Chico’s FAS Inc (NYSE:CHS) Q4 2022 Earnings Call dated Feb. 28, 2023.
Corporate Participants:
David Oliver — Senior Vice President Finance
Molly Langenstein — Chief Executive Officer and President
Patrick J. Guido — Executive Vice President – Chief Financial Officer
Analysts:
Dana Telsey — Telsey Group — Analyst
Marni Shapiro — The Retail Tracker — Analyst
Presentation:
Operator
Welcome to Chico’s FAS Fourth Quarter and Fiscal-Year End 2022 Conference Call and Webcast. All participants will be in listen-only mode. Please note this call is being recorded. I would now like to turn the call over to Corporate Controller, David Oliver. Mr. Oliver, please go-ahead.
David Oliver — Senior Vice President Finance
Good morning and welcome to the Chico’s FAS Fourth Quarter and Fiscal-Year End 2022 Conference Call and Webcast. For reference, our earnings release can be found on our website at www.chicosfas.com, under press releases on the Investor Relations page. Today’s comments will include forward-looking statements regarding our 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 these statements. Important factors that could cause actual results or events to differ materially from those projected or implied by our forward-looking statements are included in today’s earnings release, our SEC filings and the comments made on this call. We disclaim any obligation to update or revise any information discussed on this call, except as may be otherwise required by law. Certain non-measures may be referenced in today’s call. A GAAP to non-GAAP reconciliation schedule is included in our earnings presentation posted this morning on the Chico’s FAS Investor Relations page.
Now, I’ll turn the call over to our CEO and President, Molly Langenstein.
Molly Langenstein — Chief Executive Officer and President
Thank you David and good morning everyone. We achieved strong results across all key financial metrics in fiscal 2022. We delivered strong store and digital sales growth, meaningful gross margin expansion and solid expense leverage, which produced outstanding operating income, cash-flow and earnings per share. These results demonstrate the power of our three brands and our product performance and reflects our team’s steadfast commitment to our four strategic pillars of being customer-led, product obsessed, digital-first and operationally excellent.
Q4 finished strong; revenue and EPS exceeded the expectations that we provided in early-January after the nine week holiday selling season. Actual fourth quarter sales came in $9 million higher than the high-end of our projected range and EPS exceeded the high-end of our expectations due to strong January performance. Across all three brands, customers responded to new spring product offering, which drove full-price selling in the quarter.
Now, I’ll cover some highlights for the fiscal year. We posted another year of very strong bottom-line results with diluted EPS of $0.88 and nearly 140% increase over last year. This performance was driven by total sales growth of 18% meaningful gross margin expansion and solid expense leverage. We also delivered operating income of $142 million or 6.6% of sales, more than double last year. Our apparel brands continued to deliver exceptional revenue increases with Chico’s posting comparable sales growth of 31% and White House Black Market generated 26% comparable sales gain. Chico’s customers overwhelmingly responded to our elevated product and fashion newness, building complete outfit with solution-oriented products.
White House Black Market customers responded to our versatile dressing, seasonless fabric and product innovation to meet for work from anywhere needs and special occasion wear. According to NPD during the last 12 months, Chico’s and White House Black Market grew 4 times faster than the market average for apparel customers over 45 years of age with household incomes of over $100,000. Soma performance improved throughout the second half of the year, with particular strength in our foundations business.
We continue to innovate and have best-in class bra and panty offerings. Those categories continue to outperform to last year, indicating the overall long-term power and strength of the brand. Customer behavior remained healthy and innovative products, strategic marketing and our re-launched loyalty programs drove more customers to our brands. In fiscal 2022 customer count was up 5%. Spend per customer increased 12% and the average age of new customers continuing to trend younger.
Our lead inventory fueled faster sell-through rates, higher average unit retail and more full-price sales throughout the year for all three brands. Fiscal year end on-hand inventories were down 6% from the prior year. We strengthened our balance sheet, ending the fiscal year with $178 million in cash, after repaying $50 million of debt in 2022. Let me give you a brief update on how each of our strategic pillars drove performance last year. We are customer-led, focused on community engagement and creating extraordinary and memorable customer experiences, forming lasting relationships and increasing customer lifetime value.
The power of our three unique brands is driving growth through three powerful platforms. Creating long-term connection and enabling our customers to interact with us in a seamless manner. Our physical stores, our community centers where our customers experience our product in the most exciting way possible and the knowledge and enthusiasm of our stylists and thought experts drive sales and brand devotion. Digital is often the first impression of our brand and is a community hub for content and a great way to teach, share information and inspire.
