Pull up a 10-year chart of Chico's FAS (NYSE:CHS), and you'll see one of the more impressive runs from 1997 through 2005 that you're going to find from any retailer. The past year hasn't been as kind, as the apparel retailer lost roughly half its value. My Foolish colleague Alyce Lomax said it best when covering the company's latest quarterly results, "It hasn't been a year of cheer for Chico's."
Alyce also noted that during the call, management refrained from offering any fourth-quarter guidance or FY 2007 guidance. After going through the third-quarter earnings conference call myself, it turns out that guidance wasn't the only thing lacking. The management team was, for the most part, unwilling to say much of anything in regard to its turnaround efforts over the near term, choosing secrecy instead.
So, I had to go 007 in return, pulling out my trusty Foolish Conference Call Code Breaker model No. XZ1000 in order to decipher what's going down in the world of Chico's. In this edition of Fool on Call, we'll take a look at these important areas to see what's in store for Chico's and its shareholders:
- Merchandise
- Sales environment
"Did I hear a 'niner' in there?"
Chico's brand same-store sales declined 3% from the same period a year ago. One of the primary reasons offered for the decline was "missteps in fashion merchandising." Unfortunately, if you tuned into the latest conference call looking for solid answers, you may have been disappointed. When pressed on the issue during the question-and-answer part of the call by one analyst, CEO Scott Edmonds evaded, responding, "We're not going to get too specific on merchandise issues on the call. We just believe that a lot of that is proprietary."
I found the evasiveness to be a bit curious. On the surface, his response makes sense -- competitors are likely listening in on the call picking up any clue they can on the management team's next move. Given the stellar run Chico's was on for nine of the past 10 years, the competition would be wise to listen in.
But on further thought and in light of the evidence, Chico's move toward almost total secrecy really doesn't make much sense. Here's what we know: Chico's has dropped the ball with its recent fashion decisions. In the second-quarter conference call, one of the faux pas identified is that Chico's didn't have enough "wear now" items on hand.
All the while, guess who was hitting homeruns with "wear now" merchandise? Dress Barn (NASDAQ:DBRN), Ann Taylor (NYSE:ANN), and Christopher & Banks (NYSE:CBK), just to name a few. Remarkable -- everyone else seemed to be on the same page. What we learn is that fashion is much more about trends than secrets. Were these retailers paying attention to Chico's heading into the recent quarters? Likely -- and perhaps in so doing, it was enough for them to decide what not to do.
Despite management's unwillingness to go into detail, we did learn during the Q&A portion of the call that customers will not see a full revamp of the merchandise until likely next fall. The spring merchandise is already set, with little room for tweaking. The summer should see more fresh additions. But the fall is when we'll see a completely refreshed fashion line.
In light of this, investors shouldn't expect a turnaround to happen immediately. Considering it will be almost a year from now until it gets fully back into the trend-right groove, and perhaps even longer until the customers it lost from the recent missteps return, it may be some time before Chico's is back in full swing.
As for its White House/Black Market concept, it too has suffered recently by carrying too many beige and gray items and not enough of the trademark classy blacks and whites. Thankfully, the company is right on top of this one -- in Q4 we should see a dressier floor set reemphasizing the blacks and whites.
Show me the money!
Merchandise isn't the only area where Chico's has tripped up in recent quarters -- a few words on its sales environment are worth mentioning. The leadership team realized last quarter that they've been "under funding store payroll." Applying the handy code breaker tool, we can take that to mean that its sales associates at the store level were not happy. Unhappy sales associates don't exactly make for a pleasant shopping experience.
In response, Chico's has "allocated additional payroll dollars to the stores." Again, management was unwilling to go into detail about the new incentives the company is utilizing. Amusingly, one analyst immediately countered by pointing out that the sales associates seem to be more aggressive than normal, stating, "They are really pouncing on customers when they walk in the door and kind of fighting with each other to make sales."
I guess the incentives are working . whatever they are.
Despite my frustration.
I found this call to be a bit frustrating in that I would've liked to see more clarity from management on where they see the fashion trend moving over the course of the next year. Despite my frustration, I found these words by Edmonds very encouraging for both current and prospective shareholders: "You know, we're trying to run the business, not really for the next 13 weeks -- we're trying to run it for the next 13 years."
This mind-set is the best news for any long-term-minded investor. What is gained if Chico's responds to its recent hiccups with a knee-jerk reaction? More is lost than gained by such a business philosophy. Yes, the best companies are those that make investments and decisions with the future in mind. That's why, despite the challenges it will face over the next quarter or two, Chico's should remain high on investors' watch lists.
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Fool contributor Jeremy MacNealy has a player rating of 96.53 and is ranked 495th out of 14,228 participants at Motley Fool CAPS, the Fool's new stock-rating service that's open to everyone. He has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.
