Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Chico’s FAS, Inc. and its wholly-owned subsidiaries (collectively, 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. (“U.S. GAAP”) for complete financial statements. In the opinion of management, such interim financial statements reflect all normal, recurring adjustments considered necessary to present fairly the condensed consolidated financial position, the results of operations and cash flows for the interim periods presented. 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
January 30, 2016
, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on
March 8, 2016
.
As used in this report, all references to “we,” “us,” “our,” and “the Company,” refer to Chico’s FAS, Inc. and all of its wholly-owned subsidiaries.
Our fiscal years end on the Saturday closest to January 31 and are designated by the calendar year in which the fiscal year commences. Operating results for the thirteen and
twenty-six
weeks ended
July 30, 2016
are not necessarily indicative of the results that may be expected for the entire year.
Reclassifications
Reclassifications of certain prior year balances were made in order to conform to the current year presentation.
Change in Accounting Policy
Effective January 31, 2016, the Company made a voluntary change in accounting principle related to our classification of shipping expenses. Historically, we have presented shipping expenses within selling, general and administrative expenses ("SG&A"). Under the new policy, the Company is presenting these expenses within cost of good sold ("COGS") in the unaudited Condensed Consolidated Statements of Income. The Company believes that this change is preferable as the shipping expenses represent direct costs associated with the sale of our merchandise and improves comparability with the Company's peers. The accounting policy change was applied retrospectively to all periods presented. There was no change to consolidated net income, however, cost of sales increased by
$9.5 million
and SG&A decreased by the same amount for the thirteen weeks ended
August 1, 2015
. The Company recorded
$8.5 million
in shipping expense as a component of COGS during the thirteen weeks ended
July 30, 2016
. For the year-to-date period ended
August 1, 2015
, cost of sales increased by
$18.8 million
and SG&A decreased by the same amount. The Company recorded
$16.8 million
in shipping expense as a component of COGS during the
twenty-six
weeks ended
July 30, 2016
.
Reclassification of Occupancy Expenses and Correction of Immaterial Accounting Error
The Company has changed its classification of store occupancy expenses. Historically, we have presented store occupancy expenses within SG&A. As now reclassified, the Company is presenting these expenses within COGS in the unaudited Condensed Consolidated Statements of Income. The Company believes that the store occupancy expenses represent direct costs associated with the sale of our merchandise and improves comparability with the Company’s peers. This reclassification was applied retrospectively to all periods presented. There was no change to consolidated net income, however, cost of sales increased by
$97.3 million
and SG&A decreased by the same amount for the thirteen weeks ended
August 1, 2015
. The Company recorded
$96.1 million
in store occupancy expenses as a component of COGS during the thirteen weeks ended
July 30, 2016
. For the year-to-date period ended
August 1, 2015
, cost of sales increased by
$192.5 million
and SG&A decreased by the same amount. The Company recorded
$191.9 million
in store occupancy expenses as a component of COGS during the
twenty-six
weeks ended
July 30, 2016
.
The Company has also elected to correct the historical classification of shipping revenue within SG&A. To correct the immaterial error, we are classifying shipping revenue as a component of net sales within the unaudited Condensed Consolidated Statements of Income for all periods presented. There was no change to consolidated net income, however, net sales increased by
$5.5 million
and SG&A increased by the same amount for the thirteen weeks ended
August 1, 2015
. The Company recorded
$3.7 million
in shipping revenue as a component of net sales during the thirteen weeks ended
July 30, 2016
. For the year-to-date period ended
August 1, 2015
, net sales increased by
$9.9 million
and SG&A increased by the same amount. The Company recorded
$6.7 million
in shipping revenue as a component of net sales during the
twenty-six
weeks ended
July 30, 2016
.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
Adjustments to Presentation
The above mentioned changes had no cumulative effect on the presentation of the unaudited Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets, or Condensed Consolidated Statements of Cash Flows. The effects of the aforementioned accounting policy change, change in classification and error correction to the
August 1, 2015
unaudited Condensed Consolidated Statement of Income are as follows (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
% of Sales
|
|
Change in Accounting Policy
|
|
Effect of Change in Occupancy Classification
|
|
Effect of Error Correction
|
|
As Adjusted
|
|
% of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended August 1, 2015:
|
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|
|
|
|
|
|
|
|
|
Net sales
|
$
|
680,351
|
|
|
100.0
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,475
|
|
|
$
|
685,826
|
|
|
100.0
|
Cost of goods sold
|
314,383
|
|
|
46.2
|
|
9,484
|
|
|
97,258
|
|
|
—
|
|
|
421,125
|
|
|
61.4
|
Gross Margin
|
365,968
|
|
|
53.8
|
|
(9,484
|
)
|
|
(97,258
|
)
|
|
5,475
|
|
|
264,701
|
|
|
38.6
|
Selling, general and administrative expenses
|
308,437
|
|
|
45.3
|
|
(9,484
|
)
|
|
(97,258
|
)
|
|
5,475
|
|
|
207,170
|
|
|
30.2
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
% of Sales
|
|
Change in Accounting Policy
|
|
Effect of Change in Occupancy Classification
|
|
Effect of Error Correction
|
|
As Adjusted
|
|
% of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended August 1, 2015:
|
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|
|
|
|
|
|
|
|
Net sales
|
$
|
1,373,690
|
|
|
100.0
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,902
|
|
|
$
|
1,383,592
|
|
|
100.0
|
Cost of goods sold
|
611,952
|
|
|
44.5
|
|
18,825
|
|
|
192,496
|
|
|
—
|
|
|
823,273
|
|
|
59.5
|
Gross Margin
|
761,738
|
|
|
55.5
|
|
(18,825
|
)
|
|
(192,496
|
)
|
|
9,902
|
|
|
560,319
|
|
|
40.5
|
Selling, general and administrative expenses
|
636,654
|
|
|
46.3
|
|
(18,825
|
)
|
|
(192,496
|
)
|
|
9,902
|
|
|
435,235
|
|
|
31.5
|
Footnotes to the unaudited Condensed Consolidated Financial Statements herein have been adjusted to reflect the impact of these changes accordingly.
Note 2. New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-09, Compensation - Stock Compensation. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. ASU 2016-09 requires entities to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The standard also permits an employer to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. This standard will be effective and adopted for our first quarter 2017. We are currently assessing the new standard and its impact to our consolidated results of operations, financial position and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaces the existing guidance in Accounting Standard Codification 840, Leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and for operating leases, the lessee would recognize straight-line total rent expense. We are currently assessing the new standard and its impact to our consolidated results of operations, financial position and cash flows.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, under which entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify as available for sale in other comprehensive income but instead recognize the change in fair value in net income. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. We are currently assessing the new standard, but do not, at this time, anticipate a material impact to our consolidated results of operations, financial position or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which modifies the presentation of noncurrent and current deferred taxes. ASU 2015-17 requires that all deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The standard is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We early adopted this standard in the fourth quarter of 2015, with retrospective presentation, as shown in our consolidated balance sheets. Our retrospective presentation resulted in a
$7.3 million
reclassification from current assets to other assets, net for the period ending
August 1, 2015
.
In July 2015, the Financial Accounting Standards Board ("FASB") issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). The amendments, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be applied on a prospective basis. We are currently assessing the potential impact of adopting this ASU, but do not, at this time, anticipate a material impact to our consolidated results of operations, financial position or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB approved a one year deferral of the effective date, to make it effective for annual and interim reporting periods beginning after December 15, 2017. The standard allows for either a full retrospective or a modified retrospective transition method. The FASB has issued subsequent ASUs related to ASU No. 2014-09, which detail amendments to the ASU, implementation considerations, narrow-scope improvements and practical expedients. We are currently assessing the new standard and all related ASUs and its impact to our consolidated results of operations, financial position and cash flows.
Note 3. Restructuring and Strategic Charges
During the fourth quarter of fiscal 2014, we initiated a restructuring program, including the acceleration of domestic store closures and an organizational realignment, to ensure that resources align with long-term growth initiatives, including omni-channel. In fiscal 2015, in connection with the restructuring program, we completed an evaluation of the Boston Proper brand, completed the sale of the Boston Proper direct-to-consumer business, and closed its stores.
During the first quarter of fiscal 2016, we announced an expansion of our restructuring program to further align the organizational structure with long-term growth initiatives, including transition of executive leadership, and to reduce COGS and SG&A through strategic initiatives. These strategic initiatives include realigning marketing and digital commerce, improving supply chain efficiency, and reducing non-merchandise and marketing expenses. The Company recorded pre-tax restructuring and strategic charges of
$3.6 million
and
$16.6 million
in the first and second quarters, respectively. These charges primarily related to severance, proxy solicitation costs and consulting fees.
In connection with the restructuring program, we evaluated our domestic store portfolio and identified approximately
175
stores for closure, with
82
stores across our brands, including
20
Boston Proper stores, closed through the second quarter of fiscal 2016.
As a result, we expect to incur additional cash charges related to lease termination expenses of approximately
$1.7 million
through fiscal 2017 related to these future closures.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
A summary of the restructuring and strategic charges is presented in the table below:
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|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
|
|
|
|
|
|
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|
(in thousands)
|
Impairment charges
|
$
|
1,453
|
|
|
$
|
14,978
|
|
|
$
|
1,453
|
|
|
$
|
20,930
|
|
Continuing employee-related costs
|
—
|
|
|
14
|
|
|
1,015
|
|
|
5,639
|
|
Severance charges
|
8,236
|
|
|
186
|
|
|
9,420
|
|
|
1,820
|
|
Proxy solicitation costs
|
4,524
|
|
|
—
|
|
|
5,589
|
|
|
—
|
|
Lease termination charges
|
127
|
|
|
1,688
|
|
|
348
|
|
|
2,757
|
|
Consulting fees
|
2,234
|
|
|
—
|
|
|
2,234
|
|
|
—
|
|
Other charges
|
(18
|
)
|
|
(700
|
)
|
|
148
|
|
|
(105
|
)
|
Total restructuring and strategic charges, pre-tax
|
$
|
16,556
|
|
|
$
|
16,166
|
|
|
$
|
20,207
|
|
|
$
|
31,041
|
|
As of
July 30, 2016
, a reserve of
$17.2 million
related to restructuring and strategic activities was included in other current and deferred liabilities in the accompanying condensed consolidated balance sheets. A roll-forward of the reserve is presented as follows:
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|
|
|
|
|
|
|
|
|
Continuing employee-related costs
|
|
Severance Charges
|
|
Proxy Solicitation Costs
|
|
Lease Termination Charges
|
|
Consulting Fees
|
|
Other charges
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Beginning Balance, January 30, 2016
|
$
|
2,549
|
|
|
$
|
1,678
|
|
|
$
|
—
|
|
|
$
|
1,101
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
5,337
|
|
Charges
|
1,015
|
|
|
9,420
|
|
|
5,589
|
|
|
348
|
|
|
2,234
|
|
|
148
|
|
|
18,754
|
|
Payments
|
(3,001
|
)
|
|
(1,806
|
)
|
|
(1,056
|
)
|
|
(463
|
)
|
|
(424
|
)
|
|
(130
|
)
|
|
(6,880
|
)
|
Ending Balance, July 30, 2016
|
$
|
563
|
|
|
$
|
9,292
|
|
|
$
|
4,533
|
|
|
$
|
986
|
|
|
$
|
1,819
|
|
|
$
|
18
|
|
|
$
|
17,211
|
|
Note 4. Stock-Based Compensation
For the
twenty-six
weeks ended
July 30, 2016
and
August 1, 2015
, stock-based compensation expense was
$9.6 million
and
$13.7 million
, respectively. As of
July 30, 2016
, approximately
5.3 million
shares remain available for future grants of equity awards under our 2012 Omnibus Stock and Incentive Plan.
Restricted Stock Awards
Restricted stock award activity for the
twenty-six
weeks ended
July 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested, beginning of period
|
2,585,392
|
|
|
$
|
16.60
|
|
Granted
|
1,648,110
|
|
|
12.37
|
|
Vested
|
(906,050
|
)
|
|
17.16
|
|
Forfeited
|
(415,285
|
)
|
|
15.56
|
|
Unvested, end of period
|
2,912,167
|
|
|
14.18
|
|
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
Performance-based Stock Units
For the
twenty-six
weeks ended
July 30, 2016
, we granted performance-based restricted stock units (“PSUs”), contingent upon the achievement of a Company-specific performance goal during fiscal
2016
. Any units earned as a result of the achievement of this goal will vest over
3 years
from the date of grant and will be settled in shares of our common stock.
Performance-based restricted stock unit activity for the
twenty-six
weeks ended
July 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested, beginning of period
|
469,898
|
|
|
$
|
18.23
|
|
Granted
|
733,360
|
|
|
12.55
|
|
Vested
|
(214,465
|
)
|
|
18.23
|
|
Forfeited
(1)
|
(247,537
|
)
|
|
15.79
|
|
Unvested, end of period
|
741,256
|
|
|
13.43
|
|
(1)
The performance goal for the PSUs granted in 2015 was not fully met. Forfeitures for the
twenty-six
weeks ended
July 30, 2016
include the portion of the fiscal 2015 PSUs that were not earned.
Stock Option Awards
For the
twenty-six
weeks ended
July 30, 2016
and
August 1, 2015
, we did not grant any stock options.
Stock option activity for the
twenty-six
weeks ended
July 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
Outstanding, beginning of period
|
1,060,774
|
|
|
$
|
15.17
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(23,100
|
)
|
|
4.76
|
|
Forfeited or expired
|
(125,219
|
)
|
|
26.18
|
|
Outstanding and exercisable at July 30, 2016
|
912,455
|
|
|
13.93
|
|
Note 5. Income Taxes
The provision for income taxes is based on a current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. Our effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items, and the mix of earnings.
For the thirteen weeks ended
July 30, 2016
and
August 1, 2015
, the effective tax rate was
38.0%
and
(108.1)%
, respectively. For the thirteen weeks ended
July 30, 2016
, the income tax provision was
$14.1 million
. The income tax benefit for the
second
quarter of
2015
of
$28.2 million
and effective tax rate of
(108.1)%
primarily reflected the tax benefit related to the disposition of Boston Proper's stock and the impact of the Boston Proper goodwill and trade name impairment on the annual effective tax rate.
For the
twenty-six
weeks ended
July 30, 2016
and
August 1, 2015
, the effective tax rate was
37.9%
and
(32.5)%
, respectively. The income tax provision for fiscal
2016
of
$33.1 million
and effective tax rate of
37.9%
primarily reflected the pre-tax net income during the period while the fiscal
2015
benefit primarily reflected the tax benefit related to the disposition of Boston Proper's stock and the impact of the Boston Proper goodwill and trade name impairment on the annual effective tax rate.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
Note 6. Earnings Per Share
In accordance with relevant accounting guidance, unvested share-based payment awards that include non-forfeitable rights to dividends, whether paid or unpaid, are considered participating securities. As a result, such awards are required to be included in the calculation of earnings per common share pursuant to the “two-class” method. For us, participating securities are composed entirely of unvested restricted stock awards and PSUs that have met their relevant performance criteria.
Earnings per share (“EPS”) is determined using the two-class method when it is more dilutive than the treasury stock method. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted EPS reflects the dilutive effect of potential common shares from non-participating securities such as stock options and PSUs.
The following table sets forth the computation of basic and diluted EPS shown on the face of the accompanying condensed consolidated statements of operations (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
Net income
|
$
|
23,039
|
|
|
$
|
2,122
|
|
|
$
|
54,123
|
|
|
$
|
34,647
|
|
Net income and dividends declared allocated to participating securities
|
(506
|
)
|
|
(28
|
)
|
|
(1,155
|
)
|
|
(804
|
)
|
Net income available to common shareholders
|
$
|
22,533
|
|
|
$
|
2,094
|
|
|
$
|
52,968
|
|
|
$
|
33,843
|
|
Denominator
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
129,215
|
|
|
138,606
|
|
|
130,406
|
|
|
140,992
|
|
Dilutive effect of non-participating securities
|
147
|
|
|
355
|
|
|
110
|
|
|
347
|
|
Weighted average common and common equivalent shares outstanding – diluted
|
129,362
|
|
|
138,961
|
|
|
130,516
|
|
|
141,339
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.17
|
|
|
$
|
0.02
|
|
|
$
|
0.41
|
|
|
$
|
0.24
|
|
Diluted
|
$
|
0.17
|
|
|
$
|
0.02
|
|
|
$
|
0.41
|
|
|
$
|
0.24
|
|
For the thirteen weeks weeks ended
July 30, 2016
and
August 1, 2015
,
0.8 million
and
0.3 million
potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.
For the
twenty-six
weeks ended
July 30, 2016
and
August 1, 2015
,
0.9 million
and
0.8 million
potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.
Note 7. Fair Value Measurements
Our financial instruments consist of cash, money market accounts, marketable securities, assets held in our non-qualified deferred compensation plan, accounts receivable and payable, and debt. Cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value due to the short-term nature of the instruments.
Marketable securities are classified as available-for-sale and as of
July 30, 2016
generally consist of
corporate bonds, U.S. government agencies and commercial paper with
$31.5 million
of securities with maturity dates within one year or less and
$19.1 million
with maturity dates over one year and less than two years.
We consider all marketable securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classify these securities within current assets on the condensed consolidated balance sheets as they are available to support current operational liquidity needs. Marketable securities are carried at fair value, with the unrealized holding gains and losses, net of income taxes, reflected in accumulated other comprehensive income until realized. For the purposes of computing realized and unrealized gains and losses, cost is determined on a specific identification basis.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Entities are required to use a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
|
|
|
|
|
|
Level 1
|
—
|
Unadjusted quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
|
Level 2
|
—
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or; Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or; Inputs other than quoted prices that are observable for the asset or liability
|
|
|
|
|
|
Level 3
|
—
|
Unobservable inputs for the asset or liability
|
We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as available-for-sale securities, certain cash equivalents, specifically our money market accounts, and assets held in our non-qualified deferred compensation plan. The money market accounts are valued based on quoted market prices in active markets. Our marketable securities are generally valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third party pricing entities, except for U.S. government securities which are valued based on quoted market prices in active markets. The investments in our non-qualified deferred compensation plan are valued using quoted market prices and are included in other assets on our condensed consolidated balance sheets.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets, goodwill and other intangible assets for impairment using company-specific assumptions which would fall within Level 3 of the fair value hierarchy. We estimate the fair value of assets held for sale using market values for similar assets which would fall within Level 2 of the fair value hierarchy.
To assess the fair value of long-term debt, we utilize a discounted future cash flow model using current borrowing rates for similar types of debt of comparable maturities.
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
During the quarter ended
July 30, 2016
, we did not make any transfers between Level 1 and Level 2 financial instruments. Furthermore, as of
July 30, 2016
,
January 30, 2016
and
August 1, 2015
, we did not have any Level 3 financial instruments. We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
In accordance with the provisions of the guidance, we categorized our financial instruments, which are valued on a recurring basis, based on the priority of the inputs to the valuation technique for the instruments, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance as of July 30, 2016
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
(in thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
110
|
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Municipal securities
|
1,537
|
|
|
—
|
|
|
1,537
|
|
|
—
|
|
U.S. government agencies
|
23,928
|
|
|
—
|
|
|
23,928
|
|
|
—
|
|
Corporate bonds
|
21,672
|
|
|
—
|
|
|
21,672
|
|
|
—
|
|
Commercial paper
|
3,475
|
|
|
—
|
|
|
3,475
|
|
|
—
|
|
Non Current Assets
|
|
|
|
|
|
|
|
Deferred compensation plan
|
8,401
|
|
|
8,401
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
59,123
|
|
|
$
|
8,511
|
|
|
$
|
50,612
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Long-term debt
1
|
$
|
87,252
|
|
|
$
|
—
|
|
|
$
|
87,677
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 30, 2016
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
275
|
|
|
$
|
275
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
U.S. government agencies
|
21,800
|
|
|
—
|
|
|
21,800
|
|
|
—
|
|
Corporate bonds
|
26,149
|
|
|
—
|
|
|
26,149
|
|
|
—
|
|
Commercial paper
|
2,245
|
|
|
—
|
|
|
2,245
|
|
|
—
|
|
Non Current Assets
|
|
|
|
|
|
|
|
Deferred compensation plan
|
7,023
|
|
|
7,023
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
57,492
|
|
|
$
|
7,298
|
|
|
$
|
50,194
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Long-term debt
|
$
|
92,219
|
|
|
$
|
—
|
|
|
$
|
92,647
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 1, 2015
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
2,332
|
|
|
$
|
2,332
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
U.S. government agencies
|
17,022
|
|
|
—
|
|
|
17,022
|
|
|
—
|
|
Corporate bonds
|
28,977
|
|
|
—
|
|
|
28,977
|
|
|
—
|
|
Commercial paper
|
2,000
|
|
|
—
|
|
|
2,000
|
|
|
—
|
|
Non Current Assets
|
|
|
|
|
|
|
|
Deferred compensation plan
|
9,454
|
|
|
9,454
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
59,785
|
|
|
$
|
11,786
|
|
|
$
|
47,999
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Long-term debt
|
97,186
|
|
|
—
|
|
|
124,000
|
|
|
—
|
|
1
The carrying value of long-term debt includes the remaining unamortized discount of
$0.2 million
on the issuance of debt.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
Note 8. Debt
In fiscal 2015, we entered into a credit agreement (the "Agreement) providing for a term loan of
$100.0 million
and a revolving credit facility of
$100.0 million
. The term loan and revolving credit facility mature on May 4, 2020 and accrue interest by reference, at our election, at either an adjusted eurodollar rate tied to LIBOR or an Alternate Base Rate plus an interest rate margin, as defined in the Agreement. The Agreement contains customary representations, warranties, and affirmative covenants, including the requirement to maintain certain financial ratios. The Company was in compliance with the applicable ratio requirements and other covenants at
July 30, 2016
. As of
July 30, 2016
, we had total available borrowing capacity of
$100.0 million
under our revolving credit facility.
The following table provides details on our debt outstanding as of
July 30, 2016
,
January 30, 2016
and
August 1, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2016
|
|
January 30, 2016
|
|
August 1, 2015
|
|
(in thousands)
|
Credit Agreement, net
|
$
|
87,252
|
|
|
$
|
92,219
|
|
|
$
|
97,186
|
|
Less: current portion
|
(10,000
|
)
|
|
(10,000
|
)
|
|
(10,000
|
)
|
Total long-term debt
|
$
|
77,252
|
|
|
$
|
82,219
|
|
|
$
|
87,186
|
|
Note 9. Share Repurchases
During the
twenty-six
weeks ended
July 30, 2016
, we repurchased
4.9 million
shares, under our share repurchase program announced in November 2015 at a total cost of approximately
$56.3 million
. As of
July 30, 2016
, the Company has
$203.7 million
remaining under the share repurchase program. However, we have no continuing obligation to repurchase shares under this authorization, and the timing, actual number and value of any additional shares to be purchased will depend on the performance of our stock price, market conditions and other considerations.
Note 10. Commitments and Contingencies
In June 2015, the Company was named as a defendant in Ackerman v. Chico’s FAS, Inc., a putative representative Private Attorney General action filed in the Superior Court of California, County of Los Angeles. The Complaint alleges numerous violations of California law related to wages, meal periods, rest periods, wage statements, and failure to reimburse business expenses, among other things. Plaintiff subsequently amended her complaint to make the same allegations on a class action basis. In June 2016, the parties submitted a proposed settlement of the matter to the court, and the court granted preliminary approval on August 26, 2016. If finally approved, the settlement will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.
In March 2016, the Company was named as a defendant in Cunningham v. Chico’s FAS, Inc., a putative class action filed in the Superior Court of California, County of San Diego. Plaintiff seeks to represent current and former nonexempt employees of Soma Intimates in California. The Complaint alleges many of the same Labor Code violations as Ackerman, described above. The court has stayed the Cunningham case pending final approval of the Ackerman settlement in light of the fact that Ackerman was first filed and likely covers all of the claims that are alleged in Cunningham. As a result, at this time, the Company does not expect that the Cunningham case will have a material adverse effect on the Company’s consolidated financial condition or results of operations.
In June 2016, the Company was named as a defendant in Rodems v. Chico’s FAS, Inc., a putative class action filed in the Superior Court of California, County of Fresno. Plaintiff seeks to represent current and former nonexempt employees of Chico’s stores in California. The Complaint alleges many of the same Labor Code violations as Ackerman, described above. The court has stayed the matter pending final approval of the Ackerman settlement for the same reasons described in the Cunningham case discussion above. As a result, at this time, the Company does not expect that the Rodems case will have a material adverse effect on the Company’s consolidated financial condition or results of operations.
In July 2015, the Company was named as a defendant in Altman v. White House Black Market, Inc., a putative class action filed in the United States District Court for the Northern District of Georgia. The Complaint alleges that the Company, in violation of federal law, published more than the last five digits of a credit or debit card number or an expiration date on customers' receipts. The Company denies the material allegations of the complaint. Its motion to dismiss was denied on July 13, 2016, but the Company continues to believe that the case is without merit and is not appropriate for class treatment. It intends to vigorously defend the matter. At this time however, it is not possible to predict whether the proceeding will be
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 30, 2016
(Unaudited)
permitted to proceed as a class or the size of the putative class, and no assurance can be given that the Company will be successful in its defense on the merits or otherwise. Because the case is still in the early stages and class determinations have not been made, the Company is unable to estimate any potential loss or range of loss.
On July 28, 2016, the Company was named as a defendant in Calleros v. Chico’s FAS, Inc., a putative class action filed in the Superior Court of California, County of Santa Barbara. Plaintiff alleges that the Company failed to comply with California law requiring it to provide consumers cash for gift cards with a stored value of less than
$10.00
. The Company is reviewing the factual allegations in the Complaint and is not yet able to ascertain the merit or the value of the claims asserted. On initial review, the Company believes that the matter is not appropriate for class treatment; however, it is not possible to predict whether it will be permitted to proceed as a class or the size of the putative class, and no assurance can be given that the Company will be successful in its defense of this action on the merits or otherwise. Because the case is in the very early stage and class determinations have not been made, the Company is unable to estimate any potential loss or range of loss.
Other than as noted above, we are not currently a party to any legal proceedings other than claims and lawsuits arising in the normal course of business. All such matters are subject to uncertainties and outcomes may not be predictable. Consequently, the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of
July 30, 2016
are not estimable. However, while such matters could affect our consolidated operating results when resolved in future periods, management believes that upon final disposition, any monetary liability or financial impact to us would not be material to our annual consolidated financial statements.
Note 11. Subsequent Events
The Company is not aware of any material subsequent events which would require recognition or disclosure in the condensed consolidated financial statements.