CORRESP
June 17, 2009
VIA EDGAR FILING
Securities and Exchange Commission
Division of Corporation Finance
Washington, DC 20549
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Tia Jenkins
Senior Assistant Chief Accountant
Office of Beverages, Apparel and
Health Care Services
Mail Stop 3561 |
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Chico’s FAS, Inc.
Form 10-K for the fiscal year ended January 31, 2009
Filed March 27, 2009
Preliminary Proxy Statement on Schedule 14A
Filed April 24, 2009
File No.: 001-16435 |
Dear Ms. Jenkins:
We are in receipt of the comments of the Staff of the Division of Corporation Finance of the
Securities and Exchange Commission (the “Staff”) set forth in the Staff’s letter dated June 3, 2009
to Kent A. Kleeberger, Chief Financial Officer of Chico’s FAS, Inc. (the “Company”) in connection
with the Staff’s review of the Company’s Form 10-K for the fiscal year ended January 31, 2009 and
Preliminary Proxy Statement on Schedule 14A filed April 24, 2009. We respectfully submit the
following responses to the comments reflected in your letter of June 3, 2009.
Each of the responses below includes the original comments from your letter. We have also
used the same numbering system and captions as reflected in your letter. We have responded to your
specific comments and provided the specific additional data, information, support or explanations
requested.
We understand that you will be reviewing our responses and may have additional comments. We
welcome any questions you may have concerning our responses. Please feel free to call us at the
telephone number listed at the end of this letter.
U.S. Securities and Exchange Commission
June 17, 2009
Page 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
page 22
Critical Accounting Policies and Estimates, page 31
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We note from your response to comment two of our letter dated May 8, 2009, that
you will revise your disclosures of critical accounting estimates in future filings.
Please provide us with the text that contains the revisions that you intend to include
in future filings, as you had provided in your response with regards to your discussion
of inventory valuation and shrinkage. |
Company’s response:
In response to the Staff’s comment, the Company appreciates the Staff’s permission to revise
its disclosures related to critical accounting estimates in its
future filings.
The Company acknowledges that providing additional detail related to certain critical
accounting estimates including inventory valuation and shrinkage, evaluation of long-lived assets,
self-insurance, income taxes and stock-based compensation expense are appropriate. The Company
believes, however, that certain of its other critical accounting policies, such as the policies
related to revenue recognition, operating leases, and accounting for contingencies do not warrant
additional disclosure. These policies are essential to the financial statement presentation and
while an element of management estimation is involved with the application of these other policies,
the estimates are not as highly uncertain or susceptible to change and thus we do not believe they
require further descriptive analysis.
Accordingly,
the Company intends to revise its disclosure in its future filings as follows
(revisions are underlined and amounts used relate to fiscal 2008):
Inventory Valuation and Shrinkage
The Company identifies potentially excess and slow-moving inventories by evaluating
turn rates and inventory levels in conjunction with the Company’s overall growth
rate. Excess quantities of inventory are identified through evaluation of inventory
aging, review of inventory turns and historical sales experiences, as well as
specific identification based on fashion trends. Further, exposure to inadequate
realization of carrying value is identified through analysis of gross margins and
markdowns in combination with changes in current business trends. The Company
provides lower of cost or market reserves for such identified excess and slow-moving
inventories. Historically, the variation of those estimates to observed results
has been insignificant and, although possible, significant variation is not expected
in
U.S. Securities and Exchange Commission
June 17, 2009
Page 3
the future. If, however, our markdown rate and cost percentage estimates varied
by 10% of their values, the carrying amount of inventory would change by $0.5
million (based on the inventory balance at January 31, 2009).
The Company estimates its expected shrinkage of inventories between its physical
inventory counts by applying historical chain-wide average shrinkage experience
rates. The historical rates are updated on a regular basis to reflect the most
recent physical inventory shrinkage experience. Historically, the variation of
those estimates to observed results has been insignificant and, although possible,
significant variation is not expected in the future. If, however, our estimated
shrinkage percentages varied by 10%, we would incur approximately $1.4 million in
additional expense and the carrying amount of inventory would change by $0.1 million
(based on the inventory balance at January 31, 2009).
Evaluation of Long-Lived Assets
Long-lived assets are reviewed periodically for impairment if events or changes in
circumstances indicate that the carrying amount may not be recoverable. If future
undiscounted cash flows expected to be generated by the asset are less than its
carrying amount, an asset is determined to be impaired, and a loss is recorded for
the amount by which the carrying value of the asset exceeds its fair value. The
fair value of an asset is estimated using estimated future cash flows of the asset
discounted by a rate commensurate with the risk involved with such asset while
incorporating marketplace assumptions. The estimate of future cash flows requires
management to make certain assumptions and to apply judgment, including forecasting
future sales and the useful lives of the assets. The Company exercises its best
judgment based on the most current facts and circumstances surrounding its business
when applying these impairment rules. The Company establishes its assumptions
and arrives at the estimates used in this calculation based upon its historical
experience, knowledge of the retail industry and by incorporating third-party data,
which the Company believes results in a reasonably accurate approximation of fair
value. Nevertheless, changes in the assumptions used could have a significant
impact on the Company’s assessment of recoverability. For example, as it
relates to the $13.7 million write-off of fixed assets for certain underperforming
stores in fiscal 2008, if the Company had decreased its forecast of future sales by
1% throughout the forecast period, the Company’s write-off would have increased by
approximately $1.8 million. Also, an increase of 1% in the Company’s discount rate
would have increased the impairment charge by $0.1 million.
The Company evaluates the recoverability of goodwill at least annually based on a
two-step impairment test. The first step compares the fair value of the Company’s
reporting unit with its carrying amount, including goodwill. If the carrying amount
exceeds fair value, then the second step of the impairment test is performed to
U.S. Securities and Exchange Commission
June 17, 2009
Page 4
measure the amount of any impairment loss. Fair value is determined based on
estimated future cash flows, discounted at a rate that approximates the Company’s
cost of capital.
There are several significant assumptions and estimates used in the discounted
cash flow model. Included among these are the estimates used to forecast cash flows
over a 10-year forecast period, including an estimate for overall sales growth based
on assumptions with respect to future comparable store sales growth, changes in
store counts and square footage growth rates. The Company also estimates future
gross margin and operating margin percentages. The Company estimates the discount
rate based on an approximation of the Company’s weighted average cost of capital
formulated by reviewing assumptions used by marketplace participants, in order to
calculate the present value of forecasted future cash flows. Lastly, the Company’s
discounted cash flow model estimates future cash flows where appropriate beyond the
10-year forecast period for purposes of the present value computation by applying a
long-term growth rate commensurate with an estimate of overall U.S. economic growth.
With regard to its goodwill impairment test completed during the latter part of
the fourth quarter of fiscal 2008, if the Company were to have assumed a weighted
average cost of capital 1% higher than the rate actually used in its goodwill
impairment test, the fair value of the Chico’s and WH|BM reporting units would have
decreased by $30.2 million and $23.0 million, respectively. Nevertheless, even such
reduced fair value amounts still would be greater than the respective carrying
values of the respective reporting units and thus the second step of the goodwill
impairment test still would not have been triggered.
Conversely, if the Company were to have assumed a sales growth estimate 1% lower
throughout the forecast period than the rate used in its goodwill impairment test,
the fair value of the Chico’s and WH|BM reporting units would have decreased by
approximately $54.0 million and $22.8 million, respectively. Again, however, even
such reduced fair value amounts still would be greater than the respective carrying
values of the respective reporting units and thus the second step of the goodwill
impairment test still would not have been triggered.
The Company evaluates its other intangible assets for impairment on an annual basis
by comparing the fair value of the asset with its carrying value. Such estimates
are subject to change and the Company may be required to recognize impairment losses
in the future. For example, with regards to its annual impairment test of its
WH|BM trademark intangible asset, if the Company were to have assumed a sales growth
estimate 1% lower throughout the forecast period than the rate used in its trademark
impairment test, the fair value of the WH|BM trademark would have decreased by
approximately $6.0 million. Conversely, an increase of 1% in the Company’s discount
rate would have decreased the fair value by approximately $9.3 million. In
U.S. Securities and Exchange Commission
June 17, 2009
Page 5
either case, the fair value of the WH|BM trademark still would be greater than
its carrying value and no impairment charge would have been recognized.
Self-Insurance
The Company is self-insured for certain losses relating to workers’ compensation,
medical and general liability claims. Self-insurance claims filed and claims
incurred but not reported are accrued based upon management’s estimates of the
aggregate liability for uninsured claims incurred using historical experience.
Although management believes it has the ability to adequately accrue for estimated
losses related to claims, it is possible that actual results could significantly
differ from recorded self-insurance liabilities. The assumptions made by
management in estimating its self-insurance accruals include consideration of
historical claims experience either on an incurred or paid basis, insurance
deductibles, severity factors and other actuarial assumptions. Historically, the
variation of those estimates to observed results has been insignificant and,
although possible, significant variation is not expected in the future. However,
any actuarial projection of losses is potentially subject to a high degree of
variability. Among the causes of this variability are unpredictable external
factors affecting health care costs, benefit level changes and claim settlement
patterns. For example, a change of 5% in the Company’s self-insurance liability as
of January 31, 2009 would result in an approximate $0.5 million increase in such
liability and related expense.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for
Income Taxes”, which requires the use of the asset and liability method. Deferred
tax assets and liabilities are recognized based on the difference between the
financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Inherent in the measurement of deferred balances are certain
judgments and interpretations of existing tax law and published guidance as
applicable to the Company’s operations. No valuation allowance has been provided for deferred
tax assets, since management anticipates that the full amount of these assets should
be realized in the future. The Company’s effective tax rate considers management’s
judgment of expected tax liabilities within the various taxing jurisdictions in
which the Company is subject to tax. Due to the substantial amounts involved
and judgment necessary, the Company deems this policy could be critical to its
financial statements.
Effective February 4, 2007, the Company adopted the provisions of FIN 48. FIN 48
prescribes a recognition threshold and measurement element for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company establishes reserves for uncertain tax positions
that management believes are supportable, but are potentially subject to successful
U.S. Securities and Exchange Commission
June 17, 2009
Page 6
challenge by the applicable taxing authority. Consequently, changes in the
Company’s assumptions and judgments can materially affect amounts recognized related
to income tax uncertainties and may affect the Company’s results of operations or
financial position. Historically, the variation of those estimates to observed
results has been insignificant and, although possible, significant variation is not
expected in the future. The Company believes its assumptions for estimates continue
to be reasonable, although actual results may have a positive or negative material
impact on the balances of such tax positions. At January 31, 2009 and February 2,
2008, the Company had approximately $10.6 million and $6.4 million reserved for
uncertain tax positions, respectively. A 5% difference in the ultimate
settlement amount of the Company’s uncertain tax positions versus the Company’s tax
reserves recorded at year end would have affected net income and the
related reserves by approximately $0.3
million. See Note 8 to the consolidated financial statements for further
discussion regarding the impact of the Company’s adoption of FIN 48.
Stock-Based Compensation Expense
Effective January 29, 2006, the Company adopted the provisions of SFAS 123R using
the modified prospective transition method. Under this transition method,
stock-based compensation expense recognized during fiscal 2008, fiscal 2007 and
fiscal 2006 for share-based awards includes: (a) compensation expense for all
stock-based compensation awards granted prior to, but not yet vested as of, January
29, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation expense for all stock-based
compensation awards granted subsequent to January 29, 2006, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123R.
The calculation of share-based employee compensation expense involves estimates that
require management’s judgments. These estimates include the fair value of each of
the stock option awards granted, which is estimated on the date of grant using a
Black-Scholes option pricing model. There are two significant inputs into the
Black-Scholes option pricing model: expected volatility and expected term. The
Company estimates expected volatility based on the historical volatility of the
Company’s stock over a term equal to the expected term of the option granted. The
expected term of stock option awards granted is derived from historical exercise
experience under the Company’s stock option plans and represents the period of time
that stock option awards granted are expected to be outstanding.
The assumptions used in calculating the fair value of share-based payment awards
represent management’s best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if factors
change and the Company uses different assumptions, stock-based compensation expense
could be materially different in the future. For example, a change of 5% in the
assumptions for expected volatility and expected term used to calculate the fair
U.S. Securities and Exchange Commission
June 17, 2009
Page 7
value of stock options granted during the fiscal year ended January 31, 2009
would have affected net income by approximately $0.1 million in the fiscal year then
ended.
In addition, the Company is required to estimate the expected forfeiture rate, and
only recognize expense for those shares expected to vest. In determining the
portion of the stock-based payment award that is ultimately expected to be earned,
the Company derives forfeiture rates based on historical data. In accordance with
SFAS 123R, the Company revises its forfeiture rates, when necessary, in subsequent
periods if actual forfeitures differ from those originally estimated. As a
result, in the event that a grant’s actual forfeiture rate is materially
different from its estimate at the completion of the vesting period, the
stock-based compensation expense could be significantly different from what the
Company has recorded in the current and prior periods. See Note 11 to the
consolidated financial statements for a further discussion on stock-based
compensation.
Item 9A. Controls and Procedures, page 62
Controls and Procedures, page 62
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We note from your response to comment four of our letter dated May 8, 2009,
that you will add disclosure that states your “disclosure controls and procedures are
designed to provide reasonable assurance...” Please confirm to us that you will expand
your disclosure in future filings to clarify, if true, that your disclosure controls
and procedures are also effective in providing reasonable assurance that information
required to be disclosed in your reports under the Securities and Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. |
Company’s response:
In response to the Staff’s comment, the Company notes that its initial response described only
the additional language that the Company proposed to add to its disclosures concerning its
disclosure controls and procedures. The proposed additional language together with its already
existing disclosure should satisfy the Staff’s comment. If true at the time of filing, the
Company’s entire disclosure under Evaluation of Disclosure Controls and Procedures will be as
follows:
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to provide reasonable assurance
that information required to be disclosed in our reports under the Securities and Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.
U.S. Securities and Exchange Commission
June 17, 2009
Page 8
As of the end of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of the Company’s management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of such period, the Company’s
disclosure controls and procedures were effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be included in the
Company’s periodic SEC filings.
Form 8-K filed December 1, 2008
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We note your response to comment six of our letter dated May 8, 2009, and we
may have additional comment upon your filing of an amendment to the Form 8-K originally
filed with the Commission on December 1, 2008. |
Company’s response:
In response to the Staff’s comment, the Company understands that the Staff may have additional
comment upon review of the filing of the amendment to the Form 8-K originally filed with the
Commission on December 1, 2008, which the Company advises the Staff was filed on June 10, 2009.
U.S. Securities and Exchange Commission
June 17, 2009
Page 9
In addition the Company acknowledges that:
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The Company is responsible for the adequacy and accuracy of the disclosure in
the filing. |
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Staff comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the filing. |
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The Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of the
United States. |
If you have any questions or comments with regard to the foregoing, please contact me at (239)
274-4987.
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Sincerely,
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/s/ Kent A. Kleeberger
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Kent A. Kleeberger |
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Executive Vice President-Finance,
Chief Financial Officer and Treasurer |
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