Let's get this out of the way right up front.
One of management's jobs is to sell the company as a good investment. That's what they do in every presentation they make. Our "Fool on the Street" articles examine what they say and what we can learn from their words. So after reading the transcript of the presentation from women's retailer Chico's FAS
You have to eat your peas ...
As of the Lehman Brothers Retail Seminar on May 2, 2007, Chico's had 943 stores open across 3 concepts: Chico's, White House/Black Market, and Soma. CFO Charlie Kleman commented that, domestically, the market can handle about 2000 stores before the company self-destructs. Maybe store number 2001 won't detonate the company, but that's his estimate before saturation occurs.
He also noted that the average store size is growing considerably in terms of square feet for both Chico's and White House/Black Markets -- an estimated 22%-24% growth in square footage is expected this year. Additionally, he noted that 40% of Chico's stores and 50% of White House/Black Market stores produce over $1000 of sale per square foot, and could benefit from expanding the store size.
To sum up: more stores and larger stores should generate more sales.
... before you can eat your ice cream
So now that we have all those numbers out there, let's see what they might mean for the future.
Let's assume the company opens 2000 stores at a rate of 150 stores per year. That means it will take about seven years to hit saturation. Since the company is opening larger stores today and expanding the size of older, smaller stores by relocating or modifying them, let's assume the average size of the store gets to about 2600 square feet.
Finally, let's assume (boy, I wish I could give the joke about why it's not safe to assume) that stores get back to a sales productivity level of $1,000 per square foot. That would mean that the company would be generating $5.2 billion in sales in about seven years, up from its current level of $1.6 billion.
Kleman also gave conference attendees a critical piece of information to help start putting a future value on the company. He commented that the company will generate operating margins around 17%. So those $5.2 billion in sales should generate $884 million in operating profit.
The market currently values Chico's at an EV/EBIT multiple of 12.4. Since EBIT, or operating profit, may grow around 17% per year, let's put a 15 multiple on that $884 million to come up with an enterprise value of $13.3 billion. That implies that stock could return 17.5% per year over the next seven years. I think that would handily knock the socks off the market's performance.
It's the customers, stupid
These numbers are great, but they can also be dangerous. As you read, I made lots of assumptions -- tons of them! How do I know if those assumptions are any good?
That's why I want to talk about the competitive position that Kleman alluded to -- one that I think is crucial to getting anywhere near these numbers: loyal customers and great service.
Chico's FAS has very strong loyalty programs that keep customers coming back instead of heading off to Anthropologie, Coldwater Creek
Not withstanding the merchandise miss last year, which brought the price down to reasonable levels, the company does a good job of stocking its stores with the styles its customers want and following it up with excellent service. That's always a winning combination in retail.
Fool's final word
Even at today's price, I think Chico's offers an attractive investment opportunity. That's one reason I gave it an outperform rating in CAPS, and why I have lamented missing a good opportunity to put real money in at lower prices.
- A Healthy Spring for Chico's
- Fool on the Street: Chico's Eyes Rivals' Customers
- A Glimmer of Hope for Chico's?
Looking for other good bargains? Philip Durell knows how to sift through the data to find them. To see how he's outperformed the market at Inside Value, sign up today for your free 30-day trial.
Retail editor and Inside Value team member David Meier shocked a Chico's sales associate by walking in and asking questions about the company. He's ranked 1,841 out of 28,567 in CAPS and does not own shares of any of the companies mentioned. You can view his TMF profile here. bebe is a Motley Fool Stock Advisor selection. The Fool takes its disclosure policy very seriously.