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CHS > SEC Filings for CHS > Form 10-Q on 21-Nov-2012All Recent SEC Filings

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Form 10-Q for CHICOS FAS INC


21-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the accompanying unaudited consolidated financial statements and notes thereto and our 2011 Annual Report to Stockholders.

Executive Overview

We are a national specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing items operating under the Chico's, White House | Black Market ("WH|BM"), Soma Intimates ("Soma") and Boston Proper brand names. We earn revenues and generate cash through the sale of merchandise in our retail stores, on our various websites and through our call centers, which take orders for all of our brands.

Net sales for the third quarter of fiscal 2012 were $636.7 million, an increase of 18.2% compared to $538.5 million last year. The increase reflects comparable sales growth of 9.9%, square footage increase of 8.2%, and Boston Proper sales for seven incremental weeks of $16.7 million. The 9.9% increase in comparable sales for the third quarter followed a 3.7% increase in last year's third quarter and reflected increases in both average dollar sale and transaction count. The Chico's/Soma Intimates brands' comparable sales increased 11.6% following a 0.6% increase in last year's third quarter and the WH|BM brand's comparable sales increased 6.4% following an 11.0% increase in last year's third quarter.

Net income for the third quarter of fiscal 2012 was $41.7 million, an increase of 57.4% compared to net income of $26.5 million in last year's third quarter, and earnings per diluted share for the third quarter of fiscal 2012 were $0.25, an increase of 56.3% compared to $0.16 per diluted share in last year's third quarter. These results include acquisition and integration costs related to the Boston Proper acquisition of approximately $0.3 million and $3.5 million, net of tax, for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively.

We believe these results reflected a positive customer response to our fall fashion assortments and the effectiveness of our innovative marketing plans.

Future Outlook

Our planning assumptions for fiscal 2012 are:

Net sales of approximately $2.55 to $2.6 billion, which includes comparable sales growth at a mid-single digit percent;

Gross margin rate up approximately 25 to 50 basis points to 2011;

Selling, general and administrative expenses ("SG&A"), as a percentage of net sales, down approximately 50 basis points to 2011;

One-time acquisition and integration costs for Boston Proper of approximately $4 million pre-tax;

Effective tax rate of approximately 38%;

Weighted average diluted shares of approximately 165 million, excluding the impact of any future share repurchases;

Inventories increasing in-line with sales growth; and,

Capital expenditures of approximately $155 million.

These are our internal planning assumptions and are not intended to be guidance.


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Results of Operations

The following table sets forth the percentage relationship of certain items in
our consolidated statements of net income and comprehensive income to net sales
for the periods shown below:



                                          Thirty-Nine Weeks Ended                      Thirteen Weeks Ended
                                    October 27,            October 29,          October 27,            October 29,
                                        2012                  2011                  2012                  2011
Net sales                                  100.0 %                100.0 %               100.0 %               100.0 %
Cost of goods sold                          42.7                   42.9                  42.8                  44.0

Gross margin                                57.3                   57.1                  57.2                  56.0
Selling, general and
administrative expenses                     44.8                   45.5                  46.7                  47.3
Acquisition and integration
costs                                        0.1                    0.3                   0.0                   0.9

Income from operations                      12.4                   11.3                  10.5                   7.8
Interest income, net                         0.0                    0.1                   0.0                   0.1

Income before income taxes                  12.4                   11.4                  10.5                   7.9
Income tax provision                         4.7                    4.3                   4.0                   3.0

Net income                                   7.7 %                  7.1 %                 6.5 %                 4.9 %

Thirteen Weeks Ended October 27, 2012 Compared to the Thirteen Weeks Ended
October 29, 2011

Net Sales

The following table depicts net sales by Chico's/Soma Intimates, WH|BM and
Boston Proper in dollars and as a percentage of total net sales for the thirteen
weeks ended October 27, 2012 and October 29, 2011 (dollar amounts in thousands):



                                                 Thirteen Weeks Ended
          Net sales:                 October 27, 2012           October 29, 2011

          Chico's/Soma Intimates   $ 411,671        64.6 %    $ 357,208        66.3 %
          WH|BM                      197,248        31.0        170,328        31.6
          Boston Proper               27,746         4.4         11,010         2.1

          Total net sales          $ 636,665       100.0 %    $ 538,546       100.0 %

Net sales for the quarter increased 18.2% to $636.7 million from $538.5 million in last year's third quarter, primarily reflecting comparable sales growth of 9.9%, square footage increase of 8.2%, and Boston Proper sales for seven incremental weeks of $16.7 million. Comparable sales increased 9.9% for the third quarter, following a 3.7% increase in last year's third quarter and reflected increases in both average dollar sale and transaction count. The Chico's/Soma Intimates brands' comparable sales increased by 11.6% following a 0.6% increase in last year's third quarter and the WH|BM brand's comparable sales increased by 6.4% following an 11.0% increase in last year's third quarter. Boston Proper's sales are excluded from the comparable sales calculation.


