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The market definitely likes today's news that Chico's (NYSE:CHS) is acquiring the Fitigues company which, like Chico's, operates a chain of retail clothing stores selling self-branded stuff to a moderately upscale clientele.

Fitigues was started in Chicago and now is based in Scottsdale, AZ (already a Chico's hotbed). I had never heard of this company before, and have never seen their stuff, but from a glance at their website the fashion looks quite compatible with the Chico's idea -- they sell a lot of gussied up sweatpants and fatigues that are designed to be classy but comfortable, which is apparently a good upscale fashion trend to be riding right now. When I did my annual checkup a while back, I had guessed that Chico's was more likely to try to take over Lucy's, another small activewear store chain, but this seems to be a plan along the same lines.

The market was quite enthusiastic about this acquisition. Alhough we don't know yet the exact cost, we can see a few reasons for optimism.

First, the management team (the Rosensteins, company founders) are coming over with the company, according to the press release. That's good news. And Steve Rosenstein thinks they've got a good thing coming- he's quoted in the press release as saying that "The parallels and similarities of the early years of Fitigues and Chico's are quite amazing." That sounds pretty encouraging.

Second, Chico's has picked up a chain of stores that is just reaching the point where economies of scale can make a big difference. Chico's should be able to help leverage manufacturing, distribution and back office operations to make the 14 stores in the chain (12 of which Chico's will own) much more efficient.

And third, Chico's has proven that they can take a small, unnoticed retail chain and take it to the moon. Just look at White House/Black Market, which is pounding out incredible growth numbers. The key to succes for both companies will be to create a well-targeted experience and product line for Fitigues. Clearly, Chico's knows how to expand store presence quickly and profitably since they've done it before.

Of course, without knowing how much they're paying for the company, it's hard to tell whether this deal is going to make short-term sense. The only numbers I've seen are that back when Fitigues won an Inc. magazine prize in 1999 they were a $28 million company. I have no idea what their chain is worth to Chico's today, though I assume it's not an enormous amount.

Most of all, given management's track record at building two great retail clothing chains targeting the same demographics as Fitigues, I'm inclined to give them the benefit of the doubt and assume, along with Wall Street today, that it's going to work well.

So, we have one more way for Chico's to expand, and one more growth engine for a stock that has AVERAGED 90% annual gains over the past ten years. Can't wait to hear the details, which I assume will come at earnings or SSS announcement time.

Source: Chico's Buys More Growth Potential (CHS)