ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Stores
At fiscal year-end for 2019, 2018 and 2017 our total consolidated selling square feet was 3.2 million, 3.4 million and 3.5 million, respectively. For a general description of our leases, see Note 1 to our consolidated financial statements under the heading "Operating Leases." As of February 1, 2020, our 1,341 stores were located in 46 states, Puerto Rico, the U.S. Virgin Islands and Canada, as follows:
NSSC and Distribution Centers
Our NSSC is located on approximately 63 acres in Fort Myers, Florida and consists of approximately 504,000 square feet of office space. Our distribution center is located on approximately 110 acres in Winder, Georgia and consists of approximately 550,000 square feet of distribution, fulfillment, call center and office space.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
Information regarding legal proceedings is incorporated by reference from Note 12 to the accompanying consolidated financial statements under the heading “Commitments and Contingencies.”
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NYSE under the symbol “CHS.” On March 10, 2020, the last reported sale price of the common stock on the NYSE was $2.78 per share. The number of holders of record of common stock on March 10, 2020 was 1,040.
In November 2015, we announced a $300 million share repurchase authorization for the Company's common stock. In fiscal 2018, we repurchased 12.2 million shares of the Company's common stock at approximately $81.1 million. We did not repurchase any of the Company's common stock during fiscal 2019. As of February 1, 2020, $55.2 million remains authorized for repurchase under the share repurchase program. The repurchase program has no specific termination date and will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors ("Board").
In fiscal 2019, we repurchased 457,365 restricted shares in connection with employee tax withholding obligations under employee compensation plans. No repurchases associated with employee tax withholding obligations under employee compensation plans were made during the fourth quarter of fiscal 2019.
While the Company currently expects that quarterly cash dividends will continue to be paid in the future at levels comparable to recent historical levels, any determination to pay future dividends will be made by the Board of Directors based on an evaluation of our stock price, future earnings, financial condition and other factors deemed relevant by the Board.
Five Year Performance Graph
The following graph compares the cumulative total return on our common stock with the cumulative total return of the companies in the Standard & Poor’s (“S&P”) 500 Index and the S&P 500 Apparel Retail Index. Cumulative total return for each of the periods shown in the Performance Graph is measured assuming an initial investment of $100 on January 31, 2015 and the reinvestment of dividends.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Selected Financial Data at the dates and for the periods indicated should be read in conjunction with, and is qualified in its entirety by reference to the consolidated financial statements and the notes thereto referenced in this Annual Report on Form 10-K.
____________________________
Five-year table includes the operating results of Boston Proper in fiscal 2015, when the Company exited the business.
In August 2018, the Financial Accounting Standards Board (the "FASB") issued ASU 2018-11, Targeted Improvements to ASC 842, Leases ("ASC 842"), which included a provision to apply ASC 842 at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected to use the initial application date as the effective date of ASC 842. Consequently, the comparative periods are presented in accordance with ASC 840, Leases, and are not restated in accordance with ASC 842.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto. References herein to “Notes” refer to the Notes to our consolidated financial statements. Each of the periods presented had fifty-two weeks, except for fiscal 2017, which consisted of fifty-three weeks.
EXECUTIVE OVERVIEW
We are a leading omnichannel specialty retailer of women’s private branded, sophisticated, casual-to-dressy apparel, intimates and complementary accessories, operating under the Chico’s, White House Black Market (“WHBM”), Soma and TellTale brand names in the United States ("U.S."), Puerto Rico, the U.S. Virgin Islands and Canada. We refer to our Chico's and WHBM brands collectively as our "Apparel Group" and refer to our Soma and TellTale brands collectively as our "Intimates Group." Our distinct lifestyle brands serve the needs of fashion-savvy women 35 years and older. We earn revenue and generate cash through the sale of merchandise in our domestic and international retail stores, our various Company-operated e-commerce websites, our call center (which takes orders for all of our brands), through unaffiliated franchise partners and through third-party channels.
We utilize an integrated, omnichannel approach to managing our business. We want our customers to experience our brands holistically and to view the various retail channels we operate as a single, integrated experience rather than as separate sales channels operating independently. This approach allows our customers to browse, purchase, return or exchange our merchandise through whatever sales channel and at whatever time is most convenient. As a result, we track total sales and comparable sales on a combined basis.
Select Financial Results
The following table depicts select financial results for fiscal 2019, 2018 and 2017:
Loss per diluted share for fiscal 2019 was $0.11 compared to earnings per diluted share of $0.28 in fiscal 2018. The change in loss per share reflects a decrease in net income. Fiscal 2019 net loss includes the unfavorable impact of accelerated depreciation charges of approximately $8 million, after-tax, related to our retail fleet optimization plan and severance and other related net charges (collectively, "Severance Charges") of approximately $2 million, after-tax, in connection with actions taken to reposition our organizational structure. Fiscal 2018 net income includes the unfavorable impact of accelerated depreciation and impairment charges of approximately $8 million, after-tax, related to our retail fleet optimization plan, partially offset by the favorable tax benefit of approximately $5 million related to the Tax Cuts and Jobs Act of 2017 (the "Tax Act").
Key Initiatives
Fiscal 2019 key initiatives included:
• initiated new organizational structure and merchant leadership appointments that are designed to strengthen the organization, create clear lines of responsibility and accelerate sales driving priorities
• made significant progress on executing new fiscal 2019 operating priorities which include: (i) driving stronger sales through improved product and marketing; (ii) optimizing the customer journey by simplifying, digitizing and extending the Company's unique and personalized service; and (iii) transforming sourcing and supply chain operations to increase product speed to market and improve quality
• completed rollout of STYLECONNECTTM , an enhanced platform that provides digitized clienteling tools to all stores
• implemented Buy On-Line, Pick-up In-Store (BOPIS) capability across all brands
• expanded focus on reducing China penetration to diversify county of origin mix and securing partnerships with key vendors to create a leaner, more efficient supply chain
Future Outlook
The Company's outlook included in our fourth quarter Earnings Release filed on Form 8-K on February 27, 2020 does not reflect the developing impact of the coronavirus (COVID-19). In recent days, this outbreak has resulted in reduced customer traffic and the temporary reduction of operating hours for our stores as well as temporary store closures where government mandated. These recent developments are expected to result in lower sales and gross margin than provided in our previous outlook.
Key Performance Indicators
In assessing the performance of our business, we consider a variety of key performance and financial measures to evaluate our business, develop financial forecasts and make strategic decisions. These key measures include comparable sales, gross margin as a percent of sales, diluted earnings per share and return on net assets ("RONA"). The following describes these measures.
Comparable Sales
Comparable sales is an omnichannel measure of the amount of sales generated from products the Company sells directly to the consumer relative to the amount of sales generated in the comparable prior-year period. Comparable sales is defined as sales from stores open for the preceding twelve months, including stores that have been expanded, remodeled or relocated within the same general market and includes online and catalog sales, and beginning in the third quarter of fiscal 2019, includes international sales. The comparable sales calculation excludes the negative impact of stores closed four or more days and sales attributable to the fifty-third week in fiscal 2017. We believe comparable sales is a primary metric to measure the performance of our business as an increase in comparable sales can indicate improved operations at existing stores. Furthermore, comparable sales often is used as an operational tool to help manage store count.
Gross Margin as a Percentage of Net Sales
Gross margin as a percentage of net sales is computed as gross margin divided by net sales. We believe gross margin as a percentage of net sales is a primary metric to measure the performance of our business as it is used to determine the value of incremental sales, and to guide pricing and promotion decisions.
Diluted Earnings per Share
Earnings per share is determined using the two-class method when it is more dilutive than the treasury stock method. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted earnings per share reflects the dilutive effect of potential common shares from non-participating securities such as stock options, performance stock units and restricted stock units. Whereas basic earnings per share serves as an indicator of the Company's profitability, we believe diluted earnings per share is a primary metric provided it gauges the Company's quality of earnings per share assuming all potential common shares from non-participating securities are exercised.
Return on Net Assets
RONA is defined as (a) net income divided by (b) the “five-point average” (based on balances at the beginning of the first quarter plus the final balances for each quarter of the fiscal year) of net working capital less cash and marketable securities plus fixed assets. We believe RONA is a primary metric as it helps to determine how well the Company is utilizing its assets. As such, a higher RONA could indicate that the Company is using its assets and working capital efficiently and effectively.
Current Trends
Macroeconomic Impacts
The Company has exposure to volatility of the macroeconomic environment due to political uncertainty and potential changes to international trade agreements, such as new tariffs imposed on certain Chinese-made products imported to the U.S. During fiscal 2018, the U.S. began to impose duties on certain Chinese-made imported products. In May 2019, the current administration announced an increase to the tariffs currently being imposed on certain imports from 10% to 25%, effective May 10, 2019, which was further increased to 30% beginning on October 1, 2019. In August 2019, the administration announced plans to implement a tariff of 15% on approximately $300 billion of products imported into the U.S. from China. On August 13, 2019, the list of goods subject to the tariff, referred to as List 4, was divided into two parts. The tariffs for products on List 4a became effective as of September 1, 2019 and the tariffs for imported goods on List 4b became effective December 15, 2019. On February 14, 2020, the tariffs leveraged on items in List 4 and List 4a were reduced in half to 7.5%. To minimize these increased tariffs, the Company is actively engaging with its vendors on cost-sharing agreements, and managing and adjusting our forward buys and product pricing. The Company also anticipates its sourcing initiatives will largely offset any incremental tariff impacts.
Other Developments
In recent days, the COVID-19 outbreak in the United States has resulted in reduced customer traffic and the temporary reduction of operating hours for our stores as well as temporary store closures where government mandated. These recent developments are expected to result in lower sales and gross margin than provided in our previous outlook.
RESULTS OF OPERATIONS
Net Sales
The following table depicts net sales by Chico’s, WHBM and Soma in dollars and as a percentage of total net sales for fiscal 2019, 2018 and 2017:
(1) May not foot due to rounding.
(2) Includes TellTale net sales, which is not a significant component of Soma revenue.
For fiscal 2019, net sales were $2.0 billion compared to $2.1 billion in fiscal 2018. This decrease of 4.4% reflects a comparable sales decline of 3.4% as well as the impact of 77 net store closures since fiscal 2018. The comparable sales decline was driven by lower average dollar sale and a decrease in transaction count.
For fiscal 2018, net sales were $2.1 billion compared to $2.3 billion in fiscal 2017. This decrease of 6.6% reflects a comparable sales decline of 4.9%, the $29 million benefit of the fifty-third week in fiscal 2017 and the impact of a 2.9% net decrease in selling square footage in 2018. The comparable sales decline was driven by a decrease in transaction count and lower average dollar sale.
The following table depicts comparable sales percentages for Chico's, WHBM and Soma for fiscal 2019, 2018 and 2017:
(1) Fiscal 2018 comparable sales represent sales for the fifty-two weeks ended February 2, 2019 compared to sales for the fifty-two weeks ended February 3, 2018.
(2) The fifty-third week of fiscal 2017 is excluded from the comparable sales calculation.
