February same store sales decline, again. Fourth quarter profits fall more than 50% year over year. It closes down a company that it only recently bought, forcing writeoffs. And the shares were up close to 10% yesterday?
That's the story of Chico's (NYSE:CHS) in a nutshell.
And that's the nice thing about being beaten down and having weak expectations - any sign of a bottom being reached can bring new life. Clearly, investors are getting the sense that Chico's management may be on the verge of turning things around. Or at least, that the ship may no longer be taking on water.
Chico's has had a terrible year - this darling of the stock market, one of the strongest growth stocks in the country for over a decade, finally hit a speed bump. Of course, it happened to hit that speed bump not long after I bought shares, so I'm continuing to hold stock that is significantly in the red with a cost basis of just over $31.
But I've maintained that this management team deserves a bit of slack - this has been its most significantly bad year in recent memory, and it's been based on several seasons of bad merchandising decisions - and everyone has a bad year now and then.
So does that mean that this management team, the same one that put together two of the strongest growing brands in women's clothing and routinely churned out profit margins that were the envy of every other retailer, has lost the touch? Or that the company has grown too big to be effectively managed anymore? I don't really know for sure.
The risk, I think, is that the company ends up like The Gap (NYSE:GPS), with no compelling reason for customers to visit its stores and a never-ending series of shakeups in its merchandising mix in an effort to bring back lost customers. But I don't see that being a problem just yet, and Chico's is far from being as saturated as the Gap.
And I still get the sense that management is on the ball. It's taking it a while to turn things around, but my guess is that it'll be able to do it. What makes me think that?
Well, the first positive indication is that it recognizes the problems and is clearly willing to make changes. It has consistently taken the blame for making bad merchandising decisions last Spring and Summer, which then snowballed into forced markdowns in subsequent months that clobbered those nice margins Chico's has been used to. It believes it's "cleared the fashion mistakes" with those markdowns and hope that its offerings in coming seasons have more appeal, though it doesn't believe it's turned the corner on this yet, based on its results for February.
Adjustments flowing from that include some management changes, with White House/Black Market (its younger-skewing, faster growing brand) getting its founder promoted to a stronger position, and two recent upper management hires from Ann Taylor (NYSE:ANN) and American Eagle (AEOS) getting leadership positions in merchandising and marketing.
And, perhaps more significantly, it's proving that it can shelve the "growth at all costs ego" that brings down so many maturing companies, in order to hopefully make future growth stronger. Chico's will remain a fairly fast growing company this year in some regards, as sales growth is still expected to remain strong (and clocked in at 15% in February even as same store sales growth remained slightly negative) and White House/Black Market has room for many new store openings nationwide (and I think Chico's does, too, especially since it's bought out all its franchisees and has some new underserved areas to expand, but that's not the consensus). But the company made some recent decisions that indicate it's willing to scale back some near-term growth in order to maintain profitability and rebuild a strong foundation.
The biggest decision is its move to drop the Fitigues chain entirely, closing the stores and moving on. It bought this small "fancy sweatpants" (for lack of a better term) retailer just over a year ago, and while I and several investors didn't understand the odd fashion offerings, I was willing to give management the benefit of the doubt thanks to its track record with revamping and growing its older acquisition, WHBM. Clearly, over the past year it's decided that the opportunities for expanding the concept were not what it had thought, and it wasn't worth detracting from the focus on "fixing" the Chico's brand. Since it never expanded Fitigues or put much money in, it's just a 5 cents/share writeoff and we can move on.
But perhaps as significantly, it's also taking a close look at Soma, its new intimate apparel line, and deciding to take a page from its own history to slow down and reconsider its growth plans for the concept. It still believes that Soma has a bright future, but want to make sure it can develop it as a stand-alone brand that has some strength on its own and doesn't just pull in Chico's customers for the occasional bra purchase. I think that makes a lot of sense, and to some extent it mirrors the early days of the Chico's brand mass expansion . In the words of CEO Scott Edmonds from the earnings release:
We have ... decided to slow down the Soma store growth somewhat so that we can focus on strengthening the management team, improving profitability and expanding Soma beyond the Chico's customer for the long term benefit of the Soma concept and our shareholders. This strategy was successful for us in the 1994/1995 time frame when we slowed the growth of the Chico's concept so that we could improve our operations and build a solid foundation to achieve much stronger growth long-term.
I like the plan and am still willing to be patient. I think the demographic niche it works in, the loyalty of Chico's and White House/Black Market customers, and the chain's strong customer relations programs, give it a great future if it can rediscover its misplaced merchandising magic touch.
There are certainly risks ahead for Chico's. Its core concept, that it can sell a line of private label clothing that it designs itself, providing a compelling and different fashion option and cutting out costs to keep margins high, has caught the attention of everyone else in recent years, too. One small bit of good news is that Gap's move into the Chico's demographic with the Forthe and Towne concept has fallen victim to Gap's other problems (much like Chico's wants to focus on its core and not throw money at Fitigues, Gap has cut Forthe and Towne loose).
On the somewhat negative side of the demographic equation, if the movement of the baby boom generation through their target age group of the "middle aged" woman means that those women suddenly have a fashion mindchange and move on to the more conservative look of Talbots and the like, that's obviously a possible negative. I'm not that worried that the baby boomers are going to, as a group, suddenly start considering themselves to be old and toning down their wardrobes, but you never know.
Its fashion has been mimicked at times, and the success of its self-designed private label concept is probably part of the reason that much bigger companies like Federated Department Stores (FD) are pushing private label as well, and the resurgence of the department stores might be bad news for all the specialty retailers in the future.
But I'm a little stubborn and I like management, which gives me patience to wait for what I think will be a strong eventual turnaround. I think management is probably right to circle the wagons and stop providing specific annual and quarterly guidance, though it said it will continue to comment on street estimates as warranted (and of course, it'll still release plenty of data on monthly sales, etc.).
This year, Chico's management believes that a return to same store sales growth will make earnings of over a dollar a "reasonable" expectation. If so, and if this serves as the bottom of the curve while it builds a foundation for renewed growth in the future, prices here in the low $20s might still provide a nice buying opportunity (though I'm not buying more just yet).
Disclosure: I own Chico's shares.
CHS 1-yr chart