CHICOS FAS INC - 10-Q Quarterly Report

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, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

At May 26, 2003, there were 85,748,924 shares outstanding of Common Stock, $.01 par value per share.


PART I – Financial Information

Item 1. Financial Statements (Unaudited):

Consolidated Balance Sheets – May 3, 2003 and February 1, 2003		3

Consolidated Statements of Income for the Thirteen Weeks Ended May 3, 2003 and May 4, 2002		4

Consolidated Statements of Cash Flows for the Thirteen Weeks Ended May 3, 2003 and May 4, 2002		5

Notes to Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		8

Item 3. Quantitative and Qualitative Disclosures About Market Risk		12

Item 4. Controls and Procedures		12

PART II – Other Information

Item 1.Legal Proceedings		13

Item 6.Exhibits and Reports on Form 8-K		13

Signatures		14

Certifications		14

CHICO’S FAS, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)


					May 3,			February 1,
					2003			2003

				ASSETS
Current Assets:
	Cash and cash equivalents				$	21,060,273		$	8,753,089
	Marketable securities, at market					101,022,643			91,195,175
	Receivables					3,420,615			2,226,068
	Inventories					44,665,457			44,907,504
	Prepaid expenses					6,760,022			6,222,526
	Deferred taxes					7,980,000			7,125,000

			*Total Current Assets*			184,909,010			160,429,362

Property and Equipment:
	Land and land improvements					5,282,677			5,166,394
	Building and building improvements					20,376,548			19,667,654
	Equipment, furniture and fixtures					79,225,729			71,769,250
	Leasehold improvements					86,243,043			78,792,080

			*Total Property and Equipment*			191,127,997			175,395,378
	Less accumulated depreciation and amortization					(40,657,365	)		(36,686,235	)

		*Property and Equipment, Net*				150,470,632			138,709,143

Other Assets:
	Deferred taxes					603,000			92,000
	Other assets					3,273,999			2,313,242

		*Total Other Assets*				3,876,999			2,405,242

					$	339,256,641		$	301,543,747

				LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable				$	25,932,355		$	28,488,471
	Accrued liabilities					22,919,011			24,803,448
	Accrued income taxes					13,855,451			1,396,633
	Current portion of deferred liabilities					176,255			171,217

		*Total Current Liabilities*				62,883,072			54,859,769

Noncurrent Liabilities:
	Deferred liabilities					7,874,756			6,550,856

		*Total Noncurrent Liabilities*				7,874,756			6,550,856

Stockholders’ Equity:
	Common stock					857,489			852,823
	Additional paid-in capital					69,030,749			63,985,702
	Retained earnings					198,476,607			175,109,145
	Accumulated other comprehensive income					133,968			185,452

		*Total Stockholders’ Equity*				268,498,813			240,133,122

					$	339,256,641		$	301,543,747

CHICO’S FAS, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)


		Thirteen Weeks Ended

		May 3, 2003				May 4, 2002

		Amount		% of Sales		Amount		% of Sales

Net Sales by Company stores		$	161,440,522		95.5	$	125,264,126		96.0
Net Sales by catalog & Internet			5,682,730		3.4		3,581,926		2.8
Net Sales to Franchisees			1,861,345		1.1		1,607,589		1.2

	Net sales		168,984,597		100.0		130,453,641		100.0
Cost of goods sold			64,689,213		38.3		48,989,591		37.6

	Gross profit		104,295,384		61.7		81,464,050		62.4
General, administrative and store operating expenses			62,284,362		36.9		46,409,208		35.6
Depreciation and amortization			4,624,870		2.7		3,308,276		2.5

	Income from operations		37,386,152		22.1		31,746,566		24.3
Interest income, net			303,310		0.2		153,717		0.1

	Income before taxes		37,689,462		22.3		31,900,283		24.4
Income tax provision			14,322,000		8.5		12,123,000		9.2

	Net income	$	23,367,462		13.8	$	19,777,283		15.2

Per share data:
Net income per share–basic (1)		$	0.27			$	0.24

Net income per share–diluted(1)		$	0.27			$	0.23

Weighted average shares outstanding–basic(1)			85,512,752				81,885,902

Weighted average shares outstanding–diluted(1)			87,183,112				85,321,810

CHICO’S FAS, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)


				Thirteen Weeks Ended

				May 3, 2003			May 4, 2002

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	23,367,462		$	19,777,283

	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization, cost of goods sold			343,014			179,195
		Depreciation and amortization, other			4,624,870			3,308,276
		Deferred tax assets			(1,366,000	)		(1,114,000	)
		Tax benefit of options exercised			2,233,000			2,323,000
		Deferred rent expense, net			446,343			330,429
		Loss from disposal of property and equipment			258,335			591,933
	Net change in:
		Receivables			(1,194,547	)		(647,931	)
		Inventories			242,047			(7,341,633	)
		Prepaid expenses and other, net			(633,321	)		(348,136	)
		Accounts payable			(2,556,116	)		5,570,103
		Accrued liabilities			(1,879,399	)		(196,666	)
		Accrued income taxes			12,458,818			10,850,297

			Total adjustments		12,977,044			13,504,867

			Net cash provided by operating activities		36,344,506			33,282,150

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of marketable securities, net				(9,878,952	)		(11,855,577	)
	Purchases of property and equipment				(16,975,083	)		(19,484,687	)

			Net cash used in investing activities		(26,854,035	)		(31,340,264	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock				2,816,713			2,318,081
	Principal payments on debt				—			(33,250	)

			Net cash provided by financing activities		2,816,713			2,284,831

			Net increase in cash and cash equivalents		12,307,184			4,226,717
CASH AND CASH EQUIVALENTS – Beginning of Period					8,753,089			13,376,864

CASH AND CASH EQUIVALENTS – End of Period				$	21,060,273		$	17,603,581

CHICO’S FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
May 3, 2003
(Unaudited)

The accompanying unaudited consolidated financial statements of Chico’s FAS, Inc. and its wholly-owned subsidiaries (collectively, “Chico’s” or the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany balances and transactions have been eliminated in consolidation. For further information, refer to the consolidated financial statements and notes thereto for the fiscal year ended February 1, 2003, included in the Company’s Annual Report on Form 10-K filed on April 28, 2003. The February 1, 2003 balance sheet amounts were derived from audited financial statements included in the Company’s Annual Report.

Operating results for the thirteen weeks ended May 3, 2003 are not necessarily indicative of the results that may be expected for the entire year. All per share data for the prior year has been restated to reflect the two-for-one stock split in July 2002.

Certain prior year amounts have been reclassified to conform to the current year presentation.

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure (SFAS 148). SFAS 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), to provide alternative methods of transition to the fair value method of accounting for stock based employee compensation. In addition, SFAS 148 amends the disclosure provisions of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 does not amend SFAS 123 to require companies to account for their employee stock-based awards using the fair value method. However, the disclosure provisions are required for all companies with stock-based employee compensation, regardless of whether they utilize the fair value method of accounting described in SFAS 123 or the intrinsic value method described in Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25).

CHICO’S FAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
May 3, 2003
(Unaudited)

The Company uses the intrinsic value method for valuing its awards of stock options and recording the related compensation expense, if any, in accordance with APB 25. No stock-based employee or director compensation cost for stock options is reflected in net income, as all options granted during the period have exercise prices equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123 to all stock-based employee compensation.


		Thirteen Weeks Ended

		May 3, 2003		May 4, 2002

Net income, as reported		$	23,367,462	$	19,777,283
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of taxes		$	2,029,376	$	1,647,185

Net income, pro forma		$	21,338,086	$	18,130,098

Net income per common share:
	Basic – as reported	$	0.27	$	0.24
	Basic – pro forma	$	0.25	$	0.22
	Diluted – as reported	$	0.27	$	0.23
	Diluted – pro forma	$	0.24	$	0.21

Basic EPS is based upon the weighted average number of common shares outstanding and diluted EPS is based upon the weighted average number of common shares outstanding plus the dilutive effect of stock options outstanding during the period. The following is a reconciliation of the denominators of the basic and diluted EPS computations shown on the face of the accompanying statements of income:

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Results of Operations – Thirteen Weeks Ended May 3, 2003 Compared to the Thirteen Weeks Ended May 4, 2002.

Net Sales. Net sales by Company-owned stores for the thirteen weeks ended May 3, 2003 (the current period) increased by $36.2 million, or 28.9% over net sales by Company-owned stores for the comparable thirteen weeks ended May 4, 2002 (the prior period). The increase was the result of a comparable Company store net sales increase of $9.7 million and $26.5 million additional sales from the new stores not yet included in the Company’s comparable store base.

Net sales by catalog and Internet for the current period increased by $2.1 million, or 58.7% compared to net sales by catalog and Internet for the prior period. The increase was believed to be principally attributable to the increased page count and number of catalog mailings and additional television spots in the current period versus the prior period.

Net sales to franchisees for the current period increased by approximately $254,000, or 15.8%, compared to net sales to franchisees for the prior period. The increase in net sales to franchisees was primarily due to the opening of a new franchise location by an existing franchisee.

Gross Profit. Gross profit for the current period was $104.3 million, or 61.7% of net sales, compared with $81.5 million, or 62.4% of net sales, for the prior period. The decrease in the gross profit percentage resulted primarily from increased markdowns in the current period as a percent of net sales in the Company’s front-line division. The Company believes this increase in markdown rate was caused by unusually low markdowns in the prior period, and the Company does not believe the increase in the markdown rate in the current period is necessarily indicative of the markdown rate that is expected in future periods. However, markdown rates are the result of many factors, including among other matters general economic conditions and customer acceptance of the Company’s new merchandise. Although the gross margins experienced thus far at the new Pazo division have been lower than the Chico’s division, there has been little impact on overall gross margins because of the relatively small sales volume experienced in the startup months of Pazo.

General, Administrative and Store Operating Expenses. General, administrative and store operating expenses increased to $62.3 million, or 36.9% of net sales, in the current period from $46.4 million, or 35.6% of net sales, in the prior period. The increase in general, administrative and store operating expenses was, for the most part, the result of increases in store operating expenses, including associate compensation, occupancy and other costs associated with additional store openings, and to a lesser degree, an increase in marketing expenses. The increase in these expenses as a percentage of net sales was principally due to increased Company store expenses as a percent of sales in the current period versus the prior period due to cost reductions put in place in the prior year related to the events of September 11th, additional expenses as a percentage of sales incurred in the current period from the Company’s new Pazo division and a planned increase in direct marketing expenses as a percentage of net sales to 4.9% in the current period from 4.3% in the prior period. As indicated in the Company’s Form 10-K, the Company plans to maintain an overall annual direct marketing budget of between 3.5% and 4.0% of its net sales.

Depreciation and Amortization. Depreciation and amortization increased to $4.6 million, or 2.7% of net sales in the current period from $3.3 million, or 2.5% of net sales, in the prior period. The increase in depreciation and amortization was principally due to capital expenditures related to new, remodeled and expanded stores.

Interest Income, Net. The Company had net interest income during the current period of approximately $303,000 versus approximately $154,000 in the prior period. The increase in net interest income was primarily a result of the Company’s increased cash and marketable securities position.

Net Income. As a result of the factors discussed above, net income reflects an increase of 18.2% to $23.4 million in the current period from net income of $19.8 million in the prior period. The income tax provision represented an effective rate of approximately 38% for the current and prior period.

Comparable Company store net sales increased by 7.8% in the current period when compared to the comparable prior period. Comparable Company store net sales data is calculated based on the change in net sales of currently open Company-owned stores that have been operated as a Company store for at least thirteen months, including stores that have been expanded or relocated within the same general market area (approximately five miles). The comparable store percentages reported above include 27 stores that were expanded within the last twelve months from the beginning of the prior period by an average of 839 net selling square feet. If the stores that were expanded had been excluded from the comparable Company-owned store base, the increase in comparable Company-owned store net sales would have been 6.1% for the current period. The Company does not consider the effect to be material to the overall comparable store sales results and believes the inclusion of expanded stores in the comparable store net sales to be an acceptable practice, consistent with the practice followed by the Company in prior periods and by many other retailers.

The Company believes that the increase in comparable Company store net sales in the current period resulted from the continuing effort to focus the Company’s product development, merchandise planning, buying and marketing departments on Chico’s target customer. The Company also believes that the look, fit and pricing policy of the Company’s products were in line with the needs of the Company’s target customer, and that the increase in comparable store sales was also fueled by a coordinated marketing plan, which includes increased national and regional television advertising, national magazine advertising, increased direct mailings of catalogs, including an increased page count in each catalog, a larger database of existing customers for such mailings and the success of the Company’s frequent shopper club (the “Passport Club”). To a lesser degree, the Company believes the increase was due to continued store-level training efforts associated with ongoing training programs.

The Company’s primary ongoing capital requirements are for funding capital expenditures for new, expanded, relocated and remodeled stores and merchandise inventories. Also, during fiscal 2003, the Company has experienced, and will continue to experience, the need for capital to address the conversion of the Company’s former distribution center into office space and the acquisition and installation of new software packages (see the Company’s Form 10-K for the fiscal year ended February 1, 2003 for more details).

During the first three months of the current fiscal year (fiscal 2003) and the first three months of the prior fiscal year (fiscal 2002), the Company’s primary source of working capital was cash flow from operations of $36.3 million and $33.3 million, respectively. The increase in cash flow from operations of $3.1 million was primarily due to an increase in net income of $3.6 million, a decrease in inventories of $0.2 million in the current period versus an increase of $7.3 million in the prior period, an increase in accrued income taxes of $12.5 million in the current period versus an increase of $10.9 million in the prior period, and an increase in depreciation of $1.5 million over depreciation in the prior period. These increases were offset by an increase in receivables of $1.2 million in the current period versus an increase of $0.6 million in the prior period, a decrease in accounts payable in the current period of $2.6 million versus an increase of $5.6 million in the prior period, a decrease in accrued liabilities of $1.9 million in the current period versus a decrease of $0.2 million in the prior period, and an increase in deferred tax assets of $1.4 million in the current period versus an increase of $1.1 million in the prior period.

The Company invested $17.0 million in the current period in capital expenditures primarily related to the planning and opening of new, relocated, remodeled and expanded Company stores, including its initial 10 Pazo stores ($14.0 million), the acquisition and initial installation costs associated with new software packages ($1.5 million), and other miscellaneous capital expenditures including the conversion of the old distribution center into office space ($1.5 million). During the same period in the prior fiscal year, the Company invested $19.5 million for capital expenditures primarily associated with the acquisition and initial costs of equipping the new distribution center in Georgia ($8.8 million), the acquisition and initial installation costs associated with new software packages ($1.9 million) and with the planning and opening of new, relocated, remodeled and expanded Company stores.

During the first three months of the current fiscal year, six of the Company’s twenty officers and its three independent directors exercised an aggregate of 391,506 stock options at per share exercise prices ranging from $0.9307 to $10.80 and several employees and former employees exercised an aggregate of 44,757 options at prices ranging from $0.361 to $14.61. Also, during this period, the Company sold 30,340 shares of common stock during the March offering period under its employee stock purchase plan at a price of $15.36. The proceeds from these issuances of stock, exclusive of the tax benefit realized by the Company, amounted to approximately $2.8 million.

The Company invested $9.9 million, net, in marketable securities. In the prior year, the Company invested $11.9 million in marketable securities and repaid $33,000 in existing debt.

As more fully described in “Item 1” beginning on page 14 of the Company’s Form 10-K for the fiscal year ended February 1, 2003, the Company is subject to ongoing risks associated with imports. The Company’s reliance on sourcing from foreign countries causes the Company to be exposed to certain unique business and political risks. Import restrictions, including tariffs and quotas, and changes in such tariffs or quotas could affect the importation of apparel generally and, in that event, could increase the cost or reduce the supply of apparel available to the Company and have an adverse effect on the Company’s business, financial condition and/or results of operations. The Company’s merchandise flow could also be adversely affected by political instability in any of the countries in which its goods are manufactured, by significant fluctuations in the value of the U.S. dollar against applicable foreign currencies and by restrictions on the transfer of funds.

The Company plans to open a minimum of approximately 70-75 net Company-owned new stores in fiscal 2003, of which 31 were open as of May 26, 2003. The Company believes that the liquidity needed for its planned new store growth, continuing remodel/expansion program, conversion of the former distribution center, continued installation of new software packages, and maintenance of proper

inventory levels associated with this growth will be funded primarily from cash flow from operations and its strong existing cash and marketable securities balances. The Company further believes that this liquidity will be sufficient, based on the above, to fund anticipated capital needs over the near-term. Given the Company’s existing cash and marketable securities balances and the capacity included in its bank credit facilities, the Company does not believe that it would need to seek other sources of financing to conduct its operations or pursue its 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 the Company were to increase the number of new Company stores planned to be opened in future periods.

Although the operations of the Company are influenced by general economic conditions, the Company does not believe that inflation has had a material effect on the results of operations during the current or prior pe


For the Quarter Ended:		Commission File Number:
May 3, 2003		0-21258


Florida		59-2389435

(State of Incorporation)		(I.R.S. Employer Identification No.)

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	Consolidated Balance Sheets
	Consolidated Statements of Income
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements
	Notes to Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
	PART II – OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
	Signatures
	Certifications
Ex-99.1 CEO Certification
Ex-99.2 CFO Certification