FORM 10-Q
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: |
November 1, 2008
|
|
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) |
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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 November 28, 2008, there were 177,291,904 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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|
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November 1, |
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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
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
50,233 |
|
|
$ |
13,801 |
|
Marketable securities, at market |
|
|
206,105 |
|
|
|
260,469 |
|
Receivables |
|
|
38,287 |
|
|
|
11,924 |
|
Income tax receivable |
|
|
|
|
|
|
23,973 |
|
Inventories |
|
|
187,271 |
|
|
|
144,261 |
|
Prepaid expenses |
|
|
24,063 |
|
|
|
18,999 |
|
Deferred taxes |
|
|
19,131 |
|
|
|
13,306 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
525,090 |
|
|
|
486,733 |
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|
|
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|
|
|
|
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Property and Equipment: |
|
|
|
|
|
|
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|
Land and land improvements |
|
|
18,225 |
|
|
|
17,867 |
|
Building and building improvements |
|
|
74,542 |
|
|
|
62,877 |
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Equipment, furniture and fixtures |
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|
381,812 |
|
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|
347,937 |
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Leasehold improvements |
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|
428,755 |
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396,650 |
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|
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Total Property and Equipment |
|
|
903,334 |
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|
825,331 |
|
Less accumulated depreciation and amortization |
|
|
(319,083 |
) |
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|
(257,378 |
) |
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|
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Property and Equipment, Net |
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|
584,251 |
|
|
|
567,953 |
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|
|
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Other Assets: |
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|
|
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|
|
|
|
|
|
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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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|
29,406 |
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|
22,503 |
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Other assets, net |
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|
9,368 |
|
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|
37,233 |
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|
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Total Other Assets |
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|
174,478 |
|
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|
195,440 |
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|
|
|
|
|
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|
$ |
1,283,819 |
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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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|
|
|
|
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Accounts payable |
|
$ |
81,948 |
|
|
$ |
88,134 |
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Accrued liabilities |
|
|
83,883 |
|
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|
91,622 |
|
Current portion of deferred liabilities |
|
|
1,528 |
|
|
|
1,437 |
|
|
|
|
|
|
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Total Current Liabilities |
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|
167,359 |
|
|
|
181,193 |
|
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|
|
|
|
|
|
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Noncurrent Liabilities: |
|
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|
|
|
|
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|
|
|
|
|
|
|
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Deferred liabilities |
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|
174,307 |
|
|
|
156,417 |
|
|
|
|
|
|
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Total Noncurrent Liabilities |
|
|
174,307 |
|
|
|
156,417 |
|
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|
|
|
|
|
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Stockholders Equity: |
|
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Common stock |
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|
1,765 |
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|
|
1,762 |
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Additional paid-in capital |
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|
257,854 |
|
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|
249,639 |
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Retained earnings |
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|
682,522 |
|
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|
661,115 |
|
Other accumulated comprehensive income |
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|
12 |
|
|
|
|
|
|
|
|
|
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Total Stockholders Equity |
|
|
942,153 |
|
|
|
912,516 |
|
|
|
|
|
|
|
|
|
|
$ |
1,283,819 |
|
|
$ |
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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Thirty-Nine Weeks Ended |
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Thirteen Weeks Ended |
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November 1, 2008 |
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November 3, 2007 |
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November 1, 2008 |
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|
November 3, 2007 |
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% of |
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% of |
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% of |
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% of |
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Amount |
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Sales |
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Amount |
|
|
Sales |
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Amount |
|
|
Sales |
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Amount |
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|
Sales |
|
Net sales by Chicos/Soma stores |
|
$ |
832,052 |
|
|
|
68.8 |
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|
$ |
942,399 |
|
|
|
72.2 |
|
|
$ |
269,079 |
|
|
|
68.2 |
|
|
$ |
300,576 |
|
|
|
72.3 |
|
Net sales by
White House Black | Market
stores |
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|
328,696 |
|
|
|
27.2 |
|
|
|
310,928 |
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|
|
23.8 |
|
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|
106,751 |
|
|
|
27.1 |
|
|
|
97,337 |
|
|
|
23.4 |
|
Net sales by Direct to consumer |
|
|
48,278 |
|
|
|
4.0 |
|
|
|
51,587 |
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|
|
4.0 |
|
|
|
18,413 |
|
|
|
4.7 |
|
|
|
18,000 |
|
|
|
4.3 |
|
Other net sales |
|
|
|
|
|
|
|
|
|
|
115 |
|
|
|
0.0 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Net sales |
|
|
1,209,026 |
|
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|
100.0 |
|
|
|
1,305,029 |
|
|
|
100.0 |
|
|
|
394,243 |
|
|
|
100.0 |
|
|
|
415,913 |
|
|
|
100.0 |
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|
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|
|
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|
|
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|
|
|
|
|
|
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|
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|
|
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Cost of goods sold |
|
|
555,490 |
|
|
|
45.9 |
|
|
|
531,072 |
|
|
|
40.7 |
|
|
|
182,870 |
|
|
|
46.4 |
|
|
|
173,449 |
|
|
|
41.7 |
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|
|
|
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Gross margin |
|
|
653,536 |
|
|
|
54.1 |
|
|
|
773,957 |
|
|
|
59.3 |
|
|
|
211,373 |
|
|
|
53.6 |
|
|
|
242,464 |
|
|
|
58.3 |
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|
|
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|
|
|
|
|
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|
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|
|
|
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|
Selling, general and administrative
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
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Store operating expenses |
|
|
485,436 |
|
|
|
40.2 |
|
|
|
467,660 |
|
|
|
35.8 |
|
|
|
164,494 |
|
|
|
41.7 |
|
|
|
161,708 |
|
|
|
38.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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Marketing |
|
|
61,673 |
|
|
|
5.1 |
|
|
|
64,648 |
|
|
|
5.0 |
|
|
|
22,043 |
|
|
|
5.6 |
|
|
|
28,919 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
|
|
|
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Shared services |
|
|
83,553 |
|
|
|
6.9 |
|
|
|
85,949 |
|
|
|
6.6 |
|
|
|
26,535 |
|
|
|
6.7 |
|
|
|
28,554 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
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|
|
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|
|
|
|
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|
Total selling, general, and
administrative expenses |
|
|
630,662 |
|
|
|
52.2 |
|
|
|
618,257 |
|
|
|
47.4 |
|
|
|
213,072 |
|
|
|
54.0 |
|
|
|
219,181 |
|
|
|
52.7 |
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
22,874 |
|
|
|
1.9 |
|
|
|
155,700 |
|
|
|
11.9 |
|
|
|
(1,699 |
) |
|
|
(0.4 |
) |
|
|
23,283 |
|
|
|
5.6 |
|
|
|
|
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|
|
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|
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|
|
|
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|
|
|
|
|
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|
Gain on sale of investment |
|
|
|
|
|
|
|
|
|
|
6,833 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
6,833 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Interest income, net |
|
|
6,433 |
|
|
|
0.5 |
|
|
|
8,177 |
|
|
|
0.6 |
|
|
|
2,394 |
|
|
|
0.6 |
|
|
|
3,257 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
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|
|
|
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|
|
|
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|
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|
Income before taxes |
|
|
29,307 |
|
|
|
2.4 |
|
|
|
170,710 |
|
|
|
13.1 |
|
|
|
695 |
|
|
|
0.2 |
|
|
|
33,373 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) |
|
|
7,900 |
|
|
|
0.6 |
|
|
|
59,065 |
|
|
|
4.5 |
|
|
|
(1,300 |
) |
|
|
(0.3 |
) |
|
|
9,637 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
21,407 |
|
|
|
1.8 |
|
|
|
111,645 |
|
|
|
8.6 |
|
|
|
1,995 |
|
|
|
0.5 |
|
|
|
23,736 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
2,234 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,407 |
|
|
|
1.8 |
|
|
$ |
109,411 |
|
|
|
8.4 |
|
|
$ |
1,995 |
|
|
|
0.5 |
|
|
$ |
23,570 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
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|
Per share data: |
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|
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|
|
|
|
|
|
|
|
|
Income from continuing operations per
common share-basic |
|
$ |
0.12 |
|
|
|
|
|
|
$ |
0.63 |
|
|
|
|
|
|
$ |
0.01 |
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
Loss on discontinued operations per common
share-basic |
|
$ |
|
|
|
|
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
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|
|
Net income per common share-basic |
|
$ |
0.12 |
|
|
|
|
|
|
$ |
0.62 |
|
|
|
|
|
|
$ |
0.01 |
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per
common & common equivalent share-diluted |
|
$ |
0.12 |
|
|
|
|
|
|
$ |
0.63 |
|
|
|
|
|
|
$ |
0.01 |
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
Loss on discontinued operations per common
& common equivalent share-diluted |
|
$ |
|
|
|
|
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common & common equivalent
share-diluted |
|
$ |
0.12 |
|
|
|
|
|
|
$ |
0.62 |
|
|
|
|
|
|
$ |
0.01 |
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding-basic |
|
|
175,836 |
|
|
|
|
|
|
|
175,511 |
|
|
|
|
|
|
|
175,876 |
|
|
|
|
|
|
|
175,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common & common
equivalent shares outstanding-diluted |
|
|
176,017 |
|
|
|
|
|
|
|
176,614 |
|
|
|
|
|
|
|
176,029 |
|
|
|
|
|
|
|
176,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes.
4
CHICOS FAS, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
|
November 1, 2008 |
|
|
November 3, 2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,407 |
|
|
$ |
109,411 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash
provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, cost of goods sold |
|
|
7,122 |
|
|
|
7,718 |
|
Depreciation and amortization, other |
|
|
68,190 |
|
|
|
59,526 |
|
Deferred tax benefit |
|
|
(12,728 |
) |
|
|
(9,743 |
) |
Stock-based compensation expense, cost of goods sold |
|
|
2,612 |
|
|
|
3,597 |
|
Stock-based compensation expense, other |
|
|
6,822 |
|
|
|
9,131 |
|
(Excess) deficiency tax benefit of stock-based compensation |
|
|
(100 |
) |
|
|
259 |
|
Deferred rent expense, net |
|
|
5,423 |
|
|
|
7,574 |
|
Gain on sale of investment |
|
|
|
|
|
|
(6,833 |
) |
Loss (gain) on disposal of property and equipment |
|
|
711 |
|
|
|
(919 |
) |
(Increase) decrease in assets |
|
|
|
|
|
|
|
|
Receivables, net |
|
|
(528 |
) |
|
|
(2,495 |
) |
Income tax receivable |
|
|
23,973 |
|
|
|
|
|
Inventories |
|
|
(43,010 |
) |
|
|
(56,285 |
) |
Prepaid expenses and other |
|
|
(3,035 |
) |
|
|
(5,508 |
) |
(Decrease) increase in liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(6,186 |
) |
|
|
41,069 |
|
Accrued and other deferred liabilities |
|
|
3,492 |
|
|
|
25,635 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
52,758 |
|
|
|
72,726 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
74,165 |
|
|
|
182,137 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Sales (purchases) of marketable securities, net |
|
|
54,376 |
|
|
|
(39,177 |
) |
Purchase of Minnesota franchise rights and stores |
|
|
|
|
|
|
(32,896 |
) |
Acquisition of other franchise stores |
|
|
|
|
|
|
(6,361 |
) |
Proceeds from sale of land |
|
|
|
|
|
|
13,426 |
|
Proceeds from sale of investment |
|
|
|
|
|
|
15,090 |
|
Purchases of property and equipment |
|
|
(92,320 |
) |
|
|
(160,452 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(37,944 |
) |
|
|
(210,370 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
307 |
|
|
|
3,524 |
|
Excess (deficiency) tax benefit of stock-based compensation |
|
|
100 |
|
|
|
(259 |
) |
Repurchase of common stock |
|
|
(196 |
) |
|
|
(279 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
211 |
|
|
|
2,986 |
|
|
|
|
|
|
|
|
Net increase (decrease)
in cash and cash equivalents |
|
|
36,432 |
|
|
|
(25,247 |
) |
CASH AND CASH EQUIVALENTS Beginning of period |
|
|
13,801 |
|
|
|
37,203 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period |
|
$ |
50,233 |
|
|
$ |
11,956 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
39 |
|
|
$ |
470 |
|
Cash paid for income taxes, net |
|
$ |
14,556 |
|
|
$ |
72,524 |
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Receipt of note receivable for sale of land |
|
$ |
|
|
|
$ |
25,834 |
|
See Accompanying Notes.
5
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 1. Business Organization and Significant Accounting Policies
Business Organization
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.
Fiscal Year
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 thirty-nine weeks
ended November 1, 2008 are not necessarily indicative of the results that may be expected for the
entire year.
Reclassifications
Certain prior year amounts have been reclassified in order to conform to the current year
presentation.
Accounting for the Impairment of Long-Lived Assets
Long-lived assets are reviewed periodically for impairment if events or changes in
circumstances indicate that the carrying amount may not be recoverable. If future undiscounted
cash flows expected to be generated by the asset are less than its carrying amount, an asset is
determined to be impaired, and a loss is recorded for the amount by which the carrying value of the
asset exceeds its fair value. The Company uses its best judgment based on the most current facts
and circumstances surrounding its business when applying these impairment rules. Changes in
assumptions used could have a significant impact on the Companys assessment of recoverability.
6
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 1. Business Organization and Significant Accounting Policies (continued)
Goodwill and Other Intangible Assets
The Company performs an annual review for impairment of goodwill and other intangibles or
more frequently if events or changes in circumstances indicate that it is more likely than not that
the fair value of a reporting unit or intangible asset is below its carrying value. In addition to
the annual review, management uses certain indicators to evaluate whether the carrying value of
goodwill and other intangible assets may not be recoverable, such as (i) the Companys market
capitalization in relation to the book value of its stockholders equity, (ii) current-period
operating or cash flow declines combined with a history of operating cash flow declines or a
forecast that demonstrates continuing declines in cash flow or inability to improve operations to
forecasted levels, or (iii) a significant adverse change in the business climate that could affect the
value of reporting units.
Management has considered the decline in the Companys market capitalization since its most
recent annual review for impairment as well as the decline in the business climate during the
current fiscal year in performing its assessment of whether an interim impairment review was
required for any reporting units and determined an interim test was appropriate. Accordingly, the
Company performed an interim goodwill impairment test using a discounted cash flow model based on
the Companys current projections of future operating results.
Based on this interim assessment, management concluded that, as of November 1, 2008, the fair
value of its reporting units exceeds their carrying value and accordingly, the Companys goodwill
has not been impaired as of November 1, 2008. Given the current economic environment, including
extreme volatility in the capital markets, the Company will continue to monitor the need to test
goodwill for impairment as required by SFAS 142.
The significant estimates and assumptions used by management in assessing the recoverability
of goodwill and other intangible assets include estimated future cash flows, the discount rate, and
other factors. Any changes in these estimates or assumptions could result in an impairment charge.
The estimates of future cash flows, based on reasonable and supportable assumptions and
projections, require managements subjective judgment. Depending on the assumptions and estimates
used, the estimated future cash flows projected in the evaluations of long lived assets can vary
within a range of outcomes. Nevertheless, the unprecedented credit crisis including extreme
volatility in the capital markets and the global economic downturn could result in changes to
expectations of future cash flows and key valuation assumptions and estimates. These changes could
result in changes to managements estimates of the fair value of the Companys reporting units and
may result in material impairments when the Company completes its annual impairment test during the
fourth quarter of fiscal 2008. Such estimates, assumptions and judgments are also subject to known
and unknown risks and uncertainties, including those reported under Risk Factors in our Form 10-K
for the fiscal year ended February 2, 2008 and our current Form 10-Q for the fiscal quarter ended
November 1, 2008. Actual results could differ materially from those estimates and assumptions.
7
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 1. Business Organization and Significant Accounting Policies (continued)
Gain on Sale of Investment
In fiscal 2007, VF Corporation announced that it had entered into a definitive agreement to
acquire lucy activewear, inc. (Lucy), a privately held retailer of womens activewear apparel,
in which the Company held a cost method investment. The transaction was completed during the
third quarter of fiscal 2007 and the Company recorded a pre-tax gain of approximately $6.8
million, which is reflected as non-operating income in the accompanying statement of operations.
Income Taxes
Effective February 4, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (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 thirty-nine
weeks ended November 1, 2008. As of November 1, 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.
8
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 1. Business Organization and Significant Accounting Policies (continued)
Net Income per Common and Common Equivalent 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
Thirteen Weeks Ended |
|
|
November 1, |
|
November 3, |
|
November 1, |
|
November 3, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Weighted average common shares
outstanding basic |
|
|
175,835,540 |
|
|
|
175,510,734 |
|
|
|
175,875,779 |
|
|
|
175,557,197 |
|
Dilutive effect of stock options
and unvested
restricted stock outstanding |
|
|
181,677 |
|
|
|
1,103,722 |
|
|
|
153,022 |
|
|
|
724,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and
common equivalent shares
outstanding diluted |
|
|
176,017,217 |
|
|
|
176,614,456 |
|
|
|
176,028,801 |
|
|
|
176,281,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine month periods ended November 1, 2008, of the securities then
outstanding, 6,118,011 and 6,053,418 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 antidilutive.
For the three and nine month periods ended November 3, 2007, of the securities then
outstanding, 4,175,079 and 2,786,784 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 antidilutive.
Newly Adopted Accounting Pronouncements
In September 2006, the 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 business. 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 3, 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.
9
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 1. Business Organization and Significant Accounting Policies (continued)
In February 2007, the FASB issued SFAS 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.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). This Standard identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting
principles. The hierarchy set forth in SFAS 162 is directed to the entity, rather than the
independent auditors, as the entity is the one responsible for selecting accounting principles for
financial statements that are presented in conformity with generally accepted accounting
principles. The Standard is effective 60 days following SEC approval of the Public Company
Accounting Oversight Board amendments to remove the hierarchy of generally accepted accounting
principles from the auditing standards, with the expectation that the Standard will be effective
for the Companys 2009 fiscal year. The Company does not expect the Standard to have a material
impact on its consolidated financial statements.
Note 2. 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 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:
|
|
|
|
|
|
|
|
|
|
|
November 3, 2007 |
|
|
|
Thirty-nine |
|
|
Thirteen |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
Net sales |
|
$ |
1,688 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
3,416 |
|
|
$ |
181 |
|
Income tax benefit |
|
$ |
1,182 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
Net loss on
discontinued
operations |
|
$ |
2,234 |
|
|
$ |
166 |
|
|
|
|
|
|
|
|
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.
10
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 3. 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.
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, certain cash
equivalents, specifically its money market accounts, and assets held in the Companys deferred
compensation plan. In accordance with SFAS 157, the Company categorized certain of its financial
assets based on the priority of the inputs to the valuation technique for the instruments, as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 1, 2008 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts |
|
$ |
49,861 |
|
|
$ |
49,861 |
|
|
$ |
|
|
|
$ |
|
|
Marketable Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate demand notes |
|
|
157,988 |
|
|
|
|
|
|
|
157,988 |
|
|
|
|
|
Municipal bonds |
|
|
48,117 |
|
|
|
|
|
|
|
48,117 |
|
|
|
|
|
Non Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets |
|
|
8,871 |
|
|
|
8,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
264,837 |
|
|
$ |
58,732 |
|
|
$ |
206,105 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 4. Receivables
Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
November 1, |
|
|
February 2, |
|
|
|
2008 |
|
|
2008 |
|
Note receivable |
|
$ |
25,834 |
|
|
$ |
|
|
Tenant improvement advances |
|
|
5,724 |
|
|
|
6,497 |
|
Other |
|
|
6,729 |
|
|
|
5,427 |
|
|
|
|
|
|
|
|
Total receivables |
|
$ |
38,287 |
|
|
$ |
11,924 |
|
|
|
|
|
|
|
|
On August 1, 2007, the Company consummated a transaction to sell a parcel of land which
included a note receivable with a principal amount of approximately $25.8 million payable in a
balloon payment in two years. As the due date for the balloon payment is within one year of the
Companys most recently ended fiscal quarter, the Company has reclassified the $25.8 million note
receivable from a long-term asset.
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 and thirty-nine weeks ended November 1, 2008 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.
12
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 5. Stock-Based Compensation (continued)
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 thirty-nine and thirteen weeks ended November 1, 2008 and November 3, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
Thirteen Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
|
November 1, 2008 |
|
November 3, 2007 |
|
|
|
Weighted
average fair value of grants |
|
$ |
2.99 |
|
|
$ |
9.13 |
|
|
$ |
2.46 |
|
|
$ |
6.16 |
|
Expected volatility |
|
|
46 |
% |
|
|
43 |
% |
|
|
50 |
% |
|
|
42 |
% |
Expected term (years) |
|
|
4.5 |
|
|
|
4.5 |
|
|
|
4.5 |
|
|
|
4.5 |
|
Risk-free interest rate |
|
|
2.4 |
% |
|
|
4.5 |
% |
|
|
2.9 |
% |
|
|
4.0 |
% |
Expected dividend yield |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Stock Based Compensation Activity
As of November 1, 2008, 5,801,445 nonqualified options are outstanding at a weighted average
exercise price of $18.38 per share, and 10,805,960 shares remain available for future grants which
may be in the form of either stock options, restricted stock, restricted stock units or stock
appreciation rights. At the annual meeting of stockholders of the Company held on June 26, 2008,
the proposal to approve and ratify the Amended and Restated Chicos FAS, Inc. 2002 Omnibus Stock
and Incentive Plan was passed. As a result, the shares available for future grant was increased by
10,000,000 shares, which is included in the 10,805,960.
The following table presents a summary of the Companys stock options activity for the
thirty-nine weeks ended November 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of Shares |
|
Exercise Price |
Outstanding, beginning of period |
|
|
5,488,489 |
|
|
$ |
19.94 |
|
Granted |
|
|
720,550 |
|
|
|
7.29 |
|
Exercised |
|
|
(33,800 |
) |
|
|
0.99 |
|
Canceled or expired |
|
|
(373,794 |
) |
|
|
21.57 |
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
5,801,445 |
|
|
|
18.38 |
|
|
|
|
|
|
|
|
|
|
Exercisable at November 1, 2008 |
|
|
4,163,440 |
|
|
|
19.77 |
|
13
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 5. Stock-Based Compensation (continued)
The following table presents a summary of the Companys restricted stock activity for the
thirty-nine weeks ended November 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Grant Date Fair |
|
|
Number of Shares |
|
Value |
Nonvested, beginning of period |
|
|
504,671 |
|
|
$ |
21.21 |
|
Granted |
|
|
281,928 |
|
|
|
6.94 |
|
Vested |
|
|
(120,658 |
) |
|
|
25.17 |
|
Canceled |
|
|
(52,468 |
) |
|
|
16.85 |
|
|
|
|
|
|
|
|
|
|
Nonvested, end of period |
|
|
613,473 |
|
|
|
14.24 |
|
|
|
|
|
|
|
|
|
|
For the thirty-nine and thirteen weeks ended November 1, 2008 and November 3, 2007,
respectively, stock-based compensation expense was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
Thirteen Weeks Ended |
|
|
|
November 1, 2008 |
|
|
November 3, 2007 |
|
|
November 1, 2008 |
|
|
November 3, 2007 |
|
Cost of goods sold |
|
$ |
2,612 |
|
|
$ |
3,597 |
|
|
$ |
806 |
|
|
$ |
731 |
|
|
General,
administrative and
store operating
expenses |
|
|
6,822 |
|
|
|
9,130 |
|
|
|
2,260 |
|
|
|
2,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
expense before
income taxes |
|
$ |
9,434 |
|
|
$ |
12,727 |
|
|
$ |
3,066 |
|
|
$ |
2,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
2,835 |
|
|
|
4,346 |
|
|
|
821 |
|
|
|
785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based
compensation
expense after
income taxes |
|
$ |
6,599 |
|
|
$ |
8,381 |
|
|
$ |
2,245 |
|
|
$ |
1,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Subsequent Events
Credit Facility
On November 24, 2008, Chicos FAS, Inc. entered into a $55 million Senior Secured Revolving
Credit Facility (the Credit Facility) with a syndicate led by SunTrust Bank (SunTrust), as
administrative agent (the Agent) and lender and SunTrust Robinson Humphrey, Inc. as lead
arranger. The Credit Facility replaces the Companys previous credit facility with Bank of
America.
