Chico's FAS, Inc.
Q3 2020 Earnings Call Transcript

Published: 24 Nov 2020

[Operator:]

Welcome to Chico's FAS Third Quarter 2020 Conference Call and Webcast. All participants will be in a listen-only mode. Please note this call is being recorded. I would now like to turn the call over to David Oliver, Interim Chief Financial Officer and Senior Vice President, Controller. Mr. Oliver, please go ahead.

[David Oliver:]

Good morning, and welcome to the Chico's FAS Third Quarter 2020 Conference Call. Molly Langenstein, our CEO and President, also joins me today. For reference, our third quarter release can be found on our website at chicosfas.com under press releases on the Investor Relations page. Today's comments will include forward-looking statements regarding our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, which speaks only as of today's date. You should not unduly rely on forward-looking statements. Important factors that could cause actual results or events to differ materially from those projected or implied by our forward-looking statements are included in our earnings release issued this morning, in our SEC filings and in the comments that are made on this call. We disclaim any obligations to update or revise any information discussed on this call, except as may be required by law.

[Molly Langenstein:]

Thank you, David, and good morning everyone. We continue to see momentum in the business in the third quarter, and we have taken definitive actions and created a firm financial foundation that we believe prepares and positions us for 2021 and beyond. Specifically, we have accelerated our transformation to a digital-first company, fast-tracking several investments in innovation and digital technology, which are driving sales and higher customer engagement. We significantly enhanced our liquidity and financial flexibility with our amended and extended $300 million credit facility. We nearly completed our comprehensive real estate review, obtaining landlord commitments of $65 million in rent abatement and reductions. And we continued the process of streamlining our organization and reducing our cost structure to support our business. David and I will offer additional detail on these actions during today's call. Our business plan this year is to deliver improved quarter-over-quarter performance. In the third quarter, we again delivered on this objective, substantially enhancing our financial results over the second quarter. Total sales improved nearly 15% in the third quarter from the second, driven by continued strong digital performance and rebounding store revenues. Our gross margin rate rose 740 basis points, reflecting greater full price selling on leaner inventories and leverage of fixed occupancy costs. We strengthened our balance sheet with cash and cash equivalents increasing nearly $21 million, and Soma generated a 10.5% comp for the quarter. First, let's focus on our digital transformation. 18 months ago, we prioritized digital as the primary growth engine for all three of our brands, making major strategic shifts and investments in talent and technology to pivot us to a digital-first company. In March of this year, as our business became 100% digital overnight, we accelerated that transformation through innovation and state of the art technology enhancement. Even with our stores now reopened, we continue to generate double-digit year-over-year digital sales increases. As a digital-first company, we believe we are competitively positioned to accelerate growth and gain market share in 2021 and beyond. All three of our brands achieved solid digital sales growth year-over-year with Soma leading the way with a 67% increase. Digital channels continue to fuel total customer and new customer growth.

[David Oliver:]

Thanks, Molly. We entered fiscal 2020 with a solid financial foundation, and it has continued to improve, partially driven by aggressive expense reductions as well as commitments for meaningful rent abatements and reductions. We ended the third quarter with a $145 million of cash and cash equivalents, up nearly $21 million from the end of the second quarter. And we navigated through the third quarter without increasing debt levels on our credit facility. Speaking of our credit facility, in October, we substantially enhanced our financial liquidity and flexibility for the future by closing on our amended $300 million senior credit facility with a five-year term maturing in October 25, which replaced our $200 million agreement, which was scheduled to mature in August 23. We believe the new facility demonstrates the confidence our lenders have in our company and the sustainable long-term success of our brands. We do not currently expect to further access the facility this or next fiscal year. As a result of the pandemic, we suspended rent payments beginning in April 2020 due to our temporarily closed stores and engaged a top-tier real estate consultant, AMG Realty Partners to assist us in restructuring our store leases. In the last six months, we have renegotiated over 90% of the leases in our portfolio, resulting in commitments of $65 million in rent abatements and reductions to-date, plus about $3 million in rent deferrals to future years. So far, these numbers have met our expectations.

[Operator:]

Thank you. We will now begin the question-and-answer session. Today's first question comes from Susan Anderson at B. Riley. Please go ahead.

[Susan Anderson:]

Nice job managing through a really tough environment. I'm curious just on the casual product that you're mixing into Chico's and White House. I guess I'm curious, how much have you been able to increase that mix versus historically? And then also, how are you reaching out to consumers to, I guess, let them know that there's more casual product in stores to get them back in there?

[Molly Langenstein:]

Susan, thank you so much for the questions. So, we started working on the fourth quarter product in March and April. So, we were able to make some significant changes to the assortment. And so you're seeing that, and you're certainly seeing that in the percentage of the amount of gift inventory that we have in both of the apparel brands. How we're telling customers? One is, we enjoy a high loyalty penetration in all of our brands. So we leverage and lean in heavy on the high penetration of loyalty customers through our catalogs, and through our marketing outreach in both social and -- as well as our catalogs to be able to show what the expression changes have been, in addition to utilizing Style Connect, and that one-on-one customer engagement from our sales associates in stores and also customers that they know to be able to share the changes in the assortment.

