Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-21258

Chico’s FAS, Inc.

11215 Metro Parkway,

(239) 277-6200

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

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

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 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 an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes þ         No o

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

	Approximately $1,795,194,000 as of April 18, 2003 (based upon the closing sales price reported by the NYSE and published in the Wall Street Journal on April 18, 2003).

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 — 85,741,324 shares as of April 18, 2003.

Documents incorporated by reference:

	Part II Annual Report to Stockholders for the Fiscal Year Ended February 1, 2003.
	Part III Definitive Proxy Statement for the Company’s Annual Meeting of Stockholders presently scheduled for June 24, 2003.

CHICO’S FAS, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

1

PART I

ITEM 1.     BUSINESS

General

      Chico’s FAS, Inc., (together with its subsidiaries, the “Company”), is a specialty retailer of exclusively designed, private label, sophisticated, casual-to-dressy clothing, complementary accessories and other non-clothing gift items under the Chico’s and Pazo brand names.

      The Chico’s brand, which began operations in 1983, focuses on women who are 35 years old and up with moderate and higher income levels. The styling is relaxed, figure-flattering and designed for easy care. Pazo, which opened its first 10 test stores in March, 2003, focuses on women in the 25-40 age group with moderate income. Its offerings are more diverse, including casual, active wear, intimate apparel and casual career. The Pazo brand intends to be more fashion forward with a European feel that is more stylish.

      The Company is vertically integrated and designs virtually all of its products either in-house or working with its independent vendors. The Company endeavors to maintain a merchandise mix which emphasizes the continued introduction of new styles and designs to complement its seasonal and core product offerings.

      As of April 18, 2003, the Company operated 401 retail stores in 41 states and the District of Columbia. The Company’s 360 Chico’s front-line Company-owned stores, as of this date, compete in the “better-priced” market, with approximately one-third of these stores in upscale malls, approximately 20% in upscale street locations and the balance in open air specialty centers. Chico’s also has 12 franchised locations remaining in 4 states, although no new franchisees have been authorized since 1989. There are also 19 Chico’s outlet locations at April 18, 2003, which provide clearance activities for the Chico’s front-line stores.

      In March 2003, the Company launched its new Pazo division by opening 10 test stores in seven southern and southwestern states. The Company intends to open any new Pazo stores mostly in upscale malls and open air centers that are perceived to present strong demographics of its target customer. Current Pazo stores average approximately 2,390 net selling square feet of space. The Company, at this time, does not plan to support these stores with outlet stores for clearance.

      In early 2003, the Company also announced it was investigating the possibility of opening 6 to 10 intimate/activewear apparel stores in fiscal 2004, aiming at customers with the same age and income as Chico’s. It is anticipated that the name of this chain would leverage the Chico’s name. To this end, the Company has begun building a product development team by hiring a Senior Merchant who has significant experience with this type of product. The Company is in the early stages of pursuing this opportunity and has not established store size, number of test stores and other key factors.

      In May 2000, Chico’s established a call center for its catalog and online sales. Although Chico’s mails a catalog almost every month which supports its catalog and online sales, the Company relies on these catalogs as a staple to drive its target customers into its stores. Sales through the catalog’s 800 number and from www.chicos.com amounted to $16.1 million in fiscal 2002 and are viewed as a customer service for those who prefer shopping in this manner. The Company has no current plans to launch a Pazo catalog or online store at this time, but will continue to monitor the development of its Pazo division to determine whether there will come a time when establishing a Pazo catalog and/or online store would be considered advisable. The Company does intend to produce mailers to display Pazo product although there will be no infrastructure to take orders at this time.

      Chico’s has been experiencing double digit same store sales growth, for the most part, since June 1997. During the period from June 1997 through late 2000, the Company had been able to use markdowns (first, second and special sales) in its front-line stores to effectively clear merchandise without opening new outlets. During this time the Company operated between 7 and 8 outlets. In late 2000, Chico’s decided to develop a plan to discontinue using some of its smaller front-line stores as clearance vehicles and to reallocate more of the square footage to full-priced merchandise. To this end, Chico’s established a separate outlet division, with separate management, and has since expanded to 19 Chico’s outlets, most of which have a larger average store square footage than in previous years. In order to provide the outlets with a full complement of merchandise, Chico’s has also developed a supplemental product line for distribution only through its outlet stores which

2

      Also during the past few fiscal years, Chico’s has been testing the expansion of its brand within its own stores by offering certain items which complement the clothing product, such as footwear, leather goods, watches, and other gift products which are designed by the Company. All of these items are intended to promote the Chico’s brand in areas beyond clothing. Because of the additional space required to accommodate these additional categories and in an effort to improve the visual ambiance of its clothing and accessory presentations, the Company has been actively pursuing larger spaces for its existing and new Chico’s stores. Rather than targeting a 1,200-1,500 net selling square foot store as Chico’s pursued through fiscal 1998, the Company now believes the target Chico’s store size is nearer 1,800-3,000 net selling square feet. Although the Company may from time to time still open Chico’s stores in the 1,200-1,700 net selling square foot range, particularly in smaller markets or when a larger well positioned store is not available at a particular location, the Company’s primary focus in both its new and existing markets is a Chico’s store with 1,800-3,000 net selling square feet.

      The Company intends to continue locating its front-line Company-owned stores primarily in established upscale, outdoor destination shopping areas and high-end enclosed malls located either in tourist areas or in, or near, mid-to-larger sized markets. The Company opened 60 new Chico’s Company-owned front-line stores and 6 new Chico’s outlet stores in the fiscal year ended February 1, 2003 (fiscal 2002). In addition, the Minnesota franchisee opened one new Chico’s front-line franchise store in fiscal 2002. The Company plans to open a minimum of between 70 and 75 net new Company-owned stores (including at least 10 Pazo stores) in the fiscal year ending January 31, 2004 (fiscal 2003) and expects to close between one and three existing Chico’s stores during this time frame.

Fashion Risk; Impact of Economic Conditions

      The retail apparel business fluctuates according to changes in consumer preferences dictated in part by fashion, season and the economy. Economic conditions could affect the level of consumer spending on merchandise offered by the Company, including, among others, business conditions, foreign affairs, interest rates, energy costs, taxation and consumer confidence in future economic conditions. Consumer preferences and economic conditions may differ, or change, from time to time in each market in which the Company operates and could directly impact the Company’s net sales and profitability.

Business Strategies

      Overall Growth Strategy. Over the last several years, the Company has been building its infrastructure to accommodate anticipated future growth in its store base and overall revenues. This increase in infrastructure includes significant additions to its senior and middle management teams, a rollout of state-of-the art cash registers (fiscal 2001), a new distribution center (fiscal 2002) and new back office software anticipated to “go live” in the latter half of fiscal 2003. In early fiscal 2003, the Company launched its second concept, Pazo, which the Company believes could allow for continued future growth within the United States and, through added leverage of the two concepts in the leasing marketplace, better site locations for future Chico’s and Pazo stores. The Company has established a 25% annual square footage growth as its goal (which aggregates the square footage of both Chico’s stores and Pazo stores) for the next several years. From the perspective of separately assessing the growth potential of each of the two divisions, the Company anticipates the overall market for Chico’s stores in the United States and Canada is between 550 and 650 total stores, while it believes that it is premature to project the overall market potential for Pazo stores at this time.

      Distinctive In-House Designed Clothing and Coordinated Accessories. The most important element of the Company’s business strategies is the distinctive private label clothing (mostly casual) and complementary accessories offered for sale at its stores. Emphasizing casual comfort, its clothing is made from natural fabric (including cotton, rayon, linen and silk) blends and sophisticated synthetics. Accessories, such as handbags, belts and jewelry, including earrings, necklaces and bracelets, are specifically purchased and designed to coordinate with the colors and patterns of its clothing, enabling customers to easily enhance and individualize their wardrobe selections. The Pazo concept is testing a more diverse offering of apparel which also includes active wear, intimate apparel and casual career.

3

      Virtually all of the clothing offered by the Company at both of its store concepts is designed in-house, and the Company controls most aspects of the design process, including choices of pattern, construction, fabric, treatment and color. A majority of the accessory designs also are developed in-house or are enhanced at the Company’s request by the manufacturer to complement specific items of clothing.

      The Company’s private label clothing is designed through the coordinated efforts of the Company’s merchandising and product development teams at both Chico’s and Pazo. Style, pattern, color and fabric for individual items of the Company’s private label clothing are developed based upon historical sales data, anticipated future sales and perceived current and future fashion trends that will appeal to its target customer.

      The Company’s product development teams develop these in-house designs and design modifications. By conceptualizing and designing in-house and then contracting, for the most part, directly with manufacturers and providing some on-site quality control, the Company has been able to realize higher average initial gross profit margins than the industry, while at the same time providing value to its customers.

      The distinctive nature of Chico’s clothing is carried through in its sizing. Stores within the Chico’s concept incorporate international type sizing, utilizing sizes 0 (size 4-6), 1 (size 8-10), 2 (size 10-12), and 3 (size 14-16). As in the past, these stores occasionally will offer one-size-fits-all and small, medium and large sizing for some items. The relaxed nature of clothing bearing the Chico’s name allows the Chico’s stores to utilize this sizing and thus to offer a wide selection of clothing without having to invest in a large number of different sizes within a single style. The Chico’s stores have also been offering denim pants with a more varied sizing using half sizes to address fits between the four standard sizes described previously. Sizing in Pazo stores is currently American sizes in the 2-14 range which the Company believes is more appropriate for the target Pazo customer.

      Personalized Service and Customer Assistance. Chico’s has always considered personalized customer service one of the most important factors in determining its success. The Company intends, through training efforts, to make certain that Chico’s sales associates offer assistance and advice on various aspects of 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 Chico’s clothing and accessories. As part of its strategy to reinforce the casual aspects of Chico’s clothing, Chico’s sales associates are trained to demonstrate to customers the most attractive ways to wear Chico’s clothing. Dressing rooms are generally not equipped with mirrors, encouraging customers to come out of the dressing rooms in Chico’s clothes so that store personnel can provide such assistance. The Company has not found it necessary to offer alteration services.

      Chico’s 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. The Company encourages, but does not require, its sales associates to wear its clothing and accessories in its stores (subject to varying state laws) and to complement this it offers substantial employee discounts. To better serve the Chico’s customer, sales associates are encouraged to become familiar with new styles and designs of clothing and accessories by trying on new merchandise.

      The Company takes pride in empowering its employees to make decisions that best service the customer. This healthy sense of empowerment enables the Company’s employees to exceed customers’ expectations. In addition, many of the Company’s store managers and sales associates were themselves Chico’s customers prior to joining the Company and can therefore more easily identify with customers. Chico’s employees 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 are encouraged to arrange for the item to be shipped directly to the customer from another Chico’s store.

      The Company is currently evaluating the level of training and service that it feels is appropriate for the Pazo customer, although it does not believe initially that the depth of service provided at Chico’s is necessarily required at Pazo.

      Customer Loyalty. Chico’s preferred customer club, which was established in the early 90’s and which is known as the “Passport Club”, was designed to encourage repeat sales and customer loyalty. Features of the club include discounts, special promotions, invitations to private sales and personalized phone calls regarding

4

      The Company relaunched the club in February 1999 with essentially the same features. A customer signs up for the club at no cost to become a “temporary” member and once the customer spends $500 over any time frame, the customer becomes a “permanent” member entitled to a 5% lifetime discount, advance sale notices, free shipping and other benefits. Since the relaunch in early 1999, the Company has been very successful in increasing its database of “temporary” and “permanent” Passport members. As of April 3, 2003, the Company had over 688,000 permanent Passport members and over 2.5 million temporary Passport members. During fiscal 2002, the permanent Passport members accounted for approximately 73% of overall sales, while the temporary members accounted for 22% of overall sales. Also, during fiscal 2002, the Company signed up an average of 64,000 “temporary” new members per month, of which an average of 20,000 per month spent the required $500 to become a permanent member. Prior to the relaunch of the Passport Club, the permanent members accounted for approximately 10% of overall sales and the Company was unable to effectively track “temporary” Passport members sales.

      The Company believes that permanent Passport members shop more frequently and spend more on the average transaction than “temporary” Passport members. During the fiscal year ended February 1, 2003, the average permanent passport member spent $117 per transaction and shopped five to eight times per year, while the “temporary” Passport members averaged $74 per transaction and shopped one to three times per year. The Company does not have a proprietary credit card at this time.

      With the sophisticated database hardware and software the Company has acquired to manage the SKU-level transactions being recorded for both temporary and permanent Passport Club members, the Company believes it is better able to more sharply focus its marketing, design and merchandising efforts to better address and define the desires of its target customer.

      Pazo established its “Club Pazo” frequent shopper club initially without annual minimum spending levels to obtain certain benefits. The Company intends to review this concept throughout fiscal 2003 to determine whether refinements or changes to this program are advisable based upon what is best suited for the Pazo target customer.

      High-Energy, Loyal Employees. The Company believes that the dedication, high energy level and experience of the members of its senior management team, support staff and store employees are key to its continued growth and success and help to encourage personalized attention to the needs of its customers.

      In selecting its employees at all levels of responsibility, the Company looks for quality individuals with high energy levels who project a positive outlook. The Company has found that such persons perform most effectively for the Company and contribute to a fun and exciting shopping experience for its customers.

      Sales associates are compensated with a base hourly wage but also have opportunities to earn substantial incentive compensation based on their individual sales. For the most part, these incentives are based upon the dollar amount of sales to individual customers, thereby encouraging sales of multiple items. Store managers receive base salaries and are eligible to earn various incentive bonuses tied to individual sales and storewide sales performance. District and regional managers also have the opportunity to earn monthly incentive compensation based upon the sales performance of stores in their districts and regions, as well as incentives, including stock options, based on their district or region performance compared to the Company’s overall sales performance.

      The Company offers its employees other recognition programs and the opportunity to participate in its stock incentive, stock purchase and 401(k) programs. Management believes that all these programs and policies offer Chico’s sales associates and other employees opportunities to earn total compensation at levels generally at, or above, the average in the retail industry for comparable positions.

      The Company’s emphasis where possible on a “promote from within” philosophy, combined with increases in the number of new Company-owned stores, provides opportunities for qualified employees to advance to higher positions in the Company.

5

      Additional Company-Owned Stores. Management believes that the ability to open additional Company-owned stores will be a factor in the future success of the Company. During fiscal 1998, the Company opened 22 new Company stores and one new franchised store while closing two outlet stores. During fiscal 1999, the Company opened 40 new company stores and one new franchised store while closing three front-line stores. During fiscal 2000, the Company opened 51 new Company-owned stores and two new franchised stores while closing two front-line stores and one outlet store. During fiscal 2001, the Company opened 59 new Company-owned stores and five new outlet stores, while closing two front-line stores and one outlet store. During fiscal 2002, the Company opened 66 new Company-owned stores and one new franchised store, while no stores were closed. Prior to March 2003, all stores opened were under the Chico’s brand name. As of April 18, 2003, the Company has opened 11 front-line and 2 outlet stores under the Chico’s name and 10 Pazo stores of the minimum 70-75 net new Company-owned stores planned to be opened in fiscal 2003. The Company has signed leases for several additional new Chico’s store locations, and the Company also is currently engaged in negotiations for the leasing of numerous additional sites, including potential Pazo sites. The Company generally expects to open between 15 and 25 new stores each quarter of fiscal 2003.

      In general the Company intends to locate its new stores predominantly outside of Florida. In deciding whether to open a new store, the Company undertakes an extensive analysis which includes the following: identifying an appropriate geographic market; satisfying certain local demographic requirements; evaluating the location of the shopping area or mall and the site within the shopping area or mall; assessing proposed lease terms; and evaluating the sales volume necessary to achieve certain profitability criteria. Once the Company takes occupancy, it usually takes from three to five weeks to open a store. After opening, Chico’s front-line stores have typically generated positive cash flow within the first year of operation (after allocation of a portion of home office administrative expense based on sales and after recovery of the Company’s out-of-pocket cash expenses in opening the new store) and have typically had an eleven month to eighteen month payback of all initial capital and inventory costs. However, there can be no assurance that new Chico’s or Pazo stores will achieve operating results similar to those achieved by Chico’s in the past.

      The Company plans to grow by opening additional Company-owned stores and the Company does not currently intend to increase the number of franchisees. The Company intends to continue providing full support for its franchise network and anticipates that one of its existing franchisees may be able to further meet the Chico’s criteria for opening additional stores in its limited territory. This franchisee opened one new franchised store in fiscal 1998, one in fiscal 1999, two in fiscal 2000, none in fiscal 2001, and one in fiscal 2002.

Store Locations

      The Company’s stores are situated, for the most part, either in tourist areas or in, or near, mid-to-larger sized markets. The Company’s front-line stores are located almost exclusively in upscale outdoor destination shopping areas, high-end enclosed shopping malls and, to a lesser degree, regional malls which offer high traffic of its target customers. The Company seeks to locate the Company-owned front-line stores where there are other upscale specialty stores and, as to its mall locations, where there are two or more mid-to-high end department stores as anchor tenants. Chico’s outlet stores are, for the most part, located in outlet centers, although the Company is evaluating the possibility of opening in value centers.

      At February 1, 2003, Chico’s Company-owned front-line stores average approximately 1,830 net selling square feet, while the Chico’s Company-owned outlet stores average approximately 3,043 net selling square feet. The ten Pazo stores opened in March 2003, average approximately 2,390 net selling square feet. In fiscal 1999, the Company began a strategy of opening somewhat larger stores than it has opened in the past. Currently, the Company is seeking to open Chico’s front-line stores with approximately 1,800-3,000 net selling square feet to promote an improved visual ambiance and the expanded offerings of its current products. However, in locations where the Company has a desire to establish a store but where the optimum store size or location is unavailable, the Company often will lease a Chico’s front-line store with as few as 1,200 net selling square feet or as many as 3,500 net selling square feet. If the volume of business at one of these smaller stores is sufficient, and there is no ability to expand the existing store, the Company has chosen in the past to open additional stores nearby, operating more than one Chico’s store in the same general shopping area. The Company is still experimenting to a certain extent with its Pazo store size but currently is targeting stores with

6

      At April 18, 2003, there were 401 stores, of which 360 were Company-owned front-line Chico’s stores, 12 were franchised Chico’s stores, 19 were Chico’s Outlet stores and 10 were Pazo stores. The Company’s stores are located in the following jurisdictions:

7

      In a typical new front-line Company store (including new Pazo stores), the Company’s cost of leasehold improvements, fixtures, store equipment and beginning inventory ranges from $250,000 to $650,000 (after taking into account landlord construction allowances and other concessions).

      The Company utilizes teams of employees experienced in new store openings who are able to supervise final build-out and set up store interiors rapidly, including, where necessary, the flooring, furniture, fixturing, equipment and initial inventory displays. The use of in-house crews allows the Company to open a new store generally within three to five weeks after taking occupancy. Management believes that, as a result, the Company opens its new stores more rapidly and at less cost than many of its competitors. The Company has an arrangement whereby the final design and initial build-out of the store is handled by third-party architectural and contracting firms, with offices or affiliates throughout the country. Under this arrangement, the Company’s in-house crews are still responsible for approving the final stages of the build-out and for setting up the store interiors.

      The following table sets forth information concerning changes in the number of Chico’s Company-owned and franchise stores during the past five fiscal years: