| CHICOS FAS INC ITEM 1A RISK FACTORS The Company makes forward-looking statements in its filings with the Securities and Exchange Commission and in other oral or written communications |
| Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from those indicated (both favorably and unfavorably) |
| These risks and uncertainties include (but are not limited to) the risks described below |
| The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise |
| Effective Management of Growth Strategy The Company’s continued growth depends on its ability to open and operate stores successfully and to manage the Company’s planned expansion |
| During fiscal 2006, the Company plans to open approximately 135-155 net new full-line Company-owned stores, of which 45-55 are expected to be Chico’s stores, 65-70 are expected to be WH|BM stores and 25-30 are expected to be Soma stores |
| This represents at least 30 net new Company-owned stores more than the net number of stores opened in fiscal 2005, which was the largest number of new stores the Company had opened in any single year |
| Of the approximately 135-155 net new full-line Company-owned stores, the Company is planning to open 76-80 of these stores in the third quarter of fiscal 2006 |
| The largest net number of stores the Company has ever opened in a single quarter in the past has 21 _________________________________________________________________ [75]Table of Contents been 46 stores |
| In addition to the approximately 135-155 net new full-line Company-owned stores to be opened in fiscal 2006, the Company also plans to add an additional 5-10 Soma “boutique” stores to be located adjacent to or within Chico’s front-line stores |
| The Company’s planned square footage expansion and number of new stores is dependent upon a number of factors, including locating suitable store sites, negotiating favorable lease terms, having the infrastructure to address the increased new store sizes and targets, sourcing sufficient levels of inventory, hiring and training qualified management level and other associates, and integrating new stores into its existing operations |
| There can be no assurance that the Company will achieve its planned expansion or that such expansion will be profitable or that the Company will be able to manage its growth effectively |
| Fluctuations in Comparable Store Sales Results The Company’s comparable store sales results have fluctuated in the past on a weekly, monthly, quarterly and annual basis, and are expected to continue to fluctuate in the future |
| A variety of factors affect comparable store sales results, including changes in fashion trends, changes in the Company’s merchandise mix, timing of catalog mailings, calendar shifts of holiday periods, actions by competitors, weather conditions, and general economic conditions |
| Past comparable store sales results are not an indicator of future results, and there can be no assurance that the Company’s comparable store sales results will not decrease in the future |
| The Company’s overall and individual brand comparable store sales results are likely to have a significant effect on the market price of the Company’s common stock |
| Gross Profit Margin Impact of Mix of Sales The Company’s gross profit margins are impacted by the sales mix both from the perspective of merchandise sales mix within a particular brand and relative sales volumes of the different brands |
| Certain categories of apparel and accessories tend to generate somewhat higher margins than others within each brand |
| Thus, a shift in sales mix within a brand can often create significant impact on the Company’s overall gross margins |
| On the other hand, the gross margins for the Chico’s brand have been higher than at the WH|BM brand and substantially higher than at the Soma and Fitigues brands |
| As these other brands sales, particularly sales at WH|BM and Soma, grow at a faster pace than at the Chico’s brand, the Company’s overall gross profit margins may be negatively impacted which could in turn have a material adverse effect on the Company’s results of operations and the market price of the Company’s common stock |
| Risks Associated with Catalog and Internet Sales The Company sells merchandise over the Internet through its websites, www |
| whitehouseblackmarket |
| Although the Company’s catalog and Internet operations encompass only 2dtta6prca of the Company’s total sales, it is anticipated that the percentage will continue to grow and thus the risks associated with these operations could have an impact on the Company’s overall operations |
| The Company’s catalog and Internet operations are subject to numerous risks, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures and the need to invest in additional computer systems |
| The catalog and Internet operations also involve other risks that could have an impact on the Company’s results of operations including hiring, retention and training of personnel to conduct the Company’s catalog and Internet operations, diversion of sales from the Company’s stores, rapid technological change, liability for online content, credit card fraud, risks related to the failure of the computer systems that operate the website and its related support systems, including computer viruses, telecommunication failures and electronic break-ins and similar disruptions |
| There can be no assurance that the Company’s catalog and Internet operations will continue to achieve sales and profitability growth or even remain at their current level |
| Dependence on Single Distribution Facility The Company’s distribution functions for all of its Chico’s, WH|BM and Soma stores and for their respective catalog and Internet sales are handled from a single facility in Barrow County, Georgia |
| The Company is still evaluating how best to address the distribution functions for its Fitigues stores |
| Any 22 _________________________________________________________________ [76]Table of Contents significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures or other unforeseen causes could delay or impair the Company’s ability to distribute merchandise to its stores and/or fulfill catalog and Internet orders, which could cause sales to decline |
| The Company is currently exploring back-up relationships with outside providers of distribution activities to mitigate this risk |
| Market for Prime Real Estate is Competitive In order to generate customer traffic, the Company locates many of its stores in prominent locations within shopping centers that have been or are expected to be successful |
| The Company cannot control the development of new shopping centers, the availability or cost of appropriate locations within existing or new shopping centers, or the success of individual shopping centers |
| Furthermore, factors beyond the Company’s control impact shopping center traffic, such as general economic conditions, weather and consumer spending levels |
| A slowdown in the US economy could negatively affect consumer spending and reduce shopping center traffic |
| In addition, the Company must be able to effectively renew existing store leases |
| Failure to secure real estate locations adequate to meet annual targets as well as effectively manage the profitability of the Company’s existing fleet of stores could have a material adverse effect on the Company’s results of operations |
| Expensing of Stock Options A recently issued accounting standard requires the Company to begin recording compensation expense related to all unvested and newly granted stock options prospectively |
| The Company adopted this accounting standard on January 29, 2006 |
| In prior years, the Company included such expense on a pro forma basis in the notes to the Company’s quarterly and annual financial statements in accordance with accounting principles generally accepted in the US and did not include compensation expense related to stock options in its reported earnings in the financial statements |
| Although this accounting change applies to all companies, when the Company begins expensing stock options, because of the extent of options issued by the Company and the volatility of the Company’s stock, the Company’s reported earnings will be materially and negatively impacted and the Company’s stock price could decline |
| Adverse Outcomes of Litigation Matters The Company is involved from time to time with litigation and other claims to its business |
| These issues arise primarily in the ordinary course of business and often raise complex factual and legal issues, which are subject to risks and uncertainties, which could require significant management time |
| The Company believes that the Company’s current litigation issues will not have a material adverse effect on the Company’s results of operations or financial condition |
| However, the Company’s assessment of current litigation could change in light of the discovery of facts with respect to legal actions pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which do not accord with the Company’s evaluation of the possible liability or outcome of such litigation and additional litigation that is not currently pending could have a more significant impact on the Company and its operations |
| New Headquarters Construction In fiscal 2005, the Company acquired 105 acres in south Fort Myers, Florida for approximately dlra37dtta8 million, which was intended to be used for the location of a new headquarters campus |
| Because of significant increases in construction costs, traffic issues in the area and other factors, the Company is reevaluating whether it will proceed with construction of a new headquarters campus on that location or expand at its current location |
| The Company anticipates that its cash and marketable securities on hand and cash from operations will be more than adequate to cover the costs of construction for its headquarters at either location, as well as all other capital expenditures incurred over the next several years for store construction, expansion and renovation |
| However, in the event that such cash and marketable securities on hand and cash from operations is not sufficient to meet the Company’s capital expenditures needs, the Company may need to draw on its line of credit or seek other financing in order to fund the costs of construction of the headquarters or other capital expenditures |
| In addition, if a decision is made to expand at 23 _________________________________________________________________ [77]Table of Contents the Company’s current location, the Company expects that it will be able to dispose of the 105 acre property in due course without suffering any significant loss |
| Regardless of whether the Company constructs a new headquarters campus or expands at its current location, such activities could potentially result in temporary disruptions of operations or a diversion of management’s attention and resources |
