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Chico's (CHS) Q2 Earnings Beat Estimates, Sales in Line

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After a dismal first-quarter fiscal 2016, Chico's FAS Inc. recorded better-than-expected bottom-line results for the second quarter. Also, the company’s revenues came in line with the Zacks Consensus Estimate. However, both the top and bottom lines fell year over year.

Chico’s adjusted earnings of 25 cents per share outpaced the Zacks Consensus Estimate of 22 cents but dropped 3.8% on a year-over-year basis. On a GAAP basis, it reported earnings of 17 cents a share compared with 2 cents in the year-ago quarter.

CHICOS FAS INC Price, Consensus and EPS Surprise

CHICOS FAS INC Price, Consensus and EPS Surprise | CHICOS FAS INC Quote

Net sales fell 7.3% year over year to $635.7 million, mainly owing to the inclusion of Boston Proper sales in the prior-year quarter, soft comparable store sales (comps) and store closures. Further, net sales were almost in line with the Zacks Consensus Estimate of $636 million. On excluding Boston Proper from fiscal 2015, net sales declined 3.6%.

Comps decreased 3.1% against a 0.5% rise recorded in the year-ago quarter. The decline was attributable to lower transaction count, along with a marginal fall in average dollar sale. Going segment-wise, comps at Chico's and White House Black Market brands fell 5.1% and 1.3%, respectively, partly offset by a 0.7% improvement in Soma comps.

Gross profit declined nearly 9% to $240.8 million, while the gross margin contracted 70 basis points (bps) to 37.9%, attributable to higher occupancy charges as a percentage of sales, partly compensated by a rise in the merchandise margin rate.

Selling, general and administrative (SG&A) expenses decreased 9.9% to $186.6 million, and as a percentage of sales, the same contracted 80 bps to 29.4%. This was backed by lower marketing, stock-based compensation and store labor costs.

Financial Update

Chico’s ended the quarter with cash and cash equivalents of $100.5 million, inventories of $235.6 million, long-term debt of $77.3 million, and shareholders’ equity of $609.8 million.

During the first half of fiscal 2016, the company generated $121.7 million of cash from operating activities and incurred $25.2 million as capital expenditure.

Also, Chico’s repurchased 1.7 million shares for $19.7 million under its $300 million buyback plan announced in Nov 2015. This left the company with buybacks worth $203.7 million under its standing authorization.   

Store Update

During the reported quarter, Chico’s opened 5 new stores and closed 5, taking the total store count to 1,517 as of Jul 30, 2016.

Cost Savings Plan

Chico’s continued to make progress with regard to its cost control and operating efficiency endeavors, which were declared in May 2016. In line with these strategies, the company announced new plans to enhance its supply chain and optimize marketing costs, alongside lowering non-merchandise purchasing costs.

These are aimed at curtailing complexities and standardizing business processes, by defining roles and responsibilities for each of its brands and shared service center. In this regard, the company added new roles in digital and business analytics. Concurrently, it slashed its total corporate and field leadership headcount by roughly 200 or 13%, creating an organization that can adapt quickly to the changing customer needs.

These undertakings are anticipated to generate pre-tax annualized savings of roughly $25 million. Together with the plans announced in May 2016, these efforts are likely to reduce future annualized expenses in the range of $90−$110 million, valued at nearly 4% of 2015 revenues.

Outlook

Following the mixed second quarter, the company provided its outlook for the second half of fiscal 2016.

The company expects comps to decline in the low single-digit range in the second half of the fiscal. Gross margin is expected to decline in the second half due to lower sales and store occupancy expenses deleverage, offset by higher merchandise margins However, the company expects synergies from the aforementioned cost reduction and operating efficiency plans to help lower SG&A expenses and thus, offset the fall in gross margin rate. Inventories are anticipated to be in line with the 2015 level.

Zacks Rank

Chico’s currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , Tilly’s Inc. (TLYS - Free Report) and Urban Outfitters Inc. (URBN - Free Report) , all sporting a Zacks Rank #1 (Strong Buy).

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