Chico’s FAS Inc. had a big second quarter that suggests a turnaround is in progress, but headwinds are afoot as supply chain challenges abound.
In a Nutshell: “We are facing macro supply chain headwinds in the back half of the fiscal year that we expect will impact sales and gross margin, including higher freight costs, extended inbound transit times and product supplier handover delays driven by the pandemic,” Chico’s said on Tuesday when the company reported second-quarter results.
During a conference call to Wall Street analysts, CEO and president Molly Langenstein said the headwinds also include cost pressures from logistics, sourcing, fulfillment and the labor market.
“So, the biggest headwind that we see in front of us is in sourcing and with the back half in terms of being with less strategic inventories, we need to make sure that we ensure our pipeline coming into us,” the CEO said.
Langenstein said the company is managing and pivoting its supply chain, responding to the rise in Covid cases that has resulted in delays in countries like Vietnam. She said that the Chico’s team has moved 9 percent of its overall production out of Vietnam and into other countries.
“Having said that, even though we are moving deliveries, and we have protected those goods from Vietnam, at least partially, we are experiencing additional delays in terms of the ports, and also in terms of roads. So, that is why we are more cautious in the back half of the year, knowing that we have some of these supply chain headwinds,” she said.
As for what next year might look like, the CEO also said that there are indications from the market that the headwinds will “continue into the first half of the year.” The company has responded by moving up its “lifecycle calendar,” and therefore deliveries, by four weeks.
“We have partnered with suppliers to find alternative countries for production, and also we have found different ports to be able to use so we are using every strategy and tactic to be able to manage and get in front of this going forward. And when need be, we are definitely flipping to air to ensure that we have a flow of inventory,” Langenstein said.
As for the quarter ended on July 31, the CEO said that despite pandemic challenges, earnings per share of 21 cents was the “best second-quarter performance we have posted since 2013.”
The company didn’t mention contribution from either pent-up demand or the benefit of federal stimulus checks—although Langenstein did note the “euphoria” in the first-quarter report—as other retailers reporting second-quarter earnings in recent weeks have noted, but instead focused on its transformation strategy and customer response to newness and product enhancements.
At intimates brand Soma, the CEO said the brand saw four consecutive quarters of comp growth, with the brand outpacing the market in nonsports bras, panties and sleepwear for the past 12 months, when compared to the same 2019 period. Langenstein said that the brand is “well-position to capture additional market share and explode into a billion-dollar brand by 2025.”
The Chico’s customer is responding to the new comfort features, novel technology and innovative fabrics, with pronounced acceleration in the quarter in denim, pants, dresses, knit, and woven tops, she said. At White House| Black Market, elevated styling and quality improvements saw customers responding to the brand’s new pant and short programs, as well as knits and dresses.
“At both apparel brands, customers are enthusiastically responding to our elevated quality and styling enhancements, which are leading to meaningfully faster sell through, way higher productivity, and more full-price sales and better maintained margins,” the CEO said.
One area Chico’s had been lacking in years past was a robust online operation, but that seems to have changed. “Over the last two-and-a-half years, we have successfully transformed into a seamless digital first customer-led company, adding resources and making strategic investments in talent and technology,” Langenstein said, noting that new digital sales data indicates that customers are more engaged and have both higher conversion rates and average order value.
So far, the company hasn’t seen any slowdown in customer traffic to its stores, except for the last couple of days, which the CEO said is likely due to the impact from Hurricane Ida.
Because Chico’s had been faltering for so long, the question arises over whether these results are just a short-term bump.
Langenstein suggests otherwise: “Our spend per customer in the second quarter in all three brands was at its highest level in five years. And so that is a testimony that the customers are not buying the single items but multiple items at a higher AUR (average unit retail).” She noted that the buying pattern holds true for both new customers and reactivated ones.
The CEO added that while customers were excited to return to the stores when the economy started to open up, the Chico’s customer is still doing some pre-shopping online, and then reaching out to her sales associate to coordinate try-ons at the store’s fitting rooms.
Langenstein did note that there was an uptick in some prices on some items.
“There are cost pressures as you know in logistics, sourcing, fulfillment and even fabric and manufacturing. And our primary goal was to maintain or improve the quality of our products, and then deliver that product as quickly as possible to customers. So having said that, we have surgically looked at ticket prices by style and by category and raised the prices where we feel it is in a price value that our customer would expect that. We’ve done that very judiciously and surgically,” she said.
The company expects to continue to shrink its store base as store leases come due. The CEO noted lease flexibility with about 60 percent of stores coming up for renewal over the next two-to-three years. At present, the company is on track to close 13 percent to 16 percent of its store network through the end of fiscal 2023, with 45 to 50 closure set for the current fiscal year. Chico’s ended the quarter with 1,284 doors in operation. The company also has 47 Soma shop-in-shops inside Chico’s stores.
During the quarter, the company also successfully fought off a proxy fight by activist investor Barington Capital Group, which in July dropped its bid for board seats.
Net Sales: Total net sales for the quarter ended July 31 rose 54 percent to $472.1 million from $306.2 million. Total comparable sales fell 1.6 percent when compared with the pre-pandemic 2019 second quarter, with Soma up 38.1 percent and Chico’s and White House | Black Market down 14.3 percent and 5.4 percent, respectively.
By division, net sales at the core Chico’s brand rose 59 percent to $221.4 million, while sales at White House | Black Market were up 48 percent to $122 million. Net sales at the company’s intimates brand Soma increased 53 percent to $128.6 million.
At the end of the quarter, inventories totaled $202.1 million, versus $235.8 million at the end of the year-ago quarter. The company said the decrease reflects “conservatory inventory management to better align inventory and assortments with consumer demand.”
Gross margin for the quarter was $181.5 million, or 38.4 percent of net sales, versus $44.8 million, or 14.6 percent of net sales in the year-ago period. The company said the increase was due to higher full-price sales and less promotional activity, as well as improved leverage of occupancy costs with rising sales and the impact of inventory write-offs in the year-ago quarter.
Langenstein said the company posted its “highest gross margin rate in 13 consecutive quarters.”
For the six months, total net sales rose 47 percent to $860 million from $586.4 million.
Earnings: The company posted net income of $26.2 million, or 21 cents a diluted share, against a net loss of $46.8 million, or 40 cents, a year ago. As a comparison, the company reported a net loss of 2 cents a diluted share in the same pre-pandemic 2019 quarter.
Wall Street was expecting an adjusted diluted earnings per share loss of 7 cents on revenue of $407.4 million.
Because of uncertainty due to the ongoing pandemic and anticipated supply chain headwinds in the back half of the year, the company said it would not provide specific forecasts for the third quarter or full fiscal year 2021. Chico’s did say that it expects a consolidated year-over-year net sales improvement between 18 percent to 20 percent for the third quarter, and between 32 percent and 35 percent for Fiscal 2021.
For the six months, the company reported net income of $17.3 million, or 14 cents a diluted share, against a net loss of $225.1 million, or $1.95, in the same year-ago period.
CEO’s Take: “We are a digital-first, customer led company with three unique brands, each with tremendous growth potential. Our turnaround is on track and we are well positioned to build on our first half momentum, continue to improve our operating performance and generate shareholder value over the long term. We have an exciting future ahead,” Langenstein told analysts.