UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

 

Commission file number 0-21258

 

Chico’s FAS, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

11215 Metro Parkway,

Fort Myers, Florida 33966

(Address of principal executive offices) (Zip code)

 

(239) 277-6200

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  o.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant:

 

Approximately $3,934,000,000 as of July 29, 2006 (based upon the closing sales price reported by the NYSE and published in the Wall Street Journal on July 31, 2006).

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

 

Common Stock, par value $.01 per share — 175,951,765 shares as of March 19, 2007.

 

Documents incorporated by reference:

 

Part III Definitive Proxy Statement for the Company’s Annual Meeting of Stockholders presently scheduled for June 26, 2007.

 

 

CHICO’S FAS, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE
YEAR ENDED FEBRUARY 3, 2007

TABLE OF CONTENTS

 

 

General

 

Chico’s FAS, Inc. (together with its subsidiaries, the “Company”) is a specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items under the Chico’s, White House | Black Market (“WH|BM”) and Soma by Chico’s (“Soma”) brand names.

 

Chico’s.  The Chico’s brand, which began operations in 1983, sells exclusively designed, private branded clothing focusing on fashion conscious women 35 and over with a moderate to high income level. The styling interprets fashion trends in a unique, relaxed, figure-flattering manner using mainly easy-care fabrics. The Chico’s brand designs its products in a number of ways including in-house designers, working with its independent vendors or through vendor based designs.

 

WH|BM.  The WH|BM brand, which began operations in 1985 and was acquired by the Company in September 2003, focuses on women who are 25 years old and up who lead active work and social lives with moderate and higher income levels. Its offerings include fashion and merchandise in the classic and timeless colors of white and black and related shades. WH|BM utilizes an in-house design team and also works closely with a number of vendors and agents to select, modify, and create products.

 

Soma.  The Soma brand, which began operations in 2004, sells exclusively designed private branded intimate apparel, sleepwear and activewear, primarily aimed at customers with the same age and income level as customers of the Chico’s brand. This concept, however, should ultimately appeal to a broader customer base than Chico’s does. The Soma brand is developed by working closely with a number of independent vendors and agents to select products designed and manufactured by them or their sources and to design proprietary products in-house primarily through a close collaborative effort with these independent vendors.

 

In January 2006, the Company acquired most of the assets of Fitigues, a fitness inspired brand offering stylish, comfortable activewear clothing and operating through 12 free-standing retail stores in various locations throughout the country, as well as through its customer catalog and website. However, the Company recently determined that the Fitigues brand did not meet internal expectations. Therefore, the Company has committed to close the Fitigues brand and expects that all of the remaining Fitigues stores, as well as the website, will be shut down by the end of the second quarter of fiscal 2007.

 

The Company is always open to explore other specialty retail concepts, including brand extensions, which would be complimentary to its current brands and that may be future growth vehicles. In particular, if a concept appears to offer profitable growth within a reasonable time horizon, the Company may move the concept into a test phase. However, the Company believes that at this time it is important to focus its energies on its core Chico’s, WH|BM and Soma brands.

 

The Company historically has endeavored to maintain a merchandise mix that emphasizes the continued introduction of new styles and designs to complement its seasonal and core product offerings. The Company plans to continue this approach with respect to its Chico’s and WH|BM brands, and, to a lesser degree, its Soma brand, which the Company believes requires a higher level of core product.

 

As of March 19, 2007, the Company operated 930 retail stores in 47 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico. The retail stores operate under various names, including Chico’s, White House | Black Market, Soma by Chico’s and, for the short term, Fitigues. The Company’s 559 Chico’s front-line Company-owned stores, 261 WH|BM front-line stores, and 51 Soma stores, as of this date, compete in the “better-priced” market, with 29% of these stores in upscale or regional malls, 13% in upscale street locations and the balance in upscale open air specialty and strip centers. The total retail stores include the remaining 8 Fitigues front-line stores that are scheduled to be closed by the end of the second quarter of fiscal 2007.

 

There are also 34 Chico’s outlet locations, 16 WH|BM outlet locations and 1 Fitigues outlet location that provide clearance activities for each of the brands. The Fitigues outlet store is expected to be closed by the end of the

second quarter of fiscal 2007. The Company has plans to open its first Soma outlet store during the first quarter of fiscal 2007.

 

In February and March 2007, the Company completed its strategic plan to take full control of its brand image by acquiring all outstanding franchise rights and being entirely Company-owned within the United States, with no further franchise operations. Going forward, the Company does not intend to establish any franchise arrangements, or to enter into any additional franchise territory development agreements, in the United States for any of its brands. The Company has not decided to enter any foreign markets at this time and it has not decided if, when, or in what manner, it may enter a foreign market in the future.

 

The Company mails a Chico’s and WH|BM catalog almost every month, including Soma inserts where applicable. These catalogs are designed to drive customers into the stores as well as promote and encourage website or call center sales. Beginning in mid fiscal 2005, the Company launched www.whitehouseblackmarket.com providing customers the ability to order WH|BM merchandise online or through its call center. In fiscal 2006, the Company launched a separate online website for Soma merchandise, www.soma.com, allowing customers the ability to order Soma merchandise online or through its call center. Prior to this launch, Soma products could only be purchased through the Chico’s website. The Company continues to evaluate whether, and at what point, it would make sense to launch a separate catalog for Soma.

 

Sales through the call center’s toll free telephone numbers, together with sales from the Company’s various websites (www.chicos.com, www.whitehouseblackmarket.com and www.soma.com), including the relatively small amount of sales through www.fitigues.com, amounted to $53.5 million in fiscal 2006 and are viewed as additional sales that provide a customer service for those who prefer shopping through these alternative channels. The Company is targeting this area as a growth area that has currently not been penetrated to the degree of some of its competitors. To that end, the Company is investing in new hardware, software and personnel to increase its sales penetration.

 

The Company’s outlet division has outlet stores that generally have a larger average store selling square footage than the front-line stores. In order to provide the Chico’s outlets with a full complement of merchandise, Chico’s also developed a supplemental product line for distribution only through its outlet stores. This product line is known as “Additions by Chico’s.” This supplemental label includes select product items that are designed to help promote the clearance of existing merchandise within Chico’s. The Company has not established such a supplemental product for WH|BM or Soma.

 

Also during the past few fiscal years, the Company has been testing the expansion of its Chico’s and WH|BM brands within its stores by offering certain items which complement the clothing products such as leather goods, watches, children’s gifts and other gift products that are primarily designed by the Company. To that end, during fiscal 2007, the Company intends to test a new petites line of clothing in its WH|BM brand. Some of these product category tests have proved to be successful and the product category has been added to the permanent offerings at the stores. Because of the additional space required to accommodate these additional categories and in an effort to improve the visual experience of its clothing and accessory presentations, the Company has been actively pursuing larger spaces for its existing and new stores. The Company currently believes the target Chico’s brand store size is in the 3,000-3,500 selling square feet range, while the target WH|BM brand store size is in the 2,200-3,000 selling square feet range. Although the Company may from time to time open larger or smaller stores, the Company’s primary focus in both its new and existing markets is currently stores in the size ranges indicated above.

 

The Company has been opening Soma stores in various sizes as it tests the optimal size for such stores. The Company is planning to open front-line Soma stores in the future that will be slightly smaller than its Chico’s and WH|BM stores, with Soma stores ranging in size from 1,100 selling square feet to 2,300 selling square feet and which have generally been attached to, or adjacent to, Chico’s stores. Further, the Company intends to begin removing the “by Chico’s” tagline on its Soma by Chico’s stores during fiscal 2007 as it intends to begin expanding on its limited marketing to non-Chico’s customers, in the same age and income classification.

 

The Company regularly reviews the appropriate size for its stores and may adjust the target store size in the future as necessary, in part due to the Company’s above average net sales per selling square foot at its Chico’s and

WH|BM stores as well as to continually position the Company to capitalize on the growth opportunities in the industry without being space confined.

 

The Company intends to continue locating a large portion of its front-line stores, including Chico’s, WH|BM and Soma, primarily in established upscale, outdoor destination shopping areas and high-end enclosed malls located either in tourist areas or in, or near, mid-to-larger sized markets. In recent years, Chico’s has been opening locations in smaller sized markets with encouraging results and the Company intends to expand its opening of Chico’s stores in smaller sized markets as long as results are meeting expectations. In the fiscal year ended February 3, 2007 (fiscal 2006), the Company opened 145 net new Company-owned stores, acquired the Fitigues chain of 12 stores (which will be closed in the second quarter of fiscal 2007) and reacquired one of its franchise stores (subsequent to fiscal 2006, the Company reacquired the remaining 13 franchise stores, thus ending its franchise operations). During fiscal 2005, the Company opened 104 net new Company-owned stores and one of its franchisees opened two stores.

 

The Company plans to open approximately 135-145 net new stores (excluding the 10 Fitigues planned closures or the 13 acquired franchise stores subsequent to year end) in the fiscal year ending February 2, 2008 (fiscal 2007). Of this total, 55-60 are expected to be Chico’s stores, 55-60 are expected to be WH|BM stores, and 20-25 are expected to be Soma stores. The Company expects to close up to 1-3 existing Chico’s stores, 4-6 WH|BM stores, and 1-3 Soma stores during fiscal 2007.

 

The Company has been aggressively expanding or relocating Chico’s and WH|BM stores over the last several years and the Company anticipates this will continue as the Company finds more opportunities for expansion or relocation. The Company has stated its fiscal 2007 goal is to increase overall square footage by 22%-24% and if the Company were to expand or relocate more stores than the 45-55 planned, or if the Company were to open larger front-line stores than currently planned, the Company may reduce the overall number of stores it opens to maintain its approximate 22%-24% square footage growth goal.

 

Business Strategies

 

Overall Growth Strategy.  Over the last several years, the Company has continued to build its store base primarily through the opening of new stores as well as through the acquisition of other concepts such as WH|BM and the organic growth of the Soma concept. During the same time, the Company has been building its infrastructure to accommodate the anticipated future growth in its store base, its multi-branded approach to retailing, and the associated increases in revenues and expenses. This increase in infrastructure includes significant additions to its senior and middle management teams, an increase in direct to consumer staffing, the roll out of the SAP software to all brands (for more detail, see page 12), and other infrastructure initiatives. The Company has established an annual square footage growth goal of 22%-24% for fiscal 2007 and 15% for fiscal 2008, which aggregates the square footage of Chico’s, WH|BM, and Soma brands. In assessing the growth potential of each of the Company’s two primary brands, the Company believes the overall market for Chico’s stores in the United States to be between 700 and 850 stores, that the overall market for WH|BM stores in the United States appears to be either comparable or only slightly less than the potential number of Chico’s stores, that ultimately most of these current locations can accommodate higher volume, and that long-term expansion opportunities for both brands are believed to be possible in certain other countries such as Canada or certain European countries. The Company believes it is premature to assess any growth potential for the Soma brand, although the Company currently believes Soma could eventually be successful in many places where there is a successful Chico’s store, whether or not adjacent to an existing Chico’s store, as well as other high traffic shopping center locations serving the target Soma customer that do not have a Chico’s store.

 

Distinctive Private Branded Clothing and Coordinated Accessories.  The most important element of the Company’s business strategies is the distinctive clothing and complementary accessories it sells under its proprietary brands.

 

Chico’s.  Interpreting current fashion trends and providing frequent delivery of new designs, Chico’s targets women 35 and over with emphasis on a comfortable relaxed fit in a modern style. Chico’s clothing is made mostly from natural fabrics and fabric blends (including cotton, linen and silk) and sophisticated synthetics and synthetic blends. Accessories, such as handbags, belts, and jewelry, including earrings, watches,

necklaces and bracelets, are specifically designed to coordinate with the colors and patterns of the Chico’s brand clothing, enabling customers to easily enhance and individualize their wardrobe selections.

 

Chico’s designs its clothing and accessories in a number of ways including utilizing its in-house design team, working with its independent vendors, or through vendor based designs. Chico’s controls most aspects of the design process, including choices of pattern, construction, specifications, fabric, finishes and color.

 

Chico’s clothing is designed through the coordinated efforts of the merchandising and product development teams. Style, pattern, color and fabric for individual items of clothing are developed based upon perceived current and future fashion trends that will appeal to its target customer, anticipated future sales and historical sales data.

 

The Chico’s product development and merchandising teams develop and work with vendors to develop the in-house designs and design modifications. By conceptualizing and designing in-house, contracting, for the most part, directly with manufacturers, and providing on-site quality control, Chico’s has been able to realize average initial gross profit margins for its clothing and accessories that are generally higher than the industry average, while at the same time providing value to its customers.

 

The distinctive nature of Chico’s clothing is carried through to its sizing. Chico’s uses international type sizing, comprising sizes 0 (size 4-6), 1 (size 8-10), 2 (size 10-12), and 3 (size 14-16). As in the past, Chico’s occasionally will offer one-size-fits-all and small, medium and large sizing for some items. The relaxed nature of the clothing allows the stores to utilize this unusual sizing and thus offer a wide selection of clothing without having to invest in a large number of different sizes within a single style. Chico’s has also added half sizes (sizes 0.5, 1.5, 2.5 and 3.5) to some of its pant styles, most notably jeans.

 

WH|BM.  Designed to adapt within the lifestyle of today’s modern woman and to enhance her inner beauty, WH|BM clothing is made from a variety of natural and synthetic fabrics, such as cotton, rayon, silk, polyester, microfibers and matte jersey, all in white and black and related shades. As is the case with Chico’s, the accessories at WH|BM, such as handbags, shoes, belts and jewelry, including earrings, necklaces and bracelets, are specifically developed and purchased to coordinate with the colors and patterns of the clothing, enabling customers to easily coordinate with and individualize their wardrobe selections.

 

WH|BM utilizes an in-house design team and also works closely with its independent vendors for its designs. WH|BM controls almost all aspects of the design process, including choices of pattern, construction, specifications, fabric, finishes and color.

 

WH|BM clothing is designed through the coordinated efforts of the merchandising, design and product development teams. The merchandise is selected, enhanced and created so as to carry out WH|BM’s commitment to “make women feel beautiful” and to project a contemporary and feminine self-image. As is the case with Chico’s, the style, pattern, color and fabric for individual items of WH|BM clothing are selected based upon historical sales data, anticipated future sales and perceived current and future fashion trends that will appeal to its target customer.

 

The WH|BM product development, design and merchandising teams work with vendors to develop the in-house and design modifications. More so than in the past, WH|BM conceptualizes and designs in-house, contracts for a large part directly with manufacturers, and started providing on-site quality control in February 2006. Because of these changes, WH|BM has been able to realize improvements in its average initial merchandise margins compared to a few years ago, while continuing to provide stylish, affordable clothing and accessories.

 

WH|BM stores use American sizes in the 0-14 range (with online sizing up to size 16), which the Company believes is more appropriate for the target WH|BM customer. As a result, the fit of the WH|BM clothing tends to be more styled to complement the figure of a body-conscious woman, while still remaining comfortable.

 

Soma.  Soma offerings are broken into two broad categories: foundations and apparel. The foundations category includes bras, panties, and shapewear, while the apparel category includes activewear, sleepwear,

robes and loungewear. Accessories volume within the Soma concept is currently small but may be developed further in the future.

 

The foundation and apparel products are, for the most part, developed with a close collaborative effort between the in-house product development team and key vendor resources. The Company is testing some labels, other than the Soma label, as it determines the needs and desires of the target customer. The apparel offerings utilize the Chico’s sizing concept, while bras are sized using traditional American band and cup sizes. Panties currently incorporate both industry and Chico’s sizing.

 

Personalized Service and Customer Assistance.  The Company has always considered outstanding and personalized customer service one of the most important factors in determining its success. The Company intends, through its specialized training efforts, to make certain that sales associates in all of its stores offer assistance and advice on various aspects of their customers’ fashion and wardrobe needs, including clothing and accessory style and color selection, coordination of complete outfits, and suggestions on different ways in which to wear the clothing and accessories. The Company does not require sales associates to wear the Company’s clothing and accessories in its stores. It offers substantial employee discounts to those associates who wish to purchase the Company’s clothing. The Company’s sales associates are encouraged to know their regular customers’ preferences and to assist those customers in selecting merchandise best suited to their tastes and wardrobe needs. To better serve its customers, sales associates are encouraged to become familiar with new styles and designs of clothing and accessories by trying on new merchandise. None of the Company’s brands have found it necessary to offer alteration services.

 

The Company takes pride in empowering its associates to make decisions that best serve the customer. The Company believes this healthy sense of empowerment enables the Company’s associates to exceed customers’ expectations. In addition, many of the store managers and sales associates, especially for the Chico’s brand, were themselves customers prior to joining the Company and can therefore more easily identify with customers. The Company’s associates are expected to keep individual stores open until the last customer in the store has been served. If an item is not available at a particular store, sales associates are encouraged to arrange for the item to be shipped directly to the customer from another Chico’s, WH|BM or Soma store. The Company provides a Company sponsored “SKU hotline” and in-store “SKU lookup” to assist sales associates with this task. The Company is committed to its “Most Amazing Personal Services” standard and to that end it is evaluating new software that may automate the process of locating size or color requests.

 

Customer Loyalty.  Building customer loyalty through focused programs and effective implementation of the Company’s merchandising and customer service strategies is considered another key element for the Company’s success. The Company’s sophisticated customer tracking database, that tracks sales by customers at the SKU and store level, allows the Company to more sharply focus its marketing, design and merchandising efforts to better address and define the desires of its target customer. “Active” customers are those who have purchased at one of the Company’s brands within the preceding 12 months.

 

Chico’s and Soma.  Chico’s customer club, which was established in the early 1990’s, is known as the “Passport Club” (“Passport”), and is designed to encourage repeat sales and customer loyalty for its Chico’s and Soma brands. Features of the club include discounts, special promotions, invitations to private sales, and personalized phone calls regarding new Chico’s and Soma merchandise.

 

A Chico’s or Soma customer signs up to join the Passport Club at no cost, initially as a “preliminary” member. Once the customer spends a combined $500 over any time frame in either brand, the customer becomes a “permanent” member entitled to a 5% lifetime discount, advance sale notices, free shipping and other benefits. Chico’s has been very successful in increasing its database of active permanent and preliminary Passport members. As of February 3, 2007, Chico’s and Soma had approximately 1.6 million active permanent Passport members and an additional 1.6 million active preliminary Passport members. During fiscal 2006, the active permanent Passport members accounted for approximately 83% of overall sales, while the active preliminary members accounted for approximately 14% of overall sales. As a comparison to fiscal 2005, Chico’s and Soma had an average of 2.9 million active permanent and preliminary members.

 

The Company believes that active permanent Passport members shop more frequently and spend more on their average transaction than active preliminary Passport members. During fiscal 2006, the average active permanent Chico’s and Soma Passport member spent approximately $108 per transaction and shopped five to six times per year, while the active preliminary Passport members averaged approximately $66 per transaction and shopped one to two times per year.

 

WH|BM.  In late fiscal 2004, the Company launched a customer loyalty program for WH|BM called “The Black Book.” Similar to the Passport Club, The Black Book is designed to encourage repeat sales and customer loyalty. Features of the club are similar to the Passport Club and include discounts, special promotions, invitations to private sales, and personalized phone calls regarding new WH|BM merchandise. A WH|BM customer signs up to join The Black Book at no cost, initially as a “preliminary” member. Once the customer spends $300 over any time frame, the customer becomes a “permanent” member entitled to a 5% lifetime discount, birthday bonuses, double discount specials, advance sale notices, free shipping and other benefits. As of February 3, 2007, The Black Book already had approximately 0.6 million active permanent members and over 1.2 million active preliminary members. During fiscal 2006, active permanent Black Book members accounted for 63% of overall sales, while active preliminary members accounted for 31% of overall sales. As a comparison to fiscal 2005, WH|BM had an average of 1.3 million active permanent and preliminary members.

 

High-Energy, Loyal Associates.  The Company believes that the dedication, high energy level and experience of its management team, support staff, and store associates are key to its continued growth and success and helps to encourage personalized attention to the needs of its customers.

 

In selecting its associates at all levels of responsibility, the Company looks for quality individuals with high energy levels who project a positive outlook. The Company has found that such associates perform most effectively for the Company in the stores and at headquarters and contribute to a fun and exciting shopping experience for its customers.

 

Sales associates are compensated with a base hourly wage but also have opportunities to earn substantial incentive compensation based on their individual sales. For the most part, these incentives are based upon the dollar amount of sales to individual customers, thereby encouraging sales of multiple items and focusing the sales associate on each transaction. Store managers receive a base hourly wage and are also eligible to earn various incentive bonuses tied to individual sales and storewide sales performance. Each store brand has separate district and regional sales managers. The district and regional sales managers receive base salaries and also have the opportunity to earn monthly incentive compensation based upon the sales performance of stores in their districts and regions, as well as incentives, including, in some years, equity based compensation such as restricted stock or stock options, based on their district’s or region’s performance compared to the overall sales performance of the respective store brand.

 

The Company also offers its store and field management associates other recognition programs and the opportunity to participate in its stock purchase and 401(k) programs. Management believes these programs offer the Company’s store and field management associates opportunities to earn total compensation at levels generally at, or above, the average in the retail industry for comparable positions.

 

The Company’s emphasis, where possible, on a “promote from within” philosophy, combined with increases in the number of new Company-owned stores, provides opportunities for qualified associates to advance to higher positions in the Company.

 

Additional Stores.  Management believes the ability to open additional stores will be a factor in the future success of the Company. During fiscal 2006, the Company opened 145 net new Company-owned stores composed of 41 net Chico’s front-line stores, 3 Chico’s outlet stores, 58 net WH|BM front-line stores, 8 WH|BM outlet stores, 37 Soma stores and a reduction of 2 Fitigues stores from the 12 originally acquired. During fiscal 2005, the Company opened 104 net new Company-owned stores and 2 new franchise stores were opened for a total of 106 net new stores composed of 51 net Chico’s front-line stores, 6 Chico’s outlet stores, 40 net WH|BM front-line stores, 4 net WH|BM outlet stores and 5 Soma stores. In fiscal 2007, the Company plans to open approximately 135-145 net new stores, exclusive of the planned 10 Fitigues store closures and the 13 acquired franchise stores.

 

As of March 19, 2007, in fiscal 2007, of the stores planned for the fiscal year, the Company has opened 5 front-line Chico’s stores, 7 WH|BM front-line stores and 1 front-line Soma store. During this time, the Company also closed 2 Soma front-line stores. The Company has signed leases for several additional new store locations, and the Company also is currently engaged in negotiations for the leasing of numerous additional sites. Of the approximately 135-145 net new stores to be opened in fiscal 2007, the Company expects to open approximately 31-35 stores in the first quarter, 20-24 stores in the second quarter, 63-67 stores in the third quarter, and the balance in the fourth quarter.

 

In deciding whether to open a new store, the Company undertakes an extensive analysis that includes the following: identifying an appropriate geographic market; satisfying certain local demographic requirements; evaluating the location of the shopping area or mall and the site within the shopping area or mall; assessing proposed lease terms; and evaluating the sales volume necessary to achieve certain profitability criteria. Once the Company takes occupancy, it usually takes from eight to twelve weeks to open a store. After opening, Chico’s and WH|BM front-line stores have typically generated positive cash flow within the first year of operation (after allocation of a portion of home office administrative expense based on sales) and have typically had a ten to eighteen month payback of all initial capital and inventory costs. However, there can be no assurance that new Chico’s or WH|BM stores will achieve operating results similar to those achieved in the past.

 

Store Locations

 

The Company’s stores are situated, for the most part, in mid-to-larger sized markets. In recent years, the Company has been opening Chico’s stores in smaller sized markets with encouraging results. The Company intends to expand its opening of Chico’s stores in smaller sized markets as long as results are meeting expectations. The Company’s front-line stores are located almost exclusively in upscale outdoor destination shopping areas, high-end enclosed shopping malls and, to a lesser degree, regional malls which offer high traffic of the respective target customers of the brand. For all of its brands, the Company seeks to locate the front-line stores where there are other upscale specialty stores and, as to its mall locations, where there are two or more mid-to-high end department stores as anchor tenants. Where possible, the Company has historically opened the Soma stores adjacent to or nearby an existing Chico’s store. During fiscal 2007, the Company will be reevaluating future Soma locations to possibly begin opening Soma stores outside of where Chico’s locations exist. The Chico’s and WH|BM outlet stores are, for the most part, located in outlet centers, although the Company is evaluating the possibility of opening new outlets in value centers.

 

As of February 3, 2007, the Company-owned Chico’s front-line stores averaged 2,353 selling square feet, while the Company-owned Chico’s outlet stores averaged 2,823 selling square feet. WH|BM front-line stores averaged 1,720 selling square feet and WH|BM outlet stores averaged 1,839 selling square feet. Soma stores averaged 2,036 selling square feet. The Company seeks to open Chico’s front-line stores with approximately 3,000-3,500 selling square feet, to open Soma front-line stores with approximately 1,100-2,300 selling square feet and to open WH|BM front-line stores with approximately 2,200-3,000 selling square feet. However, in locations where the Company has a desire to establish a front-line store for any such brand but where the optimum store size or location is unavailable, the Company will lease a front-line store with as few as 1,200 selling square feet or as many as 4,500 selling square feet. If the volume of business at one of its smaller stores is sufficient, and there is no ability to expand the existing store, the Company has chosen in the past to open additional stores nearby, sometimes operating more than one store in the same general shopping area. Non-selling space within Company-owned stores generally amounts to 25-28% of the gross leased space, and is not considered in the selling square foot calculations.

 

The Company’s current stores, as of March 19, 2007, are located in the following jurisdictions:

 

In a typical new front-line Company store (including Chico’s, WH|BM, and Soma stores), the Company’s out-of-pocket cost of leasehold improvements, fixtures, store equipment and beginning inventory ranges from $600,000 to $900,000 (without taking into account landlord construction allowances and other concessions).

 

For each store concept, the Company utilizes third party architectural and contracting firms with offices or affiliates throughout the country, experienced in new store openings, to facilitate the build-out and set up of store interiors rapidly, including, where necessary, the flooring, furniture, fixturing, lighting, equipment and initial inventory displays. The use of these resources allows the Company to open a new store generally within eight to twelve weeks after taking occupancy. The Company primarily utilizes its own in-house teams for the initial planning and design stages of the store build-outs and for supervising the final stages of construction prior to opening, and may, from time to time, contract with outside third parties on an as needed basis.

 

The following table sets forth information concerning changes in the number of Company-owned and franchise stores during the past five fiscal years:

 

 

 

 

Outlet Stores

 

As of March 19, 2007, the Company operated 34 Chico’s outlet stores, 16 WH|BM outlet stores and 1 Fitigues outlet store. The Company’s outlet stores carry slower-selling items removed from the front-line stores, remaining pieces of better-selling items replaced by new shipments of merchandise to front-line stores, some seconds of certain merchandise, and its “Additions by Chico’s” label. The “Additions by Chico’s” label has grown to represent approximately 25% of the outlet sales during fiscal 2006, and the Company currently anticipates that the “Additions by Chico’s” label could account for up to 30% of outlet sales in fiscal 2007. The Company’s outlet stores act as a vehicle for clearing certain marked down merchandise while helping front-line stores to maintain a more limited markdown policy. Prices at the Company’s outlet stores generally range from 30% to 70% below regular retail prices at front-line stores. Although service is also important at the Company’s outlet stores, there is somewhat less emphasis on personalized customer service in the outlet stores. In fiscal 2006, sales from the Company’s outlet stores represented approximately 4.6% of the Company’s net sales, only slightly higher than historical percentages. Historically, the Company’s outlet stores have not been intended to be profit centers, and the Company is constantly re-evaluating its approach to outlet stores to improve the return on clearance of such goods. Soma closeout merchandise is currently sold through the Chico’s outlet stores, although the first Soma outlet store is planned to open in April 2007.

 

The Company’s outlet stores are generally larger than front-line stores, averaging 2,508 selling square feet at February 3, 2007. In fiscal 2006, the Company opened 3 new Chico’s outlet stores and 8 new WH|BM outlet stores. Currently, the Company is planning to open 2-4 new Chico’s outlet stores, 4-6 new WH|BM outlet stores and 1 new Soma outlet store in fiscal 2007.

 

Store Operations

 

Company-owned Chico’s and Soma stores with an average sales volume typically employ a manager, two assistant managers, and numerous sales associates who are either full-time or part-time associates. For higher volume Chico’s stores, the stores typically could also employ an operations manager, a visual manager or an additional assistant manager as well as a dedicated lead cashier, stock coordinator and fitting room assistant. The WH|BM stores historically have employed a manager and a slightly smaller support staff of associates, in part because of the smaller average size of stores and smaller average revenue per store. In an effort to further enhance customer service and drive sales in appropriate locations, staffing was increased somewhat at WH|BM stores during fiscal 2004. In addition, at newer WH|BM stores, which are generally larger in size, the Company will typically employ a staff comparable in size to that of a Chico’s store. During the peak selling seasons, both Company-owned Chico’s stores and WH|BM stores generally hire additional sales associates.

 

Many store support functions, such as purchasing and accounting, are handled by the Company’s corporate headquarters. Store managers at Company-owned stores, however, are responsible for managing the store’s day-to-day business and driving sales in the stores. In order to effectively accomplish these tasks, store managers are encouraged to be present on the sales floor whenever possible during business hours. This allocation of responsibility allows store managers more time to focus on the actual management of the store, including the recruitment, training, and retention of store associates, and compliance with store operating policies and procedures. Store managers also manage store sales through the effective day-to-day management of the sales force, focusing on customer service, and implementing in-store and local community promotional and outreach programs.

 

The Company has established formalized training programs that are intended to reinforce and enhance the personalized customer service offered by all associates as well as increase their merchandise knowledge. The comprehensive training programs include a “Most Amazing Personal Services” (M.A.P.S.) module and a “Most Amazing Register System” (M.A.R.S.) module, among others, which the Company believes will help assure that sales associates better understand the product and improve the level of service provided to its customers.

 

The Company currently supervises its store operations through its Chief Stores Officer, its Senior Vice President — Chico’s Stores, its Vice President — Store Operations, its Vice President — WH|BM Stores, its Director of Sales — Soma, territorial Vice Presidents, Regional Sales Managers, and numerous District Sales Managers. The Senior Vice President — Chico’s Stores, the Vice President — WH|BM Stores, and the Director of Sales — Soma, have direct supervision responsibility of their brand specific territorial Vice Presidents or Regional

Sales Managers, who in turn have direct supervision responsibility of their respective brand specific either Regional Sales Managers or District Sales Managers. Each District Sales Manager supervises multiple store locations within their respective brand and has primary responsibility for assisting individual store managers in meeting established sales goals, and carrying out merchandise presentation, staffing, training and expense control programs established by headquarters. During the first half of fiscal 2007, the Company intends to transition the Vice President — WH|BM Stores from reporting to the Chief Stores Officer to reporting to the Brand President-WH|BM.

 

Management Information Systems

 

The Company’s current principal management information systems are run on numerous Windows based Applications Servers and two IBM iSeries platforms located at the home office in Fort Myers, Florida and the Winder, Georgia distribution center, which provide a full range of retail, catalog, Internet, financial and merchandising information systems, including purchasing, inventory distribution and control, sales reporting, accounting, warehousing and merchandise management principally using SAP, CRS Retail Systems, Lawson, Manhattan Associates, NSB, Momentis and Mozart by Commercialware.

 

All Company-owned stores utilize essentially the same point of sale cash register computers, which are polled nightly to collect SKU-level sales data, Passport and Black Book information, and inventory receipt and transfer information for each item of merchandise, including information by style, color and size. Management evaluates this information, together with its weekly reports on merchandise shipments to the stores, to analyze profitability, formulate and implement company-wide merchandise pricing decisions, assist management in the scheduling and compensation of associates (including the determination of incentives earned) and, most importantly, to implement merchandising decisions regarding needs for additional merchandise, allocation of merchandise, future design and manufacturing needs and movement of merchandise from front-line stores to outlet stores. The Company operates a cash register system using a Windows platform in a wide area network and using the CRS Retail Systems software used by many other retailers.

 

The Company is committed to an ongoing review and improvement of its information systems to enable the Company to obtain useful information on a timely basis and to maintain effective financial and operational controls. This review includes testing of new products and systems to assure that the Company is able to take advantage of technological developments. In May 2006, the Company announced that it will work with SAP, a third party vendor, to implement an enterprise resource planning system (ERP) to manage its retail stores, beginning first with its Soma brand. This fully integrated system is expected to support and coordinate all aspects of product development, merchandising, finance and accounting and to be fully scalable to accommodate rapid growth. On February 4, 2007, the Company successfully completed the first major phase of its multi-year, planned implementation of the new ERP system by converting its Soma brand to the new merchandising system and rolling out the new financial systems at the same time. The second major phase anticipates an initial roll out and utilization of this new system in each of its other two brands beginning as early as the end of fiscal 2007 or the first half of fiscal 2008. The third major phase contemplates on-going enhancements and optimization of the new ERP across all three brands, as well as the deployment of additional functionality across various other functions within the Company through fiscal 2009.

 

Merchandise Distribution

 

Currently, distribution for all brands, is handled through the Company’s distribution center in Winder, Georgia. New merchandise is generally received daily at the distribution center. Merchandise from United States vendors is trucked to Georgia or arrives by air, as the circumstances require. Most of the merchandise from foreign vendors arrives in this country via air (and increasingly by sea) at various points of entry in Georgia, Illinois, California, or Florida and is transported via truck to the distribution center. After arrival at the distribution center, merchandise is sorted and packaged for shipment to individual stores. Merchandise is generally pre-ticketed with price and all other tags at the time of manufacture.

 

The Company’s current distribution center is highly automated, utilizing sophisticated “pick to light” material handling equipment. Using this system, the turnaround time between distribution center receipt of merchandise and arrival at stores generally averages approximately 24 to 48 hours for its nearest stores and two days to a week for its

other stores. In an attempt to ensure a steady flow of new merchandise, the Company ships merchandise continuously to its stores. The Company primarily uses the common carrier, Federal Express (air and ground), for shipments to its stores.

 

The Company believes that the capacity of its distribution center in Georgia should be sufficient to service the Company’s needs for approximately two years of future growth (including without limitation the growth of Chico’s, WH|BM, and Soma), without requiring building expansion under its existing county commitment. In fiscal 2005, the Company completed the purchase of a facility adjacent to its Winder campus distribution center to be used for all direct to consumer fulfillment (i.e., catalog and Internet) to address the continued planned growth in the volume of direct to consumer sales and the expanded number of direct to consumer items that are being made available across all brands. With respect to addressing the needs for additional distribution center space, the Company is evaluating its requirements and the appropriate timing to make additional distribution center capacity available. The Company’s present goal is to begin design work in fiscal 2007. It is currently anticipated that the Company will require additional distribution space late in fiscal 2008 or early in fiscal 2009 and, initially, the Company is focusing its evaluation on the expansion of its current distribution center on existing adjacent land that is already owned by the Company and preliminarily approved by Barrow County for such an expansion. In connection with its ongoing evaluation of the strategic long-term distribution needs of its brands, the Company may also explore adding a separate distribution center for its Soma brand.

 

Merchandise Design and Product Development

 

Chico’s, WH|BM, and Soma private branded merchandise is developed through the coordinated efforts of its respective merchandising, creative and production teams working with its independent vendors. Style, pattern, color and fabric for individual items of the Company’s private branded clothing are developed based upon future fashion trends that will appeal to its target customer, anticipated future sales and historical sales data.

 

Currently, Chico’s product development, merchandising, planning and allocation, and production and sourcing departments report directly to Michele Cloutier, Executive Vice President — Chief Merchandising Officer — Chico’s. Ms. Cloutier reports to Scott A. Edmonds, President and Chief Executive Officer. Ms. Cloutier currently has the Senior Vice President — Product Development, the Senior Vice President — General Merchandise Manager, the Senior Vice President — Planning and Allocation, the Vice President — Production and Quality, and the Vice President — Merchandise Controller reporting directly to her. Prior to the promotion of Ms. Cloutier, the product development, merchandising, planning and allocation, and production and sourcing departments reported to Patricia Murphy Kerstein, Executive Vice President — Chief Merchandising Officer, who stepped down from her Chief Merchandising Officer responsibilities on March 6, 2007, but continues to serve as an Executive Vice President for the Chico’s brand.

 

WH|BM’s creative, product development, merchandising, planning and allocation, and production and quality teams are headed up by Patricia Darrow-Smith, Brand President — White House | Black Market. Ms. Darrow-Smith currently has the WH|BM Senior Vice President — Operations, the WH|BM Vice President — General Merchandise Manager, and several directors (including a Senior Director — Design, a Senior Director — Creative and two Directors — General Merchandise Managers reporting directly to her. Ms. Darrow-Smith also reports directly to Mr. Edmonds.

 

Soma’s product development, merchandising, planning and allocation and production and sourcing teams are headed up by the Senior Vice President — General Merchandise Manager — Soma, who oversees the Vice President — Planning and Allocation and several directors (including the Director of Merchandising, the Director of Production and Sourcing and the Director of Operations) and who reports directly to Charles L. Nesbit, Jr., Executive Vice President — Chief Operating Officer. Mr. Nesbit, who has extensive previous managerial experience within the intimate apparel industry, reports directly to Mr. Edmonds.

 

The creative and product development teams for Chico’s, WH|BM and Soma develop the in-house designs and design modifications with input from its merchandising teams as well as its independent vendors. In addition to selecting distinctive patterns and colors, the Chico’s, WH|BM and Soma product development teams and the Company’s merchandising teams are particularly attentive to the design and specification of clothing style,

construction, trim and fabric treatment. The Company believes this attention to design detail assists in distinguishing its clothing and strengthening the customer’s perception of quality and value.

 

Although the Company develops merchandise for specific seasons, the product development efforts, are a constant process which result in the continual introduction of new merchandise in the Company’s front-line stores. This continual process supports the Company’s merchandising and inventory strategy, and serves to reduce, somewhat, the Company’s exposure to fashion risk associated with any group of styles or trends.

 

Chico’s and Soma have historically purchased most of their clothing and accessories from companies that manufacture such merchandise in foreign countries except for the “cut and sew” operations described below. WH|BM has historically purchased a significant amount of its clothing and accessories from companies that arrange for such items to be manufactured in foreign countries. The Company does business with all of its foreign vendors and importers in United States currency, and purchases may be supported through letters of credit.

 

Producers of the Company’s clothing utilize the designs and specifications provided by the Company most often through its CAD systems. Except for certain U.S. based “cut and sew” operations, the Company generally does not purchase and supply the raw materials for its clothing, leaving the responsibility for purchasing raw materials with the manufacturers. The Company also buys fabric and provides such fabric to domestic “cut and sew” manufacturers in the United States who make the specified Chico’s brand designs and styles. The Company anticipates it is likely to continue this practice in the future.

