Chico's Chugs Along

Chico's (NYSE: CHS  ) may have reported a decrease in its first-quarter profit, but it beat analysts' expectations, which probably explains at least part of the stock's surge following the earnings report.

The fact that Chico's grew sales by 16% to $453.1 million is impressive, but its profit decreased by 7.2% as the company experienced higher expenses and same-store sales decreased by 1.6%. Operating and net margins fell as the company spent more on payroll as it opens more stores -- and staffs larger ones as well. On the brighter side, merchandise margins increased, although gross margin as a percentage of sales was flat on a year-over-year basis at 61.7%. In another red flag, inventory increased by 22.4%, outpacing sales growth. (For all the numbers, see our related Fool by Numbers.)

This isn't a new wrinkle at Chico's. When I took a peek at the transcript from a recent Wall Street conference, I noted that Chico's CFO Charlie Kleman explained that while the core Chico's concept may be approaching the point where it wouldn't be wise to increase store count, there's still more growth to be had by relocating existing stores into larger spaces. This sort of strategy has contributed to the drag on operating margin, and in this quarter's conference call, Kleman said that will continue this year. As previously stated, he expects the reversal around the fourth quarter. (He also expressed awareness that the company will have to show its ability to turn those operating margins around, although he also asked investors to remember the company is "still producing very profitable stores with enviable store economics.")

Here lately, investors have warmed up to Chico's once again after it proved tough for the retailer to live up to its previous high standards of performance during the second half of last year. It's a stock that has increased by 180% over the last five years -- but it's fallen 13% over the last 12 months. Then again, year-to-date it's up 24%.

So far this year, it's been clear that Chico's has been on the road to recovery, but not without its share of speed bumps. For example, management says May sales trends are still rather soft, although it's pleased with gross margin thus far. However, the company continues to expect to see an improvement in its comps as fall approaches.

Chico's may still face a number of rivals who cater to a similar customer demographic -- consider Coldwater Creek (Nasdaq: CWTR  ) or Talbots (NYSE: TLB  ) -- but given Chico's historical success in running its business and knowing its customers, it doesn't seem hard to imagine that the company is a formidable force in this area.

Even if Chico's road to recovery has been chugging along with a few hiccups here and there, it does seem like the days of the deep discounts on this stock are over, for the time being anyway. I can imagine that at this point, many real bargain-hunters are probably waiting for another temporary setback before setting their sights on this stock.

Take a walk down memory lane with Chico's:

David and Tom Gardner have recommended several retailers to subscribers through Motley Fool Stock Advisor. To find out all their picks, take a 30-day free trial today.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool's disclosure policy always looks well put together.


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