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Edited Transcript of CHS earnings conference call or presentation 27-Feb-20 1:00pm GMT

Q4 2019 Chico's FAS Inc Earnings Call

FORT MYERS Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Chico's FAS Inc earnings conference call or presentation Thursday, February 27, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bonnie R. Brooks

Chico's FAS, Inc. - President, CEO & Director

* David M. Oliver

Chico's FAS, Inc. - Interim CFO, Interim Principal Financial Officer, CAO & Controller

* Molly Langenstein

Chico's FAS, Inc. - President of Apparel Group

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Conference Call Participants

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* Cynthia Mary Campo

Morgan Stanley, Research Division - Research Associate

* Dana Lauren Telsey

Telsey Advisory Group LLC - CEO & Chief Research Officer

* Gabriella Olivia Carbone

Deutsche Bank AG, Research Division - Research Associate

* Janet Joseph Kloppenburg

JJK Research Associates, Inc. - President

* Lorraine Corrine Maikis Hutchinson

BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research

* Marni Shapiro

The Retail Tracker - Co-Founder

* Roxanne Felice Meyer

MKM Partners LLC, Research Division - MD & Senior Research Analyst for Specialty Retail

* Susan Kay Anderson

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Chico's FAS Fourth Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note this call is being recorded.

I would now like to turn the conference over to David Oliver, Interim Chief Financial Officer and Senior Vice President - Controller. Mr. Oliver, please go ahead.

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David M. Oliver, Chico's FAS, Inc. - Interim CFO, Interim Principal Financial Officer, CAO & Controller [2]

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Thanks, Anita, and good morning, everyone. Welcome to the Chico's FAS Fourth Quarter 2019 Earnings Call and Webcast. Joining me today are Bonnie Brooks, CEO and President and Molly Langenstein, President, Apparel Group. Our earnings release issued today can be found on our website at www.chicosfas.com under Investor Relations Press Releases.

Let me caution you that today's comments will include forward-looking statements about current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, which speak only as of today's date. You should not unduly rely on forward-looking statements. Important factors that could cause actual results or events to differ materially from these projections or implied by our forward-looking statements are included in our earnings release issued this morning, in our SEC filings and in the comments that are made on this call. We disclaim any obligation to update or revise any information discussed in this call, except as may be otherwise required by law.

In addition, our comments and discussion of fourth quarter financial results will be on an adjusted or non-GAAP basis. You will find a GAAP and non-GAAP reconciliation schedule included in our press release issued this morning, which is available on our website. And with that, I'll turn it over to Bonnie.

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [3]

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Thank you, David, and good morning, everyone. As announced this morning, we delivered a fantastic fourth quarter across all 3 of our brands. Chico's FAS, reported a question comparable sales of 2.2%, marking the first positive comp quarter for Chico's FAS since Q2 of 2015. This is an improvement of 440 basis points from Q3 and a 920 basis points swing since Q1, demonstrating 3 quarters of sequential sales increases, and not only stabilization of the business, but strong growth. The fourth quarter also marks the first positive sales quarter for all 3 brands since Q4 of 2014.

Chico's had significant improvement in the quarter, reporting a comparable sales increase of point 0.9% driven by improvements to the assortment in the quality, design and relevance of our product. This is an improvement of 450 basis points from Q3 and is Chico's first positive comp sales quarter Since Q2 2015.

White House Black Market delivered a 10 basis point comparable sales results, it's best quarter in the past 18 quarters since Q1 2015. The improvement was driven by our ability to quickly edit our assortment and bring in new products. The positive comp is a full 16-point swing from Q2, an extraordinary recovery, which we believe is one of the fastest ever in fashion retailing.

Our fourth quarter financial performance for Chico's and White House Black Market was fueled by our disciplined focus on delivering our strategic priorities. We worked quickly to make significant changes to nearly 50% of the fall assortment.

This came in the form of major changes to the pipeline of goods and sizable cancellations that the team were stellar at executing to drive positive results. We invested in elevating the quality, taste and styling of our new products, and it's resonating with customers.

We got behind items in a major way from both an inventory and marketing perspective. The trajectory change in both Chico's and White House Black Market validates we're on the right path. And, today, I'm pleased to have Molly Langenstein, President of our Apparel Group on the call with us to elaborate on how she is driving the impressive performance for both Chico's and White House Black Market.

Soma's incredible growth continued in the fourth quarter under Intimates President, Mary van Praag, and all categories drove outstanding results, delivering a comparable sales growth of 9.4%. This was the sixth consecutive quarter of positive comp growth for Soma on top of a strong 6.2% increase last year in fourth quarter comp sales.

We realized the opportunity to grow Soma exponentially early in 2019 and moved quickly to increase investments in inventory and marketing for the brand. This momentum is supported by our focus on creating a continuous pipeline of innovative and solution-oriented products, which are key for customer acquisition and retention. Our sleep business had a strong double-digit comp in a record-setting Q4.

Earlier this week, we announced an extension to Soma's Vanishing 360 franchise with new styles and extended sizes. This launch and others will continue to increase sales through innovation. As well we have a significant growth plan for Soma, supported by increased investments in the store footprint in 2020 and in digital, both for acquisition and new customers.

For Chico's FAS Q4 was also a very strong quarter for digital sales. Our company-wide online penetration had double-digit growth as more customers shopped seamlessly and conveniently, however, wherever and whenever they want. Style Connect, our proprietary digital styling tool has exceeded our goal of deepening our personal connection with our customers in our boutiques and in digital. Notably in the quarter, all 3 brands had record high mobile traffic.

Additionally, in the back half of the year, the team reduced click to delivery time, and enhanced shipping and product tracking information, which improved customer experience. We also set new records to online order fulfillment performance at our distribution centers during the peak holiday period. We've implemented digital improvements, including a digital shoppable catalog, improved search engine optimization, and better site navigation.

Lastly, BOPIS and mobile POS were fully operational across all banners in Q4, and for 2020, we have invested in a significantly platform and are transforming the sourcing and supply chain operations to increase overall efficiency. Our sourcing group continues to focus on reducing our overall China penetration and diversifying our country of origin mix.

I'd like to comment on the impact of COVID-19, specifically to our business. We are very closely monitoring and measuring the situation and 3 things are working in our favor. First, fortunately for us, our total penetration of China goods has been reduced from the high 40% last year in this time period, to the low 20% range this year. So any slowdown in summer delivery will impact a much lower percent of our total inventory.

Secondly, we have fully accounted for all of our Q1 products and at this time expect minimal to low impact from the virus on Q1 delivery. Third, we do have time to implement mitigation strategies, should they be needed going forward, to move some production to other countries. The movement of goods out of China will also positively offset the impact of the tariffs.

When I joined the business at the end of Q1, I stated then that we would strengthen our team with seasoned apparel merchants who had demonstrated a proven track record in our specific product categories. I'm pleased to report that major progress has been made against that initiative in the last 9 months, with 12 new members added to the overall company leadership in significant senior role, not only in merchandising and design, but also in digital and marketing. These executives with impressive and directly related experience, further enhance and reinforce the bench strength right across the company in all 3 brands.

We also have implemented new disciplines to the financial planning, forecasting and tracking of all components of inventory and sales to ensure we not only meet, but exceed our goals. Along with these, we have focused our effort on the proper market positioning for each brand, and the closer alignment of the brand DNA to the customer. We are a company of 3 unique brands, each with specific and unique DNA, each with compelling competitive advantages and each operating in its own white space.

The market share we lost in recent years in apparel was directly related to the products not being precisely aligned to the target customer. And the experts we now have on the teams have already begun to apply their knowledge, their familiarity and competence in aligning the products with the exact target customer.

We are on a terrific path forward and expect the improvements and new disciplines in our business to continue to reap benefits in 2020 and beyond, as we work diligently to return Chico's FAS to the strong past performance track -- performance track record. It is certainly capable of delivering in the future.

I'd now like to turn this morning's call over to Molly Langenstein to discuss the Chico's and White House Black Market brands in more detail.

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [4]

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Thanks, Bonnie. I'm delighted to speak with you this morning about the strong results at Chico's and White House Black Market and the great momentum we are seeing in both brands. Chico's had a remarkable 450 basis point improvement from Q3 to Q4 and White House Black Market had a 580 basis point improvement from Q3 to Q4. The rigor and discipline that was put in place is working.

The challenges we experienced at Chico's and White House Black Market were related the fundamental disciplines that can be and are being fixed. We identified our talent gaps and made swift changes in the organization, which streamlines decision making. The new and existing leadership teams across both brands have multiple years of experience in multi-brand management which brought rigor and focus to driving every detail in the business.

We addressed our assortment architecture, editing process and category investments. We have built a more robust forecasting process to more accurately forecast and identify risks and opportunities. We also have established a fashion matrix to drive change in our product. Our disciplined approach is delivering results. We are continuing to make progress, and I'm excited to share the highlights for our fourth quarter.

At Chico's we made great strides in our assortment and we had big wins as a result of improvements in quality, design and newness. The teams quickly reassorted our fashion product and also we worked our marketing plan to highlight the renewed aesthetics and value our customers love and expects from us.

We were able to cancel product in the pipeline and reinvest more deeply in key items, while promoting -- excuse me, while protecting a balanced assortment between basics and fashion. We were more successful this year with gifting. Our customers are reacting positively to our assortment changes and elevated product aesthetic, evidenced by both our higher average unit retail and increased units per transaction.

At White House Black Market, we have returned to the core DNA of the brand, which is centered on a versatile black and white framework. Aligning our merchandising and design functions was key to getting our product right, and the 580 basis point comp improvement was driven by the work our team has done to quickly edit our assortment and bring in new products. Similar to Chico's, we cancelled orders during the quarter and capitalized on opportunities with key items. During the holiday season, we highlighted self-gifting and featured categories that appeal to our customers. We also used extensive data which inform new assortments and flow of inventory.

With regards to marketing activity, at Chico's we followed a promotional cadence similar for holiday in the prior year, but we saw better full-priced performance as customers responded more positively to our new offerings. Our focus was on architecting a unique and beautiful boutique assortment, and we built a promotional strategy around our elevated styles.

At White House Black Market, we have engaged in more editorial marketing, and our holiday performance was strong. We made changes to our store window strategy and interior visual presentation to drive additional traffic. We also cleared aged inventory which better showcased our new assortments and improved the shopping experience for our customers.

Recently, we met with our top Chico's and White House Black Market customers and built a product and end-use assortment architecture that is similar to what I have used in my past. This, along with our Q4 learnings, will inform our go-forward strategy and put the customer at the center of our decisions. I am pleased with how our teams are working collaboratively and holding each other accountable. I am confident that the breadth and depth of the new disciplines in the organization will continue the momentum into 2020.

I'll now pass it to David Oliver to discuss the financial.

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David M. Oliver, Chico's FAS, Inc. - Interim CFO, Interim Principal Financial Officer, CAO & Controller [5]

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Thanks, Molly, and good morning, everyone. Our comments and discussion today of fourth quarter and fiscal 2019 results are on an adjusted or non-GAAP basis. A GAAP to non-GAAP reconciliation schedule is included with our press release issued this morning.

We reported fourth quarter comparable sales up 2.2%, which is above the updated outlook we provided in January. We delivered our first all brand positive comp since the fourth quarter of fiscal 2014. The sequential improvement in comparable sales was driven by strong performance in our stores across all 3 of our brands and continued growth in our e-commerce business. For the full year, our e-commerce penetration grew double digits when compared to last year. We believe our ongoing investments in our digital capabilities will continue to feel healthy growth in this channel.

We reported fourth quarter adjusted net loss per share of $0.03, which excludes the impact of accelerated depreciation charges related to our retail fleet optimization plan.

Merchandising margin in the quarter was down 100 basis points, primarily due to a full quarter impact of tariffs, approximately $5 million. We exited the year clean and current on inventory. Total inventory was up 4.9% compared to last year, primarily due to planned investments in Soma to create and test additional assortment strategies. Notably, gross margin for the quarter was up 50 basis points.

Fourth quarter SG&A was down $4 million or 80 basis points compared to last year. On a full year basis, SG&A was down $6 million, primarily due to decrease in employee cost, partially offset by investments in marketing. Our balance sheet remains strong and we ended the quarter with $128 million in cash and short term investments, and $43 million in debt. In fiscal 2019, net cash from operating activities approximated property and equipment purchases. This resulted in net zero free cash flow for the year.

In 2019, we continue to focus our capital and cloud-based expenditures on investments in technology and existing store remodels and refreshes. Capital and capitalized cloud-based expenditures totaled $45 million.

As part of our retail fleet optimization plan in the fourth quarter, we opened 2 new stores and closed a total of 34. For the full year 2019, we opened 6 new stores and closed a total of 83. Since the announcement of the retail fleet optimization program, we have closed 94 stores. In fiscal '20, we expect to close 60 to 70 stores, and due to significant improvement in our sales trends, we are reevaluating every closure decision. We also plan to invest in opening as many as 10 new Soma stores in 2020.

In the fourth quarter, we returned approximately $10 million to shareholders in the form of dividends. As announced earlier today, we are pleased to report the company declared a 3% increase in our quarterly cash dividend. This represents our sixth consecutive 3% increase in the dividend.

Turning now to our financial outlook for the first quarter and full year fiscal 2020. Our outlook excludes any potential impact from COVID-19, otherwise known as the coronavirus. In addition, we expect tariff headwinds for the year to be largely offset by our sourcing initiatives.

For the first quarter of fiscal '20 compared to last year's first quarter, we expect a low single-digit increase in total net sales and consolidated comparable sales, reflecting continued progress and momentum in the business.

Gross Margin, as a percent of net sales, up 20 to 40 basis points, due primarily to strategic reductions and promotional depth as well as leverage over fixed cost on higher sales. SG&A will be approximately flat.

Now for the full year fiscal 2020 outlook compared to last year, we expect a pattern similar to Q1, a low single-digit increase in total net sales and consolidated comparable sales. Gross margin as a percent of net sales increasing approximately 50 to 100 basis points.

SG&A to be approximately $10 million, reflecting increased investment in marketing and a return to target incentive compensation levels, partially offset by ongoing cost management. A fiscal 2020 tax expense in the range of $3 million to $5 million and capital and cloud-based expenditure of approximately $45 million to $50 million, primarily driven by technology enhancement and targeted reinvestments in stores.

Please note, that accelerated depreciation related to our retail fleet optimization will not be reflected as a GAAP to non-GAAP adjustment in fiscal '20 based on the declining significance of this charge.

I'll now turn the call back over to Anita.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Susan Anderson with B. Riley FBR.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [2]

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I guess, looking at the gross margin for this year and then the impact of China sourcing, it's amazing you're able to get it down to 20%. I guess, I'm kind of curious, can you quantify the impact and will that mainly be in the first half and does that become a tailwind in the second half given the decline in penetration?

And then, Molly, maybe if you could talk about the new products that customers are responding well to at Chico's and White House, and maybe talk about which products and designs they're really resonating with. And then, I guess, from an inventory perspective, what percent for spring do you feel will be old inventory -- I guess, older designs versus new designs?

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David M. Oliver, Chico's FAS, Inc. - Interim CFO, Interim Principal Financial Officer, CAO & Controller [3]

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Thanks, Susan. I'll take the first half of that question and then defer to Bonnie for the second. With respect to your tailwind question specifically, the -- our efforts underway to diversify country of origin really is mitigating the impact of the tariffs. So I'm not looking for a major win in that respect. All the supply chain initiatives as a whole are all about the mitigation of the tariff as it currently exists, and so I don't see that being a tailwind moving forward beyond that. With that I'll let Bonnie take the second half.

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [4]

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I think actually the second half of the question was for Molly. Because it was -- hi, Susan, by the way, thank you and thanks for your comments. I think your question was what product is resonating with customers at White House and Chico's. So I think I -- it's best to let Molly answer that. Thanks.

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [5]

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Thank you, Susan. Our customer data has informed our product mix between work and casual for the White House brand and also the wearing occasions by the Chico brand. We are aligned to that and by design we have balanced our fashion and basics to ensure we have excitement in all stores as well as giving the customer the special items that she wants. As we said, we shared -- we used extensive data to be able to inform these decisions and those have informed the design decisions for spring and go forward. We have a new fashion discipline and have brought in fashion talent with proven track records in designing and merchandizing.

As related to your question about old versus new designs, as we shared, we came into the season clean and we feel that the impact on the new designs is very good for spring and gets better every single month as we move through the year.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [6]

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Well, the palette looks improved that both.

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [7]

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Thank you, Susan.

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Operator [8]

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Your next question comes from Kimberley Greenberger with Morgan Stanley.

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Cynthia Mary Campo, Morgan Stanley, Research Division - Research Associate [9]

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This is Cynthia Campo on for Kimberley Greenberger. We're wondering if you could talk more about your expectations in 2020 for free cash flow and how you plan to manage the expenses there going forward?

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David M. Oliver, Chico's FAS, Inc. - Interim CFO, Interim Principal Financial Officer, CAO & Controller [10]

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Sure. I think the key element with respect to free cash flow to call out, we expect to return to our targeted level of incentive compensation, which tells you that we're going to be a lot better in that respect. I mean, our free cash flow as a whole in 2020 in our plan, would have us returning to more positive territory that would more than cover our capital expenditures as well as our dividend and beyond that. And so we feel really good about the year. Positive comp sales is a wonderful thing and gives you a lot of traction.

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [11]

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David has a long history with our company as well, so he was here for the many good years and he's going to keep us focused on those numbers for sure.

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Operator [12]

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The next question comes from Lorraine Hutchinson with Bank of America.

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Lorraine Corrine Maikis Hutchinson, BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research [13]

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Can you talk a little bit about the $10 million increase in SG&A. Any specific buckets outside of marketing that you're working through? And if we should expect SG&A dollar growth to continue as a run rate in the out year?

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David M. Oliver, Chico's FAS, Inc. - Interim CFO, Interim Principal Financial Officer, CAO & Controller [14]

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With respect to the $10 million, that number reflects both the increase in incentive compensation returning to target levels and marketing. We do have cost initiatives that are mitigating part of total spend for incentive comp and marketing and so we feel really good about it.

With respect to the marketing cost, that's pretty spread evenly over the year as a whole. But going beyond, I don't have any color on the outer years at this point in time. That's a future conversation. But the $10 million is really focused on the fact that the business is expected to do better and we're investing in the business marketing.

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Lorraine Corrine Maikis Hutchinson, BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research [15]

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And then just a follow-up. The elevated levels of CapEx, I know you mentioned some investments in the cloud. Is any of that going to stores or will most of that be related to your digital strategy?

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David M. Oliver, Chico's FAS, Inc. - Interim CFO, Interim Principal Financial Officer, CAO & Controller [16]

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And so now we are investing in our store base, as well as technology. The $45 million is really consistent with our historical level. What really occurred here is, instead of having on premise installations of software, we're putting in the cloud. It goes into a different bucket on the balance sheet. So we talk about it holistically -- the total spend. And so that -- the $45 million that we spent in '19 is really fairly consistent with what we have done historically in the last few years, and what we plan as well for the fiscal '20.

But, you know, we're focused on investing. We're looking at -- in the summer brands, we're looking at 10 new markets, potentially, for stores. And we're doing our refreshes. We have required remodels that we do on a regular basis in our fleet as part of the lease. And I think we feel really good about where we stand on capital.

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Operator [17]

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The next question comes from Roxanne Meyer with MKM Partners.

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Roxanne Felice Meyer, MKM Partners LLC, Research Division - MD & Senior Research Analyst for Specialty Retail [18]

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My question is on Soma. Just -- obviously, the results there have been spectacular and I'm just wondering how you think about the long term potential for Soma's market share perceptive and just contribution to FAS operating results overall longer term.

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [19]

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Well, thank you for your comments. Yes, Soma has had a truly spectacular run in 2019. A lot of things contributing to that success. Most importantly, the innovative team they have and the products that they're creating that is absolutely solution-based. The launch they've had this -- earlier this week of Vanishing 360 has a fantastic tagline. It starts out with, "We've got your back, and your sides and your fronts." It's a truly amazing product that's resonating with customers and, you know, that's really a major part of the Soma's success. Along with the innovation pipeline is further intensification of products in the stores and testing of products in the stores and not on the additional inventory level that we were talking about.

Soma is planned to open 10 new stores this year. There is huge runway ahead for growth in Soma, because we are still extremely underpenetrated in footprints across the country, and we also have a lot of other opportunities in front of us for additional distribution. So I would say that we are extremely excited about the Soma potential and that's why we have been investing in the marketing, the stores and the inventory. And it has really one of the top teams in the industry.

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Roxanne Felice Meyer, MKM Partners LLC, Research Division - MD & Senior Research Analyst for Specialty Retail [20]

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And I guess just as a follow-up, I know that you've never necessarily broken out the margins of your different businesses, but just trying to appreciate how impactful the continued success that Soma can have on the total organization? How meaningful can it be to Chico's?

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [21]

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Well, it's been meaningful this year, clearly, in terms of 2019. And we've done a lot of work actually with BCG, et cetera, who came in and thoroughly analyzed the market and our own opportunities within the market. I mean, we do believe that we still have more growth in the categories, because we are still underpenetrated in certain categories of Intimates, and so we have a lot of potential there. We are riding a wave that is the opposite of some of our competitors in terms of being modern and being solution-based. So we are really feeling very strong about the opportunity. And, yes, Soma is making a major contribution to the total company. Thank you.

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Operator [22]

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The next question comes from Janet Kloppenberg with JJK Research.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [23]

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I had a couple of questions. I know that the gross margin outlook is being somewhat inhibited by the tariff pressures, but you had a much larger rate of improvement in the fourth quarter. So I was wondering if you could help us understand why there couldn't be further upside beyond that -- beyond what you are guiding to for the first quarter and for fiscal '20, especially with inventories being lean?

Also, I was wondering if [Maggie] or Bonnie could talk about the spring -- the February trends and if they continue to resonate? And specifically about inventory investments at Chico's and White House Black Market, do you have enough of the right products? Are your inventories aligned with demand trends? That would be really important for us to understand.

And as we go forward, perhaps you could tell us whether the reconfiguration of the assortments are completely worked out or if that will take quarter-by-quarter, and when you think they'll reflect the vision of the merchandising team? And just lastly, if we could get an idea of tax rate by the quarter?

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David M. Oliver, Chico's FAS, Inc. - Interim CFO, Interim Principal Financial Officer, CAO & Controller [24]

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I'll take the first and the last and have Molly respond to the middle question there. Specifically, with respect to gross margin expansion and in the fourth quarter what you're saying as whole. As we did call out, we did have a headwind with tariffs in the fourth quarter on maintaining margin roughly 100 bps. But in addition to that, we did have wins by leveraging ourselves. As you know, we closed 83 stores last year -- some of our underperforming stores. And so that did deliver some gross margin improvement overall. The work that we're doing in supply chain logistics to -- on country of origin is offsetting the tariffs and we're going to continue to run in that space and, ultimately, I think they pay dividends long term.

I would also call out that we are getting better product acceptance, which is resulting in better full-priced selling, less discounting overall. Speaking to the tax rate, we did call out $3 million to $5 million. We will have a higher rate in the first quarter, really driven by our incentive compensation limitations under the tax code. But, otherwise, the -- in terms of the rate, it's going to be fairly consistent the balance of the year.

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [25]

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Molly?

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [26]

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Janet, in regards to the inventory investments aligned to trends, as you know in our business that is a constant juggle to make sure that we are chasing the needs of the customers. We were pleased with the results of the customers' reaction to our inventory, and how she positively reacted to the new offerings in fourth quarter and we're seeing the same in the month of February.

As we move forward, and we reconfigure the assortments to reflect the vision, that is, we feel really positive about the changes that we've made and the information that we got from our top customers to inform that we are on the right track. So we are really pleased and confident about the 2020 year.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [27]

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And do you think that the inventory investments right now are where they should be or is that a gradual refinement process?

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [28]

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It's a gradual refinement process and the good thing is that we came into the year clean.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [29]

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And do you think that the back half assortments will be where they should be or do you think you'll get there sooner, Molly?

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [30]

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We believe that there is progress being made every month on the information that we have from our extensive customer data and we are pleased with the way that she is reacting, not only in fourth quarter, but how she's reacting today. So we're on a...

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [31]

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And I could squeeze in -- can I squeeze in one more just on the -- I know [AUL] will benefit from lower clearance and markdowns. But I was just wondering about the mix of price points, if you saw them remaining flat, moving higher or if your opening price points have modified somewhat?

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [32]

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We believe that we will be moving higher. We expect continued progress in our AUR, mostly with the benefit of the better product acceptance and more strategic promotional decisions. There will be some mix impact as the customer response to our fashion offering.

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Operator [33]

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The next question comes from Paul Trussell with Deutsche Bank.

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Gabriella Olivia Carbone, Deutsche Bank AG, Research Division - Research Associate [34]

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This is Gabby Carbone on for Paul. So you've been successful recently with your promotion reductions. Maybe if you could just discuss bigger picture on how you view the promotional environment, and if you think anything has changed over the last few quarters?

And then I know you don't usually comment separately on the outlets but just curious if you're seeing anything different in that channel versus the full line stores.

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [35]

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Thank you so much, Gabriella. It's Molly. Regarding the promotional cadence. We are being very strategic with our promotional cadence and testing into strategies and pulling back where the product allows us to pull back. We are confident that our focus on architecting a unique, beautiful boutique assortment, and building new promotional strategies will result in AUR expansion across all of our brands. As it relates to outlet or outlet business remains a small part of our portfolio and it continues to perform to our expectations.

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Gabriella Olivia Carbone, Deutsche Bank AG, Research Division - Research Associate [36]

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On the marketing investments, could you maybe discuss redirecting those dollars, maybe versus what you have done historically?

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [37]

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Hi, Gabriella. I'll take that one. It's Bonnie. One of the things that we have been doing over the last year probably more intensely is shifting marketing spend to digital. And the comp growth that we've had in digital, as we said, was double digit this year. So we know that that is paying off. And I think the most important things that we understand about our customers is that the majority of their shopping begins online. It may not end online, but the process definitely begins online. And our marketing works that has been the most well received and the changes that we've made that have been the best received are particularly evident, I would say, in Chico's were the marketing, if you saw it in the fourth quarter, was very editorial. I urge you to take a look at it now online if you haven't seen it, because it's really stand out marketing. And I would think it's fair to say that that's the direction that we're moving towards. The Soma brand marketing has also been exceptional. And so we are having some fantastic results based on new marketing strategies.

