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.

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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.

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