UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

 

Commission file number: 001-16435

 

 

11215 Metro Parkway,

Fort Myers, Florida 33966

(Address of principal executive offices) (Zip code)

(239) 277-6200

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No o

 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ      No o

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K   o .

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ

 

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant:

 

Approximately $1,655,000,000 as of July 31, 2010 (based upon the closing sales price reported by the NYSE and published in the Wall Street Journal on July 30, 2010).

 

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: Common Stock, par value $.01 per share — 176,928,893 shares as of March 14, 2011.

 

 

Documents incorporated by reference:

 

 

Part III Definitive Proxy Statement for the Company’s Annual Meeting of Stockholders presently scheduled for June 23, 2011.

 

 

CHICO’S FAS, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE
YEAR ENDED JANUARY 29, 2011

 

TABLE OF CONTENTS

 

 

Soma Intimates

 

The Soma brand, which began operations in 2004, primarily sells exclusively designed private branded sensual and luxurious lingerie, loungewear and beauty products. Soma offers trend-right, innovative and expertly fitted lingerie and loungewear apparel, with designer quality at affordable prices. Soma offerings are broken into three broad categories: lingerie, loungewear and beauty. The lingerie category includes bras, panties, shapewear and sleepwear while the loungewear category includes relaxed tops, bottoms and dresses. The sleepwear and loungewear offerings utilize extra small, small, medium, large and extra large sizing, while bras are sized using traditional American band and cup sizes. In fiscal 2010, Soma Intimates introduced an Oh My Gorgeous line of fine fragrance perfumes and lotions. The Soma brand product offerings are developed by working closely with a small number of its independent suppliers to design proprietary products in-house and, in some cases, include designs provided by its independent suppliers and under labels other than the Soma label.

 

Our Business Strategy

 

Our overall growth strategy is focused on a multi-faceted approach to retailing. This approach includes building our store base, improving store productivity levels, and growing our direct-to-consumer (“DTC”) channels. We build our store base primarily through the opening of new stores, the expansion of existing stores, acquisitions, and organic growth across each of our brands. We seek to improve store productivity with our product offerings and our “Most Amazing Personal Service” and we grow our DTC business through investments in the people, products, and infrastructure necessary to support our DTC channel.

 

To support these strategies and the associated increase in revenues and expenses, we have continued to invest in our infrastructure. This increase in infrastructure included additions of senior and middle management level associates, including our merchandising and marketing teams, increases in DTC staffing, the roll out of the SAP and JDA software to all brands (see page 6), expansion of our distribution center facilities, and other infrastructure initiatives. During fiscal 2010, we focused our infrastructure investments on opening new stores, primarily outlet stores for the Chico’s brand and new Soma stores, while continuing to improve the functionality and appeal of our DTC channel.

 

We will continue to consider the acquisition or organic development of other specialty retail concepts when our research indicates that the opportunity is appropriate and in the best interest of the shareholders. We will also continue to explore a number of potential new merchandise opportunities and brand extensions that would both complement the current brands and provide future growth. Our primary focus, however, remains on the core Chico’s, WH|BM and Soma brands and we believe we do not need an acquisition to achieve our long-term operational objectives.

 

In fiscal 2011, we will continue to focus on 1) building the Chico’s brand into a high performance brand, 2) growing the number of WH|BM and Soma boutiques, 3) accelerating the growth of our DTC sales, and 4) leveraging our cost structure and enhancing our systems. In early 2009, we had announced a stretch goal of reaching $1.00 in earnings per share for fiscal 2011. Although this goal will be somewhat challenging to achieve, especially due to the slow economic recovery, we believe it is attainable if we successfully execute to all of our strategic initiatives.

 

Our Customers

 

We believe that our customers deserve outstanding and personalized customer service and we strive to achieve this through our trademark “Most Amazing Personal Service” standard. We provide store associates with specialized training in providing customer assistance and advice on their customers’ fashion and wardrobe needs, including clothing and accessory style and color selection, coordination of complete outfits, and suggestions on different ways in which to wear the clothing and accessories. Our sales associates are encouraged to know their regular customers’ preferences and to assist those customers in selecting merchandise best suited to their tastes and wardrobe needs.

 

We take pride in empowering our associates to make decisions that best serve our customer. We believe this sense of empowerment enables our associates to exceed customer expectations. Our associates are expected to keep

individual stores open until the last customer in the store has been served. If an item is not available at a particular store, sales associates can locate the item at our distribution center or another store and arrange for it to be shipped directly to the customer.

 

Another key success strategy is building customer loyalty through preferred customer programs. The data we gather from these programs allows us to more sharply focus our design, merchandising and marketing efforts to better address and define the desires of our target customer.

 

 

Our Boutiques

 

Our boutiques are located in upscale outdoor destination shopping areas, lifestyle specialty centers, shopping malls, and some standalone street front locations. Store locations are determined on the basis of various factors, including but not limited to: geographic and demographic characteristics of the market, the location of the shopping venue including the site within the shopping center, proposed lease terms, anchor tenants in a mall location and convenience.

 

In response to business conditions over the last few years, we have become more innovative in the way we execute our real estate strategy. For example, in fiscal 2009 and 2010, we began testing “pop-up” stores. These stores are designed to take advantage of vacancies in high profile shopping locations. They require minimal investment and have short or flexible lease terms facilitating our ability to test a brand’s potential for success in a particular location. The results of the pop-up store strategy have generally been successful as many of these locations have been or we anticipate will be converted to permanent locations.

 

In fiscal 2011, we expect an increase in net new stores of approximately 9%, reflecting 24-28 net openings of Chico’s stores, 23-26 net openings of WH|BM stores, and 53-56 net openings of Soma stores. We also expect to complete 25-30 relocations or expansions.

 

Historically, our outlet stores have primarily acted as a channel for selling marked-down merchandise from our front-line stores. However, during fiscal 2009 and 2010, we increased the penetration of made-for-outlet product, primarily within the Chico’s brand outlets, which carries a higher margin than the clearance items from our front-line stores. In addition, much of the clearance is now done through our DTC channel. We believe that this approach has allowed us to increase outlet store margins and improve profitability. We expect to continue this strategy in fiscal 2011, and will direct more focus on the WH|BM brand.

As of January 29, 2011, we operated 1,151 retail stores in 48 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico. The following tables set forth information concerning our retail stores during the past five fiscal years:

 

 

 

Direct-to-Consumer

 

We currently mail a Chico’s, WH|BM and Soma catalog to current and prospective customers approximately every month. These catalogs are designed to educate our customers about our products and drive customers into the stores and promote website and catalog sales. We also utilize Soma catalog inserts in selected Chico’s mailings, where applicable, as efficient customer prospecting tools.

 

In addition to our stores, we offer two additional ways for our customers to shop with us. Each of our brands has its own dedicated website, www.chicos.com , www.whbm.com and www.soma.com , providing customers the

ability to order merchandise online. Some items are only available online, such as extended size offerings and some clearance items. We also sell merchandise for each of our brands through our call centers.

 

Sales through the three websites, together with sales from our call centers’ toll free telephone numbers, amounted to $137.4 million in 2010 compared to $98.3 million in 2009, and are included in each respective brand’s total sales.

 

During fiscal 2010, we believe our DTC sales growth of approximately 40% was a result of our strategy to invest in this previously underserved revenue channel. For fiscal 2011, we expect to continue to focus on this channel in order to increase our DTC sales penetration and look for further expansion.

 

Advertising and Promotion

 

Our marketing program currently consists of the following integrated components:

 

 

During fiscal 2010, we continued to actively market our brands through each of these components. We believe that these marketing campaigns helped acquire new customers, reactivated lapsed customers and were a key factor in our financial performance in fiscal 2010.

