Chico's FAS, Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
February 2, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-21258
Chicos FAS, Inc.
(Exact name of registrant as
specified in its charter)
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Florida
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59-2389435
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(State or other jurisdiction
of incorporation)
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(IRS Employer
Identification No.)
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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:
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Title of Class
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Name of Exchange on Which Registered
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Common Stock, Par Value $.01 Per Share
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New York Stock Exchange
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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
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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
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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, a non-accelerated
filer, or a smaller reporting company. See definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
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 $3,143,000,000 as of August 4, 2007 (based
upon the closing sales price reported by the NYSE and published
in the Wall Street Journal on August 6, 2007).
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
176,431,810 shares as of March 17, 2008.
Documents incorporated by reference:
Part III Definitive Proxy Statement for the Companys
Annual Meeting of Stockholders presently scheduled for
June 26, 2008.
CHICOS
FAS, INC.
ANNUAL REPORT ON
FORM 10-K
FOR THE
YEAR ENDED FEBRUARY 2, 2008
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 Intimates (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 generally easy-care fabrics. The
Chicos brand designs its products in a number of ways
including in-house designers, purchased designs, and working
with its independent vendors to develop 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 its independent vendors and agents to select,
modify, and create its product offerings.
Soma Intimates. The Soma brand, which
began operations in 2004, under the name Soma by
Chicos sells primarily exclusively designed private
branded intimate apparel, sleepwear and activewear. Soma was
initially focused towards the Chicos brand target
customer. In early 2007, the Soma brand was repositioned under
the name Soma Intimates to appeal to a broader
customer base. The Soma brand product offerings are developed by
working closely with a number of its independent vendors and
agents to design proprietary products in-house primarily through
a close collaborative effort with these independent vendors and
in some cases, using designs provided by its independent vendors
and labels other than the Soma label.
In January 2006, the Company acquired most of the assets of
Fitigues, a fitness inspired brand of 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. The Company determined, however,
that the Fitigues brand did not meet its internal expectations
and, in March 2007, the Company announced the planned closure of
the Fitigues brand operations. As of the end of fiscal 2007, the
operations of the Fitigues brand have ceased and the Company
does not expect to incur any further material costs associated
with the closing down of this brand.
While the Company is always open to explore the acquisition or
organic development of other specialty retail concepts, it is
not exploring such options at this time. The Company believes it
is important, at this time, to focus its energies on its core
Chicos, WH|BM and Soma brands. The Company continues to
explore a number of potential merchandise and brand extensions
that would be complementary to its current brands and may be
future growth vehicles.
The Company historically has endeavored to maintain a
merchandise mix that emphasizes the continual 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 17, 2008, the Company operated 1,045 retail
stores in 49 states, the District of Columbia, the
U.S. Virgin Islands and Puerto Rico. The retail stores
operate under the Companys three brands: Chicos,
White House | Black Market and Soma Intimates. The
Companys 606 Chicos front-line stores, 313 WH|BM
front-line stores, and 69 Soma front-line stores compete in the
better-priced market, with 31% of these stores in
upscale or regional malls, 12% in upscale street locations and
the balance in upscale open air specialty and strip centers.
There are also 37 Chicos outlet locations, 19 WH|BM outlet
locations and 1 Soma outlet location that provide clearance
functions for the respective brands. Soma also uses the
Chicos outlets as a clearance vehicle for its products at
this time.
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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
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 for any of its brands. At this time, the Company has
no immediate plans to enter any foreign markets and it has not
decided if, when, or in what manner, it may enter any foreign
markets in the future.
The Company currently mails a Chicos and WH|BM catalog
virtually every month, which may include, on occasion, inserts
to promote the Soma merchandise. These catalogs are designed to
drive customers into the stores, as well as promote the website
or catalog sales. In fiscal 2001, the Company launched
www.chicos.com to provide customers with an alternative
channel to purchase Chicos merchandise. 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. During
fiscal 2007, the Company began monthly mailings of a separate,
freestanding Soma catalog to existing Soma customers while
continuing to utilize catalog inserts in selected Chicos
mailings, where applicable, as a highly efficient customer
prospecting vehicle.
Sales through the call centers toll free telephone
numbers, together with sales from the Companys three
websites amounted to $72.1 million in fiscal 2007 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 is
currently under-penetrated. To that end, the Company is
continuing its investment in new hardware, software and
personnel to increase its direct to consumer (i.e.
catalog & Internet) sales penetration.
The Companys primary goal for its outlet operations is to
clear excess front-line merchandise. In order to assist with
this goal and to enhance the merchandise margins, Chicos
has developed a supplemental product line for distribution only
through its outlet stores; 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. At this time, the
Company has not established such a supplemental product for the
WH|BM or Soma outlet stores.
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 and gift
products that are primarily designed by the Company. In the
past, some product category tests have proven to be successful
and, as a result, the product category has been added to the
permanent offerings at the stores.
Because of the additional space required to accommodate
additional product categories and in an effort to improve the
visual experience of its merchandise presentations, the Company
has been actively pursuing somewhat larger spaces for its
existing and new stores within the Chicos and WH|BM
brands. 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 front-line Soma stores that are, in
many cases, slightly smaller than its Chicos and WH|BM
stores. Soma stores currently range in size from 950 selling
square feet to 3,100 selling square feet and, in many cases,
have been attached to, or are adjacent to, Chicos stores.
The Company regularly reviews the appropriate size for its
stores and may adjust the target store size in the future as
necessary 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 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, the Chicos brand has been
opening locations in smaller sized markets with encouraging
results and the Company intends to expand its opening of
Chicos brand stores in smaller sized markets as long as
results are meeting expectations. In the fiscal year ended
February 2, 2008 (fiscal 2007), the
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Company opened 128 net new stores (exclusive of the closure
of its 10 remaining Fitigues stores) and reacquired all 13 of
its remaining franchise stores, thus closing out its franchise
operations. During fiscal 2006, the Company opened 145 net
new Company-owned stores, acquired the Fitigues chain of 12
stores (which were all closed by the second quarter of fiscal
2007) and reacquired one of its franchise stores.
Because of the Companys recent performance challenges and
the current weaknesses in retailing in general, the Company has
decided to scale back its store opening program. In particular,
the Company plans to open approximately
35-40 net
new stores in fiscal 2008. Of this total,
17-20 are
expected to be Chicos stores,
18-20 are
expected to be WH|BM stores, and none are expected to be Soma
stores. The Company expects to close up to 8-10 existing
Chicos stores, 6-8 existing WH|BM stores and 4-6 existing
Soma stores.
Business
Strategies
Overall Growth Strategy. The Companys
growth strategy is multi-faceted. Over the last several years,
the Company has continued to build its store base primarily
through the opening of new stores for all of its brands, through
the expansion of existing stores in its Chicos and WH|BM
brands, through the acquisition and expansion of other concepts
such as WH|BM, and through the organic growth of the Soma
concept. At the same time, the Company has developed certain
product extensions for each of its brands, some of which have
been added to the permanent offerings at the stores. 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 and necessary additions to
senior and middle management level headquarters associates,
including the merchandising and marketing 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 rate of the Companys
growth (measured by overall growth in sales, growth in
comparable store sales, and other factors) will decrease from
the rate of overall sales growth experienced in years prior to
fiscal 2006 (which had been in the range of
30-40%),
such anticipated decrease in rate of growth reflecting in large
part the Companys significantly increased size, its
approximate 5-8% net square footage growth goal for fiscal 2008,
and its net square footage growth goal for fiscal 2009, which is
currently expected to be in the 4-7% range. In fiscal 2008, the
Company will continue to focus on improving the performance of
merchandising efforts in its existing stores, expanding its
direct to consumer business, and investing in design and
merchandising talent, and other critical infrastructure needs.
These activities, coupled with a strong balance sheet and a
commitment to better control its expense structure and inventory
investments accompanied by a lowering of its capital
expenditures, should allow the Company to effectively manage its
growth strategies.
In assessing the growth potential of the Companys
Chicos and WH|BM brands, the Company believes the overall
market for Chicos stores in the United States is between
700 and 800 stores and that the overall market for WH|BM stores
in the United States is either comparable or only slightly
lower. The Company further believes that ultimately, most of the
current locations for these two brands can accommodate higher
volume, and 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 continues to evaluate and monitor the progress of
Soma. At this time, the Company is still evaluating the
long-term growth opportunities of its Soma brand.
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, scarves,
and jewelry, including earrings, watches, 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.
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Chicos designs its clothing and accessories in a number of
ways including utilizing its in-house design team, purchasing
certain designs, and working with its independent vendors to
develop 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
create, purchase, and work with vendors to develop the in-house
designs and design modifications. By conceptualizing and
designing in-house, contracting directly with manufacturers, and
providing
on-site
quality control, Chicos has been able to realize average
initial merchandise margins for its clothing and accessories
that are believed to be 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 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 most of its pant styles
and some of its top styles.
WH|BM. 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. 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 to develop 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 created and enhanced to project a contemporary
and feminine self-image. 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
create, purchase, and work with vendors to develop the in-house
designs and design modifications. More so than in the past,
WH|BM conceptualizes and designs in-house, contracts in some
cases directly with manufacturers for designs, and provides
on-site
quality control. 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 Intimates. 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, 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
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labels, other than the Soma label, as it determines the needs
and desires of the target customer. The apparel offerings
utilize small, medium and large sizing, while bras are sized
using traditional American band and cup sizes. Panties were
converted to industry sizing in early 2007.
Personalized Service and Customer
Assistance. Another important factor to the
Companys success is outstanding and personalized customer
service. The Company provides its store associates with
specialized training to help all of its stores offer customers
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 and is testing new
software that is intended to further automate the process of
locating the customers requested style, including specific
size or color requests. The Company is committed to its
Most Amazing Personal Service standard.
Customer Loyalty. Another key success strategy
is building customer loyalty through focused preferred customer
programs and effective implementation of the Companys
merchandising and customer service strategies. The
Companys sophisticated customer tracking database, which
tracks sales by customers at the SKU, associate 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.
Chicos and Soma
Intimates. Chicos preferred customer
club, which was originally 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 total of $500 over any time frame in
either brand, the customer becomes a permanent
member and is currently entitled to a 5% discount on all apparel
and accessory purchases, advance sale notices, free basic
shipping and other benefits. Chicos has been very
successful in increasing its database of active permanent and
preliminary Passport members. Active customers are
those who have made a purchase of merchandise under any of the
Companys brand labels within the preceding 12 months.
As of February 2, 2008, the Chicos and Soma brands
had approximately 1.8 million active permanent Passport
members and an additional 1.6 million active preliminary
Passport members. During fiscal 2007, the active permanent
Passport members accounted for approximately 83% of overall
Chicos and Soma brand sales, while the active preliminary
members accounted for approximately 13% of overall Chicos
and Soma brand sales. As a comparison to fiscal 2006, the
Chicos and Soma brands had an average of 3.2 million
active permanent and preliminary members.
In fiscal 2007, in conjunction with the repositioning of the
Soma Intimates brand to appeal to a broader customer base, the
Company began testing a separate loyalty program for its Soma
brand.
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
6
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 a total of $300 on WH|BM merchandise over any
time frame, the customer becomes a permanent member
and is currently entitled to a 5% discount, birthday bonuses,
double discount specials, advance sale notices, free basic
shipping and other benefits. As of February 2, 2008, The
Black Book had over 0.7 million active permanent members
and approximately 1.4 million active preliminary members.
During fiscal 2007, active permanent Black Book members
accounted for 64% of overall WH|BM brand sales, while active
preliminary members accounted for 29% of overall WH|BM brand
sales. As a comparison to fiscal 2006, the WH|BM brand had an
average of 1.8 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 it 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 currently 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. The Company is currently evaluating
potential modifications to this plan that would incorporate
different payment methods designed to help encourage more active
selling with new customers, while still rewarding sales to
existing customers.
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 compared to their planned performance, as
well as incentives, including, in some years, equity based
compensation such as restricted stock or stock options.
The Company also offers its store and field management
associates other recognition programs and the opportunity to
participate in its employee 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.
Additional Stores. Management believes the
ability to open additional stores will be a factor in the future
success of the Company, particularly in the WH|BM and Soma
brands. Due to current macroeconomic and other business
conditions, the Company has scaled back its real estate growth
targets for 2008 and 2009, and does not intend to increase the
number of new stores beyond current commitments until it sees
improvements in the economy and its own performance. During
fiscal 2007, the Company opened 128 net new stores
(exclusive of the 10 Fitigues store closures and the 13 acquired
franchise stores) composed of 50 net Chicos
front-line stores, 3 net Chicos outlet stores, 55
net WH|BM front-line stores, 3 net WH|BM outlet
stores, 16 net Soma front-line stores and 1 Soma outlet
store. 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.
As of March 17, 2008, the Company has thus far opened 4
front-line Chicos stores, 5 WH|BM front-line stores and 1
front-line Soma store. During this time, the Company also closed
2 Chicos front-line stores and 1 WH|BM front-line store.
The Company has signed leases for several additional new store
locations, and the Company also is currently engaged in
negotiations for the leasing of a limited number of additional
sites. Of the approximately
35-40 net
new stores to be opened in fiscal 2008, the Company expects to
open (net of planned closures) approximately
18-20 stores
in the first quarter,
13-14 stores
in the second quarter,
14-15 stores
in the third
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quarter, and it anticipates no new store openings (only planned
closures of approximately 8-10 stores) 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 and have typically had a
twelve to fifteen 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 continue 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
levels 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. Initially and where
possible, the Company has historically opened its Soma stores
adjacent to or nearby an existing Chicos store. During
fiscal 2008, the Company will be reevaluating future Soma store
locations to focus on opening Soma stores in high traffic areas,
possibly outside of where Chicos locations exist. The
Chicos and WH|BM outlet stores are, for the most part,
located in outlet centers, with certain stores also located in
value centers.
