Edgar Filing: CHICOS FAS INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Document

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



For the Quarter Ended:		Commission File Number:
November 3, 2018		001-16435

Chico’s FAS, Inc.

(Exact name of registrant as specified in charter)



Florida		59-2389435
(State of Incorporation)		(I.R.S. Employer Identification No.)

11215 Metro Parkway, Fort Myers, Florida 33966

(Address of principal executive offices)

239-277-6200

(Registrant’s 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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At November 12, 2018, the registrant had 125,734,711 shares of Common Stock, $0.01 par value per share, outstanding.

Table of Contents

CHICO’S FAS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE

FISCAL THIRTEEN AND THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2018

TABLE OF CONTENTS



PART I – Financial Information

Item 1.	Financial Statements:

	Condensed Consolidated Statements of Income for the Thirteen Weeks and Thirty-Nine Weeks Ended November 3, 2018 (Unaudited) and October 28, 2017 (Unaudited)	3

	Condensed Consolidated Statements of Comprehensive Income for the Thirteen Weeks and Thirty-Nine Weeks Ended November 3, 2018 (Unaudited) and October 28, 2017 (Unaudited)	4

	Condensed Consolidated Balance Sheets – November 3, 2018 (Unaudited), February 3, 2018 (Unaudited), and October 28, 2017 (Unaudited)	5

	Condensed Consolidated Statements of Shareholders’ Equity for the Thirteen Weeks and Thirty-Nine Weeks Ended November 3, 2018 (Unaudited) and October 28, 2017 (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended November 3, 2018 (Unaudited) and October 28, 2017 (Unaudited)	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II – Other Information

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 6.	Exhibits	35

Signatures		36

Table of Contents

PART I – FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)



	Thirteen Weeks Ended										Thirty-Nine Weeks Ended
	November 3, 2018					October 28, 2017					November 3, 2018					October 28, 2017

	Amount			% of Sales		Amount			% of Sales		Amount			% of Sales		Amount			% of Sales
Net Sales	$	499,877		100.0	%	$	532,287		100.0	%	$	1,606,412		100.0	%	$	1,694,596		100.0	%
Cost of goods sold	318,899			63.8		335,585			63.0		1,001,699			62.4		1,051,380			62.0
Gross Margin	180,978			36.2		196,702			37.0		604,713			37.6		643,216			38.0
Selling, general and administrative expenses	178,394			35.7		171,424			32.3		538,902			33.5		527,605			31.2
Income from Operations	2,584			0.5		25,278			4.7		65,811			4.1		115,611			6.8
Interest income (expense), net	97			0.0		(388		)	0.0		(458		)	0.0		(1,286		)	(0.1	)
Income before Income Taxes	2,681			0.5		24,890			4.7		65,353			4.1		114,325			6.7
Income tax (benefit) provision	(3,800		)	(0.8	)	8,200			1.6		13,100			0.8		41,300			2.4
Net Income	$	6,481		1.3	%	$	16,690		3.1	%	$	52,253		3.3	%	$	73,025		4.3	%
Per Share Data:
Net income per common share-basic	$	0.05				$	0.13				$	0.41				$	0.57
Net income per common and common equivalent share–diluted	$	0.05				$	0.13				$	0.41				$	0.57
Weighted average common shares outstanding–basic	122,201					124,957					124,069					125,550
Weighted average common and common equivalent shares outstanding–diluted	122,273					124,989					124,120					125,591

The accompanying notes are an integral part of these condensed consolidated statements.

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CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)



	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Net Income	$	6,481		$	16,690		$	52,253		$	73,025
Other comprehensive income:
Unrealized (losses) gains on marketable securities, net of taxes	(1		)	(47		)	54			(15		)
Foreign currency translation (losses) gains	(388		)	(60		)	(475		)	49
Comprehensive Income	$	6,092		$	16,583		$	51,832		$	73,059

The accompanying notes are an integral part of these condensed consolidated statements.

Table of Contents

CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)



	November 3, 2018			February 3, 2018			October 28, 2017
ASSETS
Current Assets:
Cash and cash equivalents	$	169,380		$	160,071		$	125,646
Marketable securities, at fair value	59,484			60,060			60,411
Inventories	266,100			233,726			265,023
Prepaid expenses and other current assets	62,167			60,668			48,876
Total Current Assets	557,131			514,525			499,956
Property and Equipment, net	385,387			421,038			424,961
Other Assets:
Goodwill	96,774			96,774			96,774
Other intangible assets, net	38,930			38,930			38,930
Other assets, net	13,929			16,338			16,581
Total Other Assets	149,633			152,042			152,285
	$	1,092,151		$	1,087,605		$	1,077,202
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	150,224		$	118,253		$	135,004
Current debt	—			15,000			15,000
Other current and deferred liabilities	126,337			133,715			118,495
Total Current Liabilities	276,561			266,968			268,499
Noncurrent Liabilities:
Long-term debt	61,250			53,601			57,335
Other noncurrent and deferred liabilities	93,323			103,282			108,000
Deferred taxes	7,884			7,372			7,961
Total Noncurrent Liabilities	162,457			164,255			173,296
Commitments and Contingencies
Shareholders’ Equity:
Preferred stock, $0.01 par value; 2,500 shares authorized; no shares issued and outstanding	—			—			—
Common stock, $0.01 par value; 400,000 shares authorized; 158,407 and 156,585 and 156,697 shares issued respectively; and 125,743 and 127,471 and 127,780 shares outstanding, respectively	1,257			1,275			1,278
Additional paid-in capital	482,340			468,806			463,502
Treasury stock, at cost, 32,664 and 29,114 and 28,917 shares, respectively	(444,309		)	(413,465		)	(411,766		)
Retained earnings	614,349			599,810			582,387
Accumulated other comprehensive (loss) income	(504		)	(44		)	6
Total Shareholders’ Equity	653,133			656,382			635,407
	$	1,092,151		$	1,087,605		$	1,077,202

The accompanying notes are an integral part of these condensed consolidated statements.

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CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)



	Thirteen Weeks Ended
	Common Stock					Additional Paid-in Capital			Treasury Stock				Retained Earnings		Accumulated Other Comprehensive (Loss) Income
	Shares		Par Value			Additional Paid-in Capital			Shares	Amount			Retained Earnings		Accumulated Other Comprehensive (Loss) Income			Total
BALANCE, August 4, 2018	125,710		$	1,257		$	476,480		32,658	$	(444,252	)	$	607,643	$	(115	)	$	641,013
Net income	—		—			—			—	—			6,481		—			6,481
Unrealized loss on marketable securities, net of taxes	—		—			—			—	—			—		(1		)	(1		)
Foreign currency translation adjustment	—		—			—			—	—			—		(388		)	(388		)
Issuance of common stock	63		—			768			—	—			—		—			768
Dividends paid on common stock	—		—			—			—	—			225		—			225
Repurchase of common stock & tax withholdings related to share-based awards	(30	)	—			(193		)	6	(57		)	—		—			(250		)
Share-based compensation	—		—			5,285			—	—			—		—			5,285
BALANCE, November 3, 2018	125,743		$	1,257		$	482,340		32,664	$	(444,309	)	$	614,349	$	(504	)	$	653,133

BALANCE, July 29, 2017	128,329		$	1,283		$	458,172		28,306	$	(406,776	)	$	565,650	$	113		$	618,442
Net income	—		—			—			—	—			16,690		—			16,690
Unrealized loss on marketable securities, net of taxes	—		—			—			—	—			—		(47		)	(47		)
Foreign currency translation adjustment	—		—			—			—	—			—		(60		)	(60		)
Issuance of common stock	78		1			961			—	—			—		—			962
Dividends paid on common stock	—		—			—			—	—			47		—			47
Repurchase of common stock & tax withholdings related to share-based awards	(627	)	(6		)	(138		)	611	(4,990		)	—		—			(5,134		)
Share-based compensation	—		—			4,507			—	—			—		—			4,507
BALANCE, October 28, 2017	127,780		$	1,278		$	463,502		28,917	$	(411,766	)	$	582,387	$	6		$	635,407

The accompanying notes are an integral part of these condensed consolidated statements.