 

Our direct marketing efforts have been successful in driving traffic into our stores and to the DTC channel. During 2010, we continued our extensive prospecting efforts across all three brands to identify and motivate new customers to shop with us. In addition, we focused the circulation of our marketing materials on the more profitable or potentially profitable customers, which dramatically improved incremental sales and profitability. Also, we successfully tested a number of new sources for prospects, and as a result, were able to activate a large number of new customers at a positive return on the investment of our marketing dollars. Lastly, we successfully implemented a personalized “Lapsed Buyer” program that resulted in a considerable number of lapsed customers shopping with us again.

 

Also in fiscal 2010, we expanded our e-marketing efforts for all brands. We made significant investments in paid search with well-known internet search sites and appeared on banner ads on various highly trafficked websites. Moreover, we tested mobile marketing in a limited number of markets as we attempt to leverage technology to optimize communications with our customers. We also use social media websites such as Facebook and Twitter to connect with our customers. Social media marketing is another strategy by which we can actively engage with customers to provide them targeted brand messages or news concerning our brands.

 

Lastly, we place great value on our outreach programs. These outreach programs include editors’ events, VIP parties, fashion shows and wardrobing parties. As part of these outreach programs, we encourage our managers and sales associates to become involved in community projects. We believe that these programs, in addition to helping build and support community and charitable activities, are also effective marketing vehicles in providing introductions to new customers.

 

Information Technology

 

We are committed to having information systems that enable us to obtain, analyze and act upon information on a timely basis and to maintain effective financial and operational controls. This effort includes testing of new products and applications to assure that we are able to take advantage of technological developments.

We have worked with SAP, a third party vendor, to implement an enterprise resource planning system (“ERP”) to manage all selling channels. This fully integrated system is expected to support and coordinate most aspects of product development, merchandising, finance and accounting and to be fully scalable to accommodate rapid growth.

 

In fiscal 2007, we completed the first major phase of our multi-year, planned implementation of the new ERP system by converting Soma to the new merchandising system as well as rolling out the new financial systems at the same time. The second major phase was completed in early 2010 and we are currently utilizing this system in all of our brands. The third major phase includes ongoing enhancements and optimization of the new ERP across all three brands, as well as the deployment of additional functionality across various other functions.

 

In fiscal 2009, we purchased JDA Enterprise Planning, JDA Assortment Planning and JDA Allocation software applications and curtailed previously planned implementations of related SAP applications and revised our roll out plan accordingly. We completed the implementation of the allocation functionality during fiscal 2009, installed enterprise planning in 2010, and currently are working on implementing additional JDA planning applications over the next 12-18 months. Additionally, we are developing a product lifecycle management solution supporting the design and development process.

 

Merchandise Distribution

 

Distribution for all brands is handled by our distribution center (“DC”) in Winder, Georgia. New merchandise is generally received daily at the DC. Merchandise from United States based suppliers arrives in Georgia by truck, rail, or air, as the circumstances require. A majority of the merchandise from foreign suppliers arrives in this country at various points of entry by air or sea and is transported via truck or rail to the DC; however, we have recently increased our transports by sea to better manage shipping costs. After arrival, merchandise is sorted and packaged for shipment to individual stores or for transfer to our DTC fulfillment center. Merchandise is generally pre-ticketed with price and related informational tags at the point of manufacture.

 

During fiscal 2009, we purchased an additional 39 acres of property, including a 300,000 square foot building close to our existing DC, for $10.4 million. This facility primarily ships orders directly to our DTC customers. We believe that as a result of this acquisition together with additional infrastructure enhancements, our DC can now support over $3 billion in aggregate sales.

 

Product Development/Sourcing

 

Chico’s, WH|BM, and Soma private branded merchandise is developed through the coordinated efforts of their respective merchandising, creative and production teams working with their independent suppliers. Style, pattern, color and fabric for individual items of our private branded clothing are developed based upon perceived current and future fashion trends that will appeal to each brand’s target customer, anticipated future sales and historical sales data.

 

All of our brands purchase a significant percentage of their clothing and accessories from companies that manufacture merchandise in foreign countries. We may take ownership in the foreign country or at our DC depending on the specific terms of the sale. We conduct business with all of our foreign suppliers and importers in United States currency. Approximately 18% of total purchases in fiscal 2010 were made from one supplier, compared to 13% in fiscal 2009.

 

During fiscal 2009, we entered into a non-exclusive relationship with a sourcing service company. Acting as an agent for all three brands, this third party provides us with a number of different merchandise sourcing services. Aside from identifying key suppliers of apparel and other consumer goods, they are also involved with product development, quality assurance, negotiation of prices, and product flow tracking within the supply chain. During fiscal 2010, this relationship continued to grow, specifically as it related to the sourcing of made-for-outlet merchandise and we expect to expand this arrangement into other categories during fiscal 2011.

 

In late fiscal 2009, in order to leverage the purchasing power and talent of the Chico’s and WH|BM brands, we consolidated our sourcing activities previously residing within these brands into one service group to support the Chico’s and WH|BM brands. The purpose of this consolidation was that this single group working in concert with

our key supply chain partners, would deliver higher quality, lower price piece goods and finished merchandise costs while providing the opportunity to lessen freight costs through consolidation and perform more of the quality assurance function at the point of manufacture. In addition to these benefits, we believe that the decision to centralize our sourcing operations has helped us mitigate the impact of higher sourcing costs during fiscal 2010.

 

Because of our initiatives to lower sourcing and merchandise costs, we regularly evaluate where best to have our goods manufactured and may continue to pursue new supplier relationships throughout the world. During fiscal 2010, in response to decreased capacity and cost of labor increases in China, we began transitioning to suppliers located in other countries. In fact, for fiscal 2010, China sources accounted for approximately 63% of our merchandise cost compared to approximately 66% in the prior fiscal year. During fiscal 2011, we anticipate this trend to continue as we shift more production to other Southeast Asian countries and we have set a goal that by the end of fiscal 2012, sourcing from China will have decreased to approximately 40% of our merchandise cost.

 

Competition

 

The women’s retail apparel business is highly competitive and includes department stores, specialty stores, local or regional boutique stores, catalog companies, and online retailers. We believe that our distinctively designed merchandise offerings and emphasis on customer service distinguish us from other retailers. Nevertheless, certain of these competitors may have greater name recognition as well as greater financial, marketing and other resources compared to us.

 

Trademarks and Service Marks

 

We are the owner of certain registered and common law trademarks and service marks (collectively referred to as “Marks”).

 

Marks registered in the United States include, but are not limited to: CHICO’S, NO TUMMY, PASSPORT, ZENERGY, WHITE HOUSE|BLACK MARKET, and SOMA INTIMATES. We have registered or are seeking to register a number of these Marks in certain foreign countries as well.

 

In the opinion of management, our rights in the Marks are important to our business. Accordingly, we intend to maintain our Marks and the related registrations and applications. We are not aware of any claims of infringement or other challenges to our rights to use any registered Marks in the United States or any other jurisdiction in which the Marks have been registered.

 

Available Information

 

Our investor relations website is located at www.chicosfas.com. Through this website, we make available free of charge our Securities and Exchange Commission (“SEC”) filings including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after those reports are electronically filed with the SEC. This website also includes recent press releases, corporate governance information, beneficial ownership reports, institutional presentations, quarterly and institutional conference calls and other quarterly financial data such as historical store square footage.

 

Our Code of Ethics, which is applicable to all of our associates, including the principal executive officer, the principal financial officer and the Board of Directors, is posted on our investor relations website. We intend to post amendments to or waivers from our Code of Ethics on this website. Copies of the charters of each of the Audit Committee, Compensation and Benefits Committee, Corporate Governance and Nominating Committee and Executive Committee as well as the Corporate Governance Guidelines, Code of Ethics, Terms of Commitment to Ethical Sourcing, and Stock Ownership Guidelines are available on this website or in print upon written request by any shareholder.

