An awful year for Chico's (CHS)
2006 is by far the worst year Chico's FAS (NYSE: CHS) has ever had as a public company. Several readers wrote to me after their drastically reduced earnings outlook was announced yesterday afternoon and asked what I thought.
Well, I'm not sure.
The facts are pretty grim for the near future -- this company, one of the finest growers and highest margin retailers of the last ten years, is, not unlike the Fed, pausing. And just as with Bernanke, it's very hard to tell whether that pause is the precursor to a resumed climb or a surprising fall.
The details of the earnings release were that they enjoyed 18% sales growth and 10% earnings growth in the last quarter -- which is the flip side of what we have grown accustomed to seeing with Chico's, where their excellent margins generally have led to earnings growing faster than sales. That's no great surprise given their tepid same store sales growth in the mid-single-digits over the past several months. So, they essentially hit the current earnings estimates even as they were slightly light on the sales numbers.
What was truly surprising was the outlook -- Chico's now looks like it will have its first negative same store sales growth number in many years, as August SSS are now down about 6%, and management indicated that they're going to have to work hard to recover steady sales growth by sacrificing margins and reducing their earnings expectations for the next year. The low end of their earnings estimates for 2007, which after this bad news has sunk in should, I expect, be very conservative, is $1.28 a share.
It's encouraging in a way, because management is clearly aware that there is a problem and is investing in solutions by way of reducing costs (they're shipping more by sea than by air now), acknowledging the failure of recent marketing campaigns, and bringing in more merchandising expertise to help increase sales and store traffic.
I have given Chico's the benefit of the doubt as they had merchandising troubles this Spring, but have we now gotten to the point that these problems go beyond merchandising?
That's the real question -- has Chico's reached a saturation point, or have their core customers lost interest in the brand?
I'm still inclined to give them the benefit of the doubt to some degree, and to chalk their same store sales stagnation and poor forecast up to some serious merchandising hiccups in a company that has been growing very quickly for ten years without any serious problems.
But I'm not yet jumping in to buy more. Certainly, the shares got repriced almost instantly today for a much lower growth rate and they look much more appealing today than they were at twice this price a year ago -- but I need to watch this a little more before I decide to add to my Chico's position.
The problems at Chico's are solely with the core brand -- the Chico's stores themselves. Soma is growing well and Fitigues performing well, albeit from extremely tiny starting points, and, more importantly, White House/Black Market (WHBM) is continuing to shoot out the lights, racking up the kind of growth that the core Chico's stores had five years ago (this past month, Chico's same store sales growth was a near-record-low 3%, but WHBM was at 19%).
There are some good signs -- I'm tentatively optimistic about the fact that they hired another industry veteran with a good track record to focus on rebuilding growth at Chico's. They still have an excellent relationship with their consumers, but they've clearly had trouble this year in stocking the right designs at the right time.
Michelle Delahunty, who was hired a few days ago as head merchandiser for the Chico's brand, might help -- she was at Ann Taylor in 2003 and 2004 when that company really began the recovery that they're enjoying today, and I think more talent has every chance of being a benefit for a company that may have outgrown the capabilities of the core management team that has led their growth for more than ten years (assuming it doesn't lead to the kind of internal strife that tore New York & Company's management apart).
But with continued growth ... albeit slow growth, I think Chico's has every opportunity to return to its winning ways. The company remains small in the grand scheme of retailing chains, with (and this is an argument I've made before) room for at least a couple hundred more Chico's stores and 500 more White House/Black Market shops before they reach full saturation across the American mallscape, and the fact that they are continuing to see great success with WHBM makes me quite optimistic that this management team will be able to solve whatever problems the Chico's brand may have.
The company is having sales growth trouble, but is not itself a troubled company. Chico's has buckets of cash and no debt, and while one concept may be slowing or maturing somewhat their other three have yet to hit the first turn on the track. I can be patient with these shares, so while I'm going to wait and see how their initiative to restore growth in the Chico's brand performs before I add to my position, I am confident enough to hold on to the shares I already own. In my opinion, this is still a quality company that has every chance of regaining its lost lustre.
If we assume that they hit that conservative earnings estimate next year, we're dealing with a company that -- after the selloff of the last six months -- has a PE of about 14 on 2007 numbers, and an earnings growth rate from 2006 to 2007 of about 14%. If you think management will be able to restore growth to the Chico's brand as WHBM continues to shoot out the lights, that's a bargain ... if you think that the Chico's brand will merely continue to muddle along with mediocre growth, it still seems to me that it's a fair price.
Well, I'm not sure.
The facts are pretty grim for the near future -- this company, one of the finest growers and highest margin retailers of the last ten years, is, not unlike the Fed, pausing. And just as with Bernanke, it's very hard to tell whether that pause is the precursor to a resumed climb or a surprising fall.
The details of the earnings release were that they enjoyed 18% sales growth and 10% earnings growth in the last quarter -- which is the flip side of what we have grown accustomed to seeing with Chico's, where their excellent margins generally have led to earnings growing faster than sales. That's no great surprise given their tepid same store sales growth in the mid-single-digits over the past several months. So, they essentially hit the current earnings estimates even as they were slightly light on the sales numbers.
What was truly surprising was the outlook -- Chico's now looks like it will have its first negative same store sales growth number in many years, as August SSS are now down about 6%, and management indicated that they're going to have to work hard to recover steady sales growth by sacrificing margins and reducing their earnings expectations for the next year. The low end of their earnings estimates for 2007, which after this bad news has sunk in should, I expect, be very conservative, is $1.28 a share.
It's encouraging in a way, because management is clearly aware that there is a problem and is investing in solutions by way of reducing costs (they're shipping more by sea than by air now), acknowledging the failure of recent marketing campaigns, and bringing in more merchandising expertise to help increase sales and store traffic.
I have given Chico's the benefit of the doubt as they had merchandising troubles this Spring, but have we now gotten to the point that these problems go beyond merchandising?
That's the real question -- has Chico's reached a saturation point, or have their core customers lost interest in the brand?
I'm still inclined to give them the benefit of the doubt to some degree, and to chalk their same store sales stagnation and poor forecast up to some serious merchandising hiccups in a company that has been growing very quickly for ten years without any serious problems.
But I'm not yet jumping in to buy more. Certainly, the shares got repriced almost instantly today for a much lower growth rate and they look much more appealing today than they were at twice this price a year ago -- but I need to watch this a little more before I decide to add to my Chico's position.
The problems at Chico's are solely with the core brand -- the Chico's stores themselves. Soma is growing well and Fitigues performing well, albeit from extremely tiny starting points, and, more importantly, White House/Black Market (WHBM) is continuing to shoot out the lights, racking up the kind of growth that the core Chico's stores had five years ago (this past month, Chico's same store sales growth was a near-record-low 3%, but WHBM was at 19%).
There are some good signs -- I'm tentatively optimistic about the fact that they hired another industry veteran with a good track record to focus on rebuilding growth at Chico's. They still have an excellent relationship with their consumers, but they've clearly had trouble this year in stocking the right designs at the right time.
Michelle Delahunty, who was hired a few days ago as head merchandiser for the Chico's brand, might help -- she was at Ann Taylor in 2003 and 2004 when that company really began the recovery that they're enjoying today, and I think more talent has every chance of being a benefit for a company that may have outgrown the capabilities of the core management team that has led their growth for more than ten years (assuming it doesn't lead to the kind of internal strife that tore New York & Company's management apart).
But with continued growth ... albeit slow growth, I think Chico's has every opportunity to return to its winning ways. The company remains small in the grand scheme of retailing chains, with (and this is an argument I've made before) room for at least a couple hundred more Chico's stores and 500 more White House/Black Market shops before they reach full saturation across the American mallscape, and the fact that they are continuing to see great success with WHBM makes me quite optimistic that this management team will be able to solve whatever problems the Chico's brand may have.
The company is having sales growth trouble, but is not itself a troubled company. Chico's has buckets of cash and no debt, and while one concept may be slowing or maturing somewhat their other three have yet to hit the first turn on the track. I can be patient with these shares, so while I'm going to wait and see how their initiative to restore growth in the Chico's brand performs before I add to my position, I am confident enough to hold on to the shares I already own. In my opinion, this is still a quality company that has every chance of regaining its lost lustre.
If we assume that they hit that conservative earnings estimate next year, we're dealing with a company that -- after the selloff of the last six months -- has a PE of about 14 on 2007 numbers, and an earnings growth rate from 2006 to 2007 of about 14%. If you think management will be able to restore growth to the Chico's brand as WHBM continues to shoot out the lights, that's a bargain ... if you think that the Chico's brand will merely continue to muddle along with mediocre growth, it still seems to me that it's a fair price.
Labels: CHS
This article posted by One Guy @ 8/24/2006 11:03:00 AM 3 comments
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