Cost of Goods Sold/Gross Margin
The following table depicts cost of goods sold and gross margin in dollars and gross margin as a percentage of total net sales for fiscal 2019, 2018 and 2017:
For fiscal 2019, gross margin was $702 million, or 34.4%, compared to $763 million, or 35.8%, in fiscal 2018. This 140-basis point decrease primarily reflects charges related to our omnichannel programs, the clearance of merchandise and the impact of incremental tariffs on maintained margin incurred in the second half of fiscal 2019.
For fiscal 2018, gross margin was $763 million, or 35.8%, compared to $865 million, or 37.9%, in fiscal 2017. The decline in gross margin primarily reflects the continued expansion of our omnichannel programs and deleverage of occupancy costs as well as a 50-basis point charge due to our retail fleet optimization plan, partially offset by an improvement in merchandise margin.
Selling, General and Administrative Expenses
The following table depicts selling, general and administrative expenses ("SG&A"), which includes store and direct operating expenses, marketing expenses and NSSC expenses, in dollars and as a percentage of total net sales for fiscal 2019, 2018 and 2017:
For fiscal 2019, SG&A was $714 million, or 35.0%, compared to $720 million, or 33.8%, in fiscal 2018. This $6 million decrease primarily reflects a reduction in employee-related costs, partially offset by investments in marketing.
For fiscal 2018, SG&A was $720 million, or 33.8%, compared to $720 million, or 31.5%, in fiscal 2017. This 230-basis point increase primarily reflects investments in marketing and technology as well as deleverage of store-operating costs.
Retail Fleet Optimization Plan
In the fourth quarter of fiscal 2018, the Company announced a three-year retail fleet optimization plan to rebalance the mix between our physical store presence and our digital network. This initiative is part of the Company's efforts to better capitalize on its omnichannel platform, reduce costs, and improve our profitability and return on invested capital. In fiscal 2019, the Company recorded pre-tax accelerated depreciation charges within cost of goods sold of approximately $11 million associated with this retail fleet optimization plan. The fiscal 2019 after-tax impact of these charges was approximately $8 million. In fiscal 2018, the Company recorded pre-tax accelerated depreciation and impairment charges within cost of goods sold of approximately $1 million and $9 million, respectively. The fiscal 2018 after-tax impact of these charges was approximately $8 million.
Income Taxes
The effective tax rate for fiscal 2019, 2018 and 2017 was provisions of (6.7)%, 17.8% and 29.7%, respectively. The fiscal 2019 effective tax rate primarily reflects an income tax benefit on an annual operating loss, offset by an unfavorable fiscal 2018 provision-to-return adjustment, a valuation allowance on certain deferred tax assets for charitable contributions with limitations and employee share-based compensation expense. The fiscal 2018 effective tax rate reflects benefits from the Tax Act which include the lower federal statutory rate of 21% compared to a fiscal 2017 blended federal tax rate of 33.8% due to the timing of the effective date of the Tax Act. The fiscal 2018 effective tax rate also reflects approximately $5 million of transitional tax reform benefits related to fiscal 2017, partially offset by an approximate $1 million increase in tax expense related to the accounting for employee share-based compensation expense. Excluding the aforementioned favorable and unfavorable impacts to the effective tax rates, the fiscal 2019, 2018 and 2017 effective tax rate provisions would have been 26.4%, 25.8% and 36.4%, respectively.
Net (Loss) Income and Earnings Per Diluted Share
Net loss for fiscal 2019 was $13 million, or $0.11 loss per diluted share, compared to net income for fiscal 2018 of $36 million, or $0.28 earnings per diluted share. Fiscal 2019 net loss includes the unfavorable impact of accelerated depreciation charges of approximately $8 million, after-tax, related to our retail fleet optimization plan and Severance Charges of approximately $2 million, after-tax, in connection with actions take to reposition our organizational structure. The change in earnings per share reflects a decrease in net income.
Net income for fiscal 2018 was $36 million, or $0.28 earnings per diluted share, compared to net income for fiscal 2017 of $101 million, or $0.79 earnings per diluted share. Fiscal 2018 net income includes the unfavorable impact of impairment and accelerated depreciation charges of approximately $8 million, after-tax, related to our retail fleet optimization plan, partially offset by the favorable tax benefit of approximately $5 million related to the Tax Act. The change in earnings per share reflects a decrease in net income partially offset by the impact of share repurchases in fiscal 2018.
Cash, Marketable Securities and Debt
At the end of fiscal 2019, cash and marketable securities totaled $128 million while debt totaled $43 million.
Inventories
At the end of fiscal 2019, inventories totaled $247 million compared to $235 million at the end of fiscal 2018. This $12 million increase, or 4.9%, primarily reflects the ongoing investment in Soma inventory to fund growth.
Liquidity and Capital Resources
Overview
We believe that our existing cash and marketable securities balances, cash generated from operations, available credit facilities and potential future borrowings will be sufficient to fund capital expenditures, working capital needs, dividend payments, potential share repurchases, commitments and other liquidity requirements associated with our operations for the foreseeable future. Furthermore, while it is our intention to repurchase our stock and pay a quarterly cash dividend in the future, any determination to repurchase additional shares of our stock or pay future dividends will be made by the Board of Directors and will depend on our stock price, future earnings, financial condition and other factors considered by the Board.
Our ongoing capital requirements will continue to be primarily for enhancing and expanding our omnichannel capabilities, including expanded, relocated and remodeled stores; information technology; and supply chain.
The following table summarizes cash flows for fiscal 2019, 2018 and 2017:
(1) May not foot due to rounding.
Operating Activities
Net cash provided by operating activities in fiscal 2019 was $33 million compared to $158 million for fiscal 2018. This $125 million decrease primarily reflects lower fiscal 2019 net income, a decline in share-based compensation and investments in cloud computing arrangement ("CCA") service contracts and Soma inventory to fund growth.
Net cash provided by operating activities in fiscal 2018 was $158 million compared to $167 million for fiscal 2017. This $9 million decrease primarily reflects a decline in fiscal 2018 net income and an increase in income tax receivables which was partially offset by the timing of vendor payments and payroll accruals, payments made in fiscal 2017 for outside services, the clearing of seasonal merchandise and the impact of lower incentive compensation payments.
Investing Activities
Net cash used in investing activities for fiscal 2019 was $36 million compared to $56 million for fiscal 2018, primarily reflecting a $20 million decrease in purchases of property and equipment as we continue to invest in CCA service contracts.
Net cash used in investing activities for fiscal 2018 was $56 million compared to $58 million for fiscal 2017. The change in net cash used in investing activities reflects an $8 million net decrease in marketable securities activity as a result of the timing of securities purchases and sales, partially offset by an increase in purchases of property and equipment.
Financing Activities
Net cash used in financing activities for fiscal 2019 was $58 million compared to $138 million in fiscal 2018, primarily reflecting an $81 million decrease in share repurchases. In fiscal 2019, we paid four cash dividends at $0.0875 per share on our common stock, totaling $41 million, and received approximately $1 million in proceeds from issuing approximately 2 million shares related to employee stock ownership plans.
Net cash used in financing activities for fiscal 2018 was $138 million compared to $91 million in fiscal 2017. This $47 million increase in net cash used in financing activities primarily reflects a $54 million increase in share repurchases in fiscal 2018 compared to fiscal 2017, partially offset by a decrease in payments on net borrowings under our credit agreement in fiscal 2018. In fiscal 2018, we paid four cash dividends at $0.085 per share on our common stock, totaling $43 million, and received approximately $1 million in proceeds from issuing approximately 2 million shares related to employee stock ownership plans and stock option exercises.
Store and Franchise Activity
During fiscal 2019, we had 77 net store closures, consisting of 28 Chico's stores, 34 WHBM stores and 15 Soma stores. As part of our retail fleet optimization plan, we closed 94 underperforming stores since the announcement of our plan, with anticipated closures of approximately 60 to 70 stores in fiscal 2020. We also plan to invest in opening approximately 10 Soma stores in fiscal 2020. We continuously evaluate the appropriate store base in light of economic conditions and our business strategy and may adjust the openings and closures as conditions require or as opportunities arise. As of February 1, 2020, the Company's franchise operations consisted of 70 international retail locations in Mexico and 2 domestic airport locations.
Contractual Obligations
The following table summarizes our contractual obligations at February 1, 2020:
(1) May not cross-foot due to rounding.
As of February 1, 2020, our contractual obligations consisted of: 1) amounts outstanding under operating leases, 2) open purchase orders for inventory and other operating expenses, in the normal course of business, 3) contractual commitments for fiscal 2020 capital expenditures, 4) long-term debt obligations and 5) interest payments on long-term debt.
Until formal resolutions are reached between us and the relevant taxing authorities, we are unable to estimate a final determination related to our uncertain tax positions and therefore, we have excluded the uncertain tax positions, totaling approximately $1 million at February 1, 2020 from the above table.
Credit Facility
On August 2, 2018, the Company and certain of its domestic subsidiaries entered into a credit agreement (the “Agreement”) as borrowers and guarantors, with Wells Fargo Bank, National Association, as Agent, letter of credit issuer and swing line lender, and certain lenders party thereto. Our obligations under the Agreement are guaranteed by the subsidiary guarantors and secured by a lien on certain assets of the Company and the subsidiary borrowers and guarantors, including inventory, accounts receivable, cash deposits, and certain insurance proceeds.
The Agreement provides for a five-year asset-based senior secured revolving loan and letter of credit facility of up to $200 million, maturing August 2, 2023. In addition, during the term of the Agreement, the Company may increase the commitments under the Agreement by up to an additional $100 million, subject to customary conditions, including obtaining the agreements from the lenders to provide such commitment increase. The interest rate applicable to the loans under the
Agreement will be equal to, at the Company's option, either a base rate, determined by reference to the federal funds rate, plus an interest rate margin, or LIBOR, plus an interest rate margin, in each case, depending on availability under the Agreement. The Company expects borrowings to be at LIBOR, plus an interest rate margin. In addition, the Company will pay a commitment fee per annum on the unused portion of the commitments under the Agreement.
As of February 1, 2020, approximately $43 million in net borrowings were outstanding under the Agreement and is reflected as long-term debt in the accompanying consolidated balance sheet in this Form 10-K.
The Company is currently evaluating the impact that the pending discontinuation of, or transition away from, LIBOR will have on the Agreement. We have been in discussions with Wells Fargo Bank, National Association regarding this and do not expect the move to have a significant impact on our consolidated financial statements.
Off-Balance Sheet Arrangements
At February 1, 2020 and February 2, 2019, we did not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.
Critical Accounting Policies
The discussion and analysis of our consolidated financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors, and believes the following assumptions and estimates are significant to reporting our consolidated results of operations and financial position.
Inventory Valuation and Shrinkage
We identify potentially excess and slow-moving inventories by evaluating inventory aging, turn rates and inventory levels in conjunction with our overall sales trend. Further, inventory realization exposure is identified through analysis of gross margins and markdowns in combination with changes in current business trends. We record excess and slow-moving inventories at net realizable value and may liquidate certain slow-moving inventory through third parties. Historically, the variation of those estimates to actual results is immaterial and material variation is not expected in the future.
We estimate our expected shrinkage of inventories between our physical inventory counts by using average store shrinkage experience rates, which are updated on a regular basis. Historically, the variation of those estimates to actual results is immaterial and material variation is not expected in the future.
Revenue Recognition
Retail sales by our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under rewards programs and company issued coupons, promotional discounts and employee discounts. For sales from our websites and catalogs, revenue is recognized at the point of shipment. Amounts related to shipping and handling costs billed to customers are recorded in net sales and the related shipping and handling costs are recorded in cost of goods sold in the accompanying consolidated statements of (loss) income. Amounts paid by customers to cover shipping and handling costs are immaterial.
We sell gift cards in stores, on our Company-operated e-commerce websites and through third parties. Our gift cards do not have expiration dates. We account for gift cards by recognizing a liability at the time the gift card is sold. The liability is relieved and revenue is recognized for gift cards upon redemption. In addition, we recognize revenue for the amount of gift cards expected to go unredeemed (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We determine the gift card breakage rate based on our historical redemption patterns. We recognize revenue on the remaining unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions.
Soma offers a points-based loyalty program in which customers earn points based on purchases. Attaining specified loyalty point levels results in the issuance of reward coupons to discount future purchases. As program members accumulate points, we accrue the estimated future liability, adjusted for expected redemption rates and expirations. The liability is relieved and revenue is recognized for loyalty point reward coupons upon redemption. In addition, we recognize revenue on unredeemed points when it can be determined that the likelihood of the point being redeemed is remote and there is no legal obligation to remit the point value. We determined the loyalty point breakage rate based on historical and redemption patterns.
As part of the normal sales cycle, we receive customer merchandise returns related to store, website and catalog sales. To account for the financial impact of potential customer merchandise returns, we estimate future returns on previously sold merchandise. Reductions in sales and gross margin are recorded for estimated merchandise returns based on return history, current sales levels and projected future return levels.
Our policy towards taxes assessed by a government authority directly imposed on revenue producing transactions between a seller and a customer is, and has been, to exclude all such taxes from net sales.
Evaluation of Long-Lived Assets, Goodwill and Indefinite-Lived Intangible Assets
Long-lived assets are reviewed periodically for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. If future undiscounted cash flows expected to be generated by the asset are less than its carrying amount, an asset is determined to be impaired, and a loss is recorded for the amount by which the carrying value of the asset exceeds its fair value. The Company uses market participant rents to calculate the fair value of right of use assets ("ROU") and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores, is primarily at the store level. The estimate of future cash flows requires management to make certain assumptions and to apply judgment, including forecasting future sales and the useful lives of the assets. We exercise our best judgment based on the most current facts and circumstances surrounding our business when applying these impairment rules. We establish our assumptions and arrive at the estimates used in these calculations based upon our historical experience, knowledge of the retail industry and by incorporating third-party data, which we believe results in a reasonably accurate approximation of fair value. Nevertheless, changes in the assumptions used could have an impact on our assessment of recoverability.
We review our goodwill for impairment at the reporting unit level on an annual basis, or when circumstances indicate its carrying value may not be recoverable. We evaluate the appropriateness of performing a qualitative assessment, on a reporting unit level, based on current circumstances. If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will calculate the estimated fair value of the reporting unit. Fair value is determined based on both an income approach and market approach. The income approach is based on estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant, while the market approach is based on sales and EBITDA multiples of similar companies and/or transactions, or other available indications of value. These approaches use significant estimates and assumptions, including projected future cash flows and the timing of those cash flows, discount rates reflecting risks inherent in future cash flows, perpetual growth rates and determination of appropriate market comparables. Estimating the fair value is judgmental in nature, which could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charges. Upon adoption of Accounting Standards Update ("ASU") 2017-04 as further discussed in Note 1 to our consolidated financial statements under the heading "Business Organization and Summary of Significant Accounting Policies," goodwill impairment charges are calculated as the amount by which a reporting unit's carrying amount exceeds its fair value up to the amount of reported goodwill.
We review our other indefinite-lived intangible assets for impairment on an annual basis, or when circumstances indicate its carrying value may not be recoverable. We evaluate the appropriateness of performing a qualitative assessment based on current circumstances. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we calculate the fair value of the indefinite-lived intangible assets using a discounted cash flow method, based on the relief from royalty concept.
Operating Leases
Rent expense under store operating leases is recognized on a straight-line basis over the term of the leases. Landlord incentives, “rent-free” periods, rent escalation clauses and other fixed rental expenses are also amortized on a straight-line basis over the term of the leases, including the construction period. This is generally 60-90 days prior to the store opening date, when we generally begin improvements in preparation for our intended use. Variable rental expenses are recognized as incurred. Tenant improvement allowances are amortized as a reduction of rent expense over the term of the lease and are recorded as a deferred lease credit within deferred liabilities in fiscal 2018 and recorded within right of use assets in fiscal 2019 upon adoption of ASC 842.
Income Taxes
Income taxes are accounted for in accordance with authoritative guidance, which requires the use of the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Inherent in the measurement of deferred balances are certain judgments and interpretations of existing tax law and published guidance as applicable to our operations. Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those tax benefits are uncertain. Our effective tax rate considers management’s judgment of expected tax liabilities within the various taxing jurisdictions in which we are subject to tax.
We record amounts for uncertain tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. Consequently, changes in our assumptions and judgments could affect amounts recognized related to income tax uncertainties and may affect our consolidated results of operations or financial position. We believe our assumptions for estimates continue to be reasonable, although actual results may have a positive or negative material impact on the balances of such tax positions. Historically, the variation of estimates to actual results is immaterial and material variation is not expected in the future.
Adoption of New Accounting Pronouncements
As discussed in Note 1 and Note 8 to the accompanying consolidated financial statements under the headings "Business Organization and Summary of Significant Accounting Policies" and "Leases," respectively, we adopted ASC 842 as of February 3, 2019. As of February 1, 2020, we had $648 million, $157 million, and $556 million of operating lease right of use assets, current portion of operating lease liabilities and noncurrent portion of operating lease liabilities, respectively, as a result of the adoption of this accounting standard.
Recently Issued Accounting Pronouncements
See Note 1 to the accompanying consolidated financial statements under the heading "Business Organization and Summary of Significant Accounting Policies" for a description of certain newly issued accounting pronouncements which may impact our financial statements in future reporting periods.
Forward-Looking Statements
This Form 10-K may contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to certain events that could have an effect on our future financial performance, including but without limitation, statements regarding our plans, objectives, and the future success of our store concepts and business initiatives. These statements may address items such as future sales and sales initiatives, business strategies and strategic initiatives, customer traffic, gross margin expectations, SG&A expectations, including expected savings, operating margin expectations, earnings per share expectations, planned store openings, closings and expansions, proposed business ventures, new channels of sales or distribution, expected impact of ongoing litigation, future stock repurchase plans, future plans to pay dividends, future comparable sales, future product sourcing plans, future inventory levels, including the ability to leverage inventory management and targeted promotions, planned marketing expenditures, planned capital expenditures and future cash needs.
These statements relate to expectations concerning matters that are not historical fact and may include the words or phrases such as “will,” “should,” “expects,” “believes,” “anticipates,” “plans,” “intends,” “estimates,” “approximately,” “our planning assumptions,” “future outlook” and similar expressions. Except for historical information, matters discussed in this Form 10-K are forward-looking statements. These forward-looking statements are based largely on information currently available to our management and on our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those currently anticipated. Although we believe our expectations are based on reasonable
estimates and assumptions, they are not guarantees of performance and there are a number of known and unknown risks, uncertainties, contingencies and other factors (many of which are outside our control) that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Accordingly, there is no assurance that our expectations will, in fact, occur or that our estimates or assumptions will be correct, and we caution investors and all others not to place undue reliance on such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A, “Risk Factors” in this Annual Report on Form 10-K and the following:
The financial strength of retailing in particular and the economy in general; the extent of financial difficulties or economic uncertainty that may be experienced by customers; changes in the general or specialty or apparel industries; significant shifts in consumer behavior; our ability to secure and maintain customer acceptance of styles and in-store and online concepts; the ability to leverage inventory management and targeted promotions; the ability to effectively manage our inventory and allocation processes; the extent and nature of competition in the markets in which we operate; the ability to remain competitive with customer shipping terms and costs pertaining to product deliveries and returns; the extent of the market demand and overall level of spending for women's private branded clothing and related accessories; the effectiveness of our brand strategies, awareness and marketing programs; the ability to coordinate product development with buying and planning; the quality and timeliness of merchandise received from suppliers; changes in the costs of manufacturing, raw materials, transportation, distribution, labor and advertising; the availability of quality store sites; our ability to manage our store fleet and the risk that our investments in merchandise or marketing initiatives may not deliver the results we anticipate; our ability to successfully navigate the increasing use of on-line retailers for fashion purchases and the pressure that puts on traffic and transactions in our physical stores; the ability to operate our own retail websites in a manner that produces profitable sales; the ability to successfully identify and implement additional sales and distribution channels; the ability to successfully execute our business strategies and particular strategic initiatives (including, but not limited to, the Company’s revised organizational cost structure, retail fleet optimization plan and three operating priorities which are driving stronger sales through improved product and marketing; optimizing the customer journey by simplifying, digitizing and extending the Company’s unique and personalized service; and transforming sourcing and supply chain operations to increase product speed to market and improve quality), sales initiatives and multi-channel strategies, customer traffic; and to achieve the expected results from them; the continuing performance, implementation and integration of management information systems; the impact of any systems failures, cyber security or other data or security breaches, including any security breaches that result in theft, transfer, or unauthorized disclosure of customer, employee, or company information or our compliance with domestic and foreign information security and privacy laws and regulations in the event of such an incident; the ability to hire, train, motivate and retain qualified sales associates, managerial employees and other employees; the successful recruitment of leadership and the successful integration of new members of our senior management team; uncertainties regarding future unsolicited offers to buy the Company and our ability to respond effectively to them as well as to actions of activist shareholders and others; changes in the political environment that create consumer uncertainty; significant changes to product import and distribution costs (such as unexpected consolidation in the freight carrier industry); the ability to utilize our distribution center and other support facilities in an efficient and effective manner; the ability to secure and protect trademarks and other intellectual property rights and to protect our reputation and brand images; the risk that natural disasters, public health crises, political uprisings, uncertainty or unrest, or other catastrophic events could adversely affect our operations and financial results, including the impact of the coronavirus outbreak on manufacturing operations in China and our supply chain, customer traffic and our operations in general; the impact of unanticipated changes in legal, regulatory or tax laws; the risks and uncertainties that are related to our reliance on sourcing from foreign suppliers, including significant economic (including the impact of changes in tariffs, taxes or other import regulations, particularly with respect to China), labor, political or other shifts; and changes in governmental policies in or towards foreign countries; currency exchange rates and other similar factors.
All forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Quarterly Report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of our financial instruments as of February 1, 2020 has not significantly changed since February 2, 2019. We are exposed to market risk from changes in interest rates on any future indebtedness and our marketable securities and from foreign currency exchange rate fluctuations.
