2012 Preview: Chico's

With 2011 finally in the books, it's time to reflect on what transpired and what companies could be facing business-altering decisions in 2012. On today's plate we have women's apparel retailer Chico's (NYSE: CHS  ) .

Before we dig too deeply into what 2012 may have to offer, let's get a quick snapshot at how 2011 treated shareholders:

2011 Stock Return (7%)
Price-to-Earnings (TTM) 14.5
Price-to-Sales (TTM) 0.9
Cash/Debt $239.8M / $0
Projected 5-Year Growth Rate 14.9%
Forward P/E 11.4

Source: Yahoo! Finance. M = millions. TTM = trailing 12-months.

As bad a year as it was in women's apparel, shareholders are probably thanking their lucky stars that Chico's only lost 7% in 2011. Primary rivals Talbots (NYSE: TLB  ) and Coldwater Creek (Nasdaq: CWTR  ) are simply struggling to survive, so weakness in Chico's earnings in 2011 didn't come as a surprise to anyone. But these results are in the past. Let's look ahead and see what could be driving Chico's stock price in 2012.

What to expect
Possibly the biggest impact to Chico's stock price could come from the demise of either Talbots, Coldwater Creek, or both in 2012. Neither company has been able to solve the riddle of what consumers want for the better part of the past four years, nor do they have adequate capital to continue to operate beyond a few more quarters. Chico's, on the other hand, boasts a rock-solid balance sheet complete with no debt. Perhaps Chico's only true competition comes from the likes of ANN (NYSE: ANN  ) , which has yet to succumb to the same expensing pressure that Chico's gave into in November. Either way you look at it, less competition should translate into a boost for Chico's bottom line.

Raw material costs and gross margin will also remain in the forefront. Rising cotton prices have taken their toll on the teen retail sector while increased discounting practices have been the bane of the women's apparel sector. Chico's ability to anticipate consumers' demands and control its inventory levels at its flagship Chico's locations will be another determining factor of whether Chico's ends 2012 higher.

Finally, the potential for a buyout remains high, with the company trading at its lowest P/E ratio in four years. With no debt to worry about, speculation that private equity firms could make an offer for the company popped the stock higher two weeks ago. While I see no definitive reason for the company to sell itself, the struggle between a buyout premium and the potential for another quarterly miss are definitely going to pull at shareholders' heartstrings in 2012.

Foolish roundup
I've long been a Chico's supporter and even maintain an outperform rating on the stock in my CAPS portfolio, but earnings warnings from retailers are rarely a one-time event. If discounting is to blame, Chico's could correct the problem by changing its product assortment and better managing inventory. Selling the company, to me at least, seems like an extreme step that I don't expect to occur in 2012. If you keep your expectations reasonable, I don't see any reason why Chico's couldn't surprise investors with a good second half of 2012 and end the year higher than where it started.

What are your thoughts on Chico's heading into 2012? Share them in the comments section below and consider adding Chico's to your free and personalized watchlist to keep track of the latest news with the company.

Also, if you're looking for one more great idea heading into the new year, consider downloading a copy of our latest special report, "The Motley Fool's Top Stock for 2012," in which our chief investment officer highlights a company dubbed "the Costco of Latin America." The best part of all, this report is free!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that does its little dance on the catwalk.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 03, 2012, at 11:41 AM, kamee73 wrote:

    TLB and CWTR are not as bad as you are saying. Also I see more opportunities at these prices in those companies than in CHS. CHS is more expensive and has less opportunities. I do not think you are adding any value by misleading folks

  • Report this Comment On January 04, 2012, at 9:48 PM, FoolishFan1 wrote:

    Not sure if the Fool is aware that many of the current design team at Chico's are former TLB's that got booted when Trudy and Smaldone came on board. Also, Cinny Murray (Pres. of Chico's) is a former TLB gmm. Interesting that Chico's makes such a strong statement about listening to the customer and seems to do it well.

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