The Credit Facility provides a $55 million revolving credit facility that matures on November
24, 2011. The Credit Facility provides for swing advances of up to $5 million and issuance of
letters of credit up to $10 million. The Credit Facility also contains a feature that provides the
Company the ability, subject to satisfaction of certain conditions, to increase the commitments
available under the Credit Facility from $55 million up to $100 million through additional
syndication. The proceeds of any borrowings under the Credit Facility may be used to fund future
permitted acquisitions, to provide for working capital and to be used for other general corporate
purposes.
14
CHICOS FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1, 2008
(Unaudited)
(in thousands, except share and per share amounts)
Note 6. Subsequent Events (continued)
The interest on revolving loans under the Credit Facility will accrue, at the Companys
election, at either (i) a Base Rate plus the Applicable Margin or (ii) a Eurodollar Rate tied to
LIBOR for the selected interest rate period plus the Applicable Margin. Base Rate shall mean the
highest of (i) the per annum rate which SunTrust publicly announces as its prime lending rate, (ii)
the Federal Funds rate plus one-half of one percent (1/2%) per annum and (iii) the Eurodollar Rate
tied to the one-month LIBOR rate determined on a daily basis. The Applicable Margin is based upon
a pricing grid depending on the total unused availability under the Credit Facility. Loans under
the swingline subfacility shall bear interest at a rate agreed upon from time to time by the Agent
and the Company. The Credit Facility also requires the payment of monthly fees based on the
average daily unused portion of the Credit Facility, in an amount equal to 0.50% per annum.
The amount that is available to be borrowed from time to time under the Credit Facility is
limited based upon a percentage of eligible receivables and a separate percentage of eligible
inventory and, until certain conditions are satisfied, may be further limited based upon an overall
availability block. In the event that the amount of excess availability is less than the greater
of (a) $10 million or (b) 15% of the aggregate commitments under the Credit Facility, the Company
will be subject to meeting a fixed charge coverage ratio of (a) earnings before interest, taxes,
depreciation, amortization, lease expense and noncash compensation less the actual amount paid by
the Company in cash on account of capital expenditures less the cash taxes paid to (b) fixed
charges of at least 1.10:1.00.
The obligations under the Credit Facility are secured by (i) all credit card accounts and
receivables for goods sold or services rendered and (ii) all inventory of any kind wherever located
of Chicos FAS, Inc. and its subsidiaries.
The Credit Facility contains customary terms and conditions for credit facilities of this
type, including certain restrictions on the Companys ability to incur additional indebtedness,
create liens, enter into transactions with affiliates, transfer assets, pay dividends, or make
distributions on, or repurchase, junior capital, consolidate or merge with other entities, or
suffer a change in control.
The Credit Facility contains customary events of default. If a default occurs and is not
cured within any applicable cure period or is not waived, the Companys obligations under the
Credit Facility may be accelerated.
Equity Awards
On November 26, 2008, in an effort to motivate and retain key employees in the current challenging
macro-economic environment, the Company accelerated the awarding of its annual equity grant, which
normally would have been made in early March 2009, by granting approximately 2.4 million stock
option awards and approximately 0.8 million restricted stock awards to executive officers
(excluding the President and CEO) and certain other key members of management. Although the
absolute number of shares covered by these awards represents a multiple of the absolute number of
shares covered by awards in each of our prior annual equity grants, this increase in the absolute
number is driven in large part by the Companys depressed stock price. Nevertheless, the overall
stock-based compensation expense of these awards to the Company is lower than the overall
stock-based compensation expense of the most recent comparable annual equity grant and
substantially lower than the overall stock-based compensation expense
related to any comparable grants made in the five years prior to the
most recent grant. The Company does not anticipate making another annual broad-based equity grant
until early March 2010.
15
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, fashion-oriented, 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 website and call centers, which handle sales related to the Chicos, WH|BM,
and Soma direct to consumer operations.
The primary factors which historically influenced the Companys profitability and success have
been its growth in the 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 1,083 stores as of November 1, 2008, which includes the greater
percentage of growth in the number of WH|BM stores during that period and the growth resulting from
the launch of the Soma brand in fiscal 2004. The Company continues to expand its presence through
the opening of new stores (albeit at a slower rate than in the past), the expansion of existing
stores, the development of new opportunities such as Soma and through the extension of its
merchandise lines. However, 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 decision to adopt more
manageable net square footage growth goals (7-8% for fiscal 2008 and 2-4% for fiscal 2009) and the
more recent experience of negative same store sales.
The deteriorating macroeconomic environment, combined with the unstable financial markets,
has caused the Company to withdraw its previous earnings outlook for the second half of fiscal
2008 because the Companys future financial performance is difficult to predict in this rapidly
changing economic environment. The retail industry, in general, has been significantly impacted
by a number of economic developments, and customers have, in turn, curtailed their spending in the
face of uncertainty. The Company is not immune from these circumstances. As a result, the
Company has implemented numerous
16
strategies to help it manage through these uncertain economic times including: remaining
focused on reducing costs, conserving cash, and managing inventories in line with sales trends.
To date, the Company has identified over $50 million in annual expense savings, while trimming
2008 capital expenditures to approximately $110 million compared to the $202 million expended last
year. The Company believes its strong balance sheet, which includes $256 million in cash and
marketable securities and no debt, increases its financial flexibility and further reinforces its
ability to successfully emerge from this economic crisis.
The Company generally expects to continue to generate positive cash flow to fund its
operations and to take advantage of new growth opportunities. The Company has no long-term debt
and foresees no current need to incur debt to support its ongoing operations and future plans.
Additional factors that will be critical to determining the Companys future success include,
among others, managing its 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,
developing its newer brands, implementing the process of senior management succession, initiating
and maintaining strategic alliances with vendors, controlling expenses, 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 and thirty-nine week periods
ended November 1, 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 13.4% and 15.7%, respectively,
compared to the comparable periods last year ended November 3, 2007. The Company believes
that its same store sales performance 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. Although the Company believes it has
made noticeable progress in improving its merchandise offerings, the effect of those
improvements have been hampered by an ahistorical economic environment. The Companys
current strategy is to target a general overall trend to return to comparable store sales
growth; although it recognizes that it continues to be affected by many of these factors.
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 developing its newer brands,
and (iv) in achieving its targeted levels of earnings per share. |
|
|
|
|
Positive operating cash flow - For the thirty-nine week period ended November 1, 2008,
cash flow from operations totaled $74 million compared with $182 million for the prior
years thirty-nine week period ended November 3, 2007. Although operating cash flow
decreased in the current period compared to the prior year, the Company believes it will
generate operating cash flow sufficient to fund the ongoing needs of operations and
investments. The Company believes that historically, a key strength of its business has
been 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 any future
expansions of the |
17
|
|
|
Companys existing corporate headquarters and its existing distribution center, costs
associated with continued improvement of information technology tools, including the on-going
conversions to the SAP software platform, any future stock repurchase programs, 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 growth and frequency of shopping
associated with 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/Soma
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 entitled to a lifetime 5% discount
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. The Company believes
that the continued growth in new members and repeat shopping of its existing Passport and
Black Book club members indicates that the Company is generating strong interest from its
customers due in large part to the Companys commitment to personalized customer service
and constant newness of product. The Company continually is evaluating and testing various
enhancements to its loyalty programs which the Company believes will further the growth in
new members and increase the frequency of shopping by its loyalty club members. |
|
|
|
|
As of November 1, 2008, the Company had approximately 1.9 million active Chicos/Soma
permanent Passport Club members and approximately 1.6 million active preliminary Passport
Club members, while as of November 3, 2007, the Company had approximately 1.8 million active
Chicos/Soma permanent Passport Club members and approximately 1.5 million active
preliminary Passport Club members. |
|
|
|
|
As of November 1, 2008, the Company had approximately 0.9 million active WH|BM permanent
Black Book members and approximately 1.3 million active preliminary Black Book members, while
as of November 3, 2007, the Company had approximately 0.7 million active WH|BM permanent
Black Book members and approximately 1.4 million active preliminary Black Book members. |
|
|
|
|
Active customers are defined as those who have purchased at any one of the Companys brands
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.
18
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. 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 100-125 stores) to leverage both fixed
costs and merchandise buys. Although the previously announced slowdown in the new store openings
(in order to focus on improving the existing Soma store operations and profitability) pushed the
attainment of that target further into the future than originally anticipated, the Company believes
that its current investment in Soma is in the best long-term interest of its shareholders.
For the thirteen weeks ended November 1, 2008, the Company reported net sales, operating loss
and net income of $394.2 million, $(1.7) million and $2.0 million, respectively. Net sales
decreased by 5.2% from the comparable period in the prior fiscal year, while operating income and
net income decreased by 107.3% and 91.5%, respectively, from the comparable thirteen week period
ended November 3, 2007.
For the thirty-nine weeks ended November 1, 2008, the Company reported net sales, operating
income and net income of $1.209 billion, $22.9 million and $21.4 million, respectively. Net sales
decreased by 7.4% from the comparable period in the prior fiscal year, while operating income and
net income decreased by 85.3% and 80.4%, respectively, from the comparable thirty-nine week period
ended November 3, 2007.
Results of Operations Thirteen Weeks Ended November 1, 2008 Compared to the Thirteen Weeks Ended
November 3, 2007.
Net Sales
The following table shows net sales by Chicos/Soma stores, net sales by WH|BM stores, and net
sales by the direct to consumer channel in dollars and as a percentage of total net sales for the
thirteen weeks ended November 1, 2008 (the current period) and November 3, 2007 (the prior
period) (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
November 1, 2008 |
|
|
November 3, 2007 |
|
Net sales by Chicos/Soma stores |
|
$ |
269,079 |
|
|
|
68.2 |
% |
|
$ |
300,576 |
|
|
|
72.3 |
% |
Net sales by
WH|BM stores |
|
|
106,751 |
|
|
|
27.1 |
|
|
|
97,337 |
|
|
|
23.4 |
|
Net sales by Direct to consumer |
|
|
18,413 |
|
|
|
4.7 |
|
|
|
18,000 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
394,243 |
|
|
|
100.0 |
% |
|
$ |
415,913 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by Soma Intimates 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 at Soma. Net sales by Chicos and WH|BM stores were also impacted by decreases in each
brands comparable store net sales. A summary of the factors impacting Company wide year-over-year
sales is provided in the table below (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Comparable same store sales decreases |
|
$ |
(52,380 |
) |
|
$ |
(34,896 |
) |
Comparable same store sales % |
|
|
(13.4 |
)% |
|
|
(9.3 |
)% |
New store sales increase, net |
|
$ |
30,297 |
|
|
$ |
46,201 |
|
19
The comparable store sales decrease of 13.4% (for the thirteen-week period ended November 1,
2008 compared to the thirteen-week period ending November 3, 2007) was driven primarily by a
decrease in transactions of approximately 12% at Chicos front-line stores and approximately 10% at
WH|BM front-line stores. Comparable store sales were also impacted by a decrease of approximately
7% 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 or
mix), reflecting 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. Although the Company believes it
has made noticeable progress in improving its merchandise offerings, the effect of those
improvements has been hampered by an ahistorical economic environment. The comparable store sales
decrease was also impacted by an approximate 1% decrease in the WH|BM average unit retail price.
In the current period, WH|BM same store sales represented approximately 27% of the total same store
sales base compared to 22% in the prior period. The Chicos brand same store sales decreased by
approximately 17% and the WH|BM brands same store sales decreased by approximately 5% when
comparing fiscal 2008 to the comparable weeks last year. Although Somas comparable store sales
increased significantly, it did not have a material impact on the consolidated calculation because
of the relatively small number of Soma stores.
Net sales by direct to consumer for the current period, which included merchandise from the
Chicos, WH|BM, and Soma Intimates brands increased by $0.4 million, or 2.2%, compared to net
sales by direct to consumer for the prior period due to an increase in the WH|BM and Soma brands
for this channel offset by a decrease in the Chicos brand. The Company believes its ability to
achieve some level of overall increase in these challenging economic times is attributable to
several factors: the continued growth in customer acceptance of the offerings at the Soma and
WH|BM brands, increased traffic in the direct to consumer channel, and the Companys
implementation of planned improvements in its website and call center infrastructure. The Company
intends to continue making improvements to further increase sales through this channel.
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 November 1, 2008 and November 3, 2007 (dollar
amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Cost of goods sold |
|
$ |
182,870 |
|
|
$ |
173,449 |
|
Gross margin |
|
|
211,373 |
|
|
|
242,464 |
|
Gross margin percentage |
|
|
53.6 |
% |
|
|
58.3 |
% |
Gross margin percentage decreased by 470 basis points compared to the prior period resulting
primarily from a decrease of approximately 430 basis points in the Chicos brand merchandise
margins in the third quarter compared to the prior years third quarter due to lower initial
markups and higher markdowns in order to liquidate inventory and bring levels closer to the current
sales trends. The gross margin percentage was also negatively impacted by continued investment in
the Companys product development and merchandising functions, coupled with the deleverage of these
costs at the Chicos brand
20
attributable to the negative same store sales. The overall decrease in Company gross margin was
further exacerbated by a 450 basis point decline in the brand merchandise margins at WH|BM, which
was also due primarily to lower initial markups and higher markdowns in order to liquidate
inventory and bring levels closer to the current sales trends, which resulted in overall Company
gross margins deteriorating further due to the impact of the mix effect resulting from WH|BM sales
becoming a larger portion of the Companys overall net sales.
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 November 1, 2008 and November
3, 2007 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Store operating expenses |
|
$ |
164,494 |
|
|
$ |
161,708 |
|
Percentage of total net sales |
|
|
41.7 |
% |
|
|
38.9 |
% |
Store operating expenses include all direct expenses, including such items as personnel,
occupancy, depreciation 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 store support
functions. Store operating expenses as a percentage of net sales in the current period increased
by approximately 280 basis points compared to the prior period primarily due to increased occupancy
costs and to a lesser extent, by increased personnel costs as a percentage of sales, as selling
payroll did not flex in direct proportion to the decrease in comparable store sales. The
percentage increase was further impacted by the deleverage associated with the Companys negative
same store sales, and to a lesser extent, the mix effect of the WH|BM and Soma Intimates stores,
(which have a higher operating cost structure) becoming a larger portion of the Companys store
base.
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Marketing |
|
$ |
22,043 |
|
|
$ |
28,919 |
|
Percentage of total net sales |
|
|
5.6 |
% |
|
|
6.9 |
% |
Marketing expenses include expenses related to the Companys national marketing programs such
as direct marketing efforts (including direct mail and e-mail) and national advertising expenses.
Marketing expenses decreased by $6.9 million or approximately 130 basis points due to the on-going
cost reduction initiatives and increased efficiencies implemented by the Company.
21
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Shared services |
|
$ |
26,535 |
|
|
$ |
28,554 |
|
Percentage of total net sales |
|
|
6.7 |
% |
|
|
6.9 |
% |
Shared services expenses consist of the corporate level functions including executive
management, human resources, management information systems and finance, among others. Shared
services expenses decreased by $2.0 million or approximately 20 basis points as a percentage of
sales mainly due to the on-going cost reduction initiatives implemented by the Company.
Gain on Sale of Investment
In the third quarter of fiscal 2007, VF Corporation announced that it had entered into a
definitive agreement to acquire lucy activewear, inc. (Lucy), a privately held retailer of
womens activewear apparel, in which the Company held a cost method investment. As a result, the
Company recorded a pre-tax gain of approximately $6.8 million in last years third quarter, which
is reflected as non-operating income in the accompanying statement of operations.