Finally, our social styles can expertly connect customers to our brands and drive growth within both of these avenues. Store sales grew by 20% and digital sales grew 16% for the year. Chico’s FAS has a uniquely strong foundation with some of the most loyal and dedicated customers in retail. Our loyalty program, re launched in 2022 are continuing to exceed expectations in customer sentiment and redemption rates. We are strengthening our already-strong customer relationships and adding new customers through these elevated programs. We are product obsessed, focused on delivering best-in class merchandise to our Chico’s White House Black Market and Soma customers, offering beautiful solutions that inspire confidence and joy. At each brand, we are focused on elevating AUR and driving full-price sales growth. At both apparel brands, customers continued to respond to our elevated fashion and product offering in nearly every apparel category demonstrating that product enhancements and innovation are moving the brands forward and that customers appreciate higher-quality and are receptive to paying for value and solutions.
At both Chico’s and White House Black Market, customers bought complete outfits and accessories, instead of single items increasing AUR and basket size. At Chico’s, style, fit comfort and solutions drove revenue increases throughout the year. Customers responded to our product innovation and fashion including knits, flutters and woven tops, pants, denim and dresses. Sales of our Travelers, ZENERGY and Black Label collections also continued to grow.
She respond to novelty and focused on completing her head to toe look with easy care, wrinkle free climate right fabric. At White House Black Market throughout the year, versatile tailoring with feminine details and seasonal fabrics drove the business in key categories but if she was looking for casual or dressy pieces, customers responded to our [Indecipherable] in pants, denim, jackets woven tops and dresses. We are fabric first and continually innovating and adding new fabric to our assortment. We added four new White House Black Market fabrications last year which has further expanded our customers’ options for even more versatile dressing.
At Soma we continue to make investments in cutting-edge product and innovation and comfort solutions in fancy, sleep, active and especially bras. We are the destination for all her bra needs and we have had remarkable success with last year’s launch of our game-changing smart bra Bodify that includes proprietary technology that adjusts to a women’s individual body measurement as they fluctuate throughout the month. We are digital-first, leveraging technology to engage and deliver to our customers across channels and brands. Last year, digital sales represented 41% of total company revenue.
Over the trailing 12 months, we grew our total customer count by over 5%, Chico’s grew 10% White House Black Market was up 12% and Soma was flat. Spend per customer rose 12% over the last 12 months. The new customers we are attracting to our brands are younger than existing customers by 10 years at Chico’s, three years at White House Black Market and four years at Soma. Each digital touchpoints inspires the customer to find solutions and build her wardrobe across brands and we are driving frequency of visits online and in-store. Our customized digital styling tools, My Closet and Style Connect continue to drive sales and engagement is growing. These tools further nurture and grow the multichannel customer who is so valuable to us spending more than 3 times the single-channel customer.
Our mobile app continued to exceed our expectations with downloads and engagement growing month-over month and driving higher average order value and conversion than the site average. Apps are becoming the hub for our loyalty program and early indicators are that our most loyal customers are highly engaged with the app. We are constantly investing in technology and talent, enhancing AI driven customer engagement and science-based marketing. Our digital evolution continues.
And last, we are operationally excellent. We are continually focused on diligently managing our inventory, cost-of-sales, supply-chain, expenses and real-estate generating healthy cash-flow and delivering a strong bottom-line. During the year, we had exceptional gross margin performance a 240 basis-point improvement driven by strength in-full price sale. Higher AURs and improved leverage of inbound freight and occupancy costs, despite increases in raw material. We constantly strive to improve our sourcing, logistics and operational processes to drive efficiencies and reduce expense.
We have carefully managed our calendar and inventory flow to assure product will be available to our customers in a timely manner. Now, I’ll turn the call over to PJ to update you on our financial performance, PJ?
Patrick J. Guido — Executive Vice President – Chief Financial Officer
Thank you Molly, and good morning everyone. We posted diluted fourth quarter EPS of $0.06 compared to $0.09 in the prior year. Fourth quarter total sales of $524 million were up 5.6% over last year and 6% on a comparable sales basis, driven by higher full-price selling, AUR and average dollar spend complemented by both higher in-store and online traffic. Looking at the brand, apparel was once again the leading performer for the quarter with Chico’s, posting a 16% comparable sales increase and White House Black Market generating a 2% comparable sales gain. Soma posted a fourth quarter comparable sales decline of 5%, with the brand, showing improvement from prior quarters as we closed out fiscal 2022.