 

Employees

 

As of January 29, 2011, we employed approximately 18,900 people, approximately 25% of whom were full-time associates and approximately 75% of whom were part-time associates. The number of part-time associates fluctuates during peak selling periods. As of the above date, approximately 90% of our associates worked in our front-line and outlet stores. We have no collective bargaining agreements covering any of our associates, have never

experienced any material labor disruption and are unaware of any efforts or plans to organize our associates. We currently contribute a significant portion of the cost of medical, dental and vision coverage for eligible associates and also maintain a 401(k) accompanied by an employer matching contribution, stock incentive and stock purchase plans. All associates are also eligible to receive substantial discounts on our merchandise. We consider relations with our associates to be good.

 

Executive Officers of the Registrant

 

Set forth below is certain information regarding our executive officers:

 

David F. Dyer, 61, is our President and Chief Executive Officer and joined us in January 2009. He is also a member of our Board of Directors having joined the Board in March 2007.

 

Donna M. Colaco, 52, is our Brand President — White House | Black Market and joined us in August 2007.

 

Cynthia S. Murray, 53, is our Brand President — Chico’s and joined us in February 2009.

 

Laurie Van Brunt, 53, is our Brand President — Soma Intimates and joined us in May 2010.

 

Lee Eisenberg, 64, is our Executive Vice President — Chief Creative Officer and joined us in February 2009.

 

Gary A. King, 53, is our Executive Vice President — Chief Information Officer and joined us in October 2004.

 

Kent A. Kleeberger, 58, is our Executive Vice President — Chief Operating Officer and Chief Financial Officer and joined us in November 2007.

 

Mori C. MacKenzie, 60, is our Executive Vice President — Chief Stores Officer and joined us in October 1995.

 

A. Alexander Rhodes, 52, is our Executive Vice President — General Counsel, Chief Compliance Officer and Secretary and joined us in January 2003.

 

Sara K. Stensrud, 43, is our Executive Vice President — Chief Human Resources Officer and joined us in July 2010.

 

All of the above officers serve at the discretion of our Board of Directors.

 

resources and may result in us operating the business less effectively, which in turn could cause deterioration in the financial performance of individual stores and/or our DTC business as well as our overall operating performance.

 

Effective management of the performance of our stores is a key factor in the success of our business.

 

We cannot be assured that any new store that opens will have similar operating results to those of prior stores. New stores may take up to two or three years to reach planned operating levels due to inefficiencies typically associated with new stores, including demands on operational, managerial and administrative resources. The failure of existing or new stores to perform as predicted could negatively impact our net sales and results of operations and may result in impairment of long-lived assets at our stores.

 

Our ability to develop new concepts and brand extensions is a significant component of our long-term business strategy.

 

Our longer term business strategy involves the strategic acquisition or organic development and growth of new concepts and brand extensions. Each of these may require significant capital expenditures and management attention. Additionally, any new concept is subject to certain risks including customer acceptance, competition, product differentiation, challenges to economies of scale in merchandise sourcing, and the ability to attract and retain qualified personnel.

 

For example, we continue to expand our Soma target customer audience and continue to invest in development of the brand through marketing, new product launches and the opening of new Soma stores in order to create and maintain brand awareness and create economies of scale, which are integral factors in the success of the brand.

 

If we cannot successfully execute our growth strategies, our financial condition and results of operations may be adversely impacted.

 

Our results of operations are sensitive to, and may be adversely affected by, general economic conditions and overall consumer confidence.

 

Certain economic conditions affect the level of consumer spending on the merchandise that we offer, including, among others, unemployment levels, availability of consumer credit, inflation, interest rates, recessionary pressures, gas and other energy costs, taxation, and consumer confidence in future economic conditions. Disruptions in the overall economy and financial markets tend to reduce consumer confidence in the economy and negatively affect consumers’ spending patterns, which could be harmful to our financial position and results of operations, and may lead us to decelerate the number and timing of new store openings, relocations, or expansions. Furthermore, declines in consumer spending patterns due to economic downturns may have a more negative effect on apparel retailers than other retailers, particularly in our competitive space, and can negatively affect net sales and profitability.

 

Our comparable store sales and operating results may fluctuate.

 

Our comparable store sales and overall operating results have fluctuated in the past and are expected to continue to fluctuate in the future. A variety of factors affect comparable store sales and operating results, including changes in fashion trends, changes in our merchandise mix, customer acceptance of merchandise offerings, timing of catalog mailings, expansion of our DTC business, calendar shifts of holiday periods, actions by competitors, new store openings, weather conditions, and general economic conditions. Past comparable store sales or operating results are not an indicator of future results.

 

Our gross margin and profitability may be impacted by the sales mix between our brands or within product categories.

 

Gross margins are impacted by the sales mix from both merchandise sales mix within a particular brand and relative sales volumes of the different brands. Certain categories of apparel, accessories and lingerie tend to generate somewhat higher margins than others within each brand. Thus, a shift in sales mix within a brand can create a significant impact on our overall gross margins and consolidated earnings.

Our business may be adversely affected by pricing pressures including fluctuations in energy and/or commodity costs.

 

Fluctuations in the price, availability and quality of fabrics and other raw materials used to manufacture our products, as well as the price for labor and transportation have contributed to, and may continue to contribute to, ongoing pricing pressures throughout our supply chain. The price and availability of such inputs to the manufacturing process may fluctuate significantly, depending on several factors, including commodity costs, such as higher cotton prices, energy costs, such as fuel, inflationary pressures from emerging markets, increased labor costs, weather conditions and currency fluctuations. Any or all of these impacts could have a material adverse impact on our business, financial condition and results of operations. In addition, the increase in energy and commodity costs could adversely affect consumer spending and demand for our products.

 

Our DTC operations include risks that could have a material adverse effect on our financial condition or results of operations.

 

Our DTC operations are subject to numerous risks, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures, natural disasters, call center disruptions, and the need to invest in additional infrastructure. The DTC operations also involve other risks including increased postage or printing costs, rapid technological change, liability for online content, credit card fraud, risks related to the possible failure of the systems that operate the website and its related support systems, including computer viruses, telecommunication failures and electronic break-ins and similar disruptions. Given our business strategy to target sustained growth and increased sales penetration in the DTC area, the risks associated with DTC operations are likely to be of greater significance in fiscal 2011 and future years than in prior years.

 

We significantly rely on our ability to implement and maintain our information technology systems.

 

We rely on various information technology systems to manage our operations and regularly make investments to upgrade, enhance or replace such systems. Any delays or difficulties in transitioning or in integrating new systems with our current systems, or any other disruptions affecting our information technology systems could have a material adverse impact on the business. We also use information technology systems for individually identifiable data, which is regulated at the international, federal and state levels. Privacy and information security laws and regulation changes, and compliance with them, may result in cost increases due to system changes and the development of new administrative processes. If we or our associates fail to comply with these laws and regulations or experience a data security breach, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to fines, penalties, administrative orders and other legal risks as a result of non-compliance.

 

We also expect to continue making modifications and upgrades to our information technology systems to support our business strategies and provide business continuity. Modifications include replacing legacy systems with successor systems, making changes to existing systems or acquiring new systems with new functionality. There are inherent risks associated with replacing these systems, including accurately capturing data and system disruptions and we believe we are taking appropriate action to mitigate these risks through testing, training and staging implementation. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

 

We rely on one location to distribute goods to our stores and fulfill DTC orders.

 

The distribution functions for all of our stores and for our DTC sales are handled from our DC in Winder, Georgia. Any significant interruption in the operation of the facilities at the DC due to natural disasters, accidents, system failures or other unforeseen causes could delay or impair our ability to distribute merchandise to our stores and/or fulfill DTC orders, which could cause sales to decline. We regularly review our options to mitigate these risks including contingency plans and back-up relationships with outside providers of distribution services.

 

Our success depends on a high volume of traffic to our stores and the availability of suitable store locations.

 

In order to generate customer traffic, we locate many of our stores in prominent locations within shopping centers that have been or are expected to be successful. We cannot control the development of new shopping centers, the availability or cost of appropriate locations within existing or new shopping centers, or the success of individual

shopping centers. Furthermore, factors beyond our control impact shopping center traffic, such as general economic conditions, weather conditions, consumer acceptance of new or existing shopping centers, regional demographic shifts, and consumer spending levels. Our sales are partly dependent on a high volume of shopping center traffic and any decline in such shopping center traffic, whether because of the slowdown in the economy, a falloff in the popularity of shopping centers among our target customers, or otherwise, could have a material adverse effect on our business.

 

Our business fluctuates on a seasonal basis.

 

Our business is comprised of two distinct selling seasons: spring and fall. During the peaks of these seasons, higher inventory levels, increased marketing costs, availability of temporary personnel, and other factors may impact our results. Lower than expected sales or profit margins during these periods could materially affect our financial condition or results of operations.

 

Our inability to remain current with fashion trends and introduce new products successfully could negatively impact our financial results.

 

Our success is principally dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that is on-trend and satisfies customer demand in a timely manner. Misjudgments or unanticipated fashion changes could have a material adverse impact on our business, results of operations and financial condition. The failure to anticipate, identify or react appropriately and in a timely manner to changes in fashion trends or demands, could lead to lower sales, excess inventories and more frequent markdowns or inventory write-downs, which could have a material adverse impact on our financial results.

 

Our inability to maintain proper inventory levels could have a negative effect on our results of operations.

 

We maintain inventory levels in our stores and distribution center that we anticipate will be in line with projected demand. Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at discounted or closeout prices. These events could significantly harm our operating results and impair the image of one or more of our brands. Conversely, if we underestimate consumer demand for our merchandise, particularly higher volume styles, or if our suppliers fail to supply quality products in a timely manner, we may experience inventory shortages, which might result in missed sales, negatively impact customer relationships, diminish brand loyalty and result in lost revenues, any of which could harm our business.

 

Our suppliers may not be able to provide goods in a timely manner and meet quality standards.

 

A key supplier may become unable to address our merchandising needs due to payment terms, cost of manufacturing, adequacy of manufacturing capacity, quality control, or timeliness of delivery. If we were unexpectedly required to change suppliers or if a key supplier was unable to supply acceptable merchandise in sufficient quantities on acceptable terms, we could experience a significant disruption in the supply of merchandise. We could also experience operational difficulties with our suppliers, such as reductions in the availability of production capacity, supply chain disruptions, errors in complying with merchandise specifications, insufficient quality control, shortages of fabrics or other raw materials, failures to meet production deadlines or increases in manufacturing costs.

 

Furthermore, many of our suppliers rely on working capital financing to finance their operations. Although the credit market has improved since 2008, lenders have still maintained tightened credit standards and terms. To the extent any of our suppliers are unable to obtain adequate credit or their borrowing costs increase, we may experience delays in obtaining merchandise, the suppliers increasing their prices or the suppliers modifying payment terms in a manner that is unfavorable to us.

 

A significant portion of our merchandise is received from one supplier.

 

We have no material long-term or exclusive contract with any apparel or accessory manufacturer or supplier. Our business depends on our network of suppliers and our continued good relations with them. However, approximately 18% of total purchases in fiscal 2010 and 13% of total purchases in 2009 were made from one supplier. We cannot guarantee that this relationship will be maintained in the future or that the supplier will continue

to be available to supply merchandise. A significant disruption in the supply of merchandise from this, or any other key supplier, could have a material adverse impact on our operations.

 

Competition could negatively impact our results.

 

We compete with national, international and local department stores, specialty and discount store chains, independent retail stores, and catalog and online businesses that market and sell similar lines of merchandise. Many competitors are significantly larger and have greater financial, marketing and other resources and enjoy greater national, regional and local name recognition. In addition to competing for sales, we compete for favorable store locations, lease terms and qualified associates. Increased competition could result in price reductions, increased marketing expenditures and loss of market share, any of which could have a material adverse effect on our financial condition and results of operations. The recent recessionary conditions have resulted in more significant competition as our competitors have lowered prices and engaged in more promotional activity.

 

We rely significantly on foreign sources of production.

 

The majority of our clothing and accessories is produced outside the United States, the percentage has been growing, and this trend may continue. As a result, our business remains subject to the various risks of doing business in foreign markets and importing merchandise from abroad, such as: (i) geo-political instability; (ii) imposition of new legislation relating to import quotas that may limit the quantity of goods that may be imported into the United States from countries in which we do business; (iii) imposition of new or increased duties, taxes, and other charges on imports; (iv) foreign exchange rate challenges and pressures presented by implementation of U.S. monetary policy; (v) local business practice and political issues, including issues relating to compliance with our Terms of Commitment to Ethical Sourcing and domestic or international labor standards; (vi) transportation disruptions; (vii) natural disasters; (viii) delays in the delivery of cargo due to port security considerations; and (ix) seizure or detention of goods by U.S. Customs authorities. In particular, we continue to source a substantial portion of our merchandise from China. A change in the Chinese currency, other policies affecting labor laws or the costs of goods in China could negatively impact our merchandise costs. Additionally, due to recent inflationary pressures we have needed to reserve fabric with our suppliers further in advance of our normal production process. This results in additional risks, including forecasting of anticipated demand over a longer period, which could adversely impact our results of operations.

 

We cannot predict whether or not any of the foreign countries in which our clothing and accessories are currently, or in the future may be produced, will be subject to import restrictions by the United States government, including the likelihood, type or effect of any trade retaliation. Trade restrictions, including increased tariffs, or more restrictive quotas, including safeguard quotas, or anything similar, applicable to apparel items could affect the importation of apparel generally and, in that event, could increase the cost, or reduce the supply, of apparel available to us and adversely affect our business, financial condition and results of operations.

 

In addition, the laws and customs protecting intellectual property rights in many foreign countries can be substantially different and potentially less protective of intellectual property than those in the United States. We have taken numerous steps to protect our intellectual property overseas, but cannot guarantee that such rights are not infringed. The intentional or unintentional infringement on our intellectual property rights by one of our suppliers or any other person or entity, could diminish the uniqueness of our products, tarnish our trademarks, or damage our reputation.

 

Our business could be negatively impacted if a supplier fails to implement acceptable labor practices.

 

Although we have adopted our Terms of Commitment to Ethical Sourcing and use the services of third party audit firms to be diligent in our monitoring of compliance with these terms, we do not have absolute control over the ultimate actions or labor practices of our independent suppliers. Furthermore, we are attempting to lower our reliance on suppliers located in China. As a result, we may do business with suppliers that are not as familiar with our supplier guidelines which may result in temporary noncompliance.

The violation of labor or other laws by any of our key independent suppliers or the divergence of an independent supplier’s labor practices from those generally accepted by us as ethical could interrupt or otherwise disrupt the shipment of finished merchandise or damage our reputation.

 

Failure to comply with applicable laws and regulations could adversely impact our business.

 

Our policies and procedures are designed to comply with all applicable laws, accounting and reporting requirements, regulations and tax requirements, including those imposed by the Sarbanes-Oxley Act of 2002, the SEC and the New York Stock Exchange (“NYSE”). Failure to comply with the various laws and regulations as well as changes in laws and regulations could have an adverse impact on our reputation, financial condition or results of operations.

