The saga of Chico's (CHS) and private equity firm Sycamore Partners continues. In May, the women's apparel retailer rejected a takeover offer from Sycamore that featured a buyout price ($3.50 per share) below its share price at the time. This month, Sycamore came back to the table with an even lower offer. Given that persistent suitors usually raise their offers after being turned down, what logic could have motivated Sycamore to bring this weaker bid?

Sycamore's takeover tactics

Sycamore has been stalking Chico's for some time now. It first tried to acquire it in 2015, when Chico's had a market cap of around $2.8 billion. Sycamore abandoned that attempt after failing to secure financing.

clothing hanging on a rack

Image Source: Getty Images.

Chico's now has a market cap closer $400 million, and Sycamore has been taking a different tack. In a letter it sent to Chico's in early May, Sycamore disclosed that it had acquire a 6.6% stake in the company, and noted that its offer of $3.50 per share wouldn't require third-party financing. The catch: Chico's was trading above $3.50 a share at the time. The company's board promptly rejected Sycamore's overture.

The firm came back to the negotiating table in June with a head-scratching revised offer of just $3 per share.

Chico's management put out a press release saying it would review the offer, but noting it had rejected the previous offer and that "numerous Chico's FAS shareholders have expressed to management that they support the Board's previous decision to reject Sycamore's proposal and share the view that Sycamore's proposal is inadequate. Shareholders also support the actions underway to improve performance and value creation."

Sycamore's argument is that Chico's business is deteriorating and will be worth even less as time passes unless critical operational changes are made. Supporting Sycamore's argument is the fact that Chico's stock price has declined since its last offer and as of this writing is trading below $3.50.

CHS Total Return Price Chart

CHS Total Return Price data by YCharts

Working through a business turnaround

These takeover attempts come during a vulnerable period for Chico's. Its stock price is at a multiyear low due to persistent declines in sales and earnings. Further adding pressure is that Chico's currently lacks a permanent CEO.

The company's interim management team has laid out an ongoing turnaround plan that involves a greater focus on digital sales channels, cutting costs by reducing the number of items sold in stores, and optimizing its supply chain. However, Chico's financial results have continued to be lackluster.

Metric Q1 2019 Q1 2018 FY 2019 FY 2018
Same-store sales (7%) (5.9%) (4.9%) (7.7%)
Gross margin 36.9% 40.4% 35.8% 37.9%
Operating cash flow $5.7 million $61.9 million $158.1 million $166.9 million

Data source: Chico's. Chico's fiscal year ends Feb. 1.

The downward trends in same-store sales and gross margin are worrying enough, but arguably the most important metric is operating cash flow, and that shows that the business as a whole has become less economically productive. All of those trends support Sycamore's argument regarding the direction of Chico's business.

Sycamore's endgame

It is tough to decipher the outcome Sycamore Partners is seeking. Its takeover offers are clearly opportunistic, but they also appear unlikely to succeed due to their unattractiveness.

One explanation could be that Sycamore wants another party to acquire Chico's, and is simply making noise to attract attention to the company as an undervalued and attractive buyout target. After all, with its 6.6% stake, Sycamore could benefit if another party paid an attractive takeover premium.

Another explanation could be that Sycamore is playing a waiting game, expecting that either the stock price will fall far enough that shareholders will agree to its lowball offer, or that the company will execute a turnaround and its stock price will rally as a result.

Both explanations suggest that Sycamore Partners sees Chico's current stock price as undervaluing the company -- although it probably wouldn't want to admit it. This should be somewhat reassuring to those shareholders who have held on through its stock price slide.