It hasn't exactly been a year of cheer for Chico's (NYSE:CHS), and the third quarter delivered a bit more of the same. Should Chico's shareholders cut and run, or are there better days ahead?

Third-quarter profit at Chico's fell 21% to $42 million, or $0.24 per share. Sales increased 12.5% to $404 million. Same-store sales were a sticking point; Chico's overall comps fell 1.2%. While the company's White House/Black Market concept -- usually a growth concept for Chico's -- did report a 5% increase in same-store sales, that was less than investors are used to (for example, last year at this time, it reported a 50% increase in comps, and last quarter it was a 19% increase), and less than the company had expected. (For the full rundown of quarterly results, check out our related Fool by Numbers.)

It's certainly worthwhile to bear in mind that Chico's decline in third-quarter profit is the first downdraft in 10 years. And of course, if the market reacted mildly to the news, it's probably because Chico's shares have already taken such a beating this year and it's been well known that for the first time in ages (well, basically, a decade), this company has been making some missteps. It's never any fun, but it's also an inevitability (sooner or later) in retail.

In Chico's third-quarter conference call, management discussed its fashion missteps and future strategies. It does sound like there's some confusion as Chico's tries to get back on track. The company is opening lots of stores with increased square footage, and its expenses are increasing -- as it ramps up payroll to adequately staff its stores, for example. Chico's also declined to give any fourth-quarter guidance or fiscal year 2007 guidance, stating that in the first month of the fourth quarter, "our own fashion errors, along with a more promotional retail environment, [have] resulted in a higher-than-anticipated markdown rate."

There does seem to be a certain degree of blundering this year. In the conference call, the company said that one of its missteps was carrying too much casual assortment at White House/Black Market; it also mentioned too much grey and beige, which kind of bothered me since that retail concept has that name for a reason -- its emphasis on black and white apparel. Nobody wants to imagine that Chico's is losing its way, but at least management was candid about these types of blunders.

Still, Chico's is a quality company and has been for years. True, it does face existing and new competition for its customer base of older, affluent female shoppers; Talbots (NYSE:TLB), Ann Taylor (NYSE:ANN), and Gap's (NYSE:GPS) Forth & Towne all have great interest in these customers. Last but not least, one rival's been on a tear this year: Coldwater Creek (NASDAQ:CWTR) -- but even that company didn't please investors when it reported its most recent quarterly numbers. However, much of that competition existed back when the company was still reporting torrid growth.

Chico's stock has lost major ground this year -- it's down nearly 50% in the last 12 months. Then again, the retailer is traditionally a quality company with strong brands, a solid balance sheet, and a competent management team that has steered it through years of amazing growth (and one can easily theorize that this team will turn the company's fortunes around, too). Some might see its stock performance as a glass half-empty, but you could also argue that this is the type of year long-term investors hope for when looking for cheaper entry points for quality stocks -- as long as the problems look temporary and the fundamental investment thesis hasn't changed.

For related information, see the following Foolish articles:

  • Coldwater Creek was hot, but it got a cold shower last quarter.
  • Last quarter we wondered if Chico's shares were on the cheap.
  • Chico's got a checkup last spring.

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Alyce Lomax does not own shares of any of the companies mentioned. The Fool's disclosure policy thinks that scarf really brings out your eyes.