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Cost of Goods Sold/Gross Margin

The following table depicts cost of goods sold and gross margin in dollars and
gross margin as a percentage of total net sales for the thirteen weeks ended
October 27, 2012 and October 29, 2011 (dollar amounts in thousands):



                                             Thirteen Weeks Ended
                                    October 27, 2012       October 29, 2011

         Cost of goods sold        $          272,369      $         237,038
         Gross margin              $          364,296      $         301,508
         Gross margin percentage                 57.2 %                 56.0 %

Gross margin for the quarter was $364.3 million, an increase of 20.8% compared to $301.5 million in last year's third quarter. As a percentage of net sales, gross margin was 57.2%, a 120 basis point improvement from last year's third quarter, primarily reflecting a higher level of full-price selling and effective promotional activities, partially offset by incentive compensation.

Selling, General, and Administrative Expenses

The following table depicts SG&A in dollars and as a percentage of total net
sales for the thirteen weeks ended October 27, 2012 and October 29, 2011 (dollar
amounts in thousands):



                                                                 Thirteen Weeks Ended
                                                     October 27, 2012             October 29, 2011

Selling, general and administrative expenses        $           297,190           $         254,522
Percentage of total net sales                                      46.7 %                      47.3 %

SG&A consists of store and direct operating expenses, marketing expenses and National Store Support Center expenses.

SG&A for the quarter was $297.2 million, an increase of 16.8% compared to $254.5 million in last year's third quarter. As a percentage of net sales, SG&A was 46.7%, a 60 basis point improvement from last year's third quarter, primarily reflecting the sales leverage impact on store expenses, partially offset by higher marketing expenses and incentive compensation.

Acquisition and Integration Costs

The following table depicts acquisition and integration costs in dollars and as
a percentage of total net sales for the thirteen weeks ended October 27, 2012
and October 29, 2011 (dollar amounts in thousands):



                                                  Thirteen Weeks Ended
                                       October 27, 2012           October 29, 2011

  Acquisition and integration costs   $              480         $            4,985
  Percentage of total net sales                      0.0 %                      0.9 %

Acquisition and integration costs for the quarter were $0.5 million compared to $5.0 million in last year's third quarter. Last year, acquisition and integration costs primarily consisted of professional service fees and employee-related benefit costs.


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Net Income and Earnings Per Diluted Share

Net income for the third quarter was $41.7 million, an increase of 57.4%, compared to $26.5 million in last year's third quarter. Earnings per diluted share for the third quarter were $0.25, an increase of 56.3%, compared to $0.16 per diluted share in last year's third quarter. These results included acquisition and integration costs of approximately $0.3 million and $3.5 million, net of tax, for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively.

Thirty-Nine Weeks Ended October 27, 2012 Compared to the Thirty-Nine Weeks Ended
October 29, 2011

Net Sales

The following table depicts net sales by Chico's/Soma Intimates, WH|BM and
Boston Proper in dollars and as a percentage of total net sales for the
year-to-date period ended October 27, 2012 and October 29, 2011 (dollar amounts
in thousands):



                                               Thirty-Nine Weeks Ended
        Net sales:                  October 27, 2012             October 29, 2011

        Chico's/Soma Intimates   $ 1,251,632        64.9 %    $ 1,106,466        68.0 %
        WH|BM                        583,473        30.2          509,677        31.3
        Boston Proper                 94,099         4.9           11,010         0.7

        Total net sales          $ 1,929,204       100.0 %    $ 1,627,153       100.0 %

Net sales for the year-to-date period increased 18.6% to $1.929 billion from $1.627 billion in last year's year-to-date period, primarily reflecting comparable sales growth of 8.4%, square footage increase of 8.2%, and incremental Boston Proper sales of $83.1 million. Comparable sales increased 8.4% for the year-to-date period, following an 8.0% increase for the same period last year, and reflected increases in both average dollar sale and transaction count. The Chico's/Soma Intimates brands' comparable sales increased by 9.2% following a 6.6% increase for the same period last year and the WH|BM brand's comparable sales increased by 6.6% following an 11.1% increase for the same period last year.

Cost of Goods Sold/Gross Margin

The following table depicts cost of goods sold and gross margin in dollars and
gross margin as a percentage of total net sales for the year-to-date period
ended October 27, 2012 and October 29, 2011 (dollar amounts in thousands):



                                            Thirty-Nine Weeks Ended
                                    October 27, 2012       October 29, 2011

         Cost of goods sold        $          824,132      $         698,655
         Gross margin              $        1,105,072      $         928,498
         Gross margin percentage                 57.3 %                 57.1 %

Gross margin for the year-to-date period was $1.105 billion, an increase of 19.0%, compared to $928.5 million for the same period last year. As a percentage of net sales, gross margin was 57.3%, a 20 basis point improvement from the same period last year, primarily reflecting a higher level of full-price selling and effective promotional activities, partially offset by incentive compensation and the inclusion of Boston Proper.


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Selling, General, and Administrative Expenses

The following table depicts SG&A in dollars and as a percentage of total net
sales for the year-to-date period ended October 27, 2012 and October 29, 2011
(dollar amounts in thousands):



                                                                Thirty-Nine Weeks Ended
                                                     October 27, 2012             October 29, 2011

Selling, general and administrative expenses        $          864,987            $         739,723
Percentage of total net sales                                     44.8 %                       45.5 %

SG&A for the year-to-date period was $865.0 million, an increase of 16.9% compared to $739.7 million for the same period last year. As a percentage of net sales, SG&A was 44.8%, a 70 basis point improvement from the same period last year, primarily reflecting the sales leverage impact on store expenses and the inclusion of Boston Proper, partially offset by incentive compensation.

Acquisition and Integration Costs

The following table depicts acquisition and integration costs in dollars and as
a percentage of total net sales for the year-to-date period ended October 27,
2012 and October 29, 2011 (dollar amounts in thousands):



                                                 Thirty-Nine Weeks Ended
                                       October 27, 2012           October 29, 2011

  Acquisition and integration costs   $            1,321         $            4,985
  Percentage of total net sales                      0.1 %                      0.3 %

Acquisition and integration costs for the year-to-date period were $1.3 million compared to $5.0 million for the same period last year. Last year, acquisition and integration costs primarily consisted of professional service fees and employee-related benefit costs.

Provision for Income Taxes

Our effective tax rate for the year-to-date period was 37.9% compared to an effective tax rate of 37.5% for the same period last year. This increase primarily resulted from the expiration of certain tax credits.

Net Income and Earnings Per Diluted Share

Net income for the year-to-date period was $148.7 million, an increase of 28.4%, compared to $115.8 million for the same period last year. Earnings per diluted share for the year-to-date period were $0.89, an increase of 34.8%, compared to $0.66 for the same period last year. These results included acquisition and integration costs of approximately $0.8 million and $3.5 million, net of tax, for the year-to-date periods ended October 27, 2012 and October 29, 2011, respectively. The percentage increase in earnings per diluted share was higher than the percentage increase in net income, primarily reflecting the repurchase of 4.9 million shares since the end of the third quarter last year.


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Liquidity and Capital Resources

We believe that our existing cash and marketable securities balances and cash to be generated from operations will be sufficient to fund capital expenditures, working capital needs, dividend payments, potential share repurchases, commitments and other liquidity requirements associated with our operations through at least the next 12 months. Furthermore, while it is our intention to repurchase our stock and pay a quarterly cash dividend in the future, any determination to repurchase our stock or pay future dividends will be made by the Board of Directors and will depend on our stock price, future earnings, financial condition and other factors established by the Board.

Our ongoing capital requirements will continue to be primarily for: new, expanded, relocated and remodeled stores; information technology; and other central support facilities.

Operating Activities

Net cash provided by operating activities for the year-to-date period was $289.9 million, an increase of approximately $108.9 million from the same period last year. This increase reflects improvements in working capital, primarily related to planned inventory reductions, as well as higher net income compared to the same period last year.

Investing Activities

Net cash used in investing activities for the year-to-date period was $223.5 million compared to $32.7 million provided by investing activities for the same period last year. The net change of $256.2 million primarily reflects the use of marketable securities during the year-to-date period ended October 29, 2011 to consummate the Boston Proper acquisition.

Financing Activities

Net cash used in financing activities for the year-to-date period was $46.3 million compared to $178.9 million used in financing activities for the same period last year. The decrease is primarily attributable to a reduction in share repurchase activity compared to the same period last year.

During the third quarter of fiscal 2012, we repurchased 0.6 million shares for $11.7 million under our $200 million share repurchase program announced in November 2011. During the thirty-nine weeks ended October 27, 2012, the Company repurchased a total of 2.5 million shares for $37.4 million, with $137.7 million remaining under the program at the end of the third quarter.