[Susan Anderson:]

Great. And then for holiday, I'm curious how you're managing the holiday different than last year given the capacity constraints in the stores and then also, are you in this holiday to be more promotional than last year? And then also just on the gifting front, it sounds like you're very focused there. Should we expect a similar penetration of gifts versus last year?

[Molly Langenstein:]

So, in terms of the assortments for holiday and how we're thinking about the gifting. Number one, the gift assortments are actually bigger than last year in White House in particular. In Chico's, a little bit bigger, and in Soma, it is actually quite a bit bigger, based upon how we thought through gifting and what we think the customer will be giving in this time period. As it relates to the amount of traffic in stores, I'm pleased to share that so far with all of the moving parts on the constraints that are happening by state. In managing traffic, we are not experiencing delays in the lines, but we do have a line busting system by using Style Connect to be able to make sure that we are serving our customers. So we are navigating each day in this changing environment.

[Susan Anderson:]

Great. And then just on the promotional environment for holiday, what you're expecting?

[Molly Langenstein:]

Yes. Sorry about that. We are not planning to be more promotional than last year. And so right now, our plans are flat to last year for promotionality in all three brands.

[Operator:]

Our next question today comes from Roxanne Meyer with MKM Partners. I apologize it looks like our next question comes from Dana Telsey with Telsey Advisory Group.

[Dana Telsey:]

As you think about the impact of delivery expenses moving to a digital-first environment, how are you budgeting delivery expenses this year for holiday, especially given the shipping surcharges that are out there? And also, on the savings of $235 million, that 23% is impressive. What buckets are being adjusted? And with the rent expense, is that an additional opportunity? And what could that add to the expense streamlining?

[David Oliver:]

Sure, great questions. Starting with shipping. The pandemic, as you mentioned, has really increased market demand for shipping, as more customers are pivoting to shop online. And like other retailers, we are seeing higher pricing. But we have factored that into our fourth quarter plans and our plans for next year as well. And we are, to the extent possible, adjusting the dials to navigate that cost to mitigate it where we can. But we're moving forward, and it's in our plan. And so that was the first question. The second question related to expense reduction. So, the $235 million, the biggest component is still labor, looking at where we are universally. We took out a significant amount of labor. Last spring, we did a restructuring of our corporate organizational structure as well in the field. Today, we're still tracking below historical levels of payroll in the field as well. Other cost components include marketing. Our marketing in the third quarter is down versus our plan. You asked about rent specifically. You are not seeing any meaningful impact of the rent concessions in our P&L at this time. That is from -- is going to be on a go-forward basis because we're taking it ratably over the lease term. We treated these abatements and reductions as lease modifications. And so that's a go-forward benefit versus something you're seeing right now.

[Dana Telsey:]

Got it. And then just lastly, how would you exit the third quarter in terms of sales? And any commentary on how November is starting for you?

[Molly Langenstein:]

November, I would say, is, as I mentioned in the last call that about the stores specifically, that as there are rising cases in COVID that the store traffic has fallen all year, and we are not seeing a change in that. The good news is that, as stores have opened in the third quarter and were open the whole quarter, we did not lose traction digitally. And we were able to maintain digital growth in all three of our brands and improvement, which we are excited about and why we pivoted to so many investments in the third quarter that would get us some additional sales from the customer as we move forward into fourth quarter and beyond. So we are robust and bullish about the traction that we are getting in our digital tools to be able to manage whatever comes in the next quarter.

[Operator:]

And our next question today comes from Roxanne Meyer at MKM Partners. Please go ahead.

[Roxanne Meyer:]

My question is really a follow-up to your comments on being a digital-first company. And I'd love to hear about what that means for your longer-term outlook and strategy in terms of how you're thinking about the store fleet? I know that you mentioned 6% to 15% reduction in stores over the next few years where could that end up? And how you see margins evolving of the total company based on where they are for digital versus where they are for stores? And then also from a customer count perspective, how you think about digital-first strategy is going to impact your ability to drive new customer growth? I know you talked to a 27% increase in digital customer count, which is terrific. How many of the -- what percent of those were existing customers already at stores versus new customers across your brands?

