Chico's FAS, Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended
February 3, 2007
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
Commission file number 0-21258
Chicos FAS, Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Florida
|
|
59-2389435
|
(State or other jurisdiction
of incorporation)
|
|
(IRS Employer
Identification No.)
|
11215 Metro Parkway,
Fort Myers, Florida 33966
(Address of principal executive
offices) (Zip code)
(239) 277-6200
(Registrants telephone
number)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Class
|
|
Name of Exchange on Which Registered
|
|
Common Stock, Par Value $.01 Per
Share
|
|
New York Stock Exchange
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K o.
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant:
Approximately $3,934,000,000 as of July 29, 2006 (based
upon the closing sales price reported by the NYSE and published
in the Wall Street Journal on July 31, 2006).
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date:
Common Stock, par value $.01 per share
175,951,765 shares as of March 19, 2007.
Documents incorporated by reference:
Part III Definitive Proxy Statement for the Companys
Annual Meeting of Stockholders presently scheduled for
June 26, 2007.
CHICOS
FAS, INC.
ANNUAL REPORT ON
FORM 10-K
FOR THE
YEAR ENDED FEBRUARY 3, 2007
TABLE OF CONTENTS
1
PART I
General
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 under the Chicos, White House |
Black Market (WH|BM) and Soma by Chicos
(Soma) brand names.
Chicos. The Chicos brand, which
began operations in 1983, sells exclusively designed, private
branded clothing focusing on fashion conscious women 35 and over
with a moderate to high income level. The styling interprets
fashion trends in a unique, relaxed, figure-flattering manner
using mainly easy-care fabrics. The Chicos brand designs
its products in a number of ways including in-house designers,
working with its independent vendors or through vendor based
designs.
WH|BM. The WH|BM brand, which began operations
in 1985 and was acquired by the Company in September 2003,
focuses on women who are 25 years old and up who lead
active work and social lives with moderate and higher income
levels. Its offerings include fashion and merchandise in the
classic and timeless colors of white and black and related
shades. WH|BM utilizes an in-house design team and also works
closely with a number of vendors and agents to select, modify,
and create products.
Soma. The Soma brand, which began operations
in 2004, sells exclusively designed private branded intimate
apparel, sleepwear and activewear, primarily aimed at customers
with the same age and income level as customers of the
Chicos brand. This concept, however, should ultimately
appeal to a broader customer base than Chicos does. The
Soma brand is developed by working closely with a number of
independent vendors and agents to select products designed and
manufactured by them or their sources and to design proprietary
products in-house primarily through a close collaborative effort
with these independent vendors.
In January 2006, the Company acquired most of the assets of
Fitigues, a fitness inspired brand offering stylish, comfortable
activewear clothing and operating through 12 free-standing
retail stores in various locations throughout the country, as
well as through its customer catalog and website. However, the
Company recently determined that the Fitigues brand did not meet
internal expectations. Therefore, the Company has committed to
close the Fitigues brand and expects that all of the remaining
Fitigues stores, as well as the website, will be shut down by
the end of the second quarter of fiscal 2007.
The Company is always open to explore other specialty retail
concepts, including brand extensions, which would be
complimentary to its current brands and that may be future
growth vehicles. In particular, if a concept appears to offer
profitable growth within a reasonable time horizon, the Company
may move the concept into a test phase. However, the Company
believes that at this time it is important to focus its energies
on its core Chicos, WH|BM and Soma brands.
The Company historically has endeavored to maintain a
merchandise mix that emphasizes the continued introduction of
new styles and designs to complement its seasonal and core
product offerings. The Company plans to continue this approach
with respect to its Chicos and WH|BM brands, and, to a
lesser degree, its Soma brand, which the Company believes
requires a higher level of core product.
As of March 19, 2007, the Company operated 930 retail
stores in 47 states, the District of Columbia, the
U.S. Virgin Islands and Puerto Rico. The retail stores
operate under various names, including Chicos, White House
| Black Market, Soma by Chicos and, for the short term,
Fitigues. The Companys 559 Chicos front-line
Company-owned stores, 261 WH|BM front-line stores, and 51 Soma
stores, as of this date, compete in the
better-priced market, with 29% of these stores in
upscale or regional malls, 13% in upscale street locations and
the balance in upscale open air specialty and strip centers. The
total retail stores include the remaining 8 Fitigues front-line
stores that are scheduled to be closed by the end of the second
quarter of fiscal 2007.
There are also 34 Chicos outlet locations, 16 WH|BM outlet
locations and 1 Fitigues outlet location that provide clearance
activities for each of the brands. The Fitigues outlet store is
expected to be closed by the end of the
2
second quarter of fiscal 2007. The Company has plans to open its
first Soma outlet store during the first quarter of fiscal 2007.
In February and March 2007, the Company completed its strategic
plan to take full control of its brand image by acquiring all
outstanding franchise rights and being entirely Company-owned
within the United States, with no further franchise operations.
Going forward, the Company does not intend to establish any
franchise arrangements, or to enter into any additional
franchise territory development agreements, in the United States
for any of its brands. The Company has not decided to enter any
foreign markets at this time and it has not decided if, when, or
in what manner, it may enter a foreign market in the future.
The Company mails a Chicos and WH|BM catalog almost every
month, including Soma inserts where applicable. These catalogs
are designed to drive customers into the stores as well as
promote and encourage website or call center sales. Beginning in
mid fiscal 2005, the Company launched
www.whitehouseblackmarket.com providing customers the
ability to order WH|BM merchandise online or through its call
center. In fiscal 2006, the Company launched a separate online
website for Soma merchandise, www.soma.com, allowing
customers the ability to order Soma merchandise online or
through its call center. Prior to this launch, Soma products
could only be purchased through the Chicos website. The
Company continues to evaluate whether, and at what point, it
would make sense to launch a separate catalog for Soma.
Sales through the call centers toll free telephone
numbers, together with sales from the Companys various
websites (www.chicos.com,
www.whitehouseblackmarket.com and www.soma.com),
including the relatively small amount of sales through
www.fitigues.com, amounted to $53.5 million in
fiscal 2006 and are viewed as additional sales that provide a
customer service for those who prefer shopping through these
alternative channels. The Company is targeting this area as a
growth area that has currently not been penetrated to the degree
of some of its competitors. To that end, the Company is
investing in new hardware, software and personnel to increase
its sales penetration.
The Companys outlet division has outlet stores that
generally have a larger average store selling square footage
than the front-line stores. In order to provide the Chicos
outlets with a full complement of merchandise, Chicos also
developed a supplemental product line for distribution only
through its outlet stores. This product line is known as
Additions by Chicos. This supplemental label
includes select product items that are designed to help promote
the clearance of existing merchandise within Chicos. The
Company has not established such a supplemental product for
WH|BM or Soma.
Also during the past few fiscal years, the Company has been
testing the expansion of its Chicos and WH|BM brands
within its stores by offering certain items which complement the
clothing products such as leather goods, watches,
childrens gifts and other gift products that are primarily
designed by the Company. To that end, during fiscal 2007, the
Company intends to test a new petites line of clothing in its
WH|BM brand. Some of these product category tests have proved to
be successful and the product category has been added to the
permanent offerings at the stores. Because of the additional
space required to accommodate these additional categories and in
an effort to improve the visual experience of its clothing and
accessory presentations, the Company has been actively pursuing
larger spaces for its existing and new stores. The Company
currently believes the target Chicos brand store size is
in the 3,000-3,500 selling square feet range, while the target
WH|BM brand store size is in the 2,200-3,000 selling square feet
range. Although the Company may from time to time open larger or
smaller stores, the Companys primary focus in both its new
and existing markets is currently stores in the size ranges
indicated above.
The Company has been opening Soma stores in various sizes as it
tests the optimal size for such stores. The Company is planning
to open front-line Soma stores in the future that will be
slightly smaller than its Chicos and WH|BM stores, with
Soma stores ranging in size from 1,100 selling square feet to
2,300 selling square feet and which have generally been attached
to, or adjacent to, Chicos stores. Further, the Company
intends to begin removing the by Chicos
tagline on its Soma by Chicos stores during fiscal 2007 as
it intends to begin expanding on its limited marketing to
non-Chicos customers, in the same age and income
classification.
The Company regularly reviews the appropriate size for its
stores and may adjust the target store size in the future as
necessary, in part due to the Companys above average net
sales per selling square foot at its Chicos and
3
WH|BM stores as well as to continually position the Company to
capitalize on the growth opportunities in the industry without
being space confined.
The Company intends to continue locating a large portion of its
front-line stores, including Chicos, WH|BM and Soma,
primarily in established upscale, outdoor destination shopping
areas and high-end enclosed malls located either in tourist
areas or in, or near,
mid-to-larger
sized markets. In recent years, Chicos has been opening
locations in smaller sized markets with encouraging results and
the Company intends to expand its opening of Chicos stores
in smaller sized markets as long as results are meeting
expectations. In the fiscal year ended February 3, 2007
(fiscal 2006), the Company opened 145 net new Company-owned
stores, acquired the Fitigues chain of 12 stores (which will be
closed in the second quarter of fiscal 2007) and reacquired
one of its franchise stores (subsequent to fiscal 2006, the
Company reacquired the remaining 13 franchise stores, thus
ending its franchise operations). During fiscal 2005, the
Company opened 104 net new Company-owned stores and one of
its franchisees opened two stores.
The Company plans to open approximately
135-145 net
new stores (excluding the 10 Fitigues planned closures or the 13
acquired franchise stores subsequent to year end) in the fiscal
year ending February 2, 2008 (fiscal 2007). Of this total,
55-60 are
expected to be Chicos stores,
55-60 are
expected to be WH|BM stores, and
20-25 are
expected to be Soma stores. The Company expects to close up to
1-3 existing Chicos stores, 4-6 WH|BM stores, and 1-3 Soma
stores during fiscal 2007.
The Company has been aggressively expanding or relocating
Chicos and WH|BM stores over the last several years and
the Company anticipates this will continue as the Company finds
more opportunities for expansion or relocation. The Company has
stated its fiscal 2007 goal is to increase overall square
footage by 22%-24% and if the Company were to expand or relocate
more stores than the
45-55
planned, or if the Company were to open larger front-line stores
than currently planned, the Company may reduce the overall
number of stores it opens to maintain its approximate 22%-24%
square footage growth goal.
Business
Strategies
Overall Growth Strategy. Over the last several
years, the Company has continued to build its store base
primarily through the opening of new stores as well as through
the acquisition of other concepts such as WH|BM and the organic
growth of the Soma concept. During the same time, the Company
has been building its infrastructure to accommodate the
anticipated future growth in its store base, its multi-branded
approach to retailing, and the associated increases in revenues
and expenses. This increase in infrastructure includes
significant additions to its senior and middle management teams,
an increase in direct to consumer staffing, the roll out of the
SAP software to all brands (for more detail, see page 12),
and other infrastructure initiatives. The Company has
established an annual square footage growth goal of 22%-24% for
fiscal 2007 and 15% for fiscal 2008, which aggregates the square
footage of Chicos, WH|BM, and Soma brands. In assessing
the growth potential of each of the Companys two primary
brands, the Company believes the overall market for Chicos
stores in the United States to be between 700 and 850 stores,
that the overall market for WH|BM stores in the United States
appears to be either comparable or only slightly less than the
potential number of Chicos stores, that ultimately most of
these current locations can accommodate higher volume, and that
long-term expansion opportunities for both brands are believed
to be possible in certain other countries such as Canada or
certain European countries. The Company believes it is premature
to assess any growth potential for the Soma brand, although the
Company currently believes Soma could eventually be successful
in many places where there is a successful Chicos store,
whether or not adjacent to an existing Chicos store, as
well as other high traffic shopping center locations serving the
target Soma customer that do not have a Chicos store.
Distinctive Private Branded Clothing and Coordinated
Accessories. The most important element of the
Companys business strategies is the distinctive clothing
and complementary accessories it sells under its proprietary
brands.
Chicos. Interpreting current
fashion trends and providing frequent delivery of new designs,
Chicos targets women 35 and over with emphasis on a
comfortable relaxed fit in a modern style. Chicos clothing
is made mostly from natural fabrics and fabric blends (including
cotton, linen and silk) and sophisticated synthetics and
synthetic blends. Accessories, such as handbags, belts, and
jewelry, including earrings, watches,
4
necklaces and bracelets, are specifically designed to coordinate
with the colors and patterns of the Chicos brand clothing,
enabling customers to easily enhance and individualize their
wardrobe selections.
Chicos designs its clothing and accessories in a number of
ways including utilizing its in-house design team, working with
its independent vendors, or through vendor based designs.
Chicos controls most aspects of the design process,
including choices of pattern, construction, specifications,
fabric, finishes and color.
Chicos clothing is designed through the coordinated
efforts of the merchandising and product development teams.
Style, pattern, color and fabric for individual items of
clothing are developed based upon perceived current and future
fashion trends that will appeal to its target customer,
anticipated future sales and historical sales data.
The Chicos product development and merchandising teams
develop and work with vendors to develop the in-house designs
and design modifications. By conceptualizing and designing
in-house, contracting, for the most part, directly with
manufacturers, and providing
on-site
quality control, Chicos has been able to realize average
initial gross profit margins for its clothing and accessories
that are generally higher than the industry average, while at
the same time providing value to its customers.
The distinctive nature of Chicos clothing is carried
through to its sizing. Chicos uses international type
sizing, comprising sizes 0 (size 4-6), 1 (size 8-10), 2 (size
10-12), and
3 (size
14-16). As
in the past, Chicos occasionally will offer
one-size-fits-all and small, medium and large sizing for some
items. The relaxed nature of the clothing allows the stores to
utilize this unusual sizing and thus offer a wide selection of
clothing without having to invest in a large number of different
sizes within a single style. Chicos has also added half
sizes (sizes 0.5, 1.5, 2.5 and 3.5) to some of its pant styles,
most notably jeans.
WH|BM. Designed to adapt within the
lifestyle of todays modern woman and to enhance her inner
beauty, WH|BM clothing is made from a variety of natural and
synthetic fabrics, such as cotton, rayon, silk, polyester,
microfibers and matte jersey, all in white and black and related
shades. As is the case with Chicos, the accessories at
WH|BM, such as handbags, shoes, belts and jewelry, including
earrings, necklaces and bracelets, are specifically developed
and purchased to coordinate with the colors and patterns of the
clothing, enabling customers to easily coordinate with and
individualize their wardrobe selections.
WH|BM utilizes an in-house design team and also works closely
with its independent vendors for its designs. WH|BM controls
almost all aspects of the design process, including choices of
pattern, construction, specifications, fabric, finishes and
color.
WH|BM clothing is designed through the coordinated efforts of
the merchandising, design and product development teams. The
merchandise is selected, enhanced and created so as to carry out
WH|BMs commitment to make women feel beautiful
and to project a contemporary and feminine self-image. As is the
case with Chicos, the style, pattern, color and fabric for
individual items of WH|BM clothing are selected based upon
historical sales data, anticipated future sales and perceived
current and future fashion trends that will appeal to its target
customer.
The WH|BM product development, design and merchandising teams
work with vendors to develop the in-house and design
modifications. More so than in the past, WH|BM conceptualizes
and designs in-house, contracts for a large part directly with
manufacturers, and started providing
on-site
quality control in February 2006. Because of these changes,
WH|BM has been able to realize improvements in its average
initial merchandise margins compared to a few years ago, while
continuing to provide stylish, affordable clothing and
accessories.
WH|BM stores use American sizes in the 0-14 range (with online
sizing up to size 16), which the Company believes is more
appropriate for the target WH|BM customer. As a result, the fit
of the WH|BM clothing tends to be more styled to complement the
figure of a body-conscious woman, while still remaining
comfortable.
Soma. Soma offerings are broken into
two broad categories: foundations and apparel. The foundations
category includes bras, panties, and shapewear, while the
apparel category includes activewear, sleepwear,
5
robes and loungewear. Accessories volume within the Soma concept
is currently small but may be developed further in the future.
The foundation and apparel products are, for the most part,
developed with a close collaborative effort between the in-house
product development team and key vendor resources. The Company
is testing some labels, other than the Soma label, as it
determines the needs and desires of the target customer. The
apparel offerings utilize the Chicos sizing concept, while
bras are sized using traditional American band and cup sizes.
Panties currently incorporate both industry and Chicos
sizing.
Personalized Service and Customer
Assistance. The Company has always considered
outstanding and personalized customer service one of the most
important factors in determining its success. The Company
intends, through its specialized training efforts, to make
certain that sales associates in all of its stores offer
assistance and advice on various aspects of their
customers fashion and wardrobe needs, including clothing
and accessory style and color selection, coordination of
complete outfits, and suggestions on different ways in which to
wear the clothing and accessories. The Company does not require
sales associates to wear the Companys clothing and
accessories in its stores. It offers substantial employee
discounts to those associates who wish to purchase the
Companys clothing. The Companys sales associates are
encouraged to know their regular customers preferences and
to assist those customers in selecting merchandise best suited
to their tastes and wardrobe needs. To better serve its
customers, sales associates are encouraged to become familiar
with new styles and designs of clothing and accessories by
trying on new merchandise. None of the Companys brands
have found it necessary to offer alteration services.
The Company takes pride in empowering its associates to make
decisions that best serve the customer. The Company believes
this healthy sense of empowerment enables the Companys
associates to exceed customers expectations. In addition,
many of the store managers and sales associates, especially for
the Chicos brand, were themselves customers prior to
joining the Company and can therefore more easily identify with
customers. The Companys associates are expected to keep
individual stores open until the last customer in the store has
been served. If an item is not available at a particular store,
sales associates are encouraged to arrange for the item to be
shipped directly to the customer from another Chicos,
WH|BM or Soma store. The Company provides a Company sponsored
SKU hotline and in-store SKU lookup to
assist sales associates with this task. The Company is committed
to its Most Amazing Personal Services standard and
to that end it is evaluating new software that may automate the
process of locating size or color requests.
Customer Loyalty. Building customer loyalty
through focused programs and effective implementation of the
Companys merchandising and customer service strategies is
considered another key element for the Companys success.
The Companys sophisticated customer tracking database,
that tracks sales by customers at the SKU and store level,
allows the Company to more sharply focus its marketing, design
and merchandising efforts to better address and define the
desires of its target customer. Active customers are
those who have purchased at one of the Companys brands
within the preceding 12 months.
Chicos and Soma. Chicos
customer club, which was established in the early 1990s,
is known as the Passport Club
(Passport), and is designed to encourage repeat
sales and customer loyalty for its Chicos and Soma brands.
Features of the club include discounts, special promotions,
invitations to private sales, and personalized phone calls
regarding new Chicos and Soma merchandise.
A Chicos or Soma customer signs up to join the Passport
Club at no cost, initially as a preliminary member.
Once the customer spends a combined $500 over any time frame in
either brand, the customer becomes a permanent
member entitled to a 5% lifetime discount, advance sale notices,
free shipping and other benefits. Chicos has been very
successful in increasing its database of active permanent and
preliminary Passport members. As of February 3, 2007,
Chicos and Soma had approximately 1.6 million active
permanent Passport members and an additional 1.6 million
active preliminary Passport members. During fiscal 2006, the
active permanent Passport members accounted for approximately
83% of overall sales, while the active preliminary members
accounted for approximately 14% of overall sales. As a
comparison to fiscal 2005, Chicos and Soma had an average
of 2.9 million active permanent and preliminary members.
6
The Company believes that active permanent Passport members shop
more frequently and spend more on their average transaction than
active preliminary Passport members. During fiscal 2006, the
average active permanent Chicos and Soma Passport member
spent approximately $108 per transaction and shopped five
to six times per year, while the active preliminary Passport
members averaged approximately $66 per transaction and
shopped one to two times per year.
WH|BM. In late fiscal 2004, the Company
launched a customer loyalty program for WH|BM called The
Black Book. Similar to the Passport Club, The Black Book
is designed to encourage repeat sales and customer loyalty.
Features of the club are similar to the Passport Club and
include discounts, special promotions, invitations to private
sales, and personalized phone calls regarding new WH|BM
merchandise. A WH|BM customer signs up to join The Black Book at
no cost, initially as a preliminary member. Once the
customer spends $300 over any time frame, the customer becomes a
permanent member entitled to a 5% lifetime discount,
birthday bonuses, double discount specials, advance sale
notices, free shipping and other benefits. As of
February 3, 2007, The Black Book already had approximately
0.6 million active permanent members and over
1.2 million active preliminary members. During fiscal 2006,
active permanent Black Book members accounted for 63% of overall
sales, while active preliminary members accounted for 31% of
overall sales. As a comparison to fiscal 2005, WH|BM had an
average of 1.3 million active permanent and preliminary
members.
High-Energy, Loyal Associates. The Company
believes that the dedication, high energy level and experience
of its management team, support staff, and store associates are
key to its continued growth and success and helps to encourage
personalized attention to the needs of its customers.
In selecting its associates at all levels of responsibility, the
Company looks for quality individuals with high energy levels
who project a positive outlook. The Company has found that such
associates perform most effectively for the Company in the
stores and at headquarters and contribute to a fun and exciting
shopping experience for its customers.
Sales associates are compensated with a base hourly wage but
also have opportunities to earn substantial incentive
compensation based on their individual sales. For the most part,
these incentives are based upon the dollar amount of sales to
individual customers, thereby encouraging sales of multiple
items and focusing the sales associate on each transaction.
Store managers receive a base hourly wage and are also eligible
to earn various incentive bonuses tied to individual sales and
storewide sales performance. Each store brand has separate
district and regional sales managers. The district and regional
sales managers receive base salaries and also have the
opportunity to earn monthly incentive compensation based upon
the sales performance of stores in their districts and regions,
as well as incentives, including, in some years, equity based
compensation such as restricted stock or stock options, based on
their districts or regions performance compared to
the overall sales performance of the respective store brand.
The Company also offers its store and field management
associates other recognition programs and the opportunity to
participate in its stock purchase and 401(k) programs.
Management believes these programs offer the Companys
store and field management associates opportunities to earn
total compensation at levels generally at, or above, the average
in the retail industry for comparable positions.
The Companys emphasis, where possible, on a promote
from within philosophy, combined with increases in the
number of new Company-owned stores, provides opportunities for
qualified associates to advance to higher positions in the
Company.
Additional Stores. Management believes the
ability to open additional stores will be a factor in the future
success of the Company. During fiscal 2006, the Company opened
145 net new Company-owned stores composed of 41 net
Chicos front-line stores, 3 Chicos outlet stores,
58 net WH|BM front-line stores, 8 WH|BM outlet stores, 37
Soma stores and a reduction of 2 Fitigues stores from the 12
originally acquired. During fiscal 2005, the Company opened
104 net new Company-owned stores and 2 new franchise stores
were opened for a total of 106 net new stores composed of
51 net Chicos front-line stores, 6 Chicos
outlet stores, 40 net WH|BM front-line stores, 4 net
WH|BM outlet stores and 5 Soma stores. In fiscal 2007, the
Company plans to open approximately
135-145 net
new stores, exclusive of the planned 10 Fitigues store closures
and the 13 acquired franchise stores.
7
As of March 19, 2007, in fiscal 2007, of the stores planned
for the fiscal year, the Company has opened 5 front-line
Chicos stores, 7 WH|BM front-line stores and 1 front-line
Soma store. During this time, the Company also closed 2 Soma
front-line stores. The Company has signed leases for several
additional new store locations, and the Company also is
currently engaged in negotiations for the leasing of numerous
additional sites. Of the approximately
135-145 net
new stores to be opened in fiscal 2007, the Company expects to
open approximately
31-35 stores
in the first quarter,
20-24 stores
in the second quarter,
63-67 stores
in the third quarter, and the balance in the fourth quarter.
In deciding whether to open a new store, the Company undertakes
an extensive analysis that includes the following: identifying
an appropriate geographic market; satisfying certain local
demographic requirements; evaluating the location of the
shopping area or mall and the site within the shopping area or
mall; assessing proposed lease terms; and evaluating the sales
volume necessary to achieve certain profitability criteria. Once
the Company takes occupancy, it usually takes from eight to
twelve weeks to open a store. After opening, Chicos and
WH|BM front-line stores have typically generated positive cash
flow within the first year of operation (after allocation of a
portion of home office administrative expense based on sales)
and have typically had a ten to eighteen month payback of all
initial capital and inventory costs. However, there can be no
assurance that new Chicos or WH|BM stores will achieve
operating results similar to those achieved in the past.
Store
Locations
The Companys stores are situated, for the most part, in
mid-to-larger
sized markets. In recent years, the Company has been opening
Chicos stores in smaller sized markets with encouraging
results. The Company intends to expand its opening of
Chicos stores in smaller sized markets as long as results
are meeting expectations. The Companys front-line stores
are located almost exclusively in upscale outdoor destination
shopping areas, high-end enclosed shopping malls and, to a
lesser degree, regional malls which offer high traffic of the
respective target customers of the brand. For all of its brands,
the Company seeks to locate the front-line stores where there
are other upscale specialty stores and, as to its mall
locations, where there are two or more
mid-to-high
end department stores as anchor tenants. Where possible, the
Company has historically opened the Soma stores adjacent to or
nearby an existing Chicos store. During fiscal 2007, the
Company will be reevaluating future Soma locations to possibly
begin opening Soma stores outside of where Chicos
locations exist. The Chicos and WH|BM outlet stores are,
for the most part, located in outlet centers, although the
Company is evaluating the possibility of opening new outlets in
value centers.
As of February 3, 2007, the Company-owned Chicos
front-line stores averaged 2,353 selling square feet, while the
Company-owned Chicos outlet stores averaged 2,823 selling
square feet. WH|BM front-line stores averaged 1,720 selling
square feet and WH|BM outlet stores averaged 1,839 selling
square feet. Soma stores averaged 2,036 selling square feet. The
Company seeks to open Chicos front-line stores with
approximately 3,000-3,500 selling square feet, to open Soma
front-line stores with approximately 1,100-2,300 selling square
feet and to open WH|BM front-line stores with approximately
2,200-3,000 selling square feet. However, in locations where the
Company has a desire to establish a front-line store for any
such brand but where the optimum store size or location is
unavailable, the Company will lease a front-line store with as
few as 1,200 selling square feet or as many as 4,500 selling
square feet. If the volume of business at one of its smaller
stores is sufficient, and there is no ability to expand the
existing store, the Company has chosen in the past to open
additional stores nearby, sometimes operating more than one
store in the same general shopping area. Non-selling space
within Company-owned stores generally amounts to
25-28% of
the gross leased space, and is not considered in the selling
square foot calculations.
8
The Companys current stores, as of March 19, 2007,
are located in the following jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WH|BM
|
|
|
|
|
|
|
|
|
Fitigues
|
|
|
|
|
|
|
|
|
|
Chicos
|
|
|
Chicos
|
|
|
Front-
|
|
|
WH|BM
|
|
|
|
|
|
Front-
|
|
|
Fitigues
|
|
|
|
|
|
|
Front-Line
|
|
|
Outlet
|
|
|
Line
|
|
|
Outlet
|
|
|
Soma
|
|
|
Line
|
|
|
Outlet
|
|
|
Total
|
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
California
|
|
|
62
|
|
|
|
4
|
|
|
|
34
|
|
|
|
1
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
Florida
|
|
|
52
|
|
|
|
4
|
|
|
|
26
|
|
|
|
2
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
88
|
|
Texas
|
|
|
45
|
|
|
|
3
|
|
|
|
22
|
|
|
|
1
|
|
|
|
12
|
|
|
|
2
|
|
|
|
|
|
|
|
85
|
|
Illinois
|
|
|
24
|
|
|
|
2
|
|
|
|
12
|
|
|
|
|
|
|
|
3
|
|
|
|
1
|
|
|
|
1
|
|
|
|
43
|
|
Georgia
|
|
|
18
|
|
|
|
1
|
|
|
|
12
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
New Jersey
|
|
|
21
|
|
|
|
|
|
|
|
9
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
New York
|
|
|
23
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Maryland
|
|
|
19
|
|
|
|
1
|
|
|
|
8
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
Pennsylvania
|
|
|
21
|
|
|
|
2
|
|
|
|
6
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
Ohio
|
|
|
17
|
|
|
|
1
|
|
|
|
9
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
North Carolina
|
|
|
16
|
|
|
|
1
|
|
|
|
7
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Arizona
|
|
|
12
|
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
24
|
|
Colorado
|
|
|
11
|
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Michigan
|
|
|
15
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Virginia
|
|
|
17
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Massachusetts
|
|
|
16
|
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Oregon
|
|
|
10
|
|
|
|
1
|
|
|
|
6
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Washington
|
|
|
11
|
|
|
|
1
|
|
|
|
6
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Minnesota
|
|
|
12
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
17
|
|
Missouri
|
|
|
11
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Connecticut
|
|
|
11
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Louisiana
|
|
|
10
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
South Carolina
|
|
|
11
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Tennessee
|
|
|
10
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Nevada
|
|
|
5
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Wisconsin
|
|
|
6
|
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Alabama
|
|
|
7
|
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Indiana
|
|
|
8
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Kentucky
|
|
|
7
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Arkansas
|
|
|
6
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Kansas
|
|
|
5
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
9
|
|
New Mexico
|
|
|
5
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Oklahoma
|
|
|
5
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Utah
|
|
|
4
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Iowa
|
|
|
4
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Nebraska
|
|
|
3
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Rhode Island
|
|
|
4
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Delaware
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
District of Columbia
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
U.S. Virgin Islands
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Hawaii
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Puerto Rico
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Idaho
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Mississippi
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Montana
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Maine
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
South Dakota
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Vermont
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
West Virginia
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Wyoming
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
559
|
|
|
|
34
|
|
|
|
261
|
|
|
|
16
|
|
|
|
51
|
|
|
|
8
|
|
|
|
1
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
In a typical new front-line Company store (including
Chicos, WH|BM, and Soma stores), the Companys
out-of-pocket
cost of leasehold improvements, fixtures, store equipment and
beginning inventory ranges from $600,000 to $900,000 (without
taking into account landlord construction allowances and other
concessions).
For each store concept, the Company utilizes third party
architectural and contracting firms with offices or affiliates
throughout the country, experienced in new store openings, to
facilitate the build-out and set up of store interiors rapidly,
including, where necessary, the flooring, furniture, fixturing,
lighting, equipment and initial inventory displays. The use of
these resources allows the Company to open a new store generally
within eight to twelve weeks after taking occupancy. The Company
primarily utilizes its own in-house teams for the initial
planning and design stages of the store build-outs and for
supervising the final stages of construction prior to opening,
and may, from time to time, contract with outside third parties
on an as needed basis.
The following table sets forth information concerning changes in
the number of Company-owned and franchise stores during the past
five fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(53 weeks)
|
|
|
Company-Owned Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at beginning of year*
|
|
|
300
|
|
|
|
366
|
|
|
|
545
|
|
|
|
645
|
|
|
|
749
|
|
Opened**
|
|
|
66
|
|
|
|
74
|
|
|
|
109
|
|
|
|
109
|
|
|
|
157
|
|
Acquired from franchisees
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Acquired pursuant to Fitigues
transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Acquired pursuant to The White
House transaction
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed
|
|
|
|
|
|
|
(2
|
)
|
|
|
(10
|
)
|
|
|
(5
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at end of year
|
|
|
366
|
|
|
|
545
|
|
|
|
645
|
|
|
|
749
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Stores***
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at beginning of year
|
|
|
11
|
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
|
|
14
|
|
Opened
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
Acquired by Company
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at end of year
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stores
|
|
|
378
|
|
|
|
557
|
|
|
|
657
|
|
|
|
763
|
|
|
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores by Brand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicos front-line
|
|
|
349
|
|
|
|
399
|
|
|
|
450
|
|
|
|
499
|
|
|
|
541
|
|
Chicos outlet
|
|
|
17
|
|
|
|
23
|
|
|
|
25
|
|
|
|
31
|
|
|
|
34
|
|
Chicos franchise***
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
|
|
14
|
|
|
|
13
|
|
WH|BM front-line
|
|
|
|
|
|
|
112
|
|
|
|
156
|
|
|
|
196
|
|
|
|
254
|
|
WH|BM outlet
|
|
|
|
|
|
|
2
|
|
|
|
4
|
|
|
|
8
|
|
|
|
16
|
|
Soma
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
15
|
|
|
|
52
|
|
Fitigues front-line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Fitigues outlet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Pazo
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores at end of
year
|
|
|
378
|
|
|
|
557
|
|
|
|
657
|
|
|
|
763
|
|
|
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Not retroactively restated to include the WH|BM stores prior to
September 5, 2003 or Fitigues stores prior to
January 31, 2006. |
|
** |
|
Not retroactively restated to include the growth in the number
of WH|BM stores prior to September 5, 2003 or Fitigues
stores prior to January 31, 2006. Also, does not include
stores that opened as relocations, expansions or conversions of
previously existing stores within the same general market area
(approximately five miles). |
|
*** |
|
All 13 remaining franchise stores were reacquired by the Company
in the first quarter of fiscal 2007. |
10
Outlet
Stores
As of March 19, 2007, the Company operated 34 Chicos
outlet stores, 16 WH|BM outlet stores and 1 Fitigues outlet
store. The Companys outlet stores carry slower-selling
items removed from the front-line stores, remaining pieces of
better-selling items replaced by new shipments of merchandise to
front-line stores, some seconds of certain merchandise, and its
Additions by Chicos label. The Additions
by Chicos label has grown to represent approximately
25% of the outlet sales during fiscal 2006, and the Company
currently anticipates that the Additions by
Chicos label could account for up to 30% of outlet
sales in fiscal 2007. The Companys outlet stores act as a
vehicle for clearing certain marked down merchandise while
helping front-line stores to maintain a more limited markdown
policy. Prices at the Companys outlet stores generally
range from 30% to 70% below regular retail prices at front-line
stores. Although service is also important at the Companys
outlet stores, there is somewhat less emphasis on personalized
customer service in the outlet stores. In fiscal 2006, sales
from the Companys outlet stores represented approximately
4.6% of the Companys net sales, only slightly higher than
historical percentages. Historically, the Companys outlet
stores have not been intended to be profit centers, and the
Company is constantly re-evaluating its approach to outlet
stores to improve the return on clearance of such goods. Soma
closeout merchandise is currently sold through the Chicos
outlet stores, although the first Soma outlet store is planned
to open in April 2007.
The Companys outlet stores are generally larger than
front-line stores, averaging 2,508 selling square feet at
February 3, 2007. In fiscal 2006, the Company opened 3 new
Chicos outlet stores and 8 new WH|BM outlet stores.
Currently, the Company is planning to open 2-4 new Chicos
outlet stores, 4-6 new WH|BM outlet stores and 1 new Soma outlet
store in fiscal 2007.
Store
Operations
Company-owned Chicos and Soma stores with an average sales
volume typically employ a manager, two assistant managers, and
numerous sales associates who are either full-time or part-time
associates. For higher volume Chicos stores, the stores
typically could also employ an operations manager, a visual
manager or an additional assistant manager as well as a
dedicated lead cashier, stock coordinator and fitting room
assistant. The WH|BM stores historically have employed a manager
and a slightly smaller support staff of associates, in part
because of the smaller average size of stores and smaller
average revenue per store. In an effort to further enhance
customer service and drive sales in appropriate locations,
staffing was increased somewhat at WH|BM stores during fiscal
2004. In addition, at newer WH|BM stores, which are generally
larger in size, the Company will typically employ a staff
comparable in size to that of a Chicos store. During the
peak selling seasons, both Company-owned Chicos stores and
WH|BM stores generally hire additional sales associates.
Many store support functions, such as purchasing and accounting,
are handled by the Companys corporate headquarters. Store
managers at Company-owned stores, however, are responsible for
managing the stores
day-to-day
business and driving sales in the stores. In order to
effectively accomplish these tasks, store managers are
encouraged to be present on the sales floor whenever possible
during business hours. This allocation of responsibility allows
store managers more time to focus on the actual management of
the store, including the recruitment, training, and retention of
store associates, and compliance with store operating policies
and procedures. Store managers also manage store sales through
the effective
day-to-day
management of the sales force, focusing on customer service, and
implementing in-store and local community promotional and
outreach programs.
The Company has established formalized training programs that
are intended to reinforce and enhance the personalized customer
service offered by all associates as well as increase their
merchandise knowledge. The comprehensive training programs
include a Most Amazing Personal Services (M.A.P.S.)
module and a Most Amazing Register System (M.A.R.S.)
module, among others, which the Company believes will help
assure that sales associates better understand the product and
improve the level of service provided to its customers.
The Company currently supervises its store operations through
its Chief Stores Officer, its Senior Vice President
Chicos Stores, its Vice President Store
Operations, its Vice President WH|BM Stores, its
Director of Sales Soma, territorial Vice Presidents,
Regional Sales Managers, and numerous District Sales Managers.
The Senior Vice President Chicos Stores, the
Vice President WH|BM Stores, and the Director of
Sales Soma, have direct supervision responsibility
of their brand specific territorial Vice Presidents or Regional
11
Sales Managers, who in turn have direct supervision
responsibility of their respective brand specific either
Regional Sales Managers or District Sales Managers. Each
District Sales Manager supervises multiple store locations
within their respective brand and has primary responsibility for
assisting individual store managers in meeting established sales
goals, and carrying out merchandise presentation, staffing,
training and expense control programs established by
headquarters. During the first half of fiscal 2007, the Company
intends to transition the Vice President WH|BM
Stores from reporting to the Chief Stores Officer to reporting
to the Brand President-WH|BM.
Management
Information Systems
The Companys current principal management information
systems are run on numerous Windows based Applications Servers
and two IBM iSeries platforms located at the home office in
Fort Myers, Florida and the Winder, Georgia distribution
center, which provide a full range of retail, catalog, Internet,
financial and merchandising information systems, including
purchasing, inventory distribution and control, sales reporting,
accounting, warehousing and merchandise management principally
using SAP, CRS Retail Systems, Lawson, Manhattan Associates,
NSB, Momentis and Mozart by Commercialware.
All Company-owned stores utilize essentially the same point of
sale cash register computers, which are polled nightly to
collect SKU-level sales data, Passport and Black Book
information, and inventory receipt and transfer information for
each item of merchandise, including information by style, color
and size. Management evaluates this information, together with
its weekly reports on merchandise shipments to the stores, to
analyze profitability, formulate and implement company-wide
merchandise pricing decisions, assist management in the
scheduling and compensation of associates (including the
determination of incentives earned) and, most importantly, to
implement merchandising decisions regarding needs for additional
merchandise, allocation of merchandise, future design and
manufacturing needs and movement of merchandise from front-line
stores to outlet stores. The Company operates a cash register
system using a Windows platform in a wide area network and using
the CRS Retail Systems software used by many other retailers.
The Company is committed to an ongoing review and improvement of
its information systems to enable the Company to obtain useful
information on a timely basis and to maintain effective
financial and operational controls. This review includes testing
of new products and systems to assure that the Company is able
to take advantage of technological developments. In May 2006,
the Company announced that it will work with SAP, a third party
vendor, to implement an enterprise resource planning system
(ERP) to manage its retail stores, 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 successfully
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 and 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 two brands beginning as early as the
end of fiscal 2007 or the first half of fiscal 2008. 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.
Merchandise
Distribution
Currently, distribution for all brands, is handled through the
Companys distribution center in Winder, Georgia. New
merchandise is generally received daily at the distribution
center. Merchandise from United States vendors is trucked to
Georgia or arrives by air, as the circumstances require. Most of
the merchandise from foreign vendors arrives in this country via
air (and increasingly by sea) at various points of entry in
Georgia, Illinois, California, or Florida and is transported via
truck to the distribution center. After arrival at the
distribution center, merchandise is sorted and packaged for
shipment to individual stores. Merchandise is generally
pre-ticketed with price and all other tags at the time of
manufacture.
The Companys current distribution center is highly
automated, utilizing sophisticated pick to light
material handling equipment. Using this system, the turnaround
time between distribution center receipt of merchandise and
arrival at stores generally averages approximately 24 to
48 hours for its nearest stores and two days to a week for
its
12
other stores. In an attempt to ensure a steady flow of new
merchandise, the Company ships merchandise continuously to its
stores. The Company primarily uses the common carrier, Federal
Express (air and ground), for shipments to its stores.
The Company believes that the capacity of its distribution
center in Georgia should be sufficient to service the
Companys needs for approximately two years of future
growth (including without limitation the growth of Chicos,
WH|BM, and Soma), without requiring building expansion under its
existing county commitment. In fiscal 2005, the Company
completed the purchase of a facility adjacent to its Winder
campus distribution center to be used for all direct to consumer
fulfillment (i.e., catalog and Internet) to address the
continued planned growth in the volume of direct to consumer
sales and the expanded number of direct to consumer items that
are being made available across all brands. With respect to
addressing the needs for additional distribution center space,
the Company is evaluating its requirements and the appropriate
timing to make additional distribution center capacity
available. The Companys present goal is to begin design
work in fiscal 2007. It is currently anticipated that the
Company will require additional distribution space late in
fiscal 2008 or early in fiscal 2009 and, initially, the Company
is focusing its evaluation on the expansion of its current
distribution center on existing adjacent land that is already
owned by the Company and preliminarily approved by Barrow County
for such an expansion. In connection with its ongoing evaluation
of the strategic long-term distribution needs of its brands, the
Company may also explore adding a separate distribution center
for its Soma brand.
Merchandise
Design and Product Development
Chicos, WH|BM, and Soma private branded merchandise is
developed through the coordinated efforts of its respective
merchandising, creative and production teams working with its
independent vendors. Style, pattern, color and fabric for
individual items of the Companys private branded clothing
are developed based upon future fashion trends that will appeal
to its target customer, anticipated future sales and historical
sales data.
Currently, Chicos product development, merchandising,
planning and allocation, and production and sourcing departments
report directly to Michele Cloutier, Executive Vice
President Chief Merchandising Officer
Chicos. Ms. Cloutier reports to Scott A. Edmonds,
President and Chief Executive Officer. Ms. Cloutier
currently has the Senior Vice President Product
Development, the Senior Vice President General
Merchandise Manager, the Senior Vice President
Planning and Allocation, the Vice President
Production and Quality, and the Vice President
Merchandise Controller reporting directly to her. Prior to the
promotion of Ms. Cloutier, the product development,
merchandising, planning and allocation, and production and
sourcing departments reported to Patricia Murphy Kerstein,
Executive Vice President Chief Merchandising
Officer, who stepped down from her Chief Merchandising Officer
responsibilities on March 6, 2007, but continues to serve
as an Executive Vice President for the Chicos brand.
WH|BMs creative, product development, merchandising,
planning and allocation, and production and quality teams are
headed up by Patricia Darrow-Smith, Brand President
White House | Black Market. Ms. Darrow-Smith currently has
the WH|BM Senior Vice President Operations, the
WH|BM Vice President General Merchandise Manager,
and several directors (including a Senior Director
Design, a Senior Director Creative and two
Directors General Merchandise Managers reporting
directly to her. Ms. Darrow-Smith also reports directly to
Mr. Edmonds.
Somas product development, merchandising, planning and
allocation and production and sourcing teams are headed up by
the Senior Vice President General Merchandise
Manager Soma, who oversees the Vice
President Planning and Allocation and several
directors (including the Director of Merchandising, the Director
of Production and Sourcing and the Director of Operations) and
who reports directly to Charles L. Nesbit, Jr., Executive
Vice President Chief Operating Officer.
Mr. Nesbit, who has extensive previous managerial
experience within the intimate apparel industry, reports
directly to Mr. Edmonds.
The creative and product development teams for Chicos,
WH|BM and Soma develop the in-house designs and design
modifications with input from its merchandising teams as well as
its independent vendors. In addition to selecting distinctive
patterns and colors, the Chicos, WH|BM and Soma product
development teams and the Companys merchandising teams are
particularly attentive to the design and specification of
clothing style,
13
construction, trim and fabric treatment. The Company believes
this attention to design detail assists in distinguishing its
clothing and strengthening the customers perception of
quality and value.
Although the Company develops merchandise for specific seasons,
the product development efforts, are a constant process which
result in the continual introduction of new merchandise in the
Companys front-line stores. This continual process
supports the Companys merchandising and inventory
strategy, and serves to reduce, somewhat, the Companys
exposure to fashion risk associated with any group of styles or
trends.
Chicos and Soma have historically purchased most of their
clothing and accessories from companies that manufacture such
merchandise in foreign countries except for the cut and
sew operations described below. WH|BM has historically
purchased a significant amount of its clothing and accessories
from companies that arrange for such items to be manufactured in
foreign countries. The Company does business with all of its
foreign vendors and importers in United States currency, and
purchases may be supported through letters of credit.
Producers of the Companys clothing utilize the designs and
specifications provided by the Company most often through its
CAD systems. Except for certain U.S. based cut and
sew operations, the Company generally does not purchase
and supply the raw materials for its clothing, leaving the
responsibility for purchasing raw materials with the
manufacturers. The Company also buys fabric and provides such
fabric to domestic cut and sew manufacturers in the
United States who make the specified Chicos brand designs
and styles. The Company anticipates it is likely to continue
this practice in the future.
Currently, Chicos and Soma contract primarily with between
75 to 95 apparel and foundation vendors and 30 to 50 accessory
vendors, as well as several fabric suppliers and several
cut and sew vendors for its Chicos brand
merchandise. Because of certain lower sourcing costs associated
with the Companys vendors in various parts of the world
and certain other long term uncertainties presented by such
vendor relationships, the Company may continue to redirect a
portion of its sourcing activities towards new vendors in China,
India and other areas.
The Company also currently contracts with approximately 166
different vendors for its WH|BM merchandise, but relies on 21
core vendors who collectively account for approximately 64% of
the total WH|BM merchandise purchases. For the most part,
however, the WH|BM team is not utilizing vendors that are
currently supplying the Chicos brand.
Chicos and Soma. During fiscal
2006, China sources accounted for approximately 51% of the
Companys purchases at retail for their Chicos and
Soma merchandise, United States sources (including fabric and
cut and sew vendors) accounted for approximately 15%
of their merchandise, India sources accounted for approximately
13% of overall purchases, Peru sources accounted for
approximately 6% of overall purchases, Guatemala sources
accounted for approximately 5% of overall purchases and Turkey
sources accounted for approximately 4% of overall purchases.
Taiwan, Phillipines, and other smaller sources, in the
aggregate, amounted to approximately 6% of overall purchases. In
fiscal 2007, the Company expects sourcing from China for
Chicos and Soma merchandise is likely to increase slightly
as a percentage of overall purchases, while vendors in India can
be expected to continue to provide approximately 12% to 14% of
total purchases. Purchases from vendors in Peru are also likely
to remain in the 5% to 7% range of total purchases, while United
States vendors are expected to decrease as a percentage of
overall purchases.
WH|BM. During fiscal 2006, China
sources accounted for approximately 69% of the Companys
purchases at retail for their WH|BM merchandise, United States
sources accounted for approximately 25% of their merchandise and
Canada, Brazil, El Salvador, and other smaller sources, in the
aggregate, accounted for approximately 6% of overall purchases.
Sourcing through foreign vendors increased considerably during
fiscal 2006 as WH|BM expanded its utilization of sourcing
alternatives provided by the Company. The Company expects this
trend to continue over the next several years, although on a
more gradual pace.
Although there were no manufacturers that produced more than 10%
of the Companys merchandise during the last fiscal year,
the Company has contracted with one intermediary vendor that
accounted for approximately 16% of the purchases for the
Chicos brand (including all fabric and labor) during the
last fiscal year through separate subcontracts with several
cut and sew factories in the United States and
China. With respect to purchases made through this intermediary,
the Company, for the most part, purchases the necessary
specialized cloth and then coordinates with this intermediary
who arranges for various independent United States and Chinese
cut and sew
14
manufacturers to make the specified designs and styles. Although
the Company believes that its relationship with this particular
intermediary is good, there can be no assurance that this
relationship can be maintained in the future or that the
intermediary will continue to be available to coordinate and
facilitate production and supply of merchandise. If there should
be any significant disruption in the supply of merchandise
through this intermediary in particular, management believes
that it can successfully implement its contingency plans so as
to allow it to continue to secure the required volume of
product. Nevertheless, there is some potential that any such
disruption in supply could have a short-term material adverse
impact, and possibly even a longer-term material adverse impact,
on the Companys operations.
As with most apparel importers, the Company has infrequently
experienced certain difficulties with the quality and timeliness
of delivery of merchandise. Although the Company has been
sensitive to quality control and has taken certain steps to
better control the quality of merchandise, there can be no
assurance that the Company will not experience problems in the
future with matters such as quality or timeliness of delivery.
The Company has no material long-term or exclusive contracts
with any apparel or accessory manufacturer or supplier and
competes for production facilities with other companies offering
clothing and accessories utilizing similar manufacturing
processes. Although the Company believes that its relationships
with its existing vendors are good, there can be no assurance
that these relationships can be maintained in the future. If
there should be any significant disruption in the delivery of
merchandise from one or more of its current key vendors,
management believes there would likely be a material adverse
impact on the Companys operations. Also, the Company is in
the process of developing relationships with several new vendors
in various countries. Although the Company has investigated the
past performance of these vendors and has inspected factories
and sampled merchandise, there can be no assurance that the
Company will not experience delays or other problems with these
new sources of supply. New relationships often present a number
of uncertainties, including payment terms, cost of
manufacturing, adequacy of manufacturing capacity, quality
control, timeliness of delivery and possible limitations imposed
by trade restrictions.
Imports
and Import Restrictions
Although the Company utilizes United States manufacturers to
manufacture a portion of its clothing, the Company continues to
shift more and more of its manufacturing of clothing to
manufacturers located outside the United States, and the Company
expects this trend may continue, particularly for WH|BM. As a
result, the Companys business has been and will remain
subject to the various risks of doing business abroad and to the
imposition of United States import restrictions and customs
duties.
Textile duties represent a significant portion of the total
duties collected by the United States Department of Homeland
Security through its Customs and Border Protection division
(CBP). In addition, due to the re-imposition of
import quotas relating to China, which is described below, and
efforts to circumvent those quotas, CBP has announced that it is
increasing its enforcement of textile import regulations. As a
result, in the ordinary course of its business, the
Companys imports may from time to time be subject to
investigation by CBP, and the Company may be obligated to pay
tariffs, duties and other charges.
The Company currently imports products primarily from China,
India, Peru, Guatemala, and Turkey, all of which are currently
accorded normal trade relations status (NTR),
formerly known as most favored nation status, by the United
States. The products from all countries that have been given NTR
status are subject to the same tariffs when they enter the
United States. If the NTR status of any of these countries were
to be lost and the merchandise purchased by the Company were
then to enter the United States without the benefit of NTR
treatment, or were to enter the United States subject to
retaliatory tariffs, the merchandise would be subject to
significantly higher duty rates. Increased duties, whether as a
result of a change in NTR status or any overall change in
foreign trade policy, could have a material adverse effect on
the cost and supply of merchandise from these countries.
The NTR status for China had in the past been subject to an
annual review, and this annual review had generated considerable
debate. In October 2000, then-President Clinton signed
legislation designed to eliminate the need for this annual
review and establish permanent NTR status between the United
States and China, effective if and when China was admitted into
the World Trade Organization (WTO). In December
2001, China became a member of the WTO and was granted permanent
NTR status by the United States. However, as a condition of
15
Chinas accession to the WTO, other members of the WTO are
allowed to request safeguard restraints on imports of textiles
from China when a member believes that imports from China are
threatening to impede the orderly development of the textile
trade. The United States textile industry has been successful in
lobbying for such safeguard restraints, and safeguard restraints
have been negotiated between China and the United States, the
impact of which is discussed below.
Although the Company expects NTR status to continue for the
countries where its principal vendors are located, the Company
cannot predict whether the United States government will act to
remove NTR status for any of the countries or take other actions
that could impact the tariff treatment on goods coming from any
of the countries where its principal vendors are located. As but
one example, there continue to be legislative initiatives in the
United States Congress under which additional tariffs would be
imposed on Chinese goods, including apparel items, unless China
takes appropriate action to counteract what the United States
perceives to be an artificial undervaluing of the Chinese
currency. In addition, there is even a legislation initiative to
withdraw Chinas NTR status. However, it remains uncertain
whether the Congress will consider such legislation in the near
future, and, if so, whether any such legislation would be able
to garner sufficient support to be enacted, or to what extent
any such legislation, if enacted, would affect the
Companys business.
For these and other reasons expressed below, the ability to
continue to conduct business with vendors located outside of the
United States, and particularly those in China, is subject to
political uncertainties, the financial impact of which the
Company is unable to estimate. To the extent any of the
countries in which the Companys vendors are located, and
in particular, China, may have its exports or transaction of
business with U.S. persons restricted by political action,
the cost of imports from those countries could increase
significantly
and/or the
ability to import goods from those countries may be materially
impaired. In such an event, there could be an adverse effect on
the Company until alternative arrangements for the manufacture
of its products could be obtained on appropriate and favorable
terms.
The import of the Companys clothing and some of its
accessories also had been subject to constraints imposed by
bilateral textile agreements between the United States and a
number of foreign jurisdictions. These agreements had imposed
quotas that limited the amount of certain categories of clothing
that could be imported from these countries into the United
States.
In 1994, the member-countries of the International Trade
Organization completed the Uruguay Round of trade negotiations
of the General Agreement on Tariffs and Trade and the Agreement
was approved by the United States Congress. This pact, as it
applied to textiles, was subsequently known as the WTO Agreement
on Textiles and Clothing (the ATC), and was
implemented on January 1, 1995. The ATC imposed a series of
quotas on imports of textiles for a period of 10 years. The
ATC expired, as scheduled, effective as of January 1, 2005,
and all special textile quotas provided for under the ATC were
eliminated. In early 2005, textile exports from China to the
United States increased dramatically, and the United States
successfully used the safeguard procedures provided under
Chinas accession agreement to the WTO to negotiate new
quotas on textile imports from China through a Memorandum of
Understanding, which is discussed in the next paragraph.
On November 8, 2005, the United States and China executed
the Memorandum of Understanding Between the Governments of the
United States of America and the Peoples Republic of China
Concerning Trade in Textile and Apparel Products (the
MOU) pursuant to which the U.S. and China agreed to
restrain levels for certain textile products produced or
manufactured in China and exported to the United States between
January 1, 2006 and December 31, 2008. The Company
believes that the MOU had limited negative impact on its
financial results and operations; however, the Company cannot
predict how the MOU will affect its financial results and
operations over the next two years or whether there might be
other arrangements added in the future which impose other types
of restrictions on imports of apparel and related accessories.
In the event of any expanded or other significant protectionist
trade actions that materially impact any of its foreign
manufacturers, in particular those in China, the Company will
evaluate alternative sourcing options and will work to mitigate
any significant business risks. The Company believes that its
principal competitors are subject to similar risks regarding any
such potential trade measures.
The Omnibus Trade and Competitiveness Act of 1988 added a new
provision to the Trade Act of 1974 dealing with intellectual
property rights. This provision, which is commonly referred to
as Special 301 and which remains
16
effective even following the expiration of the ATC, directed the
United States Trade Representative (the USTR) to
designate those countries that deny adequate and effective
intellectual property rights or fair and equitable market access
to United States firms that rely on intellectual property. From
the countries designated, the USTR is to identify Priority
Foreign Countries those where the lack of intellectual
property rights protection is most egregious and has the
greatest adverse impact on United States products. The USTR is
to identify and investigate as Priority Foreign Countries only
those that have not entered into good faith negotiations or made
significant progress in protecting intellectual property. Where
such an investigation does not lead to a satisfactory resolution
of such practices, through consultations or otherwise, the USTR
is authorized to take retaliatory action, including the
imposition of retaliatory tariffs and import restraints on goods
from the Priority Foreign Country.
In addition to the list of Priority Foreign Countries, the USTR
has created a two-tier watch list that requires the
country so listed to make progress on intellectual property
protection reform or risk designation as a Priority Foreign
Country. Countries named on the first tier of the watch list,
known as the Priority Watch List, are requested to
make progress in certain areas by specific dates. Countries
named to the second tier, known as the Watch List,
are asked to improve their intellectual property protection
efforts.
As of March 16, 2007, of the countries where the
Companys existing or planned key vendors have
manufacturing operations or suppliers, none was a Priority
Foreign Country. China, India and Turkey were on the Priority
Watch List and Peru and Guatemala were on the Watch List. China
was elevated to the Priority Watch List in 2005, after a special
out-of-cycle
review under Special 301, which is discussed below.
In early 2005, a special
out-of-cycle
review under Special 301 was initiated with respect to China
because of concerns regarding weaknesses in Chinas
protection of intellectual property rights. At the conclusion of
that
out-of-cycle
review, significant concerns were expressed regarding
Chinas protection of intellectual property rights, and
China was moved from the Watch List to the Priority Watch List.
In addition, the United States continues to evaluate whether to
file a WTO dispute settlement case against China and whether to
designate China as a Priority Foreign Country under Special 301.
Furthermore, China continues to be monitored under a related
provision of the Trade Act of 1974, section 306. Under
either of these provisions, the USTR will be in a position to
impose sanctions if China fails to adequately enforce existing
bilateral agreements concerning intellectual property rights,
and the USTRs office has identified weak intellectual
property rights protection and enforcement in China as one of
its top priorities.
Of countries where the Companys existing or planned key
vendors have manufacturing operations, India, Peru, and Turkey
enjoy Designated Beneficiary Developing Country
(DBDC) status under the Generalized System of
Preferences (GSP), a special status that is granted
by the United States to developing nations. DBDC status allows
certain products imported from those countries to enter the
United States under a reduced rate of duty. In order to maintain
that status, the countries are required to meet several
criteria. The GSP was renewed in 2006 through December 31,
2008.
The Company cannot predict whether any of the foreign countries
in which its clothing and accessories are currently manufactured
or any of the countries in which the Companys clothing and
accessories may be manufactured in the future will be subject to
these or other import restrictions by the United States
government, including the likelihood, type or effect of any
trade retaliation. Trade restrictions, including increased
tariffs or more restrictive quotas, or both, applicable to
apparel items could affect the importation of apparel generally
and, in that event, could increase the cost or reduce the supply
of apparel available to the Company and adversely affect the
Companys business, financial condition and results of
operations. The Companys merchandise flow may also be
adversely affected by political, social and infrastructure
instability in any of the countries in which its goods are
manufactured, politically-motivated trade sanctions or other
restrictions by either the United States or the foreign country
in which the vendor is located, significant fluctuation in the
value of the U.S. dollar against applicable foreign
currencies and restrictions on the transfer of funds.
17
Advertising
and Promotion
The marketing program for the Company currently consists of the
following integrated components:
|
|
|
|
|
The Companys loyalty programs the Passport
Club and the Black Book (see Customer Loyalty
discussion within the Business Strategies section)
|
|
|
|
Direct Marketing efforts: Direct Mail and Email
|
|
|
|
National print and TV advertising
|
|
|
|
Internet and direct phone sales
|
|
|
|
Community outreach programs
|
The Companys Direct Marketing efforts have been successful
in driving traffic to stores and the direct to consumer
channels. Most of the active Passport and Black Book customers
maintained in the database currently receive an average of one
mailer per month.
The success of loyalty programs is dependent on the number of
active customers the programs support. Active
customers are those who have purchased at one of the
Companys brands within the preceding 12 months.
Chicos Passport Club had approximately 3.2 million
active customers at the end of fiscal 2006 versus approximately
2.9 million at the end of fiscal 2005. WH|BMs Black
Book showed significant growth in the number of active customers
from 2005 to 2006, increasing to approximately 1.8 million
at the end of fiscal 2006 from approximately 1.3 million at
the end of fiscal 2005. Soma does not have its own loyalty
program, but Soma customers can join the Chicos Passport
Club. The active customer base for Soma is growing rapidly year
over year.
The Company experienced direct to consumer (internet and
telephone) sales of approximately $53.5 million in fiscal
2006, which represented a 48% increase over the prior period. In
addition, the Companys contact center managed over a
million phone calls in fiscal 2006. The Company anticipates
mailers, national print and television advertisements, and web
marketing will be part of a marketing budget that will be
between 3.7% and 4.0% of net sales during fiscal 2007, versus
4.0% of net sales in fiscal 2006.
The Company also places additional emphasis on what it refers to
as its outreach programs. These outreach programs
include, among other events, VIP parties, fashion shows and
wardrobing parties that are organized and hosted by its
publicity managers, event coordinators, and by store managers
and sales associates. As part of these outreach programs, the
Company also encourages its managers and sales associates to
become involved in community projects. The Company believes that
these programs are effective marketing vehicles in providing
introductions to new customers and it has developed programs to
help its store level associates use these programs.
Competition
The womens retail apparel business is highly competitive
and has become even more competitive in the past several years.
The Companys stores compete with a broad range of national
and regional retail chains, including other womens apparel
stores, department stores, and specialty stores, as well as
local retailers in the areas served by the Companys stores
and mail order and internet merchandisers, all of which sell
merchandise generally similar to that offered in its stores.
Even discount department stores carry some merchandise which is
designed to compete for some of the consumers that historically
have been the target customers for the Companys various
brands. The perceived growth opportunities within the
womens apparel market has encouraged the entry of new
competitors, including a few large, well known and established
specialty retailers, as well as increased competition from
existing competitors. Certain of these competitors have greater
name recognition as well as greater financial, marketing and
other resources.
The retailers that are believed to most directly compete with
the Chicos brand are the
mid-to-high
end department stores including Nordstroms, Dillards,
Neiman-Marcus, Bloomingdales, Macys and Saks Fifth
Avenue and specialty stores including The Gap, Talbots, J. Jill,
The Limited, Banana Republic, Christopher & Banks, and
Coldwater Creek, as well as local boutique retailers. The
retailers that are believed to most directly compete with the
WH|BM brand are the same
mid-to-high
end department stores named above and specialty stores which
include Ann Taylor, Ann Taylor Loft, Banana Republic, Cache,
Anthropologie, bebe, and Arden B. as well as
18
local boutiques. Although management believes there is currently
limited direct competition for Soma merchandise largely because
of the distinctive nature of the Companys merchandise
designed with the customer aged 35 and over in mind, the
retailers that are believed to most directly compete with Soma
stores are the same
mid-to-high
end department stores and certain of the specialty stores named
above, local boutiques, and, to a more limited extent,
Victorias Secret. The number of competitors and the level
of competition facing the Companys stores vary by the
specific local market area served by each brands stores.
The following are several factors that the Company considers
important in competing successfully in the retail apparel
industry: newness and innovation of product styles, breadth of
selection in colors, sizes and styles of merchandise; product
procurement and pricing; ability to address customer preferences
and be in line with fashion trends; reputation; quality of
merchandise; store design and location; visual presentation;
effective use of customer mailing lists and frequent shopper
programs, advertising, and customer service. The Company
believes that its emphasis on personalized service and customer
assistance, the distinctive designs of its clothing and
accessories, which provide a perceived high value, their
exclusive availability at its stores, the locations of its
stores, the effectiveness of the frequent shopper programs and
its other marketing programs, are the various means by which the
Company competes. Although the Company believes that it is able
to compete favorably with other merchandisers, including
department stores and specialty retailers, with respect to each
of these factors, the Company believes it competes mainly on the
basis of its superior customer service and distinctive
merchandise selection.
Along with certain retail segment factors noted above, other key
competitive factors for the catalog and Internet operations
include the success or effectiveness of customer mailing lists,
response rates, catalog presentation, merchandise delivery and
web site design and availability. The
direct-to-consumer
operations compete against numerous catalogs and web sites,
which may have greater circulation and web traffic.
Employees
As of February 3, 2007, the Company employed approximately
12,500 persons, approximately 42% of whom were full-time
associates and approximately 58% of whom were part-time
associates. The number of part-time associates fluctuates during
peak selling periods. As of the above date, 90% of the
Companys associates worked in its front-line and outlet
stores and in direct field supervision, 2% worked in the
Companys distribution center in Winder, Georgia and 8%
worked in its corporate headquarters and support functions
located in Fort Myers, Florida and several other satellite
locations.
The Company has no collective bargaining agreements covering any
of its associates, has never experienced any material labor
disruption and is unaware of any efforts or plans to organize
its associates. The Company contributes most of the cost of
medical, dental and vision coverage for eligible associates and
also maintains a 401(k), stock incentive and stock purchase
plan. All associates also receive substantial discounts on
Company merchandise. The Company considers relations with its
associates to be good.
Trademarks
and Service Marks
The Company, through its subsidiaries, is the owner of certain
registered and common law trademarks and service marks
(collectively referred to as Marks) and has a number
of trademark and service mark applications pending.
The Companys Marks registered in the United States
include: CHICOS, CHICOS PASSPORT, M.A.P.S., MARKET
BY CHICOS, MOST AMAZING PERSONAL SERVICE, NO TUMMY,
PASSPORT, BLACK MARKET, THE WHITE HOUSE, WHITE HOUSE BLACK
MARKET, FASHION FOR BOTH SIDES OF YOU, FITIGUES and LEMONADE FOR
LIFE. The Company has registered or is seeking to register a
number of these Marks in certain foreign countries as well.
In the opinion of management, the Companys rights in the
Marks are important to the Companys business. Accordingly,
the Company intends to maintain its Marks and the related
registrations and applications. The Company is not aware of any
claims of infringement or other challenges to its rights to use
any registered Marks in the United States or any other
jurisdiction in which the Marks have been registered.
19
Available
Information
The Companys website, which includes a link to its
investor relations page, is located at www.chicos.com.
Through this website, the Company makes available free of charge
all of its Securities and Exchange Commission (SEC)
filings including its annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports, as soon as reasonably
practicable after those reports are electronically filed with
the SEC. The Company also maintains various other data on this
website, including its recent press releases, corporate
governance information, beneficial ownership reports,
institutional slide show presentations, quarterly and
institutional conference calls and other quarterly financial
data, e.g., historical store square footage, monthly sales
tables, etc. The Company also operates principally selling
websites at www.chicos.com,
www.whitehouseblackmarket.com and at www.soma.com.
The Company has a Code of Ethics, which is applicable to all
associates of the Company, including the principal executive
officer, the principal financial officer, the principal
accounting officer and the Board of Directors. The Company
intends to post amendments to or waivers from its Code of Ethics
(to the extent applicable to the Companys chief executive
officer, principal financial officer, principal accounting
officer or its Directors) at this location on its website.
Copies of the charters of each of the Companys Audit
Committee, Compensation and Benefits Committee and Corporate
Governance and Nominating Committee as well as the
Companys Corporate Governance Guidelines, Code of Ethics
and Stock Ownership Guidelines are available on the website in
the Investor Relations section under Our Company or in print
upon written request by any shareholder.
The Company has included the CEO and CFO certifications
regarding its public disclosure required by Section 302 of
the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to
this report on
Form 10-K.
Additionally, the Company filed with the New York Stock Exchange
(NYSE) the CEOs certification regarding the
Companys compliance with the NYSEs Corporate
Governance Listing Standards (Listing Standards)
pursuant to Section 303A.12(a) of the Listing Standards,
which was dated July 19, 2006, and indicated that the CEO
was not aware of any violations of the Listing Standards by the
Company.
The Company makes forward-looking statements in its filings with
the Securities and Exchange Commission and in other oral or
written communications. Forward-looking statements involve risks
and uncertainties that could cause actual results to be
materially different from those indicated (both favorably and
unfavorably). These risks and uncertainties include (but are not
limited to) the risks described below. The Company undertakes no
obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise.
Effective
Management of Growth Strategy
The Companys continued growth depends on its ability to
open and operate stores successfully and to manage the
Companys planned expansion. During fiscal 2007, the
Company plans to open approximately
135-145 net
new stores (excluding the impact of the 10 Fitigues stores
planned closures or the 13 acquired franchise stores), of which
55-60 are
expected to be Chicos stores,
55-60 are
expected to be WH|BM stores and
20-25 are
expected to be Soma stores. The Companys planned square
footage expansion and number of new stores is dependent upon a
number of factors, including locating suitable store sites,
negotiating favorable lease terms, having the infrastructure to
address the increased new store sizes and targets, sourcing
sufficient levels of inventory, hiring and training qualified
management level and other associates, and integrating new
stores into its existing operations. There can be no assurance
that the Company will achieve its planned expansion or that such
expansion will be profitable or that the Company will be able to
manage its growth effectively.
Fluctuations
in Comparable Store Sales Results
The Companys comparable store sales results have
fluctuated in the past on a daily, weekly, monthly, quarterly
and annual basis, and are expected to continue to fluctuate in
the future. A variety of factors affect comparable store sales
results, including changes in fashion trends, changes in the
Companys merchandise mix, timing of catalog mailings,
calendar shifts of holiday periods, actions by competitors,
weather conditions, and general economic conditions. Past
comparable store sales results are not an indicator of future
results. The
20
Companys overall and individual brand comparable store
sales results are likely to have a significant effect on the
market price of the Companys common stock.
Gross
Profit Margin Impact of Mix of Sales
The Companys gross profit margins are impacted by the
sales mix both from the perspective of merchandise sales mix
within a particular brand and relative sales volumes of the
different brands. Certain categories of apparel and accessories
tend to generate somewhat higher margins than others within each
brand. Thus, a shift in sales mix within a brand can often
create significant impact on the Companys overall gross
margins. On the other hand, the gross margins for the
Chicos brand have been somewhat higher than at the WH|BM
and Soma brands. As sales at WH|BM and Soma grow at a faster
pace than at the Chicos brand, the Companys overall
gross profit margins may be negatively impacted which could in
turn have a material adverse effect on the Companys
results of operations and the market price of the Companys
common stock.
Impact on
Selling, General and Administrative Expenses from the Opening of
Larger Stores
The average size of the Chicos and WH|BM stores has been
increasing over the last several years. In particular, new
Chicos and WH|BM front-line stores were approximately 50%
larger than the chain average in fiscal 2006 and are again
expected to be between 40%-50% larger than the chain average in
fiscal 2007. Although these stores are expected to produce
profit dollars that will be in the range of each respective
chains average profits, they will likely increase selling,
general and administrative expenses as a percentage of sales due
to their larger size and anticipated initial lower sales per
selling foot. It is anticipated that these stores will
eventually achieve profit margins equal to more mature stores,
however, over the short term, it is likely to put pressure on
the Companys operating margin by increasing selling,
general and administrative expenses as a percentage of sales.
This could have a material adverse effect on the Companys
operating margin and stock price.
Risks
Associated with Catalog and Internet Sales
The Company sells merchandise over the Internet through its
websites, www.chicos.com,
www.whitehouseblackmarket.com, and www.soma.com.
Although the Companys catalog and Internet operations
encompassed only 3.3% of the Companys total sales for
fiscal 2006, it has been steadily growing. It is anticipated
that the percentage will continue to grow and could grow faster
than in the past, due to the Companys concentrated efforts
in the area. The Companys catalog and Internet operations
are subject to numerous risks, including unanticipated operating
problems, reliance on third party computer hardware and software
providers, system failures and the need to invest in additional
computer systems. The catalog and Internet operations also
involve other risks that could have an impact on the
Companys results of operations including hiring, retention
and training of personnel to conduct the Companys catalog
and Internet operations, diversion of sales from the
Companys stores, rapid technological change, liability for
online content, credit card fraud, risks related to the failure
of the computer systems that operate the website and its related
support systems, including computer viruses, telecommunication
failures and electronic break-ins and similar disruptions. Given
the Companys business strategy to target substantial
growth in its catalog and Internet operations and thus increase
sales penetration, supported by investment in new hardware,
software and personnel, the risks associated with catalog and
Internet operations are likely to be of greater significance in
fiscal 2007 and future years. There can be no assurance that the
Companys catalog and Internet operations will be able to
achieve targeted sales and profitability growth or even remain
at their current level.
Dependence
on Single Distribution Location
The Companys distribution functions for all of its stores
and for its catalog and Internet sales are handled from two
separate facilities located beside each other in Barrow County,
Georgia. Any significant interruption in the operation of either
of these distribution facilities due to natural disasters,
accidents, system failures or other unforeseen causes could
delay or impair the Companys ability to distribute
merchandise to its stores
and/or
fulfill catalog and Internet orders, which could cause sales to
decline. The Company is currently exploring contingency plans
and back-up
relationships with outside providers of distribution activities
to mitigate this risk.
21
Market
for Prime Real Estate is Competitive
In order to generate customer traffic, the Company locates many
of its stores in prominent locations within shopping centers
that have been or are expected to be successful. The Company
cannot control the development of new shopping centers, the
availability or cost of appropriate locations within existing or
new shopping centers, or the success of individual shopping
centers. Furthermore, factors beyond the Companys control
impact shopping center traffic, such as general economic
conditions, weather and consumer spending levels. A slowdown in
the U.S. economy could negatively affect consumer spending
and reduce shopping center traffic. In addition, the Company
must be able to effectively renew existing store leases. Failure
to secure real estate locations adequate to meet annual targets
as well as effectively manage the profitability of the
Companys existing fleet of stores could have a material
adverse effect on the Companys results of operations.
Changes
in Accounting Principles, Interpretations and
Practices
Financial statements are prepared in accordance with
U.S. generally accepted accounting principles. These
accounting principles can be complex for certain aspects of the
Companys business and may involve subjective judgments. A
change from current accounting standards could have a
significant effect on the Companys results of operations.
For example, in fiscal 2006, the Company adopted SFAS 123R,
which addressed the accounting for share-based payments. In
fiscal 2006, stock-based compensation reduced earnings per share
by approximately $.07 per diluted share. Although the
adoption of SFAS 123R is expected to continue to have a
significant impact on the Companys results of operations,
future changes to various assumptions used to determine the
fair-value of awards issued or the amount and type of equity
awards granted may impact future stock-based compensation
expense and further reduce the Companys earnings.
Adverse
Outcomes of Litigation Matters
The Company is involved from time to time with litigation and
other claims to its business. These issues arise primarily in
the ordinary course of business but could raise complex factual
and legal issues, which are subject to multiple risks and
uncertainties and could require significant management time. The
Company believes that the Companys current litigation
issues will not have a material adverse effect on the
Companys results of operations or financial condition.
However, the Companys assessment of current litigation
could change in light of the discovery of facts with respect to
legal actions pending against the Company not presently known to
the Company or determinations by judges, juries or other finders
of fact which do not accord with the Companys evaluation
of the possible liability or outcome of such litigation and
additional litigation that is not currently pending could have a
more significant impact on the Company and its operations.
New
Headquarters Expansion
During the first quarter of fiscal 2006, the Company completed
the purchase of approximately 22 acres of property adjacent
to the Companys current headquarters site on Metro Parkway
in Fort Myers, Florida to serve as the base for expansion
of the Companys corporate headquarters operations. The
total cost for this property, along with the buildings, was
approximately $26.4 million, which includes all transaction
costs as of February 3, 2007. The property includes seven
existing buildings aggregating approximately 200,600 square
feet of space, most of which continues to be leased to unrelated
third parties. As leases expire, the Company anticipates it will
be utilizing the vacant space, which is likely to require
modifications, for its expanding corporate headquarters needs.
The Company anticipates that its cash and marketable securities
on hand and cash from operations will be more than adequate to
cover the costs of construction that may be required for its
headquarters expansion, as well as all other capital
expenditures incurred over the next several years for store
construction, expansion and renovation. However, in the event
that such cash and marketable securities on hand and cash from
operations is not sufficient to meet the Companys capital
expenditures needs, the Company may need to draw on its line of
credit or seek other financing in order to fund the costs of
expansion of the headquarters campus or other capital
expenditures. In addition, such activities could potentially
result in temporary disruptions of operations or a diversion of
managements attention and resources.
22
Reliance
on Key Personnel
The Companys success and ability to properly manage its
growth depends to a significant extent both upon the performance
of its current executive and senior management team and its
ability to attract, hire, motivate, and retain additional
qualified management personnel in the future. The Companys
inability to recruit and retain such additional personnel, or
the loss of the services of any of its executive officers, could
have a material adverse impact on the Companys business,
financial condition and results of operations.
Effects
of War, Terrorism or Other Catastrophes
In response to the terrorist attacks of September 11, 2001,
security has been heightened in public areas. Any further threat
of terrorist attacks or actual terrorist events, particularly in
public areas, could lead to lower customer traffic in its
shopping centers. In addition, local authorities or shopping
center management could close in response to any immediate
security concern. For example, on September 11, 2001, a
substantial number of the Companys stores were closed
early in response to the terrorist attacks. Lower customer
traffic due to security concerns and war, or the threat of war,
or weather catastrophes such as hurricanes, could result in
decreased sales that would have a material adverse impact on the
Companys business, financial condition and results of
operations.
Merchandising/Fashion
Sensitivity
The Companys success is largely dependent upon its ability
to gauge the fashion tastes of its customers and to provide
merchandise that satisfies customer demand in a timely manner.
The Companys failure to anticipate, identify or react
appropriately in a timely manner to changes in fashion trends or
demands (such as the fashion missteps that occurred in fiscal
2006) could lead to lower sales, excess inventories and
more frequent markdowns, which could have a material adverse
impact on the Companys business. Misjudgments or
unanticipated fashion changes could also have a material adverse
impact on the Companys image with its customers. There can
be no assurance that the Companys new products will be met
with the same level of acceptance as in the past or that the
failure of any new products will not have a material adverse
impact on the Companys business, results of operations and
financial condition.
Maintaining
Proper Inventory Levels
The Company maintains an inventory of merchandise in its stores
and distribution center, particularly of selected products that
the Company anticipates will be in high demand. Inventory levels
in excess of customer demand may result in inventory write-downs
or the sale of excess inventory at discounted or closeout
prices, such as that which occurred in the latter half of fiscal
2006. These events could significantly harm the Companys
operating results and impair the image of one or more of the
Companys brands. Conversely, if the Company underestimates
consumer demand for its merchandise, particularly higher volume
styles, or if the Companys manufacturers fail to supply
quality products in a timely manner, the Company may experience
inventory shortages, which might result in missed sales,
negatively impact customer relationships, diminish brand loyalty
and result in lost revenues, any of which could harm the
Companys business.
Price,
Availability and Quality of its Offerings
Fluctuations in the price, availability and quality of fabrics
and other raw materials used in producing the Companys
products could have a material adverse effect on the
Companys cost of goods or its ability to meet customer
demands. The price and availability of such fabrics, other raw
materials and labor may fluctuate significantly, depending on
many factors, including natural resources, increased freight
costs, increased labor costs and weather conditions. In the
future, the Company may not be able to pass all or a portion of
such higher fabric, other raw materials or labor prices on to
its customers.
Reliance
on Third-Party Manufacturers
All of the Companys merchandise is produced by independent
manufacturers. The Company does not have long-term contracts
with these manufacturers. In addition, the Company faces the
risk that these third-party manufacturers with whom it contracts
to produce its merchandise may not produce and deliver the
Companys
23
merchandise on a timely basis, or at all. As a result, the
Company cannot be certain that these manufacturers will continue
to produce merchandise for the Company or that the Company will
not experience operational difficulties with its manufacturers,
such as reductions in the availability of production capacity,
errors in complying with merchandise specifications,
insufficient quality control, shortages of fabrics or other raw
materials, failures to meet production deadlines or increases in
manufacturing costs. The failure of any manufacturer to perform
to the Companys expectations could result in supply
shortages for certain merchandise and harm the Companys
business.
Reliance
on Foreign Sources of Production
Although the Company has certain portions of its clothing and
accessories produced within the United States, a majority of the
Companys clothing and accessories are still produced
outside the United States and the percentage has been growing.
As a result, the Companys business remains subject to the
various risks of doing business in foreign markets and importing
merchandise from abroad, such as: (i) political
instability; (ii) imposition of new legislation relating to
import quotas that may limit the quantity of goods that may be
imported into the United States from countries in a region that
the Company does business; (iii) imposition of duties,
taxes, and other charges on imports; (iv) foreign exchange
rates; and (v) local business practice and political
issues, including issues relating to compliance with domestic or
international labor standards.
The Company cannot predict whether any of the foreign countries
in which its clothing and accessories are currently produced or
any of the countries in which the Companys clothing and
accessories may be produced in the future will be subject to
import restrictions by the United States government, including
the likelihood, type or effect of any trade retaliation. Trade
restrictions, including increased tariffs or more restrictive
quotas, or both, applicable to apparel items could affect the
importation of apparel generally and, in that event, could
increase the cost, or reduce the supply, of apparel available to
the Company and adversely affect the Companys business,
financial condition and results of operations. The
Companys merchandise flow and cost may also be adversely
affected by political instability in any of the countries in
which its goods are produced and adverse changes in foreign
exchange rates.
Vendors
Compliance with Labor Practices Requirements
Although the Company has formal ethical labor policies and seeks
to be diligent in its monitoring of compliance with these
policies, the Company does not have absolute control over the
ultimate actions or labor practices of its independent vendors.
The violation of labor or other laws by one of its key
independent vendors or the divergence of an independent
vendors labor practices from those generally accepted as
ethical by the Company could interrupt or otherwise disrupt the
shipment of finished merchandise to the Company or damage the
Companys reputation. Any of these, in turn, could have a
material adverse effect on the Companys financial
condition, results of operations and its stock price.
Competition
The retail apparel and accessory industry is highly competitive.
The Company competes with national, international and local
department stores, specialty and discount store chains,
independent retail stores and Internet and catalog businesses
that market similar lines of merchandise. Many competitors are
significantly larger and have greater financial, marketing and
other resources and enjoy greater national, regional and local
name recognition than does the Company. Depth of selection in
sizes, colors and styles of merchandise, merchandise procurement
and pricing, ability to anticipate fashion trends and consumer
preferences, inventory control, reputation, quality of
merchandise, store design and location, brand recognition and
customer service are all important factors in competing
successfully in the retail industry.
The Companys successful performance in recent years has
increased the amount of imitation by other retailers. Such
imitation has made and will continue to make the retail
environment in which the Company operates more competitive.
24
General
Economic Conditions
The Companys business fluctuates according to changes in
consumer preferences, which are dictated in part by fashion and
season. In addition, certain economic conditions affect the
level of consumer spending on merchandise offered by the
Company, including, among others, unemployment levels, business
conditions, interest rates, energy costs, taxation and consumer
confidence in future economic conditions. Consumer preference
and economic conditions may differ or change from time to time
in each market in which the Company operates and negatively
affect the Companys net sales and profitability.
Reliance
on Information Technology
The Company relies on various information systems to manage its
operations and regularly makes investments to upgrade, enhance
or replace such systems. Any delays or difficulties in
transitioning to these or other new systems, or in integrating
these systems with the Companys current systems, or any
other disruptions affecting the Companys information
systems, could have a material adverse impact on the
Companys business.
Strategic
Development of New Concepts
A significant portion of the Companys business strategy
involves developing and growing new concepts, including brand
extensions within established brands. The Companys ability
to succeed in new concepts requires significant capital
expenditures and management attention. Additionally, any new
concept is subject to certain risks including customer
acceptance, competition, product differentiation, challenges to
economies of scale in merchandise sourcing and the ability to
attract and retain qualified personnel, including management and
designers.
During fiscal 2004, the Company launched a new 10-store concept,
Soma, in which the product offering is focused around intimate
apparel, sleepwear, and activewear for the Chicos target
customer. The Company has committed significant financial and
human resources to launching and developing this concept. During
fiscal 2005, the Company opened an additional five Soma stores
based on initial performance of the first 10 stores and based on
perceived prospects. During fiscal 2006, the Company continued
to expand the presence of the Soma brand by opening 37 new Soma
stores. The Company recently announced it is slowing its planned
new store growth in Soma stores to
20-25 net
new stores in fiscal 2007 in order to improve its operations and
profitability. The Company believes the Soma brand reduced the
Companys earnings per share by $.07 for fiscal 2006 and
the Company estimates it will reduce fiscal 2007 earnings by
between $.06 and $.10. There can be no assurance that the
Company will be able to develop and grow the Soma concept (or
any other new concept) to a point where it will become
profitable, or generate positive cash flow. If the Company
cannot successfully execute its growth strategies for its new
concepts or brand extensions, the Companys financial
condition and results of operations may be adversely impacted.
Energy
Prices
Oil prices have fluctuated dramatically in the past and have
generally risen in fiscal 2006. If the previous trend of
increasing oil prices were to continue, this trend may result in
an increase in the Companys transportation costs for
distribution, utility costs for its retail stores and costs to
purchase apparel from its vendors. In addition, rising oil
prices could adversely affect consumer spending and demand for
the Companys products and increase its operating costs,
both of which could have a material adverse effect on the
Companys business, financial condition and results of
operations.
Protection
of Intellectual Property
The Company believes that its trademarks, copyrights, and other
intellectual and proprietary rights are important to its
success. Even though the Company takes action to establish,
register and protect its trademarks, copyrights, and other
intellectual and proprietary rights, there can be no assurance
that the Company will be successful or that others will not
imitate the Companys products or infringe upon the
Companys intellectual property rights. In addition, there
can be no assurance that others will not resist or seek to block
the sale of the Companys products as infringements of
their trademarks, copyrights, or other proprietary rights. If
the Company is
25
required to stop using any of its registered or non-registered
trademarks or copyrights, the Companys sales could decline
and its business and results of operations could be adversely
affected.
Goodwill
and Intangible Assets
As of February 3, 2007, the Companys goodwill and
other intangible assets (trademark) totaled approximately
$62.6 million and $34.0 million, respectively. The
Company acquired all of the trademark value through its
acquisition of The White House, Inc. and the current goodwill
balance was also recognized primarily through its acquisition of
The White House, Inc. At the time of the White House
acquisition, the Company determined that the WH|BM trademark had
an indefinite useful life. Goodwill and intangible assets with
indefinite lives are not amortized, but rather are tested for
impairment annually or more frequently if impairment indicators
arise. During fiscal 2006, the Company decided to close the
Fitigues brand operations and as a result, the Company recorded
an impairment loss of approximately $6.8 million. If the
Company determines in the future that other impairments have
occurred, the Company would be required to write off the
impaired portion of goodwill or the WH|BM trademark asset, which
could substantially impact the Companys results of
operations.
Volatility
of Stock Price
The market price of the Companys common stock has
fluctuated substantially in the past and there can be no
assurance that the market price of the common stock will not
continue to fluctuate significantly. Future announcements or
management discussions concerning the Company or its
competitors, sales and profitability results, quarterly
variations in operating results or monthly comparable store net
sales, changes in earnings estimates by analysts or changes in
accounting policies, among other factors, could cause the market
price of the common stock to fluctuate substantially. In
addition, stock markets, in general, have experienced extreme
price and volume volatility in recent years. This volatility has
had a substantial effect on the market prices of securities of
many public companies for reasons frequently unrelated to the
operating performance of the specific companies.
The foregoing list of risk factors is not exhaustive. There can
be no assurance that the Company has correctly identified and
appropriately assessed all factors affecting its business
operations or that the publicly available and other information
with respect to these matters is complete and correct.
Additional risks and uncertainties not presently known to the
Company or that it currently believes to be immaterial also may
adversely impact the business. Should any risks or uncertainties
develop into actual events, these developments could have
material adverse effects on the Companys business,
financial condition and results of operations.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Stores
The Companys stores are located throughout the United
States as well as the U.S. Virgin Islands and Puerto Rico,
with a significant concentration in California, Florida, Texas
and the northeastern United States.
As a matter of policy, the Company prefers to lease its stores
and all the stores currently operated by the Company are leased.
Lease terms typically range from five to ten years and
approximately 60% contain one or more renewal options.
Historically, the Company has exercised most of its lease
renewal options. Approximately 75% of the leases have percentage
rent clauses which require the payment of additional rent based
on the stores net sales in excess of a certain threshold
and approximately 29% have early cancellation clauses that allow
the Company an early termination of the lease if certain sales
levels are not met in specific periods.
The following table, which covers all of the 930 Company-owned
stores existing as of March 19, 2007, sets forth
(i) the number of leases that will expire each year if the
Company does not exercise renewal options and (ii) the
26
number of leases that will expire each year if the Company
exercises all of its renewal options (assuming in each case the
lease is not otherwise terminated by either party pursuant to
any other provision thereof):
|
|
|
|
|
|
|
|
|
|
|
Leases Expiring Each Year
|
|
|
Leases Expiring Each Year
|
|
Fiscal Year Ending
|
|
if No Renewals Exercised
|
|
|
if All Renewals Exercised
|
|
|
February 2, 2008
|
|
|
49
|
|
|
|
23
|
|
January 31, 2009
|
|
|
77
|
|
|
|
22
|
|
January 30, 2010
|
|
|
89
|
|
|
|
12
|
|
January 29, 2011 and
thereafter
|
|
|
715
|
|
|
|
873
|
|
Headquarters
and Distribution Center
The Companys World Headquarters is located on
approximately 57 acres in Fort Myers, Florida. The
facility currently consists of its corporate and administrative
headquarters that comprise approximately 147,000 square
feet, and includes the Chicos and Soma product development
offices (including pattern making, sewing and sampling
activities), as well as a separate 16,500 square foot
office building that is being used as the WH|BM headquarters.
During fiscal 2006, the Company completed the purchase of an
additional approximately 22 acres (which is included in the
57 total acres above) of property adjacent to the Companys
current headquarters site on Metro Parkway in Fort Myers,
Florida to serve as the base for expansion of the Companys
corporate headquarters operations. The total cost for this
property, along with the buildings, was approximately
$26.4 million, which includes all transaction costs as of
February 3, 2007. The property includes seven existing
buildings aggregating approximately 200,600 square feet of
space, most of which continues to be leased to unrelated third
parties. As leases expire, the Company anticipates it will be
utilizing the vacant space, which is likely to require
modifications, for its expanding corporate headquarters needs.
The Company is currently developing an overall plan for the
future buildout of all of its available property.
In fiscal 2005, the Company completed the purchase of
105 acres in south Fort Myers, Florida originally
intended for the location of a new corporate headquarters campus
for a total cost of $38.1 million, which included all
transaction costs and $5.4 million of road impact fees.
When the 22 acre property adjacent to its current
headquarters site became available, the Company decided to plan
its expansion at its current location and to hold the
105 acre property for investment. During late 2006,
management committed to a plan to sell the 105 acre
property and the Company anticipates that the land will be sold
within the next 12 months. The Company does not expect that
any such sale will have any material impact on its statements of
operations or overall financial position.
In order to help with immediate space needs, the Company has
leased approximately 12,500 square feet of off-site space
in the Fort Myers area for its call center and has leased
approximately 21,000 square feet of off-site space for its
finance department.
The Company also owns 71 acres of land in Barrow County,
Georgia with its distribution and fulfillment centers situated
thereon. These facilities consist of 202,000 square feet of
distribution space, 50,000 square feet of fulfillment and
call center space and 31,000 square feet of office space.
At the time of the original acquisition, the Company also
secured a commitment from the local county to permit the
addition of up to another 200,000 square feet of
distribution space and 6,000 square feet of office space in
the future, subject to final approval by the local county at the
time the Company petitions the county to add the additional
square footage.
With respect to addressing the needs for additional distribution
center space, the Company is evaluating its requirements and the
appropriate timing to make additional distribution center
capacity available. The Companys present goal in this
regard is to begin design work in fiscal 2007. It is currently
anticipated that the Company will require additional
distribution space late in fiscal 2008 or early in fiscal 2009
and, initially, the Company is focusing its evaluation on the
expansion of its current distribution center on the existing
adjacent land in Barrow County that is already owned by the
Company. In connection with its ongoing evaluation of the
strategic long-term distribution needs of its brands, the
Company may also explore adding a separate distribution center
for its Soma brand.
All recent property purchases have been funded from the
Companys existing cash and marketable securities balances.
27
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
The Company was named as the defendant in a suit filed in
October 2004 in the Circuit Court of Lee County, Florida,
Ajit Patel v. Chicos FAS, Inc. The Complaint
alleges that the Company breached an implied contract with the
plaintiff, the Companys former Vice President
Chief Information Officer, and, alternatively, that the Company
fraudulently induced the plaintiff to work for the Company. It
is the Companys position that no contract, express or
implied, existed between the Company and the plaintiff and that
the Company did not engage in any fraudulent conduct. The
Company has asserted certain counterclaims against the
plaintiff. No trial date has yet been set. The Company believes
the plaintiffs case is without merit and will continue to
vigorously defend the litigation and prosecute its counterclaims.
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 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
ITEM A. EXECUTIVE
OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the
Companys existing executive officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years With
|
|
|
Name
|
|
Age
|
|
Company
|
|
Positions
|
|
Scott A. Edmonds
|
|
|
49
|
|
|
|
13
|
|
|
President, Chief Executive Officer
and Director
|
Charles J. Kleman
|
|
|
56
|
|
|
|
18
|
|
|
Executive Vice President-Finance,
Chief Financial Officer, Treasurer and Director**
|
Michele M. Cloutier
|
|
|
42
|
|
|
|
*
|
|
|
Executive Vice President-Chief
Merchandising Officer-Chicos
|
Patricia Murphy Kerstein
|
|
|
63
|
|
|
|
9
|
|
|
Executive Vice President***
|
Gary A. King
|
|
|
49
|
|
|
|
2
|
|
|
Executive Vice President-Chief
Information Officer
|
Michael J. Leedy
|
|
|
38
|
|
|
|
1
|
|
|
Executive Vice President-Chief
Marketing Officer
|
Mori C. MacKenzie
|
|
|
57
|
|
|
|
11
|
|
|
Executive Vice President-Chief
Stores Officer
|
Charles L. Nesbit, Jr.
|
|
|
51
|
|
|
|
2
|
|
|
Executive Vice President-Chief
Operating Officer
|
Patricia Darrow-Smith
|
|
|
45
|
|
|
|
3
|
|
|
Brand President-White House |
Black Market
|
A. Alexander Rhodes
|
|
|
48
|
|
|
|
4
|
|
|
Senior Vice President-General
Counsel and Secretary
|
Michael J. Kincaid
|
|
|
49
|
|
|
|
7
|
|
|
Senior Vice President-Finance,
Chief Accounting Officer and Assistant Secretary
|
|
|
|
* |
|
Joined the Company in September 2006 |
|
** |
|
In February 2007, Mr. Kleman announced that he would be
stepping down from these positions upon the appointment of a
successor Chief Financial Officer and Treasurer. |
|
*** |
|
In March 2007, Ms. Murphy Kerstein stepped down from her
day-to-day
responsibilities as Chief Merchandising Officer but continues to
serve the Company as an Executive Vice President. |
28
Scott A. Edmonds is President and Chief Executive Officer of the
Company. Mr. Edmonds has been employed by the Company since
September 1993, when he was hired as Operations Manager. In
February 1994, he was elected to the position of Vice
President-Operations and, effective January 1, 1996, he was
promoted to the position of Senior Vice President-Operations. In
February 2000, Mr. Edmonds was further promoted to Chief
Operating Officer, in September 2001, Mr. Edmonds was
promoted to President, and in September 2003, Mr. Edmonds
was appointed to the additional office of Chief Executive
Officer. Prior to joining the Company in 1993, Mr. Edmonds
was employed by Ferguson Enterprises, Inc., a plumbing and
electrical wholesale company since 1980. His last position with
Ferguson was President of the Fort Myers, Florida Division.
Charles J. Kleman, is Executive Vice President-Finance, Chief
Financial Officer, and Treasurer of the Company. Mr. Kleman
has been employed by the Company since January 1989, when he was
hired as the Companys Controller. In 1991, he was elected
as Vice President/Assistant Secretary. In 1992, Mr. Kleman
was designated as the Companys Chief Financial Officer. In
September 1993, he was elected to the additional position of
Secretary/Treasurer. Mr. Kleman served as Secretary until
October 2004. He served as Senior Vice President-Finance from
January 1996 through November 1996, effective December 1996, was
promoted to the position of Executive Vice President-Finance and
effective November 2003, was promoted to the additional position
of Chief Operating Officer and served in such capacity until
August 2005. In February 2007, Mr. Kleman announced that he
would be stepping down from his positions as Executive Vice
President-Finance, Chief Financial Officer, and Treasurer of the
Company, upon the Companys identification and appointment
of a successor Chief Financial Officer and Treasurer. He also
indicated that he would step down from his director position at
the same time that he steps down from his officer positions.
Prior to joining the Company, Mr. Kleman was an independent
accounting consultant in 1988, and from 1986 to 1988,
Mr. Kleman was employed by Electronic Monitoring &
Controls, Inc., a manufacturer and distributor of energy
management systems, as its Vice President/Controller. Prior to
1986, Mr. Kleman was employed by various public accounting
firms, spending over four years of that time with Arthur
Andersen & Co.
Michele M. Cloutier is Executive Vice President-Chief
Merchandising Officer-Chicos for the Company, having just
been promoted to that position in March 2007. Ms. Cloutier
joined the Company in September 2006 as Executive Vice
President-General Merchandise Manager-Chicos, after having
served in the capacity of an independent consultant from
2004-2006.
From 2003 to 2004, Ms. Cloutier served as Senior Vice
President-General Merchandising Manager at Ann Taylor Stores.
From 1993 to 2002, she held several senior merchandising roles
in multiple divisions at The Gap, Inc. Earlier in her specialty
retailing career, Ms. Cloutier held buying positions at
Macys and Abraham & Strauss.
Patricia Murphy Kerstein is Executive Vice President for the
Company. Ms. Murphy Kerstein has been with the Company
since September 1997, when she was hired as the Senior Merchant.
In April 1998, she was promoted to the position of General
Merchandise Manager, in June 1999, she was promoted to Vice
President-General Merchandise Manager, in August 2000, she was
promoted to Senior Vice President-General Merchandise Manager,
and in January 2003, Ms. Murphy Kerstein was promoted to
Executive Vice President-Chief Merchandising Officer.
Ms. Murphy Kerstein stepped down from her Chief
Merchandising Officer position in March 2007 and is scheduled to
step down from her position as Executive Vice President in March
2008. After March 2008, she will continue to serve the Company
as an executive consultant. From February 1987 until September
1997, Ms. Murphy Kerstein was Vice President of
Merchandising and Director of Fashion for Doncaster and from
October 1985 until February 1987 was Merchandiser and National
Sales Manager for Caribou Sportswear. From 1981 until 1985, she
held various positions including Divisional Merchandise Manager
and Director of Fashion Coordination for Lane Bryant, a division
of the Limited.
Gary A. King is Executive Vice President-Chief Information
Officer for the Company. Mr. King joined the Company in
October 2004 after five years at Barnes & Noble, Inc.,
where he most recently served as Vice President, Chief
Information Officer. From 1988 to 1999, Mr. King held
various positions with Avon Products, Inc. including Vice
President, Global Information Technology. From 1982 to 1987,
Mr. King held various system management positions with
Unisys Corporation and Burroughs Corporation.
Michael J. Leedy is Executive Vice President-Chief Marketing
Officer for the Company, having just been promoted to that
position in March 2007. Mr. Leedy joined the Company in
April 2006 as Senior Vice President-
29
Chief Marketing Officer. Prior to joining the Company,
Mr. Leedy spent over ten years with American Eagle
Outfitters, Inc., where he most recently served as Executive
Vice President and Chief Marketing Officer. From 1993 to 1995,
Mr. Leedy served as President of Method, Inc., a retail
brand strategy firm providing consulting services to other
retailers. From 1991 to 1993, Mr. Leedy held various
positions with The Limited, Inc.
Mori C. MacKenzie is Executive Vice President-Chief Stores
Officer for the Company. Ms. MacKenzie has been with the
Company since October 1995, when she was hired as the Director
of Stores. From June 1999 until October 2001, she served as Vice
President-Director of Stores. In October 2001,
Ms. MacKenzie was promoted to Senior Vice President-Stores,
and effective February 2004 she was promoted to the position of
Executive Vice President-Chief Stores Officer. From January 1995
until October 1995, Ms. MacKenzie was the Vice President of
Store Operations for Canadians Corporation. From August 1994
until December 1994, she was the Vice President of Store
Development for Goodys Family Clothing. From April 1992
until August 1994, Ms. MacKenzie was the Vice President of
Stores for United Retail Group (URG) and from August
1991 until April 1992 she was employed by Conston Corporation, a
predecessor of URG. In addition, Ms. MacKenzie was Vice
President-Stores for Park Lane from November 1987 until July
1991, and was Regional Director of Stores for the Limited, Inc.
from June 1976 until October 1987.
Charles L. Nesbit, Jr. is Executive Vice President-Chief
Operating Officer for the Company. Mr. Nesbit has been with
the Company since August 2004, when he was hired as Senior Vice
President-Strategic Planning and Business Development. He was
promoted to Executive Vice President-Operations in April 2005
and to the additional title of Chief Operating Officer in August
2005. Prior to joining the Company, Mr. Nesbit spent twenty
years at the Sara Lee Corporation where he most recently served
as a corporate vice president and Chief Supply Chain Officer for
the corporations U.S. and Canada apparel operations. He
served as President and Chief Executive Officer of Sara Lee
Intimate Apparel, the largest intimate apparel company in the
United States and Canada, from 1999 to 2003, and President and
Chief Executive Officer of the Bali Company from 1996 to 1999.
Patricia Darrow-Smith is Brand President-White House | Black
Market for the Company, having just been promoted to that
position in March 2007. Ms. Darrow-Smith joined the Company
in September 2003 as Senior Vice President-Merchandising of The
White House, Inc. as a result of the acquisition of The White
House, Inc. by the Company. In April 2004, she was appointed
Senior Vice President-General Merchandise Manager-White House
for the Company. She was promoted to Senior Vice President-Chief
Creative Officer-White House for the Company and appointed as
President of White House | Black Market, Inc., a wholly owned
subsidiary of the Company, in June 2006. From 1986 to September
2003 Ms. Darrow-Smith served as the most senior
merchandising executive of The White House, Inc., most recently
as Executive Vice President, Merchandising.
Ms. Darrow-Smith previously worked for the Hyatt Hotels
Corporation.
A. Alexander Rhodes is Senior Vice President-General Counsel and
Secretary for the Company. Mr. Rhodes joined the Company in
January 2003 as its Intellectual Property Counsel, expanding his
oversight of legal matters for the Company into several other
areas until October 2004, when he was promoted to Vice
President-Corporate Counsel and Secretary. In April 2006,
Mr. Rhodes was promoted to Senior Vice President-General
Counsel and Secretary. Mr. Rhodes graduated from the
Stetson University College of Law in 1994. From 1997 through
December 2002, Mr. Rhodes practiced law with the Annis
Mitchell Cockey Edwards & Roehn and Carlton Fields law
firms working primarily in the areas of commercial litigation
and intellectual property.
Michael J. Kincaid is Senior Vice President-Finance, Chief
Accounting Officer and Assistant Secretary for the Company.
Mr. Kincaid has been with the Company since August 1999
when he was hired as Controller and Director of Finance. In
October 2001, Mr. Kincaid was promoted to Vice
President-Finance, in November 2003, Mr. Kincaid was
promoted to the additional position of Chief Accounting Officer,
in December 2004, Mr. Kincaid was elected to the additional
position of Assistant Secretary, and in March 2005, was promoted
to Senior Vice President-Finance. From 1991 to 1999,
Mr. Kincaid was employed by Tractor Supply Company, most
recently as Vice President-Controller, Treasurer and Secretary.
From 1981 to 1991, he held various management and accounting
positions with Cole National Corporation, Revco D.S., Inc. and
Price Waterhouse.
There are no arrangements or understandings pursuant to which
any officer was elected to office. Executive officers are
elected by and serve at the discretion of the Board of Directors.
30
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
The Companys Common Stock trades on the New York Stock
Exchange (NYSE) under the symbol CHS. On
March 19, 2007, the last reported sale price of the Common
Stock on the NYSE was $22.05 per share.
The following table sets forth, for the periods indicated, the
range of high and low sale prices for the Common Stock, as
reported on the New York Stock Exchange:
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended February 3, 2007
|
|
High
|
|
|
Low
|
|
|
Fourth Quarter (October 29,
2006-February 3, 2007)
|
|
$
|
24.98
|
|
|
$
|
20.10
|
|
Third Quarter (July 30,
2006-October 28, 2006)
|
|
|
25.71
|
|
|
|
17.27
|
|
Second Quarter (April 30,
2006-July 29, 2006)
|
|
|
37.42
|
|
|
|
21.79
|
|
First Quarter (January 29,
2006-April 29, 2006)
|
|
|
49.40
|
|
|
|
33.77
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended January 28, 2006
|
|
High
|
|
|
Low
|
|
|
Fourth Quarter (October 30,
2005-January 28, 2006)
|
|
$
|
46.32
|
|
|
$
|
38.50
|
|
Third Quarter (July 31,
2005-October 29, 2005)
|
|
|
41.67
|
|
|
|
30.60
|
|
Second Quarter (May 1,
2005-July 30, 2005)
|
|
|
40.39
|
|
|
|
25.84
|
|
First Quarter (January 30,
2005-April 30, 2005)
|
|
|
30.25
|
|
|
|
24.60
|
|
Although the Company currently does not intend to pay any cash
dividends over the near term and intends to retain its earnings
for the future operation and expansion of the Companys
business, the Company may reconsider this intention as the
Company monitors its build up of cash reserves. Any
determination to pay dividends in the future will be at the
discretion of the Companys Board of Directors (the
Board) and will be dependent, in addition, upon the
Companys results of operations, financial condition,
contractual restrictions and other factors deemed relevant by
the Board of Directors.
In September 2004, the Companys Board approved the
repurchase, over a twelve-month period ending in September 2005,
of up to $100 million of the Companys outstanding
common stock. The Company repurchased 275,000 shares of its
common stock during the third quarter of fiscal 2004 in
connection with this stock repurchase program, at a total cost
of approximately $5.0 million; no additional repurchases
occurred during fiscal 2004 or fiscal 2005 and the balance of
the authorized repurchase expired.
In March 2006, the Companys Board of Directors (the
Board) approved the repurchase, over a twelve-month
period ending in March 2007, of up to $100 million of the
Companys outstanding common stock. During fiscal 2006, the
Company repurchased 3,081,104 shares of its common stock in
connection with this stock repurchase program, which represented
the entire $100 million initial stock repurchase program
authorized by the Companys Board.
In May 2006, the Company announced that its Board had approved
the repurchase of an additional $100 million of the
Companys common stock over a twelve month period ending in
May 2007. During fiscal 2006, the Company repurchased
3,591,352 shares of its common stock in connection with
this stock repurchase program, which represented the entire
additional $100 million program authorized by the
Companys Board. In addition, in the fourth quarter of
fiscal 2006, the Company repurchased an additional 7,090
restricted shares as more particularly set forth in the chart
below.
31
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 as
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
Part of
|
|
|
Under the
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Publicly
|
|
|
Publicly
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
Announced
|
|
Period
|
|
Purchased(a)
|
|
|
per Share
|
|
|
Plans
|
|
|
Plans
|
|
|
October 29, 2006 to
November 25, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
November 26, 2006 to
December 30, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
December 31, 2006 to
February 3, 2007
|
|
|
7,090
|
|
|
$
|
20.88
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,090
|
|
|
$
|
20.88
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Consists of 7,090 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
|
|
|
|
The approximate number of equity security holders of the Company
is as follows:
|
|
|
|
|
|
|
|
Number of Record Holders
|
|
Title of Class
|
|
as of March 19, 2007
|
|
|
Common Stock, par value
$.01 per share
|
|
|
2,954
|
|
32
Five Year
Performance Graph
The following graph compares the cumulative total return on the
Companys common stock with the cumulative total return of
the companies in the Standard & Poors 500 Index
and the Standard & Poors 500 Apparel Retail
Index. Cumulative total return for each of the periods shown in
the Performance Graph is measured assuming an initial investment
of $100 on February 2, 2002 and the reinvestment of
dividends.
Comparison
of Cumulative Five Year Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/2/2002
|
|
|
2/1/2003
|
|
|
1/31/2004
|
|
|
1/29/2005
|
|
|
1/28/2006
|
|
|
2/3/2007
|
Chicos FAS, Inc.
|
|
|
$
|
100
|
|
|
|
$
|
124
|
|
|
|
$
|
251
|
|
|
|
$
|
345
|
|
|
|
$
|
574
|
|
|
|
$
|
298
|
|
S&P 500 Index
|
|
|
$
|
100
|
|
|
|
$
|
78
|
|
|
|
$
|
104
|
|
|
|
$
|
110
|
|
|
|
$
|
123
|
|
|
|
$
|
141
|
|
S&P 500 Apparel Retail Index
|
|
|
$
|
100
|
|
|
|
$
|
90
|
|
|
|
$
|
118
|
|
|
|
$
|
141
|
|
|
|
$
|
131
|
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
Selected Financial Data at the dates and for the periods
indicated should be read in conjunction with, and is qualified
in its entirety by reference to the financial statements and the
notes thereto referenced in this Annual Report on
Form 10-K.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(53 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
|
(In thousands, except per share and selected operating
data)
|
|
|
Operating Statement
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Net sales by Chicos/Soma
stores
|
|
$
|
1,210,474
|
|
|
$
|
1,095,938
|
|
|
$
|
889,429
|
|
|
$
|
698,100
|
|
|
$
|
508,492
|
|
Net sales by WH|BM stores
|
|
|
367,063
|
|
|
|
261,601
|
|
|
|
142,092
|
|
|
|
39,818
|
|
|
|
|
|
Net sales by catalog and Internet
|
|
|
53,523
|
|
|
|
36,151
|
|
|
|
26,831
|
|
|
|
22,780
|
|
|
|
16,070
|
|
Other net sales(2)
|
|
|
15,422
|
|
|
|
10,885
|
|
|
|
8,530
|
|
|
|
7,801
|
|
|
|
6,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,646,482
|
|
|
|
1,404,575
|
|
|
|
1,066,882
|
|
|
|
768,499
|
|
|
|
531,108
|
|
Cost of goods sold(3)
|
|
|
679,416
|
|
|
|
547,532
|
|
|
|
411,908
|
|
|
|
297,477
|
|
|
|
209,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
967,066
|
|
|
|
857,043
|
|
|
|
654,974
|
|
|
|
471,022
|
|
|
|
321,338
|
|
General, administrative and store
operating expenses
|
|
|
647,421
|
|
|
|
514,529
|
|
|
|
398,117
|
|
|
|
289,118
|
|
|
|
199,495
|
|
Depreciation and amortization
|
|
|
61,840
|
|
|
|
44,201
|
|
|
|
32,481
|
|
|
|
21,130
|
|
|
|
15,050
|
|
Impairment of goodwill
|
|
|
6,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
251,053
|
|
|
|
298,313
|
|
|
|
224,376
|
|
|
|
160,774
|
|
|
|
106,793
|
|
Interest income, net
|
|
|
10,626
|
|
|
|
8,236
|
|
|
|
2,327
|
|
|
|
888
|
|
|
|
883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
261,679
|
|
|
|
306,549
|
|
|
|
226,703
|
|
|
|
161,662
|
|
|
|
107,676
|
|
Provision for income taxes
|
|
|
95,043
|
|
|
|
112,568
|
|
|
|
85,497
|
|
|
|
61,432
|
|
|
|
40,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
166,636
|
|
|
$
|
193,981
|
|
|
$
|
141,206
|
|
|
$
|
100,230
|
|
|
$
|
66,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share(4)
|
|
$
|
0.94
|
|
|
$
|
1.07
|
|
|
$
|
0.79
|
|
|
$
|
0.58
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share(4)
|
|
$
|
0.93
|
|
|
$
|
1.06
|
|
|
$
|
0.78
|
|
|
$
|
0.57
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding-basic(4)
|
|
|
177,273
|
|
|
|
180,465
|
|
|
|
178,256
|
|
|
|
172,805
|
|
|
|
166,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding-diluted(4)
|
|
|
178,452
|
|
|
|
182,408
|
|
|
|
180,149
|
|
|
|
176,284
|
|
|
|
172,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores at period end
|
|
|
920
|
|
|
|
763
|
|
|
|
657
|
|
|
|
557
|
|
|
|
378
|
|
Average net sales per Company
store:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicos
|
|
$
|
2,139
|
|
|
$
|
2,179
|
|
|
$
|
2,010
|
|
|
$
|
1,783
|
|
|
$
|
1,556
|
|
WH|BM
|
|
|
1,575
|
|
|
|
1,402
|
|
|
|
995
|
|
|
|
862
|
|
|
|
|
|
Soma
|
|
|
1,044
|
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average net sales per selling
square foot at Company stores:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicos
|
|
$
|
961
|
|
|
$
|
1,028
|
|
|
$
|
988
|
|
|
$
|
924
|
|
|
$
|
849
|
|
WH|BM
|
|
|
1,040
|
|
|
|
1,028
|
|
|
|
814
|
|
|
|
767
|
|
|
|
|
|
Soma
|
|
|
434
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increase in comparable
Company store net sales
|
|
|
2.1
|
%
|
|
|
14.3
|
%
|
|
|
12.9
|
%
|
|
|
16.1
|
%
|
|
|
13.5
|
%
|
Balance Sheet Data (at year
end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,058,134
|
|
|
$
|
999,413
|
|
|
$
|
715,729
|
|
|
$
|
470,854
|
|
|
$
|
301,544
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
109,971
|
|
|
|
70,318
|
|
|
|
59,546
|
|
|
|
24,437
|
|
|
|
6,551
|
|
Stockholders equity
|
|
|
803,931
|
|
|
|
806,427
|
|
|
|
560,868
|
|
|
|
374,835
|
|
|
|
240,133
|
|
Working capital
|
|
$
|
327,624
|
|
|
$
|
415,310
|
|
|
$
|
269,252
|
|
|
$
|
125,991
|
|
|
$
|
105,570
|
|
|
|
|
(1)
|
|
Includes results from The White
House, Inc. since September 5, 2003.
|
|
(2)
|
|
Includes net sales to franchisees
and net sales by Fitigues stores. In fiscal 2007, the Company
acquired all of its remaining franchisees and announced the
planned closure of its Fitigues operations.
|
|
(3)
|
|
Cost of goods sold includes
distribution, merchandising and product development costs, but
does not include occupancy cost.
|
|
(4)
|
|
Restated to give retroactive effect
for the 2 for 1 stock splits in February 2005 and July 2002.
|
|
(5)
|
|
Average net sales per Company store
and average net sales per selling square foot at Company stores
are based on net sales of stores that have been operated by the
Company for the full year. For the year ended February 3,
2007, average net sales per Company store and average net sales
per selling square foot at Company stores have been adjusted to
exclude the effect of the fifty-third week.
|
34
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis should be read in
conjunction with the Companys consolidated financial
statements and notes thereto.
Executive
Overview
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, WH|BM,
and Soma by Chicos (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 mainly easy-care
fabrics. WH|BM, which the Company acquired in September 2003,
and which began operations in 1985, targets
middle-to-upper
income women who are 25 years old and up. The styling is
contemporary, feminine and unique, assorted primarily in the
classic and timeless colors of white and black and related
shades. Soma was initially launched in August 2004. This concept
offers foundation products in intimate apparel, sleepwear, and
activewear that is aimed at the Chicos target customer,
but with focus and styling that is expected to ultimately appeal
to a broader customer base. In early fiscal 2006, the Company
acquired the Fitigues brand, which had began its operations in
1988 and which was a fitness inspired brand, offering stylish
yet comfortable activewear clothing. During fiscal 2006, the
Company completed an internal evaluation of the Fitigues brand
and, in the fourth quarter, decided to close down operations of
the Fitigues brand. The Company began closing the Fitigues brand
stores in the first quarter of fiscal 2007. The Company
anticipates all 10 of the remaining Fitigues stores at fiscal
year end and the website will be shut down by the end of the
second quarter of fiscal 2007.
The Company earns revenues and generates cash through the sale
of merchandise in its retail stores, to its Chicos
franchisees, and through its call centers, which handle sales
related to the Chicos, WH|BM, and Soma catalog and online
operations.
Since the Company opened its first Chicos store in 1983
principally selling folk art, its retail store system, now
selling principally womens apparel, has grown to 930
stores as of March 19, 2007, including 593 Company-owned
Chicos stores, 277 WH|BM stores, and 51 Soma stores (the
remaining 9 stores are the Fitigues stores that are in the
process of being closed). During fiscal 2006, the Company opened
145 net new Company-owned stores and repurchased one of its
franchise stores (this number of stores excludes the Fitigues
stores acquired in early fiscal 2006). Since the beginning of
fiscal 2007, the Company has reacquired the remaining 13
formerly franchised stores. Those 13 stores are included in the
593 Company-owned Chicos stores as of March 19, 2007.
From February 3, 2002 through February 3, 2007, the
Company opened 515 new Company-owned stores, acquired 2 stores
from a franchisee, and one franchisee opened 4 new franchised
stores. Of the new Company-owned stores, 157 were opened in
fiscal 2006, 109 were opened in fiscal 2005, 109 were opened in
fiscal 2004 (net of the 8 former Pazo stores that were closed
and converted into 5 WH|BM stores and 3 Soma stores), 74 were
opened in fiscal 2003, and 66 were opened in fiscal 2002. During
this same time period, the Company closed 29 Company-owned
stores and no franchised stores were closed.
The Company has revised its targeted new store openings for
fiscal 2007 to include
135-145 new
stores (excluding the 10 Fitigues planned closures and the 13
stores reacquired from its franchisees). Of this total,
55-60 are
expected to be Chicos stores,
55-60 are
expected to be WH|BM stores, and
20-25 are
expected to be Soma stores. The Company also currently
anticipates
45-55
relocations/expansions in fiscal 2007. Planned square footage
growth for fiscal 2007 is now estimated to be approximately a
22% to 24% increase in selling square footage, slightly lower
than the originally announced goal of a 25% increase.
The primary factors which historically have influenced the
Companys profitability and success have been its growth in
number of stores and selling square footage, its positive
comparable store sales, and its strong operating margin. In the
last five years the Company has grown from 311 stores as of
February 3, 2002 to 920 stores as of February 3, 2007
(910 stores if the Fitigues stores slated for closing are
excluded), which includes the significant store growth resulting
from the acquisition of the 107 WH|BM stores in fiscal 2003 and
the launch of the Soma
35
brand in fiscal 2004. The Company continues to expand its
presence through the opening of new stores, the development of
new opportunities such as Soma and through the extension of its
merchandise line. The Company anticipates that its rate of
growth (measured by overall growth in sales, growth in
comparable store sales, and other factors) can be expected to
decrease from the rate of overall sales growth experienced in
recent years (which has been in the range of
30-40%),
such anticipated decrease in rate of growth reflecting in large
part the Companys significantly increased size, its more
manageable 22%-24% net square footage growth goal for fiscal
2007, its 15% net square footage growth goal for fiscal 2008 and
the expectation that its same store sales may continue to
experience more moderate and flatter increases and may
experience decreases from time to time, as was the case in the
second half of fiscal 2006. The Company generally expects to
continue to generate the necessary cash flow to fund its
expansion and to take advantage of new opportunities. The
Company has no long-term debt and foresees no current need to
incur long-term debt to support its continued growth.
Factors that will be critical to determining the Companys
future success include, among others, managing the overall
growth strategy, including the ability to open and operate
stores effectively, maximizing efficiencies in the
merchandising, product development and sourcing processes,
maintaining high standards for customer service and assistance,
maintaining newness, fit and comfort in its merchandise
offerings, matching merchandise offerings to customer
preferences and needs, effectuating customer acceptance of new
store concepts, integrating new or acquired businesses, maturing
the newer brand concepts, implementing the process of senior
management succession, and generating cash to fund the
Companys expansion needs. In order to monitor the
Companys success, the Companys senior management
monitors certain key performance indicators, including:
|
|
|
|
|
Comparable same store sales growth In fiscal
2006, the Companys comparable store sales growth (sales
from stores open for at least twelve full months, including
stores that have been expanded or relocated within the same
general market) was 2.1%. However, the overall increase in
comparable store sales in fiscal 2006 was significantly impacted
by single digit declines in comparable store sales beginning in
the second half of fiscal 2006. The Company believes that the
decline in comparable store sales for the core Chicos
brand was principally due to missteps in fashion merchandising,
an aggressive store/opening/relocation/expansion program that is
believed to have contributed to less than acceptable store
service levels and a refocusing in the direction of the
Companys marketing initiatives. The Companys current
strategy is to target a general overall trend towards positive,
but more moderate, comparable store sales growth. The Company
believes that its ability to realize such a general overall
positive trend in comparable store sales will prove to be a key
factor in determining its future levels of success
(i) particularly in terms of the Companys success in
effectively operating its stores across all brands, (ii) in
managing its continuing store expansion program across all
brands, and (iii) in maturing and developing its newer
brands.
|
|
|
|
Positive operating cash flow In fiscal 2006,
the Company generated $289 million of cash flow from
operations compared with $268 million in fiscal 2005, which
represents an increase of 7.7%. The Company believes that a key
strength of its business is the ability to consistently generate
cash flow from operations. Strong cash flow generation is
critical to the future success of the Company, not only to
support the general operating needs of the Company, but also to
fund capital expenditures related to new store openings,
relocations, expansions and remodels, future costs associated
with the Companys proposed expansions of its existing
corporate headquarters and its existing distribution center, any
future stock repurchase programs, costs associated with
continued improvement of information technology tools, including
the conversions to the SAP software platform, and costs
associated with potential strategic acquisitions that may arise
from time to time. See further discussion of the Companys
cash flows in the Liquidity and Capital Resources section of
this MD&A.
|
Loyalty Clubs and Customer
Development Management believes that a
significant indicator of the Companys success is the
extent of the growth of its loyalty programs, the Passport
Club and The Black Book, and support for such
loyalty programs that is provided through its personalized
customer service training programs and its marketing
initiatives. The Passport Club, the Chicos and Soma
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
36
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 still
generating strong interest from its customers due in large part
to the Companys commitment to personalized customer
service and constant newness of product. Active
customers are those who have purchased at one of the
Companys brands within the preceding 12 months.
As of February 3, 2007, the Company had approximately
1.6 million active Chicos and Soma permanent Passport
Club members and approximately 1.6 million active
preliminary Passport Club members. In fiscal 2006, active
permanent Passport Club members accounted for approximately 83%
of overall sales, slightly higher than in fiscal 2005, and
active preliminary members accounted for approximately 14% of
overall sales. During fiscal 2006, active permanent Passport
members spent, on average, over 60% more per transaction than
did active preliminary members.
As of February 3, 2007, WH|BM had approximately
0.6 million active permanent Black Book members and
approximately 1.2 million active preliminary Black Book
members. In fiscal 2006, the active permanent Black Book members
accounted for 63% of overall sales, while active preliminary
members accounted for 31% of overall sales. During fiscal 2006,
active permanent Black Book members spent, on average, over 70%
more per transaction than did active preliminary members.
The Company believes that the growth and consistency of its
Passport and Black Book clubs indicate that the Company is still
generating strong interest from new and existing customers, many
of whom tend to become long-term loyal customers, due in large
part to the Companys commitment to personalized customer
service and constant newness of product.
|
|
|
|
|
Quality and merit 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 newer Soma
concept, to expand the Companys direct to consumer
business, to secure new store locations including relocations
and/or
expansions of existing stores and to launch new product
categories within all brands, are all important strategies that,
if successful, should contribute to the continued growth of the
Company.
The Company continues to evaluate and monitor the progress of
its intimate apparel initiative with its Soma brand. The Company
recognizes that the Soma business can be seen as complementary
to its basic apparel business, but also understands that many
aspects of this business require unique attention. The Company
monitors Soma merchandise offerings in a manner similar to its
other brands with special emphasis on repeat purchases in the
foundation category. The Company anticipates that additional
investment will be required to establish the Soma brand as a
suitable business that meets the profitability goals of the
Company over the longer term. The Company estimates that the
Soma brand reduced the Companys earnings per share by $.07
for fiscal 2006 and the Company believes it will reduce fiscal
2007 earnings by between $.06 and $.10. The Company further
believes that an impact on earnings per share of this order is
acceptable when balanced against the potential of the
brands perceived longer term potential.
In fiscal year 2006, the Company reported net sales, operating
income and net income of $1.65 billion, $251 million
and $167 million, respectively. Net sales increased by
17.2%, while operating income and net income decreased by 15.8%
and 14.1%, respectively, from the prior fiscal year. The
Companys gross margin decreased to 58.7% in fiscal 2006
from 61.0% in fiscal 2005. The decrease in the gross profit
percentage was primarily due to lower merchandise margins at the
Chicos front-line stores (due mostly to more extensive
markdowns), the mix effect of WH|BM and Soma sales becoming a
larger portion of the Companys overall net sales,
increased inventory clearance costs and the continued investment
in the Companys product development teams. Gross profit
percentage was also negatively impacted by the portion of the
incremental stock-based compensation expense included in cost of
goods sold, which reduced the gross margin by approximately
30 basis points due to the adoption of SFAS 123R and
the related change in accounting for stock-based compensation.
37
General, administrative and store operating expenses (including
depreciation and amortization and impairment of goodwill)
increased as a percentage of net sales over the prior period by
approximately 370 basis points primarily due to increased
store operating expenses specifically for the Chicos brand
(primarily increases in personnel and occupancy costs)
attributable mainly to the deleverage associated with the
relatively flat comparable store sales in the Chicos
stores and to the Companys planned increase in store
payroll as a percentage of sales. General, administrative and
store operating expenses were also impacted by the portion of
the incremental stock-based compensation expense included in
these expenses due to the adoption of SFAS 123R, which had
an approximate 80 basis point impact, and the increased
occupancy costs, including depreciation and amortization expense
due to capital expenditures for new, remodeled and expanded
stores, which generally are larger in size than in prior years
and consequently require increased capital expense, and, to a
lesser extent, from the accelerated depreciation of certain
legacy software systems to be replaced in connection
with the Companys decision to move to the SAP software
platform. In addition, the Companys results were also
impacted by approximately an aggregate of $8.6 million of
impairment related expenses regarding the planned closure of the
Fitigues brand. The $8.6 million, or approximately
50 basis points, consisted primarily of an impairment loss
on goodwill totaling $6.8 million (which is shown on a
separate line within the consolidated statements of operations),
accelerated fixed asset depreciation of $1.2 million, and
other impairment related charges, mainly for inventory, totaling
$0.6 million, with no comparable amounts recorded in the
prior period. Sales and profitability trends are further
discussed in the Results of Operations section.
Future
Outlook
The Company has been carefully reviewing and rethinking its
recent practice of providing specific quarterly and annual sales
and earnings guidance. The retail industry is unique in
providing monthly sales and comparable store sales data, as well
as detailed operational data, for individual brands, which
provides interested parties with much greater detail than is
presented in the Companys financial statements. Therefore,
while the Company remains committed to maintaining the
transparency of its financial reporting, the Company will no
longer provide specific quarterly or annual sales and earnings
guidance; provided, however, that the Company does expect to
comment on the street consensus estimates from time to time, as
it had done in the past and when it believes necessary and
appropriate. In the March 6, 2007 year end earnings
release, for example, the Company stated that it believed that
if it achieved a low single digit same store sales increase on a
consolidated basis for fiscal 2007, the current consensus First
Call estimates at that time for fiscal 2007 sales and diluted
earnings per share appeared reasonable.
Looking forward to fiscal 2008, the Companys initial plan
contemplates targeting an approximate 15% increase in its
selling square footage, which is expected to result from
approximately
105-115 net
new stores and
30-50
relocations and expansions of existing stores. The preliminary
breakdown of new stores by brand for fiscal 2008 is as follows:
40-50
Chicos stores,
50-60 WH|BM
stores, and 5-15 Soma stores.
Results
of Operations
Net
Sales
The following table shows net sales by Company-owned
Chicos/Soma stores, net sales by Company-owned WH|BM
stores, net sales by catalog and Internet, and other net sales
in dollars and as a percentage of total net sales for the fiscal
years ended February 3, 2007 (fiscal 2006 or current
period, which consisted of 53 weeks),
January 28, 2006 (fiscal 2005 or prior period,
which consisted of 52 weeks) and January 29, 2005
(fiscal 2004, which consisted of 52 weeks) (dollar amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
%
|
|
|
Fiscal 2005
|
|
|
%
|
|
|
Fiscal 2004
|
|
|
%
|
|
|
Net sales by Chicos/Soma
stores
|
|
$
|
1,210,474
|
|
|
|
73.5
|
%
|
|
$
|
1,095,938
|
|
|
|
78.0
|
%
|
|
$
|
889,429
|
|
|
|
83.4
|
%
|
Net sales by WH|BM stores
|
|
|
367,063
|
|
|
|
22.3
|
|
|
|
261,601
|
|
|
|
18.6
|
|
|
|
142,092
|
|
|
|
13.3
|
|
Net sales by catalog and Internet
|
|
|
53,523
|
|
|
|
3.3
|
|
|
|
36,151
|
|
|
|
2.6
|
|
|
|
26,831
|
|
|
|
2.5
|
|
Other net sales
|
|
|
15,422
|
|
|
|
0.9
|
|
|
|
10,885
|
|
|
|
0.8
|
|
|
|
8,530
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,646,482
|
|
|
|
100.0
|
%
|
|
$
|
1,404,575
|
|
|
|
100.0
|
%
|
|
$
|
1,066,882
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Net sales by Company-owned Chicos, Soma and WH|BM stores
increased in the current period from the prior period, both in
the aggregate and separately by brand, primarily due to new
store openings, and to a lesser extent, from the slight overall
increase in the Companys comparable store net sales. A
summary of the factors impacting
year-over-year
sales increases is provided in the table below (dollar amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Comparable store sales increases
|
|
$
|
28,248
|
|
|
$
|
145,054
|
|
|
$
|
93,037
|
|
Comparable same store sales %
|
|
|
2.1
|
%
|
|
|
14.3
|
%
|
|
|
12.9
|
%
|
New store sales increases
|
|
$
|
196,741
|
|
|
$
|
180,964
|
|
|
$
|
200,566
|
|
Number of new Company-owned stores
opened, net
|
|
|
145
|
*
|
|
|
104
|
|
|
|
99
|
|
|
|
|
* |
|
Does not include Fitigues stores acquired in fiscal 2006 |
The comparable store sales increase of 2.1% in fiscal 2006 was
driven primarily by the 11% increase in comparable store sales
at the WH|BM stores which resulted primarily from an increase in
the number of transactions compared to fiscal 2005 and, to a
lesser extent, from an increase of 2.5% in the WH|BM 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). The overall comparable store sales
increase was offset by an essentially flat comparable store
sales result at the Chicos and Soma stores which resulted
primarily from a decrease of 1.6% in the average unit retail
price offset by an increase in the number of transactions. In
fiscal 2006, WH|BM same store sales represented approximately
21% of the total same store sales base compared to 16% in fiscal
2005. The comparable store sales increase of 14.3% in fiscal
2005 was driven primarily by an increase in the number of
transactions compared to fiscal 2004 and, to a lesser extent,
from an increase of 0.4% in the Chicos average unit retail
price and an increase of 7.8% in the average unit retail price
for WH|BM.
WH|BM stores were included in the comparable store sales
calculation beginning in October 2004, which was 12 full months
after the acquisition date of September 5, 2003. For fiscal
2004, WH|BM sales prior to October 2004 are included in new
store sales. Sales from Soma stores in fiscal 2005 were included
in the comparable store sales calculation beginning in September
2005 and did not have a material impact on the calculation. In
fiscal 2004, all other sales from Soma stores were included in
new store sales. Sales from Fitigues stores were included in new
store sales in fiscal 2006 and will be included in
discontinued operations in fiscal 2007 due to the
planned closure of the brand.
Net sales by catalog and Internet for fiscal 2006 (which
included merchandise from all four of the Companys brands)
increased by $17.4 million, or 48.1%, compared to net sales
by catalog and Internet for fiscal 2005. It is believed that the
increase was principally attributable to significant increases
in WH|BM and Soma merchandise items available on the website,
and to a lesser extent, increases in the Chicos
merchandise available for sale through the Internet and the
increased circulation of catalog mailings.
Net sales by catalog and Internet for fiscal 2005 (which
included mostly Chicos and WH|BM merchandise and a small
offering of Soma merchandise) increased by $9.3 million, or
34.7%, compared to net sales by catalog and Internet for fiscal
2004. It is believed that the increase was principally
attributable to the increased circulation of catalog mailings
and additional television spots in fiscal 2005 compared to
fiscal 2004 and, to a lesser extent, the launch of the WH|BM
website in August 2005 providing WH|BM customers with the
opportunity to purchase merchandise over the Internet and
through its catalog.
Cost
of Goods Sold/Gross Profit
The following table shows cost of goods sold and gross profit in
dollars and the related gross profit percentages for fiscal
2006, 2005 and 2004 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Cost of goods sold
|
|
$
|
679,416
|
|
|
$
|
547,532
|
|
|
$
|
411,908
|
|
Gross profit
|
|
$
|
967,066
|
|
|
$
|
857,043
|
|
|
$
|
654,974
|
|
Gross profit percentage
|
|
|
58.7
|
%
|
|
|
61.0
|
%
|
|
|
61.4
|
%
|
39
The decrease in the gross profit percentage from fiscal 2005 to
fiscal 2006 resulted primarily from a decrease of 100 basis
points in the merchandise margins at the Chicos front-line
stores and to a lesser extent, due to the mix effect resulting
from the WH|BM and Soma sales becoming a larger portion of the
Companys overall net sales (both WH|BM and Soma brands
operate with lower gross margins than the Chicos brand).
The decrease in merchandise margins at the Chicos
front-line stores was primarily due to a higher markdown rate
compared to the prior period. Gross profit percentage was also
negatively impacted by increased inventory clearance costs and
the deleverage associated with the relatively flat comparable
store sales in the Chicos stores and, to a lesser extent,
from the continued investment in the Companys product
development and merchandising functions and by the recognition
of approximately $5.6 million of incremental stock-based
compensation expense due to the adoption of SFAS 123R and
the related change in accounting for stock-based compensation,
which reduced the gross margin by approximately 30 basis
points.
The decrease in the gross profit percentage from fiscal 2004 to
fiscal 2005 resulted primarily from a decrease in the
merchandise margins at the Companys outlet stores, from
the Companys continued investment in its Soma and WH|BM
brands, which generate somewhat lower gross margins (Soma
merchandise margins were approximately 10 percentage points
lower than the merchandise margins at Chicos and WH|BM
merchandise margins were just under 4 percentage points
lower than the merchandise margins at Chicos), and to a
lesser extent, from the Companys continued investment in
the product development and merchandising functions for all of
its brands as well as from slightly increased inventory
clearance costs. These decreases in gross profit percentage were
partially offset by an improvement of approximately 180 basis
points in the merchandise margins at WH|BM front-line stores.
