J Howard

Bad Year for Chico's, but Worth Holding On to the Stock

Look at CHS as if it were not growing the store base...

You would have $560m in CASH FLOW, defined as NET INCOME AFTER TAXES + DEPRECIATION. SUBTRACT $80m in MAINTENANCE CAPITAL EXPENDITURE, which I estimate at 100k per store. The result is $460m in FREE CASH FLOW. This is probably conservative since the business is STILL GROWING ORGANICALLY, even if it's not growing as fast as some would like. The number is also conservative because my hypothetical analysis of new new store openings does not add back the new store opening expenses that are not capitalized (i.e. they are directly expensed as incurred).

Since the highest savings rate you can get today is around 6%, I will apply a 7.5% yield to the $460m in FREE CASH FLOW that CHS generates under my scenario. This yields $6.1b. If I add the $250m in cash and securities, I get $6.35b. This number, divided by 180m FULLY DILUTED SHARES yields $35.27 per share, nearly DOUBLE the current stock price.

Basically, the growth guys are PUNISHING the stock for guiding lower and value guys should be jumping in.

My analysis stems from an OWNERS perspective, i.e. if I were to own ALL OF CHICOS and I were to say hey, "lets hold up on opening stores for now", these FREE CASH FLOWS are what I can expect to pull out of the business.

These FREE CASH FLOWS are UNLEVERED, and debt would only ENHANCE the equity value.

Some may dispute this post and say, "but wait...they ARE opening stores, so the FREE CASH FLOW you discuss is not realistic." TRUE. However, one can make the argument that the FREE CASH FLOW YIELD on a new store once it is open for one year, is even greater than the FREE CASH FLOW YIELD on the business as a whole given the operating leverge (i.e. infrastructure and corp overhead costs do not go up meaningfully as new store count increases). The point is you get a great FREE CASH FLOW YIELD on a company that can REINVEST that FREE CASH FLOW YIELD into even HIGHER FREE CASH FLOW YIELDING projects. This is the effect of compounding.

Value investors should be adding, while the growth group looks for the next "hot" concept.