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A hot retailer on sale for Christmas
Over the last five years, Chico's stock has jumped more than 2,000%. Now a small earnings stumble has some investors selling, and that creates a buying opportunity for the wise.
By Robert Walberg
The holiday season is upon us, so it's again time for a close look at retail stocks.
Want to see the bright side of the sector? Check out women's clothier Chicos FAS (CHS, news, msgs). Over the last five years, its stock has climbed an astronomical 2,300%. And for good reason. It's success has been anchored by impressive sales growth, firm pricing, tight cost controls, measured growth and a casual, interesting product mix.
Given its remarkable run and its consistently solid results, investors eagerly awaited yesterdays third quarter earnings report. In fact, the stock had rallied nearly 23% over the past month in anticipation of another strong quarter. The company didnt appear to disappoint, as earnings of 29 cents a share beat the consensus estimate by a penny and sales of $358.7 million were slightly ahead of the projected total of $358.4 million. Compared to year-ago results, sales and earnings were up by 33% and 38%.
Great expectations
A solid, bordering on sensational, quarter -- for most retailers. Not for Chicos, especially not in the third quarter. Chicos has met or beaten the consensus estimate by one cent in six of the last eight quarters, but it has exceeded the streets projection by three cents on the other two occasions -- the last two third quarters. In other words, this is the quarter investors expect even more from the company. This time, they didnt get it.
Had Chicos came into the report trading at 30 times the next year's earnings, the street might have been satisfied with the growth numbers and the modest improvement in gross margins, from 62.3% to 62.8%. However, when you consider that Chicos ended Tuesdays session trading at 41.7 times fiscal-year 2006 estimated earnings of $1.07, there was no room for disappointment, real or perceived.
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Chicos same-store sales growth for the month of November came in at 11.8%. Again, that looks pretty good until you compare it with the 14.2% rate the company has grown over the past 39 months. This quarter's rate is the lowest same-store sales comparison since March of this year, when the company posted a gain of 7.8%.
You might consider these shortcomings trivial. But believe me they matter -- at least to traders and Wall Street analysts. Dont be surprised if over the next day or two one or more analysts covering the stock issues a ratings downgrade. Investors in Chicos should expect to see the stock -- which traded after hours Tuesday at $44.15 a share -- fall over the next several weeks.
Bargain shopping
Could the stock fall below $40? Sure. However, when you consider all the positives in Chicos report, and that the companys White House|Black Market concept is enjoying the kind of success that Chicos did in its infancy, theres reason for continued optimism.
In its release, management noted that White House|Black Market, a chain of stores targeting 25 to 35 year olds, posted same-store sales growth of more than 50%. For the quarter, White House|Black Market brought in 19.1% of total sales compared to only 12.7% in the year-ago period. Not surprisingly, management plans to accelerate the chains new store openings in 2006 from 50 to 70.
At present, Chicos FAS operates 498 Chicos stores, 29 Chicos outlets, 196 White House|Black Market stores, 6 White House|Black Market outlets and 15 Soma by Chicos stores. With competitors such as Talbots (TLB, news, msgs) operating more than 1,000 stores, Chicos still has plenty of room to drive sales growth with additional store openings.
There are two more reasons that investors will want to take advantage of a short-term drop of 10% or so to buy the stock. First, Chicos managed to increase the price of its merchandise by more than 5%. Not bad, given the overall economic climate. Second, operating margins of 22.9% were the highest since the company went public in 1993. Clearly, management continues to pull most of the right strings.
This is a retailer that continues to deliver the goods quarter after quarter. As such, investors will want to put the stock on their holiday shopping list -- especially considering that Chico's is likely to get marked down by 10%-15% ahead of the holiday.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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