Chico's FAS, Inc.
Q4 2011 Earnings Call Transcript

Published: 22 Feb 2012

[Operator:]

Hello and welcome to the Fourth Quarter 2011 Chico’s FAS Earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. If you would like to ask a question during the question and answer session, please press star then one on a touchtone phone. You will hear a tone to confirm that you have entered the list. If you decide you want to withdraw your question, please press star then two to remove yourself from the list. Please note this event is being recorded. Should need assistance during the conference, please signal an operator by pressing the star key followed by zero. Now I would like to turn the conference over to Mr. Todd Vogensen, Vice President of Investor Relations. Please go ahead, sir.

[Todd Vogensen:]

Thanks Denise and good morning everyone. Welcome to the Chico’s FAS Fourth Quarter Earnings Conference Call and Webcast. Dave Dyer, CEO and Pam Knous, CFO are here with me at our national store support center in Fort Myers. Before Dave begins his executive overview, we would like to remind you that our discussions this morning, including forward-looking statements which are subject to and protected the Safe Harbor statement found in our SEC filings and today’s release. These forward-looking statements are subject to a number of factors and uncertainties that could cause actual results to differ materially. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that projected results expressed or implied by such statements will not be realized. With that, I’ll turn it over to Dave.

[David Dyer:]

Great. Thanks Todd and good morning everyone. Thank you for joining us on our fourth quarter earnings conference call. This morning we’re pleased to share our results with you as well as provide some insights into 2012 and beyond. I’m thrilled to announce our results for quarter four. We delivered record sales of 569 million, up 19.8%; comparable sales of 8.7% with all brands positive; EPS of 15% - that’s a 25% increase; inventories were not only in line but better than our stated goals; and a positive contribution from Boston Proper in its first full quarter. I’m pleased to highlight a few accomplishments over the last three years. First, fiscal year 2011 represents our third consecutive year of positive comparable sales performance or a 24% increase on a three-year stack. Second, fiscal 2011 represents our third consecutive year of double-digit increases in earnings per share, a three-year compounded annual growth rate of 28%. And finally in fiscal 2011, our Soma brand was not only profitable on a four-wall basis but the Soma brand, even considering the increased marketing expense and overhead, was cash flow positive in 2011. As customers have been trying our Soma products, loyalty and brand awareness has been steadily increasing and we’re seeing consistent growth in sales and profits as our stores gain traction. In addition, the strong cash generation of our total business over the past three years has allowed us to invest $110 million in brick and mortar locations, over 250 new stores; to fund 93 million of significant upgrades to technology, distribution and supply chain infrastructure; to complete our $213 million acquisition of Boston Proper, and to initiate a meaningful dividend and share repurchase program, returning 263 million in cash to our shareholders in 2010 and 2011. I believe you’ll agree with me that by any metric, Chico’s FAS is a growth company with an even more exciting future ahead. I’d like to extend thanks and congratulations to our many associates throughout the entire Chico’s FAS organization. Their spirit and talent drove this outcome through compelling products, exciting marketing, disciplined expense control, and it goes without saying amazing personal service that has brought over a million new customers to our brands in the last few years. We’re now poised for higher levels of profitability as we continue our current momentum. While Pam is going to get into more specifics on the quarter in a moment, I’d like to elaborate on our prospects for growth, underscoring the confidence we have in our plans to significantly build our business in the years ahead. As we have shared with you in the past, our strategic growth plan has four major components

[Pamela Knous:]

Thanks Dave and good morning everyone. I’m very pleased to announce our quarter four results

[David Dyer:]

Great. Thank you, Pam. 2011 was a great year and we’re going to give it a big woohoo and do a corporate-wide comp dance at our company meeting right after this call. Just as Pam said, we feel very good about our spring assortments. I have personally reviewed spring product in all brands, and I can tell you it looks just terrific. We’re in the fourth week of the first quarter and I can share with you that as reflected on our again unaudited daily flash sales through yesterday, our total comp sales are running up about 7% on top of the quarter-to-date comps from last year of 13%, a two-year stack of 20%. All brands are positive comp and total quarter-to-date sales, including Boston Proper – again, unaudited through yesterday – are up 19%. This reflects a strong start to our spring season and we have great marketing plans set to drive sales this spring. We hope again to see you here in Fort Myers at our investor conference on March 6, or I hope you’ll tune into our webcast. Our objective then, as always, is to make clear the considerable promise of Chico’s FAS, our portfolio of high-performing fashion brands with compelling products, a seasoned, savvy leadership team, and huge growth and profit upside. Todd?