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 November 1, 2008 and November 3, 2007 (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Interest income, net |
|
$ |
2,394 |
|
|
$ |
3,257 |
|
Percentage of total net sales |
|
|
0.6 |
% |
|
|
0.8 |
% |
Interest income decreased as a percentage of sales by approximately 20 basis points in the third quarter compared to the prior period primarily due to a decrease in marketable securities
year-over-year as well as lower interest rates.
(Benefit) Provision for Income Taxes
The income tax benefit in the third quarter of fiscal 2008 was $1.3 million compared to
income tax expense of $9.6 million in the third quarter of fiscal 2007. The effective tax rate for
the third quarter of fiscal 2008 is unusual because of the impact of the Company significantly
reducing its estimated annual pre-tax income for fiscal 2008, and to a lesser extent, the impact of
favorable permanent differences arising from tax-free interest and charitable contributions.
Net Income
The following table shows net income in dollars and as a percentage of total net sales for the
thirteen weeks ended November 1, 2008 and November 3, 2007 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Net income |
|
$ |
1,995 |
|
|
$ |
23,570 |
|
Percentage of total net sales |
|
|
0.5 |
% |
|
|
5.7 |
% |
22
Results of Operations Thirty-Nine Weeks Ended November 1, 2008 Compared to the Thirty-Nine Weeks
Ended November 3, 2007.
Net Sales
The following table shows net sales by Chicos/Soma stores, net sales by WH|BM stores, net
sales by the direct to consumer channel and other net sales (which includes net sales to
franchisees) in dollars and as a percentage of total net sales for the thirty-nine weeks ended
November 1, 2008 (the current period) and November 3, 2007 (the prior period) (dollar amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
|
November 1, 2008 |
|
|
November 3, 2007 |
|
Net sales by Chicos/Soma stores |
|
$ |
832,052 |
|
|
|
68.8 |
% |
|
$ |
942,399 |
|
|
|
72.2 |
% |
Net sales by WH|BM stores |
|
|
328,696 |
|
|
|
27.2 |
|
|
|
310,928 |
|
|
|
23.8 |
|
Net sales by Direct to consumer |
|
|
48,278 |
|
|
|
4.0 |
|
|
|
51,587 |
|
|
|
4.0 |
|
Other net sales |
|
|
|
|
|
|
|
|
|
|
115 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,209,026 |
|
|
|
100.0 |
% |
|
|
1,305,029 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by Soma Intimates 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 at Soma. Net sales by Chicos and WH|BM stores were also impacted by decreases in each
brands comparable store net sales. A summary of the factors impacting year-over-year sales is
provided in the table below (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Comparable same store sales decreases |
|
$ |
(193,452 |
) |
|
$ |
(61,973 |
) |
Comparable same store sales % |
|
|
(15.7 |
)% |
|
|
(5.5 |
)% |
New store sales increase, net |
|
$ |
100,873 |
|
|
$ |
163,706 |
|
The comparable store sales decrease of 15.7% (for the thirty-nine week period ended November
1, 2008 compared to the thirty-nine week period ending November 3, 2007) was driven primarily by a
decrease in transactions of approximately 11% at Chicos front-line stores and approximately 15% at
WH|BM front-line stores. Comparable store sales were also impacted by a decrease of approximately
9% 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 or
mix), reflecting 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. Although the Company believes it
has made noticeable progress in improving its merchandise offerings, the effect of those
improvements has been hampered by an ahistorical economic environment. The comparable store
sales decrease was offset, in part, by an approximate 5% increase in the WH|BM average unit retail
price. In the current period, WH|BM same store sales represented approximately 27% of the total
same store sales base compared to 22% in the prior period. The Chicos brand same store sales
decreased by approximately 19% and the WH|BM brands same store sales decreased by approximately 9%
when comparing fiscal 2008 to the comparable weeks last year. Although Somas comparable store
sales increased significantly, it did not have a material impact on the consolidated calculation
because of the relatively small number of Soma stores.
Net sales by direct to consumer for the current period, which included merchandise from the
Chicos, WH|BM, and Soma Intimates brands decreased by $3.3 million, or 6.4%, compared to the
prior
23
period. This decrease is attributable to decreased sales for the Chicos brand, which
decrease was partially offset by a strong increase in the Soma brands direct to consumer channel
and increased direct to consumer sales for the WH|BM brand. The Company intends to continue
making improvements to its overall direct to consumer infrastructure and merchandising approach in
an effort to increase future sales for all of its brands through this channel.
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 thirty-nine weeks ended November 1, 2008 and November 3, 2007 (dollar
amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Cost of goods sold |
|
$ |
555,490 |
|
|
$ |
531,072 |
|
Gross margin |
|
|
653,536 |
|
|
|
773,957 |
|
Gross margin percentage |
|
|
54.1 |
% |
|
|
59.3 |
% |
Gross margin percentage decreased by 520 basis points compared to the prior period resulting
primarily from a decrease of approximately 420 basis points in the Chicos brand merchandise
margins in the current period compared to the prior year, which was due to higher markdowns in
order to liquidate inventory and bring levels closer to the current sales trends. The gross margin
percentage was also negatively impacted by continued investment in the Companys product
development and merchandising functions, coupled with the deleverage of these costs attributable to
the negative same store sales. The decrease in overall gross margin was further exacerbated by a
330 basis point decline in the gross margin at WH|BM due to lower initial markups, higher markdowns
in order to liquidate inventory and bring levels closer to the current sales trends and investments
in product development and merchandising functions.
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 thirty-nine weeks ended November 1, 2008 and
November 3, 2007 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Store operating expenses |
|
$ |
485,436 |
|
|
$ |
467,660 |
|
Percentage of total net sales |
|
|
40.2 |
% |
|
|
35.8 |
% |
Store operating expenses include all direct expenses, including personnel, occupancy,
depreciation 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 store support functions.
Store operating expenses as a percentage of net sales in the current period increased by
approximately 440 basis points compared to the prior period primarily due to increased occupancy
costs and also due to increased personnel costs as a percentage of sales, as selling payroll did
not flex in direct proportion to the decrease in comparable store sales. The percentage increase
was further impacted by the deleverage associated with the Companys negative same store sales, and
to a lesser extent, the mix effect of the WH|BM and Soma Intimates stores becoming a larger portion
of the Companys store base as their store operating cost structure is higher than the Chicos
brand as a percentage of net sales.
24
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Marketing |
|
$ |
61,673 |
|
|
$ |
64,648 |
|
Percentage of total net sales |
|
|
5.1 |
% |
|
|
5.0 |
% |
Marketing expenses include expenses related to the Companys national marketing programs such
as direct marketing efforts (including direct mail and e-mail), national advertising expenses and
related support costs. Marketing expenses increased as a percentage of net sales by approximately
10 basis points due mainly to the deleverage associated with the Companys negative same store
sales. Marketing expenses decreased by approximately $3.0 million primarily due to the on-going
cost reduction initiatives and increased efficiencies implemented by the Company.
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Shared services |
|
$ |
83,553 |
|
|
$ |
85,949 |
|
Percentage of total net sales |
|
|
6.9 |
% |
|
|
6.6 |
% |
Shared services expenses increased as a percentage of net sales by approximately 30 basis
points due to the deleverage associated with the Companys negative same store sales. Shared
services expenses decreased by approximately $2.4 million mainly due to the Companys on-going cost
reduction initiatives.
Gain on Sale of Investment
In the third quarter of fiscal 2007, VF Corporation announced that it had entered into a
definitive agreement to acquire lucy activewear, inc. (Lucy), a privately held retailer of
womens activewear apparel, in which the Company held a cost method investment. As a result, the
Company recorded a pre-tax gain of approximately $6.8 million in last years third quarter, which
is reflected as non-operating income in the accompanying statement of operations.
Interest Income, net
The following table shows interest income, net in dollars and as a percentage of total net
sales for the thirty-nine weeks ended November 1, 2008 and November 3, 2007 (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Interest income, net |
|
$ |
6,433 |
|
|
$ |
8,177 |
|
Percentage of total net sales |
|
|
0.5 |
% |
|
|
0.6 |
% |
Interest income decreased as a percentage of sales by approximately 10 basis points primarily
due to a decrease in marketable securities, year-over-year as well as lower interest rates, offset
in part by higher interest income in the current year from the Companys $25.8 million note
receivable.
