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CHS > SEC Filings for CHS > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for CHICOS FAS INC

Form 10-K for CHICOS FAS INC


14-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto.

EXECUTIVE OVERVIEW

We are a leading omni-channel specialty retailer of women's 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 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 center, which takes orders for all of our brands.

We utilize an integrated, omni-channel approach to managing our business. We want our customers to experience our brands, not a channel within our brands, and view our various sales channels as a single, integrated process rather than as separate sales channels operating independently. This approach allows our customers to browse, purchase, return, or exchange our merchandise through whatever sales channel and at whatever time is most convenient for her. As a result, we track total sales and comparable sales on a combined basis.

Net sales for the fifty-two weeks ended February 1, 2014 were $2.586 billion, the highest in our history, an increase of 0.2% compared to $2.581 billion for the fifty-three week year ended February 2, 2013. The increase reflected 115 net new stores for an 8.4% square footage increase, substantially offset by a decrease in comparable sales and approximately $38 million in net sales attributable to the fifty-third week of fiscal 2012. Comparable sales for fiscal 2013 decreased 1.8% following a 7.2% increase in fiscal 2012.

In fiscal 2013, we recorded $72.5 million in pre-tax, non-cash goodwill and trade name impairment charges related to our Boston Proper reporting unit. The $72.5 million Boston Proper impairment charges included $67.3 million related to goodwill impairment and $5.2 million related to the trade name. The fiscal 2013 after-tax impact of the goodwill and trade name impairment charges totaled $70.5 million, or $0.44 per diluted share.

In fiscal 2013, income from operations was $141.2 million compared to $287.5 million in fiscal 2012, and operating margin decreased to 5.5% compared to 11.1% in fiscal 2012. Income from operations for fiscal 2013 included the pre-tax impact of Boston Proper non-cash goodwill and trade name impairment charges of $72.5 million.

Net income for fiscal 2013 was $65.9 million, a decrease of 63.4% compared to net income of $180.2 million in fiscal 2012. Earnings per diluted share for fiscal 2013 were $0.41, a decrease of 62.0% compared to $1.08 in fiscal 2012. Net income for fiscal 2013 included the impact of Boston Proper non-cash goodwill and trade name impairment charges of $70.5 million after-tax, or $0.44 per diluted share.

Cash flows from operations for fiscal 2013 were $236.7 million compared to $368.3 million in fiscal 2012 with cash and marketable securities at the end of fiscal 2013 totaling $152.4 million compared to $329.4 million at the end of fiscal 2012, primarily reflecting $245.0 million of shares repurchased during fiscal 2013.


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Future Outlook

The Company's goal remains to establish financial targets that are both sustainable and reflect strong growth metrics. The Company believes that by delivering on its long-term objectives to increase sales by a low double-digit percentage and diluted earnings per share by a mid-teen percentage over a meaningful period of time, the Company will provide its shareholders with substantial value.

Consistent with these objectives, the Company announced several strategic investments in 2013 to fuel future growth, including enhancing omni-channel capabilities, expanding into Canada, and opening its first Boston Proper stores.

RESULTS OF OPERATIONS

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 fiscal 2013,
fiscal 2012, and fiscal 2011:



Net sales:                           Fiscal 2013         %         Fiscal 2012         %         Fiscal 2011         %
                                                                    (dollars in thousands)
Chico's/Soma Intimates               $  1,630,147        63.0 %    $  1,647,476        63.8 %    $  1,460,518        66.5 %
WH|BM                                     858,972        33.2 %         809,775        31.4 %         696,358        31.7 %
Boston Proper                              96,918         3.8 %         123,806         4.8 %          39,484         1.8 %

Total net sales                      $  2,586,037       100.0 %    $  2,581,057       100.0 %    $  2,196,360       100.0 %

Net sales increased 0.2% in fiscal 2013 to $2.586 billion from $2.581 billion in fiscal 2012, primarily reflecting 115 net new stores for an 8.4% square footage increase, substantially offset by a 1.8% decline in comparable sales and approximately $38 million in net sales attributable to the fifty-third week of fiscal 2012. Comparable sales is defined as sales from stores open for at least twelve full months, including stores that have been expanded or relocated within the same general market and includes online and catalog sales. Boston Proper's sales and sales attributable to the fifty-third week in fiscal 2012 are excluded from comparable sales calculations. The comparable sales decrease reflected lower average dollar sale, partially offset by higher transaction count, primarily as a result of the cycling of strong comparable sales last year and the impact of increased promotional activity in response to lower traffic. Boston Proper net sales decreased $26.9 million, primarily reflecting decreased customer demand and the adverse impact of post-acquisition information systems conversions in early 2013.

The Chico's/Soma Intimates brands' comparable sales decreased 2.7% following a 7.5% increase in fiscal 2012. The Chico's brand experienced a mid-single digit comparable sales decrease compared to a mid-single digit increase last year, and the Soma Intimates brand experienced a mid-single digit comparable sales increase compared to a double-digit increase last year. The WH|BM brand's comparable sales were flat following a 6.5% increase in fiscal 2012.

Net sales increased 17.5% in fiscal 2012 to $2.581 billion from $2.196 billion in fiscal 2011, primarily reflecting 7.2% comparable sales growth, 101 net new stores for an 8.1% square footage increase, $84.3 million incremental Boston Proper sales and approximately $38 million net sales attributable to the fifty-third week. The comparable sales increase reflected increases in both average dollar sale and transaction count.

The Chico's/Soma Intimates brands' comparable sales increased 7.5% on top of a 6.4% increase in fiscal 2011. For fiscal 2012, the Chico's brand experienced a mid-single digit comparable sales increase and the Soma Intimates brand experienced a double-digit comparable sales increase. The WH|BM brand's comparable sales increased 6.5%, which followed a 12.2% increase for fiscal 2011.


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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 fiscal 2013, 2012 and 2011:



                                 Fiscal 2013       Fiscal 2012       Fiscal 2011
                                              (dollars in thousands)
       Cost of goods sold        $  1,169,406      $  1,129,257      $    969,989
       Gross margin              $  1,416,631      $  1,451,800      $  1,226,371
       Gross margin percentage           54.8 %            56.2 %            55.8 %

For fiscal 2013, gross margin was $1.417 billion compared to $1.452 billion in fiscal 2012. As a percentage of net sales, gross margin was 54.8%, a 140 basis point decrease from fiscal 2012, primarily reflecting increased promotional activity in response to lower traffic and investment in new distribution automation, partially offset by lower incentive compensation as a percent of net sales.

For fiscal 2012, gross margin was $1.452 billion compared to $1.226 billion in fiscal 2011. As a percentage of net sales, gross margin was 56.2%, a 40 basis point improvement from fiscal 2011, primarily reflecting a higher level of full-price selling and effective inventory management, partially offset by incentive compensation and the inclusion of Boston Proper.

Selling, General and Administrative Expenses

The following table depicts SG&A, which includes store and direct operating
expenses, marketing expenses and NSSC expenses, in dollars and as a percentage
of total net sales for fiscal 2013, 2012 and 2011:



                                                 Fiscal 2013         Fiscal 2012          Fiscal 2011
                                                                (dollars in thousands)
Selling, general and administrative expenses     $  1,202,068        $  1,161,105        $     998,861
Percentage of total net sales                            46.5 %              45.0 %               45.5 %

For fiscal 2013, SG&A was $1.202 billion compared to $1.161 billion in fiscal 2012. As a percentage of net sales, SG&A was 46.5%, a 150 basis point increase from fiscal 2012 primarily reflecting deleverage of store and marketing expenses and the impact of investment spending on strategic initiatives, partially offset by lower incentive compensation as a percent of net sales.

For fiscal 2012, SG&A was $1.161 billion compared to $998.9 million in fiscal 2011. As a percentage of net sales, SG&A was 45.0%, a 50 basis point improvement from fiscal 2011 primarily reflecting the sales leverage impact on store expenses and the inclusion of Boston Proper, partially offset by incentive compensation.

Goodwill and Trade Name Impairment Charges

In fiscal 2013, we recorded $72.5 million in pre-tax, non-cash goodwill and trade name impairment charges, or 2.8% of net sales. These impairment charges were the result of sales declines in the Boston Proper online and catalog business due to the increasingly competitive direct-to-consumer environment and the impact of integration efforts and new initiatives. The $72.5 million Boston Proper impairment charges included $67.3 million related to goodwill impairment and $5.2 million related to the trade name. The fiscal 2013 after-tax impact of the goodwill and trade name impairment charges totaled $70.5 million, or $0.44 per diluted share.


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Acquisition and Integration Costs

The following table depicts acquisition and integration costs related to Boston
Proper in dollars and as a percentage of total net sales for fiscal 2013, 2012
and 2011:




                                           Fiscal 2013                    Fiscal 2012                    Fiscal 2011
                                                                     (dollars in thousands)
Acquisition and integration costs       $              914          $                  3,157          $            5,133
Percentage of total net sales                          0.0 %                             0.1 %                       0.2 %

For fiscal 2013, acquisition and integration costs were $0.9 million and primarily consisted of systems and distribution center integration costs. For fiscal 2012, acquisition and integration costs were $3.2 million and primarily consisted of systems and distribution center integration costs and employee-related benefit costs. For fiscal 2011, acquisition and integration costs were $5.1 million and primarily consisted of professional service fees and employee-related benefit costs.

Provision for Income Taxes

Our effective tax rate was 53.5%, 37.5% and 37.1%, for fiscal 2013, 2012 and 2011, respectively. The fiscal 2013 effective tax rate reflected the impact of the Boston Proper goodwill impairment charge on the annual effective tax rate. Excluding the tax impact of the Boston Proper goodwill impairment charge, the fiscal 2013 effective tax rate would have been 36.3% compared to an effective tax rate of 37.5% for fiscal 2012, primarily reflecting favorable tax settlements and credits in the current year.

Net Income and Earnings Per Diluted Share

Net income for fiscal 2013 was $65.9 million compared to $180.2 million in fiscal 2012. Earnings per diluted share for fiscal 2013 were $0.41 compared to $1.08 per diluted share in fiscal 2012. Fiscal 2013 results included the impact of Boston Proper non-cash goodwill and trade name impairment charges of $70.5 million after-tax, or $0.44 per diluted share. The percentage decrease in earnings per diluted share was lower than the percentage decrease in net income, primarily reflecting the impact of approximately 13.8 million shares repurchased for an aggregate of $245.0 million since the end of fiscal 2012.

Net income for fiscal 2012 was $180.2 million, an increase of 27.9%, compared to $140.9 million in fiscal 2011. Earnings per diluted share for fiscal 2012 were $1.08, an increase of 31.7%, compared to $0.82 per diluted share in fiscal 2011. The percentage increase in earnings per diluted share was higher than the percentage increase in net income, primarily reflecting 6.3 million shares repurchased for an aggregate of $107.5 million from the end of fiscal 2011 through the end of fiscal 2012.

Liquidity and Capital Resources

Overview

We believe that our existing cash and marketable securities balances and cash 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 additional shares of 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.


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Our ongoing capital requirements will continue to be primarily for enhancing and expanding our omni-channel capabilities, including: new, expanded, relocated and remodeled stores; information technology; and other central support facilities.

Operating Activities

Net cash provided by operating activities in fiscal 2013 was $236.7 million, a decrease of approximately $131.6 million from fiscal 2012. This decrease primarily reflected lower net income in fiscal 2013, adjusted for the non-cash impact of goodwill and trade name impairment charges and the impact of changes in working capital. The changes in working capital primarily reflected increased inventory, lower incentive compensation, and the impact of the calendar shift as a result of last fiscal year's 53rd week.

Net cash provided by operating activities in fiscal 2012 was $368.3 million, an increase of approximately $113.1 million from fiscal 2011. This increase reflected higher net income compared to fiscal 2011 and increased accounts payable and accrued and other liabilities, partially offset by a deferred tax asset.

Investing Activities

Net cash provided by investing activities in fiscal 2013 was $17.9 million, an increase of approximately $266.3 million from fiscal 2012. This increase primarily reflected the use of marketable securities to facilitate share repurchase activities, partially offset by net purchases of property, plant and equipment.

Net cash used in investing activities in fiscal 2012 was $248.4 million, an increase of approximately $248.1 million from fiscal 2011. This increase primarily reflected the use of marketable securities during fiscal 2011 to consummate the Boston Proper acquisition.

Financing Activities

Net cash used in financing activities for fiscal 2013 was $275.0 million compared to $122.0 million in fiscal 2012. In fiscal 2013, we paid three cash dividends at $0.055 per share and one at $0.075 per share on our common stock, totaling $38.3 million. We repurchased $245.0 million of our common stock through our publicly announced share repurchase programs and we received $12.4 million in proceeds from issuing approximately 3.6 million shares related to employee stock ownership plans and stock option exercises.

Net cash used in financing activities for fiscal 2012 was $122.0 million compared to $210.7 million in fiscal 2011. In fiscal 2012, we paid $0.0525 per share quarterly cash dividends on our common stock, totaling $34.9 million. We repurchased $107.5 million of our common stock through our publicly announced share repurchase programs and we received $16.5 million in proceeds from issuing approximately 3.6 million shares related to employee stock ownership plans and stock option exercises.

New Store Openings

We expect our new stores in fiscal 2014 to increase approximately 7%, reflecting approximately 22-26 net openings of Chico's stores, 26-30 net openings of WH|BM stores, 38-42 net openings of Soma stores and 18-20 openings of Boston Proper stores. We also expect to complete approximately 26-30 relocations or remodels. 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.