Table of Contents

CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)



	Thirty-Nine Weeks Ended
	Common Stock					Additional Paid-in Capital			Treasury Stock				Retained Earnings			Accumulated Other Comprehensive (Loss) Income
	Shares		Par Value			Additional Paid-in Capital			Shares	Amount			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
BALANCE, February 3, 2018	127,471		$	1,275		$	468,806		29,114	$	(413,465	)	$	599,810		$	(44	)	$	656,382
Cumulative effect of adoption of ASU 2018-02, ASU 2016-16 and ASU 2014-09 (see Note 1)	—		—			—			—	—			(5,015		)	(39		)	(5,054		)
BALANCE, February 3, 2018, as adjusted	127,471		$	1,275		$	468,806		29,114	$	(413,465	)	$	594,795		$	(83	)	$	651,328
Net income	—		—			—			—	—			52,253			—			52,253
Unrealized gain on marketable securities, net of taxes	—		—			—			—	—			—			54			54
Foreign currency translation adjustment	—		—			—			—	—			—			(475		)	(475		)
Issuance of common stock	2,179		21			1,427			—	—			—			—			1,448
Dividends paid on common stock ($0.2550 per share)	—		—			—			—	—			(32,699		)	—			(32,699		)
Repurchase of common stock & tax withholdings related to share-based awards	(3,907	)	(39		)	(3,416		)	3,550	(30,844		)	—			—			(34,299		)
Share-based compensation	—		—			15,523			—	—			—			—			15,523
BALANCE, November 3, 2018	125,743		$	1,257		$	482,340		32,664	$	(444,309	)	$	614,349		$	(504	)	$	653,133

BALANCE, January 28, 2017	128,753		$	1,288		$	452,756		26,417	$	(386,094	)	$	541,251		$	(28	)	$	609,173
Net income	—		—			—			—	—			73,025			—			73,025
Unrealized loss on marketable securities, net of taxes	—		—			—			—	—			—			(15		)	(15		)
Foreign currency translation adjustment	—		—			—			—	—			—			49			49
Issuance of common stock	1,965		20			2,038			—	—			—			—			2,058
Dividends paid on common stock ($0.2475 per share)	—		—			—			—	—			(31,889		)	—			(31,889		)
Repurchase of common stock & tax withholdings related to share-based awards	(2,938	)	(30		)	(6,031		)	2,500	(25,672		)				—			(31,733		)
Share-based compensation	—		—			14,739			—	—			—			—			14,739
BALANCE, October 28, 2017	127,780		$	1,278		$	463,502		28,917	$	(411,766	)	$	582,387		$	6		$	635,407

The accompanying notes are an integral part of these condensed consolidated statements.

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CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



	Thirty-Nine Weeks Ended
	November 3, 2018			October 28, 2017
Cash Flows from Operating Activities:
Net income	$	52,253		$	73,025
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	69,290			73,968
Loss on disposal and impairment of property and equipment	3,592			5,204
Deferred income taxes	1,195			(1,483		)
Share-based compensation expense	15,523			14,739
Deferred rent and lease credits	(14,868		)	(14,684		)
Changes in assets and liabilities:
Inventories	(33,198		)	(32,660		)
Prepaid expenses and other assets	(190		)	5,556
Accounts payable	31,947			18,758
Accrued and other liabilities	(6,780		)	(47,598		)
Net cash provided by operating activities	118,764			94,825
Cash Flows from Investing Activities:
Purchases of marketable securities	(31,300		)	(29,097		)
Proceeds from sale of marketable securities	31,946			19,056
Purchases of property and equipment	(36,601		)	(27,128		)
Net cash used in investing activities	(35,955		)	(37,169		)
Cash Flows from Financing Activities:
Proceeds from borrowings	61,250			—
Payments on borrowings	(68,750		)	(12,500		)
Proceeds from issuance of common stock	1,448			2,058
Dividends paid	(32,674		)	(32,021		)
Repurchase of common stock	(30,879		)	(25,697		)
Payments of tax withholdings related to share-based awards	(3,420		)	(6,034		)
Net cash used in financing activities	(73,025		)	(74,194		)

Effects of exchange rate changes on cash and cash equivalents	(475		)	49
Net increase (decrease) in cash and cash equivalents	9,309			(16,489		)
Cash and Cash Equivalents, Beginning of period	160,071			142,135
Cash and Cash Equivalents, End of period	$	169,380		$	125,646

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	2,678		$	1,831
Cash paid for income taxes, net	$	22,481		$	44,783

The accompanying notes are an integral part of these condensed consolidated statements.