Credit Facility

In fiscal 2011, we entered into a $70 million senior five-year unsecured revolving credit facility (the "Credit Facility") with a syndicate led by JPMorgan Chase Bank, N.A., as administrative agent and HSBC Bank USA, National Association, as syndication agent.

The Credit Facility provides a $70 million revolving credit facility that matures on July 27, 2016. The Credit Facility provides for swing advances of up to $5 million and issuance of letters of credit up to $40 million. The Credit Facility also contains a feature that provides us the ability, subject to satisfaction of certain conditions, to expand the commitments available under the Credit Facility from $70 million up to $125 million. As of October 27, 2012, no borrowings are outstanding under the Credit Facility.


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New Store Openings

In the year-to-date period ended October 27, 2012, we had 99 net openings, consisting of 22 Chico's, 51 WH|BM and 26 Soma stores. Currently, we expect our new stores in fiscal 2012 to increase approximately 8%, reflecting net openings of approximately 23 Chico's, 53 WH|BM, and 28 Soma stores. We continuously evaluate the appropriate new store growth rate in light of economic conditions and may adjust the growth rate as conditions require or as opportunities arise.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and believes the assumptions and estimates, as set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012, are significant to reporting our results of operations and financial position. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

Forward-Looking Statements

This Form 10-Q may contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to certain events that could have an effect on our future financial performance, including but without limitation, statements regarding our plans, objectives, and future growth rates of our store concepts. These statements may address items such as future sales, gross margin expectations, SG&A expectations, operating margin expectations, earnings per share expectations, planned store openings, closings and expansions, future comparable sales, future product sourcing plans, inventory levels, planned marketing expenditures, planned capital expenditures and future cash needs. In addition, from time to time, we may issue press releases and other written communications, and our representatives may make oral statements, which contain forward-looking information.

These statements, including those in this Form 10-Q and those in press releases or made orally, relate to expectations concerning matters that are not historical fact and may include the words or phrases such as "expects," "believes," "anticipates," "plans," "estimates," "approximately," "our planning assumptions," "future outlook," and similar expressions. Except for historical information, matters discussed in such oral and written statements, including this Form 10-Q, are forward-looking statements. These forward-looking statements are based largely on information currently available to our management and on our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those currently anticipated. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance and there are a number of known and unknown risks, uncertainties, contingencies, and other factors (many of which are outside our control) that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Accordingly, there is no assurance that our expectations will, in fact, occur or that our


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estimates or assumptions will be correct, and we caution investors and all others not to place undue reliance on such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A, "Risk Factors" in our Annual Report on Form 10-K filed with the SEC on March 21, 2012 and the following:

These potential risks and uncertainties include the financial strength of retailing in particular and the economy in general, the extent of financial difficulties that may be experienced by customers, our ability to secure and maintain customer acceptance of styles and store concepts, the ability to maintain an appropriate level of inventory, the quality of merchandise received from suppliers, the extent and nature of competition in the markets in which we operate, the extent of the market demand and overall level of spending for women's private branded clothing and related accessories, the effectiveness of our brand awareness and marketing programs, the adequacy and perception of customer service, the ability to coordinate product development with buying and planning, the ability to efficiently, timely and successfully execute significant shifts in the countries from which merchandise is supplied, the ability of our suppliers to timely produce and deliver clothing and accessories, the changes in the costs of manufacturing, labor and advertising, the rate of new store openings, our ability to grow through new store openings and the buying public's acceptance of any of our new store concepts, the continuing performance, implementation and integration of management information systems, the impact of any systems failures, cyber security or security breaches, including any security breaches that result in theft, transfer, or unauthorized disclosure of customer, employee, or company information or our compliance with information security and privacy laws and regulations in the event of such an incident, the ability to hire, train, energize and retain qualified sales associates and other employees, the availability of quality store sites, the ability to expand our distribution center and other support facilities in an efficient and effective manner, the ability to hire and train qualified managerial employees, the ability to effectively and efficiently establish our websites, the ability to secure and protect trademarks and other intellectual property rights and to protect our reputation and brand images, the ability to effectively and efficiently operate our brands, risks associated with terrorist activities, risks associated with natural disasters such as hurricanes and other risks. In addition, there are potential risks and uncertainties that are related to our reliance on sourcing from foreign suppliers, including the impact of work stoppages, transportation delays and other interruptions, political or civil instability, imposition of and changes in tariffs and import and export controls such as import quotas, changes in governmental policies in or towards foreign countries, currency exchange rates and other similar factors.

All written or oral forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Litigation

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