Chico's Still Da Man

We're a motley patchwork here, which is why I'm going to add a little bit of color to what my colleague Dave Marino-Nachison wrote aboutChico's FAS (NYSE: CHS  ) recently.

I won't bother going over all the numbers that came out in the latest earnings report, since he covered that admirably enough. And I'll leave aside the question of whether the earnings constitute a "miss" given the special charges taken, because we all focus way too much on these short-term targets.

Instead, I'm going to point out what's all too easy to miss with Chico's: the way it continually raises the bar and outpaces just about any retailer out there. Sales have grown at a great clip for years. When 9.2% comps growth looks like a disappointment, you know you're dealing with a firm that sees solid demand for what it's got. So, we'll scratch that off the list as a given.

The reason I think investors needn't get unduly caught up in what looks to some like a "bloated" share price? Operational excellence. Tip of the iceberg? Cash conversion. At just more than a month before money paid out comes back in, Chico's is on par with big machines like Target (NYSE: TGT  ) , which is to say, twice as efficient as most of its comparable retail competitors.

Gross margins have been increasing for what seems like forever. This year they notched yet another tick upward to 61.4%. Operating margins, same story, up 0.2% this year to 21.2%. Net margins, same trick, coming in at 13.2%. How many retailers out there can you find that sport those kinds of margins? Not competitors such as Ann Taylor (NYSE: ANN  ) or Talbots (NYSE: TLB  ) , whose operating margins are less than half Chico's.

And these aren't just those fake-o GAAP earnings that don't turn into cash for shareholder benefit. Let's take a look at the margin of free cash flow (MoFCF), a little shorthand number I use to try and judge a company's power to reward shareholders. Despite being a fast grower -- which can take up a ton of resources and get a company into major trouble, a la KrispyKreme (NYSE: KKD  ) -- Chico's MoFCF has risen steadily over the past five years to 12%. That means 12% of revenues return not as fancy-pantsy earnings but as real live cash.

Finally, a return on assets north of 25% and a return on equity in the 30% range means that the cash Chico's generates is being very well used to fund yet more earnings growth. Bloated is in the eyes of the beholder. By setting the standard by which other apparel retailers should be judged, I think we investors can glance past the P/E and cut Chico's some slack.

For related Foolishness:

• Bling beats the bargain bin, folks .
• Keep your eyes open for Ann's wardrobe malfunction.
• Compare the three chic stocks.

Chico 's has delivered 20% since it was singled out in our annual stock-picking guide for 2004. And it was one of the laggards. If you'd like your portfolio's dogs to notch 20% gains, click here to take a look at what the Fools have dug up for 2005.

Seth Jayson used to think retail was a sucker's investment, until he met Chico's. Now he's all women's clothes, all the time. At the time of publication, he had shares of Chico's, Talbot's, and Ann Taylor but no position in any other firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.