Chico's Disappoints... Causing Shares to Climb?

| About: Chico's FAS, (CHS)

Want a clear indication of how much pessimism has been baked into shares of Chico's (NYSE:CHS) over the last six months? On Thursday, same store sales were released for July -- and they were well below Wall Street estimates. However, CHS went up several percent on the same day.

That tells me that investors had all but given up on this one. But the fact that they have even come close to hitting same store sales targets (low ones, for them, of around 5%) means perhaps this is a safe one to own again.

I have held Chico's for about a year now, buying at what seemed to me to be excellent prices in the low to mid 30s. If I had cash in the account where I hold my CHS shares, I very likely would have bought some more by now -- I think the dip in same store sales is a red herring, frankly, and I'm not that worried.

Now, that's a pretty optimistic statement to make for a company that has had massive same store sales growth for decades, almost without letup, and that has grown to the point where further dramatic growth might be difficult -- one need look no further than Starbucks (NASDAQ:SBUX) or Whole Foods (WFMI) to see what happens with retailers that investors think are losing the growth magic.

But I don't accept the argument that further growth will be extraordinarily difficult. I fully expect that the magical merchandisers at Chico's will find a way to revamp their fashions to correct the recent slowing of sales growth. I also think that their target audiences and price points will continue to grow, albeit more slowly, even in a recession.

The CFO certainly agrees -- he strenuosly defended the company's growth prospects in the last conference call when he said "Certainly the Chico's brand is more mature than it was three to five years ago, but we do not believe it is by any means mature" (more on this in a Pittsburgh Post Gazette article, FYI).

And even if the Chico's core brand does slow down, the growth from White House Black Market should be dramatic. I've written about all this before in some detail and don't want to repeat myself, but they're still opening new stores at a dramatic rate (that's why sales growth is in the high teens even with same store sales growth at a low point around 5%). They have something in the neighborhood of 700 stores now, and with two proven concepts that we know will work in almost every good mall or retail area of the country, there is certainly potential to open close to a thousand more stores. That's plenty of growth for me for the next five years.

And if they turn around same store sales, as I certainly expect them to do over the next several months, and apply the margin management to White House Black Market that has allowed the Chico's brand to lead the industry in profitability, the shares should reflect that quite quickly.

The Chico's of the 1990s is gone, and this is not going to be the single strongest stock of the next decade as it was in the last. But this is also the first time in a very long time that you can look at Chico's and say with a straight face that it's cheap (forward PEG of .6 and PE of 14 if the analysts are right, and a very low -- for Chico's -- TTM PE of 20). Analysts have spent the last several months cutting their estimates for CHS. I expect by this time next year they'll be climbing all over themselves to raise them.

CHS 1-yr chart: