Wasn't the average American consumer supposed to be out of money (and credit) by now? Apparently not, judging by the sensational retailing results being reported lately. Everybody from Wal-Mart
Charming Shoppes operates stores under the Lane Bryant, Fashion Bug, and Catherine's Plus Sizes names. About four-fifths of the company's sales are in the plus-size category. For the past couple of years, its same-store sales gains have been anything but plus-sized, but that finally changed in June. Charming announced that comparable-store sales for the five weeks ending July 2 increased by 8%. Catherine's was the real superstar of the bunch, with an almost Abercrombie-esque same-store sales increase of 23%. This was particularly good news because Catherine's was a laggard in 2004 with a 6% same-store sales decrease.
What's more, in a separate press release, Charming raised earnings expectations for the full year. The new guidance is for earnings of $0.69 to $0.73 per share, compared with an earlier estimate of $0.58 to $0.62.
Wall Street liked the news and bid the shares up by about 11% last Thursday. The earnings news probably warrants an even higher stock price, but here's the catch: Charming doesn't expect the strong same-store performance to continue. It's predicting only a low-single-digit gain for the rest of the year.
If that were the end of the story, I would say Charming Shoppes is definitely not worth looking at. But there's more.
The company's financial performance over the past couple of years -- well before June's blowout numbers -- represents a vast improvement and suggests wise management choices. Company execs, for example, have been busy closing and/or relocating underperforming stores. Gross margins and operating margins, meanwhile, have improved, and that has helped free cash flow to expand from $46 million in 2003 to $107 million in 2004. Such an improvement is an impressive feat, given the weak sales trends.
Another positive development appears to be unfolding in the recent acquisition of Crosstown Traders, a catalog-based apparel and gift business. Crosstown has higher gross margins than does Charming's retail stores and will have a positive effect on earnings this year.
The only obvious negative is the same-store sales trends. If Charming Shoppes can coax customers to come by more frequently and spend a bit more, it would likely be capable of continued strong gains in earnings and free cash flow. Investors would certainly have reason to be charmed then.
For related Foolishness, see "June's Stellar Retail Sales," or head on over to the Fool's Charming Shoppes discussion board.
Dan Bloom is neither long nor short the shares of any company mentioned in this column. He welcomes your comments here.