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CHICO’S FAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts and where otherwise indicated)

(Unaudited)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements of Chico’s 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. (“U.S. GAAP”) for complete financial statements. In the opinion of management, such interim financial statements reflect all normal, recurring adjustments considered necessary to present fairly the condensed consolidated financial position, the results of operations and cash flows for the interim periods presented. 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 3, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2018.

As used in this report, all references to “we,” “us,” “our” and “the Company,” refer to Chico’s FAS, Inc. and all of its wholly-owned subsidiaries.

Our fiscal years end on the Saturday closest to January 31 and are designated by the calendar year in which the fiscal year commences. Operating results for the thirteen and thirty-nine weeks ended November 3, 2018 are not necessarily indicative of the results that may be expected for the entire year.

Adoption of New Accounting Pronouncements

On August 17, 2018, the SEC adopted a final rule that eliminates or amends certain disclosure requirements that were deemed redundant and outdated in light of changes in SEC requirements, U.S. GAAP or changes in technology or the business environment. The rule also requires registrants to include in their interim financial statements a reconciliation of changes in stockholders’ equity in the notes or as a separate statement. The analysis should reconcile the beginning balance to the ending balance of each caption in shareholders’ equity for each period for which an income statement is required to be filed. The final rule became effective November 5, 2018. Beginning in the third quarter of fiscal 2018, we have provided a reconciliation for both the quarterly and year-to-date periods as well as comparable prior periods in this Form 10-Q. The eliminated or amended disclosures did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In the third quarter of fiscal 2018, we early adopted the guidance of Accounting Standards Update (“ASU”) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement (“CCA”) service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. Under this guidance, entities that enter into hosted CCA service contracts will apply the existing internal-use software guidance to determine which implementation costs are capitalized or expensed depending on the nature of the costs and project stage during which they are incurred. Capitalized implementation costs under ASU 2018-15 and the related amortization, are presented in the same line items of the financial statements as the costs for the associated hosting arrangement. The provisions of ASU 2018-15 were adopted on a prospective basis and did not have a material impact on the Company’s unaudited condensed consolidated financial statements. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous guidance.

In the first quarter of fiscal 2018, we early adopted the guidance of ASU 2018-02, Income Statement - Reporting Comprehensive Income, which provides entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (“OCI”) that have been stranded in accumulated OCI as a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The provisions of ASU 2018-02 were adopted on a prospective basis with a cumulative adjustment to opening retained earnings, and prior period amounts have not been adjusted and continue to be reported in accordance with the previous guidance. In the first quarter of fiscal 2018, the Company recorded an immaterial cumulative effect adjustment as an increase to opening retained earnings upon adoption of ASU 2018-02 as detailed in the table below.

In the second quarter of fiscal 2018, we adopted the guidance of ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment testing will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will then be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill. The provisions of ASU 2017-04 were adopted on a prospective basis and did not have an impact on the Company’s unaudited condensed consolidated financial statements.

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CHICO’S FAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share amounts and where otherwise indicated)

(Unaudited)

In the first quarter of fiscal 2018, we adopted the guidance of ASU 2016-16, Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory, which requires companies to recognize the income tax effects of intercompany sales or transfers of other assets in the income statement as income tax expense (benefit) in the period the sale or transfer occurs. Additionally, companies are required to evaluate whether the tax effects of the intercompany sales or transfers of non-inventory assets should be included in their estimates of annual effective tax rates by using today’s interim guidance on income tax accounting. The provisions of ASU 2016-16 were adopted on a modified retrospective basis with a cumulative adjustment to opening retained earnings, and prior period amounts have not been adjusted and continue to be reported in accordance with the previous guidance. In the first quarter of fiscal 2018, the Company recorded a cumulative effect adjustment of $5.7 million as a decrease to opening retained earnings upon adoption of ASU 2016-16. Any further tax impacts on sales or transfers of intercompany assets other than inventory will be recognized as incurred.

In the first quarter of fiscal 2018, we adopted the guidance of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, under which entities are no longer able to recognize unrealized holding gains and losses on equity securities they classify as available-for-sale in other comprehensive income but instead must recognize the change in fair value in net income. The updated guidance further eliminated equity security classification categories (i.e., trading and available-for-sale). The new standard does not change the guidance for classifying and measuring investments in debt securities. The provisions of ASU 2016-01 were adopted on a prospective basis and did not have an impact on the Company’s unaudited condensed consolidated financial statements.