 

Currently, Chico’s and Soma contract primarily with between 75 to 95 apparel and foundation vendors and 30 to 50 accessory vendors, as well as several fabric suppliers and several “cut and sew” vendors for its Chico’s brand merchandise. Because of certain lower sourcing costs associated with the Company’s vendors in various parts of the world and certain other long term uncertainties presented by such vendor relationships, the Company may continue to redirect a portion of its sourcing activities towards new vendors in China, India and other areas.

 

The Company also currently contracts with approximately 166 different vendors for its WH|BM merchandise, but relies on 21 core vendors who collectively account for approximately 64% of the total WH|BM merchandise purchases. For the most part, however, the WH|BM team is not utilizing vendors that are currently supplying the Chico’s brand.

 

Chico’s and Soma.  During fiscal 2006, China sources accounted for approximately 51% of the Company’s purchases at retail for their Chico’s and Soma merchandise, United States sources (including fabric and “cut and sew” vendors) accounted for approximately 15% of their merchandise, India sources accounted for approximately 13% of overall purchases, Peru sources accounted for approximately 6% of overall purchases, Guatemala sources accounted for approximately 5% of overall purchases and Turkey sources accounted for approximately 4% of overall purchases. Taiwan, Phillipines, and other smaller sources, in the aggregate, amounted to approximately 6% of overall purchases. In fiscal 2007, the Company expects sourcing from China for Chico’s and Soma merchandise is likely to increase slightly as a percentage of overall purchases, while vendors in India can be expected to continue to provide approximately 12% to 14% of total purchases. Purchases from vendors in Peru are also likely to remain in the 5% to 7% range of total purchases, while United States vendors are expected to decrease as a percentage of overall purchases.

 

WH|BM.  During fiscal 2006, China sources accounted for approximately 69% of the Company’s purchases at retail for their WH|BM merchandise, United States sources accounted for approximately 25% of their merchandise and Canada, Brazil, El Salvador, and other smaller sources, in the aggregate, accounted for approximately 6% of overall purchases. Sourcing through foreign vendors increased considerably during fiscal 2006 as WH|BM expanded its utilization of sourcing alternatives provided by the Company. The Company expects this trend to continue over the next several years, although on a more gradual pace.

 

Although there were no manufacturers that produced more than 10% of the Company’s merchandise during the last fiscal year, the Company has contracted with one intermediary vendor that accounted for approximately 16% of the purchases for the Chico’s brand (including all fabric and labor) during the last fiscal year through separate subcontracts with several “cut and sew” factories in the United States and China. With respect to purchases made through this intermediary, the Company, for the most part, purchases the necessary specialized cloth and then coordinates with this intermediary who arranges for various independent United States and Chinese “cut and sew”

manufacturers to make the specified designs and styles. Although the Company believes that its relationship with this particular intermediary is good, there can be no assurance that this relationship can be maintained in the future or that the intermediary will continue to be available to coordinate and facilitate production and supply of merchandise. If there should be any significant disruption in the supply of merchandise through this intermediary in particular, management believes that it can successfully implement its contingency plans so as to allow it to continue to secure the required volume of product. Nevertheless, there is some potential that any such disruption in supply could have a short-term material adverse impact, and possibly even a longer-term material adverse impact, on the Company’s operations.

 

As with most apparel importers, the Company has infrequently experienced certain difficulties with the quality and timeliness of delivery of merchandise. Although the Company has been sensitive to quality control and has taken certain steps to better control the quality of merchandise, there can be no assurance that the Company will not experience problems in the future with matters such as quality or timeliness of delivery.

 

The Company has no material long-term or exclusive contracts with any apparel or accessory manufacturer or supplier and competes for production facilities with other companies offering clothing and accessories utilizing similar manufacturing processes. Although the Company believes that its relationships with its existing vendors are good, there can be no assurance that these relationships can be maintained in the future. If there should be any significant disruption in the delivery of merchandise from one or more of its current key vendors, management believes there would likely be a material adverse impact on the Company’s operations. Also, the Company is in the process of developing relationships with several new vendors in various countries. Although the Company has investigated the past performance of these vendors and has inspected factories and sampled merchandise, there can be no assurance that the Company will not experience delays or other problems with these new sources of supply. New relationships often present a number of uncertainties, including payment terms, cost of manufacturing, adequacy of manufacturing capacity, quality control, timeliness of delivery and possible limitations imposed by trade restrictions.

 

Imports and Import Restrictions

 

Although the Company utilizes United States manufacturers to manufacture a portion of its clothing, the Company continues to shift more and more of its manufacturing of clothing to manufacturers located outside the United States, and the Company expects this trend may continue, particularly for WH|BM. As a result, the Company’s business has been and will remain subject to the various risks of doing business abroad and to the imposition of United States import restrictions and customs duties.

 

Textile duties represent a significant portion of the total duties collected by the United States Department of Homeland Security through its Customs and Border Protection division (“CBP”). In addition, due to the re-imposition of import quotas relating to China, which is described below, and efforts to circumvent those quotas, CBP has announced that it is increasing its enforcement of textile import regulations. As a result, in the ordinary course of its business, the Company’s imports may from time to time be subject to investigation by CBP, and the Company may be obligated to pay tariffs, duties and other charges.

 

The Company currently imports products primarily from China, India, Peru, Guatemala, and Turkey, all of which are currently accorded normal trade relations status (“NTR”), formerly known as most favored nation status, by the United States. The products from all countries that have been given NTR status are subject to the same tariffs when they enter the United States. If the NTR status of any of these countries were to be lost and the merchandise purchased by the Company were then to enter the United States without the benefit of NTR treatment, or were to enter the United States subject to retaliatory tariffs, the merchandise would be subject to significantly higher duty rates. Increased duties, whether as a result of a change in NTR status or any overall change in foreign trade policy, could have a material adverse effect on the cost and supply of merchandise from these countries.

 

The NTR status for China had in the past been subject to an annual review, and this annual review had generated considerable debate. In October 2000, then-President Clinton signed legislation designed to eliminate the need for this annual review and establish permanent NTR status between the United States and China, effective if and when China was admitted into the World Trade Organization (“WTO”). In December 2001, China became a member of the WTO and was granted permanent NTR status by the United States. However, as a condition of

China’s accession to the WTO, other members of the WTO are allowed to request safeguard restraints on imports of textiles from China when a member believes that imports from China are threatening to impede the orderly development of the textile trade. The United States textile industry has been successful in lobbying for such safeguard restraints, and safeguard restraints have been negotiated between China and the United States, the impact of which is discussed below.

 

Although the Company expects NTR status to continue for the countries where its principal vendors are located, the Company cannot predict whether the United States government will act to remove NTR status for any of the countries or take other actions that could impact the tariff treatment on goods coming from any of the countries where its principal vendors are located. As but one example, there continue to be legislative initiatives in the United States Congress under which additional tariffs would be imposed on Chinese goods, including apparel items, unless China takes appropriate action to counteract what the United States perceives to be an artificial undervaluing of the Chinese currency. In addition, there is even a legislation initiative to withdraw China’s NTR status. However, it remains uncertain whether the Congress will consider such legislation in the near future, and, if so, whether any such legislation would be able to garner sufficient support to be enacted, or to what extent any such legislation, if enacted, would affect the Company’s business.

 

For these and other reasons expressed below, the ability to continue to conduct business with vendors located outside of the United States, and particularly those in China, is subject to political uncertainties, the financial impact of which the Company is unable to estimate. To the extent any of the countries in which the Company’s vendors are located, and in particular, China, may have its exports or transaction of business with U.S. persons restricted by political action, the cost of imports from those countries could increase significantly and/or the ability to import goods from those countries may be materially impaired. In such an event, there could be an adverse effect on the Company until alternative arrangements for the manufacture of its products could be obtained on appropriate and favorable terms.

 

The import of the Company’s clothing and some of its accessories also had been subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign jurisdictions. These agreements had imposed quotas that limited the amount of certain categories of clothing that could be imported from these countries into the United States.

 

In 1994, the member-countries of the International Trade Organization completed the Uruguay Round of trade negotiations of the General Agreement on Tariffs and Trade and the Agreement was approved by the United States Congress. This pact, as it applied to textiles, was subsequently known as the WTO Agreement on Textiles and Clothing (the “ATC”), and was implemented on January 1, 1995. The ATC imposed a series of quotas on imports of textiles for a period of 10 years. The ATC expired, as scheduled, effective as of January 1, 2005, and all special textile quotas provided for under the ATC were eliminated. In early 2005, textile exports from China to the United States increased dramatically, and the United States successfully used the safeguard procedures provided under China’s accession agreement to the WTO to negotiate new quotas on textile imports from China through a Memorandum of Understanding, which is discussed in the next paragraph.

 

On November 8, 2005, the United States and China executed the Memorandum of Understanding Between the Governments of the United States of America and the People’s Republic of China Concerning Trade in Textile and Apparel Products (the “MOU”) pursuant to which the U.S. and China agreed to restrain levels for certain textile products produced or manufactured in China and exported to the United States between January 1, 2006 and December 31, 2008. The Company believes that the MOU had limited negative impact on its financial results and operations; however, the Company cannot predict how the MOU will affect its financial results and operations over the next two years or whether there might be other arrangements added in the future which impose other types of restrictions on imports of apparel and related accessories. In the event of any expanded or other significant protectionist trade actions that materially impact any of its foreign manufacturers, in particular those in China, the Company will evaluate alternative sourcing options and will work to mitigate any significant business risks. The Company believes that its principal competitors are subject to similar risks regarding any such potential trade measures.

 

The Omnibus Trade and Competitiveness Act of 1988 added a new provision to the Trade Act of 1974 dealing with intellectual property rights. This provision, which is commonly referred to as “Special 301” and which remains

effective even following the expiration of the ATC, directed the United States Trade Representative (the “USTR”) to designate those countries that deny adequate and effective intellectual property rights or fair and equitable market access to United States firms that rely on intellectual property. From the countries designated, the USTR is to identify “Priority Foreign Countries” those where the lack of intellectual property rights protection is most egregious and has the greatest adverse impact on United States products. The USTR is to identify and investigate as Priority Foreign Countries only those that have not entered into good faith negotiations or made significant progress in protecting intellectual property. Where such an investigation does not lead to a satisfactory resolution of such practices, through consultations or otherwise, the USTR is authorized to take retaliatory action, including the imposition of retaliatory tariffs and import restraints on goods from the Priority Foreign Country.

 

In addition to the list of Priority Foreign Countries, the USTR has created a two-tier “watch list” that requires the country so listed to make progress on intellectual property protection reform or risk designation as a Priority Foreign Country. Countries named on the first tier of the watch list, known as the “Priority Watch List,” are requested to make progress in certain areas by specific dates. Countries named to the second tier, known as the “Watch List,” are asked to improve their intellectual property protection efforts.

 

As of March 16, 2007, of the countries where the Company’s existing or planned key vendors have manufacturing operations or suppliers, none was a Priority Foreign Country. China, India and Turkey were on the Priority Watch List and Peru and Guatemala were on the Watch List. China was elevated to the Priority Watch List in 2005, after a special out-of-cycle review under Special 301, which is discussed below.

 

In early 2005, a special out-of-cycle review under Special 301 was initiated with respect to China because of concerns regarding weaknesses in China’s protection of intellectual property rights. At the conclusion of that out-of-cycle review, significant concerns were expressed regarding China’s protection of intellectual property rights, and China was moved from the Watch List to the Priority Watch List. In addition, the United States continues to evaluate whether to file a WTO dispute settlement case against China and whether to designate China as a Priority Foreign Country under Special 301. Furthermore, China continues to be monitored under a related provision of the Trade Act of 1974, section 306. Under either of these provisions, the USTR will be in a position to impose sanctions if China fails to adequately enforce existing bilateral agreements concerning intellectual property rights, and the USTR’s office has identified weak intellectual property rights protection and enforcement in China as one of its top priorities.

 

Of countries where the Company’s existing or planned key vendors have manufacturing operations, India, Peru, and Turkey enjoy Designated Beneficiary Developing Country (“DBDC”) status under the Generalized System of Preferences (“GSP”), a special status that is granted by the United States to developing nations. DBDC status allows certain products imported from those countries to enter the United States under a reduced rate of duty. In order to maintain that status, the countries are required to meet several criteria. The GSP was renewed in 2006 through December 31, 2008.

 

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 these or other 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 may also be adversely affected by political, social and infrastructure instability in any of the countries in which its goods are manufactured, politically-motivated trade sanctions or other restrictions by either the United States or the foreign country in which the vendor is located, significant fluctuation in the value of the U.S. dollar against applicable foreign currencies and restrictions on the transfer of funds.

 

Advertising and Promotion

 

The marketing program for the Company currently consists of the following integrated components:

 

 

The Company’s Direct Marketing efforts have been successful in driving traffic to stores and the direct to consumer channels. Most of the active Passport and Black Book customers maintained in the database currently receive an average of one mailer per month.