The improvement of merchandise margins at the WH|BM front-line
stores resulted primarily from improved initial markups on new
products, moderated in part by a higher markdown rate compared
to the prior period. The gross profit percentage for
Chicos front-line stores improved slightly, approximately
10 basis points, for the current period compared to the
prior period primarily due to improved initial markups on new
products offset by a higher markdown rate compared to the prior
period.
General,
Administrative and Store Operating Expenses
The following table shows general, administrative and store
operating expenses in dollars and as a percentage of total net
sales for fiscal 2006, 2005 and 2004 (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
Fiscal 2005
|
|
Fiscal 2004
|
|
General, administrative and store
operating expenses
|
|
$
|
647,421
|
|
|
$
|
514,529
|
|
|
$
|
398,117
|
|
Percentage of total net sales
|
|
|
39.3
|
%
|
|
|
36.6
|
%
|
|
|
37.3
|
%
|
The increase in general, administrative and store operating
expenses in dollars was, for the most part, the result of
increases in the Companys store operating expenses,
including associate compensation, occupancy and other costs
associated with additional store openings and, to a lesser
degree, an increase in marketing expenses, the adoption of
SFAS 123R and other general corporate infrastructure costs
to support the Companys growth, including expenses related
to housing of off-site business units.
General, administrative and store operating expenses as a
percentage of net sales increased 270 basis points in
fiscal 2006 over the prior period primarily due to increased
store operating expenses in the Chicos stores (primarily
personnel and occupancy costs) attributable mainly to the larger
size stores the Company has been opening, an increase in store
relocations and expansions, as well as the deleverage associated
with the flat comparable store sales in the Chicos stores
and the Companys planned increase in store payroll as a
percentage of net sales. General, administrative and store
operating expenses as a percentage of net sales also increased
compared to the prior period due to the recognition of
approximately $14.1 million of incremental stock-based
compensation expense due to the adoption of SFAS 123R and
the related change in accounting for stock-based compensation,
or an impact of approximately 80 basis points, when
compared to the prior period and to an even lesser extent, by a
planned increase in marketing expenses as a percentage of total
net sales. These increases in general, administrative and store
operating expenses as a percentage of net sales were offset
slightly by a reduction in incentive compensation mostly due to
the Companys lower than anticipated fiscal year results.
General, administrative and store operating expenses as a
percentage of net sales in fiscal 2005 decreased 70 basis
points over the prior period primarily because there was
$3.4 million of rent expense included in fiscal 2004
40
related to prior fiscal years (see further discussion below) to
adjust the Companys presentation of rent expense with no
comparable expense in fiscal 2005. General, administrative and
store operating expenses as a percentage of net sales was also
positively impacted by a significant decrease in WH|BM store
operating expenses (primarily in personnel and occupancy costs)
as a percentage of total net sales over the prior period
resulting from leverage associated with the WH|BM comparable
store sales increase in the
mid-to-high
thirty percent range. These decreases in general, administrative
and store operating expenses as a percentage of total net sales
were partially offset by increased incentive compensation as a
result of the Companys strong financial performance.
In fiscal 2004, general, administrative and store operating
expenses were impacted by the Companys decision, in
connection with a review of its accounting practices relating to
leasing transactions, to record a one-time, non-cash adjustment
related to the timing of rent expense for store locations.
Previously, the Company followed a practice prevalent across the
retailing industry, in which it recognized the straight line
rent expense for leases beginning generally on the earlier of
the store opening date or lease commencement date, which had the
effect of excluding the build-out period of its stores from the
calculation of the period over which it expensed rent. The
Company now records rent expense when it takes possession of a
store, which occurs before the commencement of the lease term or
approximately
45-60 days
prior to the opening of the store. This adjustment resulted in a
one-time, cumulative, non-cash increase to rent expense of
approximately $4.1 million pre-tax. Of the
$4.1 million pre-tax expense recorded in fiscal 2004,
$0.7 million was attributable to the current year and
$3.4 million pre-tax, was related to prior fiscal years.
Furthermore, in fiscal 2004, the Company revised the manner in
which it accounts for construction allowances from landlords of
properties leased by the Company for its stores. For fiscal 2004
and for future fiscal years, construction allowances are
amortized as a reduction of rent expense, rather than being
amortized as a reduction of depreciation expense, which was the
approach followed in fiscal years prior to 2004. For fiscal
2004, the impact of amortizing construction allowances as a
reduction of rent expense rather than as a reduction of
depreciation expense resulted in a decrease to rent expense of
approximately $4.2 million. The net impact of these two
lease accounting adjustments was immaterial to general,
administrative and store operating expenses in total and as a
percentage of total net sales.
Depreciation
and Amortization
The following table shows depreciation and amortization in
dollars and as a percentage of total net sales for fiscal 2006,
2005 and 2004 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
Fiscal 2005
|
|
Fiscal 2004
|
|
Depreciation and amortization
|
|
$
|
61,840
|
|
|
$
|
44,201
|
|
|
$
|
32,481
|
|
Percentage of total net sales
|
|
|
3.8
|
%
|
|
|
3.1
|
%
|
|
|
3.0
|
%
|
The increase in depreciation and amortization expense as a
percentage of total net sales was due primarily to capital
expenditures related to new, relocated and expanded stores,
which generally are larger in size than in prior years and
consequently require an increased capital expense as well as
from the deleverage associated with the relatively flat
comparable store sales in the Chicos stores, and, to a
lesser extent, from the accelerated depreciation of certain
legacy software systems to be replaced in connection
with the Companys decision to move to the SAP software
platform as well as from other newly installed hardware and
software packages.
The increase in depreciation and amortization expense from
fiscal 2004 to fiscal 2005 was, for the most part, due to
capital expenditures related to new, relocated and expanded
stores.
Impairment
of Goodwill
During fiscal 2006, the Company acquired most of the assets of
Fitigues consisting primarily of 12 retail stores and its
Internet sales operations. In the fourth quarter of fiscal 2006,
the Company completed its evaluation of the Fitigues brand and
decided to close down operations of the Fitigues brand and, in
the first quarter of fiscal 2007, began closing the Fitigues
brands stores. The Company anticipates all 10 of the
remaining Fitigues stores at fiscal year end to be closed and
the website to be shut down by the end of the second quarter of
fiscal 2007. In connection with reaching this decision, the
Company completed an impairment review of Fitigues
goodwill and determined
41
that the fair value of the Fitigues reporting unit was less than
its carrying value, including the existing goodwill. As a
result, the Company recorded a goodwill impairment charge of
$6.8 million during fiscal 2006. The loss on impairment is
included as a separate line within income from continuing
operations in the accompanying consolidated statements of income.
Provision
for Income Taxes
The Companys effective tax rate was 36.3%, 36.7% and
37.7%, for fiscal 2006, 2005 and 2004, respectively. The
decrease in the effective tax rate for fiscal 2006 from fiscal
2005 was primarily attributable to favorable permanent
differences, mainly higher charitable inventory contributions
and tax-free interest, offset, in part, by a slightly
unfavorable change in the Companys overall state effective
tax rate mainly due to a change in the weight of sales, property
and income apportioned to unitary and higher tax jurisdictions.
The decrease in the effective tax rate for fiscal 2005 from
fiscal 2004 was primarily attributable to favorable permanent
differences, including higher tax-free interest, as well as a
slightly favorable change in the Companys overall state
effective tax rate. The Company expects that its effective tax
rate for fiscal 2007 will be flat to slightly favorable compared
to the effective tax rate for fiscal 2006.
Net
Income
The following table shows net income in dollars and as a
percentage of total net sales for fiscal 2006, 2005 and 2004
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Net income
|
|
$
|
166,636
|
|
|
$
|
193,981
|
|
|
$
|
141,206
|
|
Percentage of total net sales
|
|
|
10.1
|
%
|
|
|
13.8
|
%
|
|
|
13.2
|
%
|
Comparable
Company Store Net Sales
Comparable store sales for the 53 week period ended
February 3, 2007 increased 2.1% compared to the same
53 week period last year ended February 4, 2006.
Comparable Company store net sales data is calculated based on
the change in net sales of currently open Company-owned 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 100
stores that were expanded or relocated within the last two
fiscal years by an average of 1,214 selling square feet. If the
stores that were expanded and relocated had been excluded from
the comparable Company-owned store base, the increase in
comparable Company-owned store net sales would have been 1.0%
for fiscal 2006 (versus 2.1% as reported). The Company does not
consider the effect to be material to the overall comparable
store sales results and believes the inclusion of expanded
stores in the comparable store net sales to be an acceptable
practice, consistent with the practice followed by the Company
in prior periods and by some other retailers. WH|BM stores
acquired in The White House, Inc. acquisition were included in
the comparable store sales calculation for the first time
beginning in October 2004 and WH|BM stores opened since the
acquisition are treated the same as all other Company-owned
stores. Soma stores began entering into the comparable store
sales calculation in September 2005 and due to the small number
of stores have not had a material impact on the comparable store
sales calculation. Sales from Fitigues stores were included in
new store sales in fiscal 2006 and will be included in
discontinued operations in fiscal 2007 due to the
planned closure of the brand.
The Company believes that the overall increase in comparable
Company store net sales (an 11% increase for the WH|BM brand,
offset by a relatively flat change for the Chicos brand)
for fiscal 2006 was impacted by missteps in fashion
merchandising, an aggressive store opening/relocation/expansion
program that the Company believes contributed to less than
acceptable store service levels and a refocusing of the
direction of the Companys marketing initiatives.
42
The following table sets forth for each of the quarters of the
previous five fiscal years, the percentage change in comparable
store net sales at Company-owned stores from the comparable
period in the prior fiscal year:
Fiscal
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/3/07
|
|
|
1/28/06
|
|
|
1/29/05
|
|
|
1/31/04
|
|
|
2/1/03
|
|
|
Full Year
|
|
|
2.1
|
%
|
|
|
14.3
|
%
|
|
|
12.9
|
%
|
|
|
16.1
|
%
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
6.6
|
%
|
|
|
10.8
|
%
|
|
|
20.1
|
%
|
|
|
7.8
|
%
|
|
|
13.2
|
%
|
Second Quarter
|
|
|
5.7
|
%
|
|
|
15.7
|
%
|
|
|
14.1
|
%
|
|
|
14.6
|
%
|
|
|
11.6
|
%
|
Third Quarter
|
|
|
(1.2
|
)%
|
|
|
16.0
|
%
|
|
|
6.1
|
%
|
|
|
20.9
|
%
|
|
|
18.2
|
%
|
Fourth Quarter
|
|
|
(2.0
|
)%
|
|
|
14.6
|
%
|
|
|
12.9
|
%
|
|
|
20.5
|
%
|
|
|
11.0
|
%
|
Liquidity
and Capital Resources
Overview
The Companys ongoing capital requirements have been and
are for funding capital expenditures for new, expanded,
relocated and remodeled stores and increased merchandise
inventories, for planned expansion of its headquarters,
distribution center and other central support facilities, to
fund stock repurchases under the Companys previous stock
repurchase programs, and for continued improvement in
information technology tools, including the ongoing conversion
the Company is planning to the SAP software platform.
The following table shows the Companys capital resources
at the end of fiscal year 2006 and 2005 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Cash and cash equivalents
|
|
$
|
37,203
|
|
|
$
|
3,035
|
|
Marketable securities
|
|
|
238,336
|
|
|
|
401,445
|
|
Working capital
|
|
|
327,624
|
|
|
|
415,310
|
|
Working capital decreased from fiscal 2005 to fiscal 2006
primarily due to the Companys share repurchase programs
during fiscal 2006 which totaled $200 million. This
decrease in working capital was partially offset by the
Companys cash generated from operating activities, which
cash was more than necessary to satisfy the Companys
investment in capital expenditures. 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 Headquarters Expansion
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 $289 million
and $268 million for fiscal 2006 and 2005, respectively.
The cash provided by operating activities for both periods was
due to the Companys net income, adjusted for non-cash
charges and changes in working capital such as:
|
|
|
|
|
Depreciation and amortization expense;
|
|
|
|
Deferred tax benefits;
|
|
|
|
Stock-based compensation expense and the related income tax
effects thereof;
|
|
|
|
Normal fluctuations in accounts receivable, inventories, prepaid
and other current assets, accounts payable and accrued
liabilities.
|
43
In addition, prior to the adoption of SFAS 123R, the
Company presented all tax benefits related to tax deductions
resulting from the exercise of stock options as operating
activities in the consolidated statement of cash flows.
SFAS 123R requires that cash flows resulting from tax
benefits related to tax deductions in excess of the compensation
expense recognized for those options (excess tax benefits) be
classified as financing cash flows. As a result, the Company
classified $2.4 million of excess tax benefits as a
financing cash inflow and a corresponding operating cash outflow
for fiscal 2006. The $21.5 million of tax benefit of stock
options exercised in fiscal 2005 is presented as an operating
cash inflow in the prior period in accordance with APB 25.
Investing
Activities
Net cash used in investing activities was $63.4 million and
$308.3 million for fiscal 2006 and 2005, respectively.
The Companys investment in capital expenditures during
fiscal 2006 primarily related to the planning and opening of
new, relocated, remodeled and expanded Chicos, WH|BM, Soma
and Fitigues stores ($152.8 million), costs associated with
system upgrades and new software implementations
($26.7 million), costs and improvements associated with the
purchase of a 22 acre property adjacent to the
Companys current headquarters campus ($26.4 million),
distribution center infrastructure costs ($3.9 million),
and other miscellaneous capital expenditures
($8.5 million). Capital expenditures increased by
$70.7 million from fiscal 2005 to fiscal 2006 primarily as
a result of increased costs related to the opening of a greater
number of new, relocated, remodeled and expanded Chicos,
WH|BM, Soma and Fitigues stores and increased information system
technology investments related to new technology initiatives,
including the Companys decision to move to the SAP
software platform.
The Company sold $163.2 million, net, of marketable
securities in the current year primarily to fund the
Companys stock repurchase programs. By contrast, in the
prior period, the Company invested $150.2 million, net, in
marketable securities.
In addition, during fiscal 2006, the Company completed the
purchase of most of the assets of the Fitigues brand stores for
$7.5 million and paid $0.8 million for the purchase of
the net assets of one of its franchise stores, while in fiscal
2005, the Company purchased an equity investment in a privately
held company for business and strategic purposes totaling
$10.4 million.
Financing
Activities
Net cash used in financing activities was $191.4 million in
fiscal 2006 while net cash provided by financing activities was
$28.5 million in fiscal 2005.
In March 2006, the Companys Board of Directors (the
Board) approved the repurchase, over a twelve-month
period ending in March 2007, of up to $100 million of the
Companys outstanding common stock. During fiscal 2006, the
Company repurchased 3,081,104 shares of its common stock in
connection with this stock repurchase program, which represented
the entire $100 million initial stock repurchase program
authorized by the Companys Board.
In May 2006, the Company announced that its Board had approved
the repurchase of an additional $100 million of the
Companys common stock over a twelve month period ending in
May 2007. During fiscal 2006, the Company repurchased
3,591,352 shares of its common stock in connection with
this stock repurchase program, which represented the entire
additional $100 million program authorized by the
Companys Board. In addition, in the fourth quarter of
fiscal 2006, the Company repurchased an additional
7,090 shares of restricted stock in connection with
employee tax withholding obligations under employee compensation
plans, which are not purchases under any publicly announced plan.
As discussed above, prior to the adoption of SFAS 123R, the
Company presented all tax benefits related to tax deductions
attributable to the exercise of stock options as operating
activities in the consolidated statement of cash flows.
SFAS 123R requires that cash flows resulting from tax
benefits related to such tax deductions in excess of the
compensation expense recognized for those options (excess tax
benefits) be classified as financing cash flows. As a result,
the Company classified $2.4 million of excess tax benefits
as a financing cash inflow in fiscal 2006 with no comparable
amount in fiscal 2005.
44
The Company received proceeds in both fiscal 2006 and 2005 from
the issuance of common stock related to current and former
employee option exercises and employee participation in its
employee stock purchase plan.
During fiscal 2006, certain of the Companys current and
former officers exercised an aggregate of 231,501 stock options
at prices ranging from $5.42 to $26.34 and certain employees and
former employees exercised an aggregate of 131,644 options at
prices ranging from $0.1805 to $22.10. Also, during this period,
the Company sold 9,790 and 81,760 shares of common stock
during the March and September offering periods under its
employee stock purchase plan at prices of $40.00 and $15.68,
respectively. The proceeds from these issuances of stock,
exclusive of the tax benefit realized by the Company, amounted
to approximately $6.4 million.
New
Store Openings and Headquarters Expansion
During fiscal 2007, the Company plans to open approximately
135-145 net
new stores (excluding the 10 planned Fitigues closures and the
13 acquired franchise stores), of which
55-60 are
expected to be Chicos stores,
55-60 are
expected to be WH|BM stores and
20-25 are
expected to be Soma stores. The Company believes that the
liquidity needed for its planned new store growth (including
continued investments associated with the decision to grow its
new concept, Soma), continuing remodel/expansion program,
continued installation and upgrading of new and existing
software packages, and maintenance of proper inventory levels
associated with this growth will be funded from cash flow from
operations and its existing strong cash and marketable
securities balances.
During the first quarter of fiscal 2006, the Company completed
the purchase of approximately 22 acres of property adjacent
to the Companys current headquarters site on Metro Parkway
in Fort Myers, Florida to serve as the base for expansion
of the Companys corporate headquarters operations. The
property includes seven existing buildings aggregating
approximately 200,600 square feet of space, most of which
continues to be leased to unrelated third parties. As leases
expire, the Company anticipates it will be utilizing the vacant
space, which is likely to require modifications, for its
expanding corporate headquarters needs. The total cost for this
property, along with the buildings, was approximately
$26.4 million, which includes all transaction costs as of
February 3, 2007. The acquisition was funded from the
Companys existing cash and marketable securities balances.
With respect to addressing the needs for additional distribution
center space, the Company is evaluating its requirements and the
appropriate timing to make additional distribution center
capacity available. The Companys present goal in this
regard is to begin design work in fiscal 2007. It is currently
anticipated that the Company will require additional
distribution space in late fiscal 2008 or early fiscal 2009 and,
initially, the Company is focusing its evaluation on the
expansion of its current distribution center on existing
adjacent land that is already owned by the Company.
During fiscal 2005, the Company completed the purchase of
105 acres in south Fort Myers, Florida originally
intended for the location of a new corporate headquarters campus
for a total cost of $38.1 million, which included all
transaction costs and $5.4 million of road impact fees.
When the 22 acre property adjacent to its current
headquarters site became available, the Company decided to plan
its expansion at its current location and to hold the
105 acre property for investment. During the third quarter
of fiscal 2006, management committed to a plan to sell the
105 acre property and the Company anticipates that the land
will be sold within the next 12 months. The Company does
not expect that any such sale will have any material impact on
its statements of operations or overall financial position.
In May 2006, the Company announced that it will work with SAP, a
third party vendor, to implement an enterprise resource planning
system (ERP) to assist in managing its retail stores, 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 successfully 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 and
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 as early as the end of fiscal 2007 or the first half
of fiscal 2008. 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. 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.
45
The Company further believes that this liquidity will be
sufficient, based on the above, to fund anticipated capital
needs over the near-term, including the recent franchisee
acquisitions in the first quarter of fiscal 2007. Given the
Companys existing cash and marketable securities balances
and the capacity included in its bank credit facilities, the
Company does not believe that it would 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, expanded or
relocated in future periods.
Contractual
Obligations
The following table summarizes the Companys contractual
obligations at February 3, 2007 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Long-term debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
668,072
|
|
|
|
97,671
|
|
|
|
189,705
|
|
|
|
156,506
|
|
|
|
224,190
|
|
Non-cancelable purchase commitments
|
|
|
180,883
|
|
|
|
180,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
848,955
|
|
|
$
|
278,554
|
|
|
$
|
189,705
|
|
|
$
|
156,506
|
|
|
$
|
224,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 3, 2007, the Companys contractual
obligations consisted of amounts outstanding under operating
leases and non-cancelable purchase commitments. Amounts due
under non-cancelable purchase commitments consists of amounts to
be paid under agreements to purchase inventory that are legally
binding and that specify all significant terms, as well as
amounts due on commercial letters of credit outstanding.
In June 2005, the Company entered into the Second Restated
Revolving Credit Loan Agreement with Bank of America, N.A. (the
Agreement), which replaced the Restated Revolving
Credit and Term Loan Agreement dated as of September 2002, on
terms and conditions substantially similar to the replaced
facility. The terms of the Agreement provide for a
$45 million aggregate revolving credit loan commitment,
with a letter of credit sublimit of $40 million and a line
of credit sublimit of $5 million. The revolving credit
facility initially matured June 1, 2006, but automatically
renewed through June 1, 2007 and is set up to continue to
automatically renew for additional one-year periods through 2010.
At February 3, 2007 and January 28, 2006, the Company
did not have any relationship with unconsolidated entities or
financial partnerships, of the type, which certain other
companies have established for the purpose of facilitating
off-balance sheet arrangements or for other contractually narrow
or limited purposes. Therefore, the Company is not materially
exposed to any financing, liquidity, market or credit risk that
could arise if the Company had engaged in such relationships.
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 preparation of consolidated
financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to
customer product returns, inventories, income taxes, insurance
reserves, contingencies and litigation. The Company bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
46
The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Inventory
Valuation
The Company identifies potentially excess and slow-moving
inventories by evaluating turn rates and inventory levels in
conjunction with the Companys overall growth rate. Excess
quantities are identified through evaluation of inventory
ageings, review of inventory turns and historical sales
experiences, as well as specific identification based on fashion
trends. Further, exposure to inadequate realization of carrying
value is identified through analysis of gross margins and
markdowns in combination with changes in the fashion industry.
The Company provides lower of cost or market reserves for such
identified excess and slow-moving inventories.
Inventory
Shrinkage
The Company estimates its expected shrinkage of inventories
between physical inventory counts by applying historical
chain-wide average shrinkage experience rates to the related
periods sales volume. The historical rates are updated on
a regular basis to reflect the most recent physical inventory
shrinkage experience.
Revenue
Recognition
Although the Companys recognition of revenue does not
involve significant judgment, revenue recognition represents an
important accounting policy of the Company. Retail sales by
Company stores are recorded at the point of sale and are net of
estimated customer returns, sales discounts under the
Passport Club and The Black Book loyalty
programs and Company issued coupons. Retail sales by catalog and
Internet are recorded when shipments are made to catalog and
Internet customers and are net of estimated customer returns.
Net sales to franchisees are recorded when merchandise is
shipped to franchisees and are net of estimated returns. Under
the Companys current program, gift certificate and gift
card sales do not have expiration dates. The Company accounts
for gift certificates and gift cards by recognizing a liability
at the time a gift certificate or gift card is sold. The
liability is relieved and revenue is recognized for gift
certificates and gift cards upon redemption. In addition, the
Company recognizes revenue on unredeemed gift certificates and
gift cards when it can determine that the likelihood of the gift
certificate or gift card being redeemed is remote and that there
is no legal obligation to remit the unredeemed gift certificates
or gift cards to relevant jurisdictions (commonly referred to as
gift card breakage). The Company recognizes gift card breakage
under the redemptive recognition method. This method records
gift card breakage as revenue on a proportional basis over the
redemption period based on the Companys historical gift
card breakage rate. The Company determines the gift card
breakage rate based on its historical redemption patterns. Once
the breakage rate is determined, it is recognized over a
60-month
period based on historical redemption patterns of gift
certificates and gift cards.
The Companys policy is to honor customer returns in most
instances. Returns after 30 days of the original purchase,
or returns without the original receipt, qualify for store
credit only. The Company will, in certain circumstances, offer
full customer refunds either after 30 days or without a
receipt. The Company estimates its reserve for likely customer
returns based on the average refund experience in relation to
sales for the related period.
Evaluation
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.
The Company evaluates the recoverability of goodwill at least
annually based on a two-step impairment test. The first step
compares the fair value of the Companys reporting unit
with its carrying amount, including goodwill.
47
If the carrying amount exceeds fair value, then the second step
of the impairment test is performed to measure the amount of any
impairment loss. Fair value is determined based on estimated
future cash flows, discounted at a rate that approximates the
Companys cost of capital. The Company evaluates its other
intangible assets, specifically trademarks, for impairment on an
annual basis by comparing the fair value of the asset with its
carrying value. Such estimates are subject to change and the
Company may be required to recognize impairment losses in the
future.
Self-Insurance
The Company is self-insured for certain losses relating to
workers compensation, medical and general liability
claims. Self-insurance claims filed and claims incurred but not
reported are accrued based upon managements estimates of
the aggregate liability for uninsured claims incurred using
historical experience. Although management believes it has the
ability to adequately accrue for estimated losses related to
claims, it is possible that actual results could significantly
differ from recorded self-insurance liabilities.
Income
Taxes
The Company records reserves for estimates of probable
settlements of tax audits. At any point in time, many tax years
are subject to audit by various taxing jurisdictions. The
results of these audits and negotiations with taxing authorities
may affect the ultimate settlement of these issues. The
Companys effective tax rate in a given financial statement
period may be materially impacted by changes in the mix and
level of earnings and changes in the expected outcome of tax
audits.
Accounting
for Contingencies
From time to time, the Company is subject to various
proceedings, lawsuits, disputes and claims (actions)
arising from its normal business activities. Many of these
actions raise complex factual and legal issues and are subject
to uncertainties. Accounting for contingencies arising from
these actions requires management to use its best judgment when
estimating an accrual, if any, related to such contingencies.
Management may also consult with outside legal counsel to assist
in the estimating process. However, the ultimate outcome of such
actions could be different than managements estimate, and
adjustments may be required.
Stock-Based
Compensation Expense
Effective January 29, 2006, the Company adopted the
provisions of SFAS 123R using the modified prospective
transition method. Under this transition method, stock-based
compensation expense recognized during fiscal 2006 for
share-based awards includes: (a) 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 123, and (b) 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.
In accordance with the modified prospective transition method,
results for the prior period have not been restated. Prior to
the adoption of SFAS 123R, the Company recognized
stock-based compensation expense in accordance with APB 25
and related Interpretations, as permitted by SFAS 123.
The calculation of share-based employee compensation expense
involves estimates that require managements judgments.
These estimates include the fair value of each of the stock
option awards granted, which is estimated on the date of grant
using a Black-Scholes option pricing model. There are two
significant inputs into the Black-Scholes option pricing model:
expected volatility and expected term. The Company estimates
expected volatility 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 under the
Companys stock option plans and represents the period of
time that stock option awards granted are expected to be
outstanding. The assumptions used in calculating the fair value
of share-based payment awards represent managements best
estimates, but these estimates involve inherent uncertainties
and the application of management judgment. As a result, if
factors change and the Company uses different assumptions,
stock-based compensation
48
expense could be materially different in the future. In
addition, the Company is required to estimate the expected
forfeiture rate, and only recognize expense for those shares
expected to vest. If the Companys actual forfeiture rate
is materially different from its estimate, the stock-based
compensation expense could be significantly different from what
the Company has recorded in the current period. See Note 9
to the consolidated financial statements for a further
discussion on stock-based compensation.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (the
FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being
recognized in the financial statements. Additionally,
FIN 48 provides guidance on derecognition, classification,
interest, penalties, accounting in interim periods and
disclosure related to uncertain income tax positions.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect the adoption
of FIN 48 to have a material effect on its financial
position, results of operations or cash flows.
In June 2006, the FASBs Emerging Issues Task Force
(EITF) ratified Issue
No. 06-3
(EITF
06-3),
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That is, Gross versus Net Presentation). Taxes
within the scope of EITF Issue
No. 06-3
include any taxes assessed by a governmental authority that are
directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but are not limited to,
sales taxes, use taxes, value-added taxes, and some excise
taxes. The EITF concluded that the presentation of these taxes
on either a gross (included in revenues and costs) or a net
(excluded from revenues) basis is an accounting policy decision
that should be disclosed. For any such taxes that are reported
on a gross basis, a company should disclose the amounts of those
taxes in interim and annual financial statements. The
Companys policy is and has been, to exclude all such taxes
from revenue. EITF
06-3 is
effective for interim and annual reporting periods beginning
after December 15, 2006. As the Company does not intend to
modify its current accounting policy of recording sales tax
collected on a net basis, the adoption of EITF
06-3 will
have no material impact on the Companys consolidated
financial statements.
Seasonality
and Inflation
Although the operations of the Company are influenced by general
economic conditions, the Company does not believe that inflation
has had a material effect on the results of operations during
the current or prior periods. The Company does not consider its
business to be seasonal.
The Company reports its sales on a monthly basis in line with
other public companies in the womens apparel industry.
Although the Company believes this regular reporting of interim
sales may provide for greater transparency to investors, the
Company is concerned that these interim results tend to be
relied upon too heavily as a trend. For example, such factors as
the weather (numerous hurricanes in fiscal 2005 and 2004),
national events (elections), international events (9/11 and
developments in Iraq), interest rates, increased oil and other
energy costs, changes in the nature of its merchandise
promotions, and similar factors can significantly affect the
Company for a particular period. 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 new merchandise.
Certain
Factors That May Affect Future Results
This
Form 10-K
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 profit
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,
49
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-K
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-K,
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
Form 10-K.
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 private 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 catalog and Internet sales, 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 Annual Report on
Form 10-K.
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.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The market risk of the Companys financial instruments as
of February 3, 2007 has not significantly changed since
January 28, 2006. 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 February 3, 2007, the Company did not have any
outstanding borrowings on its line of credit and, given its
strong 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 and auction rate securities, which are highly
liquid variable rate municipal debt securities. Although these
securities have long-term nominal maturity dates ranging from
2009 to 2042, the interest rates are reset, depending on the
type of security, either daily, every 7 days or every
28 days. Despite the long-term nature of the underlying
securities, 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 February 3, 2007, an increase or decrease
of 100 basis points in interest rates would have had no
impact on the fair value of the Companys marketable
securities portfolio.
50
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM
Board of Directors and Shareholders
Chicos FAS, Inc.
We have audited the accompanying consolidated balance sheets of
Chicos FAS, Inc. and subsidiaries (the Company) as of
February 3, 2007 and January 28, 2006, and the related
consolidated statements of income, stockholders equity and
cash flows for each of the three fiscal years in the period
ended February 3, 2007. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Chicos FAS, Inc. and subsidiaries at
February 3, 2007 and January 28, 2006, and the
consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended
February 3, 2007, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Chicos FAS, Inc.s internal control
over financial reporting as of February 3, 2007, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated April 2, 2007
expressed an unqualified opinion thereon.
As discussed in Note 1 to the consolidated financial
statements, as of January 29, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment.
Tampa, Florida,
April 2, 2007
51
CHICOS
FAS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,203
|
|
|
$
|
3,035
|
|
Marketable securities, at market
|
|
|
238,336
|
|
|
|
401,445
|
|
Receivables
|
|
|
14,246
|
|
|
|
7,240
|
|
Income taxes receivable
|
|
|
|
|
|
|
5,013
|
|
Inventories
|
|
|
110,840
|
|
|
|
95,421
|
|
Prepaid expenses
|
|
|
15,774
|
|
|
|
13,497
|
|
Land held for sale
|
|
|
38,120
|
|
|
|
|
|
Deferred taxes
|
|
|
17,337
|
|
|
|
12,327
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
471,856
|
|
|
|
537,978
|
|
Property and
Equipment:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
14,640
|
|
|
|
44,893
|
|
Building and building improvements
|
|
|
56,782
|
|
|
|
35,573
|
|
Equipment, furniture and fixtures
|
|
|
268,122
|
|
|
|
187,970
|
|
Leasehold improvements
|
|
|
301,670
|
|
|
|
209,342
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
641,214
|
|
|
|
477,778
|
|
Less accumulated depreciation and
amortization
|
|
|
(184,474
|
)
|
|
|
(131,846
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
456,740
|
|
|
|
345,932
|
|
Goodwill
|
|
|
62,596
|
|
|
|
61,796
|
|
Other Intangible
Assets
|
|
|
34,040
|
|
|
|
34,041
|
|
Deferred Taxes
|
|
|
11,837
|
|
|
|
|
|
Other Assets, Net
|
|
|
21,065
|
|
|
|
19,666
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,058,134
|
|
|
$
|
999,413
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
55,696
|
|
|
$
|
47,434
|
|
Accrued liabilities
|
|
|
87,367
|
|
|
|
74,586
|
|
Current portion of deferred
liabilities
|
|
|
1,169
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
144,232
|
|
|
|
122,668
|
|
Noncurrent
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred liabilities
|
|
|
109,971
|
|
|
|
65,189
|
|
Deferred taxes
|
|
|
|
|
|
|
5,129
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
109,971
|
|
|
|
70,318
|
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
|
Stockholders
Equity:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value;
400,000 shares authorized and 175,749 and
181,726 shares issued and outstanding, respectively
|
|
|
1,757
|
|
|
|
1,817
|
|
Additional paid-in capital
|
|
|
229,934
|
|
|
|
202,878
|
|
Unearned compensation
|
|
|
|
|
|
|
(3,710
|
)
|
Retained earnings
|
|
|
572,240
|
|
|
|
605,537
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
803,931
|
|
|
|
806,427
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,058,134
|
|
|
$
|
999,413
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated statements.
52
CHICOS
FAS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net sales by Chicos/Soma
stores
|
|
$
|
1,210,474
|
|
|
$
|
1,095,938
|
|
|
$
|
889,429
|
|
Net sales by WH|BM stores
|
|
|
367,063
|
|
|
|
261,601
|
|
|
|
142,092
|
|
Net sales by catalog and Internet
|
|
|
53,523
|
|
|
|
36,151
|
|
|
|
26,831
|
|
Other net sales
|
|
|
15,422
|
|
|
|
10,885
|
|
|
|
8,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,646,482
|
|
|
|
1,404,575
|
|
|
|
1,066,882
|
|
Cost of goods sold
|
|
|
679,416
|
|
|
|
547,532
|
|
|
|
411,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
967,066
|
|
|
|
857,043
|
|
|
|
654,974
|
|
General, administrative and store
operating expenses
|
|
|
647,421
|
|
|
|
514,529
|
|
|
|
398,117
|
|
Depreciation and amortization
|
|
|
61,840
|
|
|
|
44,201
|
|
|
|
32,481
|
|
Impairment of goodwill
|
|
|
6,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations
|
|
|
251,053
|
|
|
|
298,313
|
|
|
|
224,376
|
|
Interest income, net
|
|
|
10,626
|
|
|
|
8,236
|
|
|
|
2,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
261,679
|
|
|
|
306,549
|
|
|
|
226,703
|
|
Income tax provision
|
|
|
95,043
|
|
|
|
112,568
|
|
|
|
85,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
166,636
|
|
|
$
|
193,981
|
|
|
$
|
141,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share basic
|
|
$
|
0.94
|
|
|
$
|
1.07
|
|
|
$
|
0.79
|
|
Net income per common and common
equivalent share diluted
|
|
$
|
0.93
|
|
|
$
|
1.06
|
|
|
$
|
0.78
|
|
Weighted average common shares
outstanding basic
|
|
|
177,273
|
|
|
|
180,465
|
|
|
|
178,256
|
|
Weighted average common and common
equivalent shares outstanding diluted
|
|
|
178,452
|
|
|
|
182,408
|
|
|
|
180,149
|
|
The accompanying notes are an integral part of these
consolidated statements.
53
CHICOS
FAS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
Paid-In
|
|
|
Unearned
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Total
|
|
|
BALANCE, January 31,
2004
|
|
|
175,074
|
|
|
$
|
1,751
|
|
|
$
|
97,710
|
|
|
|
|
|
|
$
|
275,339
|
|
|
$
|
35
|
|
|
$
|
374,835
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,206
|
|
|
|
|
|
|
|
141,206
|
|
Unrealized loss on marketable
securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,041
|
|
Issuance of common stock
|
|
|
4,162
|
|
|
|
42
|
|
|
|
22,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,687
|
|
Repurchase of common stock
|
|
|
(275
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,989
|
)
|
|
|
|
|
|
|
(4,992
|
)
|
Tax benefit of stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
27,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, January 29,
2005
|
|
|
178,961
|
|
|
|
1,790
|
|
|
|
147,652
|
|
|
|
|
|
|
|
411,556
|
|
|
|
(130
|
)
|
|
|
560,868
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,981
|
|
|
|
|
|
|
|
193,981
|
|
Unrealized gain on marketable
securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,016
|
|
Issuance of common stock
|
|
|
2,570
|
|
|
|
25
|
|
|
|
28,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,467
|
|
Issuance of restricted stock, net
|
|
|
195
|
|
|
|
2
|
|
|
|
5,323
|
|
|
|
(5,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
1,615
|
|
Tax benefit of stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
21,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, January 28,
2006
|
|
|
181,726
|
|
|
|
1,817
|
|
|
|
202,878
|
|
|
|
(3,710
|
)
|
|
|
605,537
|
|
|
|
(95
|
)
|
|
|
806,427
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,636
|
|
|
|
|
|
|
|
166,636
|
|
Unrealized gain on marketable
securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,731
|
|
Issuance of common stock
|
|
|
703
|
|
|
|
7
|
|
|
|
6,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,402
|
|
Repurchase of common stock
|
|
|
(6,680
|
)
|
|
|
(67
|
)
|
|
|
(148
|
)
|
|
|
|
|
|
|
(199,933
|
)
|
|
|
|
|
|
|
(200,148
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
21,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,241
|
|
Reversal of unearned compensation
upon adoption of SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
(3,710
|
)
|
|
|
3,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
3,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, February 3,
2007
|
|
|
175,749
|
|
|
$
|
1,757
|
|
|
$
|
229,934
|
|
|
$
|
|
|
|
$
|
572,240
|
|
|
$
|
|
|
|
$
|
803,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated statements.
54
CHICOS
FAS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
166,636
|
|
|
$
|
193,981
|
|
|
$
|
141,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net
income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization,
cost of goods sold
|
|
|
7,564
|
|
|
|
4,651
|
|
|
|
3,605
|
|
Depreciation and amortization,
other
|
|
|
61,840
|
|
|
|
44,201
|
|
|
|
32,481
|
|
Deferred tax benefit
|
|
|
(22,324
|
)
|
|
|
(8,411
|
)
|
|
|
(2,986
|
)
|
Stock-based compensation expense,
cost of goods sold
|
|
|
6,004
|
|
|
|
438
|
|
|
|
|
|
Stock-based compensation expense,
general, administrative and store operating expenses
|
|
|
15,237
|
|
|
|
1,177
|
|
|
|
|
|
Excess tax benefit from
stock-based compensation
|
|
|
(2,365
|
)
|
|
|
|
|
|
|
|
|
Tax benefit of stock options
exercised
|
|
|
|
|
|
|
21,461
|
|
|
|
27,297
|
|
Deferred rent expense, net
|
|
|
6,867
|
|
|
|
3,673
|
|
|
|
6,450
|
|
Goodwill impairment loss
|
|
|
6,752
|
|
|
|
|
|
|
|
|
|
Loss on disposal of property and
equipment
|
|
|
826
|
|
|
|
753
|
|
|
|
311
|
|
(Increase) decrease in
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
(2,025
|
)
|
|
|
(7,147
|
)
|
|
|
1,069
|
|
Inventories
|
|
|
(14,696
|
)
|
|
|
(22,198
|
)
|
|
|
(18,280
|
)
|
Prepaid expenses and other
|
|
|
(3,676
|
)
|
|
|
(5,955
|
)
|
|
|
(2,734
|
)
|
Increase in liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
8,262
|
|
|
|
10,709
|
|
|
|
8,929
|
|
Accrued and other deferred
liabilities
|
|
|
54,092
|
|
|
|
31,073
|
|
|
|
26,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
122,358
|
|
|
|
74,425
|
|
|
|
82,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
288,994
|
|
|
|
268,406
|
|
|
|
223,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(162,690
|
)
|
|
|
(357,237
|
)
|
|
|
(404,211
|
)
|
Proceeds from sale of marketable
securities
|
|
|
325,894
|
|
|
|
207,026
|
|
|
|
257,299
|
|
Purchase of Fitigues assets
|
|
|
(7,527
|
)
|
|
|
|
|
|
|
|
|
Acquisition of franchise store
|
|
|
(811
|
)
|
|
|
|
|
|
|
(1,307
|
)
|
Purchase of equity investment
|
|
|
|
|
|
|
(10,418
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(218,311
|
)
|
|
|
(147,635
|
)
|
|
|
(93,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(63,445
|
)
|
|
|
(308,264
|
)
|
|
|
(241,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
6,402
|
|
|
|
28,467
|
|
|
|
22,684
|
|
Excess tax benefit from
stock-based compensation
|
|
|
2,365
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(200,148
|
)
|
|
|
|
|
|
|
(4,992
|
)
|
Payments on capital leases
|
|
|
|
|
|
|
|
|
|
|
(1,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(191,381
|
)
|
|
|
28,467
|
|
|
|
16,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
34,168
|
|
|
|
(11,391
|
)
|
|
|
(1,250
|
)
|
CASH AND CASH EQUIVALENTS,
Beginning of period
|
|
|
3,035
|
|
|
|
14,426
|
|
|
|
15,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
End of period
|
|
$
|
37,203
|
|
|
$
|
3,035
|
|
|
$
|
14,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
107
|
|
|
$
|
360
|
|
|
$
|
107
|
|
Cash paid for income taxes, net
|
|
$
|
105,646
|
|
|
$
|
106,091
|
|
|
$
|
56,489
|
|
The accompanying notes are an integral part of these
consolidated statements.
55
CHICOS
FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 3, 2007
(In thousands, except share and per share amounts and where
otherwise indicated)
|
|
1.
|
Business
Organization and Significant Accounting Policies:
|
Business
Organization
The accompanying consolidated financial statements include the
accounts of Chicos FAS, Inc., a Florida corporation, and
its wholly-owned subsidiaries (the Company). The Company
operates as a specialty retailer of private branded casual
clothing, intimates and related accessories. The Company
currently sells its products through traditional retail stores,
catalog, and via the Internet at www.chicos.com,
www.whitehouseblackmarket.com, and www.soma.com. As of
February 3, 2007, the Companys retail store system
consisted of 920 stores (910 stores if the Fitigues stores
scheduled for closing are excluded) located throughout the
United States, the U.S. Virgin Islands and Puerto Rico, 907
of which were owned and operated by the Company, and 13 of which
were owned and operated by franchisees (all 13 of which were
reacquired by the Company in the first quarter of fiscal
2007-see Note 12).
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. The periods presented in these financial
statements are the fiscal years ended February 3, 2007
(fiscal 2006), January 28, 2006 (fiscal 2005) and
January 29, 2005 (fiscal 2004). Fiscal 2006 contained
53 weeks while fiscal 2004 and 2003 each contained
52 weeks.
Franchise
Operations
A summary of the changes in the number of the Companys
franchise stores as compared to total Company-owned stores as of
the end of fiscal 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
2006
|
|
|
2005
|
|
|
Franchise stores opened
|
|
|
|
|
|
|
2
|
|
Franchise stores reacquired
|
|
|
1
|
|
|
|
|
|
Franchise stores in operation at
fiscal year-end
|
|
|
13
|
|
|
|
14
|
|
Company-owned stores at fiscal
year-end
|
|
|
907
|
|
|
|
749
|
|
All 13 franchise stores in operation at fiscal year-end were
reacquired by the Company in the first quarter of fiscal 2007.
See Note 12.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Segment
Information
The Companys brands, Chicos, WH|BM, Soma and
Fitigues, have been aggregated into one reportable segment due
to the similarities of the economic and operating
characteristics of the operations represented by the
Companys brands.
Management
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those
56
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimates. Significant estimates and assumptions made by
management primarily impact the following key financial areas:
Inventory
Valuation
The Company identifies potentially excess and slow-moving
inventories by evaluating turn rates and inventory levels in
conjunction with the Companys overall growth rate. Excess
quantities are identified through evaluation of inventory
ageings, review of inventory turns and historical sales
experiences, as well as specific identification based on fashion
trends. Further, exposure to inadequate realization of carrying
value is identified through analysis of gross margins and
markdowns in combination with changes in the fashion industry.
The Company provides lower of cost or market reserves for such
identified excess and slow-moving inventories.
Inventory
Shrinkage
The Company estimates its expected shrinkage of inventories
between physical inventory counts by applying historical
chain-wide average shrinkage experience rates to the related
periods sales volume. The historical rates are updated on
a regular basis to reflect the most recent physical inventory
shrinkage experience.
Sales
Returns
The Companys policy is to honor customer returns in most
instances. Returns after 30 days of the original purchase,
or returns without the original receipt, qualify for store
credit only. The Company will, in certain circumstances, offer
full customer refunds either after 30 days or without a
receipt. The Company estimates its reserve for likely customer
returns based on the average refund experience in relation to
sales for the related period.
Self-Insurance
The Company is self-insured for certain losses relating to
workers compensation, medical and general liability
claims. Self-insurance claims filed and claims incurred but not
reported are accrued based upon managements estimates of
the aggregate liability for uninsured claims incurred using
historical experience. Although management believes it has the
ability to adequately accrue for estimated losses related to
claims, it is possible that actual results could significantly
differ from recorded self-insurance liabilities.
Reclassifications
Reclassifications of certain prior year balances were made in
order to conform to the current year presentation.
Cash and
Cash Equivalents
Cash and cash equivalents includes cash on hand and in banks and
short-term highly liquid investments with original maturities of
three months or less.
Marketable
Securities
Marketable securities generally represent variable rate demand
notes and auction rate securities, which are highly liquid,
variable rate municipal debt securities. Although these
securities have long-term nominal maturity dates ranging from
2009 to 2042, the interest rates are reset, depending on the
type of security, either daily, every 7 days or every
28 days. Despite the long-term nature of the underlying
securities, the Company has the ability to quickly liquidate
these securities based on the Companys cash needs thereby
creating a short-term instrument.
57
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Marketable securities are classified as
available-for-sale
and are carried at market value, with the unrealized holding
gains and losses, net of income taxes, reflected as a separate
component of stockholders equity until realized. For the
purposes of computing realized and unrealized gains and losses,
cost is determined on a specific identification basis.
Inventories
The Companys uses the weighted average cost method to
determine the cost of merchandise inventories. Purchasing,
merchandising, distribution and product development costs are
expensed as incurred, and are included in the accompanying
consolidated statements of income as a component of cost of
goods sold.
Property
and Equipment
Property and equipment is stated at cost. Depreciation of
property and equipment is provided on a straight-line basis over
the estimated useful lives of the assets. Leasehold improvements
are amortized over the shorter of their estimated useful lives
(generally 10 years or less) or the related lease term plus
one anticipated renewal when there is an economic penalty
associated with non-renewal. The Companys property and
equipment is depreciated using the following estimated useful
lives:
|
|
|
|
|
Estimated Useful Lives
|
|
Land and land improvements
|
|
35 years
|
Building and building improvements
|
|
20 - 35 years
|
Equipment, furniture and fixtures
|
|
2 - 10 years
|
Leasehold improvements
|
|
5 - 10 years or term of
lease, if shorter
|
Maintenance and repairs of property and equipment are expensed
as incurred, and major improvements are capitalized. Upon
retirement, sale or other disposition of property and equipment,
the cost and accumulated depreciation or amortization are
eliminated from the accounts, and any gain or loss is charged to
operations.
Land Held
for Sale
During fiscal 2006, the Company reclassified a parcel of land
located in south Fort Myers, Florida with a book value of
$38.1 million from a long-term asset to a current asset
held for sale. The Company anticipates that the land will be
sold within the next 12 months, and the Company does not
expect that any such sale will have any material impact on its
statements of operations or overall financial position.
Operating
Leases
The Company leases retail stores and office space under
operating leases. The majority of the Companys lease
agreements provide for tenant improvement allowances, rent
escalation clauses
and/or
contingent rent provisions. In fiscal 2004, the Company
conformed its accounting for operating leases and leasehold
improvements to Statement of Financial Accounting Standard
No. 13, Accounting for Leases
(SFAS 13) and its related interpretations as clarified
by the Office of the Chief Accountant of the Securities and
Exchange Commission to the American Institute of Certified
Public Accountants on February 7, 2005.
Tenant improvement allowances are recorded as a deferred lease
credit within deferred liabilities and amortized as a reduction
of rent expense over the term of the lease, which includes the
construction period and one renewal when there is a significant
economic penalty associated with non-renewal.
In periods prior to fiscal 2004, the Companys consolidated
balance sheets reflected the unamortized portion of tenant
improvement allowances as a reduction of property and equipment
and consolidated statements of cash flows reflect tenant
improvement allowances as a reduction of capital expenditures
within investing activities. For fiscal 2004 and future years,
these allowances are amortized as a reduction of rent expense
and shown as an operating
58
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
activity on the consolidated statement of cash flows, rather
than amortized as a reduction of depreciation expense, as in
prior fiscal years. Since the impact of this change in
accounting was not material to any previously reported fiscal
year, the cumulative effect was recorded in the fourth quarter
of fiscal 2004.
In addition to the above, the Company recorded a one-time,
non-cash charge in the fourth quarter of fiscal 2004 to reflect
the impact of recording rent expense prior to store opening
(during the construction period). Previously, the Company
followed a practice prevalent across the retailing industry, in
which it recognized the rent expense for leases beginning on the
earlier of the store opening date or lease commencement date. As
a result of this change, landlord incentives,
rent-free periods, rent escalation clauses and
minimum rental expenses are amortized on a straight-line basis
over the terms of the leases, which now includes the
construction period, which is generally
45-60 days
prior to the store opening date when the Company generally
begins improvements in preparation of intended use. The charge
resulted in a one-time, cumulative, non-cash adjustment to rent
expense of approximately $4.1 million pre-tax in the fourth
quarter of fiscal 2004, since the impact of the change was not
material to any previously reported fiscal year.
Certain leases provide for contingent rents, which are
determined as a percentage of gross sales in excess of specified
levels. The Company records a contingent rent liability in
Accrued liabilities on the consolidated balance
sheets and the corresponding rent expense when specified levels
have been achieved or when management determines that achieving
the specified levels during the fiscal year is probable.
Goodwill
and Other Intangible Assets
The Company adopted the provisions of Statement of Financial
Accounting Standard No. 142, Goodwill and Other
Intangible Assets (SFAS 142), as of February 3,
2002. Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful
life are not amortized, but instead are tested for impairment at
least annually in accordance with the provisions of
SFAS 142. During fiscal 2003, in connection with the
acquisition of The White House, Inc., the Company recorded
goodwill and a trademark intangible asset.
Goodwill represents the excess of the purchase price over the
fair value of identifiable tangible and intangible assets
acquired and liabilities assumed in a business combination. In
accordance with the provisions of SFAS 142, the Company is
not amortizing the goodwill. Impairment testing for goodwill is
done at a reporting unit level. Under SFAS 142, reporting
units are defined as an operating segment or one level below an
operating segment, called a component. Using these criteria, the
Company identified its reporting units and further concluded
that the goodwill related to the WH|BM acquisition should be
assigned to the WH|BM reporting unit. The Company was then
required to determine the fair value of the WH|BM reporting
unit and compare it to its carrying value. To accomplish this,
the Company determined the carrying value of the WH|BM reporting
unit by assigning the assets and liabilities, including the
existing goodwill and intangible asset to it. In the fourth
quarter of fiscal 2006, the fourth quarter of fiscal 2005 and
the fourth quarter of fiscal 2004, the Company performed the
test as described above, in connection with its annual
impairment test required under SFAS 142 and the implied
fair value of the WH|BM reporting unit exceeded its respective
carrying amount. Therefore, the Company was not required to
recognize an impairment loss in any of the years.
As of February 3, 2007 and January 28, 2006, the value
of the trademark intangible asset related to the WH|BM
acquisition was $34 million. The value of the trademark
intangible asset was determined using a discounted cash flow
method, based on the estimated future benefit to be received
from the trademark. The Company is not amortizing the trademark
intangible asset, as the trademark has an indefinite useful
life. In the fourth quarter of fiscal 2006, the Company
performed an analysis to compare the implied fair value of the
trademark asset, using a discounted cash flow method, to its
carrying value and concluded that the trademark asset was not
impaired.
59
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of and changes in the Companys goodwill
consist of the following:
|
|
|
|
|
Goodwill related to acquisition of
The White House, Inc. in fiscal 2003
|
|
$
|
60,370
|
|
Goodwill related to acquisition of
most of the assets of Fitigues in fiscal 2006
|
|
|
6,752
|
|
Goodwill related to acquisition of
franchise store in fiscal 2004
|
|
|
1,426
|
|
Goodwill related to acquisition of
franchise store in fiscal 2006
|
|
|
800
|
|
Impairment loss related to the
planned closure of Fitigues in fiscal 2007 (see Note 2)
|
|
|
(6,752
|
)
|
|
|
|
|
|
Total
|
|
$
|
62,596
|
|
|
|
|
|
|
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.
Long Term
Investment
As of February 3, 2007 and January 28, 2006, the
Company has an equity investment in a privately held company for
business and strategic purposes of approximately
$10.4 million. This investment is included in other assets
on the consolidated balance sheet and is accounted for under the
cost method, as the Company does not have significant influence
over the investee. The Company monitors the investment for
impairment and will make appropriate reductions in the carrying
value if the Company determines that an impairment charge is
required based on the financial condition and near-term
prospects of the company. The Company routinely assesses its
compliance with accounting guidance, including the provisions of
Financial Accounting Standards Board (FASB) Interpretation
No. 46R, Consolidation of Variable Interest
Entities-An Interpretation of ARB No. 51
(FIN 46R) and any impairment issues. Under FIN 46R,
the Company must consolidate a variable interest entity if the
Company has a variable interest (or combination of variable
interests) in the entity that will absorb a majority of the
entitys expected losses, receive a majority of the
entitys expected residual returns, or both. Currently, the
Companys equity investment is not subject to consolidation
under FIN 46R as the Company does not have significant
influence over the investee and the Company does not absorb a
majority of the entitys losses, nor does it have a
majority of the returns.
Income
Taxes
The Company follows the liability method, which establishes
deferred tax assets and liabilities for the temporary
differences between the financial reporting bases and the tax
bases of the Companys assets and liabilities at enacted
tax rates expected to be in effect when such amounts are
realized or settled. Net deferred tax assets, whose realization
is dependent on taxable earnings of future years, are recognized
when a greater than 50 percent probability exists that the
tax benefits will be realized sometime in the future.
Fair
Value of Financial Instruments
The Companys financial instruments consist of cash and
cash equivalents, marketable securities, trade receivables and
payables. The carrying values of cash and cash equivalents,
marketable securities, trade receivables and trade payables
approximate current fair value.
Revenue
Recognition
Retail sales by Company stores are recorded at the point of sale
and are net of estimated customer returns, sales discounts under
the Passport Club and The Black Book
loyalty programs and Company issued coupons. Retail
60
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sales by catalog and Internet are recorded when shipments are
made to catalog and Internet customers and are net of estimated
customer returns. Net sales to franchisees are recorded when
merchandise is shipped to franchisees and are net of estimated
returns. Under the Companys current program, gift
certificate and gift card sales do not have expiration dates.
The Company accounts for gift certificates and gift cards by
recognizing a liability at the time a gift certificate or gift
card is sold. The liability is relieved and revenue is
recognized for gift certificates and gift cards upon redemption.
In addition, the Company recognizes revenue on unredeemed gift
certificates and gift cards when it can determine that the
likelihood of the gift certificate or gift card being redeemed
is remote and that there is no legal obligation to remit the
unredeemed gift certificates or gift cards to relevant
jurisdictions (commonly referred to as gift card breakage). The
Company recognizes gift card breakage under the redemptive
recognition method. This method records gift card breakage as
revenue on a proportional basis over the redemption period based
on the Companys historical gift card breakage rate. The
Company determines the gift card breakage rate based on its
historical redemption patterns. Once the breakage rate is
determined, it is recognized over a
60-month
period based on historical redemption patterns of gift
certificates and gift cards.
Vendor
Allowances
From time to time, the Company receives allowances
and/or
credits from certain of its vendors. The aggregate amount of
such allowances and credits is immaterial to the Companys
results of operations.
Shipping
and Handling Costs
Shipping and handling costs to either transport goods between
stores or directly to customers, net of amounts paid to the
Company by customers to cover these costs, which amounted to
$8.4 million, $6.3 million, and $4.8 million in
fiscal 2006, 2005 and 2004, respectively, do not represent a
significant portion of the Companys operations and are
included in general, administrative and store operating
expenses. Amounts paid by customers to cover shipping and
handling costs are considered insignificant.
Store
Pre-opening Costs
Operating costs (including store
set-up, rent
and training expenses) incurred prior to the opening of new
stores are expensed as incurred and are included in general,
administrative and store operating expenses in the accompanying
consolidated statements of income.
Advertising
Costs
Costs associated with advertising are charged to expense as
incurred except for catalogs, which are amortized over the life
of the catalog (typically less than six weeks). For fiscal 2006,
2005 and 2004, advertising costs of approximately
$67.6 million, $53.0 million, and $40.0 million,
respectively, are included in general, administrative and store
operating expenses.
Stock-Based
Compensation
Effective January 29, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standard
(SFAS) No. 123R, Share-Based
Payment (SFAS 123R) using the modified
prospective transition method. Under this transition method,
stock-based compensation expense recognized for share-based
awards during fiscal 2006 included: (a) 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) 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. In accordance with the modified
prospective transition method, results for the prior periods
have not been restated. In addition, upon adoption, the Company
calculated its pool of income tax benefits that were previously
recorded in additional paid-in capital and
61
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are available to absorb future income tax benefit deficiencies
that can result from the exercise of stock options or vesting of
restricted stock awards. The Company has elected to calculate
this pool under the alternative transition method provided for
in FASB Staff Position No. 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards. See Note 9 for a further
discussion on stock-based compensation.
Prior to the adoption of SFAS 123R, the Company recognized
stock-based compensation expense in accordance with Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) and related Interpretations, as
permitted by SFAS 123 and complied with the disclosure
provisions of SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure
(SFAS 148). The pro forma table below
illustrates the effect on net income and earnings per share as
if the Company had applied the fair value recognition provisions
of SFAS No. 123, as amended by SFAS No. 148,
to all stock-based employee compensation for fiscal 2005 and
fiscal 2004:
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
193,981
|
|
|
$
|
141,206
|
|
Add: Stock-based compensation
expense included in reported net income, net of taxes
|
|
|
1,017
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based methods
for all awards, net of taxes
|
|
|
13,031
|
|
|
|
9,340
|
|
|
|
|
|
|
|
|
|
|
Net income, pro forma
|
|
$
|
181,967
|
|
|
$
|
131,866
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic - as reported
|
|
$
|
1.07
|
|
|
$
|
0.79
|
|
Basic - pro forma
|
|
$
|
1.01
|
|
|
$
|
0.74
|
|
Diluted - as reported
|
|
$
|
1.06
|
|
|
$
|
0.78
|
|
Diluted - pro forma
|
|
$
|
1.00
|
|
|
$
|
0.73
|
|
Common
Stock Splits
During fiscal 2004, the Company declared a
two-for-one
stock split (the Stock Split) of the Companys
common stock payable in the form of a stock dividend on
February 22, 2005, to shareholders of record as of the
close of business on February 4, 2005. Stockholders
equity was restated as of the beginning of the earliest period
presented to give retroactive recognition to the Stock Split by
reclassifying the par value of the additional shares arising
from the split from additional paid-in capital to common stock.
All historical weighted average share and per share amounts and
all references to the number of common shares elsewhere in the
consolidated financial statements and notes thereto have been
restated to reflect this Stock Split. Par value remained
unchanged at $0.01.
Net
Income per Common and Common Equivalent Share
SFAS No. 128, Earnings per Share
(SFAS 128), requires companies with complex capital
structures that have publicly held common stock or common stock
equivalents to present both basic and diluted earnings per share
(EPS) on the face of the income statement. As provided by
SFAS 128, basic 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.
62
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 as restated for
the Stock Split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average common shares
outstanding basic
|
|
|
177,273,138
|
|
|
|
180,464,882
|
|
|
|
178,256,214
|
|
Dilutive effect of stock options
and unvested restricted stock outstanding
|
|
|
1,178,745
|
|
|
|
1,943,012
|
|
|
|
1,893,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common
equivalent shares outstanding diluted
|
|
|
178,451,883
|
|
|
|
182,407,894
|
|
|
|
180,149,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following options were outstanding as of the end of the
fiscal years but were not included in the computation of diluted
EPS because the options exercise prices were greater than
the average market price of the common shares:
|
|
|
|
|
|
|
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
|
2006
|
|
2005
|
|
2004
|
|
Number of options
|
|
851,945
|
|
229,680
|
|
215,800
|
Exercise price
|
|
$28.47 - $47.32
|
|
$35.76 - $45.80
|
|
$21.65 - $25.85
|
Expiration date
|
|
February 21, 2015 -
February 27, 2016
|
|
July 18, 2015 -
January 16, 2016
|
|
March 3, 2014 -
January 17, 2015
|
Newly
Issued Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (the
FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being
recognized in the financial statements. Additionally,
FIN 48 provides guidance on derecognition, classification,
interest, penalties, accounting in interim periods and
disclosure related to uncertain income tax positions.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the
impact of adopting FIN 48; however, the Company does not
expect the adoption of FIN 48 to have a material effect on
its financial position, results of operations or cash flows.
In June 2006, the FASBs Emerging Issues Task Force
(EITF) ratified Issue
No. 06-3
(EITF
06-3),
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That is, Gross versus Net Presentation). Taxes
within the scope of EITF Issue
No. 06-3
include any taxes assessed by a governmental authority that are
directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but are not limited to,
sales taxes, use taxes, value-added taxes, and some excise
taxes. The EITF concluded that the presentation of these taxes
on either a gross (included in revenues and costs) or a net
(excluded from revenues) basis is an accounting policy decision
that should be disclosed. For any such taxes that are reported
on a gross basis, a company should disclose the amounts of those
taxes in interim and annual financial statements. The
Companys policy is and has been, to exclude all such taxes
from revenue. EITF
06-3 is
effective for interim and annual reporting periods beginning
after December 15, 2006. As the Company does not intend to
modify its current accounting policy of recording sales tax
collected on a net basis, the adoption of EITF
06-3 will
have no material impact on the Companys consolidated
financial statements.
63
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Disposition
of Fitigues:
|
In early fiscal 2006, the Company acquired most of the assets of
Fitigues consisting primarily of 12 retail stores. The excess of
the purchase price over the fair value of identifiable tangible
and intangible assets and liabilities assumed totaling
approximately $6.8 million was allocated to goodwill.
During the fourth quarter of fiscal 2006, the Company completed
its evaluation of the Fitigues brand and decided it would close
down operations of the Fitigues brand. In connection with this
conclusion, in the fourth quarter of fiscal 2006, the Company
recorded an aggregate $8.6 million impairment charge. The
charge consists of a loss on impairment of goodwill totaling
$6.8 million, accelerated depreciation totaling
approximately $1.2 million, and other impairment charges,
mainly for inventory, totaling approximately $0.6 million.
The loss on goodwill impairment is included as a separate line
item in the accompanying consolidated statements of income. It
is expected that the closure of the remaining Fitigues stores
and the shut down of its website will be completed by the end of
the second quarter of 2007.
|
|
3.
|
Marketable
Securities:
|
The following tables summarize the Companys investments in
marketable securities at February 3, 2007 and
January 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Total marketable securities
|
|
$
|
238,336
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
238,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Total marketable securities
|
|
$
|
401,540
|
|
|
$
|
|
|
|
$
|
(95
|
)
|
|
$
|
401,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no marketable securities in an unrealized loss
position at February 3, 2007. The following table shows the
gross unrealized losses and fair value of the Companys
marketable securities with unrealized losses that are not deemed
to be
other-than-temporarily
impaired aggregated by the length of time that individual
securities have been in a continuous unrealized loss position,
at January 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2006
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Total marketable securities
|
|
$
|
84,976
|
|
|
$
|
(95
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
84,976
|
|
|
$
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
Tenant improvement advances
|
|
$
|
9,567
|
|
|
$
|
3,238
|
|
Franchisees
|
|
|
2,185
|
|
|
|
2,255
|
|
Other
|
|
|
2,559
|
|
|
|
2,166
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
14,311
|
|
|
|
7,659
|
|
Less allowance for sales returns
from franchisees
|
|
|
(65
|
)
|
|
|
(419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,246
|
|
|
$
|
7,240
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
Allowance for estimated customer
returns, gift certificates and store credits outstanding
|
|
$
|
40,930
|
|
|
$
|
37,190
|
|
Accrued payroll, bonuses and
severance costs
|
|
|
15,000
|
|
|
|
22,174
|
|
Allowance for construction in
progress
|
|
|
9,349
|
|
|
|
2,526
|
|
Other
|
|
|
22,088
|
|
|
|
12,696
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,367
|
|
|
$
|
74,586
|
|
|
|
|
|
|
|
|
|
|
The Companys income tax provision consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
103,469
|
|
|
$
|
106,624
|
|
|
$
|
77,987
|
|
State
|
|
|
13,898
|
|
|
|
14,355
|
|
|
|
10,496
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(21,319
|
)
|
|
|
(8,032
|
)
|
|
|
(2,526
|
)
|
State
|
|
|
(1,005
|
)
|
|
|
(379
|
)
|
|
|
(460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
95,043
|
|
|
$
|
112,568
|
|
|
$
|
85,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation between the statutory federal income tax rate
and the effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal
tax benefit
|
|
|
2.8
|
|
|
|
2.7
|
|
|
|
2.8
|
|
Other items, net
|
|
|
(1.5
|
)
|
|
|
(1.0
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
36.3
|
%
|
|
|
36.7
|
%
|
|
|
37.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets and liabilities are recorded due to
different carrying amounts for financial and income tax
reporting purposes arising from cumulative temporary
differences. These differences consist of the following as of
February 3, 2007, and January 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities and allowances
|
|
$
|
14,009
|
|
|
$
|
9,638
|
|
Inventories
|
|
|
3,328
|
|
|
|
2,689
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,337
|
|
|
$
|
12,327
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
$
|
4,244
|
|
|
$
|
7,712
|
|
Accrued straight-line rent
|
|
|
8,961
|
|
|
|
6,357
|
|
Deferred compensation
|
|
|
12,030
|
|
|
|
4,333
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,235
|
|
|
$
|
18,402
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(2,648
|
)
|
|
|
(10,432
|
)
|
Other intangible assets
|
|
|
(10,750
|
)
|
|
|
(13,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,398
|
)
|
|
$
|
(23,531
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets at February 3, 2007 and
January 28, 2006 totaled $42.6 million and
$30.7 million, respectively. Deferred tax liabilities at
February 3, 2007 and January 28, 2006 totaled
$13.4 million and $23.5 million, respectively.
Deferred liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred rent
|
|
$
|
23,707
|
|
|
$
|
16,840
|
|
Deferred compensation
|
|
|
11,728
|
|
|
|
9,864
|
|
Deferred lease credits
|
|
|
75,705
|
|
|
|
39,133
|
|
|
|
|
|
|
|
|
|
|
Total deferred liabilities
|
|
|
111,140
|
|
|
|
65,837
|
|
Less current portion
|
|
|
(1,169
|
)
|
|
|
(648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,971
|
|
|
$
|
65,189
|
|
|
|
|
|
|
|
|
|
|
The Company has an unsecured revolving credit facility (the
Credit Facility) with Bank of America, N.A., consisting of a
total available commitment of $45 million, composed of a
line of credit of $5 million (the Line) and a
$40 million letter of credit sublimit. All borrowings under
the Credit Facility bear interest at the LIBOR rate, plus an
additional amount ranging from 0.80 percent to
2.90 percent adjusted quarterly based on the Companys
performance per annum (a combined 6.1 percent at
February 3, 2007). The Company is also required to pay,
quarterly in arrears, a commitment fee of 0.10 percent per
annum on the average daily unused portion of the Line. There are
no compensating balance requirements associated with the Credit
Facility. No borrowings are outstanding as of February 3,
2007 and January 28, 2006.
66
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Credit Facility contains certain restrictions regarding
additional indebtedness, business operations, liens, guaranties,
transfers and sales of assets, and transactions with
subsidiaries or affiliates. In addition, the Company must comply
with certain quarterly restrictions (based on a rolling
four-quarters basis) regarding net worth, leverage ratio, fixed
charge coverage and current ratio requirements. The Company was
in compliance with all covenants at February 3, 2007. The
Credit Facility provides for automatic renewal for successive
one-year periods beginning after June 2006, but automatically
renewed through June 1, 2007 and is set up to continue to
automatically renew for additional one-year periods through June
2010, subject to the right of either party to terminate on each
renewal date upon giving proper notice.
Deferred rent represents the difference between operating lease
obligations currently due and operating lease expense, which is
recorded by the Company on a straight-line basis over the terms
of its leases.
Deferred compensation represents the deferred compensation
liability payable to participants of the Chicos FAS, Inc.
Deferred Compensation Plan (the Deferred Plan). See Note 10.
Deferred lease credits represent construction allowances
received from landlords and are amortized as a reduction of rent
expense over the appropriate respective terms of the related
leases.
|
|
8.
|
Commitments
and Contingencies:
|
The Company leases retail store space, office space and various
office equipment under operating leases expiring in various
years through the fiscal year ending 2019. Certain of the leases
provide that the Company may cancel the lease if the
Companys retail sales at that location fall below an
established level, and certain leases provide for additional
rent payments to be made when sales exceed a base amount.
Certain operating leases provide for renewal options for periods
from three to five years at their fair rental value at the time
of renewal. In the normal course of business, operating leases
are generally renewed or replaced by other leases.
Minimum future rental payments under noncancellable operating
leases (including leases with certain minimum sales cancellation
clauses described below and exclusive of common area maintenance
charges
and/or
contingent rental payments based on sales) as of
February 3, 2007, are approximately as follows:
|
|
|
|
|
Fiscal Year Ending:
|
|
|
|
|
February 2, 2008
|
|
$
|
97,671
|
|
January 31, 2009
|
|
|
97,698
|
|
January 30, 2010
|
|
|
92,007
|
|
January 29, 2011
|
|
|
83,314
|
|
January 28, 2012
|
|
|
73,192
|
|
Thereafter
|
|
|
224,190
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
668,072
|
|
|
|
|
|
|
A majority of the Companys new store operating leases
contain cancellation clauses that allow the leases to be
terminated at the Companys discretion, if certain minimum
sales levels are not met within the first few years of the lease
term. The Company has not historically exercised many of these
cancellation clauses and, therefore, has included commitments
for the full lease terms of such leases in the above table. For
fiscal 2006, 2005 and 2004, total rent expense under the
Companys operating leases was approximately
$114.2 million, $91.9 million, and $77.7 million,
respectively, including common area maintenance charges of
approximately $15.1 million, $11.4 million, and
$9.5 million, respectively, other rental charges of
approximately $14.1 million, $10.9 million, and
$8.4 million, respectively, and contingent rental expense
of approximately $10.5 million, $11.9 million, and
$8.4 million, respectively, based on sales.
At February 3, 2007, the Company has approximately
$0.9 million in commercial and standby letters of credit
outstanding (see Note 7), which arose in the normal course
of business.
67
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company was named as the defendant in a suit filed in
October 2004 in the Circuit Court of Lee County, Florida,
Ajit Patel v. Chicos FAS, Inc. The Complaint
alleges that the Company breached an implied contract with the
plaintiff, the Companys former Vice President-Chief
Information Officer, and, alternatively, that the Company
fraudulently induced the plaintiff to work for the Company. It
is the Companys position that no contract, express or
implied, existed between the Company and the plaintiff and that
the Company did not engage in any fraudulent conduct. The
Company has asserted certain counterclaims against the
plaintiff. No trial date has yet been set. The Company believes
the plaintiffs case is without merit and will continue to
vigorously defend the litigation and prosecute its counterclaims.
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.
|
|
9.
|
Stock
Option Plans and Capital Stock Transactions:
|
General
At February 3, 2007, the Company had stock-based
compensation plans as more particularly described below. The
total compensation expense related to stock-based awards granted
under these plans during fiscal 2006, reflecting the impact of
the implementation of the modified prospective transition method
in accordance with SFAS 123R, was $21.2 million. The
total compensation expense related to stock-based awards granted
under these plans during fiscal 2005, reflecting compensation
expense recognized in accordance with APB 25, was
$1.6 million. Effective January 29, 2006 and
subsequent thereto, the Company recognizes stock-based
compensation costs net of a forfeiture rate for only those
shares expected to vest and on a straight-line basis over the
requisite service period of the award. The Company estimated the
forfeiture rate for fiscal 2006 based on its historical
experience during the preceding four fiscal years.
As a result of adopting SFAS 123R, the impact to the
consolidated statements of income for fiscal 2006 on income
before income taxes and net income was a reduction of
$17.4 million and $11.2 million, respectively, from
what would have been presented if the Company had continued to
account for stock option awards under APB 25. The impact of
adopting SFAS 123R on basic and diluted earnings per share
for fiscal 2006 was a reduction of $0.06 per share.
In addition, prior to the adoption of SFAS 123R, the
Company presented all tax benefits related to deductions
resulting from the exercise of stock options as operating
activities in the consolidated statement of cash flows.
SFAS 123R requires that cash flows resulting from tax
benefits attributable to tax deductions in excess of the
compensation expense recognized for those options (excess tax
benefits) be classified as financing cash flows. As a result,
the Company classified $2.4 million of excess tax benefits
as financing cash flows for fiscal 2006. The total income tax
benefit recognized in the consolidated statement of operations
for share-based awards during fiscal 2006 (in accordance with
the provisions of SFAS 123R) was $7.6 million. During
fiscal 2005, the total income tax benefit recognized in the
consolidated statement of operations for share-based awards (in
accordance with the provisions of APB 25) was
$0.6 million.
Beginning in the first quarter of fiscal 2005, certain of the
Companys officers and non-officers, its two non-officer
inside directors, and each of its independent directors were
granted restricted stock awards, pursuant to restricted stock
agreements. A restricted stock award is an award of common
shares that is subject to certain restrictions during a
specified period. Restricted stock awards are independent of
option grants and are generally subject to forfeiture if
employment terminates prior to the release of the restrictions.
The Company holds the certificates for such shares in
safekeeping during the vesting period, and the grantee cannot
transfer the shares before the respective shares vest. Shares of
nonvested restricted stock have the same voting rights as common
stock, are entitled to receive dividends and other distributions
thereon and are considered to be currently issued and
outstanding. Restricted stock awarded to officers and
non-officer employees in fiscal 2005 vests 100% at the end of
68
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
three years from the date of grant. In early fiscal 2006, the
Company decided to change the vesting for future restricted
stock awards awarded to officers and non-officer employees such
that substantially all restricted stock vests pro-rata over a
period of three years from the date of grant. The restricted
stock awarded to non-officer directors in both fiscal 2005 and
2006 vests pro-rata over a period of three years from the date
of grant. The Company expenses the cost of the restricted stock
awards, which is determined to be the fair market value of the
shares at the date of grant, straight-line over the period
during which the restrictions lapse. For these purposes, the
fair market value of the restricted stock is determined based on
the closing price of the Companys common stock on the
grant date.
Stock
Option Plans
1993
Stock Option Plan
During fiscal year 1993, the Board approved a stock option plan,
as amended in fiscal 1999 (the 1993 Plan) for eligible employees
of the Company. The per share exercise price of each stock
option is not less than the fair market value of the stock on
the date of grant or, in the case of an employee owning more
than 10 percent of the outstanding stock of the Company and
to the extent incentive stock options, as opposed to
nonqualified stock options, are issued, the price is not less
than 110 percent of such fair market value. Also, the
aggregate fair market value of the stock with respect to which
incentive stock options are exercisable for the first time by an
employee in any calendar year may not exceed $100,000. Options
granted under the terms of the 1993 Plan generally vest evenly
over three years and have a
10-year
term. As of February 3, 2007, approximately 461,000
nonqualified options remain outstanding under the 1993 Plan.
Independent
Directors Plan
In October 1998, the Board approved a stock option plan (the
Independent Directors Plan) for eligible independent
directors of the Company. Options granted under the terms of the
Independent Directors Plan vest after six months and have
a 10-year
term. From the date of the adoption of the Independent
Directors Plan and until the 2002 Omnibus Stock and
Incentive Plan was adopted, 507,500 options were granted under
the Independent Directors Plan. As of February 3,
2007, approximately 120,000 options under the Independent
Directors Plan remain outstanding.
Omnibus
Stock and Incentive Plan
In April 2002, the Board approved the Chicos FAS, Inc.
2002 Omnibus Stock and Incentive Plan (the Omnibus Plan), which
initially reserved 9,710,280 shares of common stock for
future issuance. The Omnibus Plan provides for awards of
nonqualified stock options, incentive stock options, restricted
stock awards and restricted stock units to employees and
directors, including certain automatic option grants to outside
directors. The Omnibus Plan was amended in fiscal 2006 to change
the vesting schedule for these automatic outside director option
grants.
Once the Omnibus Plan was approved by the Companys
stockholders, no new grants could be made under the
Companys existing 1993 Plan or Independent Directors
Plan, and such existing plans remain in effect only for purposes
of administering options that were outstanding thereunder on the
date the Omnibus Plan was approved by the Companys
stockholders.
Under the Omnibus Plan, the per share exercise price of each
stock option cannot be less than the fair market value of the
stock on the date of grant or, in the case of an employee owning
more than 10 percent of the outstanding stock of the
Company and to the extent incentive stock options, as opposed to
nonqualified stock options, are issued, the price cannot be less
than 110 percent of such fair market value. Also, the
aggregate fair market value of the stock with respect to which
incentive stock options are exercisable for the first time by an
employee in any calendar year may not exceed $100,000. Options
granted under the terms of the Omnibus Plan generally vest
evenly over three years and have a
10-year
term. In accordance with the terms of the Omnibus Plan, shares
of common stock that are
69
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
represented by options granted under the Companys
previously existing plans which are forfeited, expire or are
cancelled without delivery of shares of common stock are added
to the amounts reserved for issuance under the Omnibus Plan. As
of February 3, 2007, approximately 4,520,000 nonqualified
stock options are outstanding under the Omnibus Plan.
Employee
Stock Purchase Plan
The Company sponsors an employee stock purchase plan (the
ESPP) under which substantially all full-time
employees are given the right to purchase up to 400 shares
of the Companys common stock during each of the two
specified offering periods each fiscal year, for a total of up
to 800 shares in any given fiscal year, at a price equal to
85 percent of the value of the stock immediately prior to
the beginning of each offering period. During fiscal 2006, 2005
and 2004, approximately 92,000, 92,000, and 112,000 shares,
respectively, were purchased under the ESPP. Prior to
January 29, 2006, the Company recognized no compensation
expense for the issuance of shares under the ESPP. As of
January 29, 2006 and in accordance with the provisions of
SFAS 123R, the Company recognizes compensation expense
based on the 15% discount at purchase. For fiscal 2006, ESPP
compensation expense was $0.3 million.
Methodology
Assumptions
As part of its SFAS 123R adoption, the Company examined its
historical pattern of option exercises in an effort to determine
if there were any discernable activity patterns based on certain
employee populations. From this analysis, the Company identified
two populations. The Company uses the Black-Scholes
option-pricing model to value the Companys stock options
for each of the populations. 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 the 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 two
identified populations. The expected term assumption
incorporates the contractual term of an option grant, which is
ten years, as well as the vesting period of an award, which is
generally pro-rata vesting over three years. The risk-free
interest rate is based on the implied yield on a
U.S. Treasury constant maturity with a remaining term equal
to the expected term of the option granted.
The weighted average assumptions relating to the valuation of
the Companys stock options for fiscal 2006, 2005 and 2004
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Weighted average fair value of
grants
|
|
$
|
15.12
|
|
|
$
|
14.22
|
|
|
$
|
10.21
|
|
Expected volatility
|
|
|
46
|
%
|
|
|
57
|
%
|
|
|
60
|
%
|
Exercise term (years)
|
|
|
4.5 years
|
|
|
|
4.6 years
|
|
|
|
5.0 years
|
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
3.9
|
%
|
|
|
3.3
|
%
|
Expected dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Aggregate
Stock Option Activity
As of February 3, 2007, 5,101,065 nonqualified options are
outstanding at a weighted average exercise price of
$21.08 per share, and 2,183,963 remain available for future
grants of either stock options, restricted stock or restricted
stock units, subject to certain sublimits applicable to
restricted stock. Of the options outstanding, 3,561,965 options
are exercisable as of February 3, 2007.
70
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock option activity for fiscal 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Value
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
(in thousands)
|
|
|
Outst |