Highlights From CHS's Q3 Conference Call; Double-Digit Comp Increase, The First In 3 1/2 Years

November 18, 2009 12:23 PM EST

Chico's FAS, Inc. (NYSE: CHS) reports Q3 EPS of $0.13, 6 cents better than the analyst estimate of $0.07. Revenue for the quarter was $446.9 million, which compares to the estimate of $414.70 million. Shares are up 10% today.

Highlights From CHS's Q3 Conference Call:

• (CEO) Well, if someone had told me last January that our company would deliver double-digit comp increase in Q3, its first in over three and a half years, I would have probably thought the prediction was a bit aggressive.
  
• While we've made great strides in controlling our expense, turning our inventory, improving our margin, having the right assortment for our customer is always job number one.
  
• The Chico's brand had its best Q3 comp sales improvement since 2003. The brand's average unit retail was up by mid single digit percentage, while its transactions per average store increased in the low teens.
  
• White House |Black Market had a terrific start to fall. Total comp sales were up 14.4% with full price selling up 23%. Apparel and non-apparel categories had double-digit positive comps. In particular, dresses which were strong in Q3 delivered high-teen comps. Transactions per store average unit retail, units per transaction and average dollar sales, all had meaningful increases.
  
• In 2010, we believe that Soma Intimates will reach the tipping point. That is, we plan to break even on a cash basis.
  
• We've also introduced and began implementation of our workforce management systems for stores, a program we call "spirit scheduling" to ensure that our associates will be there when our customer is there.
  
• Total net sales for the quarter increased 13.4% from a year ago to a Q3 record of 446.9 million. Our comparable store sales increased 12.8%.
  
• Our first positive double-digit comp increase since Q4 2005. By brand, Chico's and Soma Intimate combined comparable store sales increased 12.2% and White House | Black Market delivered a 14.4% increase in comparable store sales for the quarter.
  
• Direct-to-consumer or DTC sales increased 33% compared to third quarter 2008. While the Chico's brand DTC business was up over 50%, White | Black's DTC business increased, but at a lower level as inventory was being diverted to chase the front-line business.
  
• Gross margin expressed as a rate of net sales increased 400 basis points to 57.6%.
  
• Selling, general and administrative expenses expressed as a percentage of sales decreased 450 basis points from a year ago. However, on a dollar basis, SG&A increased 7.9 million.
  
• Other points to consider are store operating expenses were up only 600,000 and nearly 47 million more in net sales in front-line stores and outlets.
  
• Marketing as a percent of sales was flat, but up nearly 2.9 million in dollars that was attributable to Chico's early fall television and print media advertising campaign as well as White | Black's early fall print ad campaign and publicity events surrounding the opening of high profile stores.
  
• Interest income for the third quarter decreased nearly 2.1 million, primarily due to the decrease in short-term money market rates on invested cash.
  
• The decrease in yield caused a reduction in the amount of benefit recognized for tax-exempt interest income influencing the company's effective tax rate for the latest quarter, which was 37.9%. The bottom-line then was a sizeable increase in net income for Q3 to 22.7 million or $0.13 per diluted share compared to net income of 2 million or $0.01 per diluted share for the like period last year.
  
• Reviewing our balance sheet, cash and marketable securities as of October 31 totaled 423.3 million, reflecting a near 167 million increase in those assets from a year ago and a near of 155 million increase from year-end 2008.
  
• We are continuing to plan modest additional free cash flow for Q4.
  
• Total inventory at the end of third quarter decreased 27.2 million or 15% from a year ago to $61 per selling square foot. Quarter-end inventories for the Chico's brand decreased 17% while quarter-end inventories for White | Black decreased 22% per square foot compared to the prior year.
  
• Our cash flow statements, depreciation and amortization year-to-date totaled 72.4 million compared to 75.3 million for the like period last year.
  
• Now, looking at Q42009, while not providing specific earnings guidance, we are operating under the following assumptions. We're planning a positive comparable store sales increase for Chico's FAS, Inc. overall, however at a level that may not match what we just delivered in the latest quarter.
  
• We are targeting DTC sales to increase at a rate between 35 and 40%. We expect meaningful improvement in our gross margin rate compared to the 44.3% reported for fourth quarter 2008, a period in which significant end-of-season markdowns were taken.
  
• Our Q4 SG&A rate should reflect leverage provided by positive comps. However, we do expect SG&A dollars to be up, slightly in part because of our holiday TV and print media campaigns and some small increased store occupancy expense. We expect interest income will again decline versus last year, reflecting the comparative drop in interest rates but not a lessening in invested cash, and we expect our tax rate should remain around 38%.
  
• (Q&A) Just a quick question on the interesting comments you made about the Connor Group and the consolidation of the sourcing opportunity. Can you just give us a little bit of color around timing of that consolidation and with the transition - full transition to the Connor Group and then when do you expect to see those types of merchandise margin opportunities to kind of take hold? Is that more of a 2010 - late 2010 event or 2011 or just trying to get a little bit of timing around that? (A)Well, first of all we are already doing business with the Connor Group in some areas of the company, so they're a known quantity. In fact Dave had known them for a number of years at Land's End and in my past career we used Connor Group quite extensively at Victoria's Secret Catalogue, so it's really a great organization. In terms of the transitioning, we're really going towards the first of the year, although we have some - put in some processes in place. In terms of trying to generate any type of meaningful improvement in our merchandise margins, I expect that to happen probably in the latter half of 2010 and then build momentum into 2011.
  
• I guess first I was just wondering a lot of companies, I mean your comps were incredible obviously, but a lot of companies did see a fall-off in trends at the end of October and into November and I'm wondering if you would comment on that at all. And then secondly, just in terms of the SG&A rate, what kind of rate going forward into 2010 are you comfortable that you can maintain, dollar rate? (A)Stacy, this is Dave. I'll take the comp one. We have not seen a fall-off in the first again, what is it, 16 days or so of November in terms of comp sales increase. But I must remind you that really the fourth quarter doesn't start until the day after Thanksgiving, and goes through those weeks after Christmas. So, whether this will hold up or not is to be seen. We are getting into some unfamiliar territory there. But, certainly, our double-digit comp increases have continued through today.(A)And, as your -- as far as your question goes for SG&A rate, we really haven't addressed 2010 in any type of guidance or plans or estimates yet. What we have said is that we expect there is another 200 to 250 basis points of expense opportunity in SG&A.
  
• Thanks, and congrats, guys. Just a question sort of as you talk about becoming profitable again in Q4, can you may be talk about what kind of promotions you are planning, or what kind of categories you are planning to increase here, and do you expect both comps to decelerate at White House and at the core Chico's business in Q4? (A) This is Dave again. I would say that as I've said earlier accessories has been one of the really key categories for Chico's for the Chico's brand for a long, long time. We had - we were not as strong in the past couple of years, and we've brought it back with a vengeance. I think if you saw our television commercial which is probably ending this week or so, it was all about
  accessories. It was all about something to - so you can -the customer can give something that doesn't have the size or the fit issues, something that is a great value. We believe our accessories are a tremendous, tremendous value. If you look at our windows and the stores this fall, you will see that we are featuring jewelry along with great outfits. So, that's how we plan to drive sales. We are probably less promotional this Christmas than we were last Christmas. I'd say we are less promotional. We will take, because of our inventory, we will take less markdowns this year than we did last year, but we believe that the really compelling part of our brands, be it Chico's, Whitehouse and Soma, is the product itself. I mean that really is what attracts customers to the brand. But, as we get into that highly competitive area right after Thanksgiving and into Christmas, it's kind of new territory for us versus what we've been competing in for the first three quarters of the year. So, while we have good hopes to continue our business trends through the first - through the fourth quarter, there is a lot of uncertainty until we actually do it and get through it.

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