Lingerie Lifeline

Lingerie Lifeline

RETAIL by Jean Gruss | Editor/Lee-Collier

When Scott Edmonds joined Chico's FAS in 1993, the company almost went bankrupt. It's an experience he can draw on as he steers the women's apparel retailer through a steep downturn. One big opportunity: a new chain of lingerie stores for women over 35.

Scott Edmonds has been through this before.

Edmonds, chairman, chief executive officer and president of women's apparel company Chico's FAS, was one of four executives who rescued the Fort Myers women's apparel company from near bankruptcy in 1994.

The lessons he learned from that trial have already saved the company from a worse fate even after sales slumped by double-digit percentage rates in recent months. Chief among those: Chico's has no debt.

Corporate near-death taught Edmonds this: "Be very cautious when it comes to using your cash." In addition, slow your company's growth so you can concentrate on fixing the core business.

That's what Chico's did 14 years ago and that's what it's doing again now. In 2007, the company opened 128 net new stores. It will open fewer than half that number this year and it now plans less than a dozen in 2009. Capital expenditures this year will be slashed in half to $100 million.

There's a sense of urgency as consumers cut back dramatically. Sales at stores open longer than one year fell 21% in the five weeks ending April 7 compared with the same period in 2007. Earnings for the full year 2007 ending Feb. 2 declined 47% to $88.9 million on sales of $1.7 billion compared with the prior year, dragged down by a net loss in the fourth quarter of $21 million.

But compared to some leveraged competitors, Chico's balance sheet puts the company in a good position to weather a downturn that Edmonds says could last at least another year. As of Feb. 2, Chico's had $274 million in cash and marketable securities and zero debt. Edmonds says he hopes to finish 2008 with an even stronger balance sheet.

In addition to cutting expansion plans, Edmonds has laid off corporate employees and instituted a hiring freeze in Fort Myers. He also has abandoned a plan to build a new headquarters building in Lee County. But he's beefed up the management ranks with retail veterans from rival companies to boost sales. He's focused on fixing missteps at Chico's while pushing growth at Soma Intimates, a line of lingerie for women 35 and older.

"These are historical times," Edmonds tells his employees. The problems in housing, credit markets, oil and the war in Iraq all weigh on Chico's customers, which Edmonds calls the "worriers" of the household. "The U.S. consumer has been pummeled."

Priority one: Fix Chico's

Are Chico's problems the company's own doing or is it buffeted by economic crises beyond its control?

Edmonds says he wrestles with that question as sales decline at its 606 flagship Chico's stores. "That is sometimes maddening," Edmonds says. He estimates half the stores' problems have been caused by fashion missteps and half by a faltering economy and lower consumer confidence.

The problems at Chico's aren't things that can't be fixed and Edmonds has hired new top executives from rival retailers to bring new fashions to the stores and streamline operations. "Great brands live on forever," Edmonds says. The company says there's room for as many as 800 Chico's stores in the U.S.

But Chico's customer is a woman who typically controls her household's finances. "She is much more value conscious today," Edmonds says. "She doesn't need a plain T-shirt unless it's deeply discounted."

The company's biggest concentration of stores is in states such as California and Florida that have been hit hard by the housing downturn. Still, 85% of the Chico's sales come from repeat customers and Edmonds believes that demand will build over time. "We think this is a pause," Edmonds says.

The 50-year-old CEO is irked by U.S. investors' obsession with monthly sales, which has driven the company stock down 77% over the past year to around $6 a share. When he meets with European investors, by contrast, Edmonds says they ask him about his long-term vision for the company and don't care about the latest sales data.

Edmonds likes to preface conversations by pointing to Chico's 10-year streak of double-digit percentage sales growth that ended only last year. "It has been an unbelievable 10-year period," Edmonds says. Investors were richly rewarded if they sold near the peak.

According to an analysis by The Wall Street Journal, an investor who had bought $1,000 worth of Chico's stock at the end of 1995 would have ended up with $180,708 at the end of 2005. The company clocked an average annual return of 68% in that 10-year stretch, the best record out of 1,000 companies the newspaper analyzed.

But in the U.S., a what-have-you-done-for-me-lately attitude reigns. Few people remember Chico's initial public offering in 1993 was hailed as the "IPO of the Year" by the Wall Street Journal. It was the same year flameouts Boston Chicken and Gymboree went public.

Still, Edmonds seems resigned to shareholder pressure: "The best thing we can do is concentrate on same-store sales and earnings growth."

The future: bras and panties

In conference calls with analysts and investors, Edmonds continues to defend his focus on what he considers to be the next growth engine of the company: Soma Intimates. He believes the 70-store chain of lingerie for women 35 and older can replicate what Victoria's Secret did for younger women.

Edmonds waves a picture of women's panties called Vanishing Edge. "No one was targeting older women with a flattering cut," he says. Since its recent introduction, 400,000 pairs of Vanishing Edge panties have been sold. "We think Soma's could be the next 'blue ocean' opportunity," Edmonds says.

Although Chico's doesn't break out Soma's numbers, the chain of 70 Soma's has started out slowly and its sales per square foot are only half those of Chico's stores. Part of the challenge has been due to the fact that women generally buy lingerie at department stores. In addition, the company started the lingerie chain by locating stores next to existing Chico's and called it Soma's by Chico's. It renamed it Soma's Intimates to give it its own identity so that women who didn't shop at Chico's might be enticed.

Edmonds rejects criticism that the strategy of opening Soma's next to Chico's stores has been unsuccessful. For example, He points to the Soma's store on St. Armand's Circle in Longboat Key near Sarasota, which is next door to a Chico's store. That store sold 544 bras in a single week recently.

Fact is, investors and analysts have always underestimated Edmonds. "No one believed in Chico's. Period," he says.

On the second day Edmonds became CEO in 2003, the company acquired White House | Black Market for $90 million, a small chain of stores aimed at younger women that sells clothes in shades of black and white. Last year, the 313 White House | Black Market stores posted $419 million in sales and exceeded Chico's $792 annual net sales per square foot by $12.

But Edmonds doesn't champion all the brands he builds or acquires. Last year, for example, Chico's abandoned its expansion of a recently acquired brand of women's sportswear called Fitigues.

And, looking back, Edmonds has acknowledged he failed to plow profits back into building a stronger management team during the good times. "The pressure's always on operating-margin growth," Edmonds says. "We shouldn't have given into the pressure from the Street."

Buck stops at the chairman

Edmonds recently was elected chairman, consolidating power by adding the new title in addition to CEO and president. In addition to his day-to-day management of the company, Edmonds now has the responsibility of guiding the company's overall mission.

Many companies have split the position of chairman and CEO, on the grounds that boards and management shouldn't have too cozy a relationship. But Edmonds says the board's independent lead director Ross Roeder fulfills that oversight role. Roeder, who has been a director at Chico's since 1997, is the chairman and former CEO of Smart & Final, a chain of 235 stores that sell food and restaurant supplies.

What's more, Edmonds recently acquired $1 million worth of Chico's stock and may buy more. "I got quite a few calls" about the purchase as some investors speculated the company might be for sale. "No, we're not trying to sell," Edmonds says. "I'm confident in the success of the company," he says.

No buyers have approached the company recently, Edmonds says. Although that may seem surprising especially considering the company has no debt, Chico's stock was much too expensive during the boom and now credit woes have sidetracked any potential acquirers.

In any case, Chico's long culture of transparency makes it unlikely that any deal is in the works behind the scenes. Chico's is well regarded among investors and analysts for being open about its business, even going as far as including its top executives' employment contracts in public filings with the Securities and Exchange Commission.

"That starts at the top," Edmonds says.

Chico's FAS

Headquarters: Fort Myers

Market capitalization: $1 billion

Stock symbol: CHS

Recent stock price: $6

52-week stock price range: $5.42 - $27.94

Price-earnings ratio (trailing 12 months): 12

Source: Yahoo Finance

Chico's FAS ($ in thousands)

BALANCE SHEET

ASSETS 2/3/2007 2/2/2008 % Change

Current assets:

Cash and equivalents 37,203 13,801 ‑63

Marketable securities 238,336 260,469 9

Receivables 14,246 11,924 ‑16

Income tax receivable 2,493 23,973 862

Inventories 110,840 144,261 30

Prepaid expenses 15,774 18,999 20

Land held for sale 38,120 0

Deferred taxes 17,337 13,306 ‑23

Total current assets 474,349 486,733 3

Property and equipment:

Land and land improvements 14,640 17,867 22

Building and building improvements 56,782 62,877 11

Equipment, furniture and fixtures 268,122 396,650 31

Leasehold improvements 301,670 396,650 31

Total property and equipment 641,214 825,331 29

Less accumulated depreciation and amortization ‑184,474 ‑257,378

Property and equipment, net 456,740 567,953 24

Goodwill 62,596 96,774 55

Other intangible assets 34,040 38,930 14

Deferred taxes 11,837 22,503 90

Other assets, net 21,065 37,233 77

Total assets 1,060,627 1,250,126 18

LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable 55,696 88,134 58

Accrued liabilities 82,971 91,622 10

Current portion of deferred liabilities 1,169 1,437 23

Total current liabilities 139,836 181,193 30

Noncurrent liabilities:

Deferred liabilities 116,860 156,417 34

Total stockholders' equity 803,931 912,516 14

Total liabilities and stockholders' equity 1,060,627 1,250,126 18

INCOME STATEMENT FY ended 2/3/2007 FY ended 2/2/2008 % Change

Net sales by Chico's/Soma stores 1,210,474 1,223,217 1

Net sales by WH|BM 367,063 418,901 14

Net sales by catalog and Internet 52,959 72,093 36

Other net sales 10,431 115 ‑99

Net sales 1,640,927 1,714,326 4

Cost of goods sold 673,742 745,265 11

Gross profit 967,185 969,061 0.1

SG&A:

Store operating expenses 525,529 633,288 21

Marketing 66,465 82,736 24

Shared services 111,491 131,579 18

Total SG&A expenses 703,485 847,603 20

Income from operations 263,700 121,458 ‑54

Gain on sale of investment 0 6,833

Interest income, net 10,626 10,869 2

Income before income taxes 274,326 139,160 ‑49

Income tax provision 99,635 48,012 ‑108

Income from continuing operations 174,691 91,148 ‑48

Loss on discontinued operations 8,055 2,273 ‑72

Net income 166,636 88,875 ‑47

REVIEW SUMMARY

Company. Chico's FAS

Industry. Retail apparel

Key. Curtail growth and conserve cash when sales decline.