2 Good Buys in a Difficult Apparel Industry

Chico’s and Gap look like good investments, while Francesca’s is not that exciting.

Feb 4, 2014 at 3:49PM

The apparel industry has been on a roller-coaster ride. Most retailers have been struggling to meet analysts' expectations, with many posting losses and struggling to turn things around. Retailers are competing hard, reorganizing, and realigning their business models in order to emerge as winners in the current market.

Let's take a look at how Chico's FAS (NYSE:CHS) has done and how it compares with Francesca's Holdings (NASDAQ:FRAN) and Gap (NYSE:GPS) in the apparel and accessories market space.

Chico's performance
Chico's target customers include women in their 30's who are interested in casual-to-dressy apparel and accessories under the Chico's, White House/Black Market, Soma Intimates, and Boston Proper brands. It operates 600 boutiques and 100 outlets throughout the United States and Canada. Unfortunately, Chico's is struggling to reverse its decline.

One the major challenges that Chico's faced going into the third quarter of fiscal 2013 was a tough comparison to the year-ago period. The company's comparable sales, or comps, increased 10% in that period and the retailer posted the best third-quarter gross margin performance since 2009 last year.

However, on the back of 115 new store openings, sales grew 3% year over year to $655.6 million; although comps declined by 1.3% due to a fall in traffic and a highly promotional third quarter. Earnings declined 12% from the year-ago quarter and came in at $0.22 per share.

While the near-term environment is expected to remain challenging and promotional, Chico's was off to a positive start in the fourth quarter. Going forward, its long-term growth initiatives will focus on the expansion of the all important omnichannel in order to achieve double-digit growth in revenue and mid-teen percentage growth in earnings.

In 2014 Chico's will be opening its first store in Canada, in addition to opening more White House/Black Market stores. The company is investing in growth, and for 2014, capital expenditures will be between $140 million and $150 million. Capex will go toward opening 120 to 130 new stores, including approximately 10 international stand-alone stores for Chico's and White House/Black Market combined and 15 to 20 new Boston Proper stores.

Chico's has a habit of returning cash to shareholders through share repurchases and dividend payouts. Since 2010, the company's dividend per share has nearly doubled. In order to further reduce the share count, the company authorized a fresh share-buyback program worth $300 million in December. This reflects the sound financial position of the company.

What about Francesca's and Gap?
Just like Chico's, Francesca's also grew revenue on the back of new store openings in its third quarter. It reported an 11% year-over-year jump in sales on the back of 10 new boutiques, although comps declined 3%. However, much like Chico's, Francesca's recent quarterly comps were also up against a strong comps gain of 17% in the year-ago quarter.

However, unlike Chico's, Francesca's fourth quarter isn't off to a good start. The boutique's transactions in November and beyond to the release of results fell short of the company's expectations due to subdued traffic. 

However, a bright spot in Francesca's third quarter was its online performance, where it saw an 87% increase in direct-to-consumer sales. The company attributed this stellar performance to improved site traffic, conversion rates, and transaction values. This can be a growth driver going forward if the company can continue to lure buyers.

Much like Chico's, Gap also has been reducing share count consistently in order to return value to shareholders. Over the past five years, Gap has bought back more than 35% of its outstanding shares. Its recent share-buyback authorization of $1 billion will go a long way towards fueling bottom-line growth.

Unlike its peers, Gap reported positive comps for the seventh consecutive quarter, as a result of which sales climbed 1% and earnings per share climbed 14% versus the year-ago quarter. The differentiating factor is that Gap caters to a much wider demographic, and this enabled it to ward off the headwinds faced by its peers.

Bottom line
While Chico's performance wasn't as stellar as last year, the company is looking to grow revenue by opening more stores and entering new markets. Also, Chico's returns cash to shareholders, and this is another virtue of owning the stock.

On the other hand, when choosing between Francesca's and Gap, investors should go for Gap as it is more diversified and has a strong repurchase plan in place. So, investors looking to benefit in a difficult retail environment can consider Chico's and Gap for their portfolio.

Start investing ASAP
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Meetu Anand has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers