CHICO'S FAS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in this Quarterly
Report on Form 10-Q ("this Form 10-Q") and in our Annual Report on Form 10-K for
the fiscal year ended January 29, 2022 , filed with the Securities and Exchange
Commission ("SEC") on March 15, 2022 ("2021 Annual Report on Form 10-K").
Executive Overview
Chico's FAS is aFlorida -based fashion company founded in 1983 onSanibel Island ,Florida . The Company reinvented the fashion retail experience by creating fashion communities anchored by service, which put the customer at the center of everything we do. As one of the leading fashion retailers inNorth America ,Chico's FAS is a company of three unique brands - Chico's®,White House Black Market® ("WHBM") and Soma® - each thriving in their own white space, founded by women, led by women, providing solutions that millions of women say give them confidence and joy. We sometimes refer to our Chico's and WHBM brands collectively as our "Apparel Group ." Our distinct lifestyle brands serve the needs of fashion-savvy women with household incomes in the moderate to high income level. We earn revenue and generate cash through the sale of merchandise in our domestic retail stores, our various Company-operated e-commerce websites, social commerce, our call center (which takes orders for all of our brands) and through unaffiliated franchise partners. We utilize an integrated, omnichannel approach to managing our business. We want our customers to experience our brands holistically and to view the various commerce channels we operate as a single, integrated experience rather than as separate sales channels operating independently. This approach allows our customers to browse, purchase, return or exchange our merchandise through whatever sales channel and at whatever time is most convenient. As a result, we track total sales and comparable sales on a combined basis. Our growth strategy is supported by the "power of three" unique brands and the "power of three" commerce channels. Our physical stores serve as community centers for entertainment, self-discovery and a home for interactions with our store associate stylists and bra experts. Our digital stores serve as a first impression of our brands and an efficient platform to teach and inspire our customers about our merchandise. Our social brand ambassadors, which are a combination of store associates, social media platform hosts and hyperlocal social stylists who arrange events within their communities, are an additional connection between our physical stores and digital.
Business Highlights
The Company's highlights for the thirteen weeks ended
•Consistent strong results:Chico's FAS posted$0.20 net income per diluted share for the third quarter, driven by strong comparable sales growth and selling, general and administrative expenses ("SG&A") leverage. This performance was more than 30% over the thirteen weeks endedOctober 30, 2021 ("last year's third quarter") and the seventh consecutive quarter of year-over-year double-digit earnings growth. •Powerful portfolio performance: For the third quarter, totalChico's FAS net sales grew 14.3% and comparable sales increased 16.5% versus last year's third quarter, led by the Company's apparel brands. Chico's and WHBM comparable sales grew 28.8% and 17.0%, respectively, in the third quarter versus last year's third quarter. •Solid operating income growth: Third quarter income from operations was$31.6 million , or 6.1% of net sales, compared to$22.0 million , or 4.9% of net sales, in last year's third quarter, driven by strong sales growth and SG&A leverage, partially offset by higher raw material costs. •Strong balance sheet: The Company ended the third quarter with$140.7 million in cash and marketable securities, after repaying$30.0 million of long-term debt during the quarter. •Marketing drove traffic and new customers:Chico's FAS continued to elevate its marketing, focusing more resources on digital. Strategic marketing efforts continue to drive more customers to the Company's brands, with total year-over-year customer count up high-single digits, spend per customer up over last year's third quarter and the average age of new customers continuing to trend younger.
•New loyalty programs exceeding expectations: For the third quarter, enrollment, customer sentiment, and redemption rates continue to exceed expectations.
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Financial Results
Income per diluted share for the third quarter was$0.20 compared to income per diluted share of$0.15 for last year's third quarter. Results for last year's third quarter include the unfavorable impact of litigation settlement charges of approximately$4 million , after-tax. Income per diluted share for the thirty-nine weeks endedOctober 29, 2022 was$0.82 compared to income per diluted share of$0.29 for thirty-nine weeks endedOctober 30, 2021 . Results for the thirty-nine weeks endedOctober 30, 2021 include the unfavorable impact of litigation settlement charges of approximately$4 million , after-tax. Select Financial Results
The following table depicts select financial results for the thirteen and
thirty-nine weeks ended
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 29, October 29,
2022 October 30, 2021 2022 October 30, 2021
(in millions, except per share amounts)
Net sales $ 518 $ 454 $ 1,618 $ 1,314
Income from operations 32 22 135 50
Net income 25 18 102 35
Net income per common and common
equivalent share - diluted 0.20 0.15 0.82 0.29
Current Trends
The novel strain of coronavirus (''COVID-19'') pandemic (the ''pandemic'') has
resulted in significant challenges across our business starting in March 2020
and is expected to continue to impact our business operations in fiscal 2022 to
varying degrees. In response to the pandemic, many of our markets imposed
limitations, varying by market and in frequency, on the access to the Company's
store fleet, including temporary store closures and/or a reduction in hours,
staffing and capacity. We continue to focus on evolving consumer demand emerging
from the pandemic experience and have accelerated our transformation to a
digital-first company, fast-tracking numerous innovation and technology
investments across all three of our brands.
While most government and health authority restrictions have lifted, we expect
continued uncertainty and volatility on our business operations, operating
results and operating cash flows as the ongoing macro challenges of the
pandemic, supply chain, economic uncertainty and health concerns associated with
the pandemic and war in Ukraine continue to affect, among other things, consumer
behavior, spending levels and shopping preferences.
Overall economic uncertainty is also affecting consumer behavior. Consumers are
experiencing an overall increase in the cost of living and are shifting their
spending habits away from discretionary items. In particular, the rise in fuel
and grocery costs has had a widespread impact on how consumers are prioritizing
their spending. Inflation caused by the pandemic and geopolitical conditions,
such as the war in Ukraine , also has contributed to economic concerns including
cost of raw materials and products, fuel and freight costs, and labor costs, and
is also affecting consumer confidence and spending habits.
The Company remains confident that it currently has sufficient liquidity to
repay its obligations as they become due for the foreseeable future as the
Company continues to drive operational efficiency and effectiveness, including
ongoing expense management and actively managing its inventory positions and
production calendar to mitigate the macro challenges of the pandemic, supply
chain and economic uncertainty. However, the extent to which the pandemic,
geopolitical events and overall economic uncertainty caused by the same impacts
our business operations, financial results, and liquidity will depend on
numerous evolving factors that we may not be able to accurately predict or
assess, including the duration and scope of the pandemic, rising inflation
and/or geopolitical conditions; our response to and ability to mitigate the
impacts of the pandemic, inflation and geopolitical conditions; the negative
impact the pandemic, inflation and geopolitical conditions have on global and
regional economies and economic activity, including the duration and magnitude
of their impacts on unemployment rates and consumer discretionary spending,
among other items; their short- and longer-term impact on the levels of consumer
confidence; the ability of our suppliers, vendors and customers to successfully
address the impacts of the pandemic, inflation and geopolitical conditions;
supply chain disruptions; actions governments, businesses and individuals take
in response to the pandemic, inflation and geopolitical conditions; how quickly
economies recover after the pandemic, inflation and geopolitical conditions
subside, if at all; and our response to and ability to mitigate the impact of
heightened concerns over a possible recession.
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Fiscal 2022 Fourth Quarter and Full Year Outlook
For the fiscal 2022 fourth quarter, the Company currently expects:
•Consolidated net sales of
•Gross margin rate as a percent of net sales of 35.4% to 35.8%;
•SG&A as a percent of net sales of 32.7% to 33.2%;
•Effective income tax rate of 25.0%; and
•Earnings per diluted share of
For the fiscal 2022 full year, the Company currently expects:
•Consolidated net sales of
•Gross margin rate as a percent of net sales of 39.2% to 39.3%;
•SG&A as a percent of net sales of 32.3% to 32.4%;
•Effective income tax rate of 23.0%;
•Earnings per diluted share of
•Capital and cloud-based expenditures of approximately
Key Performance Indicators
In assessing the performance of our business, we consider a variety of key
performance and financial measures to evaluate our business, develop financial
forecasts and make strategic decisions. These key measures include comparable
sales, gross margin as a percent of sales, diluted income per share and return
on net assets ("RONA"). In light of the pandemic, we have shifted our focus to
effectively manage our liquidity position, including aligning our operating cost
structure with expected sales. We will continue to evaluate our other key
performance and financial measures in addition to our liquidity position. The
following describes these measures.
Liquidity
Liquidity is measured through cash flow, which is the measure of cash provided by or used in operating, investing and financing activities. We believe that as a result of the Company's extensive measures to mitigate the impact of the pandemic discussed above, we were able to, and continue to, effectively manage our liquidity position. Comparable Sales Comparable sales is an omnichannel measure of the amount of sales generated from products the Company sells directly to the consumer relative to the amount of sales generated in the comparable prior-year period. Comparable sales is defined as sales from stores open for the preceding twelve months, including stores that have been expanded, remodeled or relocated within the same general market and includes online and catalog sales, and beginning in the third quarter of fiscal 2019, includes international sales. The comparable sales calculation excludes the negative impact of stores closed four or more days. The Company views comparable sales as a key performance indicator to measure the performance of our business, however, we are not providing comparable sales figures for the thirty-nine weeks endedOctober 30, 2021 compared to the thirty-nine weeks endedOctober 31, 2020 as we do not believe it is a meaningful measure due to the varying degrees of business disruptions and periods of store closures and/or stores operating at reduced hours as a result of the pandemic during fiscal 2020.
Gross Margin as a Percentage of
Gross margin as a percentage of net sales is computed as gross margin divided
by net sales. We believe gross margin as a percentage of net sales is a primary
metric to measure the performance of our business as it is used to determine the
value of incremental sales, and to guide pricing and promotion decisions.
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Table of Contents Diluted Income per Share Income per share is determined using the two-class method when it is more dilutive than the treasury stock method. Basic income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted income per share reflects the dilutive effect of potential common shares from non-participating securities such as stock options, performance stock units and restricted stock units. Whereas basic income per share serves as an indicator of the Company's profitability, we believe diluted income per share is a key performance measure because it gauges the Company's quality of income per share assuming all potential common shares from non-participating securities are exercised.
Return on Net Assets
RONA is defined as (a) net income divided by (b) the "five-point average" (based on balances at the beginning of the first quarter plus the final balances for each quarter of the fiscal year) of net working capital less cash and marketable securities plus fixed assets. We believe RONA is a primary metric as it helps to determine how well the Company is utilizing its assets. As such, a higher RONA could indicate that the Company is using its assets and working capital efficiently and effectively.
Our Business Strategy
Our overall business strategy is focused on building a collection of distinct
high-performing retail brands primarily serving the fashion needs of women with
moderate to high household income levels.
In fiscal 2020, the Company took actions to rapidly transform into a
digital-first company, fast-tracking numerous innovation and digital technology
investments, and we have continued those investments in fiscal 2022. We have
also enhanced our marketing efforts to drive traffic and new customers to our
brands, while retaining newly acquired customers at a meaningfully higher rate
than the pre-pandemic year of fiscal 2019.
The primary function of the Company is the production and procurement of
beautiful merchandise that delivers the brand promise and brand positioning of
each of our brands and resonates with customers. To that end, we continue to
strengthen our merchandise and design capabilities and enhance our sourcing and
supply chain to deliver product in a timely manner to our customers while also
concentrating on improvements to the quality and aesthetic of our merchandise.
Over the long term, we may build our brand portfolio by organic development or
acquisition of other specialty retail concepts if research indicates that the
opportunity complements our current brands and is appropriate and in the best
interest of our shareholders.
We pursue improving the performance of our brands by building our omnichannel
capabilities, growing our online presence, managing our store base, executing
marketing plans, effectively leveraging expenses, considering additional sales
channels and markets, and optimizing the merchandise offerings of each of our
brands. We continue to invest heavily in our omnichannel capabilities so our
customers can fully experience our brands in the manner they choose.
We view our stores and Company-operated e-commerce websites as a single,
integrated sales function rather than as separate, independently operated sales
channels. As a result, we maintain a shared inventory platform for our primary
operations, allowing us to fulfill orders for all channels from our distribution
center ("DC") in Winder, Georgia . Our domestic customers can return merchandise
to a store or to our DC, regardless of the original purchase location. Using our
enhanced "Locate" tool, we ship in-store orders from other locations directly to
the customer, expediting delivery times while reducing our shipping costs. In
addition, our shared inventory system, Endless Aisle, enables customers to make
purchases online and ship from store. In fiscal 2019, we completed the
implementation of our Buy On-Line, Pick-up In-Store (BOPIS) capability across
all our brands, further enhancing our omnichannel capabilities, and in fiscal
2020, we completed the implementation of StyleConnect® and MY CLOSETTM, our
customized, branded, digital styling software tools that enable us to
communicate directly with the majority of our customers, to drive the frontline
business to digital fulfillment.
We seek to acquire new customers and retain existing customers by leveraging
existing customer-specific data and through targeted marketing, including
digital marketing, social media, video, catalogs and mailers. We seek to
optimize the potential of our brands with innovative product offerings,
potential new merchandise opportunities, and brand extensions that enhance the
current offerings, as well as through our continued emphasis on our trademark
"Most Amazing Personal Service" standard. We also will continue to consider
potential alternative sales channels for our brands, including international
franchise, wholesale, licensing and other opportunities.
We continue to leverage our digital investments to convert single-channel customers to be omnichannel, or multi-channel, customers, as the average omnichannel customer spends more than three times the average single-channel customer.
We have four clearly defined strategic pillars that guided our recent strategy and will continue to guide us in the future.
1.Customer led;
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2.Product obsessed;
3.Digital-first; and
4.Operationally excellent.
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Results of Operations
Thirteen Weeks Ended
Net Income and Income per Diluted Share
For the third quarter, the Company reported net income of$25 million , or$0.20 per diluted share, compared to net income of$18 million , or$0.15 per diluted share, in last year's third quarter. Results for last year's third quarter include pre-tax litigation settlement charges of approximately$4 million .
The following table depicts net sales by Chico's, WHBM and Soma in dollars and as a percentage of total net sales for the thirteen weeks endedOctober 29, 2022 andOctober 30, 2021 : Thirteen Weeks Ended October 29, 2022 October 30, 2021 (dollars in millions) Chico's$ 255 49.3 % $ 204 44.9 % WHBM 157 30.4 138 30.4 Soma 106 20.3 112 24.7 Total Net Sales$ 518 100.0 % $ 454 100.0 % For the third quarter, net sales were$518 million compared to$454 million in last year's third quarter. This 14.3% improvement primarily reflects a comparable sales increase of 16.5%, partially offset by 18 permanent net store closures since last year's third quarter. The 16.5% comparable sales improvement was driven by an increase in transaction count, partially offset by a decrease in average dollar sale.
The following table depicts comparable sales percentages by Chico's, WHBM and
Soma for the thirteen weeks ended
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
Compared to Fiscal 2021 Compared to Fiscal 2020
Chico's 28.8 % 23.3 %
WHBM 17.0 33.4
Soma (6.1) 30.2
Total Company 16.5 27.9
Cost of Goods Sold/Gross Margin
The following table depicts cost of goods sold ("COGS") and gross margin in
dollars and gross margin as a percentage of total net sales for the thirteen
weeks ended
Thirteen Weeks Ended
October 29, 2022 October 30, 2021
(dollars in millions)
Cost of goods sold $ 311 $ 269
Gross margin 207 184
Gross margin percentage 40.0 % 40.7 %
For the third quarter, gross margin was $207 million , or 40.0% of net sales,
compared to $184 million , or 40.7% of net sales, in last year's third quarter.
The 70 basis point decrease in gross margin rate primarily reflects higher raw
material costs, partially offset by freight costs, occupancy leverage and higher
average unit retail.
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Selling, General and Administrative Expenses
The following table depicts SG&A, which includes store and direct operating
expenses, marketing expenses and National Store Support Center ("NSSC")
expenses, in dollars and as a percentage of total net sales for the thirteen
weeks ended
Thirteen Weeks Ended
(dollars in millions)
Selling, general and administrative expenses $ 176 $ 162
Percentage of total net sales 33.9 % 35.8 %
For the third quarter, SG&A was
Income Taxes
For the third quarter, the$5.9 million income tax provision resulted in an effective tax rate of 19.3% compared to$2.0 million , or an effective tax rate of 9.9%, for last year's third quarter. The 19.3% effective tax rate for the third quarter primarily reflects a fiscal 2021 provision to return benefit resulting from changes in estimates due to the reversal of a valuation allowance related to fiscal 2021 temporary differences. The 9.9% effective tax rate for last year's third quarter primarily reflects a change in estimate from the second quarter of fiscal 2021 due to an increase in annual projected deferred tax assets on which a full valuation allowance exists, offset by a 2020 fiscal provision to return benefit resulting from changes in estimates due to the reversal of a valuation allowance related to 2020 temporary differences and the rate differential provided by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.
Thirty-Nine Weeks Ended
Net Income and Income per Diluted Share
For the thirty-nine weeks endedOctober 29, 2022 , the Company reported net income of$102 million , or$0.82 per diluted share, compared to net income of$35 million , or$0.29 per diluted share, for the thirty-nine weeks endedOctober 30, 2021 . Results for the thirty-nine weeks endedOctober 30, 2021 include pre-tax litigation settlement charges of approximately$4 million .
The following table depicts net sales by Chico's, WHBM and Soma in dollars and as a percentage of total net sales for the thirty-nine weeks endedOctober 29, 2022 andOctober 30, 2021 : Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (dollars in millions) Chico's$ 802 49.5 % $ 602 45.8 % WHBM 485 30.0 364 27.7 Soma 331 20.5 348 26.5 Total net sales$ 1,618 100.0 %$ 1,314 100.0 % Net sales for the thirty-nine weeks endedOctober 29, 2022 increased to$1,618 million from$1,314 million for the thirty-nine weeks endedOctober 30, 2021 . This 23.2% improvement primarily reflects a comparable sales increase of 24.7%, partially offset by 18 permanent net store closures since last year's third quarter. The 24.7% comparable sales improvement was driven by an increase in transaction count and higher average dollar sale. 24
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The following table depicts comparable sales percentages by Chico's, WHBM and
Soma for the thirty-nine weeks ended
Thirty-Nine Weeks Ended (1)
October 29, 2022
Compared to Fiscal 2021
Chico's 36.0 %
WHBM 35.6
Soma (5.8)
Total Company 24.7
(1) The Company is not providing comparable sales figures for the thirty-nine
weeks ended October 30, 2021 compared to the thirty-nine weeks ended October 31,
2020 as we do not believe it is a meaningful measure due to the significant
impacts of the pandemic during fiscal 2020.
Cost of Goods Sold/Gross Margin
The following table depicts COGS and gross margin in dollars and gross margin as a percentage of total net sales for the thirty-nine weeks endedOctober 29, 2022 andOctober 30, 2021 : Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (dollars in millions) Cost of goods sold $ 962 $ 821 Gross margin 656 493 Gross margin percentage 40.5 % 37.5 % Gross margin for the thirty-nine weeks endedOctober 29, 2022 was$656 million , or 40.5% of net sales, compared to$493 million , or 37.5% of net sales, for the thirty-nine weeks endedOctober 30, 2021 . The 300 basis point improvement in gross margin rate primarily reflects occupancy leverage combined with higher average unit retail and full price sales, partially offset by increased raw material costs.
Selling, General and Administrative Expenses
The following table depicts SG&A, which includes store and direct operating
expenses, marketing expenses and NSSC expenses, in dollars and as a percentage
of total net sales for the thirty-nine weeks ended
Thirty-Nine Weeks Ended
(dollars in millions)
Selling, general and administrative expenses $ 520 $ 443
Percentage of total net sales 32.1 % 33.7 %
For the thirty-nine weeks ended October 29, 2022 , SG&A was $520 million , or
32.1% of net sales, compared to $443 million , or 33.7% of net sales, for the
thirty-nine weeks ended October 30, 2021 . The decrease in SG&A as a percent of
total net sales primarily reflecting ongoing expense management and the impact
of $4 million in pre-tax litigation settlement charges in last year's third
quarter.
Income Taxes
The effective tax rate for the thirty-nine weeks endedOctober 29, 2022 andOctober 30, 2021 was 23.2% and 20.9%, respectively. The 23.2% for the thirty-nine weeks endedOctober 29, 2022 primarily reflects a fiscal 2021 provision to return benefit due to the reversal of a valuation allowance related to fiscal 2021 temporary differences and a favorable share-based compensation benefit. The effective tax rate of 20.9% for the thirty-nine weeks endedOctober 30, 2021 primarily reflects an annual projected deferred tax assets on which a full valuation allowance existed, offset by a 2020 fiscal provision to return benefit due to the reversal of a valuation allowance related to fiscal 2020 temporary differences, the rate differential provided by the CARES Act and favorable state audit settlements. 25
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Cash,
At the end of the third quarter, cash and marketable securities totaled$141 million compared to$137 million at the end of last year's third quarter. Debt at the end of the third quarter totaled$69 million compared to$99 million at the end of last year's third quarter, reflecting a principal payment of$30 million in the third quarter.
Inventories
At the end of the third quarter, inventories totaled$304 million compared to$278 million at the end of last year's third quarter. The$26 million increase over last year's third quarter primarily reflects early holiday receipts, alignment of on-hand inventories with higher consumer demand, strategic investments in basics and higher average unit costs.
Income Tax Receivable
At the end of the third quarter, our unaudited condensed consolidated balance sheet reflected an$11 million income tax receivable related to the recovery of Federal income taxes paid in prior years and other tax law changes as a result of the CARES Act.
Liquidity and Capital Resources
The Company's material cash requirements include amounts outstanding under operating leases; open purchase orders for inventory and other operating expenses in the normal course of business; contractual commitments for future capital expenditures; long-term debt obligations; and interest payments on long-term debt. Our ongoing capital requirements will continue to be primarily for enhancing and expanding our omnichannel capabilities, including investments in our stores; information technology; and supply chain. In response to the pandemic, the Company has taken actions to reinforce its financial position and liquidity. Specific actions include: significantly reducing capital and expense structures, centralizing key functions to create a more nimble organization to better align costs with expected sales; suspending the quarterly dividend commencingApril 2020 ; aligning inventory receipts with expected demand; partnering with suppliers and vendors to reduce operating costs and extend payment terms; and reviewing real estate and actively negotiating with landlords to deliver rent relief in the form of reductions, abatements and other concessions. InOctober 2020 andFebruary 2022 , the Company amended and extended its credit facility to strengthen its liquidity and enhance its financial stability. The Company anticipates satisfying its material cash requirements from its cash flows from operating activities, our cash on hand, capacity within our credit facility and other liquidity options. The following table summarizes cash flows for the year-to-date periodOctober 29, 2022 compared to last year's year-to-date periodOctober 30, 2021 : Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (dollars in millions) (1) Net cash provided by operating activities $ 84 $ 88 Net cash (used in) provided by investing activities (42) 7 Net cash used in financing activities (39) (52) Net increase in cash and cash equivalents $ 3 $ 44
(1) May not foot due to rounding.
Operating Activities
Net cash provided by operating activities for the year-to-date period of fiscal 2022 was$84 million compared to$88 million in last year's year-to-date period. The change in net cash provided by operating activities primarily reflects the timing of payables and income tax refunds received in last year's year-to-date period, partially offset by the change in inventories to align with consumer demand, higher fiscal 2022 net income and rent settlements made in last year's year-to-date period. 26
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Investing Activities
Net cash used in investing activities for the year-to-date period of fiscal 2022
was
Financing Activities
Net cash used in financing activities for the year-to-date period of fiscal 2022 was$39 million compared to$52 million used in last year's year-to-date period. The change in net cash used in financing activities primarily reflects a$20 million decrease in payment on borrowings, partially offset by$7 million in payments of tax withholding related to the vesting of share-based awards.
Credit Facility
OnFebruary 2, 2022 , the Company and certain material domestic subsidiaries entered into Amendment No. 2 (the "Amendment") to its credit agreement (as amended, the "Credit Agreement") originally entered into onAugust 2, 2018 and amendedOctober 30, 2020 , by and among the Company, certain material domestic subsidiaries as co-borrowers and guarantors,Wells Fargo Bank, National Association ("Wells Fargo Bank "), as Agent, letter of credit issuer and swing line lender, and certain lenders party thereto. Our obligations under the Credit Agreement are guaranteed by the guarantors and are secured by a first priority lien on certain assets of the Company and certain material domestic subsidiaries, including inventory, accounts receivable, cash deposits, certain insurance proceeds, real estate, fixtures and certain intellectual property. The Credit Agreement provides for a five-year asset-based senior secured revolving loan ("ABL") and letter of credit facility of up to$285.0 million , maturingFebruary 2, 2027 . The interest rate applicable to Term Secured Overnight Financing Rate ("SOFR") Loans drawn under the ABL is equal to Term SOFR plus 1.60% (subject to a further decrease to Term SOFR plus 1.35% or an increase to Term SOFR plus 1.85% based upon average quarterly excess availability under the ABL). The Credit Agreement also provides for a$15.0 million first-in last-out ("FILO") loan. The interest rate applicable to the FILO is equal to Term SOFR plus 3.60% (subject to a further decrease to Term SOFR plus 3.35% or an increase to Term SOFR plus 3.85% based on average quarterly excess availability under the FILO). However, for any ABL or FILO with a SOFR interest rate period of six months, the interest rate applicable to the ABL and FILO is increased by 30 basis points. The Credit Agreement contains customary representations, warranties, and affirmative covenants, as well as customary negative covenants, that, among other things restrict, subject to certain exceptions, the ability of the Company and certain of its domestic subsidiaries to: (i) incur liens, (ii) make investments, (iii) issue or incur additional indebtedness, (iv) undergo significant corporate changes, including mergers and acquisitions, (v) make dispositions, (vi) make restricted payments, (vii) prepay other indebtedness and (viii) enter into certain other restrictive agreements. The Company may pay cash dividends and repurchase shares under its share buyback program, subject to certain thresholds of available borrowings based upon the lesser of the aggregate amount of commitments under the Credit Agreement and the borrowing base, determined after giving effect to any such transaction or payment, on a pro forma basis. In addition, the Company must pay a commitment fee per annum on the unused portion of the commitments under the Credit Agreement. As ofOctober 29, 2022 ,$69 million in net borrowings were outstanding under the Credit Agreement. Availability under the Credit Agreement is determined based upon a monthly borrowing base calculation which includes eligible credit card receivables, real estate and inventory, less outstanding borrowings, letters of credit and certain designated reserves. As ofOctober 29, 2022 , the available additional borrowing capacity under the Credit Agreement was approximately$188 million , inclusive of the current loan cap of$30 million .
Store and Franchise Activity
During the thirty-nine weeks endedOctober 29, 2022 , we had 5 permanent net store closures, consisting of 8 Chico's store closures, 7 WHBM store closures and 10 Soma net store openings. As ofOctober 29, 2022 , the Company's franchise operations consisted of 58 international retail locations inMexico and 2 domestic airport locations. Stores continue to be an important part of our omnichannel strategy, and digital sales are higher in markets where we have a retail presence, but we intend to optimize our real estate portfolio, reflecting our emphasis on digital and our priority for higher profitability standards. We will continue to adjust our store base to align with these standards, primarily as leases come due, lease kickouts are available, or buyouts make economic sense. We closed net 5 underperforming locations during the thirty-nine weeks endedOctober 29, 2022 and ended the third quarter with 1,261 boutiques. The Company anticipates closing 26 stores in fiscal 2022, which primarily includes underperforming, mall-based Chico's and WHBM boutiques. We also plan to invest in opening an additional 14 Soma stores this fiscal year. We will continue to evaluate our store base in light of economic conditions and our business strategy and may adjust the openings and closures as conditions require or as opportunities arise. 27
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Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, 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 estimates with the Audit Committee of our Board of Directors and believes the assumptions and estimates, as set forth in our 2021 Annual Report on Form 10-K, are significant to reporting our results of operations and financial position. There have been no material changes to our critical accounting estimates as disclosed in our 2021 Annual Report on Form 10-K. Forward-Looking Statements This Form 10-Q may contain statements concerning our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry and other statements that are not historical facts. These are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, words or phrases such as "aim," "anticipates," "believes," "confident," "could," "estimates," "expects," "intends," "target," "will," "plans," "path," "should," "assumptions," "outlook" and similar expressions identify forward-looking statements. These forward-looking statements are based largely on information currently available to our management and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those expressed or implied by such forward-looking statements. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance. There is no assurance that our expectations will occur or that our estimates or assumptions will be correct, and we caution investors and all others not to place undue reliance on such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A, "Risk Factors" in our most recent Annual Report on Form 10-K and, from time to time, in Item 1A, "Risk Factors" of our Quarterly Reports on Form 10-Q and the following: •the effects of the pandemic, including uncertainties about its depth and duration, new variants of COVID-19 that have emerged, the speed, efficacy and availability of vaccines and treatments, its impact on general economic conditions, human capital management, consumer behavior and discretionary spending, the effectiveness of any actions taken in response to the pandemic, and the impact of the pandemic on our manufacturing operations, shipping costs and timelines and the global supply chain; •the ability of our suppliers, logistics providers, vendors and landlords, to meet their obligations to us in light of financial stress, labor shortages, liquidity challenges, bankruptcy filings by other industry participants, and supply chain and other disruptions; •increases in unemployment rates and labor shortages; •our ability to sufficiently staff our retail stores; •changes in general economic conditions, including, but not limited to, consumer confidence and consumer spending patterns; •the impacts of rising inflation, gasoline prices, and interest rates on consumer spending; •market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts (such as the war inUkraine ) or other major events, or the prospect of these events, including their impact on consumer spending, inflation, and the global supply chain; •domestic and global political and social conditions and the potential impacts of geopolitical turmoil or conflict; •shifts in consumer behavior, and our ability to adapt, identify and respond to new and changing fashion trends and customer preferences, and to coordinate product development with buying and planning; •changes in the general or specialty retail or apparel industries, including significant decreases in market demand and the overall level of spending for women's private branded clothing and related accessories; •our ability to secure and maintain customer acceptance of in-store and online concepts and styles; •increased competition in the markets in which we operate, including for, among other things, premium mall space; •our ability to remain competitive with customer shipping terms and costs; •decreases in customer traffic at malls, shopping centers and our stores; 28
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•fluctuations in foreign currency exchange rates and commodity prices; •significant increases in the costs of manufacturing, raw materials, transportation, importing, distribution, labor and advertising; •decreases in the quality of merchandise received from suppliers and increases in delivery times for receiving such merchandise; •our ability to appropriately manage our store fleet, including the closing of underperforming stores and opening of new stores, and our ability to achieve the expected results of any such store openings or store closings; •our ability to appropriately manage inventory and allocation processes and leverage targeted promotions; •our ability to maintain cost saving discipline; •our ability to operate our retail websites in a profitable manner; •our ability to successfully identify and implement additional sales and distribution channels; •our ability to successfully execute and achieve the expected results of our business, brand strategies, brand awareness programs, and merchandising and marketing programs including, but not limited to, the Company's three-year strategic growth plan, retail fleet optimization plan, sales initiatives, multi-channel strategies and four strategic pillars which are: 1) customer led; 2) product obsessed; 3) digital first; and 4) operationally excellent; •our ability to utilize our NSSC, DC and other support facilities in an efficient and effective manner; •our reliance on sourcing from foreign suppliers and significant adverse economic, labor, political or other shifts (including adverse changes in tariffs, taxes or other import regulations, particularly with respect toChina , or legislation prohibiting certain imports fromChina ); •U.S. and foreign governmental actions and policies and changes thereto; •the continuing performance, implementation and integration of our management information systems; •our ability to successfully update our information systems; •the impact of any system failure, cyber security or other data security breaches, including any security breaches resulting in the theft, transfer, or unauthorized disclosure of customer, employee, or company information; •our ability to comply with applicable domestic and foreign information security and privacy laws, regulations and technology platform rules or other obligations related to data privacy and security; •our ability to attract, hire, train, motivate and retain qualified employees in an inclusive environment; •our ability to successfully recruit leadership or transition members of our senior management team; • increased public focus and opinion on environmental, social and governance ("ESG") initiatives and our ability to meet any announced ESG goals and initiatives; •future unsolicited offers to buy the Company and actions of activist shareholders and others and our ability to respond effectively; •our ability to secure and protect our intellectual property rights and to protect our reputation and brand images; •unanticipated obligations or changes in estimates arising from new or existing litigation (including settlements thereto), income taxes and other regulatory proceedings; •unanticipated adverse changes in legal, regulatory or tax laws; and •our ability to comply with the terms of our Credit Agreement, including the restrictive provisions limiting our flexibility in operating our business and obtaining additional credit on commercially reasonable terms. These factors should be considered in evaluating forward-looking statements contained herein. All forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 29
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