| Reliance on Key Personnel The Company’s success and ability to properly manage its growth depends to a significant extent both upon the performance of its current executive and senior management team and its ability to attract, hire, motivate, and retain additional qualified management personnel in the future |
| The Company’s inability to recruit and retain such additional personnel, or the loss of the services of any of its executive officers, could have a material adverse impact on the Company’s business, financial condition and results of operations |
| Effects of War, Terrorism or Other Catastrophes In response to the terrorist attacks of September 11, 2001, security has been heightened in public areas |
| Any further threat of terrorist attacks or actual terrorist events, particularly in public areas, could lead to lower customer traffic in regional shopping centers |
| In addition, local authorities or shopping center management could close regional shopping centers in response to any immediate security concern |
| For example, on September 11, 2001, a substantial number of the Company’s stores were closed early in response to the terrorist attacks |
| Lower customer traffic due to security concerns and war, or the threat of war, or weather catastrophes such as hurricanes, could result in decreased sales that would have a material adverse impact on the Company’s business, financial condition and results of operations |
| Merchandising/ Fashion Sensitivity The Company’s success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand in a timely manner |
| The Company’s failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends could lead to lower sales, excess inventories and more frequent markdowns, which could have a material adverse impact on the Company’s business |
| Misjudgments or unanticipated fashion changes could also have a material adverse impact on the Company’s image with its customers |
| There can be no assurance that the Company’s new products will be met with the same level of acceptance as in the past or that the failure of any new products will not have a material adverse impact on the Company’s business, results of operations and financial condition |
| Maintaining Proper Inventory Levels The Company maintains an inventory of merchandise in its stores and distribution center, particularly of selected products that the Company anticipates will be in high demand |
| The Company may be unable to sell the merchandise it has ordered in advance from manufacturers or that it has in its inventory |
| Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at discounted or closeout prices |
| These events could significantly harm the Company’s operating results and impair the image of one or more of the Company’s brands |
| Conversely, if the Company underestimates consumer demand for its merchandise, particularly higher volume styles, or if the Company’s manufacturers fail to supply quality products in a timely manner, the Company may experience inventory shortages, which might result in missed sales, negatively impact customer relationships, diminish brand loyalty and result in lost revenues, any of which could harm the Company’s business |
| Price, Availability and Quality of Fabrics Fluctuations in the price, availability and quality of fabrics and other raw materials used in producing the Company’s products could have a material adverse effect on the Company’s cost of goods or its ability to meet customer demands |
| The price and availability of such fabrics and other raw materials may fluctuate significantly, depending on many factors, including natural resources, increased freight costs, increased labor 24 _________________________________________________________________ [78]Table of Contents costs and weather conditions |
| In the future, the Company may not be able to pass all or a portion of such higher fabric and other raw materials prices on to its customers |
| Reliance on Third-Party Manufacturers All of the Company’s merchandise is produced by independent manufacturers |
| The Company does not have long-term contracts with these manufacturers |
| In addition, the Company faces the risk that these third-party manufacturers with whom it contracts to produce its merchandise may not produce and deliver the Company’s merchandise on a timely basis, or at all |
| As a result, the Company cannot be certain that these manufacturers will continue to manufacture merchandise for the Company or that the Company will not experience operational difficulties with its manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality control, shortages of fabrics or other raw materials, failures to meet production deadlines or increases in manufacturing costs |
| The failure of any manufacturer to perform to the Company’s expectations could result in supply shortages for certain merchandise and harm the Company’s business |
| Reliance on Foreign Sources of Production Although the Company has certain portions of its manufacturing of clothing with United States manufacturers, a majority of the Company’s clothing and accessories are still manufactured outside the United States and the percentage is growing |
| As a result, the Company’s business remains subject to the various risks of doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) imposition of new legislation relating to import quotas that may limit the quantity of goods that may be imported into the United States from countries in a region that the Company does business; (iii) imposition of duties, taxes, and other charges on imports; (iv) foreign exchange rates; and (v) local business practice and political issues, including issues relating to compliance with domestic or international labor standards |
| The Company cannot predict whether any of the foreign countries in which its clothing and accessories are currently manufactured or any of the countries in which the Company’s clothing and accessories may be manufactured in the future will be subject to import restrictions by the United States government, including the likelihood, type or effect of any trade retaliation |
| Trade restrictions, including increased tariffs or more restrictive quotas, or both, applicable to apparel items could affect the importation of apparel generally and, in that event, could increase the cost, or reduce the supply, of apparel available to the Company and adversely affect the Company’s business, financial condition and results of operations |
| The Company’s merchandise flow and cost may also be adversely affected by political instability in any of the countries in which its goods are manufactured and adverse changes in foreign exchange rates |
| Manufacturer Compliance with Labor Practices Requirements Although the Company has strict ethical labor policies and seeks to be diligent in its monitoring of compliance with these policies, the Company does not have absolute control over the ultimate actions or labor practices of its independent manufacturers |
| The violation of labor or other laws by one of its key independent manufacturers or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical in the United States or country in which the violation or divergence occurred, could interrupt or otherwise disrupt the shipment of finished merchandise to the Company or damage the Company’s reputation |
| Any of these, in turn, could have a material adverse effect on the Company’s financial condition and results of operations |
| Competition The retail apparel and accessory industry is highly competitive |
| The Company competes with national, international and local department stores, specialty and discount store chains, independent retail stores and Internet and catalog businesses that market similar lines of merchandise |
| Many competitors are significantly larger and have greater financial, marketing and other resources and enjoy greater national, regional and local 25 _________________________________________________________________ [79]Table of Contents name recognition than does the Company |
| Depth of selection in sizes, colors and styles of merchandise, merchandise procurement and pricing, ability to anticipate fashion trends and consumer preferences, inventory control, reputation, quality of merchandise, store design and location, brand recognition and customer service are all important factors in competing successfully in the retail industry |
| The Company’s successful performance in recent years has increased the amount of imitation by other retailers |
| Such imitation has made and will continue to make the retail environment in which the Company operates more competitive |
| General Economic Conditions The Company’s business fluctuates according to changes in consumer preferences, which are dictated in part by fashion and season |
| In addition, certain economic conditions affect the level of consumer spending on merchandise offered by the Company, including, among others, unemployment levels, business conditions, interest rates, energy costs, taxation and consumer confidence in future economic conditions |
| Consumer preference and economic conditions may differ or change from time to time in each market in which the Company operates and negatively affect the Company’s net sales and profitability |
| Reliance on Information Technology The Company relies on various information systems to manage its operations and regularly makes investments to upgrade, enhance or replace such systems |
| Any delays or difficulties in transitioning to these or other new systems, or in integrating these systems with the Company’s current systems, or any other disruptions affecting the Company’s information systems, could have a material adverse impact on the Company’s business |
| Strategic Development of Certain New Concepts A significant portion of the Company’s business strategy involves developing and growing certain new concepts |
| During fiscal 2004, the Company launched a new 10-store concept, Soma, in which the product offering is focused around intimate apparel, sleepwear, and activewear for the Chico’s target customer |
| The Company has committed significant financial and human resources to launching and developing this concept |
| During fiscal 2005, the Company opened an additional five Soma stores based on initial performance of the first 10 stores and based on perceived prospects |
| To help further expand the concept, the Company plans to open 25-30 new Soma full-line stores in fiscal 2006 as well as 5-10 Soma “boutique” stores adjacent to or within Chico’s front-line stores |
| Furthermore, in late January 2006, the Company acquired most of the assets of Fitigues, a retailer with 12 stores positioned throughout the country and with its headquarters in Scottsdale, Arizona |