In the first quarter of fiscal 2018, we adopted the guidance of ASU 2014-09, Revenue from Contracts with Customers. The updated guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Through our evaluation of the impact of this ASU 2014-09, we identified certain changes that were made to our accounting policies, practices, systems and controls which include: 1) revenue related to our online sales will be recognized at the shipping point rather than upon delivery to customer; 2) timing of our recognition of advertising expenses, whereby certain expenses that previously were amortized over their expected period of future benefit will be expensed the first time the advertisement appears; 3) presentation of estimated merchandise returns as both an asset, equal to the inventory value net of processing costs, and a corresponding return liability, compared to the previous practice of recording an estimated net return liability; and 4) the recognition of any future franchise development fees will be recognized over the license period. Upon adoption, the Company’s accounting policies and treatment over revenue recognition are consistent with the provisions of ASU 2014-09 and represent a faithful depiction of the transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The provisions of ASU 2014-09 were adopted on a modified retrospective basis with a cumulative adjustment to opening retained earnings, and prior period amounts have not been adjusted and continue to be reported in accordance with the previous guidance. In the first quarter of fiscal 2018, the Company recorded a cumulative effect adjustment of $0.7 million as an increase to opening retained earnings upon adoption of ASU 2014-09.

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CHICO’S FAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(In thousands, except share and per share amounts and where otherwise indicated)

(Unaudited)

Adjustments to Presentation Upon Adoption of New Accounting Pronouncements

The following table presents the effects that the aforementioned adopted accounting standards had on our February 3, 2018 condensed consolidated balance sheet:



	February 3, 2018 (As Reported)			ASU 2018-02			ASU 2016-16			ASU 2014-09			February 3, 2018 (As Adjusted)
ASSETS
Inventories	$	233,726		$	—		$	—		$	(824	)	$	232,902
Prepaid expenses and other current assets	60,668			—			(500		)	5,389			65,557
Other assets, net	16,338			—			(5,206		)	—			11,132
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other current and deferred liabilities	$	133,715		$	—		$	—		$	3,677		$	137,392
Deferred taxes	7,372			—			—			236			7,608
Retained earnings	599,810			39			(5,706		)	652			594,795
Accumulated other comprehensive loss	(44		)	(39		)	—			—			(83		)

Had the Company not adopted the provisions of ASU 2014-09, the effects of adoption of this standard on our unaudited condensed consolidated statement of income for the thirteen and thirty-nine weeks ended November 3, 2018 and unaudited condensed consolidated balance sheet as of November 3, 2018 were as follows:



	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	November 3, 2018						November 3, 2018
	As Reported		Effects of Standard		Balances Without Adoption of ASU 2014-09		As Reported		Effects of Standard			Balances Without Adoption of ASU 2014-09
Sales	$	499,877	$	783	$	500,660	$	1,606,412	$	(3,295	)	$	1,603,117
Cost of Goods Sold	318,899		237		319,136		1,001,699		(1,934		)	999,765
Selling, general and administrative expenses	178,394		5		178,399		538,902		(631		)	538,271



	November 3, 2018
	As Reported		Effects of Standard			Balances Without Adoption of ASU 2014-09
ASSETS
Inventory	$	266,100	$	1,383		$	267,483
Prepaid expenses and other current assets	62,167		(3,165		)	59,002
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other current and deferred liabilities	$	126,337	$	(1,052	)	$	125,285

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(In thousands, except share and per share amounts and where otherwise indicated)

(Unaudited)

2. NEW ACCOUNTING PRONOUNCEMENTS

In August 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The amendments related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. We do not anticipate adoption to have a material impact on the Company’s unaudited condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which replaces the existing guidance in Accounting Standard Codification (“ASC”) 840, Leases. The FASB has also issued subsequent ASUs related to ASU 2016-02, which detail amendments to the ASU, implementation considerations, narrow-scope improvements and practical expedients. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The guidance is required to be adopted using the modified retrospective approach, which provides an entity the option to apply the guidance at the beginning of the earliest comparative period presented, or at the beginning of the period in which it is adopted. The standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and for operating leases, the lessee would recognize straight-line total rent expense. We have made progress in our assessment phase and are in the process of compiling all agreements that are considered a lease under this new guidance. We are finalizing the implementation of our leasing software solution, including identifying changes to our business processes, systems and controls to support the adoption in fiscal year 2019. Upon adoption of the standard, we expect to record material right-of-use assets and lease liabilities on the balance sheets approximating the present value of future lease payments.

