Chico's FAS Inc. (CHS) reported adjusted earnings per share of 5 cents for fourth-quarter 2014, increasing 25% from the prior-year figure of 4 cents and also surpassing the Zacks Consensus Estimate of 2 cents. Following the better-than-expected results, shares of Chico's grew 2.6% on Thursday.
Including one-time items, the company reported loss per share of 21 cents, as against break-even results in the prior-year quarter.
Net sales increased 7.6% year over year to $656.9 million in the quarter. The year-over-year jump in top line was mainly driven by the opening of 75 new stores in the quarter and positive comparable-store sales (comps) across all brands. Sales were also ahead of the Zacks Consensus Estimate of $642 million.
Quarter in Detail
Comps in the quarter rose 4.3% against a 3.4% decline registered in the year-ago quarter. The surge was due to an increase in both transaction count and average dollar sale. Store additions led to a 4.5% increase in total square footage.
In the reported quarter, Soma Intimates comps rose 13.7% compared with a 5.3% increase in the prior-year quarter. This marked the 23rd consecutive quarter of positive comps for the brand.
White House Black Market (WHBM) brands' comps increased 5.4% as opposed to a 6.6% decline registered last year. The Chico's brand comps also rose 1.2% versus a 3.0% decline last year.
Gross profit rose 6% to $328.2 million from $309.6 million reported in the year-ago quarter, while gross margin contracted 70 basis points (bps) from the year-ago quarter to 50%. Decline in gross margin was primarily due to increased promotions in order to sell through products delayed by port issues and seasonal merchandise.
Selling, general and administrative (SG&A) expenses were $317.8 million, up 5.1% from the year-ago level. As a percentage of sales, SG&A expenses rose 110 bps from the prior-year quarter to 48.4%, primarily because of sales leverage in relation to sales expenses and National Store Support Center costs, partially offset by investments in strategic initiatives.
Financial Update
Chico’s ended fiscal 2014 with cash and marketable securities of $259.9 million, compared with $152.4 million in the year-ago quarter. Inventories declined 5.7%.to $3 million due to higher sales volume, careful inventory management and the favorable shift in the timing of the Chinese New Year.
Shareholders’ equity totaled $943.6 million as of Jan 31, 2015. During fiscal 2014, the company generated $282.5 million of cash from operational activities.
Store Update
During the quarter, this retailer of women’s clothing and accessories opened 8 new stores, while shutting down 18 stores. As of Jan 31, 2015, Chico’s operated 1,547 stores across the United States and Canada.
The company now anticipates opening about 40 new stores in fiscal 2015, down from its previous forecast of 60 to 70 stores as well as prior fiscal’s store openings.
Guidance
Chico's initiated its fiscal 2015 outlook. The company is anticipating comps to increase in a low-single digit. Moreover, the company expects the spread between overall sales and comparable-sales growth to be between 2% to 3%.
It also expects gross margin rate to improve in fiscal 2015 compared with fiscal 2014. The company expects total inventories to grow at a slower rate than total company sales growth.
In an attempt to drive long-term growth and value creation, management announced a number of new capital allocation and cost reduction initiatives.
These include the accelerated share repurchase plan, reduction in the capital expenditures, store closures to improve the overall productivity of its remaining stores and an organizational realignment that includes slashing jobs.
Under its store closure plan the company intends to shut down nearly 120 underperforming stores over the next three fiscal years, which will result in cost savings of $55.2 million. Chico's will close about 35 stores in fiscal 2015.
Moving forward, the company announced an accelerated $250 million stock buyback plan to be executed in the first quarter of fiscal 2015. The buyback will be financed using both cash and debt. As of Jan 31, 2015, the company had $290 million remaining under the share repurchase authorization.
Moreover, the company expects capital expenditure of nearly $100 million in fiscal 2015, of which about $30 million will be directed toward installing new Point-of-Sale system applications in all stores, including mobile technology. The capital expenditure guidance reflects a 29% decline from the company’s three-year average.
In order to ensure that the company’s resources are better aligned with its long-term growth initiatives, including omni-channel, Chico's announced an organizational realignment plan which includes eliminating around 240 employees, or 12% of its headquarters and field management workforce. These cuts are expected to result in $38 million of annualized savings.
Other Stocks to Consider
Currently, Chico’s carries a Zacks Rank #3 (Hold). Better-ranked apparel retailers include Pacific Sunwear of California Inc. (PSUN), Stage Stores Inc. (SSI) and Citi Trends Inc. (CTRN), all carrying a Zacks Rank #1 (Strong Buy).
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