As of February 2, 2008, the Chicos front-line stores
averaged 2,541 selling square feet, while the Chicos
outlet stores averaged 2,723 selling square feet. WH|BM
front-line stores averaged 1,924 selling square feet and WH|BM
outlet stores averaged 1,844 selling square feet. Soma
front-line stores averaged 1,932 selling square feet, with its
only outlet store at 1,389 square feet. The Company seeks
to open new Chicos front-line stores with approximately
3,000-3,500 selling square feet, to open new Soma front-line
stores with approximately 1,100-2,300 selling square feet and to
open new 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 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 17, 2008,
are located in the following jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WH|BM
|
|
|
|
|
|
Intimates
|
|
|
Soma
|
|
|
|
|
|
|
Chicos
|
|
|
Chicos
|
|
|
Front-
|
|
|
WH|BM
|
|
|
Front-
|
|
|
Intimates
|
|
|
|
|
|
|
Front-Line
|
|
|
Outlet
|
|
|
Line
|
|
|
Outlet
|
|
|
Line
|
|
|
Outlet
|
|
|
Total
|
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
Stores
|
|
|
California
|
|
|
67
|
|
|
|
3
|
|
|
|
40
|
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
120
|
|
Florida
|
|
|
55
|
|
|
|
4
|
|
|
|
29
|
|
|
|
3
|
|
|
|
8
|
|
|
|
1
|
|
|
|
100
|
|
Texas
|
|
|
48
|
|
|
|
3
|
|
|
|
27
|
|
|
|
2
|
|
|
|
13
|
|
|
|
|
|
|
|
93
|
|
Pennsylvania
|
|
|
26
|
|
|
|
4
|
|
|
|
12
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
48
|
|
Illinois
|
|
|
25
|
|
|
|
1
|
|
|
|
15
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
44
|
|
New Jersey
|
|
|
25
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
43
|
|
Georgia
|
|
|
19
|
|
|
|
1
|
|
|
|
13
|
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
|
|
39
|
|
New York
|
|
|
26
|
|
|
|
2
|
|
|
|
10
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
39
|
|
Maryland
|
|
|
18
|
|
|
|
2
|
|
|
|
8
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
31
|
|
North Carolina
|
|
|
17
|
|
|
|
1
|
|
|
|
7
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
29
|
|
Ohio
|
|
|
16
|
|
|
|
1
|
|
|
|
10
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
29
|
|
Massachusetts
|
|
|
18
|
|
|
|
1
|
|
|
|
6
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Virginia
|
|
|
19
|
|
|
|
2
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Arizona
|
|
|
13
|
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
25
|
|
Michigan
|
|
|
16
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
23
|
|
Colorado
|
|
|
11
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
21
|
|
Connecticut
|
|
|
13
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
20
|
|
Oregon
|
|
|
10
|
|
|
|
1
|
|
|
|
7
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
20
|
|
Washington
|
|
|
12
|
|
|
|
1
|
|
|
|
6
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
20
|
|
Tennessee
|
|
|
13
|
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Louisiana
|
|
|
10
|
|
|
|
1
|
|
|
|
5
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
18
|
|
Missouri
|
|
|
11
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
18
|
|
Minnesota
|
|
|
12
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Nevada
|
|
|
6
|
|
|
|
1
|
|
|
|
5
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
15
|
|
South Carolina
|
|
|
10
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Alabama
|
|
|
9
|
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Indiana
|
|
|
9
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Wisconsin
|
|
|
6
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
13
|
|
Kentucky
|
|
|
7
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Arkansas
|
|
|
6
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
9
|
|
Kansas
|
|
|
5
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
9
|
|
New Mexico
|
|
|
5
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
9
|
|
Oklahoma
|
|
|
5
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Utah
|
|
|
5
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Hawaii
|
|
|
2
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Nebraska
|
|
|
4
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Iowa
|
|
|
4
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Rhode Island
|
|
|
4
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Delaware
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
District of Columbia
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Puerto Rico
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
U.S. Virgin Islands
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Idaho
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Mississippi
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Montana
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
New Hampshire
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
West Virginia
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Maine
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
North Dakota
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
South Dakota
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Vermont
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Wyoming
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
606
|
|
|
|
37
|
|
|
|
313
|
|
|
|
19
|
|
|
|
69
|
|
|
|
1
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $700,000 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 rapid build-out and set up of store interiors,
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
|
|
|
|
January 31,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
February 2,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(53 weeks)
|
|
|
(52 weeks)
|
|
|
Company-Owned Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at beginning of year*
|
|
|
366
|
|
|
|
545
|
|
|
|
645
|
|
|
|
749
|
|
|
|
907
|
|
Opened**
|
|
|
74
|
|
|
|
109
|
|
|
|
109
|
|
|
|
157
|
|
|
|
143
|
|
Acquired from franchisees
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
13
|
|
Acquired pursuant to Fitigues Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Acquired pursuant to The White House transaction
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed
|
|
|
(2
|
)
|
|
|
(10
|
)
|
|
|
(5
|
)
|
|
|
(12
|
)
|
|
|
(25
|
)***
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at end of year
|
|
|
545
|
|
|
|
645
|
|
|
|
749
|
|
|
|
907
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at beginning of year
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
|
|
14
|
|
|
|
13
|
|
Opened
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Acquired by Company
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at end of year
|
|
|
12
|
|
|
|
12
|
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stores
|
|
|
557
|
|
|
|
657
|
|
|
|
763
|
|
|
|
920
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores by Brand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicos front-line
|
|
|
399
|
|
|
|
450
|
|
|
|
499
|
|
|
|
541
|
|
|
|
604
|
|
Chicos outlet
|
|
|
23
|
|
|
|
25
|
|
|
|
31
|
|
|
|
34
|
|
|
|
37
|
|
Chicos franchise
|
|
|
12
|
|
|
|
12
|
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
WH|BM front-line
|
|
|
112
|
|
|
|
156
|
|
|
|
196
|
|
|
|
254
|
|
|
|
309
|
|
WH|BM outlet
|
|
|
2
|
|
|
|
4
|
|
|
|
8
|
|
|
|
16
|
|
|
|
19
|
|
Soma Intimates front-line
|
|
|
|
|
|
|
10
|
|
|
|
15
|
|
|
|
52
|
|
|
|
68
|
|
Soma Intimates outlet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Fitigues front-line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
Fitigues outlet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Pazo
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores at end of year
|
|
|
557
|
|
|
|
657
|
|
|
|
763
|
|
|
|
920
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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
relocations, expansions or conversions of previously existing
stores within the same general market area (approximately five
miles). |
|
*** |
|
Includes 10 Fitigues stores closed in fiscal 2007. |
10
Outlet
Stores
As of March 17, 2008, the Company operated 37 Chicos
outlet stores, 19 WH|BM outlet stores and 1 Soma 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, in
its Chicos outlets, the Additions by
Chicos label. The Additions by
Chicos label has grown to represent approximately
30% of the Chicos outlet sales during fiscal 2007, and the
Company currently anticipates that the Additions by
Chicos label could account for up to 40% of
Chicos outlet sales in fiscal 2008. The Companys
outlet stores act as a vehicle for clearing certain marked down
merchandise while historically helping front-line stores to
maintain a more limited markdown policy. Because of the
challenging economic times in recent years and the inability of
the outlets to absorb the increased volume of marked down
merchandise, the Companys front-line stores have seen a
more significant growth in markdowns. This trend is likely to
continue until there is an improvement in the economy, the
retail environment and the Companys performance.
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 2007, sales from the
Companys outlet stores represented approximately 5.1% of
the Companys net sales, somewhat higher than historical
percentages. The Companys outlet stores currently are not
intended to be profit centers, but 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, and
through the first Soma outlet store opened in April 2007.
In fiscal 2007, the Company opened 3 net new Chicos
outlet stores, 3 net new WH|BM outlet stores and 1 new Soma
outlet store. Currently, the Company is planning to open 3-5
Chicos outlet stores in fiscal 2008 and no new WH|BM or
Soma outlet stores.
Store
Operations
Chicos and Soma stores with average sales volumes
typically employ a manager, two assistant managers, and a
mixture of full or part-time sales associates. Higher volume
Chicos 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 full or
part-time associates, in part because of the smaller average
size of stores and smaller average revenue per store. In
addition, at newer WH|BM stores, which are generally larger in
size, the Company will typically employ a staff that could be
comparable in size to that of a Chicos store. During the
peak selling seasons, Chicos, WH|BM and Soma stores
generally hire additional temporary sales associates.
Most store support functions, such as purchasing and accounting,
are handled by the Companys corporate headquarters. Store
managers, however, are responsible for managing the stores
day-to-day business and driving sales productivity 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. The Company believes
that 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 Service (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,
manage the operations and improve the level of service provided
to its customers.
The Company currently manages its overall store operations
through its Chief Stores Officer, its Senior Vice
President Chicos Stores, its Vice
President Chicos Store Operations, its Senior
Vice President WH|BM
11
Stores, its Vice President of Stores Soma, its Vice
President Corporate Store Operations, its
territorial Vice Presidents, and its Regional and District Sales
Managers. The Senior Vice President Chicos
Stores, the Senior Vice President WH|BM Stores, and
the Vice President of Stores Soma, each of whom
report directly to the head of their respective brands, have
direct supervision responsibility of their brand specific
territorial Vice Presidents or Regional Sales Managers, who in
turn have direct supervision responsibility of their respective
brand specific 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.
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. These systems 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 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 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 or new merchandise
categories, 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 completed
the first major phase of its multi-year, planned implementation
of the new ERP system by converting its Soma brand to the new
merchandising system as well as rolling out the new financial
systems at the same time. The second major phase currently
anticipates an initial roll out and utilization of this new
system in each of its other two brands beginning in early fiscal
2009 with completion anticipated in mid to late fiscal 2009. The
third major phase contemplates on-going enhancements and
optimization of the new ERP across all three brands, as well as
the deployment of additional functionality across various other
functions within the Company.
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 (domestic) vendors
arrives in Georgia by truck, rail, or air, as the circumstances
require. Most of the merchandise from foreign vendors arrives in
this country via air at various points of entry in Georgia,
Illinois, California, New York, or Florida and is transported
via truck or rail 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
12
arrival at stores generally averages approximately 24 to
48 hours for its nearest stores and two days to a week for
its 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 a parcel carrier 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 (taking into account the planned 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 continuing to evaluate its requirements and the
appropriate timing to make additional distribution center
capacity available, particularly in light of its recent decision
to slow its new store growth until improvements in the economy
and the Companys performance are achieved. Even with the
scaled down growth plans, the Companys present goal is to
begin design work in late fiscal 2008. It is currently
anticipated that the Company will require additional
distribution space in late fiscal 2009 or early fiscal 2010 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.
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 perceived current and 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 M. Cloutier, Brand
President Chicos. Ms. Cloutier reports to
Scott A. Edmonds, Chairman, President and Chief Executive
Officer. Ms. Cloutier currently has the Chicos Senior
Vice President Product Development, the Chicos
Senior Vice President Planning and Allocation, the
Chicos Senior Vice President Production and
Sourcing, the Chicos Senior Vice President
Merchandise Controller and two Vice Presidents of Merchandising
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 a consultant for
the Chicos brand.
WH|BMs creative, product development, merchandising,
planning and allocation, and production and quality teams are
headed up by Donna M. Noce Colaco, Brand President
White House | Black Market. Ms. Colaco currently has the
WH|BM Senior Vice President Operations, the WH|BM
Vice President Divisional Merchandise Manager, the
WH|BM Vice President of Design and three Directors
Divisional Merchandise Managers reporting directly to her.
Ms. Colaco 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, the Vice
President Merchandising and Design, 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 create or purchase 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, 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.
13
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., Mexico and Guatemala 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. In the cut and sew operations, the
Company buys fabric and provides such fabric to domestic
cut and sew manufacturers in the United States,
Mexico and Guatemala who make the specified Chicos brand
designs and styles.
Currently, Chicos and Soma contract primarily with between
85 to 105 apparel and foundation vendors and 20 to 40 accessory
vendors, as well as several fabric suppliers and one
intermediary cut and sew vendor 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 135
different vendors for its WH|BM merchandise, but relies on 25
core vendors who collectively account for approximately 86% of
the total WH|BM merchandise purchases.
Chicos, WH|BM and Soma collaborate on sourcing operations,
including sharing of the vendor base, where appropriate. The
Company believes the sharing of the vendor base could continue
to expand in fiscal 2008. The Company also plans to begin
implementing its metric based supplier scorecard in
fiscal 2008 for its shared vendor base and ultimately its entire
vendor base across all three brands.
Chicos and Soma Intimates. During
fiscal 2007, China sources accounted for approximately 55% 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
14% of their merchandise, India sources accounted for
approximately 10% of overall purchases, Guatemala sources
accounted for approximately 6% of overall purchases, Turkey
sources accounted for approximately 4% of overall purchases,
Peru sources accounted for approximately 4% of overall
purchases, and Vietnam, the Philippines, and other smaller
sources, in the aggregate, amounted to approximately 7% of
overall purchases.
WH|BM. During fiscal 2007, China
sources accounted for approximately 74% of the Companys
purchases at retail for their WH|BM merchandise, United States
sources accounted for approximately 24% of their merchandise and
Canada, El Salvador, and other smaller sources, in the
aggregate, accounted for approximately 2% of overall purchases.
Sourcing through foreign vendors increased considerably during
fiscal 2007 as WH|BM expanded its utilization of sourcing
alternatives provided by the Company. The Company expects this
trend may 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 cut and
sew 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 factories in the United States, Mexico and
Guatemala. 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,
Mexico and Guatemala cut and sew manufacturers to
make the specified designs and styles. There can be no assurance
that the relationship with this intermediary can be maintained
in the future or that the intermediary will continue to be
14
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.
In fiscal 2008, the Company plans to further pursue its direct
to manufacturer sourcing opportunities. In addition, the Company
is in the preliminary planning stages for establishing overseas
offices in Asia that would provide technical support in areas
such as fit, fabric, color and quality assurance. The Company
believes these initiatives could lead to improved product cost,
quality control, timeliness of deliveries, and overall speed to
market.
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 certain
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. 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 been seeking to
increase 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.
Additionally, in fiscal 2006, the Company was admitted to the
Customs-Trade Partnership Against Terrorism
(C-TPAT), a United States Department of Homeland
Security Sponsored program, with CBP and, in fiscal 2007,
received its Tier Three validation status. C-TPAT is a
partnership between the government and the private sector
initiated after the events of September 11, 2001 to improve
supply chain and border security. Through C-TPAT, the Company
implements and monitors its procedures for managing the security
of its supply chain as part of the effort to protect the
U.S. against potential acts of terrorism. In exchange, CBP
provides reduced inspections at the port of arrival. As a
participant in the C-TPAT program, the Company expects all of
its suppliers shipping to the United States to adhere to the
Companys C-TPAT requirements, including standards relating
to facility security, procedural security, personnel security,
cargo security and the overall protection of the supply chain.
In the event a supplier does not comply with the Companys
C-TPAT requirements or if the Company determines that the
supplier will be unable to correct a deficiency, the Company may
terminate its business relationship with the supplier. In fiscal
2007, the Company also was certified to participate in the
Importer Self Assessment Program, or
15
ISA, a CBP program available only to C-TPAT participants with
strong internal controls and oversight mechanisms, through which
the Company has assumed responsibility for monitoring its own
compliance with applicable CBP regulations in exchange for
certain benefits, which may help increase efficiency in
importing. These benefits include exemption from government
audits, increased speed of cargo release from CBP, enhanced
prior disclosure rights from CBP in the event of alleged trade
violations, availability of voluntary additional compliance
guidance from CBP, and less intrusive government oversight of
trade compliance.
The Company currently imports products primarily from China,
India, Guatemala, Peru 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
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 have even been legislation
initiatives from time to time to withdraw Chinas NTR
status. However, it remains uncertain whether the Congress will
consider any 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
16
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 year, whether the MOU will be extended
after December 31, 2008, 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 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 17, 2008, 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 Guatemala and Peru 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
17
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.
Advertising
and Promotion
The marketing program for the Company currently consists of the
following integrated components:
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The Companys loyalty programs the Passport
Club and the Black Book (see Customer Loyalty
discussion within the Business Strategies section)
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Direct Marketing efforts: Direct Mail and Email
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National print and TV advertising
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Internet and direct phone sales
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Community outreach programs
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The Companys Direct Marketing efforts have been successful
in driving traffic to stores and the direct to consumer
channels. A large portion 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 made a purchase of merchandise
under any one of the Companys brand labels within the
preceding 12 months. The Chicos and Soma Passport
Club had approximately 3.4 million active customers at the
end of fiscal 2007 versus approximately 3.2 million at the
end of fiscal 2006. WH|BMs Black Book increased to
approximately 2.1 million at the end of fiscal 2007 from
approximately 1.8 million at the end of fiscal 2006. Soma
does not have its own loyalty program, but Soma customers can
join the Chicos Passport Club. Although the active
customer base for Soma customers is blended with the
Chicos customer base, the active customer base for Soma
purchases is growing rapidly year over year. In fiscal 2007, in
conjunction with the repositioning of the Soma Intimates brand
to appeal to a broader customer base, the Company began testing
a separate loyalty program for its Soma brand.
The Company experienced direct to consumer (Internet and
catalog) sales of approximately $72.1 million in fiscal
2007, which represented a 36% increase over the prior period. In
addition, the Companys contact center managed over a
million sales related phone calls in fiscal 2007.
The Company anticipates mailers, national print and television
advertisements, and web marketing will be part of a marketing
budget that, as has been the case in recent years, will be
targeted at between 3.9% and 4.2% of net sales during fiscal
2008. In fiscal 2007, the Companys marketing as a
percentage of sales increased to 4.8% of net sales due to the
deleverage associated with the Companys negative same
store sales and the planned increase in marketing spend in the
second half of fiscal 2007, compared to the second half of
fiscal 2006, in an effort to protect and enhance the
Companys market share and to highlight its Fall and
Holiday product offerings. In fiscal 2006, marketing was 4.1% of
net sales.
18
During the last six months of fiscal 2007, the Company ran
extensive television advertising in four distinct markets to
support the Soma brand. The Company experienced strong same
store sales during and after the time these television
commercials aired, and it is currently anticipated that
television will be used, although less extensively, in fiscal
2008. The Company is also planning to test a reintroduction of
television advertising for the Chicos brand during fiscal
2008. Chicos had moved away from television advertising in
mid fiscal 2006, putting greater focus on mailers and print
advertising.
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,
specialty stores including The Gap, Talbots, J. Jill, Banana
Republic, Ann Taylor, Ann Taylor Loft, Christopher &
Banks, and Coldwater Creek, direct to consumer retailers such as
Lands End and L.L. Bean, 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, J. Crew, The Gap
and Express as well as 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, exclusive
availability of the product offerings 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.
19
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 2, 2008, the Company employed approximately
14,300 persons, approximately 40% of whom were full-time
associates and approximately 60% 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, 1% worked in the
Companys distribution center in Winder, Georgia and 9%
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).
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, and SOMA BY CHICOS.
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.
Available
Information
The Companys corporate website, which includes a link to
its investor relations page under the section entitled Our
Company, is located at www.chicos.com. Through this
website, the Company makes available free of charge 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 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 within the investor relations page, 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 websites through
which it primarily sells its merchandise, those being
www.chicos.com, www.whitehouseblackmarket.com and
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 and which is
posted within the Investor Relations page of the Companys
website. 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,
20
Code of Ethics, Terms of Commitment to Ethical Sourcing, and
Stock Ownership Guidelines are available on the website in the
Investor Relations section (under the Our Company tab) 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 20, 2007, and indicated that the CEO
was not aware of any violations of the Listing Standards by the
Company.
ITEM 1A. RISK
FACTORS
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 growth strategy which includes brand
extensions, the planned square footage expansion, and number of
new stores is dependent upon a number of factors, including:
testing of new products, 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, generate sufficient
operating cash flows to fund the expansion plans, 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.
New Store Openings and Remodels
The Companys continued growth depends, in part, on its
ability to open and operate new stores and remodels of existing
stores. During fiscal 2008, the Company plans to open
approximately
35-40 net
new stores, of which
17-20 are
expected to be Chicos stores,
18-20 are
expected to be WH|BM stores and none are expected to be Soma
stores. The Company expects to continue to open new stores in
future years, while also remodeling, relocating and expanding a
portion of the existing store base. The planned openings and
expansions could place increased demands on operational,
managerial and administrative resources. These increased demands
could cause the Company to operate the business less
effectively, which in turn could cause deterioration in the
financial performance of individual stores. In addition, to the
extent that a number of new store openings are in existing
markets, the Company may experience reduced net sales volumes in
previously existing stores in those same markets.
Seasonal Fluctuations
The nature of the Companys business is to have two
distinct selling seasons; spring and fall. During the peaks of
these seasons, increased marketing, temporary personnel, and
other expenses may be incurred to prepare and compete for the
anticipated stronger consumer spending. Lower than expected
sales or profit margins during this period, as was experienced
in fiscal 2007, could materially affect the financial condition
and results of operations.
Vendor Relationships
The Company has no material long-term or exclusive contracts
with any apparel or accessory manufacturer or supplier. The
business depends on its network of suppliers and on continued
good relations with its vendor base. A key vendor may become
unable to supply our merchandising needs due to payment terms,
cost of manufacturing, adequacy of manufacturing capacity,
quality control, and timeliness of delivery. If the Company was
unexpectedly required to change vendors or if a key vendor was
unable to supply desired merchandise in sufficient quantities on
acceptable terms, the Company could experience inventory
shortages until alternative vendor arrangements were secured.
The Company has contracted with one intermediary cut and
sew vendor that accounted for approximately 16% of the
purchases for the Chicos brand during the last fiscal
year. The Company cannot guarantee that
21
this relationship will be maintained in the future or that the
intermediary will continue to be available to coordinate and
facilitate production and supply of merchandise. A significant
disruption in the supply of merchandise from this, or any other
key vendor, could have a material adverse impact on the
Companys operations.
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, customer acceptance of
merchandise offerings, timing of catalog mailings, calendar
shifts of holiday periods, actions by competitors, new store
openings, weather conditions, and general economic conditions.
Past comparable store sales results are not an indicator of
future results. In fiscal 2007, the Company experienced a shift
to negative overall (and negative Chicos and WH|BM brand)
comparable store sales results, which had a significant effect
on the Companys performance and market price of the
Companys common stock. Similarly, the Companys
overall and individual brand comparable store sales results in
the future, both positive and negative, are likely to have a
significant impact 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 a 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 as planned, the
Companys overall gross profit margins may be negatively
impacted which could in turn have an adverse effect on the
Companys overall operating margin 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 30%
larger than the chain average in fiscal 2007 and are again
expected to be between 30%-40% larger than the chain average in
fiscal 2008. Although these stores are expected to produce
incremental profit dollars that will be in the range of each
respective chains average anticipated 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. Although it is anticipated
that these stores will eventually achieve profit margins equal
to more mature stores, these stores are likely over at least the
short term to put pressure on the Companys operating
margin by increasing selling, general and administrative
expenses as a percentage of sales. This could have an adverse
effect on the Companys operating margin and the market
price of the Companys common stock.
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 4.2% of the Companys total sales for
fiscal 2007, these sales have 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
22
operations are likely to be of greater significance in fiscal
2008 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 regularly reviews and is developing its
options to mitigate this risk including contingency plans and
back-up
relationships with outside providers of distribution activities.
Success and Location of Shopping Centers
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 conditions and consumer spending levels. A
slowdown in the U.S. economy, as has been seen in fiscal
2007 and so far in fiscal 2008, tends to negatively affect
consumer spending and reduce shopping center traffic. The
Companys sales are partly dependent on a high volume of
shopping center traffic and any decline in such shopping center
traffic, whether because of the slowdown in the economy, a
falloff in the popularity of shopping centers among our target
customers, or otherwise, could have a material adverse effect on
our business.
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 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 2, 2008. The property includes seven
existing buildings aggregating approximately 200,600 square
feet of space, approximately
23
12% of which continues to be leased to unrelated third parties.
As the remaining leases expire or are otherwise terminated, 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
adequate to cover the necessary costs of construction for its
headquarters expansion. 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.
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 the event of war, acts of terrorism or any further threat of
terrorist attacks, customer traffic in shopping centers could
significantly decrease. In addition, local authorities or
shopping center management could close in response to any
immediate security concern or weather catastrophe such as a
hurricane or tornado. Similarly, war, acts of terrorism, threats
of terrorist attacks, or a weather catastrophe could severely
and adversely affect the Companys headquarters or
distribution center that, in turn, could have a material adverse
impact on the Companys business. Any such event 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 principally 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 and in a timely manner to changes in fashion
trends or demands (such as the fashion missteps that occurred in
fiscal 2006 and 2007) 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 and fiscal 2007. 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,
24
weather conditions and currency fluctuations. 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 currently have long-term
supply or capacity 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 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
rate challenges, which tend to be heightened as a result of
recent weaknesses in the strength of the dollar and pressures
presented by implementation of U.S. monetary policy;
(v) local business practice and political issues, including
issues relating to compliance with domestic or international
labor standards; (vi) transportation disruptions, and
(vii) seizure or detention of goods by Customs authorities.
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 continuing adverse changes in
foreign exchange rates.
Vendors Compliance with Labor Practices Requirements
Although the Company has adopted its Terms of Commitment to
Ethical Sourcing and seeks to be diligent in its monitoring of
compliance with these terms, 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
25
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.
General Economic Conditions
Certain economic conditions affect the level of consumer
spending on merchandise offered by the Company, including, among
others, unemployment levels, business conditions, inflation,
interest rates, recession, 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. Furthermore,
declines in consumer spending patterns due to economic downturns
may have a more negative effect on apparel retailers than some
other retailers and can negatively affect the Companys net
sales and profitability.
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. The Company is currently implementing a
new enterprise resource planning system (ERP) through SAP, a
third party vendor, to assist in managing its retail stores.
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. Any delays or difficulties in transitioning or in
integrating SAP 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 longer term business
strategy involves the organic development and growth of new
concepts and 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. 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 and 2007, the Company continued to expand the
presence of the Soma brand by opening 37 and 17 net new
Soma stores, respectively. The Company recently announced it is
slowing its planned new store growth in Soma stores in order to
focus on improving its operations and profitability. The Company
believes the Soma brand reduced the Companys earnings per
share by approximately $0.12 for fiscal 2007 and, to a lesser
extent, will continue to be dilutive in fiscal 2008. The Soma
store concept was initially focused towards the Chicos
target customer. The Company is currently expanding its Soma
target customer and continues to invest in development of the
brand through marketing and new product launches in order to
create and maintain brand awareness, which is an integral factor
in the success of the brand. Although the Company believes
building brand awareness will attract new customers, the Company
cannot provide assurance that the marketing activities and new
product launches will result in increased sales or profitability
in the future for the Soma brand. In addition, the Company
believes that eventual profitability is in part dependent on the
ability to open a critical mass of Soma stores (currently
believed to be at least 100 stores) and the planned slowdown in
the new store openings (in order to focus on improving the
existing Soma operations and profitability) pushes that target
further into the future. Thus, if the Company cannot
successfully execute its growth strategies for development of
the Soma brand, or any other new concepts or brand extensions
for that matter, the Companys financial condition and
results of operations may be adversely impacted.
26
Energy Prices
Oil prices have fluctuated dramatically in the past and have
risen significantly in late fiscal 2007 and early in fiscal
2008. If the trend of increasing oil prices continues, this
trend may result in a further 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, any or all 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 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 2, 2008, the Companys goodwill and
other intangible assets totaled approximately $96.8 million
and $38.9 million, respectively. In early fiscal 2007, the
Company completed the acquisition of all outstanding franchise
rights which included 12 Minnesota stores and 1 Florida store.
The Minnesota franchise acquisition resulted in the recognition
of $27.7 million of goodwill and $4.9 million of an
intangible asset, which represents the fair value of re-acquired
territory rights and which the Company determined to have an
indefinite useful life. In addition, the Florida franchise
acquisition resulted in the recognition of $6.4 million of
goodwill. The remaining goodwill and other intangible asset
balances are related to the acquisition of The White House, Inc.
At the time of the White House acquisition, the Company
determined that the WH|BM trademark also 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 a goodwill 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 either
1) goodwill, 2) the WH|BM trademark asset or
3) the Minnesota territorial rights, which could
substantially and negatively impact the Companys results
of operations.
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.
27
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Like other seasoned issuers, the Company, from time to time,
receives written comments from the staff of the SEC regarding
the Companys periodic or current reports under the
Exchange Act. There are no comments that remain unresolved that
the Company received not less than 180 days before the end
of its 2007 fiscal year to which this
Form 10-K
relates.
Stores
As shown on page 9, 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 are currently leased. Lease terms typically
range from five to ten years and approximately 66% contain one
or more renewal options. Historically, the Company has exercised
most of its lease renewal options. Approximately 78% 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 30% 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 1,045 stores
existing as of March 17, 2008, sets forth (i) the
number of leases that will expire each year if the Company does
not exercise renewal options and (ii) the 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
|
|
|
January 31, 2009
|
|
|
55
|
|
|
|
12
|
|
January 30, 2010
|
|
|
88
|
|
|
|
12
|
|
January 29, 2011
|
|
|
116
|
|
|
|
27
|
|
January 28, 2012 and thereafter
|
|
|
786
|
|
|
|
994
|
|
Headquarters
and Distribution Center
The Companys World Headquarters is located on
approximately 57 acres in Fort Myers, Florida and
consists of approximately 347,600 square feet of office
space. During fiscal 2006, the Company completed the purchase of
approximately 22 acres (which is included in the 57 total
acres above) of property, including seven existing buildings
aggregating approximately 200,600 square feet of office
space (which is included in the 347,600 total office space
above) adjacent to the Companys headquarters site for
approximately $26.4 million. This World Headquarters campus
currently consists of its corporate and administrative
headquarters for all of its brands. The Company is currently
developing a multi-year overall plan for the future buildout of
all of its available property.
During the third quarter of fiscal 2006, the Company
reclassified a parcel of land located south of Fort Myers,
Florida with a book value of $38.1 million from a long-term
asset to a current asset that was being held for sale. On
August 1, 2007, the Company consummated a transaction to
sell the land with a sales price totaling $39.7 million
consisting of approximately $13.4 million in cash proceeds,
net of closing costs, and a note receivable with a principal
amount of approximately $25.8 million and secured by a
purchase money mortgage. The note accrues interest at a fixed
rate of 6.0% annually with interest payable quarterly and the
principal amount is payable in a balloon payment in two years.
To date, the Company has received all payments due under the
note.
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 Winder, Georgia
for its distribution and fulfillment centers operations. These
facilities consist of 202,000 square feet of distribution
space, 50,000 square feet of fulfillment and
28
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.
The Company is currently evaluating its requirements and the
appropriate timing to make additional distribution center
capacity available particularly in light of its recent decision
to slow its new store growth until improvements in the economy
and the Companys performance are achieved. Even with the
scaled down growth plans, the Companys present goal is to
begin design work in late fiscal 2008. It is currently
anticipated that the Company will require additional
distribution space in late fiscal 2009 or fiscal 2010 and,
initially, the Company is focusing its evaluation on the
expansion of its current distribution center on the existing
adjacent land that is already owned by the Company.
All recent property purchases and related capital improvements
have been funded from the Companys existing cash and
marketable securities balances.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
On May 9, 2007, the Company was served with a lawsuit in
which it was named as defendant in a putative class action in
the Superior Court for the State of California, County of Los
Angeles, Linda Balint v. Chicos FAS, Inc. et
al. The Complaint alleged that the Company, in violation
of California law, failed to: (1) pay overtime wages, and
(2) provide meal periods, among other claims. The Company
timely filed its response denying the material allegations of
the Complaint. In October 2007, the parties participated in an
early mediation of this matter and reached a settlement as a
result of that mediation. In January 2008, the Court gave its
preliminary approval of the settlement and notice of the
settlement has been sent to all class members. Class members
have until April 21, 2008 to partake in, opt out of, or
object to the settlement. The settlement is subject to final
approval by the Court. The settlement, if approved by the Court,
is not expected have a material impact on the Companys
results of operations or financial condition.
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.
29
|
|
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
|
|
|
50
|
|
|
|
14
|
|
|
Chairman, President and Chief Executive Officer
|
Michele M. Cloutier
|
|
|
43
|
|
|
|
1
|
|
|
Brand President Chicos
|
Donna M. Colaco
|
|
|
49
|
|
|
|
*
|
|
|
Brand President White House | Black Market
|
Manuel O. Jessup
|
|
|
52
|
|
|
|
1
|
|
|
Executive Vice President Chief Human Resources
Officer
|
Gary A. King
|
|
|
50
|
|
|
|
3
|
|
|
Executive Vice President Chief Information Officer
|
Kent A. Kleeberger
|
|
|
55
|
|
|
|
**
|
|
|
Executive Vice President Finance, Chief Financial
Officer and Treasurer
|
Mori C. MacKenzie
|
|
|
58
|
|
|
|
12
|
|
|
Executive Vice President Chief Stores Officer
|
Charles L. Nesbit, Jr.
|
|
|
52
|
|
|
|
3
|
|
|
Executive Vice President Chief Operating Officer
|
A. Alexander Rhodes
|
|
|
49
|
|
|
|
5
|
|
|
Senior Vice President General Counsel and Secretary
|
Michael J. Kincaid
|
|
|
50
|
|
|
|
8
|
|
|
Senior Vice President Finance, Chief Accounting
Officer and Assistant Secretary
|
|
|
|
* |
|
Joined the Company in August 2007 |
|
** |
|
Joined the Company in November 2007 |
Scott A. Edmonds is Chairman, 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. In
September 2007, Mr. Edmonds was also named Chairman of the
Board of Directors. 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.
Michele M. Cloutier is Brand President Chicos
for the Company, having just been promoted to that position in
October 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 to 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.
Donna M. Colaco is Brand President White House |
Black Market for the Company, having joined the Company in
August 2007. Ms. Colaco has over 25 years of
experience in womens specialty apparel. Prior to joining
the Company, Ms. Colaco worked for Ann Taylor Corporation
for more than 10 years in numerous capacities including,
most recently, serving as President of Ann Taylor LOFT. Prior to
Ann Taylor, Ms. Colaco worked for the Lerner New York
Division of Limited, Inc. and Petrie Stores Corporation.
30
Manuel O. Jessup is Executive Vice President Chief
Human Resources Officer for the Company, having been promoted to
that position in September 2007. Mr. Jessup joined the
Company in October 2006 as Senior Vice President of Human
Resources. Mr. Jessup was previously employed by Sara Lee
Branded Apparel where he most recently served as Corporate Vice
President, Human Resources. During his 21 year career at
Sara Lee he also served as Global Vice President, Human
Resources, Sara Lee Branded Apparel, Latin America and Asia, as
well as Vice President, Human Resources, Sara Lee Hosiery. Prior
to joining Sara Lee, Mr. Jessup held human resources
management positions at Levi Strauss and J.P. Stevens.
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.
Kent A. Kleeberger is Executive Vice President
Finance, Chief Financial Officer and Treasurer, having recently
joined the Company in November 2007. From 2004 through October
2007, Mr. Kleeberger was the Senior Vice
President Chief Financial Officer for Dollar Tree
Stores, Inc. From 1998 to 2004, he served in numerous capacities
for Too Inc., now known as Tween Brands, Inc., culminating in
his appointment as Executive Vice President, Chief Operating
Officer, Chief Financial Officer, Secretary, and Treasurer.
Prior to that, Mr. Kleeberger served in various financial
positions with The Limited, Inc. Mr. Kleeberger also serves
on the Board of Directors of Shoe Carnival, 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.
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
31
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.
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 17, 2008, the last reported sale price of the Common
Stock on the NYSE was $7.32 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 2, 2008
|
|
High
|
|
|
Low
|
|
|
Fourth Quarter (November 4, 2007 - February 2, 2008)
|
|
$
|
12.87
|
|
|
$
|
6.70
|
|
Third Quarter (August 5, 2007 - November 3, 2007)
|
|
|
20.12
|
|
|
|
11.90
|
|
Second Quarter (May 6, 2007 - August 4, 2007)
|
|
|
27.70
|
|
|
|
17.98
|
|
First Quarter (February 4, 2007 - May 5, 2007)
|
|
|
27.94
|
|
|
|
20.06
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Although the Company currently does not intend to pay any cash
dividends or repurchase shares 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 or repurchase shares in the
future will be at the discretion of the Companys Board of
Directors 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 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. Furthermore, in fiscal 2006, the Company
repurchased an additional 7,090 restricted shares in connection
with employee tax withholding obligations under employee
compensation plans and in fiscal 2007 a total of 54,282
restricted shares were repurchased, of which 38,344 were
repurchased in the fourth quarter as more particularly set forth
in the chart below.
32
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
|
|
|
November 4, 2007 to December 1, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
December 2, 2007 to January 5, 2008
|
|
|
109
|
|
|
$
|
11.50
|
|
|
|
|
|
|
$
|
|
|
January 6, 2008 to February 2, 2008
|
|
|
38,235
|
|
|
$
|
10.79
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
38,344
|
|
|
$
|
10.79
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Consists of 38,344 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 17, 2008
|
|
|
Common Stock, par value $.01 per share
|
|
|
3,093
|
|
33
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 1, 2003 and the reinvestment of
dividends.
Comparison
of Cumulative Five Year Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/1/2003
|
|
|
1/31/2004
|
|
|
1/29/2005
|
|
|
1/28/2006
|
|
|
2/3/2007
|
|
|
2/2/2008
|
Chicos FAS, Inc.
|
|
|
$
|
100
|
|
|
|
$
|
202
|
|
|
|
$
|
279
|
|
|
|
$
|
463
|
|
|
|
$
|
241
|
|
|
|
$
|
117
|
|
S&P 500 Index
|
|
|
$
|
100
|
|
|
|
$
|
135
|
|
|
|
$
|
142
|
|
|
|
$
|
158
|
|
|
|
$
|
182
|
|
|
|
$
|
179
|
|
S&P 500 Apparel Retail Index
|
|
|
$
|
100
|
|
|
|
$
|
132
|
|
|
|
$
|
157
|
|
|
|
$
|
146
|
|
|
|
$
|
174
|
|
|
|
$
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
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 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(52 weeks)
|
|
|
(53 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
|
|
$
|
1,223,217
|
|
|
$
|
1,210,474
|
|
|
$
|
1,095,938
|
|
|
$
|
889,429
|
|
|
$
|
698,100
|
|
Net sales by WH|BM stores
|
|
|
418,901
|
|
|
|
367,063
|
|
|
|
261,601
|
|
|
|
142,092
|
|
|
|
39,818
|
|
Net sales by catalog and Internet
|
|
|
72,093
|
|
|
|
52,959
|
|
|
|
36,151
|
|
|
|
26,831
|
|
|
|
22,780
|
|
Other net sales(2)
|
|
|
115
|
|
|
|
10,431
|
|
|
|
10,885
|
|
|
|
8,530
|
|
|
|
7,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,714,326
|
|
|
|
1,640,927
|
|
|
|
1,404,575
|
|
|
|
1,066,882
|
|
|
|
768,499
|
|
Cost of goods sold(3)
|
|
|
745,265
|
|
|
|
673,742
|
|
|
|
547,532
|
|
|
|
411,908
|
|
|
|
297,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
969,061
|
|
|
|
967,185
|
|
|
|
857,043
|
|
|
|
654,974
|
|
|
|
471,022
|
|
Store operating expenses
|
|
|
633,288
|
|
|
|
525,529
|
|
|
|
416,833
|
|
|
|
328,491
|
|
|
|
240,929
|
|
Marketing
|
|
|
82,736
|
|
|
|
66,465
|
|
|
|
52,951
|
|
|
|
39,994
|
|
|
|
27,261
|
|
Shared services
|
|
|
131,579
|
|
|
|
111,491
|
|
|
|
88,946
|
|
|
|
62,113
|
|
|
|
42,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
121,458
|
|
|
|
263,700
|
|
|
|
298,313
|
|
|
|
224,376
|
|
|
|
160,774
|
|
Gain on sale of investment
|
|
|
6,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
10,869
|
|
|
|
10,626
|
|
|
|
8,236
|
|
|
|
2,327
|
|
|
|
888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
139,160
|
|
|
|
274,326
|
|
|
|
306,549
|
|
|
|
226,703
|
|
|
|
161,662
|
|
Income tax provision
|
|
|
48,012
|
|
|
|
99,635
|
|
|
|
112,568
|
|
|
|
85,497
|
|
|
|
61,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
91,148
|
|
|
|
174,691
|
|
|
|
193,981
|
|
|
|
141,206
|
|
|
|
100,230
|
|
Loss on discontinued operations, net of tax
|
|
|
2,273
|
|
|
|
8,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
88,875
|
|
|
$
|
166,636
|
|
|
$
|
193,981
|
|
|
$
|
141,206
|
|
|
$
|
100,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations-basic(4)
|
|
$
|
0.52
|
|
|
$
|
0.99
|
|
|
$
|
1.07
|
|
|
$
|
0.79
|
|
|
$
|
0.58
|
|
Loss on discontinued operations-basic(4)
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share(4)
|
|
$
|
0.51
|
|
|
$
|
0.94
|
|
|
$
|
1.07
|
|
|
$
|
0.79
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations-diluted(4)
|
|
$
|
0.51
|
|
|
$
|
0.98
|
|
|
$
|
1.06
|
|
|
$
|
0.78
|
|
|
$
|
0.57
|
|
Loss on discontinued operations-diluted(4)
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share(4)
|
|
$
|
0.50
|
|
|
$
|
0.93
|
|
|
$
|
1.06
|
|
|
$
|
0.78
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic(4)
|
|
|
175,574
|
|
|
|
177,273
|
|
|
|
180,465
|
|
|
|
178,256
|
|
|
|
172,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-diluted(4)
|
|
|
176,355
|
|
|
|
178,452
|
|
|
|
182,408
|
|
|
|
180,149
|
|
|
|
176,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores at period end
|
|
|
1,038
|
|
|
|
920
|
|
|
|
763
|
|
|
|
657
|
|
|
|
557
|
|
Average net sales per Company store:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicos
|
|
$
|
1,929
|
|
|
$
|
2,139
|
|
|
$
|
2,179
|
|
|
$
|
2,010
|
|
|
$
|
1,783
|
|
WH|BM
|
|
|
1,418
|
|
|
|
1,575
|
|
|
|
1,402
|
|
|
|
995
|
|
|
|
862
|
|
Soma
|
|
|
818
|
|
|
|
1,044
|
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
Average net sales per selling square foot at Company stores:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicos
|
|
$
|
792
|
|
|
$
|
961
|
|
|
$
|
1,028
|
|
|
$
|
988
|
|
|
$
|
924
|
|
WH|BM
|
|
|
804
|
|
|
|
1,040
|
|
|
|
1,028
|
|
|
|
814
|
|
|
|
767
|
|
Soma
|
|
|
400
|
|
|
|
434
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
Percentage increase(decrease) in comparable Company store net
sales
|
|
|
(8.1
|
)%
|
|
|
2.1
|
%
|
|
|
14.3
|
%
|
|
|
12.9
|
%
|
|
|
16.1
|
%
|
Balance Sheet Data (at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,250,126
|
|
|
$
|
1,060,627
|
|
|
$
|
999,413
|
|
|
$
|
715,729
|
|
|
$
|
470,854
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
156,417
|
|
|
|
116,860
|
|
|
|
70,318
|
|
|
|
59,546
|
|
|
|
24,437
|
|
Stockholders equity
|
|
|
912,516
|
|
|
|
803,931
|
|
|
|
806,427
|
|
|
|
560,868
|
|
|
|
374,835
|
|
Working capital
|
|
$
|
305,540
|
|
|
$
|
334,513
|
|
|
$
|
415,310
|
|
|
$
|
269,252
|
|
|
$
|
125,991
|
|
|
|
|
(1)
|
|
Includes results from The White
House, Inc. since September 5, 2003.
|
(2)
|
|
Includes net sales to franchisees.
|
(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 split in February 2005.
|
(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.
|
35
|
|
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, White House | Black Market
(WH|BM), and Soma Intimates (Soma) brand
names.
Chicos, which began operations in 1983, focuses on fashion
conscious women who are 35 and over with a moderate to high
income level. The styling interprets fashion trends in a unique,
relaxed, figure-flattering manner using generally easy-care
fabrics. WH|BM, which the Company acquired in September 2003,
and which began operations in 1985, targets middle-to-upper
income women who are 25 years old and up. The styling is
contemporary, feminine and unique, assorted primarily in white
and black and related shades. Soma was initially launched in
August 2004 under the name Soma by Chicos.
This concept offers intimate apparel, sleepwear, and activewear
that was initially aimed at the Chicos target customer. In
early fiscal 2007, the Soma brand was repositioned under the
name Soma Intimates to appeal to a broader customer
base. In early fiscal 2006, the Company acquired the Fitigues
brand, which had began its operations in 1988 and which was a
fitness inspired brand of 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. In March 2007, the Company
announced the planned closure of the Fitigues brand operations.
Accordingly, for all periods presented, the operating results
for Fitigues are shown as discontinued operations in the
Companys consolidated statements of income. Also, in early
fiscal 2007, the Company completed the acquisition of all
outstanding franchise rights which included 12 Minnesota stores
and 1 Florida store.
The Company earns revenues and generates cash through the sale
of merchandise in its retail stores 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,
its retail store system has grown to 1,045 stores as of
March 17, 2008, including 643 Chicos stores, 332
WH|BM stores, and 70 Soma stores. During fiscal 2007, the
Company opened 128 net new stores (exclusive of the 10
Fitigues closures) and repurchased the remaining 13 franchised
Chicos stores.
From February 2, 2003 through February 2, 2008, the
Company opened 592 new stores and acquired 15 stores from its
franchisees in various separate transactions throughout the five
year period. Of the new stores, 143 were opened in fiscal 2007,
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), and 74 were opened in fiscal 2003. During this same
time period, the Company closed 54 stores.
The Company has revised its targeted new store openings for
fiscal 2008 downward to approximately
35-40 net
new stores, of which
17-20 are
expected to be Chicos stores,
18-20 are
expected to be WH|BM stores and none are expected to be Soma
stores. The Company also currently anticipates
31-33
relocations/expansions in fiscal 2008. Planned square footage
growth for fiscal 2008 is now estimated to be approximately a
5-8% increase in selling square footage, slightly lower than the
originally announced goal of a 10% 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 378 stores as of
February 2, 2003 to 1,038 stores as of February 2,
2008, 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 brand in fiscal 2004. The Company continues
to expand its presence through the opening of new stores, the
expansion of existing stores, the development of new
opportunities such as Soma and through the extension of its
merchandise lines. The Company anticipates that its rate of
growth (measured by overall growth in sales, growth in
comparable store sales, and other factors) will decrease from
the rate of overall
36
sales growth experienced in recent years (which had been in the
range of
30-40%),
reflecting in large part the Companys significantly
increased size, its more manageable 5-8% net square footage
growth goal for fiscal 2008, its 4-7% net square footage growth
goal for fiscal 2009 and the expectation that its same store
sales will continue to be negative for the first half of fiscal
2008, return to positive in the second half of fiscal 2008, may
continue to experience flat to only moderate increases going
forward, and may again experience decreases from time to time,
as is currently the case. 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, 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
2007, the Companys comparable store sales (sales from
stores open for at least twelve full months, including stores
that have been expanded or relocated within the same general
market) decreased by 8.1%. The Company believes its same store
sales were affected by numerous challenges including a difficult
macro economic environment, declining consumer confidence
resulting in particularly cautious spending, one of the warmest
fall selling seasons on record, lower than anticipated customer
traffic and merchandise offerings that were not as compelling
from a fashion sense as the Company has offered in the past. The
Companys current strategy is to target a general overall
trend to return to 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 particularly
in terms of the Companys success (i) in effectively
operating its stores across all brands, (ii) in managing
its continuing store expansion program across all brands,
(iii) in maturing and developing its newer brands and
(iv) in achieving its targeted levels of earnings per share.
|
|
|
|
Positive operating cash flow In fiscal 2007,
the Company generated $209 million of cash flow from
operations compared with $289 million in fiscal 2006, which
represents a decrease of approximately 28%. Although operating
cash flow decreased in fiscal 2007 compared to fiscal 2006, the
Company generated operating cash flow sufficient to fund the
ongoing needs of operations and investments. The Company
believes that a key strength of its business is the ability to
consistently generate cash flow from operations. The Company
currently anticipates an increase in its free cash flow (cash
flow from operations net of capital expenditures) in fiscal 2008
compared to fiscal 2007. 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
planned 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 ongoing
spending and future 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 currently
entitled to a 5% discount on all apparel and accessory purchases
and other benefits. The Black Book loyalty program, the WH|BM
frequent shopper
|
37
|
|
|
|
|
club, is similar to the Passport Club in most key respects
except that customers become permanent members upon spending
$300, compared to $500 for the Passport Club.
|
As of February 2, 2008, the Company had approximately
1.8 million active Chicos and Soma permanent Passport
Club members and approximately 1.6 million active
preliminary Passport Club members. In fiscal 2007, active
permanent Passport Club members accounted for approximately 83%
of overall Chicos and Soma brand sales, compared to 83%
for fiscal 2006, and active preliminary members accounted for
approximately 13% of overall Chicos and Soma brand sales
versus 14% in fiscal 2006. During fiscal 2007, active permanent
Passport members spent, on average, over 60% more per
transaction than did active preliminary members.
Active customers are those who have made a purchase
of merchandise under any one of our brand labels within the
preceding 12 months.
As of February 2, 2008, WH|BM had over 0.7 million
active permanent Black Book members and approximately
1.4 million active preliminary Black Book members. In
fiscal 2007, the active permanent Black Book members accounted
for 64% of overall sales, while active preliminary members
accounted for 29% of overall WH|BM brand sales. In fiscal 2006,
active permanent Black Book members accounted for 63% of overall
WH|BM brand sales, while active preliminary members accounted
for 31% of overall sales. During fiscal 2007, active permanent
Black Book members spent, on average, over 60% more per
transaction than did active preliminary members.
|
|
|
|
|
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 Soma intimate apparel initiative. The Company recognizes
that the Soma business can be seen as complementary to its basic
apparel business, but also understands that many aspects of this
business require unique attention. The Company monitors Soma
merchandise offerings in a manner similar to its other brands
with special emphasis on repeat purchases in the foundation
category. The Company anticipates that additional investment
will be required to establish the Soma brand as a suitable
business that meets the profitability goals of the Company over
the longer term. The Company estimates that the Soma brand
reduced the Companys earnings per share by $0.12 for
fiscal 2007 and, to a lesser extent, will continue to be
dilutive in fiscal 2008. 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 addition, the Company believes that
eventual profitability is in part dependent on the ability to
open a critical mass of Soma stores (currently believed to be at
least 100 stores) and the planned slowdown in the new store
openings (in order to focus on improving the existing Soma
operations and profitability) pushes that target further into
the future.
In fiscal year 2007, the Company reported net sales, operating
income and net income of $1.71 billion, $121 million
and $89 million, respectively. Net sales increased by 4.5%,
while operating income and net income decreased by 53.9% and
46.7%, respectively, from the prior fiscal year. The
Companys gross margin decreased to 56.5% in fiscal 2007
from 58.9% in fiscal 2006. 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 than anticipated), the mix effect of WH|BM and Soma
sales becoming a larger portion of the Companys overall
net sales and the continued investment in the Companys
product development teams.
Selling, general and administrative (SG&A)
expenses increased as a percentage of net sales over the prior
period by approximately 650 basis points primarily due to
increased store operating expenses (mostly due to increases in
occupancy and personnel costs as a percentage of sales) and from
the deleverage associated with the
38
negative comparable store sales. To a lesser extent, SG&A
expenses increased over the prior period due to increased
marketing expenses as well as from increased shared services
costs, mainly personnel relocation, recruitment and severance
costs, technology and marketing support costs offset slightly by
decreased stock-based and incentive compensation. Sales and
profitability trends are further discussed in the Results of
Operations section.
Future
Outlook
Although the Company is seeing improving comparable store sales
trends in the WH|BM brand, and continuing strong top-line
performance for the Soma brand, the Chicos brand is on a
slower path to improving comparable store sales. The Company is
actively addressing issues in its accessories and Travelers
collection for the Chicos brand, and recently added a
senior level merchant to each of these areas. The Company
expects to see improvement in these categories later in fiscal
2008.
The Company is currently forecasting negative consolidated
comparable store sales for the first half of fiscal 2008, and
expects to have lower earnings than the first half of fiscal
2007. The Companys current expectations are to return to
positive consolidated comparable store sales increases in the
second half of fiscal 2008 resulting in overall earnings growth
during this time frame.
The Company has also significantly lowered its capital
expenditure plans for fiscal 2008. The total capital expenditure
plan for fiscal 2008 ranges from approximately
$120-$125 million compared to approximately
$202 million of capital expenditures in fiscal 2007. The
Companys current plan contemplates opening approximately
35-40 net
new stores, of which
17-20 are
expected to be Chicos stores,
18-20 are
expected to be WH|BM stores and none are expected to be Soma
stores. Looking forward to fiscal 2009, the Company does not
intend to increase the number of new stores beyond current
commitments of 10 or so new stores until it sees improvements in
the economy and its own performance.
Results
of Operations
Net
Sales
The following table shows net sales by Chicos/Soma stores,
net sales by 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 2, 2008 (fiscal
2007 or current period, which consisted of
52 weeks), February 3, 2007 (fiscal 2006 or
prior period, which consisted of 53 weeks) and
January 28, 2006 (fiscal 2005, which consisted of
52 weeks) (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
%
|
|
|
Fiscal 2006
|
|
|
%
|
|
|
Fiscal 2005
|
|
|
%
|
|
|
Net sales by Chicos/Soma stores
|
|
$
|
1,223,217
|
|
|
|
71.4
|
%
|
|
$
|
1,210,474
|
|
|
|
73.8
|
%
|
|
$
|
1,095,938
|
|
|
|
78.0
|
%
|
Net sales by WH|BM stores
|
|
|
418,901
|
|
|
|
24.4
|
|
|
|
367,063
|
|
|
|
22.4
|
|
|
|
261,601
|
|
|
|
18.6
|
|
Net sales by catalog and Internet
|
|
|
72,093
|
|
|
|
4.2
|
|
|
|
52,959
|
|
|
|
3.2
|
|
|
|
36,151
|
|
|
|
2.6
|
|
Other net sales
|
|
|
115
|
|
|
|
0.0
|
|
|
|
10,431
|
|
|
|
0.6
|
|
|
|
10,885
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,714,326
|
|
|
|
100.0
|
%
|
|
$
|
1,640,927
|
|
|
|
100.0
|
%
|
|
$
|
1,404,575
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by 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 offset to a lesser extent, from the overall decrease 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 2007
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Comparable store sales increases (decreases)
|
|
$
|
(123,096
|
)
|
|
$
|
28,248
|
|
|
$
|
145,054
|
|
Comparable same store sales %
|
|
|
(8.1
|
)%
|
|
|
2.1
|
%
|
|
|
14.3
|
%
|
New store sales increases
|
|
$
|
187,677
|
|
|
$
|
191,750
|
|
|
$
|
180,964
|
|
Number of new Company-owned stores opened, net
|
|
|
128
|
*
|
|
|
145
|
*
|
|
|
104
|
|
|
|
|
* |
|
Does not include Fitigues stores acquired in fiscal 2006 and
closed in fiscal 2007 |
39
The comparable store sales decrease of 8.1% in fiscal 2007 was
driven partially by a decrease of 9.1% in the Chicos
average unit retail price (which average unit retail price is a
financial indicator, the percentage change of which is believed
by management to represent a reasonable approximation of the
percentage change in Company store net sales attributable to
price changes, markdowns or mix) as well as from a decrease
in the Chicos and WH|BM average number of transactions per
store and a decline in the average transaction dollar amounts.
In fact, although the WH|BM brand experienced a slight increase
in its average unit retail price of 0.3%, it was entirely offset
by a decline in the average transaction amount and the average
number of transactions per store. The Company believes its same
store sales were affected by numerous challenges including a
difficult macro economic environment, declining consumer
confidence resulting in particularly cautious spending, one of
the warmest fall selling seasons on record, lower than
anticipated customer traffic and merchandise offerings that were
not as compelling from a fashion sense as the Company has
offered in the past. In fiscal 2007, WH|BM same store sales
represented approximately 23% of the total same store sales base
compared to 21% in fiscal 2006. The Chicos brand same
store sales decreased by approximately 8% and the WH|BM brand
same store sales decreased by approximately 9% when comparing
fiscal 2007 to fiscal 2006. Soma stores sales, which were
included in the comparable store sales calculation beginning in
September 2005, increased during fiscal 2007, although the
impact on the consolidated comparable store sales decrease was
immaterial. The overall 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
largely 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. 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.
Net sales by catalog and Internet for fiscal 2007 which included
merchandise from the Chicos, WH|BM, and Soma brands
increased by $19.1 million, or 36.1%, compared to net sales
by catalog and Internet for fiscal 2006. The Company believes
this increase is attributable to the implementation of the
Companys improvements in its website and call center
infrastructure and its current approach to merchandising on each
brands website. The Company intends to continue making
improvements to further promote sales through these channels.
Net sales by catalog and Internet for fiscal 2006 (which
included merchandise from all of the Companys current
brands) increased by $16.8 million, or 46.5%, 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 each brands website, and to a lesser extent,
increases in the Chicos merchandise available for sale
through the Internet and the increased circulation of catalog
mailings.
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
2007, 2006 and 2005 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Cost of goods sold
|
|
$
|
745,265
|
|
|
$
|
673,742
|
|
|
$
|
547,532
|
|
Gross profit
|
|
$
|
969,061
|
|
|
$
|
967,185
|
|
|
$
|
857,043
|
|
Gross profit percentage
|
|
|
56.5
|
%
|
|
|
58.9
|
%
|
|
|
61.0
|
%
|
Gross profit percentage decreased by 240 basis points in
fiscal 2007 compared to fiscal 2006 resulting primarily from a
180 basis point decrease in merchandise margins at the
Chicos front-line stores primarily due to a higher
markdown rate compared to the prior period and by the
Companys continued investment in its product development
and merchandising functions for each of its three brands. To a
lesser extent, gross profit percentage was negatively impacted
by gross margin decreases in the direct to consumer and outlet
channels due to higher markdown rates as a result of lower than
anticipated sales at the front-line stores, as well as by the
mix effect resulting from the WH|BM and Soma sales continuing to
become a larger portion of the Companys overall net sales
(both WH|BM and Soma brands operate with lower gross margins
than the gross margins experienced by the Chicos brand).
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
40
effect resulting from the WH|BM and Soma sales becoming a larger
portion of the Companys overall net sales. 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.
Store
Operating Expenses
The following table shows store operating expenses in dollars
and as a percentage of total net sales for fiscal 2007, 2006 and
2005 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Store operating expenses
|
|
$
|
633,288
|
|
|
$
|
525,529
|
|
|
$
|
416,833
|
|
Percentage of total net sales
|
|
|
36.9
|
%
|
|
|
32.0
|
%
|
|
|
29.7
|
%
|
Store operating expenses include all direct expenses, including
such items as personnel, occupancy, depreciation and supplies,
incurred to operate each of the Companys stores. In
addition, store operating expenses include those costs necessary
to support the operation of each of the Companys stores
including district and regional management expenses and other
store support functions.
Store operating expenses as a percentage of net sales increased
490 basis points in fiscal 2007 over fiscal 2006 primarily
due to increased personnel and occupancy expenses across all
three brands, attributable mainly to the investment in larger
sized Chicos and WH|BM new and expanded stores, the
Companys planned increased investment in store payroll to
improve service levels, the mix effect of the WH|BM and Soma
stores becoming a larger portion of the Companys store
base (both WH|BM and Soma brands operate with higher store
operating costs as a percentage of sales than the store
operating costs as a percentage of sales experienced by the
Chicos brand) and from the deleverage associated with the
Companys negative same store sales.
Store operating expenses as a percentage of net sales increased
230 basis points in fiscal 2006 over fiscal 2005 primarily
due to increased personnel and occupancy expenses across all
three brands, attributable mainly to the increased investment in
store payroll to improve service levels, investment in larger
sized Chicos and WH|BM new and expanded stores, and the
mix effect of the WH|BM and Soma stores becoming a larger
portion of the Companys store base (both WH|BM and Soma
brands operate with higher store operating costs as a percentage
of sales than the store operating costs as a percentage of sales
experienced by the Chicos brand).
Marketing
The following table shows marketing expenses in dollars and as a
percentage of total net sales for fiscal 2007, 2006 and 2005
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Marketing
|
|
$
|
82,736
|
|
|
$
|
66,465
|
|
|
$
|
52,951
|
|
Percentage of total net sales
|
|
|
4.8
|
%
|
|
|
4.1
|
%
|
|
|
3.8
|
%
|
Marketing expenses include expenses related to the
Companys national marketing programs such as direct
marketing efforts (including direct mail and
e-mail) and
national advertising expenses. Marketing expenses increased as a
percentage of net sales by approximately 70 basis points in
fiscal 2007. The increase was primarily due to the deleverage
associated with the Companys negative same store sales and
the planned increase in marketing spend in the second half of
fiscal 2007, compared to the second half of fiscal 2006, in an
effort to protect and enhance the Companys market share
and to highlight its Fall and Holiday product offerings.
In fiscal 2006, marketing expenses as a percentage of net sales
increased 30 basis points from fiscal 2005 mainly due to a
planned increase in marketing expenses for the WH|BM and Soma
brands offset somewhat by a decrease in similar expenses for the
Chicos brand as a percentage of total net sales.
41
Shared
Services
The following table shows shared services expenses in dollars
and as a percentage of total net sales for fiscal 2007, 2006 and
2005 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Shared services
|
|
$
|
131,579
|
|
|
$
|
111,491
|
|
|
$
|
88,946
|
|
Percentage of total net sales
|
|
|
7.7
|
%
|
|
|
6.8
|
%
|
|
|
6.3
|
%
|
Shared services expenses consist of the corporate level
functions including executive management, human resources,
management information systems and finance, among others. Shared
services expenses increased as a percentage of net sales by
approximately 90 basis points in fiscal 2007 mainly due to
increased personnel relocation, recruitment and severance costs,
technology and marketing support costs, as well as from the
deleverage associated with the Companys negative same
store sales. These increases in shared services expenses as a
percentage of net sales were offset by a reduction in incentive
compensation mostly due to the Companys lower than
anticipated fiscal year results and lower stock-based
compensation expense.
In fiscal 2006, shared services increased as a percentage of net
sales by 50 basis points compared to fiscal 2005 largely
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. These
increases in shared services 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.
Gain
on Sale of Investment
On July 26, 2007, VF Corporation announced that it had
entered into a definitive agreement to acquire lucy activewear,
inc. (Lucy), a privately held retailer of
womens activewear apparel, in which the Company held a
cost method investment. The transaction was completed during the
third quarter and the Company recorded a pre-tax gain of
approximately $6.8 million, which is reflected as
non-operating income in the accompanying statement of income.
Interest
Income, net
The following table shows interest income, net in dollars and as
a percentage of total net sales for fiscal 2007, 2006 and 2005
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Interest income, net
|
|
$
|
10,869
|
|
|
$
|
10,626
|
|
|
$
|
8,236
|
|
Percentage of total net sales
|
|
|
0.6
|
%
|
|
|
0.6
|
%
|
|
|
0.6
|
%
|
In fiscal 2007, interest income, net, increased slightly in
total dollars compared to fiscal 2006 primarily due to interest
earned on the Companys note receivable from its sale of
land in fiscal 2007 offset by lower interest rates.
In fiscal 2006, interest income, net increased in total dollars
compared to fiscal 2005 primarily the result of the impact of
higher interest rates, which offset the effect of a decrease in
the total amount of marketable securities resulting in large
part from the implementation of the Companys stock
repurchase programs earlier in fiscal 2006.
Provision
for Income Taxes
The Companys effective tax rate was 34.5%, 36.3% and
36.7%, for fiscal 2007, 2006 and 2005, respectively. The
decrease in the effective tax rate for fiscal 2007 from fiscal
2006 was primarily attributable to favorable permanent
differences, mainly charitable inventory contributions and
tax-free interest, representing a considerably higher portion of
pre-tax income in fiscal 2007 compared to fiscal 2006. 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
42
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.
Loss
on Discontinued Operations, net of tax
The following table shows loss on discontinued operations, net
of tax in dollars and as a percentage of total net sales for
fiscal 2007 and 2006 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Loss on discontinued operations, net of tax
|
|
$
|
2,273
|
|
|
$
|
8,055
|
|
Percentage of total net sales
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
During the fourth quarter of fiscal 2006, the Company completed
its evaluation of the Fitigues brand, which was acquired in the
first quarter of fiscal 2006 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 consisted 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.
As of the end of fiscal 2007, the operations of the Fitigues
brand have ceased.
In accordance with Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company has segregated
the operating results of Fitigues from continuing operations and
classified the results as discontinued operations in the
consolidated statements of income for all periods presented. In
fiscal 2007, the Company incurred additional immaterial costs
from such discontinued operations and does not expect to incur
additional material costs from such discontinued operations in
future years.
Net
Income
The following table shows net income in dollars and as a
percentage of total net sales for fiscal 2007, 2006 and 2005
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Net income
|
|
$
|
88,875
|
|
|
$
|
166,636
|
|
|
$
|
193,981
|
|
Percentage of total net sales
|
|
|
5.2
|
%
|
|
|
10.1
|
%
|
|
|
13.8
|
%
|
Comparable
Company Store Net Sales
Comparable store sales for the 52 week period ended
February 2, 2008 decreased 8.1% compared to the same
52 week period last year ended February 3, 2007.
Comparable Company store net sales data is calculated based on
the change in net sales of currently open stores that have been
operated as a Company store for at least twelve full months,
including stores that have been expanded or relocated within the
same general market area (approximately five miles).
The comparable store percentage reported above includes 116
stores that were expanded or relocated within the last two
fiscal years by an average of 1,342 selling square feet. If the
stores that were expanded and relocated had been excluded from
the comparable store base, the decrease in comparable store net
sales would have been 9.5% for fiscal 2007 (versus 8.1% 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 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 sales, which were included in the comparable store sales
calculation beginning in September 2005, increased during fiscal
2007, although the impact on the consolidated comparable store
sales decrease was immaterial.
The Company believes that the overall decrease in comparable
Company store net sales (an approximate 9% decrease for the
WH|BM brand and an 8% decrease for the Chicos brand) for
fiscal 2007 was the result of numerous challenges including a
difficult macro economic environment, declining consumer
confidence resulting
43
in particularly cautious spending, one of the warmest fall
selling seasons on record, lower than anticipated customer
traffic and merchandise offerings that were not as compelling
from a fashion sense as the Company has offered in the past.
The following table sets forth for each of the quarters of the
previous five fiscal years, the percentage change in comparable
store net sales from the comparable period in the prior fiscal
year:
Fiscal
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/2/08
|
|
|
2/3/07
|
|
|
1/28/06
|
|
|
1/29/05
|
|
|
1/31/04
|
|
|
Full Year
|
|
|
(8.1
|
)%
|
|
|
2.1
|
%
|
|
|
14.3
|
%
|
|
|
12.9
|
%
|
|
|
16.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
(1.6
|
)%
|
|
|
6.6
|
%
|
|
|
10.8
|
%
|
|
|
20.1
|
%
|
|
|
7.8
|
%
|
Second Quarter
|
|
|
(5.6
|
)%
|
|
|
5.7
|
%
|
|
|
15.7
|
%
|
|
|
14.1
|
%
|
|
|
14.6
|
%
|
Third Quarter
|
|
|
(9.3
|
)%
|
|
|
(1.2
|
)%
|
|
|
16.0
|
%
|
|
|
6.1
|
%
|
|
|
20.9
|
%
|
Fourth Quarter
|
|
|
(15.7
|
)%
|
|
|
(2.0
|
)%
|
|
|
14.6
|
%
|
|
|
12.9
|
%
|
|
|
20.5
|
%
|
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
that the Company is planning to the SAP software platform.
The following table shows the Companys capital resources
at the end of fiscal year 2007 and 2006 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Cash and cash equivalents
|
|
$
|
13,801
|
|
|
$
|
37,203
|
|
Marketable securities
|
|
|
260,469
|
|
|
|
238,336
|
|
Working capital
|
|
|
305,540
|
|
|
|
334,513
|
|
Working capital decreased from fiscal 2006 to fiscal 2007
primarily due to the Company having sold its land held for sale
and the acquisition of all of its remaining franchise operations
during fiscal 2007. Working capital was also affected by the
Companys decrease in cash generated from operating
activities, although its cash flow from operations was more than
sufficient 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 continue to
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
$208.6 million and $289.0 million for fiscal 2007 and
2006, 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;
|
44
|
|
|
|
|
Gain on sale of investment;
|
|
|
|
Fluctuations in accounts receivable, inventories, prepaid and
other current assets, accounts payable and accrued and deferred
liabilities.
|
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 $0.2 million and $2.4 million of excess tax
benefits as a financing cash inflow and a corresponding
operating cash outflow for fiscal 2007 and 2006, respectively.
Investing
Activities
Net cash used in investing activities was $235.1 million
and $63.4 million for fiscal 2007 and 2006, respectively.
Capital expenditures decreased by $16.1 million from fiscal
2006 to fiscal 2007 primarily as a result of the Companys
purchase of a 22 acre property adjacent to the
Companys current headquarters campus for
$26.4 million with no comparable purchase in fiscal 2007.
The Companys investment in capital expenditures during
fiscal 2007 primarily related to the planning and opening of
new, relocated, remodeled and expanded Chicos, WH|BM and
Soma stores ($150.0 million), costs associated with system
upgrades and new software implementations ($32.5 million)
and other miscellaneous capital expenditures
($19.7 million).
On August 1, 2007, the Company consummated a transaction to
sell a parcel of land south of Fort Myers, Florida for a
sale price totaling approximately $39.7 million consisting
of approximately $13.4 million in cash proceeds, net of
closing costs, and a note receivable with a principal amount of
approximately $25.8 million and secured by a purchase money
mortgage.
On July 26, 2007, VF Corporation announced that it had
entered into a definitive agreement to acquire Lucy, a privately
held retailer of womens activewear apparel, in which the
Company held a cost method investment. The transaction was
completed during the third quarter and the Company received
approximately $15.1 million in cash proceeds. The Company
holds a receivable of approximately $2.2 million for the
balance of the proceeds to be received in conjunction with this
transaction. The Company expects that this additional amount
will be received during fiscal 2008.
The Company invested $22.1 million, net, in marketable
securities in the current year. By contrast, in the prior
period, the Company sold $163.2 million, net, in marketable
securities primarily to fund the Companys stock repurchase
programs.
In addition, during fiscal 2007, the Company acquired all the
territorial franchise rights to the state of Minnesota and the
existing franchise locations in Minnesota for $32.9 million
and acquired a franchise store in Florida for $6.4 million,
while in the prior period, the Company purchased most of the
assets of the Fitigues brand stores for $7.5 million and
repurchased one franchise store for $0.8 million. In fiscal
2005, the Company purchased an equity investment in Lucy for
business and strategic purposes totaling $10.4 million.
Financing
Activities
Net cash provided by financing activities was $3.0 million
in fiscal 2007 while net cash used in financing activities was
$191.4 million in fiscal 2006.
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.
45
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 fiscal 2007 and fiscal
2006, the Company repurchased an additional 54,282 shares
and 7,090 shares, respectively, 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 an excess of $0.2 million and an
excess of $2.4 million in tax benefits as financing cash
inflows in fiscal 2007 and 2006, respectively.
The Company received proceeds in both fiscal 2007 and 2006 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 2007, certain of the Companys current and
former officers exercised an aggregate of 106,003 stock options
at prices ranging from $8.80 to $21.95 and certain employees and
former employees exercised an aggregate of 59,738 options at
prices ranging from $0.1805 to $20.465. Also, during this
period, the Company sold 40,013 and 12,810 shares of common
stock during the March and September offering periods under its
employee stock purchase plan at prices of $19.03 and $13.59,
respectively. The proceeds from these issuances of stock,
exclusive of the tax benefit realized by the Company, amounted
to approximately $3.5 million.
New
Store Openings and Headquarters Expansion
During fiscal 2008, the Company plans on opening approximately
35-40 net
new stores, of which
17-20 are
expected to be Chicos stores,
18-20 are
expected to be WH|BM stores and none are expected to be Soma
stores. The Company, however, continuously evaluates the
appropriate new store growth rate in light of current economic
conditions and may adjust the growth rate as conditions require.
The Company believes that the liquidity needed for its planned
new store growth (including the continued investment associated
with its Soma brand), its continuing store remodel/expansion
program, the investments required for its Headquarters and
distribution center future expansions, its continued
installation and upgrading of new and existing software
packages, and maintenance of proper inventory levels associated
with this growth will be funded primarily from cash flow from
operations and its existing cash and marketable securities
balances, and, if necessary, the capacity included in its bank
credit facilities.
During the first quarter of fiscal 2006, the Company completed
the purchase of approximately 22 acres of property adjacent
to the Companys current headquarters 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, approximately 12% of which continues to be leased
to unrelated third parties. As leases expire or are otherwise
terminated, 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 2, 2008. 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, particularly in light of its recent decision
to slow its new store growth until improvements in the economy
and the Companys performance are achieved. Even with the
scaled down growth plans, the Companys present goal is to
begin design work in late fiscal 2008. It is currently
anticipated that the Company will require additional
distribution space in late fiscal 2009 or fiscal 2010 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.
46
During the third quarter of fiscal 2006, the Company
reclassified a parcel of land located south of Fort Myers,
Florida with a book value of $38.1 million from a long-term
asset to a current asset that was being held for sale. On
August 1, 2007, the Company consummated a transaction to
sell the land with a sales price totaling $39.7 million
consisting of approximately $13.4 million in cash proceeds,
net of closing costs, and a note receivable with a principal
amount of approximately $25.8 million and secured by a
purchase money mortgage. The note accrues interest at a fixed
rate of 6.0% annually with interest payable quarterly and the
principal amount is payable in a balloon payment in two years.
To date, the Company has received all payments due under the
note.
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 completed the first major phase of its
multi-year, planned implementation of the new ERP system by
converting its Soma brand to the new merchandising system as
well as rolling out the new financial systems at the same time.
The second major phase anticipates an initial roll out and
utilization of this new system in each of its other brands
beginning in early fiscal 2009 with completion anticipated in
mid to late fiscal 2009. The third major phase contemplates
on-going enhancements and optimization of the new ERP across all
three brands, as well as the deployment of additional
functionality across various other functions within the Company
through fiscal 2009 and beyond. The Company expects that the
costs associated with the implementation of the ERP system will
be funded from the Companys existing cash and marketable
securities balances.
Given the Companys existing cash and marketable securities
balances and the 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 in future periods.
Contractual
Obligations
The following table summarizes the Companys contractual
obligations at February 2, 2008 (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
|
|
|
851,621
|
|
|
|
122,850
|
|
|
|
234,738
|
|
|
|
195,503
|
|
|
|
298,530
|
|
Non-cancelable purchase commitments
|
|
|
211,975
|
|
|
|
211,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,063,596
|
|
|
$
|
334,825
|
|
|
$
|
234,738
|
|
|
$
|
195,503
|
|
|
$
|
298,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 2, 2008, 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 is set up to continue to automatically renew for
additional one-year periods through 2010.
47
At February 2, 2008 and February 3, 2007, 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.
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 and Shrinkage
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. 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 were recorded when merchandise was
shipped to franchisees and were 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.
48
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. 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 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.
Operating
Leases
The Company accounts for store rent expense in accordance with
SFAS 13, Accounting for Leases. Accordingly,
rent expense under store operating leases is recognized on a
straight-line basis over the term of the leases. Landlord
incentives, rent-free periods, rent escalation
clauses and other rental expenses are also amortized on a
straight-line basis over the terms of the leases, which includes
the construction period and which is generally 60-90 days
prior to the store opening date when the Company generally
begins improvements in preparation of intended use. 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.
Income
Taxes
Effective February 4, 2007, the Company adopted the
provisions of FIN 48. FIN 48 prescribes a recognition
threshold and measurement element for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. Due to the substantial amounts
involved and judgment necessary, the Company deems this policy
could be critical to its financial statements.
Interpretations and guidance surrounding income tax laws and
regulations adjust over time. The Company establishes reserves
for uncertain tax positions that management believes are
supportable, but are potentially subject to successful challenge
by the applicable taxing authority. Consequently, changes in our
assumptions and judgments can materially affect amounts
recognized related to income tax uncertainties and may affect
the Companys results of operations or financial position.
See Note 1 to the consolidated financial statements for
further discussion regarding the impact of the Companys
adoption of FIN 48.
49
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 2007 and 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 year ended January 28,
2006 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 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 and
prior periods. See Note 10 to the consolidated financial
statements for a further discussion on stock-based compensation.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157),
which establishes a framework for measuring fair value in
accordance with Generally Accepted Accounting Principles
(GAAP) and expands disclosures about fair value
measurements. This statement is effective for financial assets
and liabilities as well as for any assets and liabilities that
are carried at fair value on a recurring basis in financial
statements as of the beginning of the entitys first fiscal
year that begins after November 15, 2007. In November 2007,
the FASB issued a one-year deferral for non-financial assets and
liabilities to comply with SFAS 157 which delayed the
effective date for these items until November 15, 2008. The
Company does not expect the adoption of SFAS 157 to have a
material effect on its financial position, results of operations
or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS 159). This statement
permits entities to choose to measure many financial assets and
liabilities and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This
statement is effective as of the beginning of an entitys
first fiscal year beginning after
50
November 15, 2007. The Company does not expect the adoption
of SFAS 159 to have a material effect on its financial
position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141R). SFAS 141R states that all
business combinations, whether full, partial, or step
acquisitions, will result in all assets and liabilities of an
acquired business being recorded at their fair values at the
acquisition date. In subsequent periods, contingent liabilities
will be measured at the higher of their acquisition date fair
value or the estimated amounts to be realized. SFAS 141R
applies to all transactions or other events in which an entity
obtains control of one or more businesses. This statement is
effective as of the beginning of an entitys first fiscal
year beginning after December 15, 2008.
SFAS 141Rs impact on accounting for business
combinations is dependent upon acquisitions consummated after
the Companys expected adoption date of February 1,
2009.
Inflation
The Companys operations are influenced by general economic
conditions. Historically, inflation has not had a material
effect on the results of operations. The Company believes that
recent spikes in inflation, particularly in the energy sector,
has resulted in some decreased customer spending on the
Companys merchandise.
Quarterly
Results and Seasonality
The Company reports its sales on a monthly basis in line with
other public companies in the womens apparel industry. The
Companys quarterly results may fluctuate significantly
depending on a number of factors including timing of new store
openings, adverse weather conditions, the spring and fall
fashion lines and shifts in the timing of certain holidays. In
addition, the Companys periodic results can be directly
and significantly impacted by the extent to which the
Companys new merchandise offerings are accepted by its
customers and by the timing of the introduction of such
merchandise.
Certain
Factors That May Affect Future Results
This
Form 10-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, 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,
51
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 2, 2008 has not significantly changed since
February 3, 2007. 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 2, 2008, the Company did not have any
outstanding borrowings on its line of credit and, given its
current 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 currently consists of
cash equivalents and marketable securities, including variable
rate demand notes, which are highly liquid, variable rate
municipal debt securities and municipal bonds. Although the
variable rate municipal debt securities have long-term nominal
maturity dates ranging from 2009 to 2041, the interest rates are
reset either daily or every 7 days. Despite the long-term
nature of the underlying securities of the variable rate demand
notes, the Company has the ability to quickly liquidate these
securities based on the Companys cash needs thereby
creating a short-term instrument. The municipal bonds have
average maturity dates typically less than 14 days.
Accordingly, the Companys investments are classified as
available-for-sale securities. As of February 2, 2008, 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.
52
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Chicos FAS, Inc.
