I sure am glad I'm not a professional trader. I would have been totally wrong on the turn of events for Chico's (NYSE:CHS) following its December sales release.
After an amazing streak of double-digit quarterly same-store sales increases came to an end last year, the stock hit the skids. That's not surprising, considering that great performance can act as a feedback mechanism and cause expectations to get ahead of fundamentals.
But that's enough kooky talk about feedback -- here's what happened yesterday. Chico's reported a 12% increase in sales and a 2% drop in same-store sales. But if you thought that performance wasn't that great, get a load of this bomb management dropped on shareholders. They expect earnings between $0.12 and $0.15 for the quarter, whereas analysts were predicting $0.21. Uh-oh! Look out below!
In the pre-market, the stock was down as much as 6%. It opened lower, giving up as much as 3% in early trading. Here's why I wouldn't make it as a trader. The stock rallied for the rest of the day and finished up almost 3%.
Given the market's reactions to downward earnings revisions at bebe (NASDAQ:BEBE) and Hot Topic (NASDAQ:HOTT), I fully expected to find Chico's gasping for breath as well. But alas, the market threw me a curveball. Did I mention I'm glad I'm not a trader?
A quick comparison to some competitors shows that things may not have been that bad. Urban Outfitters (NASDAQ:URBN), which operates Anthropologie, saw comps decline 5% in December. Ann Taylor's (NYSE:ANN) comps dropped 5.3%. I called the sales release hotline for Talbots (NYSE:TLB), but the recording kept saying the information wasn't available. Then I remembered why it's not. So maybe the market viewed a 2% decline as OK. Who knows?
It certainly couldn't be management's expectations for gross margins. With a range of 53%-55%, that's 5 to 7 percentage points below normal. Yeah, that stinks, and the market's not that stupid.
Maybe, just maybe, it was the comment that the older inventory is largely out of the system because of all the promotions and discounts (which are also responsible for the meteor that knocked a huge hole in margins, even while transactions per store and units per transaction were on the rise). That could have been the tiny sparkle of hope that the market was looking for in the sea of bad news. You see, if the old inventory is out of the system and the new merchandising team has done its homework and is starting to fill stores with fashions its loyal customers will pay full price for, then perhaps improved performance is around the corner.
Like I said, I don't know how markets think on a daily basis, so I would totally stink as a trader. (In fact, the stock is down more than 3.5% this morning in early trading, showing once again my lack of trading instincts.). But Chico's, with its loyal customers and its propensity to earn high returns on invested capital, sure looks cheap to me if things start to turn around over the next few years.
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Retail editor and Inside Value team member David Meier does not own shares in any of the companies mentioned. You can view his profile here. bebe is a Motley Fool Stock Advisor selection. The Fool takes its disclosure policy very seriously.