Continued innovation and active inventory management resulted in higher AURs and much stronger gross margin than last year. Fourth quarter gross margin was 34.9% compared to 34.5% last year. The 40 basis-point improvement reflected occupancy leverage, higher AUR and less air-freight, partially offset by higher raw-material costs. SG&A expenses for the quarter totaled $176 million or 33.6% of sales compared to 31.2% in the prior year. The 240 basis-points of deleverage reflected the impact of higher store expense, marketing spend and other investments needed to drive traffic, customer growth and topline revenues.
For the full-year, we posted EPS of $0.88 per share and nearly 140% increase over the prior year. Sales for the full-year totaled $2.142 billion an 18% increase over $1.1 billion in the prior year. Comparable sales rose nearly 20% for the year. Our year-over-year operating income more than doubled to $142 million or 6.6% of sales for the fiscal year, resulting from our strong sales performance, 240 basis-points of gross margin expansion and 50 basis-points of SG&A expense leverage.
We also generated just over $185 million of EBITDA in fiscal 2022, an increase of over 50% from last year, a clear indication of the continued strengthening of our operating model, which focuses on both sales and earnings growth. In addition to giving us much more flexibility, higher cash-flow generation is providing us with the fuel to invest in strategies that are working. Now, let’s turn to our balance sheet and overall financial strength. Our cash position, total liquidity and operating cash-flow remained strong, providing us with the flexibility to manage the business and make investments to further propel our growth.
After repaying $50 million of debt last year, $20 million of which was repaid in the fourth quarter, we ended the fiscal year with $178 million of cash and total liquidity of approximately $370 million inclusive of capacity on our credit facility. At fiscal year end, inventories totaled $277 million compared to $323 million last year. The $47 million or 14% decline reflects a $34 million decrease in in-transit inventories related to extended delay in the global supply-chain last year, as well as our disciplined management of inventories to align with consumer demand.
At the end of the fourth quarter, on-hand inventories were down 6% while full-year sales were up 18%. A clear indicator that our inventory is working hard for us with strong terms and full-price sell-throughs. Now, let’s shift to capital spending. Fiscal 2022 capital spending totaled $60 million, which included building our e-commerce capabilities and digital marketing platforms as well as investment in new stores and store upgrades. We believe we are good stewards of capital and investment and in fiscal 2022, we generated a return on investment, well-above our cost-of-capital. Our digital investments in 2022 included upgrading our order management system, improving our data analytical capabilities and enhancing the overall user experience of our brand website and mobile applications. In regards to real-estate, we opened 27 standalone Soma stores and refreshed 43 of our most productive Chico’s, White House Black Market and Soma boutiques. We closed 24 stores last year, down from our original target of 40 due to improving productivity and profitability of our store base.
We ended the year with 1,269 boutiques. Since 2018, we have closed 230 underperforming locations and we make those up to 20 additional locations this year, both of these [Phonetic] locations has been highly-accretive to our P&L and due to our strengthened financial position, we have been able to negotiate new and renewed leases with much more favorable lease terms. We believe our fleet is rightsized and well-positioned to deliver incremental growth and profitability going-forward.
We will continue to actively manage our real-estate portfolio to enhance overall store and company profitability. It’s important to note that our customers love to engage with our brands in the communities where they live and our digital sales trend much higher in-markets where we have a physical presence. We believe our elevated investments in both digital and stores will continue to deliver strong returns for the company. Our overall capital investment strategy is geared toward directly driving incremental traffic, conversion and customer growth across channels which ultimately translates into strong top-line growth, both now and over the long-term.
Now, let me give some color on our outlook for fiscal 2023. On top of our 18% sales increase last year, we are planning for continued top-line growth for fiscal 2023 with sales growth in all three brands. We are confident that both existing and new customers will show-up for us because we are delivering the style, innovation, uniqueness and quality that our customers expect. For the first-quarter of 2023, we are forecasting more modest sales growth than for the full-year. This is driven by inventory purchase decisions made a year-ago that were based on a lower store count.