25
Provision for Income Taxes
The Companys effective tax rate for the current period was 27.0% compared to an effective tax
rate of 34.6% for the prior period. Generally, income taxes for the interim periods are computed
using the effective tax rate estimated to be applicable for the full fiscal year, which is subject
to ongoing review and evaluation by the Company. The decrease in the effective tax rate during the
thirty-nine week period was primarily attributable to the impact of the Company significantly
reducing its estimated annual pre-tax income estimate for the full year of fiscal 2008 during the
third quarter and from the impact of certain favorable permanent differences, mainly tax-free
interest and charitable contributions, which represented a higher portion of pre-tax income in the
current period compared to the prior year.
Net Income
The following table shows net income in dollars and as a percentage of total net sales for the
thirty-nine weeks ended November 1, 2008 and November 3, 2007 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
November 1, 2008 |
|
November 3, 2007 |
Net income |
|
$ |
21,407 |
|
|
$ |
109,411 |
|
Percentage of total net sales |
|
|
1.8 |
% |
|
|
8.4 |
% |
Comparable Company Store Net Sales
Comparable Company store net sales decreased by 13.4% in the current quarter and 15.7% for the
first nine months when compared to the comparable period last year ended November 3, 2007 (the
Chicos brand same store sales decreased by approximately 17% in the current quarter and 19% for
the first nine months of the fiscal year and the WH|BM brands same store sales decreased by
approximately 5% in the current quarter and 9% in the first nine months of the fiscal year). 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 cautious spending patterns, and merchandise offerings that failed,
at times, to meet customer expectations. Although the Company believes it has made noticeable
progress in improving its merchandise offerings, the effect of those improvements have been
hampered by an ahistorical economic environment. 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 31 and 40 stores that were expanded or
relocated within the last twelve months from the beginning of the respective prior period by an
average of 1,518 and 1,568 net selling square feet, respectively. 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 13.6% for the current quarter and 16.1% for the first nine months (versus
a decrease of 13.4% and 15.7% as
reported, respectively). 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.
26
Liquidity and Capital Resources
The Companys ongoing capital requirements have been, and continue to be, 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
conversions the Company is planning to the SAP software platform and its e-commerce platform.
The following table shows the Companys capital resources as of November 1, 2008 and November
3, 2007 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
November 1, 2008 |
|
November 3, 2007 |
Cash and cash equivalents |
|
$ |
50,233 |
|
|
$ |
11,956 |
|
Marketable securities |
|
|
206,105 |
|
|
|
277,513 |
|
Working capital |
|
|
357,731 |
|
|
|
324,016 |
|
Working capital increased from November 3, 2007 to November 1, 2008 primarily due to the
reclassification of the Companys $25.8 million dollar note receivable from a long-term asset to a
current asset because the due date for the balloon payment is within one year of the Companys most
recently ended fiscal quarter. The significant components of the Companys working capital are
cash and cash equivalents, marketable securities and inventories reduced by accounts payable 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 Facility
Expansions discussed below), commitments, and other liquidity requirements associated with the
Companys operations through at least the next 12 months.
Operating Activities
Net cash provided by operating activities was $74.2 million and $182.1 million for the
thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively. The cash provided by
operating activities for the current and prior periods was due to the Companys net income adjusted
for non-cash charges, changes in working capital and other items 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. |
The decrease in net cash provided by operating activities was primarily due to a significant
decrease in net income and, to a lesser extent, timing of accounts payable, partially offset by the
collection of an income tax receivable.
27
Investing Activities
Net cash used in investing activities was $37.9 million and $210.4 million for the thirty-nine
weeks ended November 1, 2008 and November 3, 2007, respectively.
The Companys investment in capital expenditures during the current period primarily related
to the planning and opening of new, relocated, remodeled and expanded Chicos/Soma and WH|BM stores
($54.4 million), costs associated with system upgrades and new software implementations ($19.2
million), costs associated with the Companys headquarters expansion ($6.7 million), and other
miscellaneous capital expenditures ($12.0 million) aggregating $92.3 million compared to capital
expenditures aggregating $160.5 million in the prior year. The decrease in capital expenditures
was primarily due to the Companys decision to significantly lower its capital expenditure spending
in fiscal 2008 in response to deteriorating economic conditions.
In addition, the Company sold $54.4 million, net, of marketable securities during the current
thirty-nine week period primarily to invest more heavily in cash equivalent instruments due to the
overall financial market instability. In contrast, in the prior period, the Company purchased
$39.2 million, net, of marketable securities.
During the prior period, the Company consummated a transaction to sell a parcel of land in
south Fort Myers, Florida for a sale price totaling approximately $39.7 million consisting of
approximately $13.4 million in cash proceeds, net of closing costs, and a note receivable with a
principal amount of approximately $25.8 million and secured by a purchase money mortgage.
In addition, during the prior period, the Company sold its cost method investment in lucy
activewear and received approximately $15.1 million in cash proceeds.
Also, during the prior thirty-nine week 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 also acquired a franchise store in Florida for $6.4 million.
Financing Activities
Net cash provided by financing activities was $0.2 million and $3.0 million for the
thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively.
During the thirty-nine weeks ended November 1, 2008 and November 3, 2007, the Company
repurchased 28,674 and 15,938 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 first nine months of the current fiscal year, certain of the Companys
current and former employees exercised an aggregate of 33,800 stock options at prices between
$0.5139 and $8.60. Also, during this period, the Company sold 16,340 and 29,451 shares of common
stock during the March and September offering periods under its employee stock purchase plan at
prices of $7.91 and $4.88, respectively. The proceeds from these issuances of stock, exclusive of
the tax benefit realized by the Company, amounted to approximately $0.3 million.
28
Credit Facility
On November 24, 2008, Chicos FAS, Inc. entered into a $55 million Senior Secured Revolving
Credit Facility (the Credit Facility) with a syndicate led by SunTrust Bank, as administrative
agent (the Agent) and lender and SunTrust Robinson Humphrey, Inc. as lead arranger. The Credit
Facility replaces the Companys previous $45 million credit facility with Bank of America.
The Credit Facility provides a $55 million revolving credit facility that matures on November
24, 2011. The Credit Facility provides for swing advances of up to $5 million and issuance of
letters of credit up to $10 million. The Credit Facility also contains a feature that provides the
Company the ability, subject to satisfaction of certain conditions, to increase the commitments
available under the Credit Facility from $55 million up to $100 million through additional
syndication. The proceeds of any borrowings under the Credit Facility may be used to fund future
permitted acquisitions, to provide for working capital and to be used for other general corporate
purposes.
The interest on revolving loans under the Credit Facility will accrue, at the Companys
election, at either (i) a Base Rate plus the Applicable Margin or (ii) a Eurodollar Rate tied to
LIBOR for the selected interest rate period plus the Applicable Margin. Base Rate shall mean the
highest of (i) the per annum rate which SunTrust publicly announces as its prime lending rate, (ii)
the Federal Funds rate plus one-half of one percent (1/2%) per annum and (iii) the Eurodollar Rate
tied to the one-month LIBOR rate determined on a daily basis. The Applicable Margin is based upon
a pricing grid depending on the total unused availability under the Credit Facility. Loans under
the swingline subfacility shall bear interest at a rate agreed upon from time to time by the Agent
and the Company. The Credit Facility also requires the payment of monthly fees based on the
average daily unused portion of the Credit Facility, in an amount equal to 0.50% per annum.
The amount that is available to be borrowed from time to time under the Credit Facility is
limited based upon a percentage of eligible receivables and a separate percentage of eligible
inventory and, until certain conditions are satisfied, may be further limited based upon an overall
availability block. In the event that the amount of excess availability is less than the greater
of (a) $10 million or (b) 15% of the aggregate commitments under the Credit Facility, the Company
will be subject to meeting a fixed charge coverage ratio of (a) earnings before interest, taxes,
depreciation, amortization, lease expense and noncash compensation less the actual amount paid by
the Company in cash on account of capital expenditures less the cash taxes paid to (b) fixed
charges of at least 1.10:1.00.
The obligations under the Credit Facility are secured by (i) all credit card accounts and
receivables for goods sold or services rendered and (ii) all inventory of any kind wherever located
of Chicos FAS, Inc. and its subsidiaries.
The Credit Facility contains customary terms and conditions for credit facilities of this
type, including certain restrictions on the Companys ability to incur additional indebtedness,
create liens, enter into transactions with affiliates, transfer assets, pay dividends, or make
distributions on, or repurchase, junior capital, consolidate or merge with other entities, or
suffer a change in control.
The Credit Facility contains customary events of default. If a default occurs and is not
cured within any applicable cure period or is not waived, the Companys obligations under the
Credit Facility may be accelerated.
29
New Store Openings and Headquarters Expansion
The Company is planning a 7-8% 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 and 18-20 WH|BM stores. During the first nine months of the fiscal
year, the Company opened 56 new stores, closed 11 stores and expanded or relocated 30 stores. The
Company expects net closings of between 5 and 7 stores bringing its fiscal 2008 store openings to
approximately 38-40 net new stores. In addition, during the fourth quarter, the Company expects to
expand or relocate between 1 and 3 stores.
Looking forward to fiscal 2009, the Company is currently investigating whether and to what
extent it will increase the number of new stores beyond the current commitments of 10-12 new stores
and a similar amount for remodels and/or relocation.
With respect to addressing the Companys potential need for additional headquarters and
distribution center space, the Company is evaluating its requirements and the appropriate timing
to make any additional headquarters and 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.
The Company has been 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 to mid 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 new credit
facility recently established with a syndicate led by SunTrust Bank, 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.
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
30
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.
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.
31
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 November 1, 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.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Companys financial instruments as of November 1, 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 November 1, 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 2012 to 2043, the
interest rates are reset, either daily, every 7 days or monthly. 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 November 1, 2008, an
increase or decrease of 100 basis points in interest rates would have an impact of approximately
$0.7 million 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.
33
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was named as defendant in a putative class action filed in June 2008 in the
Superior Court for the State of California, County of San Diego, Michele L. Massey Haefner v.
Chicos FAS, Inc. The Complaint alleges that the Company, in violation of California law,
requested or required customers to provide personal information in conjunction with credit card
transactions. The Company filed an answer denying the material allegations of the Complaint. The
Company believes that the case is wholly without merit and, thus, does not believe that the case
should have any material adverse effect on the Companys financial condition or results of
operations.
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. 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. The following updated risks should also be considered as they could materially affect the
Companys business, financial condition or future results.
General Economic Conditions
The recent disruptions in the overall economy and the financial markets have adversely
impacted, and the continued weakness in the United States is likely to continue to affect, the
sales volume and profitability levels of the Company. Certain economic conditions affect the level
of consumer spending on merchandise offered by the Company, including, among others, rising
unemployment levels, availability of consumer credit, deteriorating business conditions, inflation,
interest rates, recession, energy costs, taxation and consumer confidence in future economic
conditions. The recent disruptions in the overall economy and
financial markets tend to reduce consumer confidence in the economy and negatively affect
consumers spending patterns, which could be harmful to the Companys financial position and
results of operations and may cause the Company to decide to further decelerate the number and
timing of store openings. Furthermore, declines in consumer spending patterns due to economic
downturns may have a more negative effect on apparel retailers than some other retailers and can
negatively affect the Companys net sales and profitability. There can be no assurances that
government responses to the disruptions in the financial markets will restore consumer confidence,
stabilize the markets or increase liquidity and the availability of credit.
Effective Management of Store Performance
The Company operated 663 Chicos stores, 348 WH|BM stores and 72 Soma stores as of November 1,
2008, 120 of which opened within the last thirteen months. The results achieved by these stores
may not be indicative of longer term performance or the potential market acceptance of stores in
other locations. The Company cannot be assured that any new store that it opens will have similar
operating results to those of
34
prior stores. New stores commonly take from 17 to 21 months to reach
planned operating levels due to inefficiencies typically associated with new stores, including
demands on operational, managerial and administrative resources. The failure of existing or new
stores to perform as predicted could negatively impact the Companys net sales and results of
operations as well as result in impairment of long-lived assets at Company stores.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized, but rather are tested
for impairment annually or more frequently if indicators of potential
impairment arise. Since the Companys
last annual review for impairment, the market value of the Companys stock has declined
significantly. In addition to the annual review, management uses certain indicators to evaluate
whether the carrying value of goodwill and other intangible assets may not be recoverable, such as
(i) the Companys market capitalization in relation to the book value of its stockholders equity,
(ii) current-period operating or cash flow declines combined with a history of operating cash flow
declines or a forecast that demonstrates continuing declines in cash flow or inability to improve
operations to forecasted levels, or (iii) a significant adverse change in business climate that
could affect the value of reporting units.
The significant estimates and assumptions used by management in assessing the recoverability
of goodwill and other intangible assets include estimated future cash flows, the discount rate, and
other factors. Any changes in these estimates or assumptions could result in an impairment charge.
The estimates of future cash flows, based on reasonable and supportable assumptions and
projections, require managements subjective judgment. Depending on the assumptions and estimates
used, the estimated future cash flows projected in the evaluations of long lived assets can vary
within a range of outcomes. Nevertheless, the unprecedented credit crisis including extreme
volatility in the capital markets and the global economic downturn could result in changes to
expectations of future cash flows and key valuation assumptions and estimates. These changes could
result in changes to managements estimates of the fair value of the Companys reporting units and
may result in material impairments when the Company completes its annual impairment test during the
fourth quarter of fiscal 2008. Actual results could differ materially from those estimates and
assumptions. If the Company determines in the future that other impairments have occurred, the
Company would be required to write off the impaired portion of either 1) goodwill, 2) the WH|BM
trademark asset or 3) the Minnesota territorial rights, which could substantially and negatively
impact the Companys results of operations.
Working Capital Requirements of Third-Party Manufacturers
The Company relies on independent manufacturers for producing its merchandise. Many of these
manufacturers rely on working capital financing to finance their operations. As a result of recent
credit market events, lenders have over the last several months generally tightened credit
standards and terms. To the extent any of the Companys manufacturers are unable to obtain
adequate credit or their borrowing costs increase, the Company may experience delays in obtaining
merchandise, the manufacturers may increase their prices or they may modify payment terms in a
manner that is unfavorable to the Company. Any of the aforementioned could adversely affect the
Companys net sales or gross margin, which could adversely affect the Companys business,
financial condition and results of operations.
35
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 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Dollar Value |
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
of Shares that |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
May Yet Be |
|
|
|
|
|
|
|
|
|
|
|
Purchased |
|
|
Purchased |
|
|
|
Total |
|
|
|
|
|
|
as Part of |
|
|
Under the |
|
|
|
Number of |
|
|
Average |
|
|
Publicly |
|
|
Publicly |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Announced |
|
Period |
|
Purchased(a) |
|
|
per Share |
|
|
Plans |
|
|
Plans |
|
August 3, 2008 to August 30, 2008 |
|
|
1,311 |
|
|
$ |
4.48 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2008 to October 4, 2008 |
|
|
9,219 |
|
|
$ |
6.02 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 5, 2008 to November 1, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,530 |
|
|
$ |
5.82 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Consists of 10,530 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. |
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 10.1
|
|
Amended and Restated Chicos FAS, Inc. Deferred Compensation Plan,
effective January 1, 2008 |
|
|
|
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 |
36
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: December 9, 2008 |
By: |
/s/ Scott A. Edmonds
|
|
|
|
Scott A. Edmonds |
|
|
|
Chairman, President and
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: December 9, 2008 |
By: |
/s/ Kent A. Kleeberger
|
|
|
|
Kent A. Kleeberger Executive Vice President - Chief Financial |
|
|
|
Officer and Treasurer
(Principal Financial Officer) |
|
|
|
|
|
Date: December 9, 2008 |
By: |
/s/ Michael J. Kincaid
|
|
|
|
Michael J. Kincaid |
|
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|
Senior Vice President - Finance, Chief
Accounting Officer, and Assistant Secretary
(Principal Accounting Officer) |
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37