We have audited the accompanying consolidated balance sheets of
Chicos FAS, Inc. and subsidiaries (the Company) as of
February 2, 2008 and February 3, 2007, and the related
consolidated statements of income, stockholders equity and
cash flows for each of the three fiscal years in the period
ended February 2, 2008. 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 2, 2008 and February 3, 2007, and the
consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended
February 2, 2008, 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. and subsidiaries
internal control over financial reporting as of February 2,
2008, based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 27, 2008 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,
March 27, 2008
53
CHICOS
FAS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,801
|
|
|
$
|
37,203
|
|
Marketable securities, at market
|
|
|
260,469
|
|
|
|
238,336
|
|
Receivables
|
|
|
11,924
|
|
|
|
14,246
|
|
Income tax receivable
|
|
|
23,973
|
|
|
|
2,493
|
|
Inventories
|
|
|
144,261
|
|
|
|
110,840
|
|
Prepaid expenses
|
|
|
18,999
|
|
|
|
15,774
|
|
Land held for sale
|
|
|
|
|
|
|
38,120
|
|
Deferred taxes
|
|
|
13,306
|
|
|
|
17,337
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
486,733
|
|
|
|
474,349
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
17,867
|
|
|
|
14,640
|
|
Building and building improvements
|
|
|
62,877
|
|
|
|
56,782
|
|
Equipment, furniture and fixtures
|
|
|
347,937
|
|
|
|
268,122
|
|
Leasehold improvements
|
|
|
396,650
|
|
|
|
301,670
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
825,331
|
|
|
|
641,214
|
|
Less accumulated depreciation and amortization
|
|
|
(257,378
|
)
|
|
|
(184,474
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
567,953
|
|
|
|
456,740
|
|
Goodwill
|
|
|
96,774
|
|
|
|
62,596
|
|
Other Intangible Assets
|
|
|
38,930
|
|
|
|
34,040
|
|
Deferred Taxes
|
|
|
22,503
|
|
|
|
11,837
|
|
Other Assets, Net
|
|
|
37,233
|
|
|
|
21,065
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,250,126
|
|
|
$
|
1,060,627
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
88,134
|
|
|
$
|
55,696
|
|
Accrued liabilities
|
|
|
91,622
|
|
|
|
82,971
|
|
Current portion of deferred liabilities
|
|
|
1,437
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
181,193
|
|
|
|
139,836
|
|
Noncurrent Liabilities:
|
|
|
|
|
|
|
|
|
Deferred liabilities
|
|
|
156,417
|
|
|
|
116,860
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
156,417
|
|
|
|
116,860
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 400,000 shares
authorized and 176,245 and 175,749 shares issued and
outstanding, respectively
|
|
|
1,762
|
|
|
|
1,757
|
|
Additional paid-in capital
|
|
|
249,639
|
|
|
|
229,934
|
|
Retained earnings
|
|
|
661,115
|
|
|
|
572,240
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
912,516
|
|
|
|
803,931
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,250,126
|
|
|
$
|
1,060,627
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated statements.
54
CHICOS
FAS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales by Chicos/Soma stores
|
|
$
|
1,223,217
|
|
|
$
|
1,210,474
|
|
|
$
|
1,095,938
|
|
Net sales by WH|BM stores
|
|
|
418,901
|
|
|
|
367,063
|
|
|
|
261,601
|
|
Net sales by catalog and Internet
|
|
|
72,093
|
|
|
|
52,959
|
|
|
|
36,151
|
|
Other net sales
|
|
|
115
|
|
|
|
10,431
|
|
|
|
10,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,714,326
|
|
|
|
1,640,927
|
|
|
|
1,404,575
|
|
Cost of goods sold
|
|
|
745,265
|
|
|
|
673,742
|
|
|
|
547,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
969,061
|
|
|
|
967,185
|
|
|
|
857,043
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Store operating expenses
|
|
|
633,288
|
|
|
|
525,529
|
|
|
|
416,833
|
|
Marketing
|
|
|
82,736
|
|
|
|
66,465
|
|
|
|
52,951
|
|
Shared services
|
|
|
131,579
|
|
|
|
111,491
|
|
|
|
88,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general, and administrative expenses
|
|
|
847,603
|
|
|
|
703,485
|
|
|
|
558,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
121,458
|
|
|
|
263,700
|
|
|
|
298,313
|
|
Gain on sale of investment
|
|
|
6,833
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
10,869
|
|
|
|
10,626
|
|
|
|
8,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
139,160
|
|
|
|
274,326
|
|
|
|
306,549
|
|
Income tax provision
|
|
|
48,012
|
|
|
|
99,635
|
|
|
|
112,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
91,148
|
|
|
|
174,691
|
|
|
|
193,981
|
|
Loss on discontinued operations, net of tax
|
|
|
2,273
|
|
|
|
8,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
88,875
|
|
|
$
|
166,636
|
|
|
$
|
193,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per common share
basic
|
|
$
|
0.52
|
|
|
$
|
0.99
|
|
|
$
|
1.07
|
|
Loss on discontinued operations per common share
basic
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share-basic
|
|
$
|
0.51
|
|
|
$
|
0.94
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per common and common
equivalent share diluted
|
|
$
|
0.51
|
|
|
$
|
0.98
|
|
|
$
|
1.06
|
|
Loss on discontinued operations per common and common equivalent
share diluted
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common and common equivalent share
diluted
|
|
$
|
0.50
|
|
|
$
|
0.93
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
175,574
|
|
|
|
177,273
|
|
|
|
180,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares
outstanding diluted
|
|
|
176,355
|
|
|
|
178,452
|
|
|
|
182,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated statements.
55
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 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
|
|
Net income and comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,875
|
|
|
|
|
|
|
|
88,875
|
|
Issuance of common stock
|
|
|
550
|
|
|
|
5
|
|
|
|
3,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,533
|
|
Repurchase of common stock
|
|
|
(54
|
)
|
|
|
|
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(694
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
17,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,080
|
|
Adjustment to excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, February 2, 2008
|
|
|
176,245
|
|
|
$
|
1,762
|
|
|
$
|
249,639
|
|
|
$
|
|
|
|
$
|
661,115
|
|
|
$
|
|
|
|
$
|
912,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated statements.
56
CHICOS
FAS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
88,875
|
|
|
$
|
166,636
|
|
|
$
|
193,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, cost of goods sold
|
|
|
10,386
|
|
|
|
7,564
|
|
|
|
4,651
|
|
Depreciation and amortization, other
|
|
|
81,593
|
|
|
|
61,840
|
|
|
|
44,201
|
|
Deferred tax benefit
|
|
|
(6,635
|
)
|
|
|
(22,324
|
)
|
|
|
(8,411
|
)
|
Stock-based compensation expense, cost of goods sold
|
|
|
4,909
|
|
|
|
6,004
|
|
|
|
438
|
|
Stock-based compensation expense, other
|
|
|
12,171
|
|
|
|
15,237
|
|
|
|
1,177
|
|
Excess tax benefit from stock-based compensation
|
|
|
(209
|
)
|
|
|
(2,365
|
)
|
|
|
|
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
21,461
|
|
Deferred rent expense, net
|
|
|
9,508
|
|
|
|
6,867
|
|
|
|
3,673
|
|
Goodwill impairment loss
|
|
|
|
|
|
|
6,752
|
|
|
|
|
|
Gain on sale of investment
|
|
|
(6,833
|
)
|
|
|
|
|
|
|
|
|
(Gain) loss on disposal of property and equipment
|
|
|
(908
|
)
|
|
|
826
|
|
|
|
753
|
|
Increase in assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
(18,770
|
)
|
|
|
(4,517
|
)
|
|
|
(7,147
|
)
|
Inventories
|
|
|
(32,388
|
)
|
|
|
(14,696
|
)
|
|
|
(22,198
|
)
|
Prepaid expenses and other
|
|
|
(3,958
|
)
|
|
|
(3,676
|
)
|
|
|
(5,955
|
)
|
Increase in liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
32,437
|
|
|
|
8,262
|
|
|
|
10,709
|
|
Accrued and other deferred liabilities
|
|
|
38,469
|
|
|
|
56,584
|
|
|
|
31,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
119,772
|
|
|
|
122,358
|
|
|
|
74,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
208,647
|
|
|
|
288,994
|
|
|
|
268,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(1,213,435
|
)
|
|
|
(162,690
|
)
|
|
|
(357,237
|
)
|
Proceeds from sale of marketable securities
|
|
|
1,191,302
|
|
|
|
325,894
|
|
|
|
207,026
|
|
Purchase of Fitigues assets
|
|
|
|
|
|
|
(7,527
|
)
|
|
|
|
|
Purchase of Minnesota franchise rights and stores
|
|
|
(32,896
|
)
|
|
|
|
|
|
|
|
|
Acquisition of other franchise stores
|
|
|
(6,361
|
)
|
|
|
(811
|
)
|
|
|
|
|
Proceeds from sale of land
|
|
|
13,426
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of investment
|
|
|
15,090
|
|
|
|
|
|
|
|
|
|
Purchase of equity investment
|
|
|
|
|
|
|
|
|
|
|
(10,418
|
)
|
Purchases of property and equipment
|
|
|
(202,223
|
)
|
|
|
(218,311
|
)
|
|
|
(147,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(235,097
|
)
|
|
|
(63,445
|
)
|
|
|
(308,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
3,533
|
|
|
|
6,402
|
|
|
|
28,467
|
|
Excess tax benefit from stock-based compensation
|
|
|
209
|
|
|
|
2,365
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(694
|
)
|
|
|
(200,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,048
|
|
|
|
(191,381
|
)
|
|
|
28,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(23,402
|
)
|
|
|
34,168
|
|
|
|
(11,391
|
)
|
CASH AND CASH EQUIVALENTS, Beginning of period
|
|
|
37,203
|
|
|
|
3,035
|
|
|
|
14,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, End of period
|
|
$
|
13,801
|
|
|
$
|
37,203
|
|
|
$
|
3,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
461
|
|
|
$
|
107
|
|
|
$
|
360
|
|
Cash paid for income taxes, net
|
|
$
|
74,563
|
|
|
$
|
105,646
|
|
|
$
|
106,091
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipt of note receivable for sale of land
|
|
$
|
25,834
|
|
|
|
|
|
|
|
|
|
Receivable from sale of equity investment
|
|
$
|
2,161
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated statements.
57
CHICOS
FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 2, 2008
(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 2, 2008, the
Companys retail store system consisted of 1,038 stores
located throughout the United States, the U.S. Virgin
Islands and Puerto Rico.
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 2, 2008
(fiscal 2007), February 3, 2007 (fiscal 2006) and
January 28, 2006 (fiscal 2005). Fiscal 2006 contained
53 weeks while fiscal 2007 and 2005 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 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Franchise stores reacquired
|
|
|
13
|
|
|
|
1
|
|
Franchise stores in operation at fiscal year-end
|
|
|
|
|
|
|
13
|
|
Company-owned stores at fiscal year-end
|
|
|
1,038
|
|
|
|
907
|
|
In early fiscal 2007, the Company completed the acquisition of
all outstanding franchise rights which included 12 Minnesota
stores and 1 Florida store.
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, and Soma
Intimates, 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
58
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 and Shrinkage
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. 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.
Sales
Taxes
The Companys policy towards taxes assessed by a government
authority directly imposed on revenue producing transactions
between a seller and a customer is, and has been, to exclude all
such taxes from revenue.
Marketable
Securities
Marketable securities generally represent variable rate demand
notes, which are highly liquid, variable rate municipal debt
securities and municipal bonds. Although the variable rate
municipal debt securities have long-term nominal maturity dates
ranging from 2009 to 2041, the interest rates are reset either
daily or every 7 days. Despite the long-term nature of the
underlying securities of the variable rate demand notes, the
Company has the ability to
59
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quickly liquidate these securities based on the Companys
cash needs thereby creating a short-term instrument. The
municipal bonds have average maturity dates typically less than
14 days.
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 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 the third quarter of fiscal 2006, the Company
reclassified a parcel of land located south of Fort Myers,
Florida with a book value of $38.1 million from a long-term
asset to a current asset that was being held for sale. On
August 1, 2007, the Company consummated a transaction to
sell the land with a sales price totaling $39.7 million
consisting of approximately $13.4 million in cash proceeds,
net of closing costs, and a note receivable with a principal
amount of approximately $25.8 million and secured by a
purchase money mortgage. The note, which accrues interest at a
fixed rate of 6.0% annually with interest payable quarterly and
the principal amount payable in a balloon payment in two years,
is included within other assets on the Companys
consolidated balance sheet. The Company has received all
payments due under the note.
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.
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.
60
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
includes the construction period and which is generally
60-90 days prior to the store opening date when the Company
generally begins improvements in preparation of intended use.
Certain leases provide for contingent rents, in addition to a
basic fixed rent, which contingent amounts 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 accounts for its goodwill and intangible assets in
accordance with Statement of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). 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. In fiscal 2007, the Company
completed the acquisition of all outstanding franchise rights
and recorded goodwill and a territorial franchise rights
intangible asset. 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 territorial franchise rights
for the state of Minnesota should be allocated to the
Chicos reporting unit and that the WH|BM acquisition
should be assigned to the WH|BM reporting unit.
The Company was then required to determine the fair values of
the Chicos reporting unit and the WH|BM reporting unit,
respectively, and compare them to their respective carrying
values. The fair value of a reporting unit is determined based
on estimated future cash flows, discounted at a rate that
approximates the Companys cost of capital. The Company
then determined the carrying value of the Chicos reporting
unit and the WH|BM reporting unit, respectively, by assigning
the assets and liabilities, including the existing goodwill and
intangible assets to each of them. In the fourth quarter of
fiscal 2007, the fourth quarter of fiscal 2006 and the fourth
quarter of fiscal 2005, 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
Chicos and the WH|BM reporting units for fiscal 2007, 2006
and 2005 exceeded their respective carrying amounts. Therefore,
the Company was not required to recognize an impairment loss in
any of the years.
As of February 2, 2008, the total value of intangible
assets of $38.9 million related to the acquired WH|BM
trademark and the acquired territorial franchise rights. As of
February 3, 2007, the total value of the intangible assets
of $34.0 million related solely to the acquired WH|BM
trademark. 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
value of the acquired territorial franchise rights was
determined using a discounted cash flow method, based on a
relief from royalty concept. The Company is not amortizing its
intangible assets, as each has an indefinite useful life. In the
fourth quarter of fiscal 2007, the Company performed an analysis
to compare the implied fair values of each of its intangible
assets, using a discounted cash flow method, to each of their
respective carrying values and concluded that the intangible
assets were not impaired.
61
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The changes in the Companys goodwill consist of the
following:
|
|
|
|
|
Balance at February 3, 2007
|
|
$
|
62,596
|
|
Goodwill related to acquisition of MN franchise stores
|
|
|
27,733
|
|
Goodwill related to acquisition of FL franchise store
|
|
|
6,445
|
|
|
|
|
|
|
Balance at February 2, 2008
|
|
$
|
96,774
|
|
|
|
|
|
|
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.
Gain on
Sale of Investment
On July 26, 2007, VF Corporation announced that it had
entered into a definitive agreement to acquire lucy activewear,
inc. (Lucy), a privately held retailer of
womens activewear apparel, in which the Company held a
cost method investment totaling $10.4 million. The
transaction was completed during the third quarter and the
Company recorded a pre-tax gain of approximately
$6.8 million, which is reflected as non-operating income in
the accompanying statement of operations.
Income
Taxes
Effective February 4, 2007, the Company adopted the
provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48).
FIN 48 prescribes a comprehensive model of how a company
should recognize, measure, present and disclose in its financial
statements uncertain tax positions that the company has taken or
expects to take on a tax return. FIN 48 states that a
tax benefit from an uncertain tax position may be recognized if
it is more likely than not that the position is
sustainable, based upon its technical merits. The tax benefit of
a qualifying position is the largest amount of tax benefit that
has greater than a 50% likelihood of being realized upon the
ultimate settlement with a taxing authority having full
knowledge of all relevant information.
The cumulative effect of adoption of FIN 48 did not result
in any adjustment in the Companys liability for
unrecognized income tax benefits. As of the date on which the
Company adopted FIN 48, the total amount of unrecognized
tax benefits associated with uncertain tax positions was
$9.0 million. There was no effect on the Companys
stockholders equity for the adoption of FIN 48. A
reconciliation of the Companys beginning and ending amount
of unrecognized tax benefit is as follows:
|
|
|
|
|
Balance at February 4, 2007
|
|
$
|
8,987
|
|
Additions based on tax positions related to the current year
|
|
|
1,074
|
|
Additions for tax positions of prior years
|
|
|
300
|
|
Reductions for tax positions of prior years due to lapse of
applicable statute of limitations
|
|
|
(495
|
)
|
Settlements
|
|
|
(2,098
|
)
|
|
|
|
|
|
Balance at February 2, 2008
|
|
$
|
7,768
|
|
|
|
|
|
|
Included in the above beginning and ending balance are tax
positions of $6.5 million and $5.2 million,
respectively, which, if recognized, would favorably affect the
effective tax rate. In addition, the beginning and ending
balances above also include $2.5 million and
$2.6 million, respectively, of tax positions for which the
62
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ultimate deductibility is highly certain but for which there is
uncertainty about the timing of such deductibility. Because of
the impact of deferred income tax accounting, other than for
interest and penalties, the disallowance of the shorter
deductibility period would not affect the effective income tax
rate but would accelerate the payment of cash to the taxing
authority to an earlier period.
The Companys continuing practice is to include estimated
interest and penalties, if any, in computing the amount that is
recognized within income tax expense relating to uncertain
income tax positions. As of February 2, 2008 and the date
of adoption, the Company had accrued $1.4 million and
$1.0 million of interest and penalties related to uncertain
tax positions, respectively, which is included in the
$7.8 million and $9.0 million unrecognized tax
benefits noted above.
Although the Company believes that it has adequately provided
for all tax positions, amounts asserted by tax authorities could
be greater or less than the Companys accrued position.
Accordingly, the Companys provisions on federal, state and
local tax-related matters to be recorded in the future may
change as revised estimates are made or the underlying matters
are settled or otherwise resolved. As of February 2, 2008,
the Company does not believe that its estimates, as otherwise
provided for, on such tax positions will significantly increase
or decrease within the next twelve months.
The Company and certain of its subsidiaries are subject to
U.S. federal income tax as well as income tax of multiple
state and local jurisdictions. In late fiscal 2005, following
the Companys receipt of an invitation from the Internal
Revenue Service (IRS), the Company agreed to
participate in the IRSs real time audit program,
Compliance Assurance Process (CAP), beginning in
fiscal 2006. Under the CAP program, material tax issues and
initiatives were disclosed to the IRS throughout the year with
the objective of reaching agreement as to the proper reporting
treatment.
During the first quarter of 2007, the Company received the
IRSs letter of a tentative full acceptance of the
Companys 2006 federal tax return subject to the completion
of a post-filing review and received the full acceptance letter
in the fourth quarter of 2007, with no changes to the filing.
The Company had previously reached agreement with the IRS and
closed the audits of fiscal years 2002 through 2005, such that
the Company no longer has any open years subject to examination
by the IRS (other than the fiscal year 2007). The Company
believes that its participation in the CAP real time audit
program reduced tax-related uncertainties and enhanced
transparency. The Company has agreed with the IRS to participate
in the CAP program again in fiscal 2007 and fiscal 2008.
As for state and local income taxes, with few exceptions, the
Company is no longer subject to state and local income tax
examinations by taxing authorities for years prior to 2003.
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 due to the short-term nature of
the instruments.
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 sales by
catalog and Internet are recorded when shipments are made to
catalog and Internet customers and are net of estimated customer
returns. Historically, net sales to franchisees were recorded
when merchandise was shipped to franchisees and were net of
estimated returns. As of March 4, 2007, the Company is no
longer in the franchise business, and as such, has no sales to
franchisees after such date. 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
63
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, amounted to
$9.5 million, $8.3 million, and $6.3 million in
fiscal 2007, 2006 and 2005, respectively, do not represent a
significant portion of the Companys operations and are
included in store operating expenses in the accompanying
consolidated statements of income. 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 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 2007,
2006 and 2005, advertising costs were approximately
$82.7 million, $66.5 million, and $53.0 million,
respectively, and are reflected as marketing expenses in the
accompanying consolidated statements of income.
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 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 10 for a further discussion on
stock-based compensation. Prior
64
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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:
|
|
|
|
|
|
|
Fiscal
|
|
|
|
2005
|
|
|
Net income, as reported
|
|
$
|
193,981
|
|
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
|
|
|
|
|
|
|
Net income, pro forma
|
|
$
|
181,967
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
Basic - as reported
|
|
$
|
1.07
|
|
Basic - pro forma
|
|
$
|
1.01
|
|
Diluted - as reported
|
|
$
|
1.06
|
|
Diluted - pro forma
|
|
$
|
1.00
|
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average common shares outstanding basic
|
|
|
175,574,116
|
|
|
|
177,273,138
|
|
|
|
180,464,882
|
|
Dilutive effect of stock options and unvested restricted stock
outstanding
|
|
|
780,991
|
|
|
|
1,178,745
|
|
|
|
1,943,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares
outstanding diluted
|
|
|
176,355,107
|
|
|
|
178,451,883
|
|
|
|
182,407,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2007, 2006 and 2005, 4,299,725, 851,945 and 229,680
potential shares of common stock, respectively were excluded
from the diluted per share calculation relating to stock option
and restricted stock awards, because the effect of including
these potential shares was antidilutive.
Newly
Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157),
which establishes a framework for measuring fair value in
accordance with Generally Accepted Accounting Principles
65
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(GAAP) and expands disclosures about fair value
measurements. This statement is effective for financial assets
and liabilities as well as for any assets and liabilities that
are carried at fair value on a recurring basis in financial
statements as of the beginning of the entitys first fiscal
year that begins after November 15, 2007. In November 2007,
the FASB issued a one-year deferral for non-financial assets and
liabilities to comply with SFAS 157 which delayed the
effective date for these items until November 15, 2008. The
Company does not expect the adoption of SFAS 157 to have a
material effect on its financial position, results of operations
or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS 159). This statement
permits entities to choose to measure many financial assets and
liabilities and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This
statement is effective as of the beginning of an entitys
first fiscal year beginning after November 15, 2007. The
Company does not expect the adoption of SFAS 159 to have a
material effect on its financial position, results of operations
or cash flows.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141R). SFAS 141R states that all business
combinations, whether full, partial, or step acquisitions, will
result in all assets and liabilities of an acquired business
being recorded at their fair values at the acquisition date. In
subsequent periods, contingent liabilities will be measured at
the higher of their acquisition date fair value or the estimated
amounts to be realized. SFAS 141R applies to all
transactions or other events in which an entity obtains control
of one or more businesses. This statement is effective as of the
beginning of an entitys first fiscal year beginning after
December 15, 2008. SFAS 141Rs impact on
accounting for business combinations is dependent upon
acquisitions consummated after the Companys expected
adoption date of February 1, 2009.
2. Acquisitions
of Chicos Franchised Stores:
On February 4, 2007, the Company consummated its asset
purchase of Intraco, Inc. (Intraco) pursuant to
which the Company acquired the franchise rights for the state of
Minnesota and purchased a substantial portion of the assets of
Intraco. Intraco, which held territorial franchise rights to the
entire state of Minnesota for the Chicos brand, operated
twelve Chicos brand store locations in Minnesota at that
time. The acquisition included all of the existing retail store
locations together with the reacquisition of the territorial
franchise rights to the state of Minnesota. The total purchase
price for the acquisition of the twelve stores was approximately
$32.9 million. The Companys allocation of the
purchase price to the tangible and intangible assets acquired
and liabilities assumed in the acquisition at their estimated
fair values with the remainder allocated to goodwill was as
follows: $0.9 million to current assets, $1.4 million
to fixed assets, $4.9 million to intangible assets, which
represents the fair value of re-acquired territory rights,
$27.7 million to goodwill, net of $2.0 million to
current liabilities. The Companys consolidated statements
of income include the results of operations for these twelve
stores from and after February 4, 2007, the date of
acquisition of such stores.
In addition, on March 4, 2007, the Company consummated its
asset purchase of a franchise store from its franchisee in
Florida. The Companys consolidated statements of income
include the results of operations for this particular store from
and after March 4, 2007, the date of acquisition of such
store. With this acquisition completed, the Company now has no
franchise stores remaining and does not intend to pursue, at
this time, any franchises or to enter into any additional
franchise territory development agreements for any of its brands.
3. Discontinued
Operations:
In early fiscal 2006, the Company acquired most of the assets of
Fitigues consisting primarily of 12 retail stores. 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 consisted of
66
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. As of the
end of fiscal 2007, the operations of the Fitigues brand have
ceased and the Company does not expect to incur any further
material costs associated with the closing down of this brand.
In accordance with Statement of Financial Accounting Standard
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company has segregated the operating
results of Fitigues from continuing operations and classified
the results as discontinued operations in the consolidated
statements of income for all periods presented as shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net sales
|
|
$
|
1,688
|
|
|
$
|
5,555
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
3,470
|
|
|
|
12,647
|
|
Income tax benefit
|
|
|
1,197
|
|
|
|
4,592
|
|
|
|
|
|
|
|
|
|
|
Net loss on discontinued operations
|
|
$
|
2,273
|
|
|
$
|
8,055
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Marketable
Securities:
|
The following tables summarize the Companys investments in
marketable securities at February 2, 2008 and
February 3, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Total marketable securities
|
|
$
|
260,469
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
260,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Total marketable securities
|
|
$
|
238,336
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
238,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no marketable securities in an unrealized loss
position at February 2, 2008 or February 3, 2007.
5. Receivables:
Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Tenant improvement advances
|
|
$
|
6,497
|
|
|
$
|
9,567
|
|
Franchisees
|
|
|
|
|
|
|
2,185
|
|
Other
|
|
|
5,427
|
|
|
|
2,559
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
11,924
|
|
|
|
14,311
|
|
Less allowance for sales returns from franchisees
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,924
|
|
|
$
|
14,246
|
|
|
|
|
|
|
|
|
|
|
67
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Allowance for estimated customer returns, gift certificates and
store credits outstanding
|
|
$
|
41,809
|
|
|
$
|
40,930
|
|
Accrued payroll, bonuses and severance costs
|
|
|
15,118
|
|
|
|
15,000
|
|
Allowance for construction in progress
|
|
|
8,407
|
|
|
|
9,349
|
|
Other
|
|
|
26,288
|
|
|
|
17,692
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,622
|
|
|
$
|
82,971
|
|
|
|
|
|
|
|
|
|
|
The Companys income tax provision consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
49,854
|
|
|
$
|
105,172
|
|
|
$
|
106,624
|
|
State
|
|
|
7,648
|
|
|
|
14,199
|
|
|
|
14,355
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(8,218
|
)
|
|
|
(19,119
|
)
|
|
|
(8,032
|
)
|
State
|
|
|
(1,272
|
)
|
|
|
(617
|
)
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
48,012
|
|
|
$
|
99,635
|
|
|
$
|
112,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation between the statutory federal income tax rate
and the effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal tax benefit
|
|
|
2.9
|
|
|
|
2.8
|
|
|
|
2.7
|
|
Other items, net
|
|
|
(3.4
|
)
|
|
|
(1.5
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34.5
|
%
|
|
|
36.3
|
%
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
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 2, 2008, and February 3, 2007:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities and allowances
|
|
$
|
11,926
|
|
|
$
|
14,009
|
|
Inventories
|
|
|
1,380
|
|
|
|
3,328
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,306
|
|
|
$
|
17,337
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
7,208
|
|
|
$
|
|
|
Accrued liabilities and allowances
|
|
|
2,527
|
|
|
|
|
|
Deferred rent
|
|
|
|
|
|
|
4,244
|
|
Accrued straight-line rent
|
|
|
13,019
|
|
|
|
8,961
|
|
Deferred compensation
|
|
|
1,551
|
|
|
|
4,435
|
|
SFAS 123R compensation
|
|
|
12,878
|
|
|
|
7,595
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,183
|
|
|
$
|
25,235
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
(2,648
|
)
|
Deferred rent
|
|
|
(273
|
)
|
|
|
|
|
Other intangible assets
|
|
|
(14,407
|
)
|
|
|
(10,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,680
|
)
|
|
$
|
(13,398
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets at February 2, 2008 and
February 3, 2007 totaled $50.5 million and
$42.6 million, respectively. Deferred tax liabilities at
February 2, 2008 and February 3, 2007 totaled
$14.7 million and $13.4 million, respectively.
Deferred liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred rent
|
|
$
|
33,215
|
|
|
$
|
23,707
|
|
Deferred compensation
|
|
|
4,049
|
|
|
|
11,728
|
|
Deferred lease credits and other
|
|
|
120,590
|
|
|
|
82,594
|
|
|
|
|
|
|
|
|
|
|
Total deferred liabilities
|
|
|
157,854
|
|
|
|
118,029
|
|
Less current portion
|
|
|
(1,437
|
)
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
156,417
|
|
|
$
|
116,860
|
|
|
|
|
|
|
|
|
|
|
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 11.
69
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
9. 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 2, 2008, are approximately as follows:
|
|
|
|
|
Fiscal Year Ending:
|
|
|
|
|
January 31, 2009
|
|
$
|
122,850
|
|
January 30, 2010
|
|
|
121,138
|
|
January 29, 2011
|
|
|
113,600
|
|
January 28, 2012
|
|
|
104,377
|
|
February 3, 2013
|
|
|
91,126
|
|
Thereafter
|
|
|
298,530
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
851,621
|
|
|
|
|
|
|
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 2007, 2006 and 2005, total rent expense under the
Companys operating leases was approximately
$140.4 million, $113.3 million, and
$91.9 million, respectively, including common area
maintenance charges of approximately $19.0 million,
$15.0 million, and $11.4 million, respectively, other
rental charges of approximately $18.8 million,
$14.0 million, and $10.9 million, respectively, and
contingent rental expense of approximately $8.2 million,
$10.5 million, and $11.9 million, respectively, based
on sales.
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 3.9 percent at
February 2, 2008). 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 2,
2008 and February 3, 2007.
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 2, 2008. The
Credit Facility was automatically renewed through June 1,
2008 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.
70
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At February 2, 2008, the Company has approximately
$0.8 million in commercial and standby letters of credit
outstanding (see Note 8), which arose in the normal course
of business.
At February 2, 2008 and February 3, 2007, the Company
had approximately $211.8 million and $180.6 million,
respectively, due under non-cancelable purchase commitments
consisting of amounts to be paid under agreements to purchase
inventory that are legally binding and that specify all
significant terms.
On May 9, 2007, the Company was served with a lawsuit in
which it was named as defendant in a putative class action in
the Superior Court for the State of California, County of Los
Angeles, Linda Balint v. Chicos FAS, Inc. et
al. The Complaint alleged that the Company, in violation
of California law, failed to: (1) pay overtime wages, and
(2) provide meal periods, among other claims. The Company
timely filed its response denying the material allegations of
the Complaint. In October 2007, the parties participated in an
early mediation of this matter and reached a settlement as a
result of that mediation. In January 2008, the Court gave its
preliminary approval of the settlement and notice of the
settlement has been sent to all class members. Class members
have until April 21, 2008 to partake in, opt out of, or
object to the settlement. The settlement is subject to final
approval by the Court. The settlement, if approved by the Court,
is not expected have a material impact on the Companys
results of operations or financial condition.
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.
10. Stock
Option Plans and Capital Stock Transactions:
General
At February 2, 2008, 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 2007 and 2006, in accordance
with SFAS 123R, was $17.1 million and
$21.2 million, respectively. 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 2007
and fiscal 2006 based on its historical experience during the
preceding four fiscal years.
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
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 fiscal 2005, 2006 and
2007 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
71
CHICOS FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair market value of the restricted stock is determined based on
the closing price of the Companys common stock on the
grant date.