<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT
For the Quarter Ended: Commission File Number:
May 1, 1999 0-21258
CHICO'S FAS, INC.
(Exact name of registrant as specified in charter)
Florida 59-2389435
(State of Incorporation) (I.R.S. Employer Identification No.)
11215 Metro Parkway, Fort Myers, Florida 33912
(Address of principal executive offices)
941-277-6200
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
At June 4, 1999, there were 8,446,016 shares outstanding of Common Stock, $.01
par value per share.
<PAGE> 2
CHICO'S FAS, INC.
Index
PART I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited): Page
----
<S> <C>
Condensed Balance Sheets - May 1, 1999 and January 30, 1999...............................................3
Condensed Statements of Income for the Thirteen Weeks Ended
May 1, 1999 and May 2, 1998..........................................................................4
Condensed Statements of Cash Flows for the Thirteen Weeks Ended
May 1, 1999 and May 2, 1998..........................................................................5
Notes to Condensed Financial Statements...................................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................7
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K................................................................10
Signatures ................................................................................................10
</TABLE>
<PAGE> 3
CHICO'S FAS, INC.
CONDENSED BALANCE SHEET
[UNAUDITED]
<TABLE>
<CAPTION>
AS OF AS OF
5/1/99 1/30/99
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,160,058 $ 14,484,776
Receivables, net 1,588,231 1,149,078
Inventories 9,979,822 10,105,153
Prepaid expenses 652,600 510,885
Deferred taxes 1,651,000 1,586,000
------------ ------------
Total Current Assets 35,031,711 27,835,892
------------ ------------
LAND, BUILDING AND EQUIPMENT:
Cost 30,022,204 27,667,014
Less accumulated depreciation and amortization (8,360,065) (8,001,753)
------------ ------------
Land, Building and Equipment, Net 21,662,139 19,665,261
------------ ------------
OTHER ASSETS:
Deferred taxes 823,000 812,000
Other assets,net 681,789 686,923
------------ ------------
Total Other Assets 1,504,789 1,498,923
------------ ------------
$ 58,198,639 $ 49,000,076
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,031,617 $ 3,995,123
Accrued liabilities 6,297,339 3,679,355
Current portion of noncurrent liabilities 289,443 309,520
------------ ------------
Total Current Liabilities 12,618,399 7,983,998
------------ ------------
NONCURRENT LIABILITIES:
Notes & capital leases payable 5,275,501 5,293,500
Deferred rent 1,483,523 1,419,545
------------ ------------
Total Noncurrent Liabilities 6,759,024 6,713,045
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 84,160 83,930
Additional paid-in capital 12,225,429 11,923,930
Retained earnings 26,511,627 22,295,173
------------ ------------
Total Stockholders' Equity 38,821,216 34,303,033
------------ ------------
$ 58,198,639 $ 49,000,076
============ ============
</TABLE>
See Accompanying Notes
Page 3
<PAGE> 4
CHICO'S FAS, INC.
CONDENSED STATEMENTS OF INCOME
[UNAUDITED]
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
5/1/99 5/2/98
------------ ------------
<S> <C> <C>
Net sales by Company stores $ 35,721,300 $ 25,518,852
Net sales to Franchisees 703,681 377,056
------------ ------------
NET SALES 36,424,981 25,895,908
Cost of goods sold 14,900,623 10,769,153
------------ ------------
GROSS PROFIT 21,524,358 15,126,755
General, administrative and
store operating expenses 14,724,977 11,166,931
------------ ------------
INCOME FROM OPERATIONS 6,799,381 3,959,824
Interest income (expense), net 2,072 (79,319)
------------ ------------
INCOME BEFORE TAXES 6,801,453 3,880,505
Income tax provision 2,585,000 1,552,000
------------ ------------
NET INCOME $ 4,216,453 $ 2,328,505
============ ============
PER SHARE DATA:
Net income per common share - basic $ 0.50 $ 0.29
============ ============
Net income per common and common
equivalent share-diluted $ 0.48 $ 0.28
============ ============
Weighted average common shares
outstanding-basic 8,404,852 8,012,041
============ ============
Weighted average common and common
equivalent shares outstanding-diluted 8,775,024 8,244,063
============ ============
</TABLE>
See Accompanying Notes
Page 4
<PAGE> 5
CHICO'S FAS, INC.
CONDENSED STATEMENT OF CASH FLOWS
[UNAUDITED]
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
CASH FLOWS FROM OPERATING ACTIVITIES: 5/1/99 5/2/98
------------ ------------
<S> <C> <C>
Net Income $ 4,216,453 $ 2,328,505
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 683,960 546,045
Deferred taxes (76,000) (274,000)
Loss on disposal of property and equipment 90,928 5,685
Increase in deferred rent 63,978 81,866
Changes in assets and liabilities:
(Increase) decrease in receivables (439,153) 598,153
Decrease in inventories 125,331 2,388,566
(Increase) decrease in prepaids and other assets (179,576) 138,614
Increase (decrease) in accounts payable 2,036,494 (704,917)
Increase in accrued liabilities 2,617,984 2,625,495
------------ ------------
Total adjustments 4,923,946 5,405,507
------------ ------------
Net cash provided by operating activities 9,140,399 7,734,012
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of certificate of deposit -- 1,000,000
Purchase of land, buildings and equipment (2,728,770) (782,363)
------------ ------------
Net cash (used in) provided by investing activities (2,728,770) 217,637
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 301,729 7,868
Principal payments on debt (38,076) (36,744)
Deferred finance costs -- (198,000)
------------ ------------
Net cash provided by (used in) financing activities 263,653 (226,876)
------------ ------------
Net increase in cash and cash equivalents 6,675,282 7,724,773
CASH AND CASH EQUIVALENT-BEGINNING OF PERIOD 14,484,776 2,943,916
------------ ------------
CASH AND CASH EQUIVALENT-END OF PERIOD $ 21,160,058 $ 10,668,689
============ ============
</TABLE>
See Accompanying Notes
Page 5
<PAGE> 6
CHICO'S FAS, INC.
Notes to Condensed Financial Statements
May 1, 1999
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Chico's
FAS, Inc. and subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and do not include all of
the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. For
further information, refer to the financial statements and notes
thereto for the year ended January 30, 1999, included in the Company's
Annual Report on Form 10-K filed on April 28, 1999. The January 30,
1999 balance sheet amounts were derived from audited financial
statements included in the Company's Annual Report.
Operating results for the thirteen weeks ended May 1, 1999 are not
necessarily indicative of the results that may be expected for the
entire fiscal year.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
SFAS 128, which became effective in fiscal 1998, requires dual
presentation of basic and diluted earnings per share (EPS) on the face
of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS is based upon the
weighted average number of common shares outstanding and diluted EPS is
based upon the weighted average number of common shares outstanding
plus the dilutive common equivalent shares outstanding during the
period. The following is a reconciliation of the denominators of the
basic and diluted EPS computations shown on the face of the
accompanying statements of income:
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN
WEEKS WEEKS
ENDED ENDED
5/1/99 5/2/98
--------- ---------
<S> <C> <C>
Basic weighted average number of common shares 8,404,852 8,012,041
Dilutive effect of options outstanding 370,172 232,022
--------- ---------
Diluted weighted average common and common
equivalent shares outstanding 8,775,024 8,244,063
========= =========
</TABLE>
Page 6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED MAY 1, 1999 COMPARED TO THE
THIRTEEN WEEKS ENDED MAY 2, 1998.
NET SALES. Net sales by Company-owned stores for the thirteen weeks ended
May 1, 1999 (the current period) increased by $10.2 million, or 40.0%, over net
sales by Company-owned stores for the comparable thirteen weeks ended May 2,
1998 (the prior period). The increase was the result of a comparable Company
store net sales increase of $5.6 million and $4.6 million additional sales from
the new (or reacquired) stores not yet included in the Company's comparable
store base (net of sales of approximately $665,000 from four stores closed in
fiscal 1999 and fiscal 2000).
Net sales to franchisees for the current period increased by approximately
$327,000, or 86.6% compared to net sales to franchisees for the prior period.
The increase in net sales to franchisees is primarily due to the opening of two
additional franchised locations (one each in fiscal 1999 and fiscal 2000) by an
existing franchisee.
GROSS PROFIT. Gross profit for the current period was $21.5 million, or
59.1% of net sales, compared with $15.1 million, or 58.4% of net sales, for the
prior period. The increase in the gross profit percentage primarily resulted
from leverage associated with the Company's 22.6% comparable store sales
increase for the quarter. To a lesser degree, this increase was caused by lower
freight costs resulting from the use of a lower-cost carrier for air freight
shipments to stores.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General,
administrative and store operating expenses for the current period were $14.7
million, or 40.4% of net sales, compared with $11.2 million, or 43.1% of net
sales, for the prior period. The increase in general, administrative and store
operating expenses was, for the most part, the result of increases in store
operating expenses, including store compensation, occupancy and other costs
associated with additional store openings. The decrease in these expenses as a
percentage of net sales was principally due to direct store costs, including
store compensation, which decreased by 2.0% of net sales due to leverage
associated with the 22.6% comparable Company store sales increase for the
quarter. To a lesser degree this decrease in expenses as a percentage of sales
was due to leverage on the Company's non-store selling, general and
administrative expenses, net of an increase in marketing expenses as a
percentage of net sales.
INTEREST INCOME NET. The Company had net interest income during the current
period of approximately $2,000 versus net interest expense of approximately
$79,000 in the prior period. The improvement to net interest income from net
interest expense was primarily a result of increased interest earnings during
the current period resulting from the Company's increased cash position.
NET INCOME. As a result of the factors discussed above, net income reflects
an increase of 81.1% to $4.2 million in the current period from net income of
$2.3 million in the prior period. The income tax provision represented an
effective rate of 38% for the current period and 40% in the prior period. The
decrease in the income tax rate is attributable to a decrease in the state
income tax rate associated with restructuring of the Company's subsidiaries, net
of a Federal income tax increase due to higher earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing capital requirements are for funding capital
expenditures related to new store openings and merchandise inventory purchases.
In addition, over the next 18 months, the Company anticipates experiencing the
need for capital to address expansions of its office and design facility at its
headquarters facilities.
During the current and prior periods, the Company's primary source of working
capital was cash flow from operations of $9.1 million and $7.7 million,
respectively. The increase in cash flow from operations of $1.4 million was
primarily due to an increase in net income to $4.2 million in the current period
from $2.3 million in the prior period and an increase in
Page 7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES (continued)
accounts payable of $2.0 million in the current period versus a decrease of
approximately $705,000 in the prior period. These increases in cash flow from
operations were offset by a decrease in inventories of approximately $125,000 in
the current period, versus a decrease of $2.4 million in the prior period and an
increase in receivables (net) of approximately $439,000 in the current period,
versus a decrease of approximately $599,000 in the prior period. The increase in
accounts payable is associated with increased fabric purchases (which generally
have an extended payment due date) and other required increased purchase
activities to support the Company's significant sales increases. The increase in
receivables (net) is due to the two additional franchises opened in fiscal 2000
and 1999 and additional tenant improvement reimbursements due to the increase in
the Company's store opening program.
The Company invested $2.7 million in the current period for capital expenditures
primarily associated with the opening of eight new company stores, and the
remodeling of several existing stores. Since the Company is now seeking stores
in the 1800 net selling square foot range (versus 1325 average net selling
square foot currently) and the Company is incorporating more sophisticated store
fronts and fixtures, its average cost of leasehold improvements and fixtures for
new stores has generally increased. It is anticipated these higher costs for
initial stores will continue as the Company refines its newer store
presentation. During the prior period, the Company invested approximately
$782,000 for capital expenditures associated with the opening of four new (or
reacquired) company stores, and the remodeling of several existing stores.
During the current period, one of the Company's officers exercised 15,666 stock
options at prices ranging from $3.25 to $8.75 and several employees exercised
7,315 options at prices ranging from $3.25 to $9.25. The proceeds from these
option exercises, including the tax benefit recognized by the Company, amounted
to approximately $302,000.
As more fully described in "Item 1-Business" appearing on pages 1 through 16 of
the Company's Annual Report on Form 10-K for the fiscal year ended January 30,
1999, the Company is subject to ongoing risks associated with imports. The
Company's reliance on sourcing from foreign countries causes the Company to be
exposed to certain unique business and political risks. Import restrictions,
including tariffs and quotas, and changes in such tariffs or quotas 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 have an adverse
effect on the Company's business, financial condition and/or results of
operations. The Company's merchandise flow could also be adversely affected by
political instability in any of the countries in which its goods are
manufactured, by significant fluctuations in the value of the U.S. dollar
against applicable foreign currencies and by restrictions on the transfer of
funds.
The Company plans to open at least 35 new stores in fiscal 2000, 11 of which
were open as of June 4, 1999. The Company plans to open at least 40 new stores
in fiscal 2001. The Company is also in the initial planning stage for an
expansion of the office and design facilities at its headquarters site, and is
also exploring planned catalog and Internet sales activities. The Company
believes that the liquidity needed for its planned new store growth, continuing
remodel program, maintenance of proper inventory levels associated with this
growth and expansion of its office and design facilities will be funded
primarily from cash flow from operations and its strong existing cash balances.
The Company further believes that this liquidity will be sufficient, based on
currently planned new store openings, to fund anticipated capital needs over the
near-term, including scheduled debt repayments. Given the Company's strong cash
balances, 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 even 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 Company stores planned to be opened in future
periods.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company has utilized a derivative financial instrument to reduce its
exposure resulting from fluctuations in interest rates. The derivative financial
instrument in effect at May 1, 1999, consisted of an interest rate swap
agreement with a principal amount of $5.4 million at a term of four years. For
the applicable period, the interest rate swap agreement effectively converts the
interest on the outstanding mortgage loan with respect to the Company's
headquarters facility to a fixed effective swap rate of 9%. The Company has
entered into this interest rate swap for non-trading purposes. Risks associated
with the interest rate swap include those associated with changes in the market
value and interest rates. The interest rate swap agreement was entered into with
a major financial institution with the goal of minimizing the risk of credit
loss. Accordingly, management considers the potential for loss in future
earnings and cash flows attributable to the interest rate swap not to be
material. As indicated under the heading of Liquidity and Capital Resources, the
Company is
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS (continued)
currently in a strong cash position. However, in order to utilize a portion of
the available cash to prepay all or any portion of the mortgage loan would
require a simultaneous termination of the interest rate swap. The cost to
terminate the outstanding interest rate swap as of June 4, 1999, was
approximately $49,000. Taking into account the cost to terminate the interest
rate swap, the Company intends to seriously evaluate the advisability of
prepaying all or a portion of the outstanding mortgage loan.
SEASONALITY AND INFLATION
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has had a material
effect on the results of operations during the current or prior periods.
Although sales have recently been somewhat higher in the Company's first and
second fiscal quarters (February through July), the Company does not consider
its business to be seasonal.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This 10-Q may contain forward looking statements which reflect the current views
of the Company with respect to certain events that could have an effect on the
Company's future financial performance. These statements include the words
"expects," "believes," and similar expressions. 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.
These potential risks and uncertainties include ability to secure customer
acceptance of Chico's styles, propriety of inventory mix and sizing, quality of
merchandise received from vendors, timeliness of vendor production and
deliveries, increased competition, extent of the market demand by women for
private label clothing and related accessories, adequacy and perception of
customer service, ability to coordinate product development along with buying
and planning, rate of new store openings, performance of management information
systems, ability to hire, train, energize and retain qualified sales associates
and other employees, availability of quality store sites, ability to hire and
retain qualified managerial employees and other risks. In addition, there are
potential risks and uncertainties that are peculiar to the Company's heavy
reliance on sourcing from foreign vendors including the impact of work
stoppages, transportation delays and other interruptions, political instability,
foreign currency fluctuations, imposition of and changes in tariffs and import
and export controls such as import quotas, changes in governmental policies in
or towards such foreign countries and other similar factors.
YEAR 2000
The Year 2000 issue results from computer programs and electronic circuitry that
do not differentiate between the year 1900 and the year 2000 because they are
written using two, rather than four, digit dates to define the applicable year.
If not corrected, many computer applications and date-sensitive devices could
fail or produce erroneous results when processing dates after December 31, 1999.