Our exposure to interest rate risk relates in part to our revolving line of credit with our bank. On August 2, 2018, we entered into a new credit agreement, as further discussed in Note 10 to the accompanying consolidated financial statements under the heading "Debt." The Agreement, which matures on August 2, 2023, has borrowing options which accrue interest, at our election, at either a base rate, determined by reference to the federal funds rate, plus an interest rate margin, or LIBOR, plus an interest rate margin, as defined in the Agreement. As of February 1, 2020, $42.5 million in net borrowings were outstanding under the Agreement and is reflected as long-term debt in the accompanying consolidated balance sheet. An increase or decrease in market interest rates of 100 basis points would not have a material effect on annual interest expense. This hypothetical analysis may differ from the actual experience or market developments that could result in a change in interest rates under the Agreement.
The Company is currently evaluating the impact that the pending discontinuation of, or transition away from, LIBOR will have on the Agreement. We have been in discussions with Wells Fargo Bank, National Association regarding this and do not expect the move to have a significant impact on the accompanying consolidated financial statements.
Our investment portfolio is maintained in accordance with our investment policy which identifies allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. Our investment portfolio consists of cash equivalents and marketable securities including corporate bonds and commercial paper. The marketable securities portfolio as of February 1, 2020, consisted of $34.0 million of securities with maturity dates within one year or less and $29.9 million with maturity dates over one year and less than or equal to two years. We consider all securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classify these securities as short-term investments within current assets on the consolidated balance sheets as they are available to support current operational liquidity needs. As of February 1, 2020, an increase or decrease of 100 basis points in interest rates would not have a material effect on the fair value of our marketable securities portfolio.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Chico’s FAS, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Chico’s FAS, Inc. and subsidiaries (the Company) as of February 1, 2020 and February 2, 2019, the related consolidated statements of (loss) income, comprehensive (loss) income, shareholders' equity and cash flows for each of the three fiscal years in the period ended February 1, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 1, 2020 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 16, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 and Note 8 to the consolidated financial statements, the Company changed its method of accounting for leases in fiscal 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02 (Topic 842), Leases, as amended.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2002.
Tampa, Florida
March 16, 2020
CHICO’S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(In thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated statements.
CHICO’S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
The accompanying notes are an integral part of these consolidated statements.
CHICO’S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
The accompanying notes are an integral part of these consolidated statements.
CHICO’S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated statements.
CHICO’S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of these consolidated statements.
CHICO’S FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and where otherwise indicated)
1.
BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
The accompanying consolidated financial statements include the accounts of Chico’s FAS, Inc., a Florida corporation, and its wholly-owned subsidiaries (“the Company”, “we”, “us” and “our”). We operate as an omnichannel specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates and complementary accessories. We currently sell our products through retail stores, catalogs and via our websites at www.chicos.com, www.chicosofftherack.com, www.whbm.com, www.soma.com and mytelltale.com. As of February 1, 2020, we had 1,341 stores located throughout the United States ("U.S."), Puerto Rico, the U.S. Virgin Islands and Canada, and sold merchandise through 70 international franchise locations in Mexico.
Fiscal Year
Our fiscal years end on the Saturday closest to January 31 and are designated by the calendar year in which the fiscal year commences. The periods presented in these consolidated financial statements are the fiscal years ended February 1, 2020 (“fiscal 2019” or “current period”), February 2, 2019 (“fiscal 2018” or “prior period”) and February 3, 2018 (“fiscal 2017”). Each of of these periods had 52 weeks, except for fiscal 2017, which consisted of 53 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segment Information
Our operating segments consist of our Chico's brand, our White House Black Market ("WHBM") brand and our Intimates Group, which includes our Soma and TellTale brands. Our three operating segments are aggregated into one reportable segment due to the similarities of the economic and operating characteristics of the brands.
Adoption of New Accounting Pronouncements
Effective February 3, 2019, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-02, Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company also adopted the package of practical expedients issued in subsequent ASUs related to ASU 2016-02. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements, to Accounting Standard Codification ("ASC") 842, Leases ("ASC 842"), which included a provision to apply ASC 842 at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected to use the initial application date as the effective date of ASC 842. Consequently, the comparative periods are presented in accordance with ASC 840, Leases, and are not restated in accordance with ASC 842. As a result of the adoption of ASC 842, on February 3, 2019, we recorded operating lease right of use ("ROU") assets of $764.1 million and lease liabilities of $845.7 million. On February 3, 2019, the Company recorded a cumulative effect adjustment of $1.3 million as a decrease to opening retained earnings upon adoption of ASC 842. The adoption of ASC 842 had an immaterial impact on the accompanying consolidated results of operations and statement of cash flows for fiscal 2019. Additional information and disclosures required by this new standard are contained in Note 8, Leases.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks, short-term highly liquid investments with original maturities of three months or less and payments due from banks for third-party credit card and debit transactions for approximately 3 to 5 days of sales.
Marketable Securities
Marketable securities are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of income taxes, reflected in accumulated other comprehensive income until realized. For the purposes of computing realized and unrealized gains and losses, cost and fair value are determined on a specific identification basis. We consider all securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classify these securities within current assets on the consolidated balance sheets as they are available to support current operational liquidity needs.
Fair Value of Financial Instruments
Our consolidated financial instruments consist of cash, money market accounts, marketable securities, assets held in our non-qualified deferred compensation plan, accounts receivable, accounts payable and debt. Cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value due to the short-term nature of the instruments.
Inventories
We use the moving average cost method to determine the cost of merchandise inventories. We identify potentially excess and slow-moving inventories by evaluating inventory aging, turn rates and inventory levels in conjunction with our overall sales trend. Further, inventory realization exposure is identified through analysis of gross margins and markdowns in combination with changes in current business trends. We record excess and slow-moving inventories at net realizable value and may liquidate certain slow-moving inventory through third parties. We estimate our expected shrinkage of inventories between physical inventory counts by using average store shrinkage experience rates, which are updated on a regular basis. Substantially all of our inventories consist of finished goods.
Costs associated with sourcing are generally capitalized while merchandising, distribution and product development costs are generally expensed as incurred and are included in the accompanying consolidated statements of (loss) income as a component of cost of goods sold ("COGS"). Approximately 19% of total purchases in fiscal 2019 and 2018 were made from one supplier. In fiscal 2019 and 2018, approximately 46% and 48% of our merchandise cost originated in China, respectively.
Capitalized Costs in Cloud Computing Arrangements
We capitalize implementation costs in cloud computing arrangement ("CCA") service contracts. Unamortized capitalized costs were $10.9 million as of February 1, 2020 and $1.1 million as of February 2, 2019. Accumulated amortization was $0.1 million as of February 1, 2020 and $0.0 million as of February 2, 2019. Expense related to capitalized CCA contracts was $0.1 million in fiscal 2019 and $0.0 million in fiscal 2018.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation of property and equipment is provided on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their estimated useful lives (generally 10 years or less) or the related lease term, plus one anticipated renewal when there is an economic cost associated with non-renewal.
Our property and equipment is generally depreciated using the following estimated useful lives:
Maintenance and repairs of property and equipment are expensed as incurred, and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation or amortization are eliminated from the accounts, and any gain or loss is charged to income.
Operating Leases
Beginning on February 3, 2019, the Company accounts for leases pursuant ASC 842 as established by ASU 2016-02. We determine if an arrangement is a lease at inception. Operating leases are included in ROU assets, current lease liabilities and long-term lease liabilities in our condensed consolidated balance sheet. The Company does not have finance leases in the periods presented.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of fixed lease payments over the lease term. The operating lease ROU asset represents the net present value of fixed payments required under the lease, discounted at the Company's incremental borrowing rate, offset by impairments and lease incentives such as tenant improvements and deferred rent balances.
Our leases do not provide an implicit rate. Accordingly, we use the Company's incremental borrowing rate at commencement date in determining the present value of lease payments over the lease term. Furthermore, we elected to apply a portfolio approach, using the same discount rate applied to a portfolio of leases for similar asset types with a similar lease term.
Our lease terms may include options to extend or terminate the lease. When it is reasonably certain that we will exercise an option to extend or terminate a lease, the Company will adjust its ROU asset and lease liability. For leases with no impairment of the ROU asset, lease expense is recognized on a straight-line basis over the lease term. For stores with impairment of the ROU asset, lease expense consists of straight-line amortization of the ROU asset and the implicit interest expense on the lease liability.
We have lease agreements with lease and non-lease components. We have made a policy election to treat both lease and non-lease components as a single component and account for the full consideration as a single lease component. This policy election is applied to all asset classes for which the Company is a lessee.
We lease retail stores and a limited amount of office space under operating leases. The majority of our lease agreements provide for tenant improvement allowances, rent escalation clauses and/or contingent rent provisions. Tenant improvement allowances are amortized as a reduction of rent expense over the term of the lease and are recorded as a deferred lease credit within deferred liabilities in fiscal 2018 and recorded within ROU in fiscal 2019 upon adoption of ASC 842. Rent escalation clauses, “rent-free” periods and other fixed rental expenses are amortized on a straight-line basis over the term of the leases, including the construction period. Variable rental expenses are recognized as incurred.
Certain leases provide for contingent rents based on defined criteria, such as gross sales in excess of a specified level. We record a contingent rent liability in accrued liabilities on the consolidated balance sheets and the corresponding rent expense when the criteria has been achieved or is probable.
Additionally, we have a nominal number of leases that meet the standard's definition of a "short-term lease" (a lease that, at the commencement date, has a lease term of twelve months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). We have made a policy election to recognize these leases as incurred and have not recognized a ROU asset or corresponding lease liability for them. The Company's short-term leases are not material.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-lived intangible assets are assessed for impairment at least annually. We perform our annual impairment test during the fourth quarter, or more frequently should events or circumstances change that would indicate that impairment may have occurred.
Goodwill represents the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Impairment testing for goodwill is done at a reporting unit level. Reporting units are defined as an operating segment or one level below an operating segment, called a component. Using these criteria, we identified our reporting units and concluded that the goodwill related to the territorial franchise rights for the state of Minnesota should be allocated to the Chico’s reporting unit and the goodwill associated with the WHBM acquisition should be assigned to the WHBM reporting unit.
We evaluate the appropriateness of performing a qualitative assessment, on a reporting unit level, based on current circumstances. If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we calculate the estimated fair value of the reporting unit. Fair value is determined based on both an income approach and market approach. The income approach is based on estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant, while the market approach is based on sales and EBITDA multiples of similar companies and/or transactions, or other available indications of value.
For fiscal 2017, we performed a qualitative assessment of the goodwill associated with the Chico's and WHBM reporting units and concluded it was more likely than not that the fair value exceeded the carrying amount as of the annual assessment dates. Had the Company elected to bypass the qualitative assessment, or if the results of the qualitative assessment indicated that it was more likely than not that the fair value of a reporting unit was less than its carrying amount, a two-step impairment test would have been performed. The first step of the impairment test compares the fair value of our reporting units with their carrying amounts, including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss.
In fiscal 2018, the Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment testing will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will then be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill. For fiscal 2019 and 2018, we elected to bypass the qualitative assessment and perform impairment testing for each of our reporting units. The estimated fair value of each of our reporting units exceeded the respective carrying value and, as such, we concluded that the goodwill was not impaired.
We test indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the intangible is less than its carrying amount. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of the intangible is less than its carrying amount, we calculate the value of the indefinite-lived intangible assets using a discounted cash flow method, based on the relief from royalty concept, and compare the fair value to the carrying value to determine if the asset is impaired. We may elect to bypass the qualitative assessment when appropriate based on current circumstances. For fiscal 2017, we performed a qualitative assessment of the WHBM trade name and concluded it was more likely than not that the fair value exceeded the carrying amount as of the annual assessment dates. For fiscal 2019 and 2018, we elected to bypass the qualitative assessment and perform impairment testing on the WHBM trade name. The estimated fair value of the WHBM trade name exceeded the respective carrying value and, as such, we concluded the WHBM trade name was not impaired.
Accounting for the Impairment of Long-lived Assets
Long-lived assets, including definite-lived intangibles, are reviewed periodically for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. If future undiscounted cash flows expected to be generated by the asset are less than its carrying amount, an asset is determined to be impaired. The Company uses market participant rents to calculate the fair value of right of use assets ("ROU") and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores, is primarily at the store level.
In fiscal 2019, 2018 and 2017, we completed an evaluation of our long-lived assets at certain underperforming stores for indicators of impairment and, as a result, recorded pre-tax impairment charges of approximately $1.3 million, $13.3 million and $6.0 million, respectively, which are primarily included in COGS in the accompanying consolidated statements of (loss) income. Pre-tax impairment charges of long-lived assets in fiscal 2018 included $9.4 million in connection with our retail fleet optimization plan as further discussed in Note 3, Retail Fleet Optimization Plan, and in fiscal 2017, included $2.9 million resulting from hurricanes Harvey, Irma and Maria.
In fiscal 2018, the Company adopted ASU 2018-05, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, under which entities are able to capitalize implementation costs in a cloud computing arrangement service contract. In fiscal 2019, we completed an evaluation of capitalized implementation costs in our cloud computing arrangements for indicators of impairment and, as a result, recorded pre-tax impairment charges of approximately $2.0 million, which is included in selling, general and administrative expenses ("SG&A") in the accompanying consolidated statements of (loss) income.
In fiscal 2019, the Company adopted ASC 842, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. As a result, operating lease assets became subject to the same impairment guidance applied to other long-lived assets. On February 3, 2019, the Company recorded a transition day fair value impairment on our ROU asset of $1.3 million, after-tax, as a decrease to opening retained earnings upon adoption of this accounting standard.
Revenue Recognition
Retail sales by our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under rewards programs and company issued coupons, promotional discounts and employee discounts. For sales from our websites and catalogs, in fiscal 2019 and 2018, revenue is recognized at the point of shipment whereas in fiscal 2017, revenue was recognized at the time we estimated the customer received the product, which was typically within a few days of shipment. Amounts related to shipping and handling costs billed to customers are recorded in net sales and the related shipping and handling costs are recorded in COGS in the accompanying consolidated statements of (loss) income.
We sell gift cards in stores, on our Company-operated e-commerce websites and through third parties. Our gift cards do not have expiration dates. We account for gift cards by recognizing a liability at the time the gift card is sold. The liability is relieved and revenue is recognized, net of third-party sales commissions, for gift cards upon redemption. In addition, we recognize revenue for the amount of gift cards expected to go unredeemed (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We determine the gift card breakage rate based on our historical redemption patterns. We recognize revenue on the remaining unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions.
As part of the normal sales cycle, we receive customer merchandise returns related to store, website and catalog sales. To account for the financial impact of potential customer merchandise returns, we estimate future returns on previously sold merchandise. Reductions in sales and gross margin are recorded for estimated merchandise returns based on return history, current sales levels and projected future return levels.
Our policy towards taxes assessed by a government authority directly imposed on revenue producing transactions between a seller and a customer is, and has been, to exclude all such taxes from net sales.
Advertising Costs
For fiscal 2019, 2018 and 2017, advertising costs associated with the production of non-media advertising are charged to expense as incurred. For fiscal 2019 and 2018, media production costs (such as television, magazine and catalogs) are expensed when the advertising first takes place whereas in 2017, these expenses were amortized over their expected period of future benefit, which was typically less than six weeks. For fiscal 2019, 2018 and 2017, advertising expense was approximately $103.3 million, $102.5 million and $94.5 million, respectively, and is included within SG&A in the accompanying consolidated statements of (loss) income.
Treasury Stock
Treasury stock is accounted for at cost. These shares are not retired and are excluded from the calculation of earnings per share.
Share-Based Compensation
Share-based compensation for all awards is based on the grant date fair value of the award, net of estimated forfeitures, and is recognized over the requisite service period of the awards. The fair value of restricted stock awards and performance-based awards, except for the grants of special performance-based restricted stock units ("PSUs") made in August and October 2019 as further discussed in Note 13, Share-Based Compensation Plans and Capital Stock Transactions, is determined by using the closing price of the Company’s common stock on the date of the grant. A Monte Carlo simulation under the option pricing framework was used to determine the grant-date fair value of the special PSU grants made in August and October 2019. Compensation expense for performance-based awards is recorded based on the amount of the award ultimately expected to vest, depending on the level and likelihood of the performance condition being met.
Shipping and Handling Costs
Shipping and handling costs to transport goods to customers amounted to $62.8 million, $58.5 million and $40.5 million in fiscal 2019, 2018 and 2017, respectively, and are included within COGS in the accompanying consolidated statements of (loss) income.
Store Occupancy and Pre-Opening Costs
Store occupancy and pre-opening costs (including store-related costs and training expenses) incurred prior to the opening of new stores are expensed as incurred and are included within cost of sales in the accompanying consolidated statements of (loss) income.
Income Taxes
Income taxes are accounted for in accordance with authoritative guidance, which requires the use of the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, we follow a comprehensive model to recognize, measure, present and disclose in our consolidated financial statements the estimated aggregate tax liability of uncertain tax positions that we have taken or expect to take on a tax return. This model states that a tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the ultimate settlement with a taxing authority having full knowledge of all relevant information.
Foreign Currency
The functional currency of our foreign operations is generally the applicable local currency. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect as of the balance sheet date, while revenues and expenses are translated at the current exchange rate in effect as of the date of the transaction. The resulting translation adjustments are recorded as a component of comprehensive income in the consolidated statements of comprehensive (loss) income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in the consolidated statements of (loss) income.
Self-Insurance
We are self-insured for certain losses relating to workers’ compensation, medical and general liability claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management’s estimates of the aggregate liability for uninsured claims incurred based on historical experience. While we do not expect the amount we will ultimately pay to differ significantly from our estimates, self-insurance accruals could be affected if future claims experience differs significantly from the historical trends and assumptions.
Supplier Allowances
From time to time, we receive allowances and/or credits from certain of our suppliers. The aggregate amount of such allowances and credits, which is included in COGS, is immaterial to our consolidated results of operations.
Earnings Per Share
In accordance with relevant accounting guidance, unvested share-based payment awards that include non-forfeitable rights to dividends, whether paid or unpaid, are considered participating securities. As a result, such awards are required to be included in the calculation of earnings per common share pursuant to the “two-class” method. For us, participating securities are composed entirely of unvested restricted stock awards and PSUs that have met their relevant performance criteria.
Under the two-class method, net income is reduced by the amount of dividends declared in the period for common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period including the participating securities. Diluted EPS reflects the dilutive effect of potential common shares from non-participating securities such as stock options, PSUs and restricted stock units.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The amendments related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. We do not anticipate adoption to have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The update and additional changes, modifications, clarifications, or interpretations related to this guidance thereafter, changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The guidance is to be applied using the modified-retrospective approach. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact the adoption will have on our consolidated financial statements by assessing the impact of historical collection rates of receivables as well as the credit ratings of the payees and reviewing the materiality of unrealized losses within our available for sale debt securities.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company’s adoption of ASU 2019-12 will not have a material impact on the Company’s consolidated results of operations and financial position. The Company is currently evaluating the impact that the adoption of the provisions of this ASU will have on its consolidated financial statements.
2.
REVENUE RECOGNITION:
Disaggregated Revenue
The following table disaggregates our operating segment revenue by brand, which we believe provides a meaningful depiction of the nature of our revenue. Amounts shown include licensing and wholesale income, which is not a significant component of total revenue, and is aggregated within the respective brands in the table below.
(1) Includes TellTale net sales, which is not a significant component of Soma revenue.
Contract Liability
Contract liabilities on the accompanying consolidated balance sheets are comprised of obligations associated with our gift card and customer loyalty programs. As of February 1, 2020 and February 2, 2019, contract liabilities primarily consisted of gift cards of $40.1 million and $42.6 million, respectively. For fiscal 2019, the Company recognized $25.3 million of revenue that was previously included in the gift card contract liability as of February 2, 2019. For fiscal 2018, the Company recognized $28.7 million of revenue that was previously included in the gift card contract liability as of February 3, 2018. The contract liability for our loyalty program was not material as of February 1, 2020 or February 2, 2019.
Performance Obligation
For fiscal 2019, revenue recognized from performance obligations to customers related to prior periods was not material. Revenue to be recognized in future periods related to performance obligations is not expected to be material.
3.
RETAIL FLEET OPTIMIZATION PLAN:
In the fourth quarter of fiscal 2018, the Company announced a three-year retail fleet optimization plan to rebalance the mix between our physical store presence and our digital network. This initiative is part of the Company's efforts to better capitalize on its omnichannel platform, reduce costs, and improve our profitability and return on invested capital. In fiscal 2019, the Company recorded pre-tax accelerated depreciation charges within COGS of $11.1 million associated with this retail fleet optimization plan. In fiscal 2018, the Company recorded pre-tax accelerated depreciation and impairment charges within COGS of $1.3 million and $9.4 million, respectively.
A summary of the retail fleet optimization charges is presented in the table below:
(1) Adjustments for accelerated depreciation and impairment charges reflect the impact of incremental store closures included in the Company’s retail fleet optimization plan.
(2) Reflects the impact of accelerated depreciation on property and equipment due to the change in the useful life of store assets for store closures added as a result of the Company’s retail fleet optimization plan.
4.
MARKETABLE SECURITIES:
Marketable securities are classified as available-for-sale and generally consist of corporate bonds, commercial paper, U.S. government agencies and municipal securities. At February 1, 2020, we had $34.0 million of securities with maturity dates within one year or less and $29.9 million with maturity dates over one year and less than two years. As of February 1, 2020, marketable securities consisted of corporate bonds and commercial paper which exceed their amortized cost bases and are not other-than-temporarily impaired.
The following tables summarize our investments in marketable securities at February 1, 2020 and February 2, 2019:
5.
FAIR VALUE MEASUREMENTS:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Entities are required to use a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities, or; Unadjusted quoted
prices for identical or similar assets or liabilities in markets that are not active, or; Inputs other than quoted
prices that are observable for the asset or liability
Level 3 - Unobservable inputs for the asset or liability.
We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as available-for-sale securities, certain cash equivalents, specifically our money market accounts and assets held in our non-qualified deferred compensation plan. The money market accounts are valued based on quoted market prices in active markets. Our marketable securities are generally valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third-party pricing entities, except for U.S. government securities which are valued based on quoted market prices in active markets. The investments in our non-qualified deferred compensation plan are valued using quoted market prices and are included in other assets on our consolidated balance sheets.
From time to time, we measure certain other assets, net at fair value on a non-recurring basis. This includes the evaluation of long-lived assets, goodwill and other intangible assets for impairment using Company-specific assumptions which would fall within Level 3 of the fair value hierarchy.
We assess the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses market participant rents to calculate the fair value of ROU assets and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores, is primarily at the store level.
To assess the fair value of goodwill, we utilize both an income approach and a market approach. Inputs used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant. Inputs used to calculate the fair value based on the market approach include identifying sales and EBITDA multiples based on guidelines for similar publicly traded companies and recent transactions when relevant comparable transactions exist.
To assess the fair value of trade names, we utilize a relief from royalty approach. Inputs used to calculate the fair value of the trade names primarily include future sales projections, discounted at a rate that approximates the cost of capital of a market participant and an estimated royalty rate.
The carrying value of goodwill for the Chico's and WHBM reporting units and WHBM trade name as of both February 1, 2020 and February 2, 2019 was $36.4 million, $60.4 million and $34.0 million, respectively. No impairment charges were recognized in fiscal 2019 and fiscal 2018. If profitability trends do not improve as projected for our Chico's and WHBM reporting units, or if market conditions continue to deteriorate, it is possible that a future interim test may result in an impairment of these assets.
In fiscal 2019 and fiscal 2018, the outstanding debt of $42.5 million and $57.5 million, respectively, under our revolving loan and letter of credit facility approximates fair value as this instrument has a variable interest rate which approximates current market rates (Level 2 criteria).
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
During fiscal 2019, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, during fiscal 2019 and fiscal 2018, we did not have any Level 3 financial assets measured on a recurring basis. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
In accordance with the provisions of the guidance, we categorized our financial assets and liabilities which are valued on a recurring basis, based on the priority of the inputs to the valuation technique for the instruments, as follows:
6.
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consisted of the following:
7.
PROPERTY AND EQUIPMENT, NET:
Property and equipment, net, consisted of the following:
Total depreciation expense for fiscal 2019, 2018 and 2017 was $88.0 million, $91.2 million and $96.2 million, respectively. Depreciation expense in fiscal 2019 and 2018 included $11.1 million and $1.3 million of accelerated depreciation, respectively, in connection with our retail fleet optimization plan as further discussed in Note 3, Retail Fleet Optimization Plan.
8.
LEASES:
We lease retail stores, a limited amount of office space and certain office equipment under operating leases expiring in various years through the fiscal year ending 2030. All of our leases have been classified as operating leases and are recognized and measured as such.
Certain operating leases provide for renewal options that are at a pre-determined period and rental value. Furthermore, certain leases provide that we may cancel the lease if our retail sales at that location fall below an established level. Within the first few years of the initial lease term, a majority of our store operating leases contain cancellation clauses that allow the leases to be terminated at our discretion, if certain minimum sales levels are not met. In the normal course of business, operating leases are typically renewed or replaced by other leases.
Escalation of operating lease payments of certain leases depend on an existing index or rate, such as the consumer price index or the market interest rate. These are considered variable lease payments and are included in lease payments when the escalation is known.
Operating lease expense was as follows:
(1) Includes approximately $22.6 million in variable lease costs for fiscal 2019.
Supplemental balance sheet information related to operating leases was as follows:
(1) The incremental borrowing rate used by the Company is based on the rate at which the Company could borrow funds using its credit rating for a collateralized loan of similar term to the lease. The weighted average discount rate represents a weighted average of the incremental borrowing rate for each lease, weighted based on the remaining fixed lease obligations.
Supplemental cash flow information related to operating leases was as follows:
Minimum future rental payments under non-cancelable operating leases (including leases with certain minimum sales cancellation clauses described below and exclusive of variable common area maintenance charges and/or contingent rental payments based on sales) as of February 1, 2020, are approximately as follows:
Certain leases provide that we may cancel the lease if our retail sales at that location fall below an established level. A majority of our store operating leases contain cancellation clauses that allow the leases to be terminated at our discretion, if certain minimum sales levels are not met within the first few years of the lease term. We have not historically met or exercised a significant number of these cancellation clauses and, therefore, have included commitments for the full lease terms of such leases in the above table. For fiscal 2019, 2018 and 2017, total rent expense under operating leases was approximately $250.8 million, $261.3 million and $263.7 million, respectively, including common area maintenance charges of approximately $45.7 million, $48.0 million and $47.9 million, respectively, other rental charges of approximately $38.4 million, $40.9 million and $40.3 million, respectively, and contingent rental expense, based on sales, of approximately $4.9 million, $3.6 million and $4.3 million, respectively.
9.
OTHER CURRENT AND DEFERRED LIABILITIES:
Other current and deferred liabilities consisted of the following:
(1) In August 2018, the FASB issued ASU 2018-11, Targeted Improvements, to ASC 842, which included a provision to apply ASC 842 at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected to use the initial application date as the effective date of ASC 842. Consequently, the comparative periods are presented in accordance with ASC 840, Leases, and are not restated in accordance with ASC 842.
10.
DEBT:
On August 2, 2018, the Company and certain of its domestic subsidiaries entered into a credit agreement (the “Agreement”) as borrowers and guarantors, with Wells Fargo Bank, National Association, as Agent, letter of credit issuer and swing line lender, and certain lenders party thereto. Our obligations under the Agreement are guaranteed by the subsidiary guarantors and secured by a lien on certain assets of the Company and the subsidiary borrowers and guarantors, including inventory, accounts receivable, cash deposits, and certain insurance proceeds. The Agreement provides for a five-year asset-based senior secured revolving loan and letter of credit facility of up to $200 million, maturing August 2, 2023. In addition, during the term of the Agreement, the Company may increase the commitments under the Agreement by up to an additional $100 million, subject to customary conditions, including obtaining the agreements from the lenders to provide such commitment increase. The interest rate applicable to the loans under the Agreement will be equal to, at the Company's option, either a base rate, determined by reference to the federal funds rate, plus an interest rate margin, or LIBOR, plus an interest rate margin, in each case, depending on availability under the Agreement. The Company expects borrowings to be at LIBOR, plus an interest rate margin. In addition, the Company will pay a commitment fee per annum on the unused portion of the commitments under the Agreement.
The Agreement contains customary representations, warranties, and affirmative covenants, as well as customary negative covenants, that, among other things restrict, subject to certain exceptions, the ability of the Company and certain of its domestic subsidiaries to: (i) incur liens, (ii) make investments, (iii) issue or incur additional indebtedness, (iv) undergo significant corporate changes, including mergers and acquisitions, (v) make dispositions, (vi) make restricted payments, (vii) prepay other indebtedness and (viii) enter into certain other restrictive agreements. The Company may pay cash dividends and repurchase shares under its share buyback program, subject to certain thresholds of available borrowings based upon the lesser of the aggregate amount of commitments under the Agreement and the borrowing base, determined after giving effect to any such transaction or payment, on a pro forma basis.
As of February 1, 2020, our outstanding debt consisted of $42.5 million in borrowings under the Agreement, resulting in $157.5 million available for borrowings under the revolving loan and letter of credit facility. As of February 1, 2020, deferred financing costs of $0.4 million was outstanding related to the Agreement, and is presented in other current assets in the accompanying consolidated balance sheet.
The following table provides details on our debt outstanding as of February 1, 2020 and February 2, 2019:
There are no debt payments due through fiscal year 2022 and $42.5 million is due in fiscal 2023.
11.
OTHER NONCURRENT AND DEFERRED LIABILITIES:
Other Noncurrent and Deferred liabilities consisted of the following:
(1) In August 2018, the FASB issued ASU 2018-11, Targeted Improvements, to ASC 842, which included a provision to apply ASC 842 at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected to use the initial application date as the effective date of ASC 842. Consequently, the comparative periods are presented in accordance with ASC 840, Leases, and are not restated in accordance with ASC 842.
Deferred rent represents the difference between operating lease obligations currently due and operating lease expense, which is recorded on a straight-line basis over the appropriate respective terms of the leases. In fiscal 2019, deferred rent is presented within right of use assets.
Deferred lease credits represent construction allowances received from landlords and are amortized as a reduction of rent expense over the appropriate respective terms of the related leases. In fiscal 2019, deferred lease credits are presented within right of use assets.
12.
COMMITMENTS AND CONTINGENCIES:
Leases
Information regarding our lease commitments and contingencies, including total rent expense under operating leases and minimum future rental payments under non-cancelable operating leases (including leases with certain minimum sales cancellation clauses and exclusive of variable common area maintenance charges and/or contingent rental payments based on sales), as of February 1, 2020, is incorporated by reference from Note 8, Leases.
Open Purchase Orders
At February 1, 2020 and February 2, 2019, we had approximately $325.6 million and $321.8 million, respectively, of open purchase orders for inventory, in the normal course of business.
Legal Proceedings
In July 2015, White House Black Market, Inc. ("WHBM") was named as a defendant in Altman v. White House Black Market, Inc., a putative class action filed in the United States District Court for the Northern District of Georgia ("District Court"). The complaint alleges that WHBM, in violation of federal law, willfully published more than the last five digits of a credit or debit card number on customers' point-of-sale receipts. The plaintiff seeks an award of statutory damages of $100 to $1,000 for each alleged willful violation of the law, as well as attorneys' fees, costs and punitive damages. WHBM denies the material allegations of the complaint and believes the case is without merit. On February 12, 2018, the District Court issued an order certifying the class.
On April 9, 2018, the District Court, sua sponte, issued an order granting WHBM's earlier 2016 request to appeal, to the Eleventh Circuit Court of Appeals ("Eleventh Circuit"), the District Court's ruling that the plaintiff has standing to maintain the lawsuit. On April 19, 2018, WHBM filed a petition for review in the Eleventh Circuit. In the meantime, the District Court stayed all further proceedings in the case pending the outcome of the appeal in the Eleventh Circuit.
On July 12, 2018, the plaintiff and WHBM notified the Eleventh Circuit that the plaintiff and WHBM had reached a class settlement on all claims and therefore voluntarily dismissed WHBM's appeal to the Eleventh Circuit. On August 2, 2018, the District Court reopened the case for purposes of reviewing/approving the proposed settlement. On October 22, 2018, the plaintiff filed the settlement papers with the District Court, along with a motion to stay the District Court's consideration of the
settlement pending the Eleventh Circuit's final disposition of Muransky v. Godiva Chocolatier, Inc., in which the Eleventh Circuit held, in an opinion issued October 3, 2018 and supplemented on April 22, 2019, that the display of the first six and last four digits of a credit or debit card number on a customer's receipt given at the point of sale establishes a "concrete injury" sufficient to confer Article III standing, enabling the customer to maintain a lawsuit. The District Court granted the motion to stay on November 15, 2018. A petition for rehearing on the October 2018 opinion was filed in the Muransky case on October 24, 2018. In October 2019, the Eleventh Circuit granted rehearing and, on February 25, 2020, heard oral argument in the en banc appeal. The Muransky opinion, if not altered on the petition for rehearing, would bind the District Court in the Altman case and likely establish that the plaintiff has standing to maintain her lawsuit against WHBM. In such event, the stay will be lifted and the proposed settlement will be reviewed by the District Court. If the Eleventh Circuit holds that there is not standing in the Muransky case, the parties have agreed to submit the proposed settlement to the Superior Court for Cobb County, Georgia for approval. The proposed settlement would not have a material adverse effect on the Company's consolidated financial condition or results of operations.
However, no assurance can be given that the proposed settlement will be approved. If the proposed settlement is rejected and the case were to proceed as a class action and WHBM were to be unsuccessful in its defense on the merits, then the ultimate resolution of the case could have a material adverse effect on the Company’s consolidated financial condition or results of operations.
In May 2019, the Company was named as a defendant in Fisher v. Chico's FAS, Inc., a putative class action filed in the United States District Court for the Southern District of California. The complaint alleges that the Company advertised fictitious prices and corresponding phantom discounts on its made-for-outlet products in its Chico's outlets in violation of California's Unfair Competition Laws, California's False Advertising Laws and the California Consumer Legal Remedies Act. The plaintiff seeks disgorgement of the Company's profits and alleged unjust enrichment resulting from such advertising practices, injunctive relief, a corrective advertising campaign, as well as attorneys' fees and costs. The Company was served on May 10, 2019. On October 22, 2019, the parties attended a mediation, where they discussed potential settlement terms, subject, to among other things, agreement upon final terms, the execution of definitive documentation and court approval. The settlement agreement terms have been finalized and the settlement agreement will be signed by both parties in the coming weeks, and Plaintiff will move for preliminary approval. The terms of the settlement are not material to our annual consolidated financial statements.
Pursuant to the settlement agreement, Plaintiff voluntarily dismissed the case from federal court on March 5, 2020, and re-filed the complaint in San Diego County Superior Court. There can be no assurances that the settlement agreement will be approved. If the matter were instead to proceed as a class action and the Company were to be unsuccessful in its defense on the merits, then the ultimate resolution of the case could have a material adverse effect on the Company's consolidated financial condition or results of operations.
Other than as noted above, we are not currently a party to any material legal proceedings other than claims and lawsuits arising in the normal course of business. All such matters are subject to uncertainties, and outcomes may not be predictable. Consequently, the ultimate aggregate amounts of monetary liability or financial impact with respect to other matters as of February 1, 2020 are not estimable. However, while such matters could affect our consolidated operating results when resolved in future periods, management believes that upon final disposition, any monetary liability or financial impact to us would not be material to our annual consolidated financial statements.
13.
SHARE-BASED COMPENSATION PLANS AND CAPITAL STOCK TRANSACTIONS:
General
In April 2017, the Board approved the Amended and Restated 2012 Omnibus Stock and Incentive Plan (the "Amended Omnibus Plan"), which replaced the Chico's FAS, Inc. 2012 Omnibus Stock and Incentive Plan, effective upon shareholder approval on June 22, 2017. The aggregate number of shares of our common stock that may be issued under the Amended Omnibus Plan (since inception) is 15.5 million shares plus any shares represented by awards granted under prior plans that are forfeited, expired or canceled without delivery of shares. Awards under the Amended Omnibus Plan may be in the form of restricted stock, restricted stock units, performance-based restricted stock, performance-based stock units, stock options and stock appreciation rights, in accordance with the terms and conditions of the Amended Omnibus Plan. The terms of each award will be determined by the Human Resources, Compensation and Benefits Committee of the Board of Directors or by the Board of Directors.
We have historically issued restricted stock, including non-vested restricted stock, performance-based stock units and stock options. Shares of non-vested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon, and are considered to be currently issued and outstanding. The Company's
performance-based stock units are subject to vesting conditions, including meeting specified annual Company performance objectives. Under the annual PSU grants in March 2019, each performance based award recipient could vest 0% to 175% of the target shares granted contingent on the achievement of the Company's financial performance metrics, whereas each performance based award recipient could vest 0% to 150% of the target shares granted under the special PSU grants in August and October 2019. Performance-based stock units are entitled to dividend equivalents only to the extent the specific performance goals are met and are entitled to voting rights only upon the issuance of shares after meeting these specific performance goals. Generally, share-based awards vest evenly over three years or cliff-vest after a three-year period; stock options generally have a 10-year term. As of February 1, 2020, approximately 0.2 million nonqualified stock options are outstanding under a predecessor plan and approximately 4.8 million shares remain available for future grants of share-based awards assuming all awards will vest 100% of the target shares granted.
Share-based compensation expense for all awards is based on the grant date fair value of the award, net of estimated forfeitures, and is recognized over the requisite service period of the awards. Compensation expense for restricted stock awards and stock options with a service condition is recognized on a straight-line basis over the requisite service period. Compensation expense for performance-based awards with a service condition is recognized ratably for each vesting tranche based on our estimate of the level and likelihood of meeting certain Company-specific performance goals. We estimate the expected forfeiture rate for all share-based awards, and only recognize expense for those shares expected to vest. In determining the portion of the share-based payment award that is ultimately expected to be earned, we derive forfeiture rates based on historical data. In accordance with the authoritative guidance, we revise our forfeiture rates, when necessary, in subsequent periods if actual forfeitures differ from those originally estimated. Total compensation expense related to share-based awards in fiscal 2019, 2018 and 2017 was $7.1 million, $19.8 million and $20.7 million, respectively. The total tax benefit associated with share-based compensation for fiscal 2019, 2018 and 2017 was $1.8 million, $5.0 million and $7.6 million, respectively.
Restricted Stock Awards
Restricted stock awards vest in equal annual installments over a three-year period from the date of grant, except for a restricted stock award granted to our Chief Executive Officer ("CEO") in fiscal 2019, which vests over a four-year period from the date of grant and is described further in the Company’s Current Report on Form 8-K/A filed with the SEC on August 20, 2019.
Restricted stock activity for fiscal 2019 was as follows:
Total fair value of shares of restricted stock that vested during fiscal 2019, 2018 and 2017 was $6.7 million, $10.6 million and $15.6 million, respectively. The weighted average grant date fair value of restricted stock granted during fiscal 2019, 2018 and 2017 was $4.22, $9.68 and $13.23, respectively. As of February 1, 2020, there was $10.0 million of unrecognized share-based compensation expense related to non-vested restricted stock awards. That cost is expected to be recognized over a weighted average remaining period of approximately 2.1 years.
Performance-based Stock Units
For fiscal 2019, we granted PSUs contingent upon the achievement of Company-specific performance goals. The annual PSU grants in March 2019 have a performance period of the three fiscal years 2019 through 2021. Special PSU grants in August and October 2019 have a performance period of part of fiscal year 2019 through the end of fiscal year 2021. Any units earned as a result of the achievement of the performance goals of the PSUs will vest three years from the date of grant for the March 2019 grants and in March 2022 for the August and October 2019 grants and will be settled in shares of our common stock. All PSUs granted during fiscal 2019 were granted under our Amended Omnibus Plan, except for one PSU award granted as an inducement award as permitted under New York Stock Exchange ("NYSE") Rule 303A.08. The inducement award was granted to our CEO outside of the Amended Omnibus Plan and is described further in the Company’s Current Report on Form 8-K/A filed with the SEC on August 20, 2019.
Performance-based stock unit activity for fiscal 2019 was as follows:
Total fair value of performance-based stock units that vested during fiscal 2019, 2018 and 2017 was $1.4 million, $1.9 million and $4.2 million, respectively. There was $3.0 million of unrecognized share-based compensation expense related to performance-based stock units expected to vest as of February 1, 2020. That cost is expected to be recognized over a weighted average period of approximately 2.1 years.
Stock Option Awards
We used the Black-Scholes option-pricing model to value our stock options. No stock options have been issued since fiscal 2011 and all have been fully vested since fiscal 2014. Using this option-pricing model, the fair value of each stock option award was estimated on the date of grant. The fair value of the stock option awards, which are subject to pro-rata vesting generally over three years, was expensed on a straight-line basis over the vesting period of the stock options. For fiscal 2019, 2018 and 2017, we did not grant any stock options.
Stock option activity for fiscal 2019 was as follows:
Employee Stock Purchase Plan
We sponsor an employee stock purchase plan (“ESPP”) under which substantially all full-time employees are given the right to purchase shares of our common stock during each of the two specified offering periods each fiscal year at a price equal to 85 percent of the value of the stock immediately prior to the beginning of each offering period. During fiscal 2019, 2018 and
2017, approximately 354,000, 175,000 and 232,000 shares, respectively, were purchased under the ESPP. Cash received from purchases under the ESPP for fiscal 2019 was $1.1 million.
Share Repurchase Program
In fiscal 2018, we repurchased 12.2 million shares at a total cost of $81.1 million under the Company's $300 million share repurchase program announced in November 2015. We did not repurchase any of the Company's common stock during fiscal 2019. As of February 1, 2020, $55.2 million remains under the share repurchase program. However, we have no continuing obligation to repurchase shares under this authorization, and the timing, actual number and value of any additional shares to be purchased will depend on the performance of our stock price, market conditions and other considerations.
14.
RETIREMENT PLANS:
We have a 401(k) defined contribution employee retirement benefit plan (the “Plan”) covering all employees upon the completion of six months of service and 500 hours worked. Participants must meet a minimum age requirement of 21. Under the Plan, employees may contribute up to 75 percent of their annual compensation, subject to certain statutory limitations. We have elected to match employee contributions at 50 percent on the first 6 percent of the employees’ contributions and can elect to make additional contributions over and above the mandatory match. Employees’ rights to Company contributions vest fully upon completing five years of service, with incremental vesting starting in service year two. For fiscal 2019, 2018 and 2017, our costs under the Plan were approximately $3.5 million, $3.3 million and $3.3 million, respectively.
We have also adopted the Chico’s FAS, Inc. Deferred Compensation Plan (the “Deferred Plan”) to provide supplemental retirement income benefits for highly compensated employees. Eligible participants may elect to defer up to 80 percent of their base salary and 100 percent of their bonus earned under an approved bonus plan pursuant to the terms and conditions of the Deferred Plan. The Deferred Plan generally provides for payments upon retirement, death, disability, termination of employment or a defined period of years. The Company matches employee contributions on 50% of the first 2.5% of base salary deferrals. The amount of the deferred compensation liability payable to the participants is included in other noncurrent and deferred liabilities in the consolidated balance sheets. These obligations are funded through the purchase of corporate owned life insurance (COLI), cash and other securities held within a grantor trust established by the Company to hold assets for the payment of benefits under the Deferred Plan to participants. The trust assets are reflected in other assets, net in the accompanying consolidated balance sheets.
15.
INCOME TAXES:
The income tax provision consisted of the following:
The foreign component of pre-tax income (loss), arising principally from operating foreign stores and other management and cost sharing charges we are required to allocate under U.S. tax law, for fiscal 2019, 2018 and 2017 was $(1.6) million, $(1.7) million and $0.1 million, respectively.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective January 1, 2018. As a result, the Company’s fiscal 2019 and 2018 federal tax rate was 21% and blended federal tax rate for fiscal 2017 was 33.8%.
As a result of the Tax Act and in accordance with SEC Staff Accounting Bulletin 118, the Company recorded provisional tax expense in the fourth quarter of fiscal 2017 related to executive compensation and other deferred tax balances. During fiscal 2018, the Company made a $4.9 million reduction, or 11.2% benefit to the effective tax rate, to the provisional tax expense related to the acceleration of certain tax deductions into fiscal 2017 and the subsequent revaluation of the associated deferred tax liabilities to reflect the new rate. The change was a result of additional analysis, changes in interpretation and assumptions, as well as additional regulatory guidance that was issued.
The Tax Act requires a one-time transition tax that is based on total post-1986 earnings and profits (“E & P”) previously deferred from U.S. income taxes. As the Company does not have any post-1986 E & P in its foreign subsidiaries, no one-time transition tax was recorded.
No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the one-time transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. There were no significant undistributed foreign earnings at February 1, 2020, February 2, 2019 and February 3, 2018.
The Company completed its accounting for the income tax effects of the Tax Act in December 2018.
A reconciliation between the statutory federal income tax rate and the effective income tax rate follows:
(1) Given the low level of pre-tax income in absolute dollars in fiscal 2019, effective tax rate reconciling items that may have been considered de minimis in prior years in terms of absolute dollars and on a percentage basis are amplified on a percentage basis in the current year even though the absolute dollar value of the reconciling items are similar to prior year. As such, comparability of information disclosed for fiscal 2019 in comparison to fiscal 2018 and fiscal 2017 may be difficult as a result of the amplifying effect of the lower level of pre-tax income.
Deferred tax assets and liabilities are recorded due to different carrying amounts for financial and income tax reporting purposes arising from cumulative temporary differences. These differences consist of the following as of February 1, 2020 and February 2, 2019:
As of February 1, 2020, the Company had deferred tax assets for state and local net operating losses and tax credit carryovers in the amounts of $18.0 million and $5.1 million, respectively, on a gross basis that could be utilized to reduce future years' tax liabilities. The net operating losses and tax credit carryovers expire, if unused, in the years 2020 - 2039 and 2020 - 2028, respectively. As of February 1, 2020, the Company had deferred tax assets related to foreign net operating loss carryforwards in the amount of $5.4 million on a gross basis. The foreign carryforwards will begin to expire, if unused, in 2022. Some foreign net operating losses have an indefinite carryforward.
The Company believes it is more likely than not that the net operating losses and credit carryforwards will reduce future years’ tax liabilities in various states. The Company has recorded valuation allowances against all foreign net operating loss carryforwards as the Company does not believe it is more likely than not that the foreign net operating losses will be utilized. Valuation allowances have also been provided on certain deferred tax assets for charitable contributions with limitations and other foreign deferred tax assets. No other valuation allowances have been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future. While the Company does not expect material adjustments to the total amount of valuation allowances within the next twelve months, changes in assumptions may occur based on the information then currently available. In such case, the Company will record an adjustment in the period in which a determination is made.
Accumulated other comprehensive loss is shown net of deferred tax assets and deferred tax liabilities. The amount was not significant at February 1, 2020 or February 2, 2019.
A reconciliation of the beginning and ending amounts of uncertain tax positions for each of fiscal 2019, fiscal 2018 and fiscal 2017 is as follows:
At February 1, 2020, February 2, 2019 and February 3, 2018, balances included $0.6 million, $1.2 million and $1.2 million respectively, of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate in future periods. We do not expect any events to occur that would cause a change to our unrecognized tax benefits or income tax expense within the next twelve months.
Our continuing practice is to recognize potential accrued interest and penalties relating to unrecognized tax benefits in the income tax provision. We accrued $0.1 million for interest and penalties for each of the fiscal years 2019, 2018 and 2017. We had approximately $0.1 million, $0.3 million and $0.3 million, respectively, for the payment of interest and penalties accrued at February 1, 2020, February 2, 2019 and February 3, 2018, respectively. The amounts included in the reconciliation of uncertain tax positions do not include accruals for interest and penalties.
In fiscal 2006, we began participating in the IRS’s real time audit program, Compliance Assurance Process (“CAP”). Under the CAP program, material tax issues and initiatives are disclosed to the IRS throughout the year with the objective of reaching an agreement as to the proper reporting treatment when the federal return is filed. Previous years through fiscal 2017 have been accepted. Fiscal 2018 is in the post-filing review process.
We are no longer subject to state and local examinations for years before fiscal 2011. Various state and foreign examinations are currently underway for fiscal periods spanning from 2013 through 2018; however, we do not expect any significant change to our uncertain tax positions within the next year.
16.
NET (LOSS) INCOME PER SHARE:
The following table sets forth the computation of basic and diluted net (loss) income per share shown on the face of the accompanying consolidated statements of (loss) income (in thousands, except per share amounts):
In fiscal 2019, 2018 and 2017, 0.3 million, 0.7 million and 0.7 million of potential shares of common stock were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.
17.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
(1) Results for the first quarter, second quarter and fourth quarter of fiscal 2019 include the unfavorable impact of accelerated depreciation charges of $3.6 million, $2.2 million, $0.8 million, after-tax, respectively, related to our retail fleet optimization plan.
(2) Results for the third quarter of fiscal 2019 include the unfavorable impact of accelerated depreciation charges of $1.5 million, after-tax, related to our retail fleet optimization plan and the impact of severance and other related net charges of $2.1 million, after-tax, in connection with actions taken to reposition our organization structure.
(3) Results for the third quarter of fiscal 2018 include the favorable tax benefit of $5.0 million related to the Tax Act.
(4) Results for the fourth quarter of fiscal 2018 include the unfavorable impact of impairment and accelerated depreciation charges of $8.1 million, after-tax, related to our retail fleet optimization plan.
18.
SUBSEQUENT EVENTS:
On February 27, 2020, we announced that our Board of Directors declared a quarterly dividend of $0.09 per share on our common stock. The dividend will be payable on March 30, 2020 to shareholders of record at the close of business on March 16, 2020. Although it is our Company’s intention to continue to pay a quarterly cash dividend in the future, any decision to pay future cash dividends will be made by the Board of Directors and will depend on future earnings, financial condition and other factors.
In recent days, the COVID-19 outbreak in the United States has resulted in reduced customer traffic and the temporary reduction of operating hours for our stores as well as temporary store closures where government mandated. These recent developments are expected to result in lower sales and gross margin than provided in our previous outlook.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective in providing reasonable assurance in timely alerting them to material information relating to us (including our consolidated subsidiaries) and that information required to be disclosed in our reports is recorded, processed, summarized and reported as required to be included in our periodic SEC filings.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of February 1, 2020 as required by Rule 13a-15(c) under the Exchange Act. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013 framework). Based on our evaluation, management concluded that our internal control over financial reporting was effective as of February 1, 2020.
No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
The Company’s independent registered public accounting firm, Ernst & Young LLP, that audited the consolidated financial statements included in this Annual Report on Form 10-K, issued an attestation report on the Company’s internal control over financial reporting as of February 1, 2020, which follows.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Chico’s FAS, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Chico’s FAS, Inc. and subsidiaries’ internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Chico’s FAS, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of February 1, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Chico’s FAS, Inc. and subsidiaries as of February 1, 2020 and February 2, 2019, the related consolidated statements of (loss) income, comprehensive (loss) income, shareholders' equity and cash flows for each of the three fiscal years in the period ended February 1, 2020, and the related notes and our report dated March 16, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Tampa, Florida
March 16, 2020
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our executive officers, directors and nominees for director, procedures by which security holders may recommend director nominees, the code of ethics, the audit committee, audit committee membership and our audit committee financial expert and Section 16(a) beneficial ownership reporting compliance in our 2020 Annual Meeting proxy statement is incorporated herein by reference.
Information about executive compensation and the Human Resources, Compensation and Benefits Committee report in our 2020 Annual Meeting proxy statement is incorporated herein by reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except as provided below, the information required by this item is included in our 2020 Annual Meeting proxy statement and is incorporated herein by reference.
Equity Compensation Plan Information
The following table shows information concerning our equity compensation plans as of February 1, 2020:
1.
Consists of the Amended and Restated 2012 Omnibus Stock and Incentive Plan, the Amended and Restated 2002 Omnibus Stock and Incentive Plan, and the Second Amended and Restated 2002 Employee Stock Purchase Plan.
2.
On August 20, 2019, the Company granted to Bonnie Brooks an award of performance share units with a target of 700,000 units (100% payout) and a maximum of 1,050,000 units (150% payout), with each unit representing one share of the Company’s common stock (the “PSU Inducement Award”). The PSU Inducement Award is earned based on achievement of performance objectives relating to comparable sales improvement and the Company’s stock price during the performance period beginning with the third quarter of fiscal 2019 and ending on the last day of fiscal 2021. The PSU Inducement Award was granted outside of the Amended and Restated 2012 Omnibus Stock and Incentive Plan in connection with Ms. Brooks’ employment as President and CEO of the Company pursuant to Section 4(a)(2) of the Securities Act and the employment inducement award exemption in NYSE Rule 303A.08.
3.
The weighted average exercise price is calculated based solely on the outstanding stock options. It does not take into account the shares issuable upon vesting of outstanding restricted stock, restricted stock units or performance stock units, which have no exercise price.
4.
Consists of (i) 4.0 million shares that were available for future issuance under the Amended and Restated 2012 Omnibus Stock and Incentive Plan as of February 1, 2020 and (ii) 0.2 million shares that were available for future issuance under the Second Amended and Restated 2002 Employee Stock Purchase Plan as of February 1, 2020, including shares subject to purchase during the current offering period.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is included in our 2020 Annual Meeting proxy statement and is incorporated herein by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is included in our 2020 Annual Meeting proxy statement and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this Report.
(1)
The following consolidated financial statements are contained in Item 8:
Consolidated Financial Statements
Page in this Report
Report of Ernst & Young LLP, independent registered public accounting firm
Consolidated Statements of (Loss) Income
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2)
The following Financial Statement Schedules are included herein:
Schedules are not submitted because they are not applicable, not required or because the required information is included in the financial statements or the notes thereto.
(3)
The following exhibits are filed as part of this report:
* Denotes management contract
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHICO’S FAS, INC.
By:
/s/ Bonnie R. Brooks
Bonnie R. Brooks
Chief Executive Officer, President and Director
Date: March 16, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.