Before reading this article, I recommend reviewing the quarter one results and full FY 14 results here.
A couple months ago, a friend of mine recommended an open finance position at Chico's (NYSE:CHS) headquarters in Fort Myers, Florida, where I live. I told them I would give it a try, even though I was not looking for a new job. Naturally, as a financial analyst, I started digging into the company's results over the last several years. Before finishing my analysis, I went ahead and applied that night. I heard back from Chico's the very next morning. It was the standard copy and paste email thanking me for applying, but declining employment. I thought this was odd (such a quick response), so I followed up with the company and learned there was a hiring freeze.
Now I was interested to learn more about what was going on over at Chico's. I continued my financial analysis of the company. Even though the economy has improved greatly over the last several years, Chico's revenues seem to be treading water. I started asking around about the brand, and that is where my passion to write this article began.
Here's what we are going to review:
1. Hiring freeze
2. Financial results
3. Brand identities
4. My personal recommendation
Listening in on the quarter one conference call, I was looking for guidance on the hiring freeze. It received no mention, but should be noted to investors. Management should clarify whether layoffs are expected and what other areas are looking at similar cost-cutting measures.
Here are revenues for the last 12 quarters. Revenues grew at a healthy pace in 2012 and then into 2013. From 2013 on, revenues have leveled off. Given the amount of new store openings and the improving macro environment, I question slowing revenue growth in a younger company.
Here is revenue divided by brand (chart directly from the FY 2014 Form 10K):
I would personally like to see Chico's and Soma's sales separated. We will talk about brand identity soon, but Chico's flagship store has been showing weakness for some time. White House l Black Market (WHBM) revenue continues to show some strength. Boston Proper's revenue dropped significantly last year. I had high hopes for this brand upon acquisition. With the introduction of boutiques, revenues should begin posting double-digit gains.
Besides revenues, another concern I have going forward are margins. SGA expenses continued to increase, from 45.5% in FY 13 to 46.8% in the current quarter (this has trended upward). Gross margins were average in FY 14 at 54.8%. However, for the first quarter, they stood at 56.2%, and we know, per guidance, Chico's is holding a lot of inventory. I don't expect gross margins to improve until at least quarter three and potentially into quarter four. Quarter two will be a test for outlet locations in moving dated product.
I estimate FY 15 earnings at $0.70 per share, based on current sales trends, margins, economic outlook, forward guidance, and share repurchases. This gives the current stock price an estimated forward P/E of 21.71. This is a generous guidance, assuming the company can get through the inventory backlog and have a successful holiday season.
I was particularly concerned about the company not purchasing shares (other than restricted stock) in the last quarter. To me, this suggests the company predicts further downside in its share price. Just like investors, companies do not want to overpay for their own stock. Insider sales have continued to increase. The current share repurchase program does provide existing shareholders with a small insurance policy for downward movement, until second-quarter earnings. A second-quarter earnings miss would change my target to $14.
The company continues to have the leverage of a $70 million unsecured revolving credit facility. As an investor, I appreciate a company with zero debt. The company has the financial ability to act swiftly, if needs should arise.
1. Chico's/Soma brands
Back to the passion for writing this article. My principal is a middle-aged woman (maybe 55), and makes around $100,000 per year. She is constantly buying new clothes, and I wanted to get her feedback on Chico's. I asked her, "What do you think about Chico's?" She looked at me, and without hesitating stated, "Oh, it's for old ladies".
I created surveys for each brand on Surveymonkey.com, and started emailing it to LinkedIn connections, Facebook friends, co-workers, etc. I tried to target women between the ages of 40 and 60. I received over 100 responses. A response to the Chico's brand survey was consistently, it's for older women, not my style. This was concerning, because most of these women were in the targeted 40-60 year old range. The majority also met Chico's targeted income range. As a man, I don't understand much about fashion. I am more of a $5 T-shirt and $10 shorts from Old Navy (NYSE:GPS) kind of guy. I can, however, relate to not wanting to feel old. I would not frequent an establishment I felt was for older clientele, even if I was getting older.
The Chico's brand must take steps to ensure that customers feel confident in its products, not put off from ever entering a store. Chico's brand revenue proves there are underlying factors management is not highlighting.
Soma performed well in the brand survey and, I believe, is the main reason Chico's brand revenue is not down considerably more.
Chico's management should provide guidance on what steps they plan to take for rebranding or reinventing their Chico's brand stores. This is an essential part of the company's long-term success.
2. White House l Black Market (WHBM)
A bright spot in my brand survey. WHBM received above-average marks for quality and selection. Current customers expressed happiness with the brand, and did not indicate any age barriers.
3. Boston Proper
I did not get many responses on the Boston Proper survey. From an investor standpoint, I hope the company is able to turn around revenues at Boston Proper. Venturing into the retail store space will provide more opportunities for success or failure. Here's hoping for success!
Margins will continue to see pressure well into the fourth quarter as the company tries to move excess inventory and cut costs in SGA. I predict further margin pressure will come from competitors as they too reduce prices to keep revenue and foot traffic high. As current earnings have alluded, clothing retail is going to be a tough sector this year.
Chico's has many opportunities to cross sell-and implement the Omni Channel across all brands. International expansion is promising, and provides additional opportunities for revenue growth. Chico's new customer loyalty and incentive programs for each brand look promising for creating more sales per current customer.
Chico's has proven its commitment to shareholders through solid dividend payments and its share repurchase program.
FY 15 will be a consolidating year for the company. Top line growth needs to return, especially with the number of new stores continuing to open. As revenues improve, margins should improve simultaneously.
My recommendation: Hold
Price target: $16
Forward EPS FY15 estimate: $0.70
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.