Driven by robust sales performance and improved margins, U.S.
based specialty retailer
Chico's FAS Inc.
) reported the highest third-quarter earnings per share in 2012
since 2005. The company's earnings of 25 cents per share for the
quarter surged approximately 39% from the year-ago quarter's
adjusted earnings of 18 cents, surpassing the Zacks Consensus
Estimate of 22 cents.
Net sales climbed 18.2% to $636.7 million from the comparable
quarter last year and were slightly above the Zacks Consensus
Estimate of $634.0 million. Top line in the quarter mainly
benefited from a comparable store sales (comps) increase of 9.9%,
square footage growth of 8.2% and increase of $16.7 million in
sales from Boston Proper.
Comps gains in the quarter resulted from a rise in both
average dollar sale and transaction count. Innovative marketing
plans and favorable customer response to its merchandise
offerings also contributed to the comps growth.
In the reported quarter, Chico's/Soma Intimates brands'
comparable store sales increased 11.6% and White House Black
Market (WHBM) comparable store sales improved 6.4%.
Gross profit jumped 20.8% to $364.3 million while gross margin
expanded 120 basis points (bps) from the year-ago quarter to
57.2%, largely due to higher full-price selling and effective
promotional activities, which were partially offset by increased
Selling, general and administrative (SG&A) expenses in the
reported quarter were $297.2 million, up 16.8% from the third
quarter 2011 level. However, as a percentage of sales, SG&A
expenses contracted 60 bps from the prior-year quarter to 46.7%,
primarily due to sales leverage impact on store expenses
partially offset by increased marketing and incentive
Adjusted operating income (excluding the impact of acquisition
and integration costs related to Boston Proper) was $67.1 million
compared with $47.0 million recorded in the third quarter of
2011, while operating margin came in at 10.54%, an increase of
182 bps primarily due to increased gross margin and lower
Cash and marketable securities as of October 27, 2012, were
$371.5 million, compared with $239.8 million as of October 29,
2011. For the nine months ended October 27, 2012, the company
used cash to fund share buybacks worth $41.0 million and dividend
payments of $26.3 million.
The company spent $11.7 million during the third quarter to
buy back 0.6 million shares under its ongoing $200.0 million
share repurchase program authorized in November last year. At
present, Chico's has $137.7 million remaining under its current
Concurrent to its earnings release, Chico's has also announced
a cash dividend of 5.25 cents per share, an increase of 5% over
the comparable-quarter last year. The dividend will be paid on
December 17, 2012 to the shareholders of record date as of
December 3, 2012.
At the end of the quarter, total inventories were $234.2
million compared with $247.5 million at the end of the
third-quarter of 2011. The year-over-year decline in inventories
was in the line with the company's planned reductions.
Chico's is in the midst of its store expansion strategy.
During the third quarter, it opened 5 Chico's frontline
boutiques, 6 Chico's outlets, 17 WH|BM frontline boutiques, 6
WH|BM outlets, 7 Soma frontline boutiques, and 1 Soma outlet,
while it closed 1 store each of WH|BM frontline boutiques and
Soma frontline boutiques.
The company's Chico's brand currently operates 611 boutiques
and 95 outlet stores, WH|BM runs 399 boutiques and 43 outlet
stores, and Soma Intimates operates 191 boutiques and 16 outlet
stores - cumulatively a total of 1,355 stores. The company has
operations in 48 states, the District of Columbia, the U.S.
Virgin Islands and Puerto Rico.
Chico's maintains its guidance for net sales for fiscal 2012 in
the range of $2.55-$2.6 billion. Moreover, the company continues
to expect comparable store sales for the year to increase in the
mid-single-digit percentage range.
Further, Chico's anticipates that gross margin for fiscal 2012
will improve in the range of 25- 50 bps from the 2011 level,
while SG&A expense, as a percentage of sales, is expected to
decline 50 basis points from 2011. The effective tax rate for the
year is projected to be about 38%. Inventories at the end of
fiscal 2012 are estimated to be in line with sales growth, while
capital expenditures for the year is anticipated to be
approximately $155 million.
Currently, Chico's has a Zacks #2 Rank which implies a
short-term Buy rating. We believe Chico's management, which is
focused on operational discipline and improved product direction,
is leading a turnaround story while its competitors continue to
struggle. One of the company's main competitors,
) recently reported its third-quarter 2012 earnings per share,
which jumped 20.3% year over year to 71 cents but fell a penny
short of the Zacks Consensus Estimate.
Further, even though the economic environment remains
uncertain, we believe that Chico's merchandising and marketing
initiatives are beginning to drive meaningful improvements in
sales and profits. Moreover, Chico's products are best positioned
in the missy space since its merchandise is of superior quality,
more stylish and very different from that of its competitors. In
addition, we believe that the company's continuous focus on
expanding its store network along with a leaner cost structure
will drive considerable earnings leverage in the coming
However, Chico's products are more sensitive to macroeconomic
headwinds. We are concerned about the negative macroeconomic
events, which may undermine the company's performance. Therefore,
we are maintaining our long-term 'Neutral' recommendation on the
CHICOS FAS INC (CHS): Free Stock Analysis
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