Chico's FAS, Inc.
Q4 2020 Earnings Call Transcript

Published: 2 Mar 2021

[Operator:]

Welcome to Chico's FAS Fourth Quarter and Fiscal Year End 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 fourth quarter and fiscal year 2020 conference call and webcast. Molly Langenstein, our CEO and President, also joins me today. For reference, our earnings release can be found on our website at www.chicosfas.com and under press releases on the Investor Relations page.

[Molly Langenstein:]

Thank you, David, and good morning everyone. Although 2020 and pandemic uncertainty created a sales environment that was challenging as reflected in the results, we successfully navigated this extraordinary landscape, while also creating a solid foundation that we believe positions us for our return to growth in 2021 and the years ahead. We rapidly accelerated our transformation to a digital first company, fast tracking numerous innovation and technology investments, which drove higher consumer engagement and year-over-year digital sales increase of nearly 20% led by Soma's digital sales increase of 72%. As a brand, Soma generated comparable sales growth for the last seven months in fiscal 2020. And according to the NPD Group, for the 12 months ended January 2021, Soma's growth exceeded that of the US apparel market and the market leader for non-sport bras and panties and was in the top five brands overall in the sleepwear market. I am also pleased to report that Soma's sales for the back half of fiscal 2020 were the highest in the history of the brand. We believe that there is compelling evidence. Soma is well positioned to accelerate recent market share gains. Our enhanced marketing efforts drove traffic, as well as new customers to our brands, and newly acquired customers were retained at a meaningfully higher rate in fiscal 2019. The average age of our new customers dropped 10 years for Chico's and eight years for Soma. And the average age for the new White House Black Market customers complimented the current target customer reinforcing the runway for all three brands. Our new apparel selections resonated with customers. We re-launched Zenergy in Chico with new fabrication, styling and marketing and also increased our gifting assortment in key item depth, which showed positive results. At White House Black Market, we pivoted to casualization and launched Lux Weekend, new runway leggings, and a focus on denim that customers loved.

[David Oliver:]

Thanks, Molly. Our balance sheet remains solid. We ended the fiscal year with $109 million of cash and cash equivalents after paying $38 million in fourth quarter rent settlements. And we navigated the fourth quarter without increasing debt levels on our newly amended credit facility, which matures in October 2025. As you recall, last year, we renegotiated over 90% of our store leases, resulting in commitments of $65 million in rent abatements and reductions. On a cash basis approximately $44 million of these savings were realized in fiscal 2020. With the majority of the balance expected to be realized in fiscal 2021. This $65 million represented about 25% of our annual rent expense, which we felt was a reasonable request at the time. However, with the effect of the pandemic now extending well beyond original expectations, this month, we are launching Phase 2 of our lease renegotiation process, going back to our landlords for additional reductions.

[Operator:]

Thank you. And today's first question comes from Susan Anderson with B. Riley. Please go ahead.

[Susan Anderson:]

Hi. Good morning. Thanks for taking my question. I guess, a quick question on your guidance for sales for the first half to be flat. Is that, I guess, consistent across first quarter and second quarter? Are there any differences you're expecting there? And then also with the stores now open in first quarter versus last year, I think they were half the quarter. Are you expecting Chico's and White House to be down or flat? And then it sounds like you expect Soma to be positive. And I'm just curious, have you seen yet as maybe some of your customers have started to get vaccinated? Have you seen them come back to the stores yet? Thanks.

[Molly Langenstein:]

Good morning, Susan. What we are - in terms of our outlook, what we are saying is that our trends are in line with what's happening in the market. So in other words, yes, we are definitely seeing that as before, where we followed the virus and the traffic followed the virus, we are now seeing the inverse that traffic is following the vaccine. So in areas where there is a - for our target customer, the majority of the people that are vaccinated, we are seeing the improvement in traffic. So we believe that traffic and sales will continue to follow that trend line as it did in '20. And - so that's how we are looking at sales for the first half of the year. In terms of your question on Soma, we believe that the runway that we've had in Soma and the investments that we're making in the inventory will continue to pay out greater than the market trends that we have in front of us.

[Susan Anderson:]

Great. That's really helpful. Thank you. And then just if I could add a follow-up on gross margin, how much of that deleverage was occupancy in the fourth quarter versus the maintained margin? And then can you talk about the puts and takes you see for first quarter? It looks like your inventory is pretty lean. And I think you mentioned that first quarter is going to be down 30%. So are you expecting maintained margins to improve year over year?

[David Oliver:]

Yeah. Looking at the maintained margin, occupancy cost was the material driver of the deleverage on the rate. But we also had a few other items that impacted the number, one I would call out would be the promotional activity moving through inventory, as well as shipping cost. 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. More specifically, when you look at the fourth quarter, the port delays have required us to flip some goods from - 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.

[Susan Anderson:]

Okay. And are you - sorry.

[Molly Langenstein:]

And we do expect margins to be better because our inventories are very lean. And so we expect to be less promotional in the apparel brands. We were flat in promotion in Q4 in Soma, and we expect to be less promotional in the apparel brands and margins to improve.

[Susan Anderson:]

Great. And just on the port delays, are you expecting an impact in first quarter with - are you seeing late deliveries? Or were you able to manage around that?

[Molly Langenstein:]

We've been closely monitoring the supply chain. We've had no cancellations from our suppliers. We've had - 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 US. The delays have been at the port, consistently out of the LA 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. So we literally have a weekly meeting to stay close to the issue, and we're confident that we have the impact realized in our sales.

[Susan Anderson:]

Great. That's helpful. Thanks so much. Good luck this year.

[Molly Langenstein:]

Thank you, Susan.

[Operator:]

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

[Marni Shapiro:]

Hey, guys. Amazing at Soma, the stores look truly amazing. Just a follow-up on that conversation about the freight costs and the flipping of the floor sets and everything in the marketing, have you had to incur cost to get all of this done? Or were you doing it on the fly? You hadn't planned too much, so you didn't have to undo and redo?

[Molly Langenstein:]

We have - we did have to incur costs in terms of air for the fourth quarter. And most of that was to drive Soma and to drive the gifting. For just the apparel brands and when following floor set, it's had, I'd say, on average, about a 2 week impact versus where we were originally planning sets to be customer facing and make sure that the assets follow the inventory and are aligning closely to make sure that these - the product and the marketing is aligned.

[Marni Shapiro:]

Okay. So - but there hasn't been any incremental cost to the marketing or to the changes you've made to the floor set. It's more of the freight costs that were the incremental?

[Molly Langenstein:]

Correct.

[Marni Shapiro:]

Okay. And then just also a follow-up. You talked a lot about the store, the shop-in-shops in Soma. I've seen two of them being built. Your associates were shaking with excitement. It was so exciting. But are you going to open any stand-alone Soma stores as well? Because I don't know if that came through in the call today?

[Molly Langenstein:]

We've identified eight White House Black Market stores where it makes sense to flip them to Soma. And so those are the first that we've identified in addition to the 40 other shop-in-shops that we have rolled out by May in Chico's locations, and we are excited to report that the 10 initial shop-in-shops are beating our expectations.

[Marni Shapiro:]

That's very exciting. And then one last follow-up, if it's okay, if I could sneak it in. I guess, how are you thinking about the balance of product at White House? Because, in particular, with your stores, actually, I don't even know because Chico's was so hard hit, too, because of that customer, but the White House customer was going to White House to buy outfits, go to the office, and then outfits to go to bridal showers and events and parties and graduations, none of which happened. As we start to step back into all that, how are you - I guess, how are you planning to relayer in the dresses and all of that, so you don't get caught with all leggings when she's looking for dresses, but all dresses when she's still looking for leggings. Like how - what's your thought around that?

[Molly Langenstein:]

We are maniacally listening to our customer. We have a - every other week conversation with our customers to understand what's happening in her life. And how she's thinking about the coming months and maybe events that she's starting to think about participating in again. In addition to that, we are staying very close to failed searches online as addition to Google Search. And starting to see some activity where she's starting to look a little bit more aggressively even though it's down significantly. So we have positioned products in the pipeline so that we can pull triggers when she's ready. But - and we're also using the US data on when people are getting vaccinated, and we're going to have to make some decisions and - just in terms of when she's going to open back up again because we feel that the closure and the reopening are probably going to be as swift. So that timing is critical for us to stay close to.

[Marni Shapiro:]

Yeah. Fantastic. Best of luck, guys.

[Molly Langenstein:]

Thank you, Marni.

[Operator:]

And our next question comes from Dana Telsey with Telsey Group. Please go ahead.

[Dana Telsey:]

Good morning, everyone. As do you think of the rent abatements, which were considerable in 2020, the $65 million, what is coming up in 2021? Could it be as significant in 2021 as compared to what you achieved in 2020? And then when you think about digital, how are the digital margins given as it is scaling? Is there any synergies that you can get or how do you expect it to be in 2021? Thank you.

[Molly Langenstein:]

Thank you, Dana. I'll let David take the rent abatement, and then I'll take digital margin.

[David Oliver:]

With respect to rent abatements, we are now in the planning stage of that Phase 2. We'll be launching that next week. But looking at our plans at this point, we're really working with A&G. We think it will be meaningful savings moving forward. We have not put a number to it that we're putting publicly at this time, but we'll update you on the first quarter call, but we'll be launching that next week.

[Molly Langenstein:]

Yeah. Dana, when we looked at the original work that we did with A&G, at the time, we thought there was only going to be about a disruption in the quarter of the year. So that was what we thought out to negotiate from our landlords, and we're successful to achieve that. As the stores are opened, we all know they're not normal. They are opened, but they still have reduced hours. They have less inventory. They have social distancing guidelines. So there's still - the stores are not operating as they normally would be, even though they are open. So we felt that it was important to go back since the original time line, we expect it to only be a quarter of the year, has lasted actually still through till now. And that we're looking at those social distancing and guidelines and the reduced hours to continue through the spring season. And why we felt confident that we needed to go back as the situation was not normal to go back to our landlord since the situation has been longer than the quarter than we had expected in 2020. So I don't expect it to be material to the levels that we had last year, but material enough that we wanted to launch a Phase 2.

[Dana Telsey:]

Thank you.

[Molly Langenstein:]

In regards to the digital margins, the digital margins in Soma are encouraging. And we feel confident that we've built and strategically engineered a strategy that didn't happen by happenstance. We went after a 3 year strategy within Soma because we saw the market share way before COVID started and materially wanted to go after owning the intimate apparel space. We made strategic decisions to eliminate categories within the business and drive those - some of those, which included the launch of lounge, which we had in the pipeline before COVID even came into impact. So we are really excited about how we were able to drive the digital margins in the Soma brand and confident that we have a playbook to mimic within the apparel brands past the pause within COVID starts to lift, and she starts to get out of the house.

[Dana Telsey:]

Thank you.

[Molly Langenstein:]

You're welcome.

[Operator:]

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Molly Langenstein for closing remarks.

[Molly Langenstein:]

Thank you so much, Roko. We are a company of three unique brands, each with well-defined competitive advantages and unique growth opportunities. I am encouraged by our results and bullish about our company's future. The Soma increase was strategically engineered, and I have every confidence in the opportunity in all three brands as the COVID pause lifts. Our vision to be a digital first company, customer led company, building a larger, more engaged customer community. We have a talented and nimble leadership team and lean organizational structure. Our balance sheet and financial position are solid. In 2021, our goal is to build on our strengths and execute on our five key focus areas to maximize the opportunities in each of our brands and create meaningful value for our shareholders. 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 June for our first quarter call. Operator Thank you. And ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines.