Welcome to Chico's FAS First Quarter 2021 Conference Call and Webcast. All participants will be in a listen-only mode. Please note, this call is being recorded. I would now like to turn the call over to David Oliver, Interim CFO and SVP, Controller. Mr. Oliver, please go ahead, sir.

Good morning. And welcome to the Chico's FAS first quarter '21 conference call and webcast. Molly Langenstein, our CEO and President, also joins me today. For reference, our earnings release can be found on our website at www.chicosfas.com and under Press Releases on the Investor Relations page. Today's comments will include forward-looking statements regarding our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, which speak only as of today's date. You should not unduly rely on these statements. Important factors that could cause actual results or events to differ materially from those projected or implied by our forward-looking statements are included in today's earnings release, our SEC filings and the comments made on this call. We disclaim any obligation to update or revise any information discussed on this call, except as may be otherwise required by law. Now I'll turn the call over to Molly.

Thank you, David, and good morning, everyone. Our first quarter results underscore the tremendous progress we are making in our turnaround strategy, the power of our three unique brands and being a digital-first, customer-led company. The strong Q1 performance across all three brands was fueled by our significant improvements in product and marketing. Our momentum started in Q4 2019 temporarily stalled by the pandemic is now back on track to deliver meaningful growth in the years to come. Total first quarter sales grew 38% over last year. Spurred by Soma's extraordinary sales growth of 65% as well as fantastic customer response to Chico's and White House Black Market, which drove 31% growth in our apparel brands. We delivered meaningful year-over-year gross margin and SG&A rate improvement, and our balance sheet is strong with ample cash and liquidity and strategically lean inventories. We drove much higher gross margin by dramatically reducing the number of promotional days. Not only did Soma post a 65% sales growth over last year's first quarter, a comparable sales grew a remarkable 39% over the first quarter of 2019. Soma is well on its way to delivering an incremental $100 million in sales this year. According to NPD research data, Soma outpaced the market leader in growth in bras, panties and sleepwear, excluding sports bras, for the last 12 months. These powerful results give us confidence that Soma will continue to take meaningful share of the U.S. intimate apparel market and explode into a $1 billion brand by 2025. The business strategies put in place in Soma around inventory, product, marketing and digital are working. And we have every confidence applying these same strategies at Chico's and White House Black Market will continue the apparel sales momentum. Exciting things are happening at Chico's and White House Black Market. And in the first quarter, the apparel brands posted faster sell-through rates and higher maintained margins than in 2019. This is a proof that our marketing efforts are increasingly more compelling and that our elevated product and styling are truly resonating with our customers. Our first quarter results underscore the tremendous progress we are making on the 5 strategic priorities that I shared last quarter. Let me take a few minutes to update you on each. Number one, continuing our ongoing digital transformation. Over the last two years, we have successfully transformed into a seamless digital-first, customer-led model for all three of our brands, making major strategic investments in talent and technology. These efforts are paying off as year-over-year first quarter digital sales grew very healthy 13.4%. All three brands, digital sales grew year-over-year. Customers using our proprietary digital tools, Style Connect and My Closet are more engaged and have our highest conversion rates. These tools fueled 10% sequential multichannel customer growth and these customers spend more than 3 times a single channel customer. Number two, further refining product through styling, fabric and innovation, at each of our brands, we are laser-focused on our customer and on continually elevating our product in order to increase our market share and drive results. Innovation and creating comfortable, beautiful solutions are core in the Soma brand. Our products serve our customers' lifestyle and promote health, including a great night sleep. Allow infused for a store and cool nights are two great examples. We continually innovate and introduced three new bras during the quarter, exceeding sales expectations. In both our apparel brands, we've changed the styling of the product to more appropriate align with the customer. We embrace the comfort culture and develop innovative fabrics and technology to provide comfort features, shifting her from sweat to fabrics with ease. We are very encouraged by what we are seeing. At Chico's, she loves our core franchise bottoms and woven and knit top in new fabrics. At White House Black Market, new elevated casual and denim and tops are popular as she is buying coordinating outfits and dresses are once again at the top of her list for both apparel brands. Number three, driving significant increased customer engagement through digital storytelling. Our enhanced marketing is driving brand awareness, generating traffic and acquiring new customers through social media engagement and creative storytelling. Newly acquired customers are being retained at a meaningfully higher rate than in fiscal 2019. The year-over-year average age of new customers dropped 10 years at Chico's. At Soma, the average age dropped 8 years and at White House Black market, the average age dropped slightly. These stats reinforce the runway for all three brands. At Soma, we are growing the customer base. One in three new customers is under 34, resulting from our more inclusive branding and evolved product assortment. Our brands use digital storytelling. The use of social influencers and building upon our organic social efforts and wide by communications are some of the ways we are working to elevate our marketing and reach new customers. Our weekly Facebook live events, for example, are driving significant engagement compared to industry benchmarks. Number four, maintaining our operating and cost discipline. Our biggest Q1 accomplishment was the strength in full price sales and corresponding reduced promotions. Our on-hand inventories are strategically lean and receipts are disciplined. On-hand inventory levels, which were down 29% versus last year's first quarter and down 21% compared to the first quarter of 2019 drove more full price sales and generated a solid gross margin in the first quarter. Scarcity of products, improved products and social proofing are driving a sense of urgency for customer purchasing. These factors should continue to strengthen gross margin performance. And number five, delivering higher productivity in our real estate portfolio. Stores continue to be an integral part of our strategy because data shows that digital sales are higher in markets where we have a retail presence. We also will support store growth where the investment delivers profitable returns. Soma is a great example of that. We have successfully opened 30 Soma shop-in-shops inside Chico's stores. These started opening in February, and we will have 47 open by mid-June. These shop-in-shops are exceeding plan, driving brand awareness and generating both store and digital sales in markets where Soma is not represented. At the same time, we continue to rationalize and tighten our real estate portfolio for higher store profitability standards. We will continue to shrink our store base to align with these standards. Primarily as leases come due, lease kick outs are available or buyouts make economic sense. We have lease flexibility with nearly 60% of our leases coming up for renewal or pick up available over the next three years. We anticipate closing 13% to 16% of our remaining store fleet over the next three years with 40 to 45 of those closures occurring in fiscal '21. Our stand-alone boutiques outperformed those in regional enclosed malls by about 7 percentage points. Accordingly, the vast majority of closures are expected to be mall-based with the skew towards Chico's and White House Black Market stores. Now let me turn the call over to David to update you on our financial performance.

Thanks, Molly. First quarter net sales totaled $388 million compared to $280 million last year. This 38.4% increase reflects a 13.4% increase in digital sales and recovery in-store sales as our stores were temporarily closed last year. Looking at first quarter compared to 2019, comparable sales declined 22%, with Soma up 39% and the apparel brands, down 33%. Total company on-hand inventories for the first quarter compared to 2019 were down 21%, with Soma up 13% and the apparel brands down 35%. Illustrating the strategic investments in Soma's growth and our turnaround strategy in apparel. We reported a net loss of $8.9 million or $0.08 per diluted share compared to a net loss of $178 million or $1.55 per diluted share last year, which included $135 million or $1.17 per diluted share and significant after-tax noncash charges. Our gross margin was 32.7% compared to negative 4% last year. The prior year margin included the impact of significant noncash inventory write-offs and store asset impairments. This year, we meaningfully expanded our margin rate as a result of disciplined inventory control, strategically reduced promotions and more full price selling. SG&A expenses for the first quarter totaled $134 million. Just a modest uptick from the first quarter last year, when our stores were closed for approximately half of the quarter. We have continued our cost discipline and reduction initiatives. Generating lower SG&A expense dollars and rate than the first quarter of fiscal '19 and a sequential improvement in both dollars and rate over the fourth quarter of fiscal '20. Our balance sheet remains very solid. We ended the first quarter with over $102 million in cash and marketable securities. And borrowings on our $300 billion credit facility remained unchanged from fiscal year-end at $149 million. Our financial position and liquidity continued to be bolstered by strong digital performance across all brands, improving retail store sales and a significant leaner expense structure that better aligns cost with sales. In addition, our balance sheet reflects a federal income tax receivable of approximately $55 million that we expect to realize in the summer of fiscal '21. We anticipate building cash throughout fiscal '21. Regarding first quarter cash flows, cash used in operating activities were $4.4 million. This use reflects the impact of more than $15 million in outflows for residual rent settlements. For our fiscal '20 real estate rent abatement and reduction initiatives as well as reductions in extended supplier payment terms implemented last year. On the real estate front, in March, we launched Phase 2 of our lease renegotiation process with A&G Real Estate Partners. We have secured commitments from landlords of approximately $10 million of additional rent abatements and reductions, the majority of which will be realized in fiscal '21. This is in addition to the $65 million abatements and reductions negotiated last year. On a cash basis, approximately $20 million of those savings are expected to be realized this year. We expect to close up to a total of 330 stores from the beginning of fiscal '19 through the end of fiscal '23. In the first quarter of fiscal '21, we closed 9 stores and we ended the quarter with 1,293 boutiques. Now let me turn to our outlook. We expect continued improving demand throughout the year for Chico's FAS. And we also realize there is economic uncertainty as we continue to merge from the pandemic. We do, however, believe it is appropriate to provide some high-level outlook expectations for fiscal 2021. We expect consolidated year-over-year net sales improvement in the 28% to 34% range. Gross margin rate improvement of 18 percentage points to 20 percentage points over last year. SG&A as a percent of sales, down 500 basis points to 600 basis points year-over-year. And income tax expense of approximately $500,000. I'll now turn the call back over to Molly.

Thank you, David. Before I conclude my remarks, I would like to briefly address the Barrington Group's public letter and press release that was issued yesterday. We are committed to making all appropriate actions to improve performance and drive shareholder value, and we look forward to continuing to engage with our shareholders to discuss our progress. Our turnaround is on track. And we are uniquely positioned to build on our first quarter momentum, improved our operating performance and generate shareholder value over the long term. We have an exciting future ahead. We will not be making further comments on the contents of their income statement or our shareholder conversations at this time. The purpose of today's call is to discuss our earnings results and we ask that you keep your questions focused on this topic. With that we can open up the call to Q&A. Operator?

[Operator Instructions] And today's first question comes from Dana Telsey with Telsey Group.

Good morning, everyone. Nice to see the progress and the continuing progress on at Soma’s. As you think about marketing that you've put in place to elevate the styling and products at Chico's and White House black market. How do you see the tack of top line and margin evolving there? And can you just give us any further update and expanding on inventories given the freight and port congestion disruptions? Thank you.

Good morning, Dana. First of all, let's address the apparel. Our turnaround strategies are on track and we're not simply bouncing back from COVID. We are recently a company that's had six years of decline in specifically the apparel brands. And we are being methodical and strategic about that. So the inventory discipline and then sales accordingly because of what we're doing in marketing, we feel confident of what's happening from the customer response. You in particular can see as the business opened up and vaccines were aggressively being put out into the marketplace that our sales were improving and starting particular in the March period. And we've seen that grow from March through May. So we are pleased with the results that we are seeing in apparel and keeping our inventory disciplined, as we continue to put our turnaround strategies in place, and taking the disciplines that we've learned from so much to put into the apparel brands. That will drive top-line sales and margin, because we are keeping our inventories tight. So that we can continue to drive maintain margins, which right now are back to the historical highs. And you asked me about supply chain?

Yes.

Sorry, Dana. In terms of supply chain, yes, we are experiencing headwinds. We are not fully out of COVID. There are problems to overcome and cost pressures in the supply chain, sourcing, production, logistics, fulfillment, and also the tightening labor market. So we've done several things to mitigate these pressures. We are expanding our third party footprint. We've identified alternative port strategies. We've adjusted our product life cycle calendar actually up four weeks to adjust to some of these headwinds. We are also shifting to air when it's critical. We are partnering with suppliers for alternative countries and production. And we are continuing to keep our inventories mean so that the regular price you to drive solid gross margin to absorb these escalating operating costs.

And our next question today comes from Susan Anderson of B. Riley. Please go ahead.

Hi, good morning. Nice to see the improvement in the business. I was curious if you could talk about the margins and how you view them longer term? It looks like the gross margin guidance puts you a little bit below 2019 gross margin levels. So I'm curious if you think you can get back to those '19 levels? Or would you need sales to get back to the '19 level to get there? And then what other levers on margins, can you pull to get closer to the historical levels?

Thank you, Susan. The biggest factor for margin, as you look back in the many years has been our overpurchasing and having too much inventory and having to be too promotional. So we are very disciplined in how we are managing, in particular, our apparel margins. As we look at this that we are in the middle of our turnaround, and this really is our second quarter of positive improvement on top of the Q4 improvement that we had in '19 before the COVID pause. So we are learning from what the customer is responding to in our assortments and keeping our inventories lean allows us to have dramatic reduction in promotions and ability to be able to build very thoughtful promotions inside the business that are category in item specific versus being entire inventories just as there was just too much inventory flooded in the market. So we feel that we're very disciplined. So we've been conservative in terms of how we're projecting the outlook because as many of you have pointed out, we don't really know if part of the euphoria in Q1 is how sustainable that is going to be. So we feel that being disciplined is the right approach as we move forward. But the expectation and what we're seeing in the business, in particular, as we closed April and May, that the margin should continue to be very healthy as it relates back to historical highs.

Great. And then just on the inventory levels. It looks pretty lean across the brands. It sounds like maybe there was some more demand than you had supply. Can you maybe talk about those areas where you wish you had more inventory? And then also are there still some areas that remain high, maybe in the more fashionable apparel or workwear? And then also, if you could talk about maybe your ability to chase to try and fulfill that demand? Or is the supply chain situation with the backup at the ports kind of hindering that?

Sure. The apparel product that's selling indicates optimism and excitement. Actually, our customers are emotionally responding to color print and novelty at a very high level. And we see strong categories are in wovens and dresses. Also, we have strong business across bottoms in the denim pants and short categories in both apparel brands. And we see where we've integrated new fabrics that have a touch of cool or they have antimicrobial hand or we've included technology into our bottom so that they are more comfortable. All of those are working across the apparel brands. The beauty right now, Susan, is that we don't have a category that we're overstocked that we don't have a category that we're overstocked in. So we are lean and tight across each one of our categories and classifications. And see positivity in the business and very, very lean clearance inventories as a comparison to '19. So that all bodes well. In Soma, where we've made investments because of the size intensity of that business and also the launch of new bras. We are very pleased with the performance that we are seeing in the growth that we're continuing to get, and our sales continue in all three brands to outperform the investment in our inventory. As it relates to being able to chase inventory, we had said at the -- at Q4 that we felt that we would be having our inventory in Q1 we're going to be down 30% in apparel and down more 30% in Soma. So you can see based upon where our on-hand inventories have ended that we have been chasing goods because the sales have been better than we had forecasted. So far, by changing the PLC calendar for weeks and really keeping a very close eye on vessel versus air and also being able to manipulate the ports. We've been able to stay on top of a really challenging situation. But we know that there are additional headwinds in front of us in terms of as the year unfolds. So we're staying very close to it and moving up as many of our buys as we can to stay on top of the inventory to flow it to sales.

Great. That sounds good. And then if I could just add one last one. I assume you saw the sales accelerate throughout as you went throughout the first quarter. I'm curious if that momentum continued in the second quarter or if you've even seen it accelerate as more and more people get vaccinated, and people are starting to get out, particularly as the weather is broke now?

Yes. Susan, that's exactly what we are seeing. In particular, the two apparel brands, in particular, are for women. We don't have a team business. So in comparison to other retailers, you have to look at how the woman is spending her time and how she was vaccinated. And you saw both in NPD data and NRF data that the apparel business really started to open up the second week in March once they're -- once most people had their second shot, and it started to continue to escalate after that time. We definitely saw that in the business. If you isolate the March through May period, we saw a difference in our Q1 results being down 17% as compared to being down 22%. So it was really that first 5, 6 weeks of the quarter that were still pretty depressed and where we saw the business opening up overall in the apparel brand and the Soma momentum continued. So we are expecting that to continue as we get into the summer months and into the back half of the year. So we are very encouraged.

Our next question today comes from Marni Shapiro with Retail Tracker.

Congrats, great improvement. I guess a couple of follow-ups on some of the questions. Could you talk a little bit about some of the delivery delays? I know White House is having some issues. Is that I think it was in the fourth quarter. Could you talk a little bit about the impact it had to the brands in the stores during the first quarter? And is it pretty much cleaned up for the second quarter and going forward? And then if you could also just touch on Soma's business continues to be outstanding, obsessed. They look amazing. Could you talk about what percentage of those shoppers are sticky like coming back -- repeat shoppers coming back time on time after time? If you have data, I don't even though if you do?

Yes. Deliveries, yes, I think every single one of us have been friends with supply chain challenge. Unfortunately, we are not out of that yet. It's been a whole host of different challenges that we have, we have experienced weather and none of it actually has been factory related. Our factories and our deliveries have been on time. It's all done on that capacity vessel failing time port delays, the lack of SaaS, even the U.S. to be able to get trucks to our DC. So, every single leg of the supply chain posts, our suppliers has had some kind of issue along the way. So the short answer is that for the moment, yes, we have cleaned up and done and mitigated everything that we've experienced so far, so that we feel that we've got a very strong hold on the supply chain moving forward. However, I say that with caution, as there is still a lot of headwinds that are in front of every single function of stuff that's coming into the port. So we are seeing very closely aligned to it. I would say that probably everybody in the organization has they know more about supply chain today than they've ever known. And, but it's a critical piece in terms of keeping the flow moving and keeping fresh goods to our customers to keep them engaged. So today we feel confident, that we've made all the right decisions within very close to that morning. And as it relates to Soma, actually, yes, we are staying within Soma that our customer is also fiercely loyal. We know that in Chicos, the customer table, but there's 13 years in White House nine. But insomuch to stay for the six years, and we're finding that some of the typical buying patterns for intimate apparel being less frequent are a little more frequent as we expand our bra menu, and we really offer a lot of different options for her. And because we feel that the bra in particular is a very sticky category and you need a wardrobe of them. You don't need just one for all the different wearing occasions. So we are encouraged by what we're seeing on the frequency of the shopper within Soma.

Thank you. This concludes our question-and-answer session. I would like to turn call back over to Molly Langenstein for closing comments.

Thank you, Rocco. Our turnaround is on track and we are uniquely positioned to build on our first quarter momentum, improving our operating performance and generating shareholder value over the long-term. We have an exciting future ahead. Thank you so much for your interest in Chico's FAS and for joining us today. We look forward to speaking with you again in August for our second quarter call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.