Yesterday, I took advantage of a sale price in another company that I really like by picking up some additional shares in Chico's (NYSE:CHS) at $29.30. I missed on the limit order I had sitting on my account for a few days at $28.76. However, after reassessing the company yesterday morning, I decided that I was happy to pay a few cents more than that at that point; especially after they announced a new (smallish) buyback that might perk up the shares a bit (their past $100 million authorization was fulfilled, and they've authorized $100 million more).
Chico's is, I would argue, the single best apparel retailer in the country. The Chico's stores are incredibly successful and have hugely loyal employees and customers. They are still growing at a good clip, around 8% store growth this year by my count. They also have incredibly good margins for retail, since they design their own clothing and can charge reasonable prices. I'm willing to buy that -- even if they do have an occasional fashion slipup, which is what appears to have happened with their April same-store sales numbers that got everyone freaked out and started this latest decline on the heels of their one-penny earnings miss last quarter.
But the Chico's brand isn't even the real growth driver here anymore. That honor falls to the subsidiary brand White House/Black Market, which has less than half as many stores as Chico's but is growing much faster (close to 15% store growth this year). White House/Black Market will open significantly more stores than the flagship Chico's brand this year and there is a huge amount of room for growth.
Soma by Chico's line of lingerie and sleepwear is another significant growth driver, with many separate stores opening, as well as some value-added boutiques within traditional Chico's shops.
I've seen retail consultants and marketers posit that there are roughly 800 high quality malls in the US where retailers generally want to get space. Chico's, which also has a lot of non-mall stores, has about 520 stores as of early this year (of which they own 508). White House/Black Market has 205 stores and Soma has fewer than 20. The company believes that there is room for between 700-850 Chico's and WH/BM stores, which lines up with what I hear from retail analysts. They also believe that there is room for a Soma store everywhere that they have a "strong" Chico's store. Some recent new malls are opening up with one of each of these three concepts.
Chico's also has some other holdings that may become significant: Fitigues was purchased by the company last year and is being evaluated as a potential new growth engine. I don't understand the fashion of this one myself, but apparently the stores have been very successful so far. And Chico's has a significant investment in Lucy's activewear stores, a concept that works well with the Chico's look and skews a bit younger. Either of these companies, with fashions skewed more to activewear and perhaps a bit younger, might end up being good in the long run. I don't know, but after their success in building the Chico's brand for over 20 years and in very quickly revitalizing and ramping up WH/BM, I trust this management to do the right thing with growing new concepts.
Chico's has had a few uneven spots in its history as a public company. They've missed on earnings on occasion (as with the past quarter). They've also had a few months (like last month) of uneven sales or slight fashion miscues and when they were a bit smaller they took some hits for hurricanes that closed stores in their stronger markets. So far, each of these have been tremendous buying opportunities.
I've written before about why I like Chico's -- but really, almost everyone likes Chico's. The only question is whether you're getting the right price and whether their growth will slow significantly. Their margins blow away almost everyone in retail and while they'll probably dip a bit with their weaker sales growth from last month and the encroaching maturity of the Chico's line, I think the continued rapid growth of WH/BM will bring continued strong margins as well. Being in the mid-Atlantic region, where WH/BM got its start and has been a presence for decades, it's easy for me to forget that much of the country doesn't have one of these popular stores easily accessible -- that's going to change in the next few years.
I purchased Chico's initially last summer when I was delighted to see a tepid earnings report (which hit analyst estimates, but didn't beat, and margins were a bit lower than usual) push the shares under $35 (I got my shares at $35.05). I saw their problems as temporary, with costs increasing with the Soma rollout and with some of their outlets.
Shares then climbed to $45 or so before dipping again when they missed estimates by one cent in March and they've been gradually falling since. I think this is far overdone, and I'm very happy to pick up shares near $30 now that some panic has set in.
Even with the decline we've seen, Chico's is not what I would call a truly cheap company -- but it has almost never been cheap. The forward PE is in the mid-20s, and most analysts have them growing earnings at about 15% this year and more than 20% in 2007. Growth continues to be significant, even if same store sales growth is somewhat uneven this spring, and there is every sign that they'll be able to successfully expand their two biggest concepts dramatically over the coming years (and maybe get some gravy if Fitigues or Soma are big hits).
This company has proven that they can merchandise to women very effectively and grow with great margins. I continue to believe that they'll be able to do that going forward, and I think every dip like this is a chance to buy more.
Even if growth does slow markedly, and I don't believe that will happen within the next five years, I think the company could transition to a cash flow machine that throws off huge dividends. If they stopped using their cash to expand, their debt-free balance sheet would allow a huge amount of that cash flow to go right to investors. Again, I don't see that happening anytime soon, but I think that's a nice fallback position if they do manage to saturate their markets and fail to add new productive concepts. I see a slow maturation ahead, but I'm in no hurry for it to arrive.
CHS 1-yr chart: