Chico’s (CHS: Charts, News, Offers), a specialty retailer of women’s clothing, reported impressive earnings on Wednesday, with profits of $28.8 million, or 16 cents per share, edging out analysts’ estimates of 15 cents. It was a considerable improvement over the $22.7 million, or 13 cents per share, reported in the same quarter last year. Overall sales rose 8.1% to $483 million, from $446.9 million in last year’s third quarter. Net income, which was slightly diluted by impairment charges, came in at $94.7 million, or 53 cents per share, compared to $52.1 million, or 25 cents per share, a year earlier. While its growth may not seem as explosive as some industry peers like Coach (COH: Charts, News, Offers), Chico’s most recent earnings show that it is currently an undervalued play on rebounding retail.
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Chico’s FAS operates 1,099 women’s specialty stores in the continental United States, the Virgin Islands and Puerto Rico. As of May, it owned 598 Chico’s retail stores, 50 Chico’s outlet stores, 334 White House / Black Market retail stores, 17 White House / Black Market outlet stores, 95 Soma intimate apparel retail stores and five Soma outlet stores. The company is a specialty retailer of private branded, mid-tier casual to dressy clothing, intimate apparel, accessories, and non-clothing gift items. Chico’s markets to women 35 and over in the upper middle to upper class income range. Its brand is designed in house, and outsourced both domestically and internationally to finish its manufacturing phase.
Due to its age and price range, Chico’s has been criticized as being fashion-conscious but not fashion-forward, and its product innovation is limited by these constraints. Its products are regarded as clothing inspired by necessity and not luxury. This classification places it squarely in competition with Ann Taylor (ANN: Charts, News, Offers), Coldwater Creek (CWTR: Charts, News, Offers), Talbots (TLB: Charts, News, Offers) and Banana Republic (GPS: Charts, News, Offers). Chico’s has also hit a growth bottleneck. With an estimated core demographic of 14.8 million women, the company’s Passport membership program already has an impressive 7 million members. This kind of market saturation has caused many to question the company’s growth potential with its current line of products. Its aforementioned competitors all offer other avenues of growth in addition their clothing lines. Talbots offers a wider range of clothing sizes and shoes, and Coldwater Creek has diversified into personal care products and spa services.
It is due to these factors that two key metrics – same-store sales and gross margins, have been on the decline. The company’s same-store sales on average increased 3.1%, compared to a 12.8% increase a year earlier. Chico’s and Soma’s same-store sales increased an anemic 1.5%, compared to 12.2% a year earlier. White House and Black Market’s same-store sales fared slightly better, at 7.1%, but still far less than its 14.4% increase the previous year. The company has stated that this was attributed to a premature transition to fall merchandise. However, direct-to-consumer sales, including Internet sales, increased 41% to $34.4 million, though these are not regarded as same-store sales. Chico’s is also facing heavy competition from its industry peers, and has had to spend more on marketing and promotion. This has caused its gross margin to decrease slightly from 57.6% last year to 57.0% this quarter. The decline was worsened by softer sales and more aggressive markdowns in its frontline retail stores. However, outlet stores helped offset the decline with higher sales of its made-for-outlet products.
Chico’s fortunes are tied to the retail economy, and like its industry peers it has looked for safety nets in the event of another recession or sluggish consumer spending. Its plans are to grow its two concept lines – White House / Black Market and Soma – rather than spend more money on its highly saturated Chico’s brand. It is looking to streamline its current brands to cut costs, and to diversify further with non-clothing gifts, such as leather goods, watches and children’s gifts. If Chico’s continues to diversify and expand, it may have a better chance at capturing untapped markets, and it certainly has the brand strength to pull that off. In addition, a strengthening retail environment moving into the holidays will help boost the company’s bottom line.
The company has also declared a quarterly dividend of 4 cents per share. The stock currently trades with a forward P/E 13.57 of and a PEG ratio of 0.98, both highly undervalued bullish signals.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