[Todd Vogensen:]

All right, thanks Dave. So before we move into questions, one quick calendar item – as Dave mentioned, Chico’s FAS is hosting our fourth security analyst day on Tuesday, March 6 here at our Fort Myers campus. Details of the webcast of that meeting will be included in an upcoming press release. That concludes our prepared comments. At this time, we’re happy to take questions and I will turn the call back over to Denise.

[Operator:]

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you decide your question has been answered and you would like to withdraw from the queue, please press star then two. We ask that you do limit yourself to one question so that all participants wishing to ask a question may have that opportunity. We will begin with Adrienne Tennant of Janney Capital Markets. Please go ahead.

[Adrienne Tennant:]

Good morning and excuse my voice, but I wanted to give you a big woohoo. That’s a fantastic quarter in a very, very difficult environment. So having said that, Dave, I have seen the White House Black Market television ad. It’s very energetic, looks very good; but I wanted to know what have you learned from the fall season television advertising that you did about Chico’s and White House, and what does that imply for the marketing budget for spring – so how much should we be expecting marketing dollars to be up for spring? And then really quickly as a follow-up, Pam, on the 150 basis points of gross margin hit in Q1, can you give us any color on the split between IMU pressure and mark-down activity, promotional activity? Thank you.

[David Dyer:]

Well I’ll talk about White House advertising. I would say that one of the primary things that we did as we entered fall is we have been striving for brand recognition, certainly as we expand the White House footprint nationally. One of the great things about White House Black Market is the customers are so passionate about the brand, yet they haven’t been very good about sharing where they find all this great apparel. So I would say that as we look at the TV commercial and then analyze the new customers that are coming to White House Black Market, we have seen the best growth rate of new customers to the brand, and I think that that’s what it’s all about – it’s about building the file and introducing new customers to the brand, and based on that it has been very, very successful. Pam, you have--?

[Pamela Knous:]

Yeah, actually I would just say, Adrienne, we’re not going to quantify the differences; but I did comment that there are some cost increases that are providing some pressure as well as we do expect it to be a more promotional environment. So that’s what we actually see transpiring in the first quarter; and as far as marketing, we would just comment that across the full year, we would expect it to be basically flat, excluding Boston Proper.

[Operator:]

Our next question will come from Betty Chen of Wedbush Securities. Please go ahead.

[Betty Chen:]

Thank you. Good morning and congratulations on a great quarter. I was wondering, Dave, if you can speak a little bit more about the store plans. You had mentioned four major growth initiatives for real estate. I was wondering if you can break that down a little bit in terms of what percent of the growth will come from smaller markets versus relocations or remodels, as well as the acceleration of Soma and outlets. And then I think related to that, you had mentioned the recent classes of Chico’s stores to be smaller than the ’05-’06 timeframe. How many more Chico’s stores would qualify into that bucket, and what sort of productivity improvements have you seen in the more recent classes? Thank you.

[David Dyer:]

Well that’s about 85 questions in one, but let me try to start. I think that we had said sometime back if we wound up with Chico’s stores, they were about 150 to 170 of them that were of a size that we thought was just too big. That was back in the time when the thought process was, gee, we’re doing $1,000 a square foot – if we doubled the size of the store, look at how much volume we can do. Well, we doubled the size of the store and we did half the dollars per square foot; so that didn’t work too well, and these are the ones that are coming up for kick-out or certainly for renegotiation, and these are the ones that we’re reacting to. Overall, it is our objective to drive store productivity and to increase our dollars per square foot. That’s the strategy. When we look at the remodels and refreshes of our store projects, a lot of that is outside of the new store growth – in other words, if we remodeled a store, we did talk about it for Soma but other stores that we remodel or refresh are not in our 135 gross square foot numbers. That could go anywhere from simply painting and putting fresh carpet into a store to doing a full-blown build-out, and those are additional projects. Our real estate department and construction department are very, very busy with the projects that we have. Our goal is to keep a fresh fleet. I mean, one of the things that I think, just as we’ve said at Chico’s in the past, there probably hadn’t been the investment. Well, we now know there hadn’t been the investment that should in systems and infrastructure; there equally was not the investments in keeping some of our stores fresh, and we’ve gone back and tried to get stores on a regular maintenance and refresh program, and basically we tested it. We tested a lot of different things from just painting to the full-blown remodel, and we have seen various lifts from each of the things that we do; but we do know that it makes a difference.

[Operator:]

Our next question will come from David Telsey of Telsey Advisory Group.

[Dana Telsey:]

Hi, it’s Dana Telsey. Congratulations everyone. Can you give a bit more color on Boston Proper, how you see that margin opportunity, and what that cadence of the business should be compared to regular Chico’s? And lastly, what synergies do you see in operating Boston Proper with Chico’s? Thank you.

[David Dyer:]

Well, Boston Proper – I think the first when you look at a direct to consumer business, is you may have a little bit lower margin but you have also lower SG&A total. So when you look at it, I think Pam had said that Boston Proper was in the 18% operating profit area, which is certainly higher than the company as a whole. So they are adding nicely to our total profitability, even though they get at it a little bit different way. Now we’ll see that mix change over time as we open stores, certainly; but the base of Boston Proper really just fits terrific into our portfolio. As you look at it, hopefully we’ll have the ability to take you guys or invite you to a meeting at our distribution center in Winder, Georgia and let you see it sometime. What we have just done up there, it’s really incredible; and we do see lots of synergy. We see it from sourcing. We see it from buying power, whether it is paper and printing or packaging or shipping rates. There’s just been lots of synergies, and as Pam said, the synergies we have seen so far look like they more than offset the one-time charges associated with the brand, so we ought to see those start to kick in as we go forward. What else can I answer there? Is there anything else in the question?

[Pamela Knous:]

I think that’s good.

[David Dyer:]

All right.

[Operator:]

And our next question will come from Janet Kloppenburg from JJK Research.

[Janet Kloppenburg:]

Good morning everyone. Let me add my congratulations. I was just wondering, Dave, if you could talk a little bit about your expense outlook for fiscal 2012. I would think with the kind of sales increase you’re running now and your mid-teens guidance that the possibility of greater than 50 basis points SG&A leverage is there. I’m wondering if marketing expense will be rising again, or if there’s other investments that are pushing n that SG&A rate, or if it’s just a conservative outlook? Thanks.

[David Dyer:]

The only thing I can say if we’ve said that marketing will be approximately flat to last year, so we think we’re at the appropriate level of marketing spend now. So as we look at the SG&A, I think there’s several things that we’re seeing where we can get leverage. We think we can do a better job at store expense; we continually look at that. But there is some pressure through our shared services as we add more brands and more volume and more stores. Obviously, we have to do things to support the growth, and so that’s where you’re seeing there are some headcount increases, there are certainly lots of infrastructure increases that we’re doing just as I was talking about in Winder, Georgia; and I think Pam said there’s probably been in systems and infrastructure something short of $100 million over the last two or three years that we’ve invested. All that, even though these systems are fantastic and make us state-of-the-art, to bring people up to speed in these systems, the training and development that’s necessary certainly is an additional cost.

[Operator:]

And our next question will come from Sam Panella of Raymond James.

[Sam Panella:]

Good morning everyone. Obviously it sounds like you’re very pleased with the Soma business, and just wondering if we could have an update in terms of the timeline, getting this division accretive to EPS, and just also wondering as you’re switching now away from the pop-up store format, does this impact either the square footage of those stores or your ability to continue to be cash flow positive on this division in 2012? Thank you.

[David Dyer:]

Yes, we plan to be cash flow positive going forward – I mean, that’s the name of the game – and to reach profitability as we go forward, more important profitability. I think that what the end of the pop-up store says is that we now have enough data and we have enough scale that we know a lot more about the brand. We know how long it takes to bring a store kind of to maturity. Soma is a brand that takes a while to build. You’re asking customers to change loyalty basically in their foundation garments, which is a very, very high loyalty product, and it takes a while. It also takes a while with brand recognition. And so we really understand the marketplaces, we understand the success factors, I think we understand the size of the store a lot better, and certainly we have a focus on all the things that are going to make us successful – margin, expense, occupancy cost, and putting stores in a location where we have a high probability of making money. I think that’s it. Basically I feel we’ve kind of figured it out, and now it’s moving forward in a planned, organized manner, opening stores. I think that by any means, opening 40 to 60 stores a year is not bad. So that’s where we’re heading.

