Chico's FAS, Inc.

Good day and welcome to the Chico's FAS third quarter 2022 conference call and webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions, and should you require operator assistance, please press star then zero. Please note that this event is being recorded. I would now like to turn the call over to corporate controller David Oliver. Mr. Oliver, please go ahead.

Good morning. and welcome to the Chico's FAS 3rd Quarter 22 Conference Call and Webcast. For reference, our range 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-GAAP measures may be referenced in today's call. A GAAP and non-GAAP reconciliation schedule is included in our earnings release Presentation posted this morning on the Chico's FES Investor Relations page. Now I'll turn the call over to our CEO and President, Molly Langenstein.

Thank you, David, and good morning, everyone. Our robust momentum continued. We posted another quarter of outstanding sales growth and operating income and our seventh consecutive quarter of year-over-year double-digit EPS growth. resulting from continued strong store and digital sales and solid expense leverage. Our strong performance and quarter after quarter momentum demonstrate that our strategy is working, and we are very pleased with the substantial progress toward our three-year plan. The power of our portfolio, three unique brands, and execution of our strategic pillars are driving our continued strong performance, and we remain confident in delivering over $2.5 billion in sales by 2024. Let me cover some highlights. We posted another quarter of very strong bottom-line results, with diluted ETFs of $0.20, more than 30% over last year. This performance was driven by comparable sales growth of nearly 17%. combined with solid expense leverage, and this performance was on top of a 28% comparable sales increase in last year's third quarter. Customer behavior remained healthy during the quarter. Consistent newness, innovation, and product enhancements drove strong digital and store traffic and sales growth. We generated greater year-over-year full-price selling, average unit retail, and spend for customers. Our apparel brands continue to deliver exceptional results, with Chico's posting a 29% comparable sales gain and White House Black Market recording comparable sales growth of 17% in the quarter. AUR was up in both brands to last year. Chico's customers overwhelmingly responded to our elevated product and fashion newness, building complete outfits 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. Our SOMA performance improved compared to the second quarter, with particular strength in our foundations business. SOMA comparable sales grew 35% compared to the third quarter of fiscal 2019. Soma continues to take market share in non-sport bras and panties, according to NTD, indicating the overall long-term power and strength of the brand. We continue to make investments in cutting-edge product innovation. Strategic marketing continues to drive more customers to our brand, with total year-over-year customer count up high single digits, spend per customer up over last year's third quarter, and the average age of new customers continuing to trend younger. Our 14% sales growth and solid expense leverage delivered on operating margin of more than 6%, well above last year's third quarter operating margin of 4.9%. We strengthened our balance sheet, ending the quarter with $141 million in cash, after repaying $30 million of debt. Our four strategic pillars, customer-led, product-obsessed, digital-first, and operationally excellent, continue to guide us to deliver on our three-year strategic plan. Let me give you a brief update on each. We are customer-led, focused on community engagement and creating extraordinary and memorable customer experiences, forming lasting relationships and increasing customer lifetime value. Store and digital sales both grew by double digits for the quarter. The power of our three unique brands is driving growth through three powerful platforms, creating long-term connections and enabling our customers to interact with us in a seamless manner. Our physical stores are community centers where our customers experience our products in the most exciting way possible. and the knowledge and enthusiasm of our stylists and raw experts drive sales and brand loyalty. Stores are the community connection that so many customers are searching for in a disconnected world. Digital is often the first impression of our brands and is a community hub for content and a great way to teach, share information, and inspire. And our social stylists skillfully connect customers to stores and digital. Chico's FAS has a uniquely strong foundation with some of the most loyal and dedicated customers in retail. Our loyalty programs that were recently relaunched are continuing to exceed expectations in enrollment, customer sentiment, and redemption rates. We are strengthening our already strong customer relationship and adding new customers through these elevated programs. We are product obsessed, continually delivering innovative and best-in-class merchandise to our Chico, 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 continue to respond to our elevated fashion and product offerings in nearly every apparel category, demonstrating that product enhancements and innovations 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, which increased AUR and basket size. At Chico's, style, fit, comfort, and solutions are driving our revenue increases. Customers responded enthusiastically to our product innovation and fashion, including in tops, knits, wovens, and sweaters, pants and denim, jackets, dresses, jewelry, and shoes. She is focused on completing her head-to-toe look with easy care, wrinkle-free, climate-right fabric. At White House Black Market, versatile tailoring and feminine details in seasonless fabric drove the business in key categories. Whether she was looking for casual pieces or something dressier, customers responded to our newness in tops, in sweaters and in wovens, bottoms and premium denim, dresses, and jackets. Soma continues to make investments in beautiful solutions that continue to fuel growth in our foundations business in both bras and panties. We are delighted to welcome Chris Munley to our team as SVP of Merchandising and Design at FOMA. I am confident that Chris, who has a 30-plus years of apparel experience and a proven track record, will work with our expert foundations design team to drive FOMA growth in this evolving business. We are digital first, leveraging technology to engage and deliver to our customers across channels and brands. Over the trailing 12 months, We grew our total customer count by 8%. Chico's grew by 11%, White House Black Market was up 14%, and Soma added 4%. Spend also rose high single digits over the last 12 months. We are continuing to attract new customers to our brand, and they are trending younger than existing by 10 years at Chico's, 3 years at White House Black Market, and 4 years at Soma. Each digital touchpoint inspires the customer to find solutions and build her wardrobe across brands. And we are driving frequency of visits online and especially 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 multi-channel customer who is so valuable to us. spending more than three times single channel customers and fueling overall growth. Combined digital tools grew significantly over last year's third quarter, fueling the most growth in stores. Digital tools are driving higher average order value in both channels. Style Connect is so powerful, it now represents 13% of total FAS sales. Our mobile apps are exceeding our expectations with downloads and engagement growing month over month and driving higher average order value and conversion than the site average. Our apps are being designed to become the key hub of our new loyalty program. We are really excited to add the Style Connect feature to our app in January. Buy online, pick up in store has remained a customer convenience. Revenues not only increase double digits year over year, but add-on store revenues are growing as customers are responding to coordinating items that our expert stylists suggest. 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 quarter, we had solid gross margin performance while slightly lower than last year. Higher raw material costs were partially offset by freight, occupancy leverage, and higher average unit retail. Our year-to-date gross margin was 300 basis points ahead of the prior year. We are focusing on constantly improving our sourcing, logistics, and operational processes to help drive efficiencies and lower costs. We have carefully managed our calendar and inventory flow to ensure product will be available to our customers in a timely manner. We have also prudently controlled our mix of ocean versus air freight, with air costs for the third quarter down 95% from last year's third quarter, reducing overall freight costs by nearly 75%.