 

We may be subject to adverse outcomes of litigation matters.

 

We are involved from time to time in litigation and other claims against our business. These matters arise primarily in the ordinary course of business but could raise complex, factual and legal issues, which are subject to multiple risks and uncertainties and could require significant management time. We believe that our current litigation matters will not have a material adverse effect on the results of operations or financial condition. However, our assessment of current litigation could change in light of the discovery of facts with respect to legal actions pending against us, not presently known to us, or determinations by judges, juries or other finders of fact which do not accord with our evaluation of the possible liability or outcome of such litigation and additional litigation that is not currently pending could have a more significant impact on our business and operations.

 

We may be unable to retain or recruit key personnel.

 

Our success and ability to properly manage our growth depends to a significant extent both upon the performance of our current executive and senior management team and our ability to attract, hire, motivate, and retain additional qualified personnel in the future. If we cannot recruit and retain such additional personnel or we lose the services of any of our executive officers without appropriate succession planning, it could have a material adverse impact on our business, financial condition and results of operations.

 

In addition, our success also depends in part upon our ability to attract, develop and retain a sufficient number of qualified employees, including store associates and talented merchants. If we are unable to identify, hire, develop, retain and motivate associates sufficiently in order to maintain our current business and support our growth strategies, our business could be adversely impacted.

 

War, terrorism or other catastrophes may negatively impact our results.

 

In the event of war, acts of terrorism or the threat of terrorist attacks, customer traffic in shopping centers and consumer spending could significantly decrease. In addition, local authorities or shopping center management could close in response to any immediate security concern or weather catastrophe such as hurricanes, earthquakes, or tornadoes. Similarly, war, acts of terrorism, threats of terrorist attacks, or a weather catastrophe could severely and adversely affect our National Store Support Center (“NSSC”) campus or distribution center which, in turn, could have a material adverse impact on our business.

 

Impairment charges could have a material impact on our results of operations and financial condition.

 

Periodically, we review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We also test our goodwill and intangible assets for impairment at least annually or more frequently if impairment indicators arise. Significant negative industry or economic trends, disruptions to our business and unexpected significant changes or planned changes in use of the assets may result in impairments to goodwill and other long-lived assets. Future impairment charges could significantly affect our results of operations in the periods recognized.

 

Our failure to protect our brands’ reputation and/or intellectual property could have an adverse effect on our brand images.

 

Our ability to protect our brands’ reputation is an integral part of our general success strategy and is critical to the overall value of the brands. Maintaining and positioning these brands is an ongoing investment for us and our

continued investment in customer research and promotional venues will be essential. Additionally, if we fail to maintain high standards for merchandise quality and integrity, such failures could jeopardize the brands’ reputation and have a negative effect on our business. Damage to our reputation as a whole could also cause a loss of consumer and investor confidence and could have a material effect on our business.

 

In addition, our trademarks, copyrights, and other intellectual and proprietary rights are important to our success. Even though we take action to protect all of our intellectual property and other proprietary rights, others may attempt to imitate our products or obtain or infringe upon our intellectual property rights. Other parties may also claim that some of our products infringe on their trademarks, copyrights, or other intellectual property rights. To the extent such claims are successful, sales could decline and our business and results of operations could be adversely affected.

 

Our stock price may be volatile.

 

The market price of our common stock has fluctuated substantially in the past and may continue to do so in the future. Future announcements or management discussions concerning us or our competitors, sales and profitability results, quarterly variations in operating results or comparable store net sales, or changes in earnings estimates by analysts, among other factors, could cause the market price of the common stock to fluctuate substantially. In addition, stock markets, in general, have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated to the operating performance of the specific companies.

 

 

NSSC and Distribution Center

 

Our NSSC is located on approximately 58 acres in Fort Myers, Florida and consists of approximately 364,000 square feet of office space. In fiscal 2009, we completed the purchase of 39 acres of property in close proximity to our existing DC in Winder, Georgia including an approximately 300,000 square foot building for approximately $10.4 million. This acquisition, combined with our existing 233,000 square foot retail distribution center and 50,000 square foot call and data center, results in a total of 583,000 square feet on a combined 110 acres in Winder, Georgia for our distribution and fulfillment operations.

 

 

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 Standard & Poor’s 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 28, 2006 and the reinvestment of dividends.

 

 

 

 

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 financial statements and the notes thereto referenced in this Annual Report on Form 10-K. Amounts in the following tables are in thousands, except per share data, number of stores data, net sales and inventory per square foot, and number of associates.

 

 

 

 

 

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto.

 

Executive Overview

 

We are a national specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items operating under the Chico’s, White House | Black Market, and Soma Intimates brand names. We earn revenues and generate cash through the sale of merchandise in our retail stores, on our various websites and through our call centers, which take orders for all brands.

 

Results of 2010 Initiatives

 

Fiscal 2010’s results are a reflection of our continued progress in executing the goals that we have established as being vital to the performance of our company. These goals were and continue to be:

 

 

Chico’s  — The performance of the Chico’s brand during fiscal 2010 was a clear indication that we have made significant progress in our turnaround efforts. Chico’s had its best comparable store sales performance since fiscal 2005. We believe this is attributable to our ability to provide customers with fresh and trend-right merchandise offerings supported by novel and timely marketing campaigns as well as personalized customer service. In fiscal 2010, the Chico’s brand also focused on increasing the penetration of its made-for-outlet product which resulted in improved profitability for our stores in the outlet channel.

 

WH|BM  — The WH|BM brand had another successful year in fiscal 2010 with total sales reaching $590 million, an increase of 14.3% over last year. WH|BM added touches of bright and vibrant color accents to its fashion selection at various times, which proved to be a big hit with our customer and a significant driver behind the brand’s improved results over fiscal 2009.

 

Soma  — We continue to believe in the growth potential of the Soma brand and are encouraged by its progress in fiscal 2010. During 2010, Soma introduced its first television advertising campaign since 2007, which served to attract new customers and reactivate lapsed customers.

 

Direct-to-consumer  — In fiscal 2010, net sales for the DTC channel increased 39.7% to $137.4 million. This 39.7% increase in fiscal 2010 follows a similar 39.3% increase in 2009.

 

Expense Structure  — Selling, general and administrative (“SG&A”) expenses during fiscal 2010 increased over fiscal 2009 mostly as a result of costs associated with operating 71 net, new stores opened since the end of fiscal 2009 and planned increases in marketing expenses. However, as a percentage of net sales, SG&A for fiscal 2010 decreased by over 200 basis points compared to fiscal 2009.

 

Inventory Management  — Effective inventory management is essential in enabling us to offer our customers an appropriate selection of current merchandise. During fiscal 2010, we believe that we improved our in-stock levels and inventory turnover in an effort to limit the markdowns needed to clear merchandise. Furthermore, we believe our inventory balance at year end is in line with our current sales trend.

Financial Highlights for Fiscal 2010

 

 

Key Performance Indicators

 

In order to monitor our success, we review certain key performance indicators, including:

 

 

Future Outlook

 

For fiscal 2011, we are currently forecasting a low-to-mid single digit increase in comparable sales inclusive of DTC with slight improvement expected in our gross margin rate as a percentage of net sales. Although we expect our SG&A expenses as a percentage of net sales to decrease reflecting leverage based on the forecasted comparable sales increase, we anticipate approximately $8.0 million of incremental marketing costs over last year as well as the costs associated with opening 100 to 110 net, new stores.

 

Capital expenditures for fiscal 2011 are expected to range between $110 million to $120 million, which contemplates the opening of approximately 100 to 110 net new stores as well as continued enhancements of our information technology systems and other infrastructure costs including DTC automation projects.

Results of Operations

 

 

Net sales by Chico’s/Soma and WH|BM increased from the prior period primarily due to positive comparable sales (including DTC sales) for all three brands as well as new store openings. A summary of the factors impacting year-over-year sales increases is provided in the table below (dollar amounts in thousands):

 

 

Consolidated comparable sales increased in fiscal 2010 and were driven by an approximate 7% increase in transactions at Chico’s front-line stores, which was partially offset by a slight decrease in units per transaction. In addition, WH|BM stores experienced an increase in both transactions and units per transaction in fiscal 2010. The increase in consolidated comparable sales is also attributable to a 39.7% increase in net DTC sales in fiscal 2010 over fiscal 2009 due to enhanced website functionality, increased DTC promotions and expanded online product offerings, including clearance items. Comparable store sales excluding DTC sales for the Chico’s/Soma brands’ increased by 5.4% while the WH|BM brand’s comparable store sales increased by 8.4% over last year.

 

The consolidated comparable store sales increase of 6.1% in fiscal 2009 was driven primarily by an approximate 8% increase in the Chico’s average unit retail price, which was partially offset by a slight decrease in units per transaction at Chico’s front-line stores. Comparable store sales results also benefited from an increase in both the average unit retail price as well as total transactions at the WH|BM brand compared to the like period in fiscal 2008. The Chico’s/Soma brands’ comparable store sales increased by approximately 4% and the WH|BM brand’s comparable store sales increased by approximately 11% compared to the like period in fiscal 2008. Net sales by the DTC for fiscal 2009 increased by $27.7 million, or 39.3%, compared to fiscal 2008 due to enhanced functionality on our websites and improved online assortments. Consolidated comparable sales, which include DTC sales, increased in fiscal 2009 by 7.6% over fiscal 2008.

 

 

As a percentage of net sales, gross margin increased by only 10 basis points in fiscal 2010 compared to fiscal 2009. This increase was mainly attributable to improved merchandise margins at outlet stores due to increased penetration of made-for-outlet product but offset, for the most part, by a slight decrease in merchandise margins at Chico’s front-line stores. This decrease in merchandise margins was primarily driven by increases in markdowns for fiscal 2010, partially offset by slightly higher initial markups for the Chico’s brand.

Gross margin percentage increased by 420 basis points in fiscal 2009 compared to fiscal 2008. The gross margin increase was attributable to significant improvements in the merchandise margins at both the Chico’s and WH|BM brands. Both brands benefited from substantially lower markdowns and, to a lesser extent, higher initial markups. These improvements in gross margin were slightly offset by continued investment in merchandise and product development including technology initiatives.

 

 

Store and direct operating expenses include store and DTC operational expenses, and reflect such items as personnel, occupancy, credit card fees, depreciation and supplies, incurred to operate each of our stores and the DTC channel. In addition, store and direct operating expenses include support expenditures for district and regional management expenses and other store support functions. Store and direct operating expenses increased by $26.1 million over fiscal 2009 primarily due to increased store labor costs and occupancy expense associated with 71 net new stores over last year, accompanied by increased in-store promotions and higher credit card fees due to higher sales volume compared to last year. Store operating expenses as a percentage of net sales decreased by 250 basis points in fiscal 2010 due to the leverage associated with positive comparable store sales.

 

In fiscal 2009, store operating expenses increased slightly in dollars due to higher occupancy costs but, as a percentage of net sales, decreased by 300 basis points due to the leverage from positive comparable store sales as well as effective implementation of ongoing cost saving initiatives at the store level.

 

 

Marketing expenses include marketing programs such as direct marketing efforts, national advertising expenses via various media and related support costs. Marketing expenses increased in fiscal 2010 by $24.4 million compared to fiscal 2009 mainly due to planned increases in marketing initiatives across all three brands, particularly with television advertising and e-marketing initiatives. As a percentage of net sales, marketing expenses increased 80 basis points in fiscal 2010 compared to fiscal 2009.

 

Marketing expenses decreased as a percentage of net sales by approximately 50 basis points in fiscal 2009 compared to fiscal 2008 mainly due to the leverage from positive comparable store sales. In addition, marketing expenses in dollars decreased due to savings in direct mailing costs attributable to both decreased materials costs and circulations, partially offset by an increase in broadcast and print advertisement.

 

NSSC expenses consist of corporate level functions including executive management, human resources, management information systems and finance, among others. In fiscal 2010, NSSC expenses increased slightly mainly due to increased recruiting and relocation costs. However, as a percentage of net sales, NSSC expenses decreased by 50 basis points due to the leverage associated with positive comparable store sales for the year.

 

NSSC expenses in fiscal 2009 increased slightly in dollars mainly due to increased incentive compensation costs, offset by back office cost reduction initiatives. However, as a percentage of net sales, NSSC expenses decreased by 40 basis points due to the leverage associated with the positive comparable store sales.

 

 

The impairment charges recognized in fiscal 2010 include non-cash impairment charges incurred in the first and fourth quarters of the year. An evaluation of long-lived assets at certain underperforming stores for indicators of impairment was performed and, as a result, we determined that the carrying values of certain assets exceeded their future undiscounted cash flows. The fair value of these assets was determined by discounting their future cash flows using a rate approximating our cost of capital, which resulted in an impairment charge of approximately $0.8 million and $1.1 million in the first and fourth quarters, respectively.

 

The impairment charges recognized in fiscal 2009 include non-cash impairment charges incurred in the first, second and fourth quarters of the year. During the first quarter of fiscal 2009, an impairment charge totaling $8.1 million was recorded related to the write-off of development costs for software applications. During the second quarter of fiscal 2009, a non-cash charge totaling $3.8 million was incurred related to the partial write-off of a note receivable and $1.1 million in non-cash impairment charges related to the write-off of fixed assets at certain underperforming stores. During the fourth quarter, an additional non-cash impairment charge of $2.0 million was taken on the aforementioned note receivable based on a further evaluation of the underlying collateral.

 

The impairment and restructuring charges recognized in fiscal 2008 consisted of non-cash impairment charges totaling $13.7 million related to the write-off of fixed assets at certain underperforming stores, and severance and workforce reduction costs totaling $10.0 million related to the elimination of approximately 11% of the NSSC employee base and charges associated with the separation agreement with our former Chief Executive Officer. Virtually all payments related to the severance and workforce reduction action were completed in fiscal 2009.

 

In fiscal 2010, interest income, net, was flat in total dollars and as a percentage of net sales compared to fiscal 2009.

 

In fiscal 2009, interest income, net, decreased in total dollars and as a percentage of net sales compared to fiscal 2008 primarily due to lower interest rates on our investments and, to a lesser extent, due to the reversal and non-accrual of interest income in fiscal 2009 on a note receivable for which interest was deemed uncollectible.

 

Provision for Income Taxes

 

Our effective tax rate was 35.5%, 36.6% and 39.9%, for fiscal 2010, 2009 and 2008, respectively. The decrease in the effective tax rate for fiscal 2010 from fiscal 2009 was primarily due to the favorable settlement of certain state tax examinations. The decrease in the effective tax rate for fiscal 2009 from fiscal 2008 was primarily due to the favorable settlement of certain state tax examinations and the expiration of various statutes of limitation relating to certain state tax accruals.

 

Investing Activities

 

Net cash used in investing activities was $220.6 million and $212.0 million for fiscal 2010 and 2009, respectively. We had net purchases of $147.5 million of marketable securities in the current year compared to $144.1 million of net purchases in fiscal 2009.

 

Our approximate $5.1 million increased investment in capital expenditures when compared to the prior year was primarily related to costs associated with new, relocated, remodeled and expanded Chico’s, Soma and WH|BM stores offset slightly by a decrease in distribution center investments.

 

Financing Activities

 

Net cash used in financing activities was $41.4 million in fiscal 2010 compared to net cash provided by financing activities of $7.1 million in fiscal 2009. In fiscal 2010, we declared and paid four quarterly $0.04 per share cash dividends on our common stock totaling $28.5 million and repurchased $18.3 million of our common stock through the share repurchase program announced in August 2010. In the current and prior fiscal years, we received proceeds from both the issuance of common stock related to option exercises and employee participation in our employee stock purchase plan.

 

During fiscal 2010, 2009 and 2008, we repurchased 70,642, 76,479 and 60,168 shares, respectively, of restricted stock in connection with employee tax withholding obligations under employee compensation plans, which are not purchases under any publicly announced plan.

 

New Store Openings and Infrastructure Investments

 

We expect our new stores in fiscal 2011 to increase approximately 9%, reflecting 24-28 net openings of Chico’s stores, 23-26 net openings of WH|BM stores, and 53-56 net openings of Soma stores. We also expect to complete 25-30 relocations or expansions. We continuously evaluate the appropriate new store growth rate in light of economic conditions and may adjust the growth rate as conditions require or as opportunities arise.

 

We believe that the liquidity needed for new stores, including the continued investment associated with the Soma brand, our continuing store remodel/expansion program, the investments required for our distribution center, our continued installation and upgrading of new and existing software packages, and investment in inventory levels associated with this growth will be funded primarily from cash flow from operations and our existing cash and marketable securities balances, and, if necessary, the capacity included in our bank credit facility.

 

At the beginning of fiscal 2010, we completed the second major phase of our multi-year, planned implementation of our enterprise resource planning (“ERP”) system and we are currently utilizing this system in all of our brands. The third major phase includes ongoing enhancements and optimization of the new ERP across all three brands, as well as the deployment of additional functionality across various other functions.

 

In fiscal 2009, we purchased JDA Enterprise Planning, JDA Assortment Planning and JDA Allocation software applications and curtailed the previously planned implementations of related SAP applications and revised our roll out plan accordingly. We completed the implementation of the allocation functionality during fiscal 2009, installed enterprise planning in 2010, and are currently working on implementing the additional JDA planning applications over the next 12-18 months. Additionally, we are developing a product lifecycle management solution supporting the design and development process.

 

Given our existing cash and marketable securities balances and the capacity included in our bank credit facility, we do not believe that we will need to seek other sources of financing to conduct our operations, pay future dividends or pursue our expansion plans even if cash flow from operations should prove to be less than anticipated, or if there should arise a need for additional letter of credit capacity due to establishing new and expanded sources of supply, or if we were to increase the number of new stores planned to be opened in future periods.

 

As of January 29, 2011, our contractual obligations consisted of amounts outstanding under operating leases and non-cancelable purchase commitments. Amounts due under non-cancelable purchase commitments consist of amounts to be paid under agreements to purchase inventory.

 

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 $3.6 million at January 29, 2011 from the above table.

 

On November 24, 2008, we entered into a $55 million Senior Secured Revolving Credit Facility (the “Credit Facility”) with SunTrust Bank, as administrative agent and lender and SunTrust Robinson Humphrey, Inc. as lead arranger.

 

The Credit Facility provides a $55 million revolving credit facility that matures on November 24, 2011. The Credit Facility provides for swing advances of up to $5 million and issuance of letters of credit up to $10 million. The Credit Facility also contains a feature that provides us the ability, subject to satisfaction of certain conditions, to increase the commitments available under the Credit Facility from $55 million up to $100 million through additional syndication. The proceeds of any borrowings under the Credit Facility may be used to fund future permitted acquisitions, to provide for working capital and for other general corporate purposes.

 

Off-Balance Sheet Arrangements

 

At January 29, 2011 and January 30, 2010, 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. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our 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 United States. 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 results of operations and financial position.

 

Inventory Valuation and Shrinkage

 

We identify potentially excess and slow-moving inventories by evaluating turn rates and inventory levels in conjunction with our overall sales trend. Excess quantities of inventory are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences, as well as specific identification based

on fashion trends. Further, exposure to inadequate realization of carrying value is identified through analysis of gross margins and markdowns in combination with changes in current business trends. We provide lower of cost or market adjustments for such identified excess and slow-moving inventories. Historically, the variation of those estimates to observed results has been insignificant and, although possible, significant variation is not expected in the future. If, however, our markdown rate and cost percentage estimates varied by 10% of their values, the carrying amount of inventory would have changed by approximately $0.2 million.

 

We estimate our expected shrinkage of inventories between our physical inventory counts by applying the most recent average store shrinkage experience. These rates are updated to reflect the most recent physical inventory shrinkage experience. Historically, the variation of those estimates to observed results has been insignificant and, although possible, significant variation is not expected in the future. If, however, our estimated shrinkage percentages increased by 10%, we would have incurred approximately $0.9 million in additional expense and the carrying amount of inventory would have changed by approximately $0.5 million.

 

Revenue Recognition

 

Although our recognition of revenue does not involve significant judgment, revenue recognition represents an important accounting policy. Retail sales at our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under the “Passport Club” and “The Black Book” loyalty programs and company issued coupons, promotional discounts and associate discounts. We record DTC revenue based on the estimated receipt date of the product by our customers.

 

Under our current program, 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 on 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 (commonly referred to as gift card breakage). We recognize 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.

 

As part of the normal sales cycle, we receive customer merchandise returns related to store and DTC sales. To account for the financial impact of this process, 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.

 

Evaluation of Long-Lived 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 fair value of an asset is estimated using estimated future cash flows of the asset discounted by a rate commensurate with the risk involved with such asset while incorporating marketplace assumptions. 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. For example, as it relates to the $1.9 million write-off of fixed assets for certain underperforming stores in fiscal 2010, if we had decreased our forecast of future sales by 1% throughout the forecast period or increased our discount rate by 1%, our write-off would have increased by less than $0.1 million.

We evaluate the recoverability of goodwill at least annually based on a two-step impairment test. The first step 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. Fair value is determined based on estimated future cash flows, discounted at a rate that approximates our cost of capital.

 

There are several significant assumptions and estimates used in the discounted cash flow model. Included among these are the estimates used to forecast cash flows over a 10-year forecast period, including an estimate for overall sales growth based on assumptions with respect to future comparable store sales growth, changes in store counts and square footage growth rates. We also estimate future gross margin and operating margin percentages. The discount rate is estimated based on an approximation of our weighted average cost of capital formulated by reviewing assumptions used by marketplace participants, in order to calculate the present value of forecasted future cash flows. Lastly, our discounted cash flow model estimates future cash flows where appropriate beyond the 10-year forecast period for purposes of the present value computation by applying a long-term growth rate commensurate with an estimate of overall U.S. economic growth.

 

With regard to the goodwill impairment test completed during the fourth quarter of fiscal 2010, if we had assumed a weighted average cost of capital 1% higher than the rate used in the goodwill impairment test, the estimated fair value of the Chico’s and WH|BM reporting units would have decreased by approximately $173.2 million and $59.1 million, respectively. Nevertheless, even such reduced fair value amounts still would be greater than the respective carrying values of the respective reporting units and thus the second step of the goodwill impairment test still would not have been triggered.

 

Conversely, if we had assumed a sales growth estimate 1% lower throughout the forecast period than the rate used in our goodwill impairment test, the fair value of the Chico’s and WH|BM reporting units would have decreased by approximately $227.5 million and $122.8 million, respectively. Again, however, even such reduced fair value amounts still would be greater than the respective carrying values of the respective reporting units and thus the second step of the goodwill impairment test still would not have been triggered. Currently, we believe that neither of our reporting units is at risk of failing the first step of goodwill impairment testing.

