CHICO's FAS, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended:
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Commission File Number: |
May 3, 2008
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0-21258 |
Chicos FAS, Inc.
(Exact name of registrant as specified in charter)
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Florida
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59-2389435 |
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(State of Incorporation)
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(I.R.S. Employer Identification No.) |
11215 Metro Parkway, Fort Myers, Florida 33966
(Address of principal executive offices)
239-277-6200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
At May 22, 2008, there were 176,441,606 shares outstanding of Common Stock, $.01 par value per
share.
CHICOS FAS, Inc.
Index
2
CHICOS FAS, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
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May 3, |
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February 2, |
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2008 |
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2008 |
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(Unaudited) |
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ASSETS
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Current Assets: |
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Cash and cash equivalents |
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$ |
37,022 |
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$ |
13,801 |
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Marketable securities, at market |
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233,752 |
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260,469 |
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Receivables |
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15,028 |
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11,924 |
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Income tax receivable |
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23,973 |
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Inventories |
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161,260 |
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144,261 |
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Prepaid expenses |
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19,880 |
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18,999 |
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Deferred taxes |
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15,924 |
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13,306 |
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Total Current Assets |
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482,866 |
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486,733 |
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Property and Equipment: |
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Land and land improvements |
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17,792 |
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17,867 |
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Building and building improvements |
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69,224 |
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62,877 |
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Equipment, furniture and fixtures |
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359,372 |
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347,937 |
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Leasehold improvements |
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411,930 |
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396,650 |
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Total Property and Equipment |
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858,318 |
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825,331 |
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Less accumulated depreciation and amortization |
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(276,528 |
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(257,378 |
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Property and Equipment, Net |
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581,790 |
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567,953 |
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Other Assets: |
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Goodwill |
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96,774 |
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96,774 |
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Other intangible assets |
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38,930 |
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38,930 |
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Deferred taxes |
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24,287 |
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22,503 |
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Other assets, net |
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37,596 |
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37,233 |
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Total Other Assets |
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197,587 |
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195,440 |
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$ |
1,262,243 |
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$ |
1,250,126 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities: |
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Accounts payable |
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$ |
68,905 |
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$ |
88,134 |
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Accrued liabilities |
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99,277 |
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91,622 |
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Current portion of deferred liabilities |
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1,472 |
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1,437 |
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Total Current Liabilities |
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169,654 |
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181,193 |
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Noncurrent Liabilities: |
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Deferred liabilities |
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165,135 |
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156,417 |
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Total Noncurrent Liabilities |
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165,135 |
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156,417 |
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Stockholders Equity: |
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Common stock |
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1,764 |
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1,762 |
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Additional paid-in capital |
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251,843 |
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249,639 |
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Retained earnings |
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673,847 |
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661,115 |
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Total Stockholders Equity |
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927,454 |
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912,516 |
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$ |
1,262,243 |
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$ |
1,250,126 |
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See Accompanying Notes.
3
CHICOS FAS, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
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Thirteen Weeks Ended |
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May 3, 2008 |
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May 5, 2007 |
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Amount |
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% of Sales |
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Amount |
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% of Sales |
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Net sales by Chicos/Soma stores |
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$ |
285,694 |
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69.8 |
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$ |
333,052 |
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73.5 |
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Net sales by White House | Black Market stores |
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107,849 |
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26.3 |
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103,467 |
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22.9 |
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Net sales by Direct to Consumer |
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16,021 |
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3.9 |
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16,454 |
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3.6 |
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Other net sales |
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115 |
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0.0 |
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Net sales |
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409,564 |
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100.0 |
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453,088 |
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100.0 |
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Cost of goods sold |
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180,762 |
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44.1 |
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173,323 |
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38.3 |
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Gross margin |
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228,802 |
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55.9 |
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279,765 |
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61.7 |
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Selling, general and administrative expenses: |
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Store operating expenses |
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160,985 |
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39.3 |
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154,693 |
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34.1 |
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Marketing |
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22,843 |
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5.6 |
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20,939 |
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4.6 |
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Shared services |
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28,281 |
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6.9 |
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29,471 |
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6.5 |
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Total selling, general and administrative expenses |
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212,109 |
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51.8 |
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205,103 |
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45.2 |
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Income from operations |
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16,693 |
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4.1 |
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74,662 |
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16.5 |
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Interest income, net |
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2,239 |
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0.5 |
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2,245 |
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0.5 |
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Income before income taxes |
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18,932 |
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4.6 |
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76,907 |
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17.0 |
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Income tax provision |
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6,200 |
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1.5 |
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27,764 |
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6.2 |
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Income from continuing operations |
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12,732 |
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3.1 |
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49,143 |
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10.8 |
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Loss on discontinued operations, net of tax |
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0.0 |
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1,985 |
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0.4 |
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Net income |
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$ |
12,732 |
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3.1 |
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$ |
47,158 |
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10.4 |
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Per share data: |
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Income from continuing operations per common sharebasic |
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$ |
0.07 |
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$ |
0.28 |
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Loss on discontinued operations per common sharebasic |
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(0.01 |
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Net income per common sharebasic |
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$ |
0.07 |
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$ |
0.27 |
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Income from continuing operations per common and common
equivalent sharediluted |
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$ |
0.07 |
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$ |
0.28 |
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Loss on discontinued operations per common and common
equivalent sharediluted |
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(0.01 |
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Net income per common and common equivalent
sharediluted |
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$ |
0.07 |
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$ |
0.27 |
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Weighted average common shares outstandingbasic |
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175,796 |
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175,421 |
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Weighted average common and common equivalent shares
outstandingdiluted |
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176,014 |
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176,595 |
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See Accompanying Notes.