[Operator:]

And our next question will come from Margaret Whitfield of Sterne, Agee. Please go ahead.

[Margaret Whitfield:]

Good morning everyone. Well Dave, it sounds like the Chico’s brand had improved markedly going from Q3 to Q4 and into the near year. If you could comment on what improved the business?

[David Dyer:]

Well yes it did, and that’s one of the things that I can tell you that I am really proud of – that Chico’s team. We saw, as we said in third quarter, we saw the business slow with a lot of things with the economy and our customers. Chico’s reacted to it. They were able to cut expense. They were able to look at their own order. They were able to make adjustments, and fashion inventory is like produce – just like tomatoes, it doesn’t get better with age. So we reacted to it, we took our mark-downs and we actually used it strategically to drive market share during that period. As we look at fourth quarter, Chico’s came back strongly and wound up, again, with positive comps for the fourth quarter and is again, as I said earlier, is starting off the first quarter with positive comps. So I think that that just shows the agility of our merchandising teams, and I am really proud of the way that they were able to take that adversity and turn it around. Again, to go back, we had come out of June and July with 11 to 14% comps as we went into third quarter, planning a 7% comp, which I think most people would think would have been a reasonable plan. When it didn’t materialize, we reacted, we did what we needed to do, and we controlled our business and drove our business and did what we had to do to deliver the year. Kudos to the whole Chico’s team for that.

[Operator:]

Our next question will come from Jennifer Black of Jennifer Black Associates.

[Jennifer Black:]

Good morning, and let me add my congratulations. I know you just started the TV advertising for the So Slimming Jean, and I wondered if you could talk about the initial response and do you think this will be the most effective ad campaign you’ve done? And also, I know you just launched the So Slimming denim crops – will you be launching additional styles throughout the year, and will you incorporate non-denim based pants? And are you going to play in colored denim?

[David Dyer:]

The answer to the styles and the non-denim base is yes, we’re looking at all of that. But I would say that So Slimming, you know, we’ve had it in for probably about seven months now and haven’t been able to keep it into stock, so based on the fall sales we know we have a winner. This is something unique for Chico’s. Normally we have advertised assortment. This is the first time we’ve advertised a specific item just like Soma has advertised items, and I think that there is big merit in advertising this way and I think that we can create some excitement and get a lot of customers into Chico’s to give that denim pant a trial, and while they’re there pick up a few other things.

[Operator:]

Our next question will come from Michelle Tan of Goldman. Please go ahead.

[Tiffany:]

Thanks. This is Tiffany on for Michelle this morning. Pam, you mentioned a number of times you’re planning for a more promotional environment, so was wondering if you can go into more detail about how you’re approaching your promotional strategy into 2012 and any changes we can expect there? Then also, in the past you guys have called out the sensitivity of your customer to macro headlines, so we were wondering if you can just speak a little bit to that and any shifts in customer behavior you’re seeing.

[Pamela Knous:]

Well I think as far as what we’re seeing right now, Dave did share with you that the year is off to a strong start. There is, as you well know, a lot of uncertainty on how the economy is going to play out over the course of the year. We’ve talked frequently about the savvyness of the Chico’s consumer, that she does monitor her portfolio and is in tune to economic events. So from the perspective, we just are, as we said, planning somewhat more conservatively. We do see that the environment continues to be more promotional than it has been in the past, but we are planning in anticipation of that and believe that we’re off to a good start for the beginning of the year.

[Operator:]

Our next question will come from Janice Ong of UBS.

[Roxanne Meyer:]

Great, hi. It’s Roxanne Meyer from UBS. Let me add my congratulations on a great quarter. I just wanted to know if you were able to discuss some of the big swing factors that could allow you to get to a mid-teens operating margin over time, and I guess specifically how dependent are you on getting Soma off and running and profitable in order to get there? Thanks.

