Chico's FAS, Inc.

Welcome to Chico's FAS Third Quarter 2020 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 David Oliver, Interim Chief Financial Officer and Senior Vice President Controller. Mr. Oliver, please go ahead.

Good morning, and welcome to the Chico's FAS Third Quarter 2020 Conference Call. Wally Langenstein, our CEO and President, also joins me today. For reference, our third quarter release can be found on our website at shekelsfas.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 speaks only as of today's day. You should not unduly rely on forward-looking 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 our earnings release issued this morning, in our SEC filings, and in the comments that are made on this call. We disclaim any obligations to update or revise any information discussed on this call, except as may be required by law. And with that, I'll turn the call over to Molly.

Thank you, David. And good morning, everyone. We continue to see momentum in the business in the third quarter, and we have taken definitive action and created a firm financial foundation that we believe prepares and positions us for 2021 and beyond. Specifically, we have accelerated our transformation to a digital first company, fast tracking several investments in innovation and digital technology which are driving sales and higher customer engagement. We significantly enhanced our liquidity and financial flexibility with our amended and extended $300 million credit facility. We nearly completed our comprehensive real estate review, obtaining landlord commitments of $65 million in rent abatement and reductions. and we continued the process of streamlining our organization and reducing our cost structure to support our business. David and I will offer additional detail on these actions during today's call. Our business plan this year is to deliver improved quarter-over-quarter performance. In the third quarter, we again delivered on this objective, substantially enhancing our financial results over the second quarter. Total sales improved nearly 15% in the third quarter from the second, driven by continued strong digital performance and rebounding store revenues. Our gross margin rate rose 740 basis points, reflecting greater full-price selling on leaner inventories and leverage of fixed occupancy costs. We strengthened our balance sheet with cash and cash equivalents increasing nearly 21 million. And Soma generated a 10.5% comp for the quarter. First, let's focus on our digital transformation. 18 months ago, we prioritized digital as the primary growth engine for all three of our brands, making major strategic shifts and investments in talent and technology to pivot us to a digital-first company. In March of this year, as our business became 100% digital overnight, we accelerated that transformation through innovation and state-of-the-art technology enhancements. Even with our stores now reopened, we continue to generate double-digit year-over-year digital sales increases. As a digital-first company, we believe we are competitively positioned to accelerate growth and gained market share in 2021 and beyond. All three of our brands achieved solid digital sales growth year-over-year, with Selma leading the way with a 67% increase. Digital channels continue to fuel total customer and new customer growth. For the third quarter, year-over-year digital customer count grew nearly 27%, and conversion was up 170 basis points. Soma is a true success story. Soma is now a digital-first business supported by boutiques throughout the country. We believe we can replicate the learning and success of Soma to our apparel brands. Let me talk about some specific innovations we have put in place that we consider meaningful competitive advantages. Style Connect. Our digital styling tool connects our customer with our style experts to receive personalized advice. Year over year, StyleConnect sales once again more than doubled in Q3 and increased more than 20% over the second quarter. In the third quarter, we added Shop the Look as a component of StyleConnect, which has generated increased engagement and units per transaction. We will continually enhance this tool with additions such as outfit recommendations. We accelerated the formal launch of our personal closet feature, My Closet, into the third quarter after a successful soft launch. Sales for this tool, which enabled customers to augment their closets by coordinating with past purchases, doubled from Q2 to Q3, and will continue to expand its functionality to StyleConnect. Since launch, the conversion rate of this new feature has been remarkable, exceeding six times the site average conversion rate. Here is an example of how these digital investments in new tools impact sales. A Chico's associate reached out to her customer through StyleConnect, making a virtual appointment where she showed the customer new products that coordinate with past purchases. resulting in a $2,000 sale. This happy customer shared, I can't believe you know what's in my closet. I don't even know what's in my closet. And she picked up her purchases curbside. In the third quarter, we also successfully tested and rolled out social proofing for all three brands. Social proofing provides insight into real-time customer shopping behavior, allowing her peers to influence her purchases as they might be in the fitting room, This feature allows customers to build confidence and creates urgency for customers to buy. Early reads show excellent conversion results. Our prioritization to digital also incorporates mobile POS, AI search engine optimization, and enhanced navigation touchpoints across all brands. We have also accelerated the launch of new leading-edge digital selling and fulfillment tools to drive greater customer demand in our online channels. We were honored that each of our brands were recently named Best Online Shop for 2020 by Newsweek, building on our Best Online Company designation. We have recently made additional investments that are innovating the customer experience to drive greater digital sales across all of our brands. In October, we invested in new strategic relationships with leading technology companies, including Salesforce, Afterpay, and ContentStack to further modernize and personalize the digital experience. To better leverage our unified view of our millions of customers and their robust data that has been collected for more than three decades, we are partnering with Salesforce to help us track every omnichannel customer journey and interaction. Connect every commerce channel, create more engaging, personalized, and targeted marketing and messaging using predictive intelligence and adjust marketing in real time based upon trends or customer action. This includes leveraging our loyalty program, which has some of the highest participation rates in retail. Salesforce, a leading company driving CRM, has a track record of driving double-digit sales and productivity growth. This holiday season, customers have a new way to shop, the company's online boutiques. enjoying their purchases now and paying for them later with interest-free installments using Afterpay. Early reads show a meaningful increase in average order value as well as conversion and unit per transaction improvement. And finally, our commitment to deliver on the best overall customer experience, we enabled a new analytical tool through ContentStack and streamlined digital processes to be able to read real-time customer behavior and take actions to continually optimize per path to purchase. We continue to leverage our digital investments, converting single-channel customers to be omni-channel customers, as the average omni-channel customer spends nearly three and a half times more than the single-channel customer. A quick note about our stores. All of our boutiques were open during the quarter, and traffic and sales continued to rebound month over month for each brand. at the store level grew nearly 20% from last year, demonstrating that customers are responding to our product. Curbside picked up and continued to grow in popularity, expanding 50% from the second quarter. Third quarter store productivity was nearly 60% of last year's sales, an improvement over the second quarter performance. The two-thirds of our boutiques located in outdoor centers continue to outperform those in enclosed malls. and we are continuing to monitor local and state mandates for reduced mall hours and closures. On the marketing front, we continue to build on our organic social efforts and participated in multiple partnerships and virtual events throughout the quarter with several well-known organizations, media partners, and social influencers to increase brand awareness, drive engagement, generate traffic, and acquire new customers. Our new marketing campaigns in the third quarter, including marketing Soma products to both Chico's and White House black market customers, we saw this effort pay off. Our marketing efforts are driving site and store traffic as well as new customers to our brand, and we are retaining our newly acquired digital and store customers at a meaningful higher rate than last year. In addition, quarter-over-quarter spend for customers for both existing and reactivated customers is up. We continue to be laser focused on our customer and to elevate our product. Customers are responding to current products and our best ideas are selling out. At Selma, we are innovating and creating the most incredibly soft and functional fabric and products that are offering our customers beautiful solutions, style, and comfort that are synonymous with the brand. Continual product newness and investments in pajamas and the Intimus franchises are expanding market share and driving results. At Chicos White House Black Market, as our customers' lifestyle needs have evolved by both living and working from home, we have shifted our focus to colorful, casual, comfortable, and versatile apparel. As we move into the holiday season, inventories are positioned with uplifting gifting messages in whimsical colors and prints. We have the right product, personalized service, and creative marketing to drive sales during this important period. David?