Home at the hermitage
If you've been reading the Fool this week, you may have noticed an interesting phenomenon. The Inside Value team has been setting aside some of its cheapskate tendencies and engaging in a few flights -- or fits -- of fantasy. We've been (Lean closer. I don't want everyone to hear this.) exploring our basest desires. Even coveting -- gasp! -- stocks with unpredictable cash flows and prices so high they've got no discernable margin of safety!

Though you might not be able to tell from our ascetic investing advice, we're flesh and blood like the rest of you. It's not all boring choirboy stuff like Coke (NYSE:KO) and Home Depot (NYSE:HD) for us. We experience lust as well. It's just that we normally manage to hold back the urges. See that brambly switch next to my thin mattress in the corner of my cell? When I've got it bad, when I'm hot for Taser, as I sometimes am, it's time for action. A few whacks at my back -- or maybe a quick peek at the recent sales standstill -- and it's back to purity and devout contemplation of the most sacred cash flow statement.

But not this week. This week, it's off with the hair shirt, and we're letting it all hang out.

Bring on the flower prints and elastic waistbands
Allow me to slip into something a bit more comfortable. Just a second. This thing's a bit stiff and gamey. Hmm. You don't see something like that growing on ya every day. Ah. There.

I want to tell you today about a little company called Chico's FAS (NYSE:CHS). If you haven't heard of this clothing retailer, ask any 40-plus lady in your life and you'll get clued in. Chico's sells clothes. Ladies clothes. And Chico's sells a ton of them.

Chico's may not be hot hot in the fashion sense, but if you listen to the cash register, you'll probably start twitching with inappropriate pecuniary pleasure.

The ca-ching thing
Chico's sales growth has been nothing short of phenomenal over the past several years. Below are the sales data for the periods ended in the given dates.

2005

2004

2003

2002

2001

Sales (millions)

$1,066.9

$768.5

$531.1

$378.1

$259.4

% growth over prior year

38.8%

44.7%

40.5%

45.8%

67.4%



And in case you think all that revenue growth was had by simply adding a slew of stores, turn your attention to Chico's incomparable same-store sales growth. The torrid rate at which existing stores continue to ramp up their revenues (14% for July) shows just how well Chico's continues to leverage its current store base.

It does this through a particular kind of magic. Obviously, its internally designed clothing line strikes a chord with its shoppers. It doesn't hurt that its prime demographic includes middle-aged women, a group that seems to have plenty of money to spend, and one that's growing steadily in numbers. Toss in an effective loyalty program and you've got a recipe for continued sales growth for a long time to come.

What about the bottom line?

The fun numbers at Chico's don't stop at the top of the operations statements. The bottom line is just as enviable. And free cash flow per share has been pretty impressive as well, especially for a company that's still growing by leaps and bounds (meaning that its got fairly hefty capital expenditures to manage.)

2005

2004

2003

2002

2001

Earnings per share

$0.78

$0.57

$0.39

$0.25

$0.17

% growth over prior year

36.8%

46.2%

56%S

47.1%

70%

FCF per share

$0.72

$0.53

$0.26

$0.17

$-.01



Excellence is largely marginal
I could go on and on about the operational excellence that makes Chico's so worthy of lust. The cash conversion cycle -- a measure of how quickly the company is able to convert payouts into payback -- has shrunk from 54 days seven years ago to just over a month last year. That's on par with giant retailers like Target (NYSE:TGT) and is even better than Home Depot. Needless to say, it's twice as good as you see from competitors like Ann Taylor (NYSE:ANN) and nearly three times faster than at Talbots.

But perhaps the last thing I need to point out is that Chico's margins crush anything you see in the rest of the retailing world. Its net margins are better than many competitors' and peers' operating margins.

Margins, last fiscal year

Gross

Operating

Net

Chico's

61.4%

21%

13.2%

Ann Taylor

51.1%

5.7%

3.4%

Talbots

35.6%

8.4%

5.6%

Gap (NYSE:GPS)

39.2%

11.5%

7.1%

Abercrombie & Fitch (NYSE:ANF)

45%

17.2%

10.7%

Industry Average

36%

6.1%

3.6%



As you can see, Chico's is already whomping the tar out of its peers. But what's even better is that margins have kept improving as the company has been able to deliver more and more sales on fixed -- or more slowly growing -- costs. If you can stomach one more table to illustrate that, here it is.

Chico's Margins

2005

2004

2003

2002

2001

Gross

61.4%

61.3%

60.5%

59.3%

58.1%

Operating

21%

20.9%

20.1%

17.9%

17.5%

Net

13.2%

13%

12.6%

11.2%

10.9%



Doesn't seem like much? Remember that with $1 billion in sales, every 0.1% improvement in the net margin adds a million bucks (pre-tax) to the bottom line, or half a cent per share.

The ugly
Here's the worst thing about Chico's, as far as I'm concerned. I had a pretty torrid affair with this stock on sale last fall. I came out of my cell and picked it up when it took a precipitous drop on unfounded worries about a hurricane. We kept in touch until spring, and I made some pretty sinful gains, but then, the monastic maniac inside told me it was time to call it quits.

I said goodbye. I thought I was being both prudent and clever. Chico's usually takes another big swoon some time during the spring or summer. Also, at a P/E in the mid 30s, it looked richly valued. In fact, I was an idiot because I left another 50% or so laying on the table, and I've been kicking myself about it ever since.

The Foolish bottom line
The moral of this story, from a value investor's perspective, is that you shouldn't let your stock-picking rigor and selling criteria keep you from reassessing the prospects of the good growers out there. If you buy one of these superior businesses with your value hat on, make sure that, looking forward, you adjust your expectations accordingly. Chico's is a company that clearly has plenty of growth ahead of it, and it's so well managed that the top-line growth delivers earnings and cash flow directly to common investors.

I will not try to argue that Chico's isn't fully valued by usual metrics today, and there's certainly little margin of safety, something Philip requires when he makes his final picks for Inside Value. But I am also 90% sure that it has plenty of growth left before things slow down, and that's why I'd love to own Chico's again, even at today's prices. If the market would kindly keep beating it down for the next 10 days, I'll buy another bushel for myself, and I'll stuff it under my mattress and hang on tight.

Want to tell us about a company you'd love to own? If you'd like to enter our "A Stock I'd Love to Own" contest or see which stocks the Fool's other value mavens would love to own, take a no-obligation 30-day free trial to Motley Fool Inside Value. (Full contest rules are available by clicking here.) You'll have access to all of our previous picks, and if you win the contest, you'll receive a free one-year subscription to the service. Runners-up will receive free six- and three-month subscriptions. Click here to learn more.

Related Foolishness:

Coca-Cola and Home Depot are Motley Fool Inside Value picks. Gap is a Motley Fool Stock Advisor pick.

Seth Jayson loves digging past the obvious, even though it makes his brain hurt. At the time of publication, he had no positions in any company mentioned. View his stock holdings and Fool profile here. Fool rules are here.