4
CHICOS FAS, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
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Thirteen Weeks Ended |
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May 3, 2008 |
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May 5, 2007 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
12,732 |
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$ |
47,158 |
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Adjustments to reconcile net income to net cash
provided by operating activities |
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Depreciation and amortization, cost of goods sold |
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2,700 |
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2,530 |
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Depreciation and amortization, other |
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23,517 |
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19,772 |
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Deferred tax benefit |
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(4,402 |
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(3,451 |
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Stock-based compensation expense, cost of goods sold |
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1,008 |
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1,422 |
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Stock-based compensation expense, other |
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2,129 |
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3,604 |
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(Excess) deficiency tax benefit of stock-based compensation |
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(100 |
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88 |
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Deferred rent expense, net |
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2,417 |
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1,644 |
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Loss on disposal of property and equipment |
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9 |
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Decrease (increase) in assets |
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Receivables, net |
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20,869 |
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1,861 |
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Inventories |
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(16,999 |
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(29,600 |
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Prepaid expenses and other |
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(1,245 |
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(1,462 |
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(Decrease) increase in liabilities |
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Accounts payable |
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(19,229 |
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17,865 |
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Accrued and other deferred liabilities |
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13,001 |
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27,014 |
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Total adjustments |
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23,675 |
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41,287 |
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Net cash provided by operating activities |
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36,407 |
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88,445 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Sales (purchases) of marketable securities, net |
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26,717 |
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(12,216 |
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Purchase of Minnesota franchise rights and stores |
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(32,896 |
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Acquisition of other franchise stores |
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(6,361 |
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Purchases of property and equipment |
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(40,063 |
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(52,267 |
) |
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Net cash used in investing activities |
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(13,346 |
) |
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(103,740 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of common stock |
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163 |
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1,612 |
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Excess (deficiency) excess tax benefit of stock-based compensation |
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100 |
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(88 |
) |
Repurchase of common stock |
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(103 |
) |
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(98 |
) |
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Net cash provided by financing activities |
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160 |
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1,426 |
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Net increase (decrease) in cash and cash equivalents |
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23,221 |
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(13,869 |
) |
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CASH AND CASH EQUIVALENTS Beginning of period |
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13,801 |
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37,203 |
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CASH AND CASH EQUIVALENTS End of period |
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$ |
37,022 |
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$ |
23,334 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION: |
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Cash paid for interest |
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$ |
22 |
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$ |
20 |
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Cash paid for income taxes, net |
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$ |
460 |
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$ |
11,213 |
|
See
Accompanying Notes.
5
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
May 3, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Chicos FAS, Inc. and its
wholly-owned subsidiaries (collectively, the Company) have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and notes required by
accounting principles generally accepted in the U.S. for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. All significant intercompany balances and
transactions have been eliminated in consolidation. For further information, refer to the
consolidated financial statements and notes thereto for the fiscal year ended February 2, 2008,
included in the Companys Annual Report on Form 10-K filed with the Securities and Exchange
Commission (SEC) on March 28, 2008. The February 2, 2008 balance sheet amounts were derived from
audited financial statements included in the Companys Annual Report.
The Companys fiscal years end on the Saturday closest to January 31 and are designated by the
calendar year in which the fiscal year commences. Operating results for the thirteen weeks ended
May 3, 2008 are not necessarily indicative of the results that may be expected for the entire year.
Other net sales for the prior period consisted of net sales to franchisees.
Certain prior year amounts have been reclassified in order to conform to the current year
presentation.
Note 2. Newly Adopted Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and
liabilities. Under SFAS 157, fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants in the
market in which the reporting entity transacts. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007; however, the FASB provided a one year
deferral for implementation of the standard for non-recurring, non-financial assets and
liabilities. The Company adopted SFAS 157 effective February 3, 2008, for all financial assets and
liabilities as required. Refer to Note 7, Fair Value Measurements, for additional information.
The Company does not expect the standard to have a material impact on its consolidated financial
statements when fully adopted in fiscal year 2009.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement 115, (SFAS 159). This statement permits entities to choose to measure many financial
assets and liabilities and certain other items at fair value. SFAS 159 was effective for the
Company effective February 3, 2008. The adoption of SFAS 159 did not have an impact on the
Companys consolidated results of operations or financial condition as the Company did not elect to
adopt the fair value option for any of its financial assets or liabilities.
6
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
May 3, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 3. Discontinued Operations
As disclosed in the Companys Form 10-K for the fiscal year ended February 3, 2007, during the
fourth quarter of fiscal 2006, the Company completed its evaluation of its Fitigues brand and
decided that it would close down operations of the Fitigues brand. In accordance with Statement of
Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company has segregated the operating results of Fitigues, if any, from
continuing operations and classified the results as discontinued operations in the consolidated
statements of income for all periods presented as shown in the following table:
|
|
|
|
|
|
|
Thirteen |
|
|
|
Weeks Ended |
|
|
|
May 5, 2007 |
|
|
|
|
|
|
Net sales |
|
$ |
1,582 |
|
|
|
|
|
Loss from operations |
|
$ |
3,106 |
|
Income tax benefit |
|
|
1,121 |
|
|
|
|
|
Net loss on discontinued operations |
|
$ |
1,985 |
|
|
|
|
|
In mid fiscal 2007, the operations of the Fitigues brand ceased and the Company does not
expect to incur any further material costs associated with the closing of this brand.
Note 4. Income Taxes
Effective February 4, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48). FIN 48 prescribes a comprehensive model of how a company should recognize, measure, present
and disclose in its financial statements uncertain tax positions that the company has taken or
expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain tax position
may be recognized if it is more likely than not that the position is sustainable, based upon its
technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit
that has greater than a 50% likelihood of being realized upon the ultimate settlement with a taxing
authority having full knowledge of all relevant information.
As of February 2, 2008, the Companys liability for unrecognized tax benefits associated with
uncertain tax positions was $7.8 million. There have been no significant changes to the total
amount of unrecognized tax benefits associated with uncertain tax positions during the thirteen
weeks ended May 3, 2008. As of May 3, 2008, the Company does not believe that its estimates, as
otherwise provided for, on such tax positions will significantly increase or decrease within the
next twelve months.
7
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
May 3, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 5. Stock-Based Compensation
General
The
Company accounts for share-based compensation in accordance with the provisions of SFAS No. 123R, Share-Based Payment (SFAS 123R).
Stock-based compensation expense for share-based awards recognized during the thirteen weeks ended
May 3, 2008 and May 5, 2007 includes: (a) the applicable portion of compensation expense for all
stock-based compensation awards granted prior to, but not yet vested as of, January 29, 2006, based
on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123), and (b) the applicable portion of
compensation expense for all stock-based compensation awards granted subsequent to January 29,
2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
Methodology Assumptions
The Company uses the Black-Scholes option-pricing model to value the Companys stock options.
Using this option-pricing model, the fair value of each stock option award is estimated on the date
of grant. The fair value of the Companys stock option awards, which are subject to pro-rata
vesting generally over 3 years, is expensed on a straight-line basis over the vesting period of the
stock options. The expected volatility assumption is based on the historical volatility of the
Companys stock over a term equal to the expected term of the option granted. The expected term of
stock option awards granted is derived from historical exercise experience for each of two
identified employee populations under the Companys stock option plans and represents the period of
time that stock option awards granted are expected to be outstanding for each of the identified
employee populations. The expected term assumption incorporates the contractual term of an option
grant, which is ten years, as well as the vesting period of an award, which is generally pro-rata
vesting over three years. The risk-free interest rate is based on the implied yield on a U.S.
Treasury constant maturity with a remaining term equal to the expected term of the option granted.