 

The success of loyalty programs is dependent on the number of active customers the programs support. “Active” customers are those who have purchased at one of the Company’s brands within the preceding 12 months. Chico’s Passport Club had approximately 3.2 million active customers at the end of fiscal 2006 versus approximately 2.9 million at the end of fiscal 2005. WH|BM’s Black Book showed significant growth in the number of active customers from 2005 to 2006, increasing to approximately 1.8 million at the end of fiscal 2006 from approximately 1.3 million at the end of fiscal 2005. Soma does not have its own loyalty program, but Soma customers can join the Chico’s Passport Club. The active customer base for Soma is growing rapidly year over year.

 

The Company experienced direct to consumer (internet and telephone) sales of approximately $53.5 million in fiscal 2006, which represented a 48% increase over the prior period. In addition, the Company’s contact center managed over a million phone calls in fiscal 2006. The Company anticipates mailers, national print and television advertisements, and web marketing will be part of a marketing budget that will be between 3.7% and 4.0% of net sales during fiscal 2007, versus 4.0% of net sales in fiscal 2006.

 

The Company also places additional emphasis on what it refers to as its “outreach programs.” These outreach programs include, among other events, VIP parties, fashion shows and wardrobing parties that are organized and hosted by its publicity managers, event coordinators, and by store managers and sales associates. As part of these outreach programs, the Company also encourages its managers and sales associates to become involved in community projects. The Company believes that these programs are effective marketing vehicles in providing introductions to new customers and it has developed programs to help its store level associates use these programs.

 

Competition

 

The women’s retail apparel business is highly competitive and has become even more competitive in the past several years. The Company’s stores compete with a broad range of national and regional retail chains, including other women’s apparel stores, department stores, and specialty stores, as well as local retailers in the areas served by the Company’s stores and mail order and internet merchandisers, all of which sell merchandise generally similar to that offered in its stores. Even discount department stores carry some merchandise which is designed to compete for some of the consumers that historically have been the target customers for the Company’s various brands. The perceived growth opportunities within the women’s apparel market has encouraged the entry of new competitors, including a few large, well known and established specialty retailers, as well as increased competition from existing competitors. Certain of these competitors have greater name recognition as well as greater financial, marketing and other resources.

 

The retailers that are believed to most directly compete with the Chico’s brand are the mid-to-high end department stores including Nordstrom’s, Dillards, Neiman-Marcus, Bloomingdale’s, Macy’s and Saks Fifth Avenue and specialty stores including The Gap, Talbots, J. Jill, The Limited, Banana Republic, Christopher & Banks, and Coldwater Creek, as well as local boutique retailers. The retailers that are believed to most directly compete with the WH|BM brand are the same mid-to-high end department stores named above and specialty stores which include Ann Taylor, Ann Taylor Loft, Banana Republic, Cache, Anthropologie, bebe, and Arden B. as well as

local boutiques. Although management believes there is currently limited direct competition for Soma merchandise largely because of the distinctive nature of the Company’s merchandise designed with the customer aged 35 and over in mind, the retailers that are believed to most directly compete with Soma stores are the same mid-to-high end department stores and certain of the specialty stores named above, local boutiques, and, to a more limited extent, Victoria’s Secret. The number of competitors and the level of competition facing the Company’s stores vary by the specific local market area served by each brand’s stores.

 

The following are several factors that the Company considers important in competing successfully in the retail apparel industry: newness and innovation of product styles, breadth of selection in colors, sizes and styles of merchandise; product procurement and pricing; ability to address customer preferences and be in line with fashion trends; reputation; quality of merchandise; store design and location; visual presentation; effective use of customer mailing lists and frequent shopper programs, advertising, and customer service. The Company believes that its emphasis on personalized service and customer assistance, the distinctive designs of its clothing and accessories, which provide a perceived high value, their exclusive availability at its stores, the locations of its stores, the effectiveness of the frequent shopper programs and its other marketing programs, are the various means by which the Company competes. Although the Company believes that it is able to compete favorably with other merchandisers, including department stores and specialty retailers, with respect to each of these factors, the Company believes it competes mainly on the basis of its superior customer service and distinctive merchandise selection.

 

Along with certain retail segment factors noted above, other key competitive factors for the catalog and Internet operations include the success or effectiveness of customer mailing lists, response rates, catalog presentation, merchandise delivery and web site design and availability. The direct-to-consumer operations compete against numerous catalogs and web sites, which may have greater circulation and web traffic.

 

Employees

 

As of February 3, 2007, the Company employed approximately 12,500 persons, approximately 42% of whom were full-time associates and approximately 58% of whom were part-time associates. The number of part-time associates fluctuates during peak selling periods. As of the above date, 90% of the Company’s associates worked in its front-line and outlet stores and in direct field supervision, 2% worked in the Company’s distribution center in Winder, Georgia and 8% worked in its corporate headquarters and support functions located in Fort Myers, Florida and several other satellite locations.

 

The Company has no collective bargaining agreements covering any of its associates, has never experienced any material labor disruption and is unaware of any efforts or plans to organize its associates. The Company contributes most of the cost of medical, dental and vision coverage for eligible associates and also maintains a 401(k), stock incentive and stock purchase plan. All associates also receive substantial discounts on Company merchandise. The Company considers relations with its associates to be good.

 

Trademarks and Service Marks

 

The Company, through its subsidiaries, is the owner of certain registered and common law trademarks and service marks (collectively referred to as “Marks”) and has a number of trademark and service mark applications pending.

 

The Company’s Marks registered in the United States include: CHICO’S, CHICO’S PASSPORT, M.A.P.S., MARKET BY CHICO’S, MOST AMAZING PERSONAL SERVICE, NO TUMMY, PASSPORT, BLACK MARKET, THE WHITE HOUSE, WHITE HOUSE BLACK MARKET, FASHION FOR BOTH SIDES OF YOU, FITIGUES and LEMONADE FOR LIFE. The Company has registered or is seeking to register a number of these Marks in certain foreign countries as well.

 

In the opinion of management, the Company’s rights in the Marks are important to the Company’s business. Accordingly, the Company intends to maintain its Marks and the related registrations and applications. The Company is not aware of any claims of infringement or other challenges to its rights to use any registered Marks in the United States or any other jurisdiction in which the Marks have been registered.

 

Available Information

 

The Company’s website, which includes a link to its investor relations page, is located at www.chicos.com. Through this website, the Company makes available free of charge all of its Securities and Exchange Commission (“SEC”) filings including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after those reports are electronically filed with the SEC. The Company also maintains various other data on this website, including its recent press releases, corporate governance information, beneficial ownership reports, institutional slide show presentations, quarterly and institutional conference calls and other quarterly financial data, e.g., historical store square footage, monthly sales tables, etc. The Company also operates principally selling websites at www.chicos.com, www.whitehouseblackmarket.com and at www.soma.com.

 

The Company has a Code of Ethics, which is applicable to all associates of the Company, including the principal executive officer, the principal financial officer, the principal accounting officer and the Board of Directors. The Company intends to post amendments to or waivers from its Code of Ethics (to the extent applicable to the Company’s chief executive officer, principal financial officer, principal accounting officer or its Directors) at this location on its website. Copies of the charters of each of the Company’s Audit Committee, Compensation and Benefits Committee and Corporate Governance and Nominating Committee as well as the Company’s Corporate Governance Guidelines, Code of Ethics and Stock Ownership Guidelines are available on the website in the Investor Relations section under Our Company or in print upon written request by any shareholder.

 

The Company has included the CEO and CFO certifications regarding its public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this report on Form 10-K. Additionally, the Company filed with the New York Stock Exchange (“NYSE”) the CEO’s certification regarding the Company’s compliance with the NYSE’s Corporate Governance Listing Standards (“Listing Standards”) pursuant to Section 303A.12(a) of the Listing Standards, which was dated July 19, 2006, and indicated that the CEO was not aware of any violations of the Listing Standards by the Company.

 

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 2007, the Company plans to open approximately 135-145 net new stores (excluding the impact of the 10 Fitigues stores planned closures or the 13 acquired franchise stores), of which 55-60 are expected to be Chico’s stores, 55-60 are expected to be WH|BM stores and 20-25 are expected to be Soma 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 daily, 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. 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 somewhat higher than at the WH|BM and Soma brands. As 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.

 

Impact on Selling, General and Administrative Expenses from the Opening of Larger Stores

 

The average size of the Chico’s and WH|BM stores has been increasing over the last several years. In particular, new Chico’s and WH|BM front-line stores were approximately 50% larger than the chain average in fiscal 2006 and are again expected to be between 40%-50% larger than the chain average in fiscal 2007. Although these stores are expected to produce profit dollars that will be in the range of each respective chain’s average profits, they will likely increase selling, general and administrative expenses as a percentage of sales due to their larger size and anticipated initial lower sales per selling foot. It is anticipated that these stores will eventually achieve profit margins equal to more mature stores, however, over the short term, it is likely to put pressure on the Company’s operating margin by increasing selling, general and administrative expenses as a percentage of sales. This could have a material adverse effect on the Company’s operating margin and stock price.

 

Risks Associated with Catalog and Internet Sales

 

The Company sells merchandise over the Internet through its websites, www.chicos.com, www.whitehouseblackmarket.com, and www.soma.com. Although the Company’s catalog and Internet operations encompassed only 3.3% of the Company’s total sales for fiscal 2006, it has been steadily growing. It is anticipated that the percentage will continue to grow and could grow faster than in the past, due to the Company’s concentrated efforts in the area. 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. Given the Company’s business strategy to target substantial growth in its catalog and Internet operations and thus increase sales penetration, supported by investment in new hardware, software and personnel, the risks associated with catalog and Internet operations are likely to be of greater significance in fiscal 2007 and future years. There can be no assurance that the Company’s catalog and Internet operations will be able to achieve targeted sales and profitability growth or even remain at their current level.

 

Dependence on Single Distribution Location

 

The Company’s distribution functions for all of its stores and for its catalog and Internet sales are handled from two separate facilities located beside each other in Barrow County, Georgia. Any significant interruption in the operation of either of these distribution facilities 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 contingency plans and 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 U.S. 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.

 

Changes in Accounting Principles, Interpretations and Practices

 

Financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles can be complex for certain aspects of the Company’s business and may involve subjective judgments. A change from current accounting standards could have a significant effect on the Company’s results of operations. For example, in fiscal 2006, the Company adopted SFAS 123R, which addressed the accounting for share-based payments. In fiscal 2006, stock-based compensation reduced earnings per share by approximately $.07 per diluted share. Although the adoption of SFAS 123R is expected to continue to have a significant impact on the Company’s results of operations, future changes to various assumptions used to determine the fair-value of awards issued or the amount and type of equity awards granted may impact future stock-based compensation expense and further reduce the Company’s earnings.

 

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 but could raise complex factual and legal issues, which are subject to multiple risks and uncertainties and 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 Expansion

 

During the first quarter of fiscal 2006, the Company completed the purchase of approximately 22 acres of property adjacent to the Company’s current headquarters site on Metro Parkway in Fort Myers, Florida to serve as the base for expansion of the Company’s corporate headquarters operations. The total cost for this property, along with the buildings, was approximately $26.4 million, which includes all transaction costs as of February 3, 2007. The property includes seven existing buildings aggregating approximately 200,600 square feet of space, most of which continues to be leased to unrelated third parties. As leases expire, the Company anticipates it will be utilizing the vacant space, which is likely to require modifications, for its expanding corporate headquarters needs. 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 that may be required for its headquarters expansion, 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 expansion of the headquarters campus or other capital expenditures. In addition, 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 its shopping centers. In addition, local authorities or shopping center management could close 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 or demands (such as the fashion missteps that occurred in fiscal 2006) 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. Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at discounted or closeout prices, such as that which occurred in the latter half of fiscal 2006. 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 its Offerings

 

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, other raw materials and labor may fluctuate significantly, depending on many factors, including natural resources, increased freight costs, increased labor costs and weather conditions. In the future, the Company may not be able to pass all or a portion of such higher fabric, other raw materials or labor 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 produce 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 clothing and accessories produced within the United States, a majority of the Company’s clothing and accessories are still produced outside the United States and the percentage has been 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 produced or any of the countries in which the Company’s clothing and accessories may be produced 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 produced and adverse changes in foreign exchange rates.

 

Vendor’s Compliance with Labor Practices Requirements

 

Although the Company has formal 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 vendors. The violation of labor or other laws by one of its key independent vendors or the divergence of an independent vendor’s labor practices from those generally accepted as ethical by the Company 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, results of operations and its stock price.

 

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 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 New Concepts

 

A significant portion of the Company’s business strategy involves developing and growing new concepts, including brand extensions within established brands. The Company’s ability to succeed in 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.

 

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. During fiscal 2006, the Company continued to expand the presence of the Soma brand by opening 37 new Soma stores. The Company recently announced it is slowing its planned new store growth in Soma stores to 20-25 net new stores in fiscal 2007 in order to improve its operations and profitability. The Company believes the Soma brand reduced the Company’s earnings per share by $.07 for fiscal 2006 and the Company estimates it will reduce fiscal 2007 earnings by between $.06 and $.10. There can be no assurance that the Company will be able to develop and grow the Soma concept (or any other new concept) to a point where it will become profitable, or generate positive cash flow. If the Company cannot successfully execute its growth strategies for its new concepts or brand extensions, the Company’s financial condition and results of operations may be adversely impacted.

