Will Chico's Find Coal in Its Earnings Stocking This Holiday Season?

Specialty retailer Chico's FAS (NYSE: CHS  ) came out with third-quarter results that fell below both analysts' and management's expectations. The Fort Myers, Fla.-based company has been bearing the full brunt of acquisition charges and lower margins on its bottom line. But let's take a closer, Foolish look at what's up with Chico's.

Figuring it out
Chico's saw its third-quarter net profit decline by 8% to $26.5 million. Net sales for the quarter, on the other hand, were up by 11.5% at $538.5 million. Comparable sales on a consolidated basis saw a 3.7% increase from last year's quarter. Not bad on the sales front.

For Soma Intimates brand, comparable sales were flattish with a slight increase of 0.6%, while the company's White House Black Market brand saw comparable sales go up by around 11%, adding to a 10.2% increase for the same period last year.

Back in September, Chico's closed the acquisition of Boston Proper, a direct-to-consumer retailer of women's apparel and accessories, for $205 million. The brand has contributed approximately $11 million to revenue in the six weeks since its acquisition. However, its sales will not be incorporated into comparable-store sales figures until 12 months after its acquisition.

On the margins front, Chico's saw a 100-basis-point haircut in gross margins to 56% as a result of more discounts, which were imperative because of a poor sales environment. Selling, general, and administration margins also worsened as it rose to 48.2%. But that was mainly caused by acquisition and integration costs; excluding those, the margins would have improved with a 50 basis point drop to 47.3% from the third quarter last year. Nevertheless, apart from the third quarter, it seems that Chico's margins probably won't be looking too great for months to come.

Discounting profits
The company warned that its margins are likely to stay under pressure for some time as it tries to attract more customers with deeper discounts during the holiday season. In fact, retailers across the country are hoping to attract more budget-conscious shoppers with irresistible discounts. These include Gap (NYSE: GPS  ) , which recently announced that it would be looking at going aggressive on its discounts during the crucial holiday season. This in turn is directly translating into lower margins, which are already getting a shave from stubbornly high commodity costs. ANN (NYSE: ANN  ) has also upped the ante by overhauling its merchandise and offering discounts in order to rake in more customers. However, unlike Chico's, ANN's quarterly profits have been better than analysts' expectations, mainly due to better margins driven by its popular LOFT brand.

A sign of the times?
Judging from the sales figures around Black Friday, you might be thinking that Americans are loaded with more cash for holiday spending than they were a year ago. This assumption is understandable, as a survey from the National Retail Federation indicated that Americans spent $7.4 billion more during this period than they did for the same period in 2010. The news even caused a rally in the stock markets.

But what the survey did not reveal is that consumers merely advanced their spending in order to take advantage of discounted goods that were up for grabs. According to Capital Economics, while consumers are spending more during the holiday season, it's not as if it's money they wouldn't have spent anyway at another time. And this should not come as a very big surprise this year, with inflation eating through the average consumer's paycheck and unemployment rates at lofty 9% levels.

An analyst from Goldman Sachs also commented that strong sales on Black Friday were not a very encouraging sign, as consumers are now showing greater eagerness for bargains, which could result in lower retailer margins going forward as stores must meet consumers' low-price expectations.

The Foolish bottom line
Given that Chico's faces a lot of competition and continues to remain aggressive on discounts, margins will likely take a beating in the next quarter. So, for this reason I would be rather cautious in putting my money here. What do you Fools think about Chico's and the retail sector's performance as a whole? Let us know by giving your response in the comments box below.

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