(Filed Under Financial and General Interest News). Chico’s FAS Inc., the apparel chain that is parent to the Soma intimates stores, is again considering a sale to Sycamore Partners. The company has also been approached by other potential private equity buyers according to a report by Bloomberg.
Last February Sycamore dropped a proposed purchase, which had been valued at over $3 billion, reportedly because of problems arranging the financing. Should Sycamore succeed this time, one result is that it would emerge as an intimate apparel powerhouse. The firm already has investments in several retailers with significant intimate apparel offerings and Soma itself now operates 284 lingerie stores (and has previously projected “600 plus” lingerie stores in its future according to Chico’s executives). Also intriguing is the insight Sycamore must have gained about the operations of Victoria’s Secret when it bought a major apparel sourcing division from L Brands, Victoria’s Secret’s parent.
The sale of Chico’s may not take place, may be weeks away and might be to an entity other than Sycamore.
Sycamore was founded in 2011 and the same year acquired a 51 percent controlling interest in Mast Global Fashions, (now called MGF) the third-party apparel sourcing division of L Brands. It is completing the purchase of the remainder of MGF this year. At the time of the initial investment it called MGF “one of the largest apparel sourcing, manufacturing, and supply chain companies in the world.” L has retained its “separate sourcing operation for their intimate apparel and personal care/beauty businesses.”
Sycamore also owns Hot Topic (which includes both Torrid and Blackheart lingerie), a prominent retailer of apparel and intimates with a total of 800 stores in the U.S. and Canada, and it has a non-controlling investment in Aeropostale, which sells apparel and underwear to young women in over 1,000 stores in the U.S., Puerto Rico, and Canada.
For any buyer of Chico’s, its lingerie stores would seem to be the most appealing part of the company. Soma was the only division where comparable sales actually grew in the 26 weeks ended August 1. They were up 5.7%, the 25th consecutive quarter of such growth. Soma is also an expanding portion of overall Chico’s, representing 12.1% of the company’s sales (or $166.4 million) during the most recent half, compared to 11% for the 26 weeks ended August 2, 2014.
At the end of August, Chico’s announced it was closing one division, its 20 Boston Proper stores, to focus on its other two chains, White House | Black Market and Chico’s.
For the second quarter, Chico’s announced net income of $2.1 million on sales of $680.4 million compared to income of $30.1 million on sales of $671.1 million for the same period last year. The decline in profit was attributed to “the plan to exit Boston Proper and restructuring and strategic charges.”
At the end of August, during a conference call with analysts to discuss the second quarter, company officials talked about Soma and its growing importance to Chico’s. President and CEO David Dyer noted that it takes longer for Soma stores to reach their maximum potential. “Stores that are five-plus years old are as productive as our Chico’s or White House | Black Market stores. At this point, only 30% of the Soma fleet is six years or more old. 70% of our fleet is still on the maturity curve.” Thus, he emphasized, “Soma still has plenty of room to grow.”
“Our extensive customer information is also pointing to future growth. We have found that we have customers who are either very loyal to bras, or very loyal to sleepwear. What a great opportunity it is to give them offers to come in and try the products that they’re not currently buying. As this initiative gains traction, we may start to see newer stores reaching a higher level of productivity faster than in the past, and the older stores enjoying additional productivity gains. Moreover, the new Soma Rewards program celebrated its first anniversary in the second quarter. Our Soma Rewards anniversary email drove Soma’s highest ever online traffic day, even higher than Cyber Monday.”
Dyer concluded, “Summing up, Soma’s growth translates into more than just higher sales for Chico’s FAS. Soma’s merchandise also has higher margins than our other brands. As Soma continues to grow and mature, we’ll be able to further leverage expenses, driving higher profit margin for the brand and for the company overall.”
EVP Todd Vogensen repeated that with Soma, “our merchandise margins are a bit better than apparel brands, which you would expect. That’s kind of the industry norm, so we have that good base to grow from, and now we’re in a position where each year we’ve seen progressively better operating margins, both dollars and percents. And just need to continue along our path of growing that top line so that we can leverage the investments that we have in not only occupancy, but I think we’ve talked about in the past, the process to design, develop, and bring to market bras is fairly complex and takes a reasonable amount of infrastructure. So now we’re at the point of just getting the top line growth so that we can start to leverage that infrastructure.”
The full conference call can be found here: http://seekingalpha.com/article/3468826-chicos-fas-chs-q2-2015-results-earnings-call-transcript?page=1&p=qanda&l=last
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