[David Dyer:]

Well Soma is certainly part of the equation, but I think that when you look at the relative size compared to the White House Black Market and certainly Chico’s, it would not have the same impact of making movement in White House and Chico’s. Also, our direct to consumer initiatives through the brands are very, very important in driving that operating income to us, and certainly as you can see from Boston Proper, which is already operating in the mid-teens operating profit. So I would say it’s probably more dependent on Chico’s and White House, but certainly can be helped along by continued improvements in Soma. I’m very pleased with the way Soma has responded. You know, this was a brand that there was a lot of questions about three years ago. I feel that this brand is poised to be a major contributor and a great part of our growth platform in the future.

[Operator:]

Our next question will come from Robin Murchison of SunTrust. Please go ahead.

[Robin Murchison:]

Thanks very much. Congratulations everyone. Can you give us a little more color on the small market characteristics and how many you have in the portfolio? Any metrics that you might have, comparative metrics would also be helpful.

[David Dyer:]

Well the answer is no, and that’s basically for competitive reasons. We think that we have kind of figured out some interesting criteria that helps us identify markets, and as we have said, those markets tend to be more productive, more profitable as some of the characterizations, and I think that they have exceeded our expectations in almost every market that we’ve gone into that way.

[Operator:]

And our next question will come from Stacy Pak of Barclays.

[Stacy Pak:]

Thank you. A couple questions – can you clarify, did you say – I don’t think you did – what the AUC would actually be down in the second half of ’12, and the Boston Proper EPS contribution? And then on White House, could you talk about just the strengths in career and what you’re seeing there?

[David Dyer:]

Well in terms of the strength of career, there’s work kit that we launched last fall – it has been nothing short of fantastic, and as a matter of fact, if you look at our latest commercial, it certainly brings that out, the versatility and I guess the breadth of our career work wear. But that’s not to overshadow the fact that White House is a total lifestyle brand. We go from casual to social occasion, special occasion as well as work wear, so we’re beginning to be relevant in all aspects of our White House Black Customers’ life.

[Pamela Knous:]

Right. And then actually just on the AUC, we said we’re starting out the year with average unit costs up a mid-single digit percent; and as far as the specifics around Boston Proper, we did share their sales as well as the fact that their historical operating margin has been around 18% as well as the fact that there’s approximately $4 million of amortization costs associated with the list, and synergies as well. So from that, you should be able to get a pretty good sense for modeling purposes for the impact of Boston Proper.

[Operator:]

And our next question will come from Kimberly Greenberger of Morgan Stanley.

[Kimberly Greenberger:]

Thank you so much. Good morning. I was wondering if you could address new store productivity. The math that we’re doing on it looks like the 2011 class of stores produced about 60% of the sales of the average in your existing fleet, and I’m wondering if perhaps that number is being pulled down by Soma or if you could address how you’re thinking about new store productivity and the volumes that we should be expecting from those new stores. Thanks.

[David Dyer:]

I would say the math—you know, whatever math you want to use is the math. I mean, we understand what we’re doing. There is Soma in the mix, and each one of them have different characteristics and different ways that they build. But overall, we’re driving for more store productivity.

[Operator:]

And our final question this morning will come from Anna Andreeva of FBR. Please go ahead.

[Anna Andreeva:]

Great, thanks so much and congrats to this very solid start to the year. I had a couple questions – what kind of EPS impact are you guys embedding in the guidance from the 53rd week? I thought you said it was negligible, but I just wanted to double check. Quarter-to-date, you said comps are up 7. Is that comparable by brand? And also, are you embedding any share buyback in the guidance?

[Pamela Knous:]

Okay, I can take that. We did say that the EPS impact from the 53rd week would be negligible. Quarter-to-date is up 7%. We’re not commenting on the specifics by brand. And the last question was--?

[David Dyer:]

Well, all brands are positive.

[Pamela Knous:]

Yeah, all brands are positive. And her last question was--? Oh, share buyback. Actually, we didn’t provide any specific comment on share buyback. We just said that we would look to do it as we have in the past in a measured manner. But it is not included in our guidance.

[Operator:]

And ladies and gentlemen, that will conclude our question and answer session this morning. I would like to turn the conference back over to Todd Vogensen for any closing comments.

[Todd Vogensen:]

All right, thank you Denise. That does conclude our call for this morning. We apologize to those of you that we were not able to get to today. As always, I’ll be available for any follow-ups necessary. Thanks for joining us this morning and we appreciate your continuing interest in Chico’s FAS.

[Operator:]

Thank you. The call has concluded. Thank you for attending today’s presentation. You may now disconnect your lines.