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Operator [38]

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The next question comes from Manny Shapiro (sic) [Marni Shapiro] with Retail Tracker.

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Marni Shapiro, The Retail Tracker - Co-Founder [39]

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I have a technology question for you. You have a very engaged digital consumer. And it sounds like in all your commentary that your e-commerce, your online sales, digital continue to grow at a rapid clip. And years ago Chico's was one of the first to kind of roll out the in-store apps for their sales associates. So I'm curious what you guys are thinking next steps POS and BOPIS and things like that for your consumer. And could you talk a little bit about apps and linking loyalty programs into apps and things like that the Chico's consumer?

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [40]

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Sure. The tool that we have -- that the proprietary tool that was developed a couple of years ago --- well, over the last few years, and has been rolled out across all the brand is called Style Connect. And it is a tool that has had incredible response and is really taking our most amazing personnel service and moving it through a digital platform.

There are new steps in the pipeline for that program that we can't share right now. But it continues to evolve. And the actual rollout of Style Connect that was completed by the end of Q3 was really fully implemented across the business and Q4 has beat our expectations. So we do believe that the team's work is over performing and we're very excited about some of the new developments that are coming down the pipeline.

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Marni Shapiro, The Retail Tracker - Co-Founder [41]

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And are you going to roll out an app for the customers? Because I suppose you don't have an app yet, right?

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [42]

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Well, we'll share that -- I will share all of that with you next time.

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Operator [43]

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The next question comes from Dana Telsey with Telsey Advisory Group.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [44]

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Can you unpack a little bit more about the merchandize margin, what the components were and how you're thinking about that going forward given the improvements that you're seeing in brand reception and what looks to be some full-priced sell-through?

And secondly, can you touch on the real estate state aspect of the business, not only openings and closings little bit more, but inside the store, any changes do you experienced given the heavy loyalty component you have to your customer?

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David M. Oliver, Chico's FAS, Inc. - Interim CFO, Interim Principal Financial Officer, CAO & Controller [45]

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I'll take the first half of that question with respect to margin. In terms of where we're going to have the wins, that's really going to be split fairly evenly between maintain margin and other. As you know, costs or occupancy cost is a component of the other. But, as we -- on the maintain side, as we have better product acceptance, you're going to achieve basis points improvement on the maintain side, and as we increase the sales, we're going to get leverage on the occupancy cost. And we're also with growth in digital you're going to get -- you're going to have leverage on your omnichannel cost where we've invested there as well.

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [46]

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In regards in the store, Dana, we have a huge customer loyalty in both of the apparel brands. And evidenced by the acceptance in Q4 and the sales recovery, she is responding to our assortments and to our associates that we have in our store.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [47]

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Any other factoids on the loyalty program, number of loyalty members or increase in response given the newest assortments that since you've been there, Molly?

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Molly Langenstein, Chico's FAS, Inc. - President of Apparel Group [48]

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You know, our customer is fiercely loyal and responds quickly and positively when we deliver the products she wants. This quarter we affirmed that for us, we saw our file and our health of our file improve. Thanks, Dana.

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Operator [49]

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This concludes our question and answer sessions. I would now like to turn the call back over to Bonnie for any closing comments.

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Bonnie R. Brooks, Chico's FAS, Inc. - President, CEO & Director [50]

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Thank you very much, Anita. In conclusion, we continue to execute on our 3 strategic priorities and now have a strong team and a solid foundation in place to drive growth. I remain very confident in our business, in our market position, and in our opportunity to gain market share. I firmly believe we will deliver long term increased value for all of our shareholders.

Thank you all very much for participating in today's call and for your kind words on our business. Thanks very much.

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Operator [51]

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This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.