Chico's Cheers Up

For a former market darling, Chico's (NYSE: CHS  ) has been slow to recover from negative investor sentiment. The bad news began when the once-fashionable retailer slowed down in 2006 after years of impressive success. Chico's big jump in share price following its earnings news may suggest that the company's slumping ways are about to change.

Chico's fourth-quarter profit fell 60% to $18 million, or $0.10 per share. This included a $0.03 per-share impairment charge related to the company's decision to close its Fitigues concept in the first quarter.

The retailer increased sales by 18.8% to $446 million. Same-store sales for all the company's brands decreased 2%. Fourth-quarter comps for each brand showed this drop evenly spread across brands, as the Chico's/Soma and White House/Black Market brands both fell 2%.

As promised, Chico's has been clearing out old inventory so that it can start fresh this year, although it still reported a 16% increase for 2006, about in line with its revenue increase. Management said that so far, its spring line seems to be selling well, with February gross margins strong despite the bad weather, but it also cautioned that it hasn't "fully realized" its new initiatives to provide more compelling fashions.

Chico's said it has decided to stop providing sales and earnings guidance. As a consolation prize, it stated that if it achieves a low single-digit same-store sales increase for 2007, First Call's consensus estimates for sales and earnings "appear reasonable." Maybe Chico's shareholders shouldn't be thrilled with less visibility into the future, but it appears the outlook cheered them, since the stock jumped as much as 10% during today's session.

Investors monitoring Chico's are abundantly aware of its tough time in 2006; it's struggled to get back on track after several fashion misses. So it's probably not surprising that Chico's free cash flow generation fell by nearly half, to $70.7 million for the year.

Despite its difficulties (and with any luck, reflecting confidence in the future), Chico's announced several promotions and an addition to the management team. The retailer promoted Michele Cloutier, a former Gap (NYSE: GPS  ) executive who joined Chico's in September 2006, to executive vice president and chief merchandising officer. Patricia Darrow-Smith is more of a Chico's veteran; she's been with the company since 2003 and is being promoted to brand president for White House/Black Market. Michael Leedy, a veteran of American Eagle Outfitters (Nasdaq: AEOS  ) , is being promoted to executive vice president and chief marketing officer, from senior vice president and chief marketing officer. He's been at Chico's just shy of a year.

Chico's decided to discontinue the Fitigues concept -- an intriguing move, given Gap's recent decision to shutter Forth & Towne. Chico's acquired Fitigues -- consisting of 11 stores and one outlet -- just a year ago, and it has been apparent that Chico's didn't quite know what to do with it. As with Forth & Towne, sometimes a good run is better than a bad stand, especially with a new concept that isn't exhibiting good return on investment. It's logical for Chico's to focus on its core business as it tries to compete with retail rivals like Ann Taylor (NYSE: ANN  ) , Talbots (NYSE: TLB  ) , and Coldwater Creek (Nasdaq: CWTR  ) .

I've long considered Chico's a strong company for the long term. Most retailers inevitably face short-term stumbles sooner or later, and it's easy to become the victim of one's own success, when strong past performance becomes increasingly tough to beat. Although Chico's still has its work cut out for it, it seems investors are finally starting to ponder whether the retailer's difficult times are behind it.

Further fashion-forward Foolishness:

Gap has been recommended by Motley Fool Stock Advisor and Motley Fool Inside Value. American Eagle Outfitters is also a Stock Advisor selection. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned.


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