Why Chico’s Is Not a Good Bet Right Now

The apparel & accessories industry has been witnessing tough times lately. I previously wrote about the woes of the "3As" of the teen-apparel retail industry in the U.S. It isn't any different at The Men's Wearhouse either as discussed here. It seems that the story also isn't going to be any different for women's exclusive apparel & accessories retailer Chico's FAS (NYSE: CHS  ) .

Looking closely
Chico's caters to the women in the 30 and above age group and sells casual-to-dressy apparel and accessories under the Chico's, White House/Black Market, Soma Intimates and Boston Proper brands.

The global women's clothing industry is expected to exceed $621 billion in 2014, marking a 12% increase in five years. The women's apparel market saw 3% growth in 2012 as per estimates and it is projected to reach the 4%-5% level during the next five years.

However, Chico's seems to be unable to profit from this growth.

One of the main reasons behind the tepid performance in apparel retail has been the fact that dollars are being spent on other items as consumers hurry to take advantage of still low interest rates. As we see in the graph below, with the rise in disposable personal income, car registrations have gone up.

source: tradingeconomics.com

On the decline
As such, Chico's comparable store sales, or comps, in the quarter fell 2.6%, while SG&A increased by 3.7%, leading to a margin squeeze in the reported quarter. Earnings came in at $0.27 per share, which was a 15.6% decline from the same quarter a year ago. Net sales increased 1.2% from the year-ago quarter to $649.5 million, but still fell short of consensus estimates. The increase in revenue was primarily due to the addition of 112 net new stores, resulting in a square footage increase of 8.8%.

The problem with Chico's is essentially the same as the problems faced by the "3As" even though the companies target different customers. This generally points to more of a trend in the sector which only added to the woes of Chico's, which has posted a couple of disappointing quarters on the trot. This hasn't gone down too well with investors and is reflected in the year-to-date stock price decline of 12%.

Chico's is taking steps to counter the negative sentiment. This includes plans to expand into Canada and opening up 135-140 new stores with capital expenditure for fiscal 2013 pegged at $140 million. It is also committed to omni-channel retailing.

Bucking the trend
The apparel & accessories retail sector, despite macroeconomic headwinds, includes retailers that are successfully bucking the trend. Express (NYSE: EXPR  ) has beaten analyst expectations in 12 of the last 13 quarters. It is poised to grow going forward with the back-to-school shopping season finishing and the holiday season fast approaching.

Express reported second-quarter results last month and saw revenue increase 7% from the same quarter a year ago to $486.2 million. The company reported an increase of 6% in comps as compared to a decline of 1% in the year-ago quarter. The e-commerce channel increased an impressive 27%.

The company has been looking to capitalize on the back to school season through smart promotion strategies. For instance, by way of its denim promotions, Express has been able to move other items as well, driving revenue higher in the process. Also, the company is looking to open 12 to 13 new franchise locations this year globally. Hence it is not surprising that Express has been able to turn its business around successfully.

The Gap (NYSE: GPS  ) is yet another apparel & accessories retailer that's doing well and bucking the trend in the retail sector. On the back of solid top-line growth and improved margins, the company reported earnings of $0.64 a share for the second quarter of fiscal 2013.  This was 30.6% more than the same quarter a year ago.

Gap increased its store count by 34 and closed 33 stores, bringing the total store count of company-operated stores to 3,106. So, Gap is doing pretty well and the company has been expanding. It is looking to drive further gains by opening more stores and closing unprofitable ones.

In the current fiscal year, Gap plans to open another 160 stores, mostly in China. However, Gap plans to close down 80 stores and most of the closures will take place in North America. This is a smart strategy since apparel retailers in the U.S. are having a tough time. In comparison, the second-largest apparel market in the world, China, is expected to continue growing as disposable income increases, according to Cotton Incorporated.

Conclusion
Buying Chico's at this point looks like a risky bet since the company's vital metrics have been falling. The company has been trying to bring some meaningful improvements to its business by opening new stores but until and unless there are tangible signs of a turnaround, investors should stay away.

Which retailers are positioned for the coming years?
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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