The weighted average assumptions relating to the valuation of the Companys stock options for
the thirteen weeks ended May 3, 2008 and May 5, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 3, 2008 |
|
May 5, 2007 |
Weighted average fair value of grants |
|
$ |
3.00 |
|
|
$ |
9.41 |
|
Expected volatility |
|
|
46 |
% |
|
|
43 |
% |
Expected term (years) |
|
|
4.5 |
|
|
|
4.5 |
|
Risk-free interest rate |
|
|
2.3 |
% |
|
|
4.6 |
% |
Expected dividend yield |
|
|
N/A |
|
|
|
N/A |
|
8
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
May 3, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Stock Based Compensation Activity
As of May 3, 2008, 5,942,936 nonqualified options are outstanding at a weighted average
exercise price of $18.73 per share, and 717,001 remain available for future grants of either stock
options, restricted stock or restricted stock units, subject to certain sublimits applicable to
restricted stock.
The following table presents a summary of the Companys stock options activity for the
thirteen weeks ended May 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of Shares |
|
Exercise Price |
Outstanding, beginning of period |
|
|
5,488,489 |
|
|
$ |
19.94 |
|
Granted |
|
|
606,600 |
|
|
|
7.42 |
|
Exercised |
|
|
(33,800 |
) |
|
|
0.99 |
|
Canceled or expired |
|
|
(118,353 |
) |
|
|
22.15 |
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
5,942,936 |
|
|
|
18.73 |
|
|
|
|
|
|
|
|
|
|
Exercisable at May 3, 2008 |
|
|
4,126,181 |
|
|
|
19.66 |
|
The following table presents a summary of the Companys restricted stock activity for the
thirteen weeks ended May 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of Shares |
|
Grant Date Fair Value |
|
|
|
|
|
|
|
|
|
Nonvested, beginning of period |
|
|
504,671 |
|
|
$ |
21.21 |
|
Granted |
|
|
187,596 |
|
|
|
7.42 |
|
Vested |
|
|
(60,735 |
) |
|
|
25.19 |
|
Canceled |
|
|
(25,559 |
) |
|
|
17.80 |
|
|
|
|
|
|
|
|
|
|
Nonvested, end of period |
|
|
605,973 |
|
|
|
16.68 |
|
|
|
|
|
|
|
|
|
|
For the thirteen weeks ended May 3, 2008 and May 5, 2007, respectively, stock-based
compensation expense was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
May 3, 2008 |
|
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
$ |
1,008 |
|
|
$ |
1,422 |
|
Selling,
general and administrative expenses |
|
|
2,129 |
|
|
|
3,604 |
|
|
|
|
|
|
|
|
Stock based compensation expense before income taxes |
|
$ |
3,137 |
|
|
$ |
5,026 |
|
Income tax benefit |
|
|
1,018 |
|
|
|
1,766 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense after income
taxes |
|
$ |
2,119 |
|
|
$ |
3,260 |
|
|
|
|
|
|
|
|
9
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
May 3, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 6. Net Income Per Share
Basic Earnings Per Share (EPS) is computed by dividing net income by the weighted-average
number of common shares outstanding. Restricted stock grants to employees and directors are not
included in the computation of basic EPS until the securities vest. Diluted EPS reflects the
dilutive effect of potential common shares from securities such as stock options and unvested
restricted stock. The following is a reconciliation of the denominators of the basic and diluted
EPS computations shown on the face of the accompanying consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
May 3, |
|
|
May 5, |
|
|
|
2008 |
|
|
2007 |
|
Weighted average common shares outstanding basic |
|
|
175,796,061 |
|
|
|
175,421,047 |
|
Dilutive effect of stock options and unvested
restricted stock outstanding |
|
|
217,683 |
|
|
|
1,173,961 |
|
|
|
|
|
|
|
|
Weighted average common and common equivalent
shares outstanding diluted |
|
|
176,013,744 |
|
|
|
176,595,008 |
|
|
|
|
|
|
|
|
For the thirteen weeks ended May 3, 2008 and May 5, 2007, 5,915,788 and 1,896,216 potential
shares of common stock, respectively, were excluded from the computation of diluted EPS relating to
stock option and restricted awards because the effect of including these potential shares was
anti-dilutive.
Note 7. Fair Value Measurements
Effective February 3, 2008, the Company adopted SFAS 157, except as it applies to FASB Staff
Position No. FAS 157-2 Effective Date of FASB Statement No. 157 (FSP SFAS 157-2). FSP SFAS
157-2 allows entities to defer the effective date of SFAS 157 for one year for certain
non-financial assets and non-financial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (i.e. as least annually).
SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. This statement does not require any new fair value
measurements; rather, it applies to other accounting pronouncements that require or permit fair
value measurements. Fair value is defined under SFAS 157 as the price that would be received to
sell an asset or paid to transfer a liability in the principal or most advantageous market in an
orderly transaction between market participants on the measurement date. SFAS 157 also
establishes a three-level hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
10
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
May 3, 2008
(Unaudited)
(in thousands, except share and per share amounts)
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset
or liability on the measurement date. The three levels are defined as follows:
|
Level 1 |
|
Unadjusted quoted prices in active markets for identical assets or liabilities |
|
|
Level 2 |
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or;
Unadjusted quoted prices for identical or similar assets or liabilities in markets
that are not active, or; Inputs other than quoted prices that are observable for the
asset or liability |
|
|
Level 3 |
|
Unobservable inputs for the asset or liability. |
The Company measures certain financial assets at fair value on a recurring basis, including
its marketable securities, which are classified as available-for-sale securities, and certain cash
equivalents, specifically its money market accounts. In accordance with SFAS 157, the Company
categorized its financial assets based on the priority of the inputs to the valuation technique
for the instruments, as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 3, 2008 |
Current Assets |
|
|
Total |
|
|
Level 1 |
|
Level 2 |
|
|
Level 3 |
|
Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts |
|
|
4,022 |
|
|
|
4,022 |
|
|
|
|
|
|
|
|
|
Marketable Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate Demand Notes |
|
|
233,752 |
|
|
|
|
|
|
|
233,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
237,774 |
|
|
|
4,022 |
|
|
|
233,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements 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 the Companys 2007 Annual Report to Stockholders.
Executive Overview
Chicos FAS, Inc. (together with its subsidiaries, the Company) is a specialty retailer of
private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories,
and other non-clothing gift items operating under the Chicos, White House | Black Market (WH|BM)
and Soma Intimates (Soma) brand names.
Chicos, which began operations in 1983, focuses on fashion conscious women who are 35 and
over with a moderate to high income level. The styling interprets fashion trends in a unique,
relaxed, figure-flattering manner using generally easy-care fabrics. WH|BM, which the Company
acquired in September 2003, and which began operations in 1985, targets middle-to-upper income
women who are 25 years old and up. The styling is contemporary, feminine and unique, assorted
primarily in white and black and related shades. Soma was initially launched in August 2004 under
the name Soma by Chicos. This concept offers foundation products in intimate apparel, sleepwear,
and activewear that was initially aimed at the Chicos target customer. In early fiscal 2007, the
Soma brand was repositioned under the name Soma Intimates to appeal to a broader customer base.
In March 2007, the Company announced the planned closure of the Fitigues brand operations
(Fitigues). Accordingly, for all periods presented, the operating results for Fitigues, if any,
are shown as discontinued operations in the Companys consolidated statements of income.
