Equity, Cash Flow And Notes Analysis

2534 words - 11 pages

Chico's FAS, INCAnalysis of Equity, Cash Flows, Notes to Financial Information and Other Financial information Report to Scott Edmonds President and CEOChico's FAS, Inc. (NYSE: CHS) is a retailer of high-end women's apparel designs, sources and retails unique brands of trendy women's sophisticated and casual fashion Chico's started in 1983, after the acquisition of White House / Black Market in 2003 they have over 571 stores in 46 states, Washington DC, Puerto Rico and the Virgin Islands. The company competes with giants such as Federated Department stores, and similar sized chains such as Ann Taylor and Talbots. We examined the company's 2003 10K filing for their fiscal year ending January 31, 2004. Our report will analyze the Statement of Cash Flows, Statement of Changes in Stockholder's (Owner's) Equity, Important Notes to Consolidated Financial Statements, and Explanations of Other Financial Information. We feel the information demonstrates that Chico's has been laying the foundations for a profitable 2004.Statement of Cash FlowsThe statement of Cash Flows (page 18 on attached 10K) is divided into three sections, Net cash provided by operating activities, Net cash used in investing activities, and Net cash provided by financing activities. From February 1, 2003 through January 31, 2004, the net increase in cash and cash equivalents increased by nearly $7MM. or 79%. Net cash provided by operating activities is comprised of Net Income plus adjustments.Chico's FAS amounts expressed in thousandsStatement of Cash Flows 2004 2003 $$ Change % ChangeNet Income 100,230 66,759 33,471 50.14%Adjustments to reconcile net income to net cashDepreciation CGS 1,970 1,093 877 80.24%Depreciation Other 21,130 15,050 6,080 40.40%Deferred Tax expense (benefit) 1,336 -1,651 2,987 -180.92%Tax benefit of Options Exercised 15,126 22,549 -7,423 -32.92%Deferred Rent 1,874 1,482 392 26.45%Loss on impairment and disposal of property and equipment 3,746 1,315 2,431 184.87%Acquisition ImpactReceivables Net -1,953 -143 -1,810 1265.73%Inventories -4,658 -16,002 11,344 -70.89%Prepaid expenses -1,281 -1,691 410 -24.25%Accounts payable -3,175 9,000 -12,175 -135.28%Accrued liabilities 11,035 11,046 -11 -0.10%Total adjustments 45,150 42,048 3,102 7.38%Net cash from operating 145,380 108,807 36,573 33.61%CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of marketable securities -166,855 -134,918 -31,937 23.67%Proceeds from sale of marketable securities 153,447 84,235 69,212 82.17%Acquisition, net of cash acquired -87,636 0 -87,636 NAPurchases of property and equipment -52,300 -64,742 12,442 -19.22%Net cash used in investing activities -153,344 -115,425 -37,919 32.85%Cash Flows From Financing ActivitiesProceeds from issuance of common stock 15,231 7,247 7,984 110.17%Payments on capital leases -344 0 -344 NAPrincipal payments on debt 0 -5,155 5,155 -100.00%Deferred finance costs 0 -98 98 -100.00%Net cash provided by financing activities 14,887 1,994 12,893 646.59%Net increase (decrease) in cash and cash equivalents 6,923 -4,624 11,547 -249.72%CASH AND CASH EQUIVALENTS, Beginning of period 8,753 13,377 -4,624 -34.57%CASH AND CASH EQUIVALENTS, End of period 15,676 8,753 6,923 79.09%Cash Flows From Operating ActivitiesFor the prior year Net come was $66.759MM and the current year was $100.230 MM. this was an increase of $33.471MM or 50%. This increase primarily the result of the White House / Black Market acquisition in September of 2003, and to a lesser degree, an increase of same store sales during the fiscal year 2003.Adjustments to reconcile net income to net cashAdjustments to reconcile net income to net cash provided by operating activities totaled $42MM in 2003 and $45MM in 2004. This was an increase of $3MM or 7%. Depreciation is the first line item and is divided into Depreciation and amortization of cost of goods sold and then Depreciation and amortization other. This is the most significant adjustment in terms of dollars and as a percentage of the adjustment. It is the adding back of the non-cash expense of depreciation for capital assets. This would be the result of additional capital assets from acquisitions and required for store growth.Tax benefit of options exercised adjustment decreased ($7.4MM) or (33%). This could have been due to fewer options being exercised than in the prior year.The next two subsections are (Increase) decrease in assets net of effects of acquisition and (Decrease) increase in liabilities net of effects of acquisition. Inventories adjustment increased from ($16MM) to ($4.6MM) an increase of $11.3MM, this means that at the end of the period the inventory sitting as an unsold asset was much smaller than the year before.Accounts payable adjustment decreased by $12MM . The company used cash to reduce the total amount of payables.Total adjustments increased $3.1MM making the total net cash from operations $145.3MM.Cash Flows From Investing ActivitiesIn this section, the company identifies the net cash used in investing activities. All the line items except for proceeds from selling securities are reductions in cash. Overall, ($153.3MM) of cash was used in investing activities.Purchases of marketable securities increased by $31.9MM. The company not only purchased but also sold marketable securities of $153.4MM an increase of $69.2MM from the prior year. Because the company is debt free and generates substantial cash, the cash is put to use by purchasing marketable securities.Acquisition, net of cash acquired is a new line item for this report, as the previous two years have no entry. The total use of cash for the acquisition was ($87.6MM).The total net cash used in investing activities increased by $37. It is interesting to note that the amount of net cash used in investing activities was more than the amount of net cash from operating activities by $7.9MM.Cash Flows From Financing ActivitiesProceeds from issuance of common stock increased $8.MM. The company raised additional cash from selling common stock. Principal payments on debt decreased by $5.1MM from ($5.1MM) to $0. The company is now debt free. Deferred finance costs also decreased from ($.098MM) to $0. The total net cash provided by financing activities was $14.9MM.The total net increase in cash and cash equivalents was $6.9MM, from $8.7MM to $15.6MM. The largest components of the change were the cash used for acquisitions, buying and selling marketable securities, reducing inventories and accounts payable, issuing common stock and paying off debt.Statement of Changes in Stockholder's (Owner's) EquityThe statement of Changes in Stockholder's Equity (page 17 attached 10K form) is divided into four line items for each year with six column headings. From February 1, 2003 through January 31, 2004 Owner's or Stockholder's Equity increased by $134,702,000.00. This increase was driven by three line items, Retained Earnings of $100MM net income; Additional Paid In Capital from issuing $19.5 MM in common stock, and the Tax benefit of stock options exercised of $15.1MM. There was also an unrealized loss on the sale of marketable securities of $150m.Amounts in Thousands Shares Com Stk Par Value Additonal PIC Retained Earnings Other income Total Increase from Prior % changeBalance 2/2/2002 81,581 816 34,227 108,350 102 143,495Net Income 66,759 66,759Unrealized gain on MKT sec 83 83Comprehensive INC 66,842Issuance of Common Stock 3701 37 7,210 7,247Tax Benefit of Options exercised 22,549 22,549Balance 2/1/2003 85,282 853 63,986 175,109 185 240,133 96,638 67.35%Net Income 100,230 100,230 33,471 50.14%Unrealized gain on MKT sec -150 -150 -233 -280.72%Comprehensive INC 100,080 33,238 49.73%Issuance of Common Stock 2255 22 19,474 19,496 12,249 169.02%Tax Benefit of Options exercised 15,126 15,126 -7,423 -32.92%Balance 1/31/2004 87,537 875 98,586 275,339 35 374,835 134,702 56.09%Net income of $100MM increased Retained earnings, this was an increase of $33.4MM from the prior year. This is the same net income as shown on the cash flow statement as a result of operations. The next item, unrealized loss on the sale of marketable securities is very small only $150 thousand, however it is a $233 thousand change from the prior year. The total of Net income and unrealized gain (loss) on sale of marketable securities is the line item comprehensive income. This increased $33.2MM from the prior year. The next line item is the issuance of Common Stock. There were 1.4 million fewer shares issued in 2003 than in 2002, from 3.7MM shares to 2.2MM shares, all at par value of $0.01, however the stock price was substantially higher in 2003 as the Additional Paid in Capital increased from $7.2MM to $19.4MM an increase of $12.2MM or 169%. This is due to a higher market value for each share. The last line item is Tax Benefit of Options exercised. This decreased from $22.5MM to $15.1MM, a decrease of $7.4MM or 33% from the prior year.Important NotesThe objective of financial statements is to provide information about the financial position and performance of an enterprise that is useful to a wide range of users in making economic decisions. However, without notes, financial statements do not provide all the information that users may need to make economic decisions since they do not necessarily provide important specific and qualitative information about a firm. Thus, notes and explanatory material are an integral part of the financial statements. There has been an increasing need for more useful and informative financial statements, including especially more concern about the relevance and usefulness of Notes to Financial Statement. Recent economic upheaval and breakdown in Corporate America demonstrates the importance of transparency and credibility of accounting information in the process of resources allocation in a capital market. Among various kinds of financial information, notes as a vital part of financial statements are considered more significant accounting information in decision making about firms. In this sense of relevance and usefulness of accounting information, notes play an important role in helping users to invest healthy firms and make relevant investment decisions, promote business activities and capital transactions by providing more detailed and significant qualitative information not shown on the face of financial statements. Without adequate notes, users of financial statements cannot judge properly the opportunities and risks of investment opportunities. To make reasonable decisions, users need a variety of information provided by Notes.The accelerating pace of change today coupled with the long lead time necessary to effect improvements in financial reporting require standard setters and regulators to anticipate the changing needs of users. Without a long-term perspective, business reporting will continue to react to yesterday's crises and not keep pace with the evolving information needs of users. However, notes to the financial statements are generally characterized by complexity and variety of disclosure methods.Some of the more important notes on the Chico's 10K are found starting on page 18 on the attached form 10K. On page 20, the company discusses the change in inventory valuation from LIFO to weighted average cost. They state the reason for the change is to better match revenues to expenses. With the cost of merchandise declining as they source more of their inventory from China the company is experiencing deflation in its inventory costs, so LIFO no longer has a tax benefit. On page 22 the company provides more detailed information regarding the acquisition of White House / Black Market. This section describes how the company used $93.2MM in the last year, which is a major portion of cash used for investments. On page 18 the company describes management's methods of estimating certain values such as slow moving inventory, shrinkage and sales returns and how those are reconciles to actual numbers for future estimates. On page 21, the company describes how the Goodwill from the acquisition will be amortized and then tested for impairment. On page 22, the company provides details regarding its stock compensation plan. This is important to note due to the significance of the tax benefits from options exercised.Other Financial InformationManagement discussion about the financial information is critical to understanding how the information is recorded, it is also helpful to understand any changes in the way the company does business to understand changes in the financial information. For example if we know that the company increased the number of stores, it would help explain the increase on revenue and associated costs of operating more stores. Management is also projecting their forecast for the upcoming year, stating how many net new stores will be opened, any new products to be launched and any concepts which have been discontinued such as Pazos.In conclusion, the information provided in the 10K helps management and investors to understand the how the company performed over the prior year, and can lead to ideas about how the company may perform in the next year. It allows a view of where the money came from, how it was used and where it may come from next year. In the two previous years Chico's relied on issuing common stock to raise about 10% of its cash Now that the company has no long term debt, and substantially more stores it will be interesting to see how much net income will be generated for 2004.



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