Thursday, July 2, 1998

Chico's FAS, Inc.
(Nasdaq: CHCS)
Phone: 941-277-6200
Website: http://www.chicos.com
Price (7/1/98): $15 1/2

HOW DID IT DOUBLE?

With a strong economy fueling retail spending and investors leaning toward retail stocks to avoid Asia's troubles, it's been a flattering time for many fashion purveyors. Women's clothing outfit Chico's FAS has benefited from this positive environment as well as its own rebound from a disastrous 1997.

In recent years, Chico's rode a roller coaster -- from $4 in June 1995 to $12 a year later and then back down to $2 3/4 by April of 1997. The six-bagger since then followed from a management shakeup last March that refocused the company's merchandising strategy to feature seasonal discounts when necessary.

Results have struck more than a pose, with first quarter numbers announced May 7 showing sales up 38% to $25.9 million on 32% growth in same-store sales. Net margins soared to 9%, with profits rising to $2.3 million from just $1 million in the year-ago period and earnings per share up to $0.28 versus just $0.13. And the clothes keep flying off the shelves, with May sales up 47% on 33% comparable-store growth.

This good news hasn't gone unnoticed. Kathy Oher at Southwest Securities initiated coverage with a "buy" rating back in November. She reiterated that rating June 3, offering a 12- to 18-month price target of $18. A Raymond James analyst chimed in the next day with a "buy" rating and a 12-month target of $15. Then on June 11, Oher chose Chico's for her selection in the Wall Street Journal's stockpicking contest, raising her target to $23 four days later.

From trouble to double to media star, Chico's has been styling.

BUSINESS DESCRIPTION

Based in Ft. Meyers, Florida, Chico's is a specialty retailer that sells its own private label casual clothing and accessories to moderate- to upper-income women largely between ages 35 and 60.

Chico's apparel includes collections of color-coordinated tops, pants, shorts, skirts, jumpsuits, dresses, vests, jackets, and other items. Products are designed by Chico's and made by manufacturers, mainly in Hong Kong (32% of sales) and Turkey (23%).

Chico's has 141 stores in 34 states, including 29 in Florida, 16 in California, and 9 in Texas. Seven are owned and operated by franchisees. Most are boutiques with about 1,300 square feet of sales space; 8 are outlet stores.

The stores are located in established, upscale, outdoor destination shopping areas and high-end enclosed malls located either in tourist areas or mid-to-larger sized markets. Chico's opened 13 new stores last year while closing six others. Plans call for 16 to 20 new stores to be opened in FY99.

Its direct competitors include the Gap (NYSE: GPS), The Limited (NYSE: LTD), and Banana Republic. Insiders own 29% of the stock with most held by the co-founders: Chair/CEO Marvin Gralnick and his wife, Senior VP Helene Gralnick. Fidelity also owns a 10% stake.

FINANCIAL FACTS

Income Statement
12-month sales: $82.6 million
12-month income: $4.1 million
12-month EPS: $0.49
Profit Margin: 5.0%
Market Cap: $127.8 million

Balance Sheet
Cash & Securities: $10.7 million
Current Assets: $20.0 million
Current Liabilities: $8.2 million
Long-term Debt: $6.8 million (including leases)

Ratios
Price-to-earnings: 31.6
Price-to-sales: 1.5

HOW COULD YOU HAVE FOUND THIS DOUBLE?

When a company falters due to management issues, personnel changes are a good first step. In March '97, Chico's said goodbye to Melissa Payner (president since August '96). Marvin Gralnick reclaimed Payner's responsibilities. In September, the firm brought in a new senior merchant. Improving results against a backdrop of such changes was likely to be significant.

Yet perhaps the surest way to spot a retailing double before it happens is to keep tabs on comparable-store sales. While a retailer may run special promotions that make such figures of dubious value, growing same-store sales are almost a prerequisite for massive stock price appreciation.

One month may be an aberration, but back-to-back positive months suggest a possible trend. Three strong months in a row should get you excited, especially if the company in question is virtually undiscovered. (Comparable-store sales data for many retailers is published monthly).

On April 9, Chico's announced that same-store sales for the March period rose 32%, the fourth consecutive month of 20% plus comparable-store sales increases. Even with the year-ago period being especially weak, these were terrific numbers. This was also the first time monthly sales had topped $10 million. A definite pattern had emerged. The stock was already up 26% for the year, but it could still have been had for $8 1/2.

WHERE TO FROM HERE?

Chico's continually introduces new merchandise designed to complement colors and styles it has sold in the past. The goal is to instill a sense of urgency so customers will buy now (or miss out on the item) while also creating repeat customers by the overall continuity in the merchandise.

In the early '90s, Chico's generated a handsome 10.5% net profit margin. Based on the first quarter's results, the firm has a sales run-rate of $104 million, well ahead of the $75 million in FY98 revenues. Assuming the current sales pace and a return to the margins last seen in FY94, the company could deliver earnings of perhaps $1.32 per share.

However, the retailing environment has become more price-conscious in recent years, so it seems unlikely that the company could deliver such profitability. Even so, a year's worth of the 9% profit margins seen in the first quarter would pump earnings per share up to $1.13 based on the first quarter run-rate, crushing the current FY99 estimate of $0.74. An earnings multiple of 20 would then get us near Oher's target price of $23.

With strong sales providing operating leverage, these targets seem possible. Chico's also has a decent balance sheet. Still, I'd hate to have to compete with the Gap and a revamped Limited. Moreover, the fashion business is especially fickle, with one season of miscues wrecking an otherwise good year. Chico's recent results, though, suggest that the company is once again in fashion.

-- Louis Corrigan
(TMFSeymor@aol.com)

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