At this point, the "death of retail" is a well-hewn storyline in the market. Down about 75% over the past decade, Chico's FAS (CHS) looks like it's unfortunately another name in this all-too-familiar story. But look a bit closer, and Chico's has a lot of potential as an exciting turnaround play. Here's why.
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What is Chico's?
Chico's is an omnichannel retailer of women's apparel and accessories. It operates through three brands: its namesake Chico's brand, White House Black Market, and Soma. The company has 1,261 total locations: 613 Chico's stores, 382 White House Black Markets, and 266 Somas.
The FAS in the company's name originally stood for "Folk Art Specialties" but it now stands for "Fashion, Artistry, and Solutions" to better reflect its new positioning. Chico's is women-founded and women-led, and its vision is to "create a world where women never have to compromise."
Chico's says that its purpose is "providing solutions, building communities, and creating memorable experiences to bring women confidence and joy," and it's hard to argue with that mission statement.
New sheriff in town
CEO Molly Langenstein joined Chico's in August 2019 and took over as CEO in July 2020. A turnaround seems to be underway under her leadership as the company has now posted seven straight quarters of double-digit earnings growth. During the most recent quarter, Chico's grew diluted earnings per share by 30% year over year.
Langenstein has outlined a credible three-year plan for Chico's in which she targets $2.5 billion in revenue by fiscal 2025 (with $1 billion in digital sales), 40% gross margin, and 7.5% operating margin. Langenstein says that this will drive EPS growth of 15% over the next three years and lead to shareholder returns in excess of 15% per year.
Chico's is making good progress on these targets as the company has already eclipsed $2 billion in sales and is near its target for gross margin (and is already above the operating margin target).
Let's get digital
A key piece of Langenstein's strategy is to adapt a digital-first mindset. In fact, 40% of Chico's sales are now digital, making it a true omnichannel retailer instead of just a behind-the-times brick-and-mortar retailer. Chico's has enhanced its online experience with tools like Style Connect, which enables customers to connect one-on-one with a sales associate to get style advice, and My Closet, which uses a customer's purchase history to help them build upon their current wardrobe with each purchase rather than starting from scratch.
Now, you may be asking why it matters if sales are made digitally or in-store. According to Langenstein, these omnichannel customers spend three times as much as single-channel customers over the course of their relationship with the company. During the most recent quarter, the company's multichannel customer base grew by 17%, which is an encouraging sign for the future.
Strong customer base
Chico's is interesting in that its customer base is a bit older and wealthier than one might expect. Langenstein says that the brand largely serves women aged 45 and older with a household income of over $100,000 and that the company is well-positioned to continue to take market share within this group. This is a good demographic to serve as they have considerable spending power and are likely more recession-resistant than the average consumer.
However, this could be a bit of a "best of both worlds" story too, as the customer base is beginning to skew a bit younger. Management reports that new customers are trending lower than existing ones across its brands -- 10 years younger for Chico's, three years younger for White House Black Market, and four years younger for Soma. Over the past 12 months, Chico's has grown its customer base by 10.6%, White House Black Market has increased its customer count by 13.7%, and Soma has grown by 3.5%. These new customers should grow with the brand and generate higher lifetime values for the company.
Bargain bin valuation
Chico's stock is unbelievably cheap, trading at just 5 times earnings and 4.5 times forward earnings. Perhaps investors are not giving the company a lot of credit yet for its turnaround, based on its weak performance before Langenstein's tenure. But either way, this is an incredibly cheap stock, especially when the average multiple of the S&P 500 is 16.
A stock with a cheap valuation like this gives investors plenty of margin of safety when investing, and leaves plenty of room for upside as the market comes around to the durability of the company's turnaround. Additionally, Chico's has built up a strong cash position (with $140 million of cash on its balance sheet as of the end of last quarter versus a market capitalization of about $530 million) and it has continued to make steady progress on reducing its debt.
The shares also look undervalued based on a price-to-earnings growth (PEG) ratio of just 0.5. This PEG ratio indicates that Chico's isn't just a "cigar butt" investment, where a stock is cheap because its business is in decline. The PEG ratio takes a stock's earnings growth rate into account by dividing its price-to-earnings ratio by its earnings growth. A PEG ratio of under 1 is generally considered to be undervalued, so a PEG ratio of 0.5 looks particularly attractive.
A compelling buy
With an impressive new CEO executing against a credible long-term vision for the company, Chico's looks like an intriguing turnaround story within the retail space. The company's steady pattern of increasing earnings indicates that progress is underway, and its increasing digital presence is an encouraging sign for the future.
The rock-bottom valuation gives investors considerable margin for safety, and leaves plenty of room for upside. Based on these factors, Chico's looks like a compelling turnaround story. I recently bought shares of the company and look forward to being a long-term investor.
