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Chico's (CHS) Misses on Q1 Earnings & Sales; Stock Down
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Chico's FAS Inc. slipped 2.6% after the company posted dismal results for first-quarter fiscal 2016, starting the year on a drab note. The company’s top and bottom lines lagged estimates and fell year over year.
Chico’s adjusted earnings of 25 cents per share missed the Zacks Consensus Estimate of 31 cents and plunged 16.7% year over year. The decline in the bottom line stemmed from weak margins and higher inventories, which indicated lower-than-planned sales of spring items owing to a major slowdown in traffic. On a GAAP basis, earnings rose 4.6% to 23 cents per share.
Net sales fell 7.9% year over year to roughly $643 million, mainly owing to Boston Proper sales, soft comparable store sales (comps) and store closures. Further, net sales missed the Zacks Consensus Estimate of $669.2 million.
Comps dropped 4.2%, reflecting lower average dollar sale, along with a marginal fall in transaction count. Going segment-wise, comps at Chico's and White House | Black Market brands declined 5.4% and 3.8% respectively, partly offset by a 0.5% improvement in Soma comps.
Gross profit fell 11.3% to $262.3 million, while the gross margin contracted 160 basis points (bps) to 40.8%, attributable to higher store occupancy costs as a percentage of sales and intense promotional activities – which stemmed from lower traffic. This was partly compensated by lower incentive compensation.
Selling, general and administrative (SG&A) expenses declined 8.8% to $208.1 million, and as a percentage of sales, the same contracted 30 bps to 32.4%. This was backed by lower marketing, incentive compensation and store labor costs.
Financial Update
Chico’s ended the quarter with cash and cash equivalents of $56.5 million, long-term debt of $79.7 million, and shareholders’ equity of $613.5 million.
During the first quarter, the company generated $32.6 million of cash from operating activities and incurred $13.1 million as capital expenditure.
Also, the company repurchased 3.2 million shares for $36.6 million under its $300 million buyback plan announced in Nov 2015. This left Chico’s with buybacks worth $223.4 million under its standing authorization.
Store Update
During the quarter, Chico’s opened 7 new stores and closed 8, taking the total store count to 1,517 as of Apr 30, 2016.
The company intends to introduce 25 stores and shut down another 50 stores in fiscal 2016, as part of its efficient capital allocation and cost-containment efforts.
Cost Savings Plan
Chico’s mainly concentrates on improving consumer experience, solidifying its brand structure, boosting financials and utilizing retail science. In line with these strategies, the company announced new plans to enhance its supply chain and marketing initiatives, alongside using non-merchandise procurement. These are aimed at curtailing complexities and standardizing business processes, enabling the company to cater to the evolving customer demand.
These undertakings are anticipated to generate annualized savings of roughly $50−$70 million. Also, the company announced plans of realigning its marketing and digital commerce functions, in Apr 2016. These are expected to generate annualized savings of approximately $14 million.
Hence, on a combined basis, these efforts are likely to bring in savings of about $65−$85 million annually. Management envisions generating about $15 million of these cost savings in fiscal 2016 itself. Also, these initiatives are likely to take full swing in 2017.
Outlook
Evidently, most apparel retailers are falling prey to weak traffic and soft sales trends. Chico’s expects this trend to linger in fiscal 2016, which caused it to provide the following outlook.
The company expects fiscal 2016 to witness a low-single digit decline in comps over the remaining period. Gross margin deleverage is now expected in fiscal 2016, compared with the previous flat guidance. This is because the company now anticipates SG&A deleverage owing to the tough sales environment.
Zacks Rank
Chico’s currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , with a Zacks Rank #1 (Strong Buy) and Destination XL Group, Inc. (DXLG - Free Report) , with a Zacks Rank #2 (Buy). Another well-ranked stock in the related textile-apparel space is Delta Apparel Inc. (DLA - Free Report) , with a Zacks Rank #1.
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Chico's (CHS) Misses on Q1 Earnings & Sales; Stock Down
Chico's FAS Inc. slipped 2.6% after the company posted dismal results for first-quarter fiscal 2016, starting the year on a drab note. The company’s top and bottom lines lagged estimates and fell year over year.
Chico’s adjusted earnings of 25 cents per share missed the Zacks Consensus Estimate of 31 cents and plunged 16.7% year over year. The decline in the bottom line stemmed from weak margins and higher inventories, which indicated lower-than-planned sales of spring items owing to a major slowdown in traffic. On a GAAP basis, earnings rose 4.6% to 23 cents per share.
Net sales fell 7.9% year over year to roughly $643 million, mainly owing to Boston Proper sales, soft comparable store sales (comps) and store closures. Further, net sales missed the Zacks Consensus Estimate of $669.2 million.
Comps dropped 4.2%, reflecting lower average dollar sale, along with a marginal fall in transaction count. Going segment-wise, comps at Chico's and White House | Black Market brands declined 5.4% and 3.8% respectively, partly offset by a 0.5% improvement in Soma comps.
Gross profit fell 11.3% to $262.3 million, while the gross margin contracted 160 basis points (bps) to 40.8%, attributable to higher store occupancy costs as a percentage of sales and intense promotional activities – which stemmed from lower traffic. This was partly compensated by lower incentive compensation.
Selling, general and administrative (SG&A) expenses declined 8.8% to $208.1 million, and as a percentage of sales, the same contracted 30 bps to 32.4%. This was backed by lower marketing, incentive compensation and store labor costs.
Financial Update
Chico’s ended the quarter with cash and cash equivalents of $56.5 million, long-term debt of $79.7 million, and shareholders’ equity of $613.5 million.
During the first quarter, the company generated $32.6 million of cash from operating activities and incurred $13.1 million as capital expenditure.
Also, the company repurchased 3.2 million shares for $36.6 million under its $300 million buyback plan announced in Nov 2015. This left Chico’s with buybacks worth $223.4 million under its standing authorization.
Store Update
During the quarter, Chico’s opened 7 new stores and closed 8, taking the total store count to 1,517 as of Apr 30, 2016.
The company intends to introduce 25 stores and shut down another 50 stores in fiscal 2016, as part of its efficient capital allocation and cost-containment efforts.
Cost Savings Plan
Chico’s mainly concentrates on improving consumer experience, solidifying its brand structure, boosting financials and utilizing retail science. In line with these strategies, the company announced new plans to enhance its supply chain and marketing initiatives, alongside using non-merchandise procurement. These are aimed at curtailing complexities and standardizing business processes, enabling the company to cater to the evolving customer demand.
These undertakings are anticipated to generate annualized savings of roughly $50−$70 million. Also, the company announced plans of realigning its marketing and digital commerce functions, in Apr 2016. These are expected to generate annualized savings of approximately $14 million.
Hence, on a combined basis, these efforts are likely to bring in savings of about $65−$85 million annually. Management envisions generating about $15 million of these cost savings in fiscal 2016 itself. Also, these initiatives are likely to take full swing in 2017.
Outlook
Evidently, most apparel retailers are falling prey to weak traffic and soft sales trends. Chico’s expects this trend to linger in fiscal 2016, which caused it to provide the following outlook.
The company expects fiscal 2016 to witness a low-single digit decline in comps over the remaining period. Gross margin deleverage is now expected in fiscal 2016, compared with the previous flat guidance. This is because the company now anticipates SG&A deleverage owing to the tough sales environment.
Zacks Rank
Chico’s currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , with a Zacks Rank #1 (Strong Buy) and Destination XL Group, Inc. (DXLG - Free Report) , with a Zacks Rank #2 (Buy). Another well-ranked stock in the related textile-apparel space is Delta Apparel Inc. (DLA - Free Report) , with a Zacks Rank #1.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>