The Year 2000 issue affects virtually all companies and organizations including
Chico's.
Chico's employs a number of information technology systems in its operations,
including without limitation, computer networking systems, financial systems and
other similar systems, most of which are licensed from outside vendors, while a
few are internally developed. A number of these systems, including the Company's
merchandising, financial and sales software systems, have recently been upgraded
and thus most of these recently upgraded systems are believed to be Year 2000
compliant. Management has developed and has been pursuing a plan to identify
whether Chico's other information technology systems are Year 2000 compliant and
is in the process of implementing a conversion, modification or upgrade of those
other critical data processing systems which are not already Year 2000
compliant. Management currently expects these activities to be substantially
complete by mid 1999.
Throughout its operations, the Company also employs electronic equipment such as
building security, product handling and other devices containing embedded
electronic circuits. Chico's is continuing with the process of identifying and
prioritizing any embedded technology devices which may be deemed to be mission
critical or that tend to have a more significant impact on normal operations. A
team of internal staff and management that has been identified to manage Chico's
Year 2000 initiative has already been able to secure confirmation that many of
the Company's embedded technology devices which are critical to Chico's overall
operations are Year 2000 compliant. This team is developing a separate plan to
upgrade any other embedded technology devices which are identified as being
mission critical. Management currently expects these activities to be
substantially complete by mid 1999.
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<PAGE> 10
YEAR 2000 (continued)
Costs incurred to date implementing the Year 2000 initiatives amount to less
than $50,000 and management currently expects that the overall cost of
implementing the Year 2000 initiatives relative to information technology
systems and the higher priority embedded technology devices, including internal
costs and costs incurred to date, will not exceed $75,000.
Chico's is also in the process of evaluating and managing the potential risk
posed by the impact of the Year 2000 issue on its major suppliers and vendors.
Formal and informal communications with these major suppliers and vendors have
been initiated, with an expectation and plan to substantially complete an
assessment in this regard by mid 1999. To date, Chico's is not aware of any
major suppliers or vendors who have not either addressed their Year 2000 issues
or provided assurances that such issues are in the process of being timely
addressed. In particular, Chico's key financial institution has confirmed that
it will be Year 2000 compliant on or before December 31, 1999. However it may be
difficult to determine with any certainty whether Chico's suppliers and vendors
will be able to successfully address their respective Year 2000 issues and the
extent to which any failure to do so would negatively impact Chico's operations.
Although Chico's does not believe, based on its current evaluation of these
matters, that the Year 2000 issue will have a significant effect on its overall
operations, Chico's initiatives in this regard are subject to a variety of risks
and uncertainties, some of which are beyond the Company's control. The failure
of Chico's or any of its major suppliers or vendors to achieve Year 2000
readiness could adversely impact the Company's business operations, which could
in turn have an adverse effect on the Company's future financial results.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K: The Company did not file any reports on
Form 8-K during the current period
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 11, 1999 By: /s/ Marvin Gralnick
--------------- --------------------------------------------
Marvin Gralnick
Chief Executive Officer
(Principal Executive Officer)
Date: June 11, 1999 By: /s/ Charles J. Kleman
--------------- --------------------------------------------
Charles J. Kleman
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 21,160,058
<SECURITIES> 0
<RECEIVABLES> 1,588,231
<ALLOWANCES> 0
<INVENTORY> 9,979,822
<CURRENT-ASSETS> 35,031,711
<PP&E> 30,022,204
<DEPRECIATION> 8,360,065
<TOTAL-ASSETS> 58,198,639
<CURRENT-LIABILITIES> 12,618,399
<BONDS> 6,759,024
0
0
<COMMON> 84,160
<OTHER-SE> 38,737,056
<TOTAL-LIABILITY-AND-EQUITY> 58,198,639
<SALES> 35,721,300
<TOTAL-REVENUES> 35,721,300
<CGS> 14,900,623
<TOTAL-COSTS> 14,900,623
<OTHER-EXPENSES> 14,724,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,072)
<INCOME-PRETAX> 6,801,453
<INCOME-TAX> 2,585,000
<INCOME-CONTINUING> 4,216,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,216,453
<EPS-BASIC> .50
<EPS-DILUTED> .48
</TABLE>
