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Checking Up on Chico's

No retail company, no company of any stripe really, manages high-level performance indefinitely. When a big part of your business is anticipating what you're customers want (sometimes before they even know that they want it), you're going to mess up eventually. But what separates the good companies from the bad companies is a track record of making the right decisions -- and women's clothing specialist Chico's (NYSE: CHS  ) certainly has a good record.

For the first time in quite a while, Chico's is being called into question. The story here has really always been about consistently strong comp-store sales and earnings growth, exceptional merchandising savvy, and very high sales per square feet. With comp-store sales flagging in part because of merchandising missteps, now folks are suddenly worried about the valuation and whether there will be enough growth to support it.

There were certainly a few spots on this quarterly report. Sales were up 20%, with comps up 6.6% for the quarter. Growth was once again quite strong at the White House | Black Market business, while Chico's and Soma had a much more restrained performance. And though gross margins held up reasonably well, operating income was up just 8% (in part because of stock compensation expense).

There were a few other items that on their own aren't a huge problem but together might be cause for concern. Membership trends in Chico's loyalty programs seem a little softer (on a year-over-year basis), and the company is apparently at least considering moving to quarterly comp-sales reporting as opposed to the current monthly reporting. Again, neither is really a problem on its own, but they might add to a general sense of anxiety around the company and stock.

Being a value guy who appreciates well-run businesses, I really do hope that investors panic about the future or overreact to what may be difficult comps and estimates to achieve later this year. After all, I'd be more than happy to take a second run with a stock that I sold way too early the first time.

In the meantime, there's an annoying lack of real bargains in the retail space. I'm not sure you could pay me to own Gap (NYSE: GPS  ) today, and the relatively few companies that are both well-run and undervalued (like Nordstrom (NYSE: JWN  ) ) really aren't as cheap as I'd like for a new purchase. Still, patience can pay off, so I'll be keeping an eye on Chico's for the next few months.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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Stephen D.

I'm an ex-Wall Street sell-side and buy-side analyst who has spent most of the last 10 years writing on a wide range of industries and investment ideas.

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Related Tickers

11/27/2015 1:00 PM
CHS $12.35 Up +0.20 +1.65%
Chico's FAS, Inc. CAPS Rating: ***
GPS $27.36 Down -0.69 -2.46%
Gap CAPS Rating: ***
JWN $57.61 Down -0.18 -0.31%
Nordstrom CAPS Rating: ****