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Contractual Obligations

The following table summarizes our contractual obligations at February 1, 2014:



                                         Less than 1                                     After 5
                           Total            year          1-3 years      4-5 years        years
                                                     (in thousands)
 Operating leases       $ 1,016,453           180,173        326,864        214,164       295,252
 Purchase orders            439,140           439,140             -              -             -
 Capital expenditures        13,745            13,745             -              -             -

 Total                  $ 1,469,338           633,058        326,864        214,164       295,252

As of February 1, 2014, our contractual obligations consisted of: 1) amounts outstanding under operating leases, 2) open purchase orders for inventory and other operating expenses, in the normal course of business, which are cancellable with no, or limited, recourse available to the vendor and 3) contractual commitments for fiscal 2014 capital expenditures.

Until formal resolutions are reached between us and the relevant taxing authorities, we are unable to estimate a final determination related to our uncertain tax positions and therefore, we have excluded the uncertain tax positions, totaling $4.0 million at February 1, 2014 from the above table.

Credit Facility

On July 27, 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 February 1, 2014, no borrowings are outstanding under the Credit Facility.

The Credit Facility contains customary financial covenants for unsecured credit facilities, consisting of a maximum total debt leverage ratio that cannot be greater than 3.25 to 1.00 and a minimum fixed charge coverage ratio that cannot be less than 1.20 to 1.00.

The Credit Facility contains customary events of default. If a default occurs and is not cured within any applicable cure period or is not waived, the Company's obligations under the Credit Facility may be accelerated or the Credit Facility may be terminated. The Company was in compliance with the applicable ratio requirements and other covenants at February 1, 2014.

Off-Balance Sheet Arrangements

At February 1, 2014 and February 2, 2013, we did not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.


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Critical Accounting Policies

The discussion and analysis of our consolidated 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 and 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 following assumptions and estimates are significant to reporting our consolidated results of operations and financial position.

Inventory Valuation and Shrinkage

We identify potentially excess and slow-moving inventories by evaluating inventory aging, turn rates and inventory levels in conjunction with our overall sales trend. Excess quantities of inventory are identified through evaluation of inventory aging, review of inventory turns and historical sales experience, as well as specific identification based on fashion trends. Further, exposure is identified through analysis of gross margins and markdowns in combination with changes in current business trends. We provide lower of cost or market adjustments for such identified excess and slow-moving inventories. Historically, the variation of those estimates to actual results is immaterial and material variation is not expected in the future.

We estimate our expected shrinkage of inventories between our physical inventory counts by using average store shrinkage experience rates, which are updated on a regular basis. Historically, the variation of those estimates to actual results is immaterial and material variation is not expected in the future.

Revenue Recognition

Retail sales at our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under rewards programs and company issued coupons, promotional discounts and associate discounts. We record sales from our websites and catalogs based on the estimated receipt date of the product by our customers, which is typically within a few days of shipment date.

Under our current program, gift cards do not have expiration dates. We account for gift cards by recognizing a liability at the time the gift card is sold. The liability is relieved and revenue is recognized for gift cards upon redemption. In addition, we recognize revenue on unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (commonly referred to as gift card breakage). We recognize gift card breakage under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We determine the gift card breakage rate based on our historical redemption patterns.

As part of the normal sales cycle, we receive customer merchandise returns related to store, website and catalog sales. To account for the financial impact of potential customer merchandise returns, we estimate future returns on previously sold merchandise. Reductions in sales and gross margin are recorded for estimated merchandise returns based on return history, current sales levels and projected future return levels.

Evaluation of Long-Lived Assets, Goodwill and Indefinite-Lived Intangible Assets

Long-lived assets are reviewed periodically for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. If future undiscounted cash flows expected to be generated by the asset are less than its carrying amount, an asset is determined to be impaired, and a loss is recorded for the amount by which the carrying value of the asset exceeds its fair value. The fair value of an asset is estimated using estimated future cash flows of the asset discounted by a rate commensurate with the risk involved with such


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asset while incorporating marketplace assumptions. The estimate of future cash flows requires management to make certain assumptions and to apply judgment, including forecasting future sales and the useful lives of the assets. We exercise our best judgment based on the most current facts and circumstances surrounding our business when applying these impairment rules. We establish our assumptions and arrive at the estimates used in these calculations based upon our historical experience, knowledge of the retail industry and by incorporating third-party data, which we believe results in a reasonably accurate approximation of fair value. Nevertheless, changes in the assumptions used could have an impact on our assessment of recoverability.

We review our goodwill for impairment at the reporting unit level on an annual basis, or when circumstances indicate its carrying value may not be recoverable. We evaluate the appropriateness of performing a qualitative assessment, on a reporting unit level, based on current circumstances. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step impairment test will be performed. If we conclude that this is not the case, then the two-step impairment test will not be required. We may elect to skip the qualitative assessment and perform the two-step impairment test. The first step of the impairment test compares the fair value of our reporting units with their carrying amounts, including goodwill. If the carrying amount exceeds the fair value, then the second step of the impairment test is performed to measure the . . .

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