Like any typical office, there are a few jokes among The Motley Fool's editorial staff that probably won't ever lose their humor. My favorite takes place at the end of our morning news meeting, when one Fool writer finishes the briefing with an update on the wearable computers sector and its leader Xybernaut (Nasdaq: XYBR). The other joke that always seems to come up concerns Chico's FAS (NYSE: CHS), the specialty women's clothing retailer that's the subject of today's column.
Chico's same-store sales growth (table below) has been so strong for so long nearly every Fool writer has developed some far-reaching theory to explain it. From spiking the air-conditioner ducts of its stores with a secret formula that encourages aggressive purchasing to teaching sales clerks Jedi mind tricks to use on shoppers, the explanations set forth month after month have been both hilarious and at times over the top. Still, while most of the theories are within the realm of possibility, Chico's same-store sales growth most likely has a more logical explanation. Here's a look at those numbers for the past three-and-a-half years:
Quarter Same-Store Sales Growth Q1-98 31.7% Q2-98 23.0% Q3-98 28.5% Q4-98 38.5% Q1-99 22.6% Q2-99 17.2% Q3-99 26.9% Q4-99 26.5% Q1-00 30.9% Q2-00 34.3% Q3-00 39.1% Q4-00 32.2% Q1-01 27.7% Q2-01 ?
As you can see, Chico's same-store sales have been outstanding, but before delving into the company's impressive performance, let's review why same-store sales are an important metric. Same-store sales, which are also known as comps, measure sales growth at stores that have been open for at least one year. It's important to exclude stores that have been open less than a year because in some instances sales at new locations are very high as companies spend lots of money on marketing to bring shoppers in. If new stores were included, same-stores sales would look very high for a company that was opening new locations aggressively, for instance.
Increasing same-stores sales is the most efficient way a company can grow revenues. Chico's can increase its sales by either selling more clothes and accessories at existing locations or by increasing its total number of stores. The latter drains the company's cash flow and returns on capital because it's expensive to buy or lease real estate and build stores. The former is less expensive because it means more customers are either shopping at Chico's stores or paying higher prices. (For more on the retail industry, visit our InDepth page on the sector.)
Still, none of this explains why Chico's has been able to post such impressive numbers. Increasing same-store sales can be attributed to a number of factors, but the company credits the results to its strong brand and product offering. Chico's products are targeted toward women between the ages of 35 and 55 in the middle- to upper-income brackets. This customer is one of the fastest-growing segments in the U.S. as well as one the biggest spenders. Its clothing is sold under the "CHICO'S" brand and has reached growing appeal as women demand apparel that's both stylish and casual. The company's moderate prices have also added to its success.
While those reasons might satisfy some investors, there are other less-obvious factors that might explain such stellar same-store sales results. First, in those results Chico's includes stores that have been expanded or relocated within the same general market area (approximately 5 miles). Some Wall Street analysts have pointed to this fact in the past, and Chico's has responded by saying it's a practice followed by other retailers. Looking at its competitors, however, I came to a slightly different conclusion.
Ann Taylor (NYSE: ANN), for example, states in its 10-K that expanded stores are excluded from same-store sales for the first year following expansion. Talbots' (NYSE: TLB) 10-K states, "when a new Talbots Petites store, Talbots Woman store or Talbots Accessories & Shoes store is opened adjacent to or in close proximity to an existing Misses store which would qualify as a comparable store, such Misses store is excluded from the computation of comparable store sales for a period of 13 months." I also checked the 10-Ks of Gap (NYSE: GPS) and Limited (NYSE: LTD), but couldn't find explanations for same-store sales, which means either could include stores that have been expanded or relocated within the same market area.
It appears that Chico's recognizes same-store sales more aggressively than at least some of its competition, but the company points out that if expanded stores had been excluded, same-store sales would have come in only 1.6% less in 2000, 0.6% less in 1999, and 0.5% less in 1998. While this appears to put the controversy to rest, it's worth noting that the company only expanded 30 stores in the last two fiscal years. Going forward, Chico's plans to increase the number of expanded and renovated stores, and this could lead to a larger disparity between comps that include expanded/relocated stores and those that do not.
The company's same-store sales have also been driven by its membership program, "Passport Club." Once a customer buys $500 of merchandise, she's offered a membership with a 5% discount and advance notice of sales. There are more than 200,000 permanent Passport members whose purchases make up more than half of sales, plus another 500,000 temporary (shoppers invited into the club, but who haven't yet spent $500) members, accounting for 20% of sales.
I don't have a problem with a retailer offering discounts to spur additional sales volume, but companies like Gap have come across problems in the past for too much discounting. Over time, if volume doesn't increase like Chico's plans, same-store sales growth could suffer. The discounting could also hurt margins, although Chico's profitability -- gross margins of 59% -- is as good or better than most of its industry peers at the moment.
The speculation over Chico's same-store sales, even among Fool writers, will continue as long as the company continues to post such strong numbers. That attention could quickly dwindle, however, as the performance has left the company with some very difficult same-store sales comparisons. (In August of 2000, for example, Chico's posted a whopping same-store sales figure of 37.2%.)
That said, it's important that investors bear in mind that same-store sales are simply one metric by which to assess Chico's. The stock's valuation of 29 times trailing earnings, the management team, and the company's continued profitability are all issues savvy investors will want to consider further.