The Company earns revenues and generates cash through the sale of merchandise in its retail
stores, and through its call centers, which handle sales related to the Chicos, WH|BM, and Soma
direct to consumer operations.
The primary factors which historically have influenced the Companys profitability and success
have been its growth in number of stores and selling square footage, its positive comparable store
sales, and its strong operating margin. In the last five years, the Company has grown from 557
stores as of February 1, 2004 to 1,056 stores as of May 3, 2008, which includes the significant
store growth resulting from the acquisition of the 107 WH|BM stores in fiscal 2003 and the launch
of the Soma brand in fiscal 2004. The Company continues to expand its presence through the opening
of new stores, the expansion of existing stores, the development of new opportunities such as Soma
and through the extension of its merchandise lines. Since fiscal 2005, the Companys rate of
growth (measured by overall growth in sales, growth in comparable store sales, and other factors)
has decreased from the rate of overall sales growth experienced in earlier years (which had been in
the range of 30-40%), reflecting in large part the Companys significantly increased size, its more
manageable net square footage growth goals (5-8% for fiscal 2008 and 4-7% for fiscal 2009) and the
expectation that its same store sales will continue to be negative for the first half of fiscal
2008, with a return to positive comparable store sales increases sometime in the second half of
fiscal 2008 (if the Company sees some level of improvement in the economic
environment), may continue to experience flat to only moderate increases going forward, and may
again experience decreases from time to time, as was the case during fiscal 2007 and the current
period. The Company generally expects to continue to generate the necessary cash flow to fund its
expansion and to take advantage of new opportunities. The Company has no long-term debt and
foresees no current need to incur long-term debt to support its continued growth.
12
Factors that will be critical to determining the Companys future success include, among
others, managing the overall growth strategy, including the ability to open and operate stores
effectively, maximizing efficiencies in the merchandising, product development and sourcing
processes, maintaining high standards for customer service and assistance, maintaining newness, fit
and comfort in its merchandise offerings, matching merchandise offerings to customer preferences
and needs, customer acceptance of new store concepts, integrating new or acquired businesses,
maturing the newer brand concepts, implementing the process of senior management succession, and
generating cash to fund the Companys expansion needs. In order to monitor the Companys success,
the Companys senior management monitors certain key performance indicators, including:
|
|
|
Comparable same store sales growth For the thirteen-week period ended May 3, 2008,
the Companys consolidated comparable store sales results (sales from stores open for at
least twelve full months, including stores that have been expanded or relocated within the
same general market) decreased 17.5% compared to the thirteen-week period last year ending
May 5, 2007. The Company believes this decrease in same store sales was affected by
numerous challenges including a difficult macro economic environment, declining consumer
confidence resulting in lower than anticipated customer traffic and particularly cautious
spending, and merchandise offerings that failed, at times, to meet customer expectations.
The Companys current strategy is to target a general overall trend to return to comparable
store sales growth. The Company believes that its ability to realize such a general
overall positive trend in comparable store sales will prove to be a key factor in
determining its future levels of success: (i) in effectively operating its stores across
all brands, (ii) in managing its continuing store expansion program across all brands,
(iii) in maturing and developing its newer brands, and (iv) in achieving its targeted
levels of earnings per share. |
|
|
|
|
Positive operating cash flow For the thirteen-week period ended May 3, 2008, cash
flow from operations totaled $36.4 million compared with $88.4 million for the prior years
thirteen-week period ended May 5, 2007. Although operating cash flow decreased in the
current period compared to the prior period, the Company generated operating cash flow
sufficient to fund the ongoing needs of operations and investments. The Company currently
anticipates an increase in its free cash flow (cash flow from operations net of capital
expenditures) in fiscal 2008 compared to fiscal 2007. The Company believes that a key
strength of its business is the ability to consistently generate cash flow from operations.
Strong cash flow generation is critical to the future success of the Company, not only to
support the general operating needs of the Company, but also to fund capital expenditures
related to new store openings, relocations, expansions and remodels, costs associated with
the Companys proposed expansions of its existing corporate headquarters and its existing
distribution center, any future stock repurchase programs, costs associated with continued
improvement of information technology tools, including the planned conversions to the SAP
software platform, and costs associated with potential strategic acquisitions that may
arise from time to time. See further discussion of the Companys cash flows in the
Liquidity and Capital Resources section of this MD&A. |
|
|
|
|
Loyalty Clubs and Customer Development Management believes that a significant
indicator of the Companys success is the extent of the ongoing spending and future growth
of its loyalty programs, the Passport Club and The Black Book, and support for such
loyalty programs that is provided through its personalized customer service training
programs and its marketing initiatives. The Passport Club, the Chicos and Soma Intimates
frequent shopper club, features discounts and other special promotions for its members.
Preliminary members may join the Passport Club at no cost and, upon spending $500,
customers automatically become permanent members and are currently entitled to a 5%
discount on apparel and accessory purchases and other benefits. The Black Book loyalty
program, the WH|BM frequent shopper club, is similar to the Passport Club in most key
respects except that customers become permanent members upon spending $300, compared to
$500 for the Passport Club. |
13
|
|
|
As of May 3, 2008, the Company had approximately 1.9 million active Chicos and Soma
Intimates permanent Passport Club members and approximately 1.6 million active preliminary
Passport Club members, while as of May 5, 2007, the Company had approximately 1.7 million
active Chicos and Soma Intimates permanent Passport Club members and approximately 1.5
million active preliminary Passport Club members. |
|
|
|
|
As of May 3, 2008, the Company had approximately 0.8 million active WH|BM permanent Black
Book members and approximately 1.4 million active preliminary Black Book members, while as of
May 5, 2007, the Company had approximately 0.6 million active WH|BM permanent Black Book
members and approximately 1.3 million active preliminary Black Book members. |
|
|
|
|
Active customers are those who have made a purchase of merchandise under any of our brand
labels within the preceding 12 months. |
|
|
|
|
Quality of merchandise offerings To monitor and maintain the acceptance of its
merchandise offerings, the Company monitors sell-through levels, inventory turns, gross
margins and markdown rates on a classification and style level. Although the Company does
not disclose these statistics for competitive reasons, this analysis helps identify
comfort, fit, and newness issues at an early date and helps the Company plan future product
development and buying. |
In addition to the key performance indicators mentioned above, the Companys operational
strategies are focused on qualitative factors as well. The Companys ability to manage its
multiple brands, to develop and grow its Soma Intimates concept, to expand the Companys direct to
consumer business, to secure new store locations including relocations and/or expansions of
existing stores and to launch new product categories within all brands, are all important
strategies that, if successful, should contribute to the continued growth of the Company.
The Company continues to evaluate and monitor the progress of its Soma intimate apparel
initiative. The Company recognizes that the Soma business can be seen as complementary to its
basic apparel business, but also understands that many aspects of this business require unique
attention. The Company monitors Soma merchandise offerings in a manner similar to its other brands
with special emphasis on repeat purchases in the foundation category. The Company anticipates that
additional investment will be required to establish the Soma brand as a suitable business that
meets the profitability goals of the Company over the longer term.
The Company incurred approximately $2.2 million of pre-tax charges in the
current period related to the closure of seven underperforming Soma
stores. In addition, the Company believes that eventual profitability is
in part dependent on the ability to open a critical mass of Soma Intimates stores (currently
believed to be at least 100 stores) and the planned slowdown in the new store openings (in order to
focus on improving the existing Soma operations and profitability) pushes that target further into
the future.
For the thirteen weeks ended May 3, 2008 (the current period), the Company reported net
sales, operating income and net income of $409.6 million, $16.7 million and $12.7 million,
respectively. Net sales decreased by 9.6% from the comparable period in the prior fiscal year,
while operating income and net income decreased by 77.6% and 73.0%, respectively, from the
comparable thirteen-week period ended May 5, 2007 (the prior period). The Companys gross margin
percentage decreased to 55.9% for the current period compared 61.7% in the prior period while
selling, general and administrative expenses (SG&A) for the fiscal 2008 first quarter increased
3.4% to $212.1 million from $205.1 million in the prior years first
14
quarter. The increase in SG&A dollars for the current quarter was primarily due to increased
store occupancy costs and, to a lesser extent, increased marketing expenses. As a percentage of
sales, SG&A in the current quarter increased by approximately
660 basis points as the increase in the percentage was further exacerbated by the deleverage associated with the Companys negative same store
sales as well as the larger size Chicos and WH|BM stores that
the Company has been opening over the last two years.
Results of Operations Thirteen Weeks Ended May 3, 2008 Compared to the Thirteen Weeks Ended May
5, 2007.
Net Sales
The following table shows net sales by Chicos/Soma stores, net sales by WH|BM stores, net
sales by direct to consumer and other net sales (which consists of net sales to franchisees) in
dollars and as a percentage of total net sales for the thirteen weeks ended May 3, 2008 and May 5,
2007 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
May 3, 2008 |
|
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by Chicos/Soma stores |
|
$ |
285,694 |
|
|
|
69.8 |
% |
|
$ |
333,052 |
|
|
|
73.5 |
% |
Net sales by WH|BM stores |
|
|
107,849 |
|
|
|
26.3 |
|
|
$ |
103,467 |
|
|
|
22.9 |
|
Net sales by Direct to Consumer |
|
|
16,021 |
|
|
|
3.9 |
|
|
|
16,454 |
|
|
|
3.6 |
|
Other net sales |
|
|
|
|
|
|
|
|
|
|
115 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
409,564 |
|
|
|
100.0 |
% |
|
$ |
453,088 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by Soma and WH|BM stores increased in the current period from the prior period
primarily due to new store openings in the case of WH|BM and due to strong comparable store sales
increases at Soma. Net sales by Chicos and WH|BM stores were also impacted by decreases in the
Chicos and WH|BM brands comparable store net sales. A summary of the factors impacting
year-over-year sales increases is provided in the table below (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 3, 2008 |
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
Comparable store sales (decreases) |
|
$ |
(75,432 |
) |
|
$ |
(6,042 |
) |
Comparable same store sales % |
|
|
(17.5 |
)% |
|
|
(1.6 |
)% |
New store sales increase, net |
|
$ |
32,456 |
|
|
$ |
66,582 |
|
The comparable store sales decrease of 17.5% (for the thirteen-week period ended May 3, 2008
compared to the thirteen-week period ending May 5, 2007) was driven primarily by a decrease in
transactions at the Chicos front-line stores as well as by a decrease of 7.0% in the Chicos
average unit retail price (which average unit retail price is a financial indicator, the percentage
change of which is believed by management to represent a reasonable approximation of the percentage
change in Company store net sales attributable to price changes, markdowns or mix), and merchandise
offerings that failed, at times, to meet customer expectations. The comparable store sales
decrease was also impacted by a decrease in transactions at WH|BM front-line stores, offset by a
4.0% increase in the average unit retail price at WH|BM stores. In the current period, WH|BM same
store sales represent approximately 26% of the total same store sales base compared to 21% in the
prior period. The Chicos brand same store sales decreased by approximately 22% and the WH|BM
brands same store sales decreased by approximately 10% when comparing the current period to the
prior period. Although Somas comparable store sales increased significantly, it did not have a
material impact on the consolidated calculation.
15
Net sales for the direct to consumer channel in the current period, which included
merchandise from all of the Companys brands, decreased by $0.4 million, or 2.6%, compared to net
sales for the direct to consumer channel in the prior period. This decrease is attributable
specifically to decreased sales for the Chicos brand, which were almost entirely offset by
increases in the WH|BM and Soma brands direct to consumer businesses. The Company intends to
continue making improvements to its direct to consumer infrastructure and merchandising approach in an effort to
further promote sales through these channels.
Cost of Goods Sold/Gross Margin
The following table shows cost of goods sold and gross margin in dollars and the related gross
margin percentages for the thirteen weeks ended May 3, 2008 and May 5, 2007 (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 3, 2008 |
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
$ |
180,762 |
|
|
$ |
173,323 |
|
Gross margin |
|
|
228,802 |
|
|
|
279,765 |
|
Gross margin percentage |
|
|
55.9 |
% |
|
|
61.7 |
% |
Gross margin as a percentage of sales for the current quarter was 55.9%, compared to a record
first quarter gross margin of 61.7% in the first quarter for fiscal 2007. In the current period,
the Company incurred approximately $4.6 million of charges to clear up aged and overstock
inventories for Chicos front-line and outlet stores. As a result, Chicos front-line stores
merchandise margins in the first quarter decreased by approximately 480 basis points compared to
the prior years first quarter primarily due to higher markdowns and the aforementioned expenses.
Gross margin percentage was also negatively impacted by continued investment in the Companys
product development and merchandising functions and lower merchandise margins in the outlet and
direct to consumer channels primarily due to higher ownership of inventory that was marked down and
transferred from front-line stores.
Selling, General, and Administrative Expenses
The following tables show store operating expenses, marketing, and shared services in dollars
and as a percentage of total net sales for the thirteen weeks ended May 3, 2008 and May 5, 2007
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 3, 2008 |
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
Store operating expenses |
|
$ |
160,985 |
|
|
$ |
154,693 |
|
Percentage of total net sales |
|
|
39.3 |
% |
|
|
34.1 |
% |
Store operating expenses include all direct expenses including personnel, occupancy and
supplies incurred to operate each of the Companys stores. In addition, store operating expenses
include those costs necessary to support the operation of each of the Companys stores including
district and regional management expenses and other brand specific store support functions.
Store operating expenses as a percentage of sales in the first quarter increased by approximately
520 basis points compared to the prior period primarily due to increased occupancy and personnel
costs as a percentage of sales attributable mainly to the deleverage associated with the
Companys negative same store sales coupled with the larger size Chicos and WH|BM stores that
the Company has been opening over the last two years. Further, the mix effect of the WH|BM and
Soma stores becoming a larger portion of the Companys store base also negatively impacted store
operating expenses as a percentage of sales (both WH|BM and Soma brands operate with higher store
operating costs as a percentage of sales than the store operating costs as a percentage of sales
experienced by the Chicos brand).
16
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 3, 2008 |
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
Marketing |
|
$ |
22,843 |
|
|
$ |
20,939 |
|
Percentage of total net sales |
|
|
5.6 |
% |
|
|
4.6 |
% |
Marketing expenses include expenses related to the Companys marketing program such as direct
marketing efforts (including direct mail and e-mail), national advertising expenses and related
support costs. Marketing costs as a percentage of sales for the fiscal 2008 first quarter
increased by approximately 100 basis points due mainly to the deleverage associated with the
Companys negative same store sales and increased marketing spend for Soma and consumer research
for Chicos.
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 3, 2008 |
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
Shared services |
|
$ |
28,281 |
|
|
$ |
29,471 |
|
Percentage of total net sales |
|
|
6.9 |
% |
|
|
6.5 |
% |
Shared services expenses consist of the corporate level functions including executive
management, human resources, management information systems and finance, among others. Shared
services expenses increased as a percentage of net sales by approximately 40 basis points mainly
due to the deleverage associated with the Companys negative same store sales and, to a lesser
extent, from increased technology costs.
Interest Income, net
The following table shows interest income, net in dollars and as a percentage of total net
sales for the thirteen weeks ended May 3, 2008 and May 5, 2007 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 3, 2008 |
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
Interest income, net |
|
$ |
2,239 |
|
|
$ |
2,245 |
|
Percentage of total net sales |
|
|
0.5 |
% |
|
|
0.5 |
% |
Interest income was flat in the first quarter compared to the prior period primarily due to
interest income earned on the Companys note receivable recorded in connection to its land sale in
fiscal 2007, offset by lower interest rates on its other interest bearing investments in the
current period compared to the prior period.
Provision for Income Taxes
The Companys effective tax rate for the current period was 32.7% compared to an effective tax
rate of 36.1% for the prior period. The decrease is primarily attributable to favorable permanent
differences, mainly charitable inventory contributions, representing a considerably higher portion
of pre-tax income, offset, in part, by a slightly higher overall state effective tax rate.
Net Income
The following table shows net income in dollars and as a percentage of total net sales for the
thirteen weeks ended May 3, 2008 and May 5, 2007 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 3, 2008 |
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,732 |
|
|
$ |
47,158 |
|
Percentage of total net sales |
|
|
3.1 |
% |
|
|
10.4 |
% |
17
Comparable Company Store Net Sales
Comparable Company store net sales for the thirteen-week period ended May 3, 2008 decreased by
17.5% when compared to the thirteen-week period last year ending May 5, 2007 (the Chicos brand
same store sales decreased by approximately 22% and the WH|BM brands same store sales decreased by
approximately 10%). The Company believes this decrease in same store sales was affected by
numerous challenges including a difficult macro economic environment, declining consumer confidence
resulting in lower than anticipated customer traffic and particularly cautious spending, and
merchandise offerings that failed, at times, to meet customer expectations. Comparable Company
store net sales data is calculated based on the change in net sales of currently open stores that
have been operated as a Company store for at least twelve full months, including stores that have
been expanded or relocated within the same general market area (approximately five miles).
The comparable store percentage reported above includes 57 stores that were expanded or
relocated within the last twelve months from the beginning of the respective prior period by an
average of 1,471 net selling square feet. If the stores that were expanded and relocated had been
excluded from the comparable store base, the decrease in comparable store net sales would have been
18.3% for the current quarter (versus a decrease of 17.5% as reported). The Company does not
consider the effect to be material to the overall comparable store sales results and believes the
inclusion of expanded stores in the comparable store net sales to be an acceptable practice,
consistent with the practice followed by the Company in prior periods and by some other retailers.
Soma Intimates stores began entering into the comparable store sales calculation in September 2005
but have not had a material impact on the comparable store sales calculation due to the relatively
small number of comparable stores.
Liquidity and Capital Resources
The Companys ongoing capital requirements have been and are for funding capital expenditures
for new, expanded, relocated and remodeled stores and increased merchandise inventories, for
planned expansion of its headquarters, distribution center and other central support facilities,
to fund stock repurchases under the Companys previous stock repurchase programs, and for
continued improvement in information technology tools, including the ongoing conversion that the
Company is planning to the SAP software platform.
The following table shows the Companys capital resources as of May 3, 2008 and May 5, 2007
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 3, 2008 |
|
May 5, 2007 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
37,022 |
|
|
$ |
23,334 |
|
Marketable securities |
|
|
233,752 |
|
|
|
250,560 |
|
Working capital |
|
|
313,212 |
|
|
|
312,771 |
|
Working capital as of May 3, 2008 is essentially flat compared to May 5, 2007. The
significant components of the Companys working capital are cash and cash equivalents, marketable
securities, and inventories reduced by accounts payables and accrued liabilities.
Based on past performance and current expectations, the Company believes that its cash and
cash equivalents, marketable securities and cash generated from operations will satisfy the
Companys working capital needs, capital expenditure needs (see New Store Openings and Headquarter
Expansion discussed below), commitments, and other liquidity requirements associated with the
Companys operations through at least the next 12 months.
18
Operating Activities
Net cash provided by operating activities was $36.4 million and $88.4 million
for the thirteen weeks ended May 3, 2008 and May 5, 2007, respectively. The cash provided by
operating activities for both periods was due to the Companys net income adjusted for non-cash
charges and changes in working capital such as:
|
|
|
Depreciation and amortization expense; |
|
|
|
|
Deferred tax benefits; |
|
|
|
|
Stock-based compensation expense and the related income tax effects thereof; |
|
|
|
|
Fluctuations in accounts receivable, inventories, prepaid and other current
assets, accounts payable and accrued deferred liabilities. |
Investing Activities
Net cash used in investing activities was $13.3 million and $103.7 million for the thirteen
weeks ended May 3, 2008 and May 5, 2007, respectively.
The Companys investment in capital expenditures during the current thirteen-week period
primarily related to the planning and opening of new, relocated, remodeled and expanded Chicos,
WH|BM, and Soma Intimates stores ($25.8 million), costs associated with system upgrades and new software
implementations ($6.2 million) and other miscellaneous capital expenditures ($8.1 million).
In addition, the Company sold $26.7 million, net, of marketable securities during the current
thirteen-week period. In contrast, in the prior period, the Company purchased $12.2 million, net,
in marketable securities.
Also, during the prior period, the Company acquired all the territorial franchise rights to
the state of Minnesota and the existing franchise locations in Minnesota for $32.9 million and
acquired a franchise store in Florida for $6.4 million.
Financing Activities
Net
cash provided by financing activities was $0.2 million and
$1.4 million for the thirteen weeks ended May 3, 2008 and May 5,
2007, respectively.
During the thirteen weeks ended May 3, 2008 and May 5, 2007, the Company repurchased 13,783
and 3,991 shares respectively, in connection with employee tax withholding obligations under
employee compensation plans, which are not purchases under any publicly announced plan.
The Company received proceeds in both periods from the issuance of common stock related to
current and former employee option exercises and employee participation in its employee stock
purchase plan.
During the thirteen weeks ended May 3, 2008, certain employees and former employees exercised
an aggregate of 33,800 options at prices ranging from $0.5139 to $8.60. Also, during this period,
the Company sold 16,340 shares of common stock during the March offering period under its employee
stock purchase plan at a price of $9.31. The proceeds from these issuances of stock, exclusive of
the tax benefit realized by the Company, amounted to approximately $0.2 million.
19
New Store Openings and Headquarters Expansion
The Company is planning a 5-8% increase in its selling square footage for fiscal 2008, which
is expected to result from approximately 35-40 net new stores and 31-33 relocations and expansions
of existing stores. The anticipated breakdown of net new stores by brand for fiscal 2008 is as
follows: 17-20 Chicos stores, 18-20 WH|BM stores and none are expected to be Soma stores. During
the thirteen weeks ended May 3, 2008, the Company opened 23 new stores, closed 5 stores and
expanded or relocated 17 stores.
Looking forward to fiscal 2009, the Company does not intend to increase the number of new
stores beyond current commitments of 10 or so new stores until it sees improvements in the economy
and its own performance.
In fiscal 2006, the Company completed the purchase of approximately 22 acres of property
adjacent to the Companys current headquarters in Fort Myers, Florida to serve as the base for
expansion of the Companys corporate headquarters operations. The property includes seven
existing buildings aggregating approximately 200,600 square feet of space, approximately 6% of
which continues to be leased to unrelated third parties. All leases will expire or otherwise
terminate on or before August 31, 2008. The Company will utilize the vacant space, which is
likely to require modifications, for its expanding corporate headquarters needs. With respect to
addressing the needs for additional distribution center space, the Company is evaluating its
requirements and the appropriate timing to make additional distribution center capacity available,
particularly in light of its recent decision to slow its new store growth until improvements in
the economy and the Companys performance are achieved. Even with the scaled down growth plans,
the Companys present goal is to begin design work in late fiscal 2008. It is currently
anticipated that the Company will require additional distribution space in late fiscal 2009 or
fiscal 2010 and, initially, the Company is focusing its evaluation on the expansion of its current
distribution center on existing adjacent land that is already owned by the Company.
The Company is working with SAP, a third party vendor, to implement an enterprise resource
planning system (ERP) to assist in managing its retail operations, beginning first with its Soma
brand. This fully integrated system is expected to support and coordinate all aspects of product
development, merchandising, finance and accounting and to be fully scalable to accommodate rapid
growth. On February 4, 2007, the Company completed the first major phase of its multi-year,
planned implementation of the new ERP system by converting its Soma brand to the new merchandising
system as well as rolling out the new financial systems at the same time. The second major phase
anticipates an initial roll out and utilization of this new system in each of its other brands
beginning in early fiscal 2009 with completion anticipated in mid to late fiscal 2009. The third
major phase contemplates on-going enhancements and optimization of the new ERP across all three
brands, as well as the deployment of additional functionality across various other functions within
the Company through fiscal 2009 and beyond. The Company expects that the costs associated with the
implementation of the ERP system will be funded from the Companys existing cash and marketable
securities balances.
Given the Companys existing cash and marketable securities balances and the capacity included
in its bank credit facilities, the Company does not believe that it will need to seek other sources
of financing to conduct its operations or pursue its expansion plans even if cash flow from
operations should prove to be less than anticipated or if there should arise a need for additional
letter of credit capacity due to establishing new and expanded sources of supply, or if the Company
were to increase the number of new stores planned to be opened in future periods.
20
Critical Accounting Policies and Estimates
The Companys discussion and analysis of its financial condition and results of operations are
based upon the Companys consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The critical accounting
matters that are particularly important to the portrayal of the Companys financial condition and
results of operations and require some of managements most difficult, subjective and complex
judgments are described in detail in the Companys Annual Report on Form 10-K for the fiscal year
ended February 2, 2008. The preparation of consolidated financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to customer product returns,
inventories, income taxes, insurance reserves, contingencies and litigation. The Company bases its
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. There
have been no material changes to the Companys critical accounting policies as disclosed in the
Companys Annual Report on Form 10-K for the fiscal year ended February 2, 2008.
Inflation
The Companys operations are influenced by general economic conditions. Historically,
inflation has not had a material effect on the results of operations. The Company believes that
recent spikes in inflation, particularly in the energy and food sectors, have resulted in some
decreased customer spending on the Companys merchandise.
Quarterly Results and Seasonality
The Company reports its sales on a monthly basis in line with other public companies in the
womens apparel industry. The Companys quarterly results may fluctuate significantly depending on
a number of factors including timing of new store openings, adverse weather conditions, the spring
and fall fashion lines and shifts in the timing of certain holidays. In addition, the Companys
periodic results can be directly and significantly impacted by the extent to which the Companys
new merchandise offerings are accepted by its customers and by the timing of the introduction of
such merchandise.
Certain Factors That May Affect Future Results
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 the current views of the Company with respect to certain events
that could have an effect on the Companys future financial performance, including but without
limitation, statements regarding future growth rates of the established Company store concepts and
the roll out of the Soma concept. The statements may address items such as future sales, gross
margin expectations, operating margin expectations, earnings per share expectations, planned store
openings, closings and expansions, future comparable store sales, future product sourcing plans,
inventory levels, planned marketing expenditures, planned capital expenditures and future cash
needs. In addition, from time to time, the Company may issue press releases and other written
communications, and representatives of the Company may make oral statements, which contain
forward-looking information.
21
These statements, including those in this Form 10-Q and those in press releases or made
orally, may include the words expects, believes, 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 subject to various
risks and uncertainties that could cause actual results to differ materially from historical
results or those currently anticipated. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in Item 1A, Risk Factors of the
Companys most recent Form 10-K filed with the Securities and Exchange Commission on March 28,
2008.