[Molly Langenstein:]

Thank you, Roxanne. So let's start with the investments that we are making in digital and being a digital-first company. We thought long and hard about the $8 million write-down that we had to take on our digital tools. And we did that specifically to be able to pivot dollars and investments into tools that would be able to more immediately impact our digital business and to think about our business as the customer as the channel versus where the actual purchase ends up, whether that transaction is online or in the store. That's important because the interaction that we are seeing and the example that I gave of the customer that was so delighted that we actually knew what was in her closet, and she didn't know, is that we can meet her needs wherever she wants to shop with us. So the -- each one of the tools, Style Connect, My Closet, the social proofing, and all of those things are things that we are seeing traction on, that should continue to gain traction. Whether we started a soft launch in Q2, and we saw improvement into Q3. So, we feel that those investments are going to continue to serve us well. And that not only is a transaction online that the customer themselves can drive, but it also can be an aided transaction that the sales associates in stores can provide for consumers. And that's why I mentioned that it is so incredibly important that we have this large customer base that is single channel. There's a lot of customers that shop just online and a lot of customers that shop just in store, but that consumer that shops at both channels is 3.5 times more valuable and part of our strategy on how we're going to continue to get growth. New customers, Roxanne, you mentioned that in terms of each one of our brands is acquiring new customers across the board. We're actually seeing that these new customers that are coming into us are returning at a faster rate than they did last year, which we believe is an indication of our assortment, and the stickiness of all three of our brands. In addition to that, we're seeing the customers that they are a little bit younger in overall age, but there are similar profiles that we've had in the past. So, we just see a broadening of the new customers that are coming to our brand. Just to add on that a little bit, Roxanne, that's the reason why we believe that the new relationship with Salesforce is so incredibly important. That we're sitting on this mountain of data from all of the customers that we've had -- we've been collecting over the years that to be able to more actively use the customer data and speak to her in the past purchase behavior that she has shown, and to be more specific and personalized in our messaging will be a really something very positive for us one from a ROS standpoint, but also in terms of the customer responsiveness.

[Operator:]

And our next question today comes from Marni Shapiro with Retail Tracker. Please go ahead.

[Marni Shapiro:]

Congrats. In the case I forget, the Chico stores look absolutely outstanding for the holiday, completely amazing to me. Molly, could you talk a little bit there's been obviously a significant shift to direct-to-consumer in a very short period of time. So can you talk about your return cadence prior to that with your direct-to-consumer shopper across the brands? And then, what has it looked like since the shift has happened? And how did you plan for that for the fourth quarter?

[Molly Langenstein:]

You mean, Marni, the shift from the customer that's only shopping in the store channel?

[Marni Shapiro:]

The shop, yes. Well, as people moved more online, have you seen your returns pop up because she's normally shopping in the store and now she's shopping online. How did you manage that? Yes and how do you manage that? How do you think about it for fourth quarter, which is always a very different animal anyway?

[Molly Langenstein:]

Yes. We felt that it was incredibly important in the second quarter when stores were closed, that it wasn't fair to penalize customers that weren't able to get back into stores to not be able to return. So, we wanted to make that customer first decision and accommodate consumers. So, we extended our return window in the second quarter, and we had a lot of positive feedback from customers that made them feel at ease and made them have a lot more trust in our organization. As far as a percent of returns to each one of the brands, we've not seen a change. It's really stayed flat to where it has been in the past. And so, we have not seen an increase in any three of the brands during Q2 or Q3.

[Marni Shapiro:]

That's fantastic. And then can I just follow-up? I know you said that you've had a pretty significant increase in buy online, pickup in-store and curb side, I think, especially. Is it a significant part of the sales now? Is it into the double-digit percentage of your sales at this point?

[Molly Langenstein:]

We see it growing month-over-month. Our largest month was October in terms of curbside. And we are marketing it because we believe that in -- for the fourth quarter time period, back to the -- one of the earlier questions about the escalating challenges for shipping, that we want to make sure it's convenient for customers to be able to pick up packages also in the last 10 days, when they want assurance to be able to pick up their packages. And with two-thirds of our fleet being in outdoor centers, it makes curbside very easy and seamless for them to pick up their packages. So, we're hopeful the momentum that we got from Q2 to Q3, where it doubled in the quarters, and the momentum that we saw in October is going to continue and just become a part of way to do business going forward.

[Marni Shapiro:]

That's fantastic. Best to luck with the holidays. The stores really look fantastic.

[Molly Langenstein:]

Thanks Marni.

[Operator:]

And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the call back over to Molly Langenstein for any closing comments.

[Molly Langenstein:]

Thank you so much, Rocco, and thank you, everyone, for coming this morning. I am extremely privileged to lead this company of product and customer-obsessed associates and these three very special and distinctive brands that offer women's thoughtful solutions and give them confidence and joy. We are fortunate that each of our brands have unique growth opportunities that we have -- and we have a very robust and growing digital business, a strong real estate portfolio, a solid balance sheet and financial position and a talented and nimble and experienced team. I believe the actions we have taken and continue to take are establishing a solid foundation to thrive in the years ahead and create meaningful value for our shareholders. I'm excited about the future of Chico's FAS. Before I conclude my remarks, I want to offer a special thank you to all of our associates, especially those on the front lines in our distribution center and in our stores, who will assure our customers have terrific experiences during this disruptive holiday season. I hope everyone has a wonderful and safe Thanksgiving. Thank you so much for your interest in Chico's FAS and for joining us today. We look forward to speaking with you again in February for our fiscal year-end call.

[Operator:]

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.