3. REVENUE RECOGNITION

Disaggregated Revenue

The following table disaggregates our operating segment revenue by brand, which we believe provides a meaningful depiction of the nature of our revenue. Amounts shown include licensing and wholesale income, which is not a significant component of total revenue, and is aggregated within the respective brands in the table below.



	Thirteen Weeks Ended								Thirty-Nine Weeks Ended
	November 3, 2018				October 28, 2017				November 3, 2018				October 28, 2017
Chico's	$	259,503	51.9	%	$	284,560	53.5	%	$	847,247	52.8	%	$	896,904	53.0	%
WHBM	167,805		33.6		175,265		32.9		519,391		32.3		552,993		32.6
Soma	72,569		14.5		72,462		13.6		239,774		14.9		244,699		14.4
Total Net Sales	$	499,877	100.0	%	$	532,287	100.0	%	$	1,606,412	100.0	%	$	1,694,596	100.0	%

Accounting Policies

The Company recognizes revenue pursuant ASC 606 as established by ASU 2014-09 (“ASC 606”). Retail sales by our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under rewards programs and Company issued coupons, promotional discounts and employee discounts. Sales from our websites and catalogs are recognized at the time of shipment. Amounts related to shipping and handling costs billed to customers are recorded in net sales and the related shipping and handling costs are recorded in cost of goods sold in the accompanying unaudited condensed consolidated statements of income. Amounts paid by customers to cover shipping and handling costs are immaterial. Our policy towards taxes assessed by a government authority directly imposed on revenue producing transactions between a seller and a customer is, and has been, to exclude all such taxes from revenue. Licensing and wholesale income, which is not a significant component of total revenue, is recognized based upon delivery of products, except when the customer has a contractual right of return.

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(Unaudited)

We sell gift cards in stores, on our e-commerce website and through third parties. Our gift cards do not have expiration dates. We account for gift cards by recognizing a liability at the time the gift card is sold. The liability is relieved and revenue is recognized, net of third party sales commissions, for gift cards upon redemption. In addition, we recognize revenue for the amount of gift cards expected to go unredeemed (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We determine the gift card breakage rate based on our historical redemption patterns. We recognize revenue on the remaining unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions.

Soma offers a points-based loyalty program in which customers earn points based on purchases. Attaining specified loyalty point levels results in the issuance of reward coupons to discount future purchases. As program members accumulate points, we accrue the estimated future liability, adjusted for expected redemption rates and expirations. The liability is relieved and revenue is recognized for loyalty point reward coupons upon redemption. In addition, we recognize revenue on unredeemed points when it can be determined that the likelihood of the point being redeemed is remote and there is no legal obligation to remit the point value. We determine the loyalty point breakage rate based on historical and redemption patterns.

As part of the normal sales cycle, we receive customer merchandise returns related to store, website and catalog sales. To account for the financial impact of potential customer merchandise returns, we estimate future returns on previously sold merchandise. Reductions in sales and gross margin are recorded for estimated merchandise returns based on return history, current sales levels and projected future return levels.

The Company’s accounting policies and treatment over revenue recognition are consistent with the provisions of ASC 606 and represent a faithful depiction of the transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

Contract Liability

Contract liabilities on the unaudited condensed consolidated balance sheet were comprised of obligations associated with our gift card and customer loyalty programs. As of November 3, 2018 and February 3, 2018, contract liabilities primarily consisted of gift cards of $29.4 million and $43.6 million, respectively. For the thirteen weeks and thirty-nine weeks ended November 3, 2018, the Company recognized $3.7 million and $25.5 million, respectively, of revenue that was previously included in the gift card contract liability as of February 3, 2018. The contract liability for our loyalty program was not material as of November 3, 2018 or February 3, 2018.

Performance Obligation

For the thirteen weeks and thirty-nine weeks ended November 3, 2018, revenue recognized from performance obligations related to prior periods was not material. Revenue recognized in future periods related to performance obligations is not expected to be material.

4. SHARE-BASED COMPENSATION

For the thirty-nine weeks ended November 3, 2018 and October 28, 2017, share-based compensation expense was $15.5 million and $14.7 million, respectively. As of November 3, 2018, approximately 7.0 million shares remain available for future grants of equity awards under our Amended and Restated 2012 Omnibus Stock and Incentive Plan, which was amended and restated effective June 22, 2017.

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(In thousands, except share and per share amounts and where otherwise indicated)

(Unaudited)

Restricted Stock Awards

Restricted stock awards vest in equal annual installments over a three-year period from the date of grant.

Restricted stock award activity for the thirty-nine weeks ended November 3, 2018 was as follows:



	Number of Shares		Weighted Average Grant Date Fair Value
Unvested, beginning of period	2,328,259		$	13.08
Granted	1,944,280		9.68
Vested	(1,047,063	)	13.00
Forfeited	(259,668	)	11.85
Unvested, end of period	2,965,808		10.99

Performance-based Restricted Stock Units

For the thirty-nine weeks ended November 3, 2018, we granted performance-based restricted stock units (“PSUs”), contingent upon the achievement of Company-specific performance goals during the three fiscal years 2018-2020. Any units earned as a result of the achievement of this goal will vest 100% three years from the date of grant and will be settled in shares of our common stock.

Performance-based restricted stock unit activity for the thirty-nine weeks ended November 3, 2018 was as follows:



	Number of Units/ Shares		Weighted Average Grant Date Fair Value
Unvested, beginning of period	690,950		$	13.65
Granted	725,300		9.87
Vested	(190,777	)	13.08
Forfeited	(88,188	)	13.11
Unvested, end of period	1,137,285		11.40

Stock Option Awards

For the thirty-nine weeks ended November 3, 2018 and October 28, 2017, we did not grant any stock options.

Stock option activity for the thirty-nine weeks ended November 3, 2018 was as follows:



	Number of Options		Weighted Average Exercise Price
Outstanding, beginning of period	368,745		$	12.36
Granted	—		—
Exercised	(21,200	)	4.46
Forfeited or expired	(112,268	)	13.39
Outstanding and exercisable, end of period	235,277		12.58

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(In thousands, except share and per share amounts and where otherwise indicated)

(Unaudited)

5. INCOME TAXES

The provision for income taxes is based on a current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. Our effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items and the mix of earnings.

For the thirteen weeks ended November 3, 2018 and October 28, 2017, the Company’s effective tax rate was (141.7)% and 32.9%, respectively. The Company’s income tax benefit for the thirteen weeks ended November 3, 2018 includes the impact of accelerated income tax deductions into the 2017 federal income tax return. Due to the Tax Act, which reduced the U.S. corporate income tax rate from 35% to 21%, the acceleration of these deductions into 2017 resulted in the Company recognizing cash savings that increased its deferred income tax liability, which, upon remeasurement to the 21% rate, resulted in permanent expense savings in the quarter of approximately $4.9 million and a net tax benefit of $3.8 million. This resulted in an effective tax rate for the thirteen weeks ended November 3, 2018 of (141.7)% compared to 32.9% for the thirteen weeks ended October 28, 2017.

For the thirty-nine weeks ended November 3, 2018, the income tax provision was $13.1 million compared to $41.3 million for the thirty-nine weeks ended October 28, 2017. For the thirty-nine weeks ended November 3, 2018 and October 28, 2017, the Company’s effective tax rate was 20.0% and 36.1%, respectively. The 16.1% reduction in the effective tax rate was primarily the result of the acceleration of income tax deductions into the 2017 federal income tax return as discussed above.

In accordance with Staff Accounting Bulletin No. 118, we have reflected the income tax effects of the aspects of the Tax Act for which the accounting under ASC 740 is complete. Our provision for income taxes does include estimates around the timing of certain deductions. To the extent those estimates change, there could be effects to income tax expense due to the change in the tax rate. Additionally, the final impact of the Tax Act may differ from our estimates due to additional regulations that may be issued or changes in interpretations as we gain a more thorough understanding of the tax law. These items remain provisional estimates. Pursuant to SAB 118, the Company will complete the accounting for the tax effects of all of the provisions of the Tax Act within the required measurement period, which ends in December 2018.

