Judging by the steep drop in its share price following its first-quarter earnings report, teen retailer Charlotte Russe (NASDAQ:CHIC) looks like quite a wallflower today. Is this "fast fashion" retailer slowing down?
Charlotte Russe's first-quarter net income increased by 96%, but earnings from continuing operations increased 47% to $13.9 million, or $0.55 per share. (Discontinued operations include Rampage, which it disposed of last summer.) Sales rose 17.2% to $209.2 million, with a same-store increase of 1.5% (compared to a strong 16.3% increase in comps at this time last year).
There was some good news on the balance sheet, too. Total cash increased 95% to $116.9 million year over year, and the company has no long-term debt. Inventories are also down a pleasant 4%; Charlotte Russe's merchandise appears to be moving well. That's heartening, since it was a rather promotional holiday season for many retailers, and Charlotte Russe seems to have bucked the trend -- for example, gross margin improved to 29%, compared to 27% last year.
That implies Charlotte Russe's product assortment is strong. As a reminder, Charlotte Russe competes in the "fast fashion" category, which relies on quickly turning over inexpensive merchandise produced with swift lead times. Last time I looked at Charlotte Russe, I pointed out that its rivals include a well-known fast fashion superstar, Sweden's H&M, as well as Limited's (NYSE:LTD) Express concept, Wet Seal (NASDAQ:WTSLA), and Forever 21. (Of course, you could argue that since Charlotte Russe targets teen shoppers, it also competes with youth retailers like Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NASDAQ:AEOS).)
Last time I checked, Charlotte Russe shares had fallen nearly 11% on the quarterly news, so there's something investors aren't happy about. Let's start with Charlotte Russe missing the consensus estimate by a penny, while its second-quarter guidance just met expectations. Meanwhile, its earnings are expected to decrease year over year in the second quarter. Also, last year's second quarter included a non-recurring $0.05-per-share benefit for gift card income. Finally, a calendar shift is expected to hit the second-quarter numbers by $0.09-$0.10 per share, since this year's second quarter won't include the week after Christmas.
It seems to me that maybe investors are overreacting by beating down the shares today. Even though Charlotte Russe is up against some tough comparisons this coming year, especially when it comes to comps, its forward P/E of 14 sounds reasonable compared to expected growth rates. In fact, the retailer's earnings for fiscal 2007 are expected to grow 61% (and another 20% in fiscal 2008). Regardless of the pessimism, it seems like there are many signs that Charlotte Russe is still strong.
Catch up on earlier quarters at Charlotte Russe:
- Take a look at last quarter.
- Revisit Charlotte Russe last summer.
American Eagle Outfitters is a Motley Fool Stock Advisor recommendation. To find out what other companies David and Tom Gardner have recommended to subscribers, click here for a 30-day free trial.
Alyce Lomax does not own shares of any of the companies mentioned. Limited is an Income Investor selection. The Fool's disclosure policy thinks skinny jeans are ridiculous.