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, the ability of the Company to secure and maintain customer acceptance of the
Companys styles and store concepts, the propriety of inventory mix and sizing, the quality of
merchandise received from vendors, the extent and nature of competition in the markets in which the
Company operates, the extent of the market demand and overall level of spending for womens
privately branded clothing and related accessories, the adequacy and perception of customer
service, the ability to coordinate product development with buying and planning, the ability of the
Companys 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, the buying publics
acceptance of any of the Companys new store concepts, the performance, implementation and
integration of management information systems, the ability to hire, train, energize and retain
qualified sales associates and other employees, the availability of quality store sites, the
ability to expand headquarters, 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 and operate its direct to consumer operations, the ability to
secure and protect trademarks and other intellectual property rights, the ability to effectively
and efficiently operate the Chicos, WH|BM, and Soma merchandise divisions, 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 peculiar to the Companys
reliance on sourcing from foreign vendors, 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.
The forward-looking statements included herein are only made as of the date of this Quarterly
Report on Form 10-Q. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
Litigation
In the normal course of business, the Company is subject to proceedings, lawsuits and other
claims including proceedings under laws and government regulations relating to labor, product,
intellectual property and other matters, including the matters described in Item 1 of Part II of
this Quarterly Report on Form 10-Q. Such matters are subject to many uncertainties, and outcomes
are not predictable with assurance. Consequently, the ultimate aggregate amount of monetary
liability or financial impact with respect to these matters at May 3, 2008, cannot be ascertained.
Although these matters could affect the operating results of any one quarter when resolved in
future periods, and although there can be no assurance with respect thereto, management believes
that, after final disposition, any monetary liability or financial impact to the Company would not
be material to the annual consolidated financial statements.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Companys financial instruments as of May 3, 2008 has not significantly
changed since February 2, 2008. The Company is exposed to market risk from changes in interest
rates on any future indebtedness and its marketable securities.
The Companys exposure to interest rate risk relates in part to its revolving line of credit
with its bank; however, as of May 3, 2008, the Company did not have any outstanding borrowings on
its line of credit and, given its liquidity position, does not expect to utilize its line of credit
in the foreseeable future except for its continuing use of the letter of credit facility portion
thereof.
The Companys investment portfolio is maintained in accordance with the Companys investment
policy which identifies allowable investments, specifies credit quality standards and limits the
credit exposure of any single issuer. The Companys investment portfolio consists of cash
equivalents and marketable securities, including variable rate demand notes, which are highly
liquid, variable rate municipal debt securities and municipal bonds. Although the variable rate
municipal debt securities have long-term nominal maturity dates ranging from 2013 to 2047, the
interest rates are reset, either daily or every 7 days. Despite the long-term nature of the
variable rate demand notes, the Company has the ability to quickly liquidate these securities based
on the Companys cash needs thereby creating a short-term instrument. Accordingly, the Companys
investments are classified as available-for-sale securities. As of May 3, 2008, an increase or
decrease of 100 basis points in interest rates would have had an immaterial impact on the fair
value of the marketable securities portfolio.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of the Companys management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of such period, the Companys
disclosure controls and procedures were effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be included in the
Companys periodic SEC filings.
Changes in Internal Controls
There were no significant changes in the Companys internal controls or in other factors that
could significantly affect the Companys disclosure controls and procedures subsequent to the date
of the above referenced evaluation. Furthermore, there was no change in the Companys internal
control over financial reporting or in other factors during the quarterly period covered by this
report that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 9, 2007, the Company was served with a lawsuit in which it was named as defendant in a
putative class action in the Superior Court for the State of California, County of Los Angeles,
Linda Balint v. Chicos FAS, Inc. et al. The Complaint alleged that the Company, in
violation of California law, failed to: (1) pay overtime wages, and (2) provide meal periods, among
other claims. The Company timely filed its response to the Complaint. In October 2007, the parties
participated in an early mediation of this matter and reached a settlement as a result of that
mediation. In January 2008, the Court gave its preliminary approval of the settlement and notice of
the settlement has been sent to all class members. Class members had until April 21, 2008 to
partake in, opt out of, or object to the settlement. On May 20, 2008, the Court granted its final
approval of the settlement. The settlement is not expected have a material impact on the Companys
results of operations or financial condition.
The Company is not a party to any other legal proceedings, other than various claims and
lawsuits arising in the normal course of business, none of which the Company believes should have a
material adverse effect on its financial condition or results of operations.
ITEM 1A. RISK FACTORS
In addition to the other information discussed in this report, the factors described in Part
I, Item 1A., Risk Factors in the Companys 2007 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 2008 should be considered as they could materially
affect the Companys business, financial condition or future results. There have not been any
significant changes with respect to the risks described in our 2007 Form 10-K, but these are not
the only risks facing the Company. Additional risks and uncertainties not currently known to the
Company or that the Company currently deems to be immaterial also may adversely affect the
Companys business, financial condition or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information concerning purchases made by the Company of its
common stock for the periods indicated (dollar amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Shares |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
that May Yet Be |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Purchased Under the |
|
|
Total Number of |
|
Average Price Paid |
|
Part of Publicly |
|
Publicly Announced |
Period |
|
Shares Purchased(a) |
|
per Share |
|
Announced Plans |
|
Plans |
February 3, 2008 to March 1, 2008 |
|
|
2,766 |
|
|
$ |
9.71 |
|
|
|
|
|
|
$ |
|
|
March 2, 2008 to April 5, 2008 |
|
|
9,327 |
|
|
$ |
7.01 |
|
|
|
|
|
|
$ |
|
|
April 6, 2007 to May 3, 2008 |
|
|
1,690 |
|
|
$ |
6.28 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
13,783 |
|
|
$ |
7.46 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Consists of 13,783 shares of restricted stock repurchased in connection with employee
tax withholding obligations under employee compensation plans, which are not purchases
under any publicly announced plan. |
24
ITEM 6. EXHIBITS
|
(a) |
|
The following documents are filed as exhibits to this Quarterly Report on Form
10-Q (exhibits marked with an asterisk have been previously filed with the Commission as
indicated and are incorporated herein by this reference): |
|
|
|
Exhibit 31.1
|
|
Chicos FAS, Inc. and Subsidiaries Certification Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 Chief Executive Officer |
|
|
|
Exhibit 31.2
|
|
Chicos FAS, Inc. and Subsidiaries Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 Chief
Financial Officer |
|
|
|
Exhibit 32.1
|
|
Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
Exhibit 32.2
|
|
Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
CHICOS FAS, INC.
|
|
Date: May 28, 2008 |
By: |
/s/ Scott A. Edmonds
|
|
|
|
Scott A. Edmonds |
|
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: May 28, 2008 |
By: |
/s/ Kent A. Kleeberger
|
|
|
|
Kent A. Kleeberger |
|
|
|
Executive Vice President Finance, Chief
Financial Officer and Treasurer
(Principal Financial Officer) |
|
|
|
|
|
Date: May 28, 2008 |
By: |
/s/ Michael J. Kincaid
|
|
|
|
Michael J. Kincaid |
|
|
|
Senior Vice President Finance, Chief
Accounting Officer, and Assistant Secretary
(Principal Accounting Officer) |
|
|
26