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Has Chico's Become the Perfect Stock?

http://www.fool.com/investing/general/2011/11/01/has-chicos-become-the-perfect-stock.aspx

Dan Caplinger
November 1, 2011

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Chico's FAS (NYSE: CHS  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Chico's.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

6%

Fail

 

1-Year Revenue Growth > 12%

11.9%

Fail

Margins

Gross Margin > 35%

56.4%

Pass

 

Net Margin > 15%

6.8%

Fail

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

3.06

Pass

Opportunities

Return on Equity > 15%

13.4%

Fail

Valuation

Normalized P/E < 20

15.80

Pass

Dividends

Current Yield > 2%

1.6%

Fail

 

5-Year Dividend Growth > 10%

NM

NM

       
 

Total Score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Chico's started paying a dividend in March 2010. Total score = number of passes.

Since we looked at Chico's last year, the company has seen a two-point drop in its score. Minor improvements in margins and return on equity weren't enough to make up for slower revenue growth.

Chico's targets older female shoppers with its fashions. That segment has taken a hard hit since even before the financial crisis. The women's retailer still dominates its competition, with wider net margins even than more youth-focused retailers like American Eagle Outfitters (NYSE: AEO