Poor, Poor Chico's

For quite some time now, Chico's (NYSE: CHS) stock has looked like a bargain. There's just been one major problem -- it simply hasn't been able to turn its business around.

The pain isn't over yet. Chico's third-quarter net income dropped a whopping 44% to $23.6 million, or $0.13 per share. Sales increased 3.4% to $416 million, but quarterly same-store sales decreased 9.3%. Chico's inventory also increased a formidable 22% on a year-over-year basis, a red flag for investors.

Interestingly, Chico's sold its stake in yoga-apparel brand lucy activewear to VF (NYSE: VFC), which added nearly $0.03 per share to its earnings. Apparently Chico's took a stake in lucy in fall 2005, which was news to me.

Chico's plans to scale down expansion plans for the time being, lowering square-footage growth in 2008 to 10% from the previous goal of 12%-15% and reducing its number of store openings to 60-65. CEO Scott Edmonds said the plan includes improving existing stores and bringing in more merchandising and design talent. It sounds reasonable, but it also means there's still plenty of work to do. And lackluster fourth-quarter guidance is also contributing to investors' negativity today.

It's interesting to note that last December, Chico's founders, the Gralnicks, retired (for the second time, actually; they tried to retire in 1993, but returned when the company lost its way) -- and the retailer had already suffered a tough year then.

Despite my historical optimism on Chico's, in October I realized I was losing confidence in this particular segment of retail; I know I'm not the only one who's noted that many of the retailers targeting mature females seem to have lost touch with their core customers. Talbots (NYSE: TLB) hasn't had the magic in ages, but it seems Chico's and Coldwater Creek (Nasdaq: CWTR) have each lost their bearings, too.

Given Chico's historical success, I give it better odds than its rivals when it comes to finding its way again. However, my confidence has certainly been shaken. Chico's shareholders can only hope for a better 2008, but given its ongoing difficulties and concerns about the macroeconomic climate next year (and considering that older women pinch their pennies when times are tough), I can see why many investors might be throwing in the towel on this stock for the time being.