Chico’s FAS Narrows Losses and Shows Signs of Recovery

·6 min read

Chico’s FAS is starting to show signs of a comeback — but activist investors don’t think it’s fast enough.

The Fort Myers, Fla.-based retailer — parent company to the Chico’s, White House Black Market, Soma and TellTale brands — revealed quarterly earnings Tuesday morning before the market opened, improving on top-line revenues across the entire portfolio and narrowing its losses. Shares of Chico’s FAS closed up 9.57 percent to $6.30 apiece Tuesday as a result.

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“Our first-quarter results underscore the tremendous progress we are making in our turnaround strategy and the power of our three unique brands and being a digital-first, customer-led company,” Molly Langenstein, Chico’s FAS chief executive officer and president, said in a statement. “Operating discipline, strategically planned inventories and the ongoing benefit of cost actions are further expanding margins and contributing to our return to profitable growth.”

Total company revenues for the three-month period ending May 1 were approximately $388 million, compared with $280 million the same time last year. Soma was the clear standout, with sales surging 65 percent during the quarter to roughly $107 million, up from nearly $65 million the same time last year. But the innerwear and sleepwear brand’s performance improved even when compared to pre-pandemic levels. Comparable sales grew 39 percent, compared with 2019’s first quarter.

Chico’s and White House Black Market also made noticeable progress. Total revenues at Chico’s were $177 million, up from $131 million a year ago, while White House Black Market had $104 million in total sales, up from nearly $84 million last year.

“At Chico’s and White House Black Market, elevated styling and quality are leading to faster sell-through rates and customer enthusiasm,” the CEO added in her prepared remarks.

“The business strategies put in place in Soma around inventory, product marketing and digital are working,” Langenstein added on Tuesday morning’s conference call with analysts. “And we have every confidence [that] applying the same strategies at Chico’s and White House Black Market will continue the apparel sales momentum.”

In addition, the company said the average age of new customers continues to drop, “reinforcing the runway for all three brands.”

Chico’s FAS narrowed its losses as a result, with $8.9 million in losses, compared with more than $178 million in losses last year.

“Our momentum started in the fourth quarter of fiscal 2019, stalled by the pandemic, [and] is now back on track to deliver meaningful growth in the years to come,” Langenstein said. “Our progress is measurable and the opportunities planned throughout the coming year will continue driving sales growth, even deeper customer loyalty and market share gains.”

But only a day earlier, activist investors Barington Capital Group, whose shareholders own about 2 percent of Chico’s FAS, sent a letter to Chico’s executive chair of the board, urging the retailer to explore strategic alternatives in its turnaround efforts. Barington’s list of suggestions include adding board members who have experience in e-commerce and women’s specialty retailing to further enhance the company’s digital efforts — and selling off unprofitable brands.

“Barington believes the operating struggles at the company’s fashion clothing brands, Chico’s and White House Black Market, have long overshadowed the positive contributions from Soma, the company’s intimate apparel and loungewear brand,” the letter stated. “[Barington] believes Soma, the company’s intimate apparel brand, is likely worth the company’s entire enterprise value, but is being overshadowed by poor operating performance of other brands. Based on recent peer valuations, Barington believes Soma’s value could exceed the company’s enterprise value of approximately $640 million.

“In Barington’s opinion, the company’s board is largely responsible for this underperformance, as it has failed to adequately refresh the board,” the letter continued. “Barington sees promise in the new CEO’s operating plan, which is driven by digital-led retailing and improvements to merchandise quality. Given the sizable cost reductions enacted by management last year, Barington expects to see a return to profitability in [fiscal-year] 2021.”

Chico’s FAS responded to the letter the same day with a statement, saying the firm is in ongoing conversations with all of its shareholders including Barington to discuss the retailer’s future prospects.

“The company is making tremendous progress in its turnaround strategy to become a digital-first, customer-led company,” Chico’s FAS said. “This work, which commenced in the third quarter of 2019, was showing significant traction prior to the pandemic. In addition, actions taken over the last 18 months to reduce costs and strengthen the company’s balance sheet provide a strong financial foundation to invest and grow for the foreseeable future.

“We look forward to continuing to engage with all of our shareholders, including Barington, about this work and the execution of our transformation strategy,” the statement continued. “We are committed to taking all appropriate actions to improve performance and drive shareholder value.”

To help curb expenses, Chico’s FAS Canada, a subsidiary of Chico’s FAS, filed for bankruptcy with the Ontario, Canada, office of the Superintendent in Bankruptcy, last July.

The move meant all 10 of its stores in Canada — four Chico’s and six White House Black Market locations — would close permanently. The company continues to operate its e-commerce platforms in Canada.

Chico’s FAS has also previously said it would close between 13 and 16 percent of its store fleet over the next three years, starting with 40 to 45 stores in the current fiscal year. The majority of the closures will be in underperforming mall-based Chico’s and White House Black Market stores.

In addition, the retailer continues to boast about Soma’s success.

“Soma, which posted a 65 percent sales increase over last year’s first quarter, remains on track to be one of the largest intimate apparel brands in the country,” Langenstein said on Tuesday. “According to market research firm [The] NPD Group, for the 12 months [ending in] April 2021, Soma’s growth exceeded that of the U.S. apparel market, was in the top 10 brands for non-sport bras and panties and was in the top five brands in the sleepwear market. We believe this is compelling evidence [that] Soma is well positioned and on track to accelerate market share gains and explode into a billion-dollar brand by 2025.”

The lingerie and innerwear brand also began rolling out Soma shops-in-shop in Chico’s stores in the most recent quarter, saying the early results are “exceeding expectations.” The retailer plans to have 47 Soma shops-in-shop in Chico’s stores by mid-June.

The retailer has nearly 1,300 stores in the U.S. Chico’s FAS also sells merchandise through 66 franchise locations in Mexico, along with two domestic airport franchise locations.

The company ended the quarter with $83.8 million in cash and cash equivalents and $149 million in long-term debt.

Chico’s is not providing full-year fiscal 2021 guidance, but did say it now expects consolidated year-over-year net sales improvements of between 28 and 34 percent. Shares of Chico’s FAS are up 200 percent, year-over-year.

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