Here at The Motley Fool, we believe individual investors should have the same access to information that Wall Street has. In that spirit, we've listened in on some investment-bank conferences with major companies and are giving you the rundown. We call this feature "Fool on the Street."
Ah, Chico's (NYSE: CHS ) -- it remains one of my poorest picks in Motley Fool CAPS, although I admit I still have faith that the retailer's stumbles are just temporary. That's why I found it interesting to peek at the transcript from a recent Wall Street conference and see that the company still has the hungry spirit.
On April 11, Chief Financial Officer Charlie Kleman spoke at the 36th annual SunTrust Robinson Humphrey Institutional Conference about the opportunities that await this retailer as it seeks to regain the powerhouse status that it saw eroding last year.
Demographic refresher course
Many of you are already aware that Chico's aims at an older demographic, but it never hurts to take the refresher course. Chico's also encompasses two other brands, White House/Black Market and Soma, so it's branching out from its core baby-boomer target customer but hasn't strayed too far.
Kleman explained that the target at Chico's is women between 35 and 55, but that a good estimate of the average age of a Chico's customer is 52. The company believes this makes for a target market of 15 million people.
White House/Black Market, on the other hand, skews younger, with an average age of 42. Kleman explained that 30% of its patrons are less than 30 years old, while another 30% are older than 50. White House/Black Market, which principally provides white and black apparel and accessories, is a "true mother/daughter brand," according to Kleman, and has about the same market opportunity.
Then there's Soma Intimates. As the company seeks to increase Soma's market share, it's moving away from the "Soma by Chico's" name. That may very well be a wise move, since the core Chico's customer skews much older and would likely limit the brand's reach. Kleman mentioned that the "unfitted" sizing scheme at Chico's -- 0, 1, 2, and 3 -- limits potential customers for Soma. (Yes, it's difficult not to make a "granny panties" joke here, which is likely the association Chico's is trying to avoid by taking the Soma brand solo.) Indeed, Chico's is branching out with Soma in the hopes of attracting women who are loyal to the Talbots (NYSE: TLB ) and Ann Taylor (NYSE: ANN ) retail brands and may be slightly younger than the average Chico's customer. Kleman also pointed out that Soma is not aiming for the same customer that Limited's (NYSE: LTD ) Victoria's Secret targets.
Big is beautiful
If you want to look at the glass as half empty, you could say that the core Chico's brand is creeping ever closer to maturation, with nearly 600 stores now. The company has long said that it believes it can have 700 to 850 Chico's stores out there, but obviously, the retailer's pretty close to that level already.
However, Kleman explained that there is additional opportunity for existing stores, namely by relocating some Chico's locations to bigger spaces with more selling power. This year, the expense of opening bigger stores has been hurting operating margins, but Kleman expects that around the fourth quarter, when some of these relocations begin to hit anniversaries, operating margins should begin heading upward again.
Also interesting is that the core Chico's locations tend to be stores in strip malls, lifestyle centers, and street locations, as opposed to mall-based shops -- because these are the locations where the company believes that boomer females like to shop. White House/Black Market is more mall-based, a reflection, Kleman said, of its younger demographic.
It's not too surprising that Chico's is working on expanding the direct-to-consumer portion of its business, as many retailers are doing these days, although one might wonder what portion of the Chico's plan simply involves old-school catalogs, which can represent a pretty hefty expense as opposed to Internet-based direct-to-consumer initiatives. Kleman admitted that rivals Coldwater Creek (Nasdaq: CWTR ) , J. Jill, and Talbots all started off as catalogers and moved in the opposite direction when they began opening up stores, but Chico's believes it has opportunity in that niche.
Kleman also mentioned the company's loyalty programs, which encourage repeat shopping and, of course, higher transactions. It's already pretty well known that the Passport program at Chico's has been one of the big success stories in the industry.
When a rival falls and can't get up
Chico's admittedly had a difficult year last year, one that was quite an anomaly given that the company had reported years of stunning profits, sales, and comps. One of the questioners at the conference brought up the situation at Gap (NYSE: GPS ) -- considering Gap's long-standing struggles, what's gone on at that company has got to be a retailer's worst nightmare. Even more interesting, Gap has already moved to shutter Forth & Towne, which could have represented quite a threat to Chico's and its rivals, since it aimed for an older female demographic.
When asked for observations concerning where Gap went wrong, Kleman mentioned the retailer's aggressive move to increase square footage and the similarity between its Gap merchandise and its lower-priced Old Navy apparel. Kleman said Gap's woes are one reason why Chico's talks about how many stores it should open, not how many it could open. That approach should be heartening to Chico's shareholders, as should the company's success in avoiding a lot of merchandise overlap among its three brands.
Furthermore, Chico's may have had a rough year last year overall, but its issues have not gone on for nearly as long as Gap's have; Gap is certainly in the position where it must fight to fix its brand and bring customers back.
It's good to hear the details behind the company's attempts to manage its growth while looking for ways to augment it. Last week, my Foolish colleague Jeremy MacNealy reported on the most recent monthly comps, and it looks as if Chico's means business when it said it was starting fresh. It did indeed provide a March bursting with healthy gains in sales and comps. It's therefore not surprising that investors are starting to warm up to Chico's once again.
Here's some related Foolishness:
- Check out the March comps.
- Last quarter, Chico's cheered up.
- In January, Chico's management spoke at a different Wall Street conference.