 

We evaluate our other intangible assets for impairment on an annual basis by comparing the fair value of the asset with its carrying value. Such estimates are subject to change and we may be required to recognize impairment losses in the future. For example, with regard to our annual impairment test of the WH|BM trademark intangible asset, if we had assumed a sales growth estimate 1% lower throughout the forecast period than the rate used in its trademark impairment test, the fair value of the WH|BM trademark would have decreased by approximately $7.8 million. Conversely, an increase of 1% in the discount rate would have decreased the fair value by approximately $9.4 million. In either case, the fair value of the WH|BM trademark still would be greater than its carrying value and no impairment charge would have been recognized.

 

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 rental expenses are also amortized on a straight-line basis over the terms of the leases, which includes the construction period and which is generally 60 — 90 days prior to the store opening date when we generally begin improvements in preparation for our intended use. Tenant improvement allowances are recorded as a deferred lease credit within deferred liabilities and amortized as a reduction of rent expense over the term of the lease, which includes the construction period and one renewal when there is a significant economic penalty associated with non-renewal.

 

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. No valuation allowance has been provided for deferred tax assets, since management anticipates that the full amount of these assets should be realized in the future. Our effective tax rate considers management’s judgment of expected tax liabilities within the various taxing jurisdictions in which we are subject to tax. Due to the substantial amounts involved and judgment necessary, we deem this policy could be critical to our financial statements.

 

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 materially affect amounts recognized related to income tax uncertainties and may affect our results of operations or financial position. Historically, the variation of those estimates to observed results has been insignificant and, although possible, significant variation is not expected in the future. 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. At January 29, 2011 and January 30, 2010, we had approximately $3.6 million and $6.9 million reserved for uncertain tax positions, respectively. A 5% difference in the ultimate settlement amount of our uncertain tax positions versus our tax reserves recorded on January 29, 2011 would have affected net income and the related reserves by approximately $0.1 million. See Note 6 to the consolidated financial statements for further discussion of our uncertain tax positions.

 

Stock-Based Compensation Expense

 

The calculation of stock-based employee compensation expense involves estimates that require management’s judgment. These estimates include the fair value of each of the stock option awards granted, which is estimated on the date of grant using the Black-Scholes option pricing model. There are two significant inputs into the Black-Scholes option pricing model: expected volatility and expected term. We estimate expected volatility based on the historical volatility of our stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under our stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, stock-based compensation expense could be materially different in the future. However, a change of 5% in the assumptions for expected volatility and expected term used to calculate the fair value of stock options granted during the fiscal year ended January 29, 2011 would have affected net income by approximately $0.1 million for fiscal 2010.

 

In addition, we are required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. In determining the portion of the stock-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. As a result, in the event that a grant’s actual forfeiture rate is materially different from its estimate at the completion of the vesting period, the stock-based compensation expense could be significantly different from what we record in the current and prior periods. See Note 9 to the consolidated financial statements for further discussion on stock-based compensation.

 

Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update 2010-06 (“ASU 2010-06”) which amends Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measures and Disclosures . ASU 2010-06 amends the ASC to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also require more detailed disclosure about the activity within Level 3 fair value measurements. This guidance is effective for annual and interim reporting periods beginning after December 15, 2009, except for requirements related to Level 3 disclosures, which are effective for annual and interim periods beginning after December 15, 2010. We do not expect that adoption of the remaining provisions of ASU 2010-06 will have a material impact on our consolidated financial statements.

Quarterly Results and Seasonality

 

Our quarterly results may fluctuate significantly depending on a number of factors including timing of new store openings, adverse weather conditions, the spring and fall fashion lines and shifts in the timing of certain holidays. In addition, our periodic results can be directly and significantly impacted by the extent to which new merchandise offerings are accepted by customers, the timing of the introduction of such merchandise and the timing of marketing initiatives.

 

Certain Factors That May Affect Future Results

 

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 future growth rates of our store concepts. The statements may address items such as future sales, gross margin expectations, operating margin expectations, earnings per share expectations, planned store openings, closings and expansions, future comparable store sales, future product sourcing plans, inventory levels, planned marketing expenditures, planned capital expenditures and future cash needs. In addition, from time to time, we may issue press releases and other written communications, and our representatives may make oral statements, which contain forward-looking information.

 

These statements, including those in this Form 10-K and those in press releases or made orally, may include the words “expects,” “believes,” and similar expressions. Except for historical information, matters discussed in such oral and written statements, including this Form 10-K, are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those currently anticipated. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in Item 1A, “Risk Factors” of this Form 10-K.

 

These potential risks and uncertainties include the financial strength of retailing in particular and the economy in general, the extent of financial difficulties that may be experienced by customers, our ability to secure and maintain customer acceptance of styles and store concepts, the propriety of inventory mix and sizing, the quality of merchandise received from suppliers, the extent and nature of competition in the markets in which we operate, the extent of the market demand and overall level of spending for women’s private branded clothing and related accessories, the adequacy and perception of customer service, the ability to coordinate product development with buying and planning, the ability to efficiently, timely and successfully execute significant shifts in the countries from which merchandise is supplied, the ability of our suppliers to timely produce and deliver clothing and accessories, the changes in the costs of manufacturing, labor and advertising, the rate of new store openings, the buying public’s acceptance of any of our new store concepts, the performance, implementation and integration of management information systems, the ability to hire, train, energize and retain qualified sales associates and other employees, the availability of quality store sites, the ability to expand our distribution center and other support facilities in an efficient and effective manner, the ability to hire and train qualified managerial employees, the ability to effectively and efficiently establish and operate DTC sales, the ability to secure and protect trademarks and other intellectual property rights, the ability to effectively and efficiently operate the Chico’s, WH|BM, and Soma merchandise brands, risks associated with terrorist activities, risks associated with natural disasters such as hurricanes and other risks. In addition, there are potential risks and uncertainties that are peculiar to our reliance on sourcing from foreign suppliers, including the impact of work stoppages, transportation delays and other interruptions, political or civil instability, imposition of and changes in tariffs and import and export controls such as import quotas, changes in governmental policies in or towards foreign countries, currency exchange rates and other similar factors.

 

The forward-looking statements included herein are only made as of the date of this Annual 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.

 

The market risk of our financial instruments as of January 29, 2011 has not significantly changed since January 30, 2010. We are exposed to market risk from changes in interest rates on any future indebtedness and our marketable securities.

 

Our exposure to interest rate risk relates in part to our revolving line of credit with our bank; however, as of January 29, 2011, we did not have any outstanding borrowings on our line of credit and, given our current liquidity position, do not expect to utilize our line of credit in the foreseeable future except for the continuing use of the letter of credit facility portion thereof.

 

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 variable rate demand notes, which are considered highly liquid, variable rate municipal debt securities, municipal bonds, asset-backed securities, corporate bonds, and U.S. treasury securities. Although the variable rate demand notes, totaling $319.2 million, have long-term maturity dates ranging from 2011 to 2049, the interest rates generally reset weekly. Despite the long-term nature of the underlying securities of the variable rate demand notes, we have the ability to quickly liquidate or put back these securities. The remainder of the portfolio, as of January 29, 2011 consisted of $117.7 million of securities with maturity dates less than one year and $97.1 million with maturity dates over one year and less than two years. We consider all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and therefore classify these securities as short-term investments within current assets on the consolidated balance sheets. As of January 29, 2011, an increase of 100 basis points in interest rates would reduce the fair value of our marketable securities portfolio by approximately $1.9 million. Conversely, a reduction of 100 basis points in interest rates would increase the fair value of our marketable securities portfolio by approximately $1.0 million.

 

 

The accompanying notes are an integral part of these consolidated statements.