Chico's Gets Punished, But Still Has Room to Grow (CHS)

| About: Chico's FAS, (CHS)

Well, it had to happen eventually ... Chico's (NYSE:CHS) finally missed and disappointed, and the Street decided to take back the extra billion dollars or so of market cap that CHS had picked up over the past month of torrid growth. While I'm surprised to see such a drop on a minor miss of a penny, I haven't heard anything to argue against my long-term rationale for owning this wonderful company.

Those of you who have watched Chico's at all over the years know that this is the single best performer in the stock market over the past ten years -- a truly remarkable run that has included many moments like this when investors suddenly lost faith in their ability to continue growing at a rapid rate.

Of course, at some point they will slow down markedly ... but I'm not so sure that this moment has come. I bought into Chico's at about $35 last year because I was delighted to see the stock dip into what I considered a reasonable price range. We're looking at the single best retailer in the US -- highest margins, two great concepts that appeal to people who will always want to shop, and a management team that has earned the respect of everyone in retailing with their uncanny ability to merchandise, attract and retain customers, and control costs.

So is this a buying opportunity? Not yet for me ... I still love the company, but I'm not interested in adding to my position just yet. If some actual bad news comes along (not just a one penny "miss"), then hopefully we'd see a more significant decline that would make a purchase worthwhile. Above $40, I'm happy to just hold my shares -- I expect that over the long term Chico's will continue both build new concepts and acquire and boost undermanaged brands (like White House Black Market, which they revitalized with incredible speed, and hopefully Fitigues in the coming years) and build out their empire. Unlike the Gap, which has nowhere left to expand in my opinion, Chico's various concepts have a tremendous amount of potential. Even if Chico's itself is (arguably) starting to reach saturation, the other brands are still just getting going.

And on that last point -- every time we begin to think Chico's has saturated the market, they find a way to continue to improve their business ... not only are sales still climbing but margins and earnings for 2005 climbed even faster than sales. The fact that they were able to increase their operating margins without sacrificing sales tells me all I need to know about their excellent management team.

Analyst downgrades and a warning that they'll be pressured a bit on gross margins have brought us this decline ... but I'm not worried just yet, they can afford to give back some margin in the short term and I trust this management more than any other in the industry to manage those margins and their growth effectively. If we do make it back down near my original purchase price over the coming months I'll have to consider whether another buy is warranted.

CHS 1-yr Chart

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