Chico's FAS Shares Rally As Operational Performance Remains Outstanding

| About: Chico's FAS, (CHS)

Shares of Chico's FAS (CHS), a retailer of casual apparel for women, ended the week 10% higher. On Wednesday, the retailer announced record second quarter results.

Second Quarter Results

Chico's FAS reported second quarter revenues of $641.7 million, up 16.4% compared to last year. Sales were driven by comparable sales growth of 5.6%, as a result of increased traffic and higher prices. Square footage increased 7.4% on the year, while sales of Boston Proper came in at $32.6 million. Second quarter revenues came in line with analysts estimates of $641.3 million.

The company reported a 23% increase in net income to $53.4 million. Earnings per share rose 28% to $0.32 per share. On average, analysts expected the company to earn $0.30 per share.

Gross margins rose 30 basis points to 56.4%. Margin improvement was driven by increased full-price selling and more effective promotional activities. Selling, general & administrative expenses fell by 60 basis points to 43.0% as a result of positive operating leverage.

During the second quarter, Chico's repurchased 1.8 million shares for a total consideration of $25.6 million. At the end of the quarter, it still has $149.4 million remaining, under its $200 million authorized repurchase program. The program gives management the authority to repurchase approximately 5% of its shares outstanding.

Segmental Information

Sales of Chico's/Soma Intimates totaled $414.6 million, up 10.8% compared to last year. Revenues were driven by a solid 7.2% increase in comparable sales. The company opened 7 new Chico's stores over the quarter, bringing the total store count to 695. The company opened 10 new Soma stores, bringing the total to 190.

White House / Black Market sales rose 9.8% from $177.1 million last year, to $194.5 million in the second quarter. Comparable sales grew a mere 2.3%. WH/BM store openings totaled 19 during the quarter, bringing the total to 390.

Boston Proper generated $32.6 million in quarterly revenues, while it did not have any contribution last year.

Outlook

For the full year of 2012, Chico's anticipates sales of $2.55-$2.60 billion. This includes comparable store sales growth at mid-single digits. The guidance is in line with analysts expectations of $2.58 billion.

Gross margins are expected to be flat compared to last year, while selling, general and administrative expenses are expected to fall by 50 basis points.

Valuation

Chico's FAS ended its second quarter with $358 million in cash, equivalents and marketable securities. The company operates without the assumption of meaningful amounts of debt.

For the first six months of 2012, Chico's generated sales of $1.29 billion. Net income came in at $107 million, or $0.64 per diluted share.

Currently the company is valued at almost $3.1 billion. Excluding the generous net cash position, the firm's operating assets are valued at $2.8 billion. This values Chico's FAS at 1.1 times 2012's anticipated annual revenues of $2.6 billion. Earnings per share could rise to little over $1.00 per share, around $180 million. This values Chico's at roughly 15 times earnings.

Chico's valuation compares to a revenue multiple of 1.0 times for Ascena Retail (ASNA) and 0.8 times for ANN (ANN). These competitors trade at 19 and 16 times trailing annual earnings, respectively.

The company pays a quarterly dividend of $0.0525, for an annual dividend yield of 1.1%.

Investment Thesis

Year to date, shares of Chico's FAS trade with gains of 65%. Shares steadily rose throughout 2012. Over the past five years, shares trade almost flat. Shares hit lows of $2 during the darkest days in 2008 and 2009 but steadily recovered to levels around $18 at the moment.

In the meantime, Chico's continued to show improvements in operating performance. Annual revenues grew from $1.6 billion in 2008, to an expected $2.6 billion in 2012. While the company lost money in 2008, earnings are expected to top $1.00 per share in 2012, around $180 million. Furthermore the company did not pay dividends back in 2008, now paying $0.0525 to its shareholders every quarter.

While operating performance has been impressive, so has the run-up been in Chico's share price. Shares are trading near the highest levels since 2007. Despite the share price run-up, valuation levels have been getting more appealing, given the acceleration in operating performance.

Chico's is trading near fair value with comparable store sales slowing down. Yet I still see a little bit more potential in the shares which could reach $20 in the coming weeks.

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.