| Fitigues sells luxurious comfortable clothing through its free-standing retail store locations as well as through its customer catalog and over the Internet |
| The Company’s ability to succeed in these new concepts requires significant capital expenditures and management attention |
| Additionally, any new concept is subject to certain risks including customer acceptance, competition, product differentiation, challenges to economies of scale in merchandise sourcing and the ability to attract and retain qualified personnel, including management and designers |
| There can be no assurance that the Company will be able to develop and grow these or any other new concepts to a point where they will become profitable, or generate positive cash flow |
| If the Company cannot successfully execute its growth strategies for these new concepts, the Company’s financial condition and results of operations may be adversely impacted |
| Successful Integration of Businesses Acquired As part of the Company’s growth strategy, the Company has made certain acquisitions, including the acquisition of WH|BM in 2003 and, most recently, the acquisition of most of the assets of Fitigues |
| Although the Company appears to have been successful in integrating WH|BM, the integration of Fitigues has only 26 _________________________________________________________________ [80]Table of Contents recently begun |
| The integration of these and any future acquisitions may not be successful or generate anticipated sales increases |
| When the Company acquires businesses, it believes those businesses can enhance its business opportunities and its growth prospects |
| All acquisitions involve risks that could materially adversely affect the Company’s business and operating results |
| These risks include: • Distracting management from the Company’s business operations; • Losing key personnel and other employees; • Costs, delays and inefficiencies associated with integrating acquired operations and personnel; • The impairment of acquired assets and goodwill, and • Acquiring the contingent and other liabilities of the businesses acquired |
| In addition, acquired businesses may not provide the Company with increased business opportunities, or result in the growth that the Company anticipates |
| Furthermore, integrating acquired operations is a complex, time-consuming, and expensive process |
| Combining acquired operations may result in lower overall operating margins, greater stock price volatility, and quarterly earnings fluctuations |
| Cultural incompatibilities, career uncertainties, and other factors associated with such acquisitions may also result in the loss of employees |
| Failure to acquire and successfully integrate complementary practices, or failure to achieve the business synergies or other anticipated benefits, could materially adversely affect the Company’s business and results of operations |
| Protection of Intellectual Property The Company believes that its trademarks, copyrights, and other intellectual and proprietary rights are important to its success |
| Even though the Company takes action to establish, register and protect its trademarks, copyrights, and other intellectual and proprietary rights, there can be no assurance that the Company will be successful or that others will not imitate the Company’s products or infringe upon the Company’s intellectual property rights |
| In addition, there can be no assurance that others will not resist or seek to block the sale of the Company’s products as infringements of their trademarks, copyrights, or other proprietary rights |
| If the Company is required to stop using any of its registered or non-registered trademarks or copyrights, the Company’s sales could decline and its business and results of operations could be adversely affected |
| Goodwill and Intangible Assets As of January 28, 2006, the Company’s goodwill and other intangible assets (trademark) totaled approximately dlra61dtta8 million and dlra34dtta0 million, respectively |
| The Company acquired substantially all of the goodwill and trademark value through its acquisition of The White House, Inc |
| At the time of the acquisition, the Company determined that the WH|BM trademark had an indefinite useful life |
| Goodwill and intangible assets with indefinite lives are not amortized, but rather are tested for impairment annually or more frequently if impairment indicators arise |
| If the Company determines in the future that impairment has occurred, the Company would be required to write off the impaired portion of goodwill or the trademark asset, which could substantially impact the Company’s results of operations |
| Volatility of Stock Price The market price of the Company’s common stock has fluctuated substantially in the past and there can be no assurance that the market price of the common stock will not continue to fluctuate significantly |
| Future announcements or management discussions concerning the Company or its competitors, sales and profitability results, quarterly variations in operating results or monthly comparable store net sales, changes in earnings estimates by analysts or changes in accounting policies, among other factors, could cause the market price of the common stock to fluctuate substantially |
| In addition, stock markets, in general, have experienced extreme price and volume volatility in recent years |
| This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated to the operating performance of the specific companies |