Fool on the Street: An Opening for Chico's Investors

The CIBC World Markets Annual Consumer Growth Conference was timely for Chico's FAS (NYSE: CHS  ) shareholders. Last Wednesday, the latest comparable same-store sales figures were released for the women's apparel retailer -- which were not pretty, I might add -- and the conference scheduled later that same day provided a good opportunity for CFO Charlie Kleman to explain what went wrong and what the company is doing to correct the problem.

In this edition of "Fool on the Street," we will take a closer look at these and other remarks, and determine what it all means for investors.

A refreshed look on the way
The first topic that Kleman addressed was the poor sales figures for the month of June. He put it rather simply: The "product was not where it should be." Later in his discussion, he added that Chico's has struggled for some time now with comps -- since about August, to be specific. We at the Fool can certainly verify that. We have been watching this company closely for some time now; we know that it was a lack of "wear now" (or casual wear) merchandise that hurt the company last August and got the ball rolling in the wrong direction.

So when does Chico's leadership anticipate a turnaround? "We believe that's going to change somewhat this fall as we introduce new product," advised Kleman. On this point, the management team is essentially reiterating what they said at the outset of the year at another Wall Street conference and even earlier at a quarterly earnings conference call held last November. Chico's brought on a new chief merchandising officer in Michele Cloutier, who took the position this past March.

No other detail was offered as to what type of new look to expect from Cloutier and company this fall, but based on the failures last year, we can make an educated guess. Where Dress Barn (Nasdaq: DBRN  ) , Ann Taylor (NYSE: ANN  ) , and Christopher & Banks (NYSE: CBK  ) were all able to cash in last fall with the right mix of casual wear, Chico's major gaffe was that it did not carry enough of it on hand. I suspect the retailer will not make that mistake again.

The other goof last year was the color mix, which was just kind of blah. "Too dark and uninspiring" were the exact words used. So not only do I expect to see an improved product mix of casual wear (but not at the expense of dresses, since these have been hot items this year), we should also see more life and variation in terms of color.

Another change we are likely to see this fall, which was alluded to in this conference, is a deeper and more expanded merchandise lineup altogether. One of the main points that Kleman made during his remarks was that although the company has been opening larger stores with much greater floor space in recent years, the merchandise has yet to catch up and properly fill that space.

This past year, Chico's has increased the traditional store size by roughly 50%, cranking it up to 3,300 square feet from the prior level of 2,300 square feet. The short-term setback of the new design is that Chico's really did not have an apparel lineup that was deep enough to fill the larger floor space. As a result, operating margins have been negatively affected. Kleman indicated that margins would continue to suffer through the third quarter. In the fourth quarter and beyond -- when the new and expanded merchandise has hit store floors -- we should start to see a recovery.

The direct-to-consumer operation
Beyond the upcoming changes to its merchandise offerings, I thought the discussion on the company's efforts to expand its direct-to-consumer (DTC) business was the most important of the whole conference.

Kleman indicated that its DTC biz has grown around 30% in just the past year, and by all indications, this rapid growth is expected to continue. The opportunity here does appear to be significant. Kleman pointed out that in the past four years or so, DTC went from making up roughly 2.5% of net sales to almost 4%, where it is today.

He added that most of its competitors' DTC operations are in a range of 10%-20% of their respective net sales, suggesting that Chico's is far behind the rest of the industry. "We think there's a 10% opportunity here," Kleman added. "That is, it [DTC] could be about 10% of our sales."

One reason this opportunity is so important is that DTC is one of the "most profitable" parts of Chico's business. "It's very much like one of our most profitable stores," Kleman explains. So not only will an expanded DTC operation drive top-line growth, it should also be a nice boost to the company's bottom line and profitability.

To expand this operation, the company will launch new hardware and software this year. The websites are going to be overhauled with a new look. These new changes are expected to "enhance the experience" for the customer.

It all comes back to the right merchandise
Chico's is trading at near multi-year lows right now. But based on remarks made in this conference, the outlook for Chico's future appears to be much brighter than recent trading suggests. By year's end, the company should have roughly 1,000 stores in operation between its three brands -- Chico's, White House/Black Market, and Soma. The management believes the brands can combine for more than 2,000 stores just in the U.S. This does not include its DTC opportunity, as we have already discussed.

The opportunity here for investors is significant, but it all gets back to merchandise. Can Chico's hit a home run with its new fall lineup and get the ball rolling in the right direction again? We will know soon enough.

Related Foolishness:

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. 
 
Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.


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