Chico's Clicks

Chico's FAS has never done much business on the Internet. But that's about to change as Chief Executive Officer David Dyer plans to double online sales of its women's apparel.

Since taking over as chief executive officer in January, David Dyer hasn't wasted time shaking up Chico's FAS, the women's clothing retailer based in Fort Myers.

The 59-year-old retail veteran cut 11% of the staff at the company's headquarters, reshuffled the management and pacified an angry institutional shareholder. While expense cuts have gotten most of the headlines, Dyer also has launched an effort to double the company's online sales and has rededicated efforts to turn its intimate apparel into a profitable business.

Despite double-digit percentage declines in sales last year, Chico's is in a better position than many of its competitors to weather the economic downturn and invest in growth opportunities. It has $269 million in cash and marketable securities, no debt and a newly signed $55-million line of credit with SunTrust Bank, according to the most recent financial statements.

Dyer declined to comment about his plans, but his first conference call to discuss fourth-quarter results with investors recently shows he's investing in areas such as Internet sales that promise future growth while cutting administrative and operational costs.

Investors appear to be cautiously optimistic, pushing Chico's stock to $4.31 on March 4, up 148% it November low, though it's still far from the $40 range a few years ago.

Like most retailers, Dyer is attempting to reverse a substantial decline in sales. In 2008, the company lost $19 million on sales of $1.58 billion compared with earnings of $89 million on sales of $1.71 billion in 2007. In 2008, sales at stores open longer than a year dropped 15.1% compared with the previous year. The same-store sales were down 19% at its flagship Chico's stores.

But in an early indication that Internet sales could help the company out of its slump, such “direct to consumer” sales rose by 8.8% in the most recent quarter to $22.3 million. This is a departure for Chico's, which has been focused on its 1,074 stores across the country. The company has 618 Chico's stores, 41 Chico's outlet stores, 327 White House | Black Market stores, 70 Soma Intimates stores and one Soma Intimates outlet store.

During a question-and-answer session to discuss fourth-quarter results on March 3, Dyer says he doesn't expect online sales will take business away from the stores.

“Currently, our direct-to-consumer is about 4% of our business,” Dyer told investors. “We believe that with improved infrastructure and attention to this channel, we can set a near-term goal to become 10% of our business.”

In the meantime, Dyer is also giving the Soma intimate apparel division more attention and resources, despite the fact that it's lost about $100 million since it was launched in 2004. Investors have grumbled that the intimate-apparel business has been a distraction of management's time and resources.

“I will tell you that I do believe the Soma division has the opportunity to be a $600 million to $1 billion business for the company over time,” Dyer told analysts. “Right now, we see in the next few years [Soma] growing to somewhere around 120 to 150 stores, and we believe that somewhere over 100 stores that it reaches the proper scale so it can source better and more efficiently.” The company doesn't break out results for its Soma stores because it doesn't believe they're material yet.

Dyer appointed Charles Nesbit Jr. as brand president of Soma from his previous position as executive vice president and chief operating officer. Dyer says he made the move so Nesbit, a long-time executive in the intimate apparel business with companies such as Sara Lee and Bali, can focus on building Soma.
Dyer is hoping Nesbit does what he did for Wonderbra years ago: raise sales.

BY THE NUMBERS

CHICO'S FAS
(Amounts in $, in thousands)

Income statement
Year ended
2/2/08 1/31/09 %CHG.
Net sales 1,714,326 1,582,405 -8%
Cost of goods sold 745,265 762,913 2%
Selling, general and administrative 847,603 859,086 1%
Gain on sales of investment 6,833 0
Interest income 10,869 7,757 -29%
Income tax provision or benefit 48,012 -12,700
Loss on discontinued operations, net of tax 2,273 0
Net income or loss 88,875 -19,137

Balance sheet 2/2/08 1/31/09 %change
Assets
Current assets
Cash and cash equivalents 13,801 26,549 92%
Marketable securities, at market 260,469 242,153 -7%
Receivables 11,924 33,993 185%
Income tax receivable 23,973 11,706 -51%
Inventories 144,261 132,413 -8%
Prepaid expenses 18,999 17,859 -6%
Deferred taxes 13,306 17,859 34%
Total current assets 486,733 486,375 0.1%

Property and equipment
Land and land improvements 17,867 18,627 4%
Building and building improvements 62,877 74,998 19%
Equipment, furniture and fixtures 347,937 376,218 8%
Leasehold improvements 396,650 418,691 6%
Total property and equipment 825,331 888,534 8%
Less accumulated depreciation
and amortization -257,378 -327,989
Property and equipment, net 567,953 560,545 -1%

Other assets:
Goodwill 96,774 96,774
Other intangible assets 38,930 38,930
Deferred taxes 22,503 38,458 71%
Other assets, net 195,440 179,263 -8%

Total assets 1,250,126 1,226,183 -2%

Liabilities and shareholder's equity

Current liabilities:
Accounts payable 79,030 56,542 -28%
Accrued liabilities 100,726 88,446 -12%
Current portion of deferred liabilities 1,437 1,748 22%
Total current liabilities 181,193 146,736 -19%

Noncurrent liabilities 156,417 177,251 13%

Stockholders equity 912,516 902,196 -1%
Source: Chico's FAS Inc.