6. EARNINGS PER SHARE

In accordance with relevant accounting guidance, unvested share-based payment awards that include non-forfeitable rights to dividends, whether paid or unpaid, are considered participating securities. As a result, such awards are required to be included in the calculation of earnings per common share pursuant to the “two-class” method. For the Company, participating securities are comprised entirely of unvested restricted stock awards and PSUs that have met their relevant performance criteria.

Earnings per share (“EPS”) is determined using the two-class method when it is more dilutive than the treasury stock method. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted EPS reflects the dilutive effect of potential common shares from non-participating securities such as stock options, PSUs and restricted stock units.

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(Unaudited)

The following table sets forth the computation of basic and diluted EPS shown on the face of the accompanying condensed consolidated statements of income:



	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Numerator
Net income	$	6,481		$	16,690		$	52,253		$	73,025
Net income and dividends declared allocated to participating securities	(182		)	(394		)	(1,365		)	(1,683		)
Net income available to common shareholders	$	6,299		$	16,296		$	50,888		$	71,342
Denominator
Weighted average common shares outstanding – basic	122,201			124,957			124,069			125,550
Dilutive effect of non-participating securities	72			32			51			41
Weighted average common and common equivalent shares outstanding – diluted	122,273			124,989			124,120			125,591
Net Income per Share:
Basic	$	0.05		$	0.13		$	0.41		$	0.57
Diluted	$	0.05		$	0.13		$	0.41		$	0.57

For the thirteen weeks ended November 3, 2018 and October 28, 2017, 0.2 million and 0.7 million potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.

For the thirty-nine weeks ended November 3, 2018 and October 28, 2017, 0.8 million and 0.7 million potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.

7. FAIR VALUE MEASUREMENTS

Our financial instruments consist of cash, money market accounts, marketable securities, assets held in our non-qualified deferred compensation plan, accounts receivable and payable, and debt. Cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value due to the short-term nature of the instruments.

Marketable securities are classified as available-for-sale and as of November 3, 2018 generally consist of corporate bonds, U.S. government agencies, municipal securities, and commercial paper with $41.1 million of securities with maturity dates within one year or less and $18.4 million with maturity dates over one year and less than two years.

We consider all marketable securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classify these securities within current assets on the condensed consolidated balance sheets as they are available to support current operational liquidity needs. Marketable securities are carried at fair value, with the unrealized holding gains and losses, net of income taxes, reflected in accumulated other comprehensive income until realized. For the purposes of computing realized and unrealized gains and losses, cost is determined on a specific identification basis.

Fair value is defined 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. Entities are required to use 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.

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(Unaudited)

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

We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as available-for-sale securities, certain cash equivalents, specifically our money market accounts and assets held in our non-qualified deferred compensation plan. The money market accounts are valued based on quoted market prices in active markets. Our marketable securities are generally valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third-party pricing entities, except for U.S. government securities which are valued based on quoted market prices in active markets. The investments in our non-qualified deferred compensation plan are valued using quoted market prices and are included in other assets on our consolidated balance sheets.

From time to time, we measure certain assets at fair value on a non-recurring basis. This includes the evaluation of long-lived assets, goodwill and other intangible assets for impairment using Company-specific assumptions which would fall within Level 3 of the fair value hierarchy.

To assess the fair value of goodwill, we utilize both an income approach and a market approach. Inputs used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant. Inputs used to calculate the fair value based on the market approach include identifying sales and EBITDA multiples based on guidelines for similar publicly traded companies and recent transactions.

To assess the fair value of trade names, we utilize a relief from royalty approach. Inputs used to calculate the fair value of the trade names primarily include future sales projections, discounted at a rate that approximates the cost of capital of a market participant and an estimated royalty rate.

To assess the fair value of long-term debt, we utilize a discounted future cash flow model using current borrowing rates for similar types of debt of comparable maturities.

Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.

During the quarter ended November 3, 2018, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, as of November 3, 2018, February 3, 2018 and October 28, 2017, we did not have any Level 3 financial assets measured on a recurring basis. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.

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(Unaudited)

In accordance with the provisions of the guidance, we categorized our financial assets and liabilities which are valued on a recurring basis, based on the priority of the inputs to the valuation technique for the instruments, as follows:

Fair Value Measurements at Reporting Date Using

Balance as of November 3, 2018

Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Financial Assets:

Current Assets

Cash equivalents:

Money market accounts

2,691