave Chico’s a consolidated total comp of down 6.1 percent for the quarter. Chico’s said part of the decline was due to the closure of 53 stores compared to the year ago store count.

Gross margin was 33.2 percent of net sales, versus 36.1 percent a year ago. The decrease primarily reflected an increased effort to clear White House Black Market inventory, as well as charges connected to its omnichannel programs.

Earnings: The company reported a loss of $2.3 million, or 2 cents a diluted share, against net income of $16.8 million, or 13 cents, a year ago.

Wall Street was expecting 0 cents on sales of $513.3 million.

For the third quarter, Chico’s saw a low to mid-single-digit decline in total net sales and consolidated comp sales. For the full year fiscal 2019, it forecasted a mid-single digit decline in total net sales and consolidated comp sales. That’s slightly better than the prior fiscal year guidance that expected a low to mid-single-digit decline in total net sales and consolidated comp sales.

The company also noted that its guidance did not include any “incremental impact from the implementation of new tariffs.”

CEO’s Take: “We are seeing evidence of progress within our business and reported second-quarter results in line with our expectations,” Brooks said, noting that changes made at White House Black Market in product, marketing and in-store presentation are driving improved results and that the company expects “these improvements to continue benefiting the brand throughout the fall and holiday seasons.”

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