 

Energy Prices

 

Oil prices have fluctuated dramatically in the past and have generally risen in fiscal 2006. If the previous trend of increasing oil prices were to continue, this trend may result in an increase in the Company’s transportation costs for distribution, utility costs for its retail stores and costs to purchase apparel from its vendors. In addition, rising oil prices could adversely affect consumer spending and demand for the Company’s products and increase its operating costs, both of which could have a material adverse effect on the Company’s business, financial condition 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 February 3, 2007, the Company’s goodwill and other intangible assets (trademark) totaled approximately $62.6 million and $34.0 million, respectively. The Company acquired all of the trademark value through its acquisition of The White House, Inc. and the current goodwill balance was also recognized primarily through its acquisition of The White House, Inc. At the time of the White House 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. During fiscal 2006, the Company decided to close the Fitigues brand operations and as a result, the Company recorded an impairment loss of approximately $6.8 million. If the Company determines in the future that other impairments have occurred, the Company would be required to write off the impaired portion of goodwill or the WH|BM 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.

 

The foregoing list of risk factors is not exhaustive. There can be no assurance that the Company has correctly identified and appropriately assessed all factors affecting its business operations or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to the Company or that it currently believes to be immaterial also may adversely impact the business. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the Company’s business, financial condition and results of operations.

 

None.

 

Stores

 

The Company’s stores are located throughout the United States as well as the U.S. Virgin Islands and Puerto Rico, with a significant concentration in California, Florida, Texas and the northeastern United States.

 

As a matter of policy, the Company prefers to lease its stores and all the stores currently operated by the Company are leased. Lease terms typically range from five to ten years and approximately 60% contain one or more renewal options. Historically, the Company has exercised most of its lease renewal options. Approximately 75% of the leases have percentage rent clauses which require the payment of additional rent based on the store’s net sales in excess of a certain threshold and approximately 29% have early cancellation clauses that allow the Company an early termination of the lease if certain sales levels are not met in specific periods.

 

The following table, which covers all of the 930 Company-owned stores existing as of March 19, 2007, sets forth (i) the number of leases that will expire each year if the Company does not exercise renewal options and (ii) the

number of leases that will expire each year if the Company exercises all of its renewal options (assuming in each case the lease is not otherwise terminated by either party pursuant to any other provision thereof):

 

 

Headquarters and Distribution Center

 

The Company’s World Headquarters is located on approximately 57 acres in Fort Myers, Florida. The facility currently consists of its corporate and administrative headquarters that comprise approximately 147,000 square feet, and includes the Chico’s and Soma product development offices (including pattern making, sewing and sampling activities), as well as a separate 16,500 square foot office building that is being used as the WH|BM headquarters.

 

During fiscal 2006, the Company completed the purchase of an additional approximately 22 acres (which is included in the 57 total acres above) of property adjacent to the Company’s current headquarters site on Metro Parkway in Fort Myers, Florida to serve as the base for expansion of the Company’s corporate headquarters operations. The total cost for this property, along with the buildings, was approximately $26.4 million, which includes all transaction costs as of February 3, 2007. The property includes seven existing buildings aggregating approximately 200,600 square feet of space, most of which continues to be leased to unrelated third parties. As leases expire, the Company anticipates it will be utilizing the vacant space, which is likely to require modifications, for its expanding corporate headquarters needs. The Company is currently developing an overall plan for the future buildout of all of its available property.

 

In fiscal 2005, the Company completed the purchase of 105 acres in south Fort Myers, Florida originally intended for the location of a new corporate headquarters campus for a total cost of $38.1 million, which included all transaction costs and $5.4 million of road impact fees. When the 22 acre property adjacent to its current headquarters site became available, the Company decided to plan its expansion at its current location and to hold the 105 acre property for investment. During late 2006, management committed to a plan to sell the 105 acre property and the Company anticipates that the land will be sold within the next 12 months. The Company does not expect that any such sale will have any material impact on its statements of operations or overall financial position.

 

In order to help with immediate space needs, the Company has leased approximately 12,500 square feet of off-site space in the Fort Myers area for its call center and has leased approximately 21,000 square feet of off-site space for its finance department.

 

The Company also owns 71 acres of land in Barrow County, Georgia with its distribution and fulfillment centers situated thereon. These facilities consist of 202,000 square feet of distribution space, 50,000 square feet of fulfillment and call center space and 31,000 square feet of office space. At the time of the original acquisition, the Company also secured a commitment from the local county to permit the addition of up to another 200,000 square feet of distribution space and 6,000 square feet of office space in the future, subject to final approval by the local county at the time the Company petitions the county to add the additional square footage.

 

With respect to addressing the needs for additional distribution center space, the Company is evaluating its requirements and the appropriate timing to make additional distribution center capacity available. The Company’s present goal in this regard is to begin design work in fiscal 2007. It is currently anticipated that the Company will require additional distribution space late in fiscal 2008 or early in fiscal 2009 and, initially, the Company is focusing its evaluation on the expansion of its current distribution center on the existing adjacent land in Barrow County that is already owned by the Company. In connection with its ongoing evaluation of the strategic long-term distribution needs of its brands, the Company may also explore adding a separate distribution center for its Soma brand.

 

All recent property purchases have been funded from the Company’s existing cash and marketable securities balances.

 

The Company was named as the defendant in a suit filed in October 2004 in the Circuit Court of Lee County, Florida, Ajit Patel v. Chico’s FAS, Inc. The Complaint alleges that the Company breached an implied contract with the plaintiff, the Company’s former Vice President — Chief Information Officer, and, alternatively, that the Company fraudulently induced the plaintiff to work for the Company. It is the Company’s position that no contract, express or implied, existed between the Company and the plaintiff and that the Company did not engage in any fraudulent conduct. The Company has asserted certain counterclaims against the plaintiff. No trial date has yet been set. The Company believes the plaintiff’s case is without merit and will continue to vigorously defend the litigation and prosecute its counterclaims.

 

The Company is not a party to any other legal proceedings, other than various claims and lawsuits arising in the normal course of business, none of which the Company believes should have a material adverse effect on its financial condition or results of operations.

 

None.

 

ITEM A.  EXECUTIVE OFFICERS OF THE COMPANY

 

The following table sets forth certain information regarding the Company’s existing executive officers:

 

 

 

 

Scott A. Edmonds is President and Chief Executive Officer of the Company. Mr. Edmonds has been employed by the Company since September 1993, when he was hired as Operations Manager. In February 1994, he was elected to the position of Vice President-Operations and, effective January 1, 1996, he was promoted to the position of Senior Vice President-Operations. In February 2000, Mr. Edmonds was further promoted to Chief Operating Officer, in September 2001, Mr. Edmonds was promoted to President, and in September 2003, Mr. Edmonds was appointed to the additional office of Chief Executive Officer. Prior to joining the Company in 1993, Mr. Edmonds was employed by Ferguson Enterprises, Inc., a plumbing and electrical wholesale company since 1980. His last position with Ferguson was President of the Fort Myers, Florida Division.

 

Charles J. Kleman, is Executive Vice President-Finance, Chief Financial Officer, and Treasurer of the Company. Mr. Kleman has been employed by the Company since January 1989, when he was hired as the Company’s Controller. In 1991, he was elected as Vice President/Assistant Secretary. In 1992, Mr. Kleman was designated as the Company’s Chief Financial Officer. In September 1993, he was elected to the additional position of Secretary/Treasurer. Mr. Kleman served as Secretary until October 2004. He served as Senior Vice President-Finance from January 1996 through November 1996, effective December 1996, was promoted to the position of Executive Vice President-Finance and effective November 2003, was promoted to the additional position of Chief Operating Officer and served in such capacity until August 2005. In February 2007, Mr. Kleman announced that he would be stepping down from his positions as Executive Vice President-Finance, Chief Financial Officer, and Treasurer of the Company, upon the Company’s identification and appointment of a successor Chief Financial Officer and Treasurer. He also indicated that he would step down from his director position at the same time that he steps down from his officer positions. Prior to joining the Company, Mr. Kleman was an independent accounting consultant in 1988, and from 1986 to 1988, Mr. Kleman was employed by Electronic Monitoring & Controls, Inc., a manufacturer and distributor of energy management systems, as its Vice President/Controller. Prior to 1986, Mr. Kleman was employed by various public accounting firms, spending over four years of that time with Arthur Andersen & Co.

 

Michele M. Cloutier is Executive Vice President-Chief Merchandising Officer-Chico’s for the Company, having just been promoted to that position in March 2007. Ms. Cloutier joined the Company in September 2006 as Executive Vice President-General Merchandise Manager-Chico’s, after having served in the capacity of an independent consultant from 2004-2006. From 2003 to 2004, Ms. Cloutier served as Senior Vice President-General Merchandising Manager at Ann Taylor Stores. From 1993 to 2002, she held several senior merchandising roles in multiple divisions at The Gap, Inc. Earlier in her specialty retailing career, Ms. Cloutier held buying positions at Macy’s and Abraham & Strauss.

 

Patricia Murphy Kerstein is Executive Vice President for the Company. Ms. Murphy Kerstein has been with the Company since September 1997, when she was hired as the Senior Merchant. In April 1998, she was promoted to the position of General Merchandise Manager, in June 1999, she was promoted to Vice President-General Merchandise Manager, in August 2000, she was promoted to Senior Vice President-General Merchandise Manager, and in January 2003, Ms. Murphy Kerstein was promoted to Executive Vice President-Chief Merchandising Officer. Ms. Murphy Kerstein stepped down from her Chief Merchandising Officer position in March 2007 and is scheduled to step down from her position as Executive Vice President in March 2008. After March 2008, she will continue to serve the Company as an executive consultant. From February 1987 until September 1997, Ms. Murphy Kerstein was Vice President of Merchandising and Director of Fashion for Doncaster and from October 1985 until February 1987 was Merchandiser and National Sales Manager for Caribou Sportswear. From 1981 until 1985, she held various positions including Divisional Merchandise Manager and Director of Fashion Coordination for Lane Bryant, a division of the Limited.

 

Gary A. King is Executive Vice President-Chief Information Officer for the Company. Mr. King joined the Company in October 2004 after five years at Barnes & Noble, Inc., where he most recently served as Vice President, Chief Information Officer. From 1988 to 1999, Mr. King held various positions with Avon Products, Inc. including Vice President, Global Information Technology. From 1982 to 1987, Mr. King held various system management positions with Unisys Corporation and Burroughs Corporation.

 

Michael J. Leedy is Executive Vice President-Chief Marketing Officer for the Company, having just been promoted to that position in March 2007. Mr. Leedy joined the Company in April 2006 as Senior Vice President-

Chief Marketing Officer. Prior to joining the Company, Mr. Leedy spent over ten years with American Eagle Outfitters, Inc., where he most recently served as Executive Vice President and Chief Marketing Officer. From 1993 to 1995, Mr. Leedy served as President of Method, Inc., a retail brand strategy firm providing consulting services to other retailers. From 1991 to 1993, Mr. Leedy held various positions with The Limited, Inc.

 

Mori C. MacKenzie is Executive Vice President-Chief Stores Officer for the Company. Ms. MacKenzie has been with the Company since October 1995, when she was hired as the Director of Stores. From June 1999 until October 2001, she served as Vice President-Director of Stores. In October 2001, Ms. MacKenzie was promoted to Senior Vice President-Stores, and effective February 2004 she was promoted to the position of Executive Vice President-Chief Stores Officer. From January 1995 until October 1995, Ms. MacKenzie was the Vice President of Store Operations for Canadians Corporation. From August 1994 until December 1994, she was the Vice President of Store Development for Goody’s Family Clothing. From April 1992 until August 1994, Ms. MacKenzie was the Vice President of Stores for United Retail Group (“URG”) and from August 1991 until April 1992 she was employed by Conston Corporation, a predecessor of URG. In addition, Ms. MacKenzie was Vice President-Stores for Park Lane from November 1987 until July 1991, and was Regional Director of Stores for the Limited, Inc. from June 1976 until October 1987.

 

Charles L. Nesbit, Jr. is Executive Vice President-Chief Operating Officer for the Company. Mr. Nesbit has been with the Company since August 2004, when he was hired as Senior Vice President-Strategic Planning and Business Development. He was promoted to Executive Vice President-Operations in April 2005 and to the additional title of Chief Operating Officer in August 2005. Prior to joining the Company, Mr. Nesbit spent twenty years at the Sara Lee Corporation where he most recently served as a corporate vice president and Chief Supply Chain Officer for the corporation’s U.S. and Canada apparel operations. He served as President and Chief Executive Officer of Sara Lee Intimate Apparel, the largest intimate apparel company in the United States and Canada, from 1999 to 2003, and President and Chief Executive Officer of the Bali Company from 1996 to 1999.

 

Patricia Darrow-Smith is Brand President-White House | Black Market for the Company, having just been promoted to that position in March 2007. Ms. Darrow-Smith joined the Company in September 2003 as Senior Vice President-Merchandising of The White House, Inc. as a result of the acquisition of The White House, Inc. by the Company. In April 2004, she was appointed Senior Vice President-General Merchandise Manager-White House for the Company. She was promoted to Senior Vice President-Chief Creative Officer-White House for the Company and appointed as President of White House | Black Market, Inc., a wholly owned subsidiary of the Company, in June 2006. From 1986 to September 2003 Ms. Darrow-Smith served as the most senior merchandising executive of The White House, Inc., most recently as Executive Vice President, Merchandising. Ms. Darrow-Smith previously worked for the Hyatt Hotels Corporation.

 

A. Alexander Rhodes is Senior Vice President-General Counsel and Secretary for the Company. Mr. Rhodes joined the Company in January 2003 as its Intellectual Property Counsel, expanding his oversight of legal matters for the Company into several other areas until October 2004, when he was promoted to Vice President-Corporate Counsel and Secretary. In April 2006, Mr. Rhodes was promoted to Senior Vice President-General Counsel and Secretary. Mr. Rhodes graduated from the Stetson University College of Law in 1994. From 1997 through December 2002, Mr. Rhodes practiced law with the Annis Mitchell Cockey Edwards & Roehn and Carlton Fields law firms working primarily in the areas of commercial litigation and intellectual property.

 

Michael J. Kincaid is Senior Vice President-Finance, Chief Accounting Officer and Assistant Secretary for the Company. Mr. Kincaid has been with the Company since August 1999 when he was hired as Controller and Director of Finance. In October 2001, Mr. Kincaid was promoted to Vice President-Finance, in November 2003, Mr. Kincaid was promoted to the additional position of Chief Accounting Officer, in December 2004, Mr. Kincaid was elected to the additional position of Assistant Secretary, and in March 2005, was promoted to Senior Vice President-Finance. From 1991 to 1999, Mr. Kincaid was employed by Tractor Supply Company, most recently as Vice President-Controller, Treasurer and Secretary. From 1981 to 1991, he held various management and accounting positions with Cole National Corporation, Revco D.S., Inc. and Price Waterhouse.

 

There are no arrangements or understandings pursuant to which any officer was elected to office. Executive officers are elected by and serve at the discretion of the Board of Directors.

 

The Company’s Common Stock trades on the New York Stock Exchange (“NYSE”) under the symbol “CHS”. On March 19, 2007, the last reported sale price of the Common Stock on the NYSE was $22.05 per share.

 

The following table sets forth, for the periods indicated, the range of high and low sale prices for the Common Stock, as reported on the New York Stock Exchange:

 

 

 

Although the Company currently does not intend to pay any cash dividends over the near term and intends to retain its earnings for the future operation and expansion of the Company’s business, the Company may reconsider this intention as the Company monitors its build up of cash reserves. Any determination to pay dividends in the future will be at the discretion of the Company’s Board of Directors (the “Board”) and will be dependent, in addition, upon the Company’s results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors.

 

In September 2004, the Company’s Board approved the repurchase, over a twelve-month period ending in September 2005, of up to $100 million of the Company’s outstanding common stock. The Company repurchased 275,000 shares of its common stock during the third quarter of fiscal 2004 in connection with this stock repurchase program, at a total cost of approximately $5.0 million; no additional repurchases occurred during fiscal 2004 or fiscal 2005 and the balance of the authorized repurchase expired.

 

In March 2006, the Company’s Board of Directors (the “Board”) approved the repurchase, over a twelve-month period ending in March 2007, of up to $100 million of the Company’s outstanding common stock. During fiscal 2006, the Company repurchased 3,081,104 shares of its common stock in connection with this stock repurchase program, which represented the entire $100 million initial stock repurchase program authorized by the Company’s Board.

 

In May 2006, the Company announced that its Board had approved the repurchase of an additional $100 million of the Company’s common stock over a twelve month period ending in May 2007. During fiscal 2006, the Company repurchased 3,591,352 shares of its common stock in connection with this stock repurchase program, which represented the entire additional $100 million program authorized by the Company’s Board. In addition, in the fourth quarter of fiscal 2006, the Company repurchased an additional 7,090 restricted shares as more particularly set forth in the chart below.

The following table sets forth information concerning purchases made by the Company of its common stock for the periods indicated (dollar amounts in thousands, except per share amounts):

 

 

 

 

 

Five Year Performance Graph

 

The following graph compares the cumulative total return on the Company’s common stock with the cumulative total return of the companies in the Standard & Poor’s 500 Index and the Standard & Poor’s 500 Apparel Retail Index. Cumulative total return for each of the periods shown in the Performance Graph is measured assuming an initial investment of $100 on February 2, 2002 and the reinvestment of dividends.

 

Comparison of Cumulative Five Year Total Return

 

 

 

Selected Financial Data at the dates and for the periods indicated should be read in conjunction with, and is qualified in its entirety by reference to the financial statements and the notes thereto referenced in this Annual Report on Form 10-K. The Company’s fiscal years end on the Saturday closest to January 31 and are designated by the calendar year in which the fiscal year commences.

 

 

 

 

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto.

 

Executive Overview

 

The Company is a specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items operating under the Chico’s, WH|BM, and Soma by Chico’s (“Soma”) brand names.

 

Chico’s, which began operations in 1983, focuses on fashion conscious women who are 35 and over with a moderate to high income level. The styling interprets fashion trends in a unique, relaxed, figure-flattering manner using mainly easy-care fabrics. WH|BM, which the Company acquired in September 2003, and which began operations in 1985, targets middle-to-upper income women who are 25 years old and up. The styling is contemporary, feminine and unique, assorted primarily in the classic and timeless colors of white and black and related shades. Soma was initially launched in August 2004. This concept offers foundation products in intimate apparel, sleepwear, and activewear that is aimed at the Chico’s target customer, but with focus and styling that is expected to ultimately appeal to a broader customer base. In early fiscal 2006, the Company acquired the Fitigues brand, which had began its operations in 1988 and which was a fitness inspired brand, offering stylish yet comfortable activewear clothing. During fiscal 2006, the Company completed an internal evaluation of the Fitigues brand and, in the fourth quarter, decided to close down operations of the Fitigues brand. The Company began closing the Fitigues brand stores in the first quarter of fiscal 2007. The Company anticipates all 10 of the remaining Fitigues stores at fiscal year end and the website will be shut down by the end of the second quarter of fiscal 2007.

 

The Company earns revenues and generates cash through the sale of merchandise in its retail stores, to its Chico’s franchisees, and through its call centers, which handle sales related to the Chico’s, WH|BM, and Soma catalog and online operations.

 

Since the Company opened its first Chico’s store in 1983 principally selling folk art, its retail store system, now selling principally women’s apparel, has grown to 930 stores as of March 19, 2007, including 593 Company-owned Chico’s stores, 277 WH|BM stores, and 51 Soma stores (the remaining 9 stores are the Fitigues stores that are in the process of being closed). During fiscal 2006, the Company opened 145 net new Company-owned stores and repurchased one of its franchise stores (this number of stores excludes the Fitigues stores acquired in early fiscal 2006). Since the beginning of fiscal 2007, the Company has reacquired the remaining 13 formerly franchised stores. Those 13 stores are included in the 593 Company-owned Chico’s stores as of March 19, 2007.

 

From February 3, 2002 through February 3, 2007, the Company opened 515 new Company-owned stores, acquired 2 stores from a franchisee, and one franchisee opened 4 new franchised stores. Of the new Company-owned stores, 157 were opened in fiscal 2006, 109 were opened in fiscal 2005, 109 were opened in fiscal 2004 (net of the 8 former Pazo stores that were closed and converted into 5 WH|BM stores and 3 Soma stores), 74 were opened in fiscal 2003, and 66 were opened in fiscal 2002. During this same time period, the Company closed 29 Company-owned stores and no franchised stores were closed.

 

The Company has revised its targeted new store openings for fiscal 2007 to include 135-145 new stores (excluding the 10 Fitigues planned closures and the 13 stores reacquired from its franchisees). Of this total, 55-60 are expected to be Chico’s stores, 55-60 are expected to be WH|BM stores, and 20-25 are expected to be Soma stores. The Company also currently anticipates 45-55 relocations/expansions in fiscal 2007. Planned square footage growth for fiscal 2007 is now estimated to be approximately a 22% to 24% increase in selling square footage, slightly lower than the originally announced goal of a 25% increase.

 

The primary factors which historically have influenced the Company’s profitability and success have been its growth in number of stores and selling square footage, its positive comparable store sales, and its strong operating margin. In the last five years the Company has grown from 311 stores as of February 3, 2002 to 920 stores as of February 3, 2007 (910 stores if the Fitigues stores slated for closing are excluded), which includes the significant store growth resulting from the acquisition of the 107 WH|BM stores in fiscal 2003 and the launch of the Soma

brand in fiscal 2004. The Company continues to expand its presence through the opening of new stores, the development of new opportunities such as Soma and through the extension of its merchandise line. The Company anticipates that its rate of growth (measured by overall growth in sales, growth in comparable store sales, and other factors) can be expected to decrease from the rate of overall sales growth experienced in recent years (which has been in the range of 30-40%), such anticipated decrease in rate of growth reflecting in large part the Company’s significantly increased size, its more manageable 22%-24% net square footage growth goal for fiscal 2007, its 15% net square footage growth goal for fiscal 2008 and the expectation that its same store sales may continue to experience more moderate and flatter increases and may experience decreases from time to time, as was the case in the second half of fiscal 2006. The Company generally expects to continue to generate the necessary cash flow to fund its expansion and to take advantage of new opportunities. The Company has no long-term debt and foresees no current need to incur long-term debt to support its continued growth.

 

Factors that will be critical to determining the Company’s future success include, among others, managing the overall growth strategy, including the ability to open and operate stores effectively, maximizing efficiencies in the merchandising, product development and sourcing processes, maintaining high standards for customer service and assistance, maintaining newness, fit and comfort in its merchandise offerings, matching merchandise offerings to customer preferences and needs, effectuating customer acceptance of new store concepts, integrating new or acquired businesses, maturing the newer brand concepts, implementing the process of senior management succession, and generating cash to fund the Company’s expansion needs. In order to monitor the Company’s success, the Company’s senior management monitors certain key performance indicators, including:

 

 

• Loyalty Clubs and Customer Development — Management believes that a significant indicator of the Company’s success is the extent of the growth of its loyalty programs, the “Passport Club” and “The Black Book”, and support for such loyalty programs that is provided through its personalized customer service training programs and its marketing initiatives. The Passport Club, the Chico’s and Soma frequent shopper club, features discounts and other special promotions for its members. Preliminary members may join the Passport Club at no cost and, upon spending $500, customers automatically become permanent members and are entitled to a lifetime 5% discount and other benefits. The Black Book loyalty program, the WH|BM frequent shopper club, is similar to the Passport Club in most key respects except that customers become

permanent members upon spending $300, compared to $500 for the Passport Club. The Company believes that the continued growth in new members and repeat shopping of its existing Passport and Black Book club members indicates that the Company is still generating strong interest from its customers due in large part to the Company’s commitment to personalized customer service and constant newness of product. “Active” customers are those who have purchased at one of the Company’s brands within the preceding 12 months.

 

As of February 3, 2007, the Company had approximately 1.6 million active Chico’s and Soma permanent Passport Club members and approximately 1.6 million active preliminary Passport Club members. In fiscal 2006, active permanent Passport Club members accounted for approximately 83% of overall sales, slightly higher than in fiscal 2005, and active preliminary members accounted for approximately 14% of overall sales. During fiscal 2006, active permanent Passport members spent, on average, over 60% more per transaction than did active preliminary members.

 

As of February 3, 2007, WH|BM had approximately 0.6 million active permanent Black Book members and approximately 1.2 million active preliminary Black Book members. In fiscal 2006, the active permanent Black Book members accounted for 63% of overall sales, while active preliminary members accounted for 31% of overall sales. During fiscal 2006, active permanent Black Book members spent, on average, over 70% more per transaction than did active preliminary members.

 

The Company believes that the growth and consistency of its Passport and Black Book clubs indicate that the Company is still generating strong interest from new and existing customers, many of whom tend to become long-term loyal customers, due in large part to the Company’s commitment to personalized customer service and constant newness of product.

 

 

In addition to the key performance indicators mentioned above, the Company’s operational strategies are focused on qualitative factors as well. The Company’s ability to manage its multiple brands, to develop and grow its newer Soma concept, to expand the Company’s direct to consumer business, to secure new store locations including relocations and/or expansions of existing stores and to launch new product categories within all brands, are all important strategies that, if successful, should contribute to the continued growth of the Company.

 

The Company continues to evaluate and monitor the progress of its intimate apparel initiative with its Soma brand. The Company recognizes that the Soma business can be seen as complementary to its basic apparel business, but also understands that many aspects of this business require unique attention. The Company monitors Soma merchandise offerings in a manner similar to its other brands with special emphasis on repeat purchases in the foundation category. The Company anticipates that additional investment will be required to establish the Soma brand as a suitable business that meets the profitability goals of the Company over the longer term. The Company estimates that the Soma brand reduced the Company’s earnings per share by $.07 for fiscal 2006 and the Company believes it will reduce fiscal 2007 earnings by between $.06 and $.10. The Company further believes that an impact on earnings per share of this order is acceptable when balanced against the potential of the brand’s perceived longer term potential.

 

In fiscal year 2006, the Company reported net sales, operating income and net income of $1.65 billion, $251 million and $167 million, respectively. Net sales increased by 17.2%, while operating income and net income decreased by 15.8% and 14.1%, respectively, from the prior fiscal year. The Company’s gross margin decreased to 58.7% in fiscal 2006 from 61.0% in fiscal 2005. The decrease in the gross profit percentage was primarily due to lower merchandise margins at the Chico’s front-line stores (due mostly to more extensive markdowns), the mix effect of WH|BM and Soma sales becoming a larger portion of the Company’s overall net sales, increased inventory clearance costs and the continued investment in the Company’s product development teams. Gross profit percentage was also negatively impacted by the portion of the incremental stock-based compensation expense included in cost of goods sold, which reduced the gross margin by approximately 30 basis points due to the adoption of SFAS 123R and the related change in accounting for stock-based compensation.

 

General, administrative and store operating expenses (including depreciation and amortization and impairment of goodwill) increased as a percentage of net sales over the prior period by approximately 370 basis points primarily due to increased store operating expenses specifically for the Chico’s brand (primarily increases in personnel and occupancy costs) attributable mainly to the deleverage associated with the relatively flat comparable store sales in the Chico’s stores and to the Company’s planned increase in store payroll as a percentage of sales. General, administrative and store operating expenses were also impacted by the portion of the incremental stock-based compensation expense included in these expenses due to the adoption of SFAS 123R, which had an approximate 80 basis point impact, and the increased occupancy costs, including depreciation and amortization expense due to capital expenditures for new, remodeled and expanded stores, which generally are larger in size than in prior years and consequently require increased capital expense, and, to a lesser extent, from the accelerated depreciation of certain “legacy” software systems to be replaced in connection with the Company’s decision to move to the SAP software platform. In addition, the Company’s results were also impacted by approximately an aggregate of $8.6 million of impairment related expenses regarding the planned closure of the Fitigues brand. The $8.6 million, or approximately 50 basis points, consisted primarily of an impairment loss on goodwill totaling $6.8 million (which is shown on a separate line within the consolidated statements of operations), accelerated fixed asset depreciation of $1.2 million, and other impairment related charges, mainly for inventory, totaling $0.6 million, with no comparable amounts recorded in the prior period. Sales and profitability trends are further discussed in the Results of Operations section.

 

Future Outlook

 

The Company has been carefully reviewing and rethinking its recent practice of providing specific quarterly and annual sales and earnings guidance. The retail industry is unique in providing monthly sales and comparable store sales data, as well as detailed operational data, for individual brands, which provides interested parties with much greater detail than is presented in the Company’s financial statements. Therefore, while the Company remains committed to maintaining the transparency of its financial reporting, the Company will no longer provide specific quarterly or annual sales and earnings guidance; provided, however, that the Company does expect to comment on the street consensus estimates from time to time, as it had done in the past and when it believes necessary and appropriate. In the March 6, 2007 year end earnings release, for example, the Company stated that it believed that if it achieved a low single digit same store sales increase on a consolidated basis for fiscal 2007, the current consensus First Call estimates at that time for fiscal 2007 sales and diluted earnings per share appeared reasonable.

 

Looking forward to fiscal 2008, the Company’s initial plan contemplates targeting an approximate 15% increase in its selling square footage, which is expected to result from approximately 105-115 net new stores and 30-50 relocations and expansions of existing stores. The preliminary breakdown of new stores by brand for fiscal 2008 is as follows: 40-50 Chico’s stores, 50-60 WH|BM stores, and 5-15 Soma stores.

 

Results of Operations

 

Net Sales

 

The following table shows net sales by Company-owned Chico’s/Soma stores, net sales by Company-owned WH|BM stores, net sales by catalog and Internet, and other net sales in dollars and as a percentage of total net sales for the fiscal years ended February 3, 2007 (fiscal 2006 or “current period”, which consisted of 53 weeks), January 28, 2006 (fiscal 2005 or “prior period”, which consisted of 52 weeks) and January 29, 2005 (fiscal 2004, which consisted of 52 weeks) (dollar amounts in thousands):

 

Net sales by Company-owned Chico’s, Soma and WH|BM stores increased in the current period from the prior period, both in the aggregate and separately by brand, primarily due to new store openings, and to a lesser extent, from the slight overall increase in the Company’s comparable store net sales. A summary of the factors impacting year-over-year sales increases is provided in the table below (dollar amounts in thousands):

 

 

 

 

The comparable store sales increase of 2.1% in fiscal 2006 was driven primarily by the 11% increase in comparable store sales at the WH|BM stores which resulted primarily from an increase in the number of transactions compared to fiscal 2005 and, to a lesser extent, from an increase of 2.5% in the WH|BM average unit retail price (which average unit retail price is a financial indicator, the percentage change of which is believed by management to represent a reasonable approximation of the percentage change in Company store net sales attributable to price changes or mix). The overall comparable store sales increase was offset by an essentially flat comparable store sales result at the Chico’s and Soma stores which resulted primarily from a decrease of 1.6% in the average unit retail price offset by an increase in the number of transactions. In fiscal 2006, WH|BM same store sales represented approximately 21% of the total same store sales base compared to 16% in fiscal 2005. The comparable store sales increase of 14.3% in fiscal 2005 was driven primarily by an increase in the number of transactions compared to fiscal 2004 and, to a lesser extent, from an increase of 0.4% in the Chico’s average unit retail price and an increase of 7.8% in the average unit retail price for WH|BM.

 

WH|BM stores were included in the comparable store sales calculation beginning in October 2004, which was 12 full months after the acquisition date of September 5, 2003. For fiscal 2004, WH|BM sales prior to October 2004 are included in new store sales. Sales from Soma stores in fiscal 2005 were included in the comparable store sales calculation beginning in September 2005 and did not have a material impact on the calculation. In fiscal 2004, all other sales from Soma stores were included in new store sales. Sales from Fitigues stores were included in new store sales in fiscal 2006 and will be included in “discontinued operations” in fiscal 2007 due to the planned closure of the brand.

 

Net sales by catalog and Internet for fiscal 2006 (which included merchandise from all four of the Company’s brands) increased by $17.4 million, or 48.1%, compared to net sales by catalog and Internet for fiscal 2005. It is believed that the increase was principally attributable to significant increases in WH|BM and Soma merchandise items available on the website, and to a lesser extent, increases in the Chico’s merchandise available for sale through the Internet and the increased circulation of catalog mailings.

 

Net sales by catalog and Internet for fiscal 2005 (which included mostly Chico’s and WH|BM merchandise and a small offering of Soma merchandise) increased by $9.3 million, or 34.7%, compared to net sales by catalog and Internet for fiscal 2004. It is believed that the increase was principally attributable to the increased circulation of catalog mailings and additional television spots in fiscal 2005 compared to fiscal 2004 and, to a lesser extent, the launch of the WH|BM website in August 2005 providing WH|BM customers with the opportunity to purchase merchandise over the Internet and through its catalog.

 

Cost of Goods Sold/Gross Profit

 

The following table shows cost of goods sold and gross profit in dollars and the related gross profit percentages for fiscal 2006, 2005 and 2004 (dollar amounts in thousands):

 

The decrease in the gross profit percentage from fiscal 2005 to fiscal 2006 resulted primarily from a decrease of 100 basis points in the merchandise margins at the Chico’s front-line stores and to a lesser extent, due to the mix effect resulting from the WH|BM and Soma sales becoming a larger portion of the Company’s overall net sales (both WH|BM and Soma brands operate with lower gross margins than the Chico’s brand). The decrease in merchandise margins at the Chico’s front-line stores was primarily due to a higher markdown rate compared to the prior period. Gross profit percentage was also negatively impacted by increased inventory clearance costs and the deleverage associated with the relatively flat comparable store sales in the Chico’s stores and, to a lesser extent, from the continued investment in the Company’s product development and merchandising functions and by the recognition of approximately $5.6 million of incremental stock-based compensation expense due to the adoption of SFAS 123R and the related change in accounting for stock-based compensation, which reduced the gross margin by approximately 30 basis points.

 

The decrease in the gross profit percentage from fiscal 2004 to fiscal 2005 resulted primarily from a decrease in the merchandise margins at the Company’s outlet stores, from the Company’s continued investment in its Soma and WH|BM brands, which generate somewhat lower gross margins (Soma merchandise margins were approximately 10 percentage points lower than the merchandise margins at Chico’s and WH|BM merchandise margins were just under 4 percentage points lower than the merchandise margins at Chico’s), and to a lesser extent, from the Company’s continued investment in the product development and merchandising functions for all of its brands as well as from slightly increased inventory clearance costs. These decreases in gross profit percentage were partially offset by an improvement of approximately 180 basis points in the merchandise margins at WH|BM front-line stores. The improvement of merchandise margins at the WH|BM front-line stores resulted primarily from improved initial markups on new products, moderated in part by a higher markdown rate compared to the prior period. The gross profit percentage for Chico’s front-line stores improved slightly, approximately 10 basis points, for the current period compared to the prior period primarily due to improved initial markups on new products offset by a higher markdown rate compared to the prior period.

 

General, Administrative and Store Operating Expenses

 

The following table shows general, administrative and store operating expenses in dollars and as a percentage of total net sales for fiscal 2006, 2005 and 2004 (dollar amounts in thousands):

 

 

The increase in general, administrative and store operating expenses in dollars was, for the most part, the result of increases in the Company’s store operating expenses, including associate compensation, occupancy and other costs associated with additional store openings and, to a lesser degree, an increase in marketing expenses, the adoption of SFAS 123R and other general corporate infrastructure costs to support the Company’s growth, including expenses related to housing of off-site business units.

 

General, administrative and store operating expenses as a percentage of net sales increased 270 basis points in fiscal 2006 over the prior period primarily due to increased store operating expenses in the Chico’s stores (primarily personnel and occupancy costs) attributable mainly to the larger size stores the Company has been opening, an increase in store relocations and expansions, as well as the deleverage associated with the flat comparable store sales in the Chico’s stores and the Company’s planned increase in store payroll as a percentage of net sales. General, administrative and store operating expenses as a percentage of net sales also increased compared to the prior period due to the recognition of approximately $14.1 million of incremental stock-based compensation expense due to the adoption of SFAS 123R and the related change in accounting for stock-based compensation, or an impact of approximately 80 basis points, when compared to the prior period and to an even lesser extent, by a planned increase in marketing expenses as a percentage of total net sales. These increases in general, administrative and store operating expenses as a percentage of net sales were offset slightly by a reduction in incentive compensation mostly due to the Company’s lower than anticipated fiscal year results.

 

General, administrative and store operating expenses as a percentage of net sales in fiscal 2005 decreased 70 basis points over the prior period primarily because there was $3.4 million of rent expense included in fiscal 2004

related to prior fiscal years (see further discussion below) to adjust the Company’s presentation of rent expense with no comparable expense in fiscal 2005. General, administrative and store operating expenses as a percentage of net sales was also positively impacted by a significant decrease in WH|BM store operating expenses (primarily in personnel and occupancy costs) as a percentage of total net sales over the prior period resulting from leverage associated with the WH|BM comparable store sales increase in the mid-to-high thirty percent range. These decreases in general, administrative and store operating expenses as a percentage of total net sales were partially offset by increased incentive compensation as a result of the Company’s strong financial performance.

 

In fiscal 2004, general, administrative and store operating expenses were impacted by the Company’s decision, in connection with a review of its accounting practices relating to leasing transactions, to record a one-time, non-cash adjustment related to the timing of rent expense for store locations. Previously, the Company followed a practice prevalent across the retailing industry, in which it recognized the straight line rent expense for leases beginning generally on the earlier of the store opening date or lease commencement date, which had the effect of excluding the build-out period of its stores from the calculation of the period over which it expensed rent. The Company now records rent expense when it takes possession of a store, which occurs before the commencement of the lease term or approximately 45-60 days prior to the opening of the store. This adjustment resulted in a one-time, cumulative, non-cash increase to rent expense of approximately $4.1 million pre-tax. Of the $4.1 million pre-tax expense recorded in fiscal 2004, $0.7 million was attributable to the current year and $3.4 million pre-tax, was related to prior fiscal years.

 

Furthermore, in fiscal 2004, the Company revised the manner in which it accounts for construction allowances from landlords of properties leased by the Company for its stores. For fiscal 2004 and for future fiscal years, construction allowances are amortized as a reduction of rent expense, rather than being amortized as a reduction of depreciation expense, which was the approach followed in fiscal years prior to 2004. For fiscal 2004, the impact of amortizing construction allowances as a reduction of rent expense rather than as a reduction of depreciation expense resulted in a decrease to rent expense of approximately $4.2 million. The net impact of these two lease accounting adjustments was immaterial to general, administrative and store operating expenses in total and as a percentage of total net sales.

 

Depreciation and Amortization

 

The following table shows depreciation and amortization in dollars and as a percentage of total net sales for fiscal 2006, 2005 and 2004 (dollar amounts in thousands):