Recall, we closed 16 fewer stores than originally planned last year, due to improving store productivity mostly White House Black Market locations. As we move into the second-quarter and balance of the year, we expect sales trends to improve, as we have secured additional inventory receipts that align with our store count. We are currently forecasting continued gross margin expansion through lean inventories supply-chain cost management full-price selling, strategic price adjustments, product mix and occupancy leverage.
We remain highly disciplined on expense control and have a lean cost structure. We will still make the necessary investments in-store labor, marketing and other expenses in fiscal 2023 to further support sales and customer growth. We continue to make prudent investments in our business that will drive traffic conversion, customer growth and revenue across all channels. Our planned capital expenditures for fiscal 2023 are expected to total between $80 million and $90 million inclusive of cloud-based investments.
The majority of our investment this year will be used to strengthen our digital-first positioning, further augmenting our digital and marketing systems and building out our Connected Commerce platform to seamlessly drive traffic and conversion across channels. This investment will create digital tailwinds for years to come. We also expect to upgrade approximately 60 Chico’s and White House Black Market boutiques this year. In addition, we are targeting up to 50 new summer boutiques this year.
The real-estate market has tightened and we are focused on opening stores in locations where we believe we can generate the highest returns. As our cash-flow and EBITDA base continue to grow, we expect our financial position to strengthen. In addition to funding strategic investments, strong cash-flow will allow us to navigate the ongoing uncertain macroeconomic environment, growing our EBITDA and cash-flow base is permitting us to invest in our long-term strategic plan and although we are seeing some pressure on SG&A, we expect ongoing investments to support profitable future growth.
So with that, for the first-quarter, we expect total sales of $535 million to $550 million. Gross margin rate as a percent of sales to be in the 41.3% to 41.8% range. SG&A as a percent of sales to be in the 32.8% to 33.3% range and effective tax-rate of approximately 25% and diluted EPS of $0.26 to $0.30 per share. For the full-year, which is a 53 week year for 2023, we expect total sales up $2.22 billion to $2.25 billion gross margin rate as a percent of sales to be in the 39.4% to 39.8% range. SG&A as a percent of sales to be in the 33% to 33.4% range and effective tax-rate of approximately 26% and diluted EPS of $0.79 to $0.91 per share.
In closing, we continue to work towards achieving our growth plan and are confident in our ability to create shareholder value both now and over the long-term. We look-forward to keeping you posted on our progress.
Now, I’ll turn the call over back to the operator. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from Dana Telsey from The Telsey Group. Please go-ahead.
Dana Telsey — Telsey Group — Analyst
Good morning everyone, and congratulations on the nice progress. As you mentioned in the call and in the release, it sounds like January was very strong. What did you see in January, by brand? Was there any improvement in the White House Black Market which I think had a little bit of a tougher holiday season and how you’re thinking about the level of promotions going-forward? And then, just on the SG&A investments PJ, can you just highlight how you think it breaks out the investments this year, whether marketing or others and some of those tech investments you were talking about and how you’re planning for marketing spend? Thank you.
Molly Langenstein — Chief Executive Officer and President
Thank you Dana and good morning. We did see strength in January across the three brands specifically you asked about White House Black Market and we did see a pop-in the business in January. We took care of what we needed to in December, as we shared, we went into January with inventories clean and the customer came back responding to categories in jackets and tops, including knit and wovens and we also saw her responding to career and dresses.
So we believe that, that was a point in time and we’re very pleased with the results. We continue to see strength in Chico’s, as we delivered our spring deliveries with customers responding to our solution-based category and then in Soma as well, as we moved out-of-the holiday time period we continue to invest in newness in the categories of bras, we had some new categories like a new Vanishing Tummy thong and some shapewear lunches. So we’re really excited about the start that we have to the spring season and how we saw the customer respond to regular-price, higher AUR and product with more innovation.
As it relates directly to the question about level of promotion, we continue to be steadfast on not going backwards in terms of promotion. Our strategy is to leverage our loyalty program and to entice consumers at their tier level based upon their spend and we’re going to continue on that front as we move forward throughout the year.
Patrick J. Guido — Executive Vice President – Chief Financial Officer
And then Dana, on SG&A for 2023 and as we’ve mentioned, we’re continuing to invest in the business pursuant to our long-term plan. The majority of the SG&A deleverage, we’re showing which is modest is due to marketing investment to continue to build our customer file and drive new customer growth. Store labor and DC labor do remain elevated costs due to inflation and us needing to be competitive. And then the balance will be our investment in IT-related projects that ultimately will drive incremental traffic and conversion, as we move through 2023 and into 2024.
Dana Telsey — Telsey Group — Analyst
Got it, and then just with the moderating freight costs — what’s the benefit of that as you go through the year and is there any offset in terms of raw-material costs. How you’re looking at that as we go through the year?
Patrick J. Guido — Executive Vice President – Chief Financial Officer
Yeah, the net supply-chain impact will be positive this year at least that’s what is in our forecast. Inbound freight costs are coming down as you said, but outbound freight costs — so shipping to customers that’s a slight increase — there’s an offset there. And then we — in innovative fabrics so we wanted to keep that pipeline full, so raw-material costs will remain like elevated for the balance of the year, but we believe that is an investment that ultimately allows for us to price for innovation and drive AUR higher.
Dana Telsey — Telsey Group — Analyst
Got it. And just one last thing on your outlook that you gave for 2024, I would assume that no change to that outlook, given the 2023 guide?
Patrick J. Guido — Executive Vice President – Chief Financial Officer
No change. Correct.
Dana Telsey — Telsey Group — Analyst
Thank you.
Molly Langenstein — Chief Executive Officer and President
Thanks, Dana.
Operator
Our next question comes from Marni Shapiro, The Retail Tracker. Please go-ahead.
Marni Shapiro — The Retail Tracker — Analyst
Hey guys, congratulations on the great end to the year and an outstanding start to the New Year, the stores have really looked fantastic. Could you — PJ I’m sorry, you ran through the store openings and closings so quickly. I think you said you were going to upgrade 60 Chico’s and White House is that 60 each or 60 total and how many Soma stores did you say, you would open this year?
Patrick J. Guido — Executive Vice President – Chief Financial Officer
So the upgrades are 60 total and we are targeting up to 15 new Somas and we had originally expected 30 annually. The reason for the slowdown is it’s just a function of us being more disciplined in our approach to generating returns in our stores and the real-estate market is getting more competitive and rents — there is pressure on rents, so we want to make sure what we’re doing is prudent on the real-estate front.
Marni Shapiro — The Retail Tracker — Analyst
Great. And then just a follow-up on that, the upgrades that — I think I’m seeing your upgrades out already on the White House — the outside of the store — the new White House Black Market. As you’re doing some of these upgrades and modernizing the look, are you doing anything else branding wise? Are you changing hang tags or anything else in-store to go along with it or is this really just a physical space upgrade?
Molly Langenstein — Chief Executive Officer and President
Yeah, thank you Marni. It’s a rolling change, we’ve actually been making changes to hang tags in inner beauty, branding across the brands over the last two years. So, you’ll continue to see the evolution of that as we move forward and not only on the product, but all the way through to the store environment so excited about what’s to come.
Marni Shapiro — The Retail Tracker — Analyst
It looks great. And then, can I just ask one quick question on this — your younger customer that you’re getting into the brands it’s a pretty significant jump down in Chico’s, is there anything markedly different about this customer, is she fashion first, is she coming in and buying full-price? Just a little bit more on that customer?
Molly Langenstein — Chief Executive Officer and President
Yeah. First of all-in terms of our new customers, we find that it’s our solutions across the three brands, is our entry point and so we really use that as our marque to be able to communicate to new customers. Second, what we are finding is that, this customer is buying head to toes as our other customers have and that’s primarily based upon the unbelievable service that we have in our stores and how she is catered to and how we can really build-out her wardrobe. So, we’re just really talking to this customer, as we do others and sharing with her, how amazing our brands are when she discovers them.
Marni Shapiro — The Retail Tracker — Analyst
That’s fantastic. I’ll leave it for somebody else and take it offline. Thanks guys. Best of luck for spring.
Molly Langenstein — Chief Executive Officer and President
Thank you Marni.
Operator
Thank you. This concludes our question-and-answer session. I would like to turn the call-back over to Molly Langenstein for closing comments.
Molly Langenstein — Chief Executive Officer and President
Thank you. I want to thank our entire team for another terrific year. Our results demonstrate that our pillars are fueling our strategy and our strategy is working. In 2023, we will build on our standout fiscal 2022 results and based on January, we believe we’re off to a great start. Thank you for your interest and time. We look-forward to speaking with you again during our first quarter conference call in June.
Operator
[Operator Closing Remarks]