CHICOS FAS INC CHS
July 29, 2010 - 7:04am EST by
gocanucks97
2010 2011
Price: 9.30 EPS $0.78 $0.98
Shares Out. (in M): 178 P/E 12.0x 9.5x
Market Cap (in $M): 1,663 P/FCF 0.0x 0.0x
Net Debt (in $M): -482 EBIT 203 270
TEV ($): 1,180 TEV/EBIT 5.8x 4.3x

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Description

I used to be a street darling and a 200 bagger in 10 years. Now I am a boring old unsexy company, just like my customers. On the other hand, my customers like me, my competitors suck, and demand/supply picture looks decent. Business is doing fairly well with room for margin improvement and modest topline growth. In 6 months, 40% of my market cap will be cash, and I will trade at 6x next year's EPS and 3x EBITDA at non-peak margin ex-cash.

My name is Chico's.

Company background: CHS is a specialty retailer of women's apparel targeting the boomers. Company operates about 1080 stores under 3 concepts -- Chico's, White House Black Market, and Soma.

I assume most people on VIC are familiar with the retail space and have heard of CHS. CHS was a great growth stock from '96 to '05 under the leadership of original founder couple and subsequent CEO Scott Edmonds. The company posted double digit SSS and 30%+ EPS growth for almost a decade. Unfortunately, the success also laid the seeds for an equally spectacular collapse, which saw two years of negative SSS and margins going from industry-best 20% to losing money. Stock plummeted from $48 to $2. Since then the company had a complete reshuffle of top mgmt team, from CEO to CFO to top merchants at all 3 concepts. Company has undergone an impressive turn-around, and stock recovered nicely before pulling back 40% after a "disappointing" Q1 report and typical summer retail massacre.  

Improving supply/demand: First, on demand. A few years ago, many company presentations across industries had a page describing how they would serve the baby boomer generation. Well, the boomers are finally here, and the demographic wave should be very favorable for Chico's in the next few years, since the sweet spot of their customers are 55 years+. In addition, during the recent downturn, women have pulled back on their apparel purchase much more than teens, kids, and men. Most of the industry had negative SSS from '06 to '09, and while it is dangerous to argue there is "pent-up demand", I think it is safe to assume current consumption is not above normal. Of course, we can debate whether US consumers are finally tapped out this time, but that is too philosophical a question, and I will resort to Peter Lynch's motto of "don't bet against US consumers".

On supply. The success of CHS had once attracted such memorable new concepts as "Janeville" by Gymboree, "Forth & Towne" by Gap, and copy-cats like Coldwater Creek. Today, the 10-15% sqft growth days are long gone, and most companies in the industry have either stopped expansion or closed stores.

Still good store economics: Even after CHS had seen sales/sqft fall from $1100/sqft at the peak to $600 currently and margin from 20% to 10%, it is still one of the best in the space of missy apparel retailers, vs. ANN/CWTR/TLB all hovering around $300/sqft. This is purely my personal opinion from following the space closely for the last few years, but I think CHS's competitors are a weak bunch, led by the likes of Trudy "I fail everywhere I work" Sullivan at TLB, Kay "One concept must suck at any given time" Krill at ANN, and Dennis "I used to the richest guy in Idaho" Pence at CWTR. I do not have a strong view on the current mgmt team at CHS, but I would note the new CEO and CFO have hit most of the operating goals since they took over. In fact, most people (myself included) were laughing at their goal of $1 EPS power outlined in early '09, when the stock was trading at $2 with $1+ in cash/share. It looks much closer to reality now.

Opportunities in both sales & margins: CHS currently has about 1100 stores. It probably can open another 350 stores (100 Chico's in small markets, 150 WHBM, and 100 outlet stores across both concepts). In terms of store productivity, while $1100/sqft is history, even improving from $600/sqft to $750/sqft would be meaningful sales increase. And obviously there is the free option of Soma, which if successful could be a meaningful growth concept, although I put a very small probability on it.

On margins, unlike many of its peers, CHS is not at peak merchandise/gross margin. Its current gross margin (ex occupancy) is still 400-500bps below prior peak. Inventory had trended below sales growth, although it is worth monitoring as mgmt had planned to boost inventory in 2H to drive sales. Mgmt is embarking on some sourcing initiatives, which should also add some upside in the out years. Online sales also hold some promise as it generally gets higher margin once sales hit critical mass. Lastly, Soma is still losing money (my estimate is 5-10c), and if it gets folded, the core Chico's/WHBM's margins are likely higher than currently reported. Net net, CHS is at 10% op margin at current run rate, vs. 20% prior peak.

Putting everything together, I think CHS can do $1 EPS next year on 13% op margin (well below prior peak of 20%). In a best case scenario, company can do $1.25 EPS at 15% op margin on $2.2B sales in '11 in a best-case scenario.

  FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011E FY 2012E
                         
# stores             920 1038 1076 1080 1136 1188
SSS             2.1% -8.1% -15.0% 6.4% 6.7% 3.0%
    Chico's             0.0% -7.8% -16.9% 4.5% 7.8% 4.0%
    WHBM             11.0% -8.9% -8.0% 10.9% 9.4% 4.0%
Revenue $259 $378 $531 $768 $1,067 $1,405 $1,641 $1,714 $1,582 $1,713 $1,919 $2,076
    yoy   45.7% 40.5% 44.7% 38.8% 31.7% 16.8% 4.5% -7.7% 8.3% 12.0% 8.2%
  - Cost of Revenue 109 154 210 297 412 548 674 745 763 753    
Gross Profit 151 224 321 471 655 857 967 969 819 960    
SG&A 105 157 215 310 431 559 703 848 835 837    
    yoy   48.6% 37.0% 44.6% 38.8% 29.8% 25.9% 20.5% -1.4% 0.1%    
Operating Income 45 68 107 161 224 298 264 121 -16 123 203 271
Pretax Income 46 68 108 162 227 307 274 139 -32 110 206 275
  - Tax 17 26 41 61 85 113 100 48 -13 40    
Net Income $28 $42 $67 $100 $141 $194 $167 $89 -$19 $70 $131 $176
EPS $0.17 $0.25 $0.39 $0.57 $1.17 $1.06 $0.93 $0.50 ($0.11) $0.39 $0.78 $0.98
Shares 163.3 167.6 172.1 176.3 180.1 182.4 178.5 176.4 175.9 178.9 180.0 180.0
                         
Gross Margin 58.1% 59.3% 60.5% 61.3% 61.4% 61.0% 58.9% 56.5% 51.8% 56.0% 57.4% 59.1%
Operating Margin 17.5% 17.9% 20.1% 20.9% 21.0% 21.2% 16.1% 7.1% -1.0% 7.2% 10.6% 13.1%
ROE                   7.4% 12.5% 14.7%
                         
Cash Flow Statements                        
  + Net Income $28 $42 $67 $100 $141 $194 $167 $89 -$19 $70 $131 $176
  + D&A 6 10 16 23 36 49 69 92 98 96 96 96
Cash From Operations $39 $65 $109 $145 $224 $268 $289 $209 $99 $215 $227 $272
  - Capex -40 -37 -65 -52 -93 -148 -218 -202 -105 -68 -85 -100
FCF ($1) $28 $44 $93 $131 $121 $71 $6 ($5) $147 $142 $172
                         
B/S                        
  Cash & Equivalents $18 $54 $100 $120 $266 $404 $276 $274 $269 $424 $606 $782
      per share                 $1.53 $2.37 $3.37 $4.35
  Inventories 24 29 45 55 73 95 111 144 132 139    
    yoy   18.5% 55.4% 22.2% 33.4% 30.3% 16.2% 30.2% -8.2% 4.6%    
  + Other Current Assets 5 8 13 16 21 31 74 56 51 34    
Total Current Assets 51 93 160 198 365 538 474 487 486 600    
  + Net Fixed Assets 66 91 139 174 248 346 457 568 561 522    
Total Assets 118 186 302 471 716 999 1061 1250 1226 1319    
                         
Total Current Liabilities 25 35 55 72 95 123 140 181 147 195    
Total Shareholders' Equity $85 $143 $240 $375 $561 $806 $804 $913 $902 $982 $1,113 $1,289

 

Valuation

  Now 2011
# shares 178.8 178.8
Stock price  $    9.30  $    9.30
Mkt Cap  $   1,663  $  1,663
Cash  $     482  $     606
EV  $   1,181  $  1,057
P/E 11.9 9.5
P/E ex-cash 8.5 6.0
     
Cash/sh $2.7 $3.4
fwd EV/Sales 0.6 0.5
fwd EV/EBITDA 4.0 2.9
fwd FCF Yield 12% 16%

Why the opportunity: Stock ran up significantly in '09 and early '10 to a high of $16, and arguably was ahead of itself, fully pricing in the $1 EPS power number. CHS then reported a "disappointing" Q1, where mgmt invested the upside into TV marketing. Investors abandoned the stock, and there were a couple of downgrades this week, citing reasons like slowing momentum, incremental promotion, and BP oil spill. I do not have a strong view on the NT results, although dept stores like M & JWN have generally reported decent SSS in recent months. I think the street is too myopic on near term earning momentum while completely ignoring the balance sheet, FCF and valuation. To me, the story hasn't changed too much in 3 months, but stock at $9 is a completely different proposition from stock at $16.

I realize 6 months sounds like a long time in this market, but if we fast forward 6 months, this stock will have close to $3.5 in cash, and trades at single digit EPS/FC ex-cash at below average margin. I think the stock has $5-6 upside (12x '11 + cash) and $1-2 downside from here. I do realize the stock had traded a lot lower during '08, although the same can be said about most other stocks, and CHS has $2 more in cash/share, which has to count something.

Risks:

  • SSS fell off a cliff and heavy markdowns return.
  • Economy double dip. Though I'd think the transports like the truckers would be better shorts than retailers at this point.
  • Mgmt blew the cash on some stupid acquisition. Acquisitions have been rare in specialty retail space, and there are actually a few success stories (WHBM by Chico's, and the couple by DBRN).

 

Catalyst

Decent results.
Less fear about double-dip and end of world for consumers.
    sort by   Expand   New

    Description

    I used to be a street darling and a 200 bagger in 10 years. Now I am a boring old unsexy company, just like my customers. On the other hand, my customers like me, my competitors suck, and demand/supply picture looks decent. Business is doing fairly well with room for margin improvement and modest topline growth. In 6 months, 40% of my market cap will be cash, and I will trade at 6x next year's EPS and 3x EBITDA at non-peak margin ex-cash.

    My name is Chico's.

    Company background: CHS is a specialty retailer of women's apparel targeting the boomers. Company operates about 1080 stores under 3 concepts -- Chico's, White House Black Market, and Soma.

    I assume most people on VIC are familiar with the retail space and have heard of CHS. CHS was a great growth stock from '96 to '05 under the leadership of original founder couple and subsequent CEO Scott Edmonds. The company posted double digit SSS and 30%+ EPS growth for almost a decade. Unfortunately, the success also laid the seeds for an equally spectacular collapse, which saw two years of negative SSS and margins going from industry-best 20% to losing money. Stock plummeted from $48 to $2. Since then the company had a complete reshuffle of top mgmt team, from CEO to CFO to top merchants at all 3 concepts. Company has undergone an impressive turn-around, and stock recovered nicely before pulling back 40% after a "disappointing" Q1 report and typical summer retail massacre.  

    Improving supply/demand: First, on demand. A few years ago, many company presentations across industries had a page describing how they would serve the baby boomer generation. Well, the boomers are finally here, and the demographic wave should be very favorable for Chico's in the next few years, since the sweet spot of their customers are 55 years+. In addition, during the recent downturn, women have pulled back on their apparel purchase much more than teens, kids, and men. Most of the industry had negative SSS from '06 to '09, and while it is dangerous to argue there is "pent-up demand", I think it is safe to assume current consumption is not above normal. Of course, we can debate whether US consumers are finally tapped out this time, but that is too philosophical a question, and I will resort to Peter Lynch's motto of "don't bet against US consumers".

    On supply. The success of CHS had once attracted such memorable new concepts as "Janeville" by Gymboree, "Forth & Towne" by Gap, and copy-cats like Coldwater Creek. Today, the 10-15% sqft growth days are long gone, and most companies in the industry have either stopped expansion or closed stores.

    Still good store economics: Even after CHS had seen sales/sqft fall from $1100/sqft at the peak to $600 currently and margin from 20% to 10%, it is still one of the best in the space of missy apparel retailers, vs. ANN/CWTR/TLB all hovering around $300/sqft. This is purely my personal opinion from following the space closely for the last few years, but I think CHS's competitors are a weak bunch, led by the likes of Trudy "I fail everywhere I work" Sullivan at TLB, Kay "One concept must suck at any given time" Krill at ANN, and Dennis "I used to the richest guy in Idaho" Pence at CWTR. I do not have a strong view on the current mgmt team at CHS, but I would note the new CEO and CFO have hit most of the operating goals since they took over. In fact, most people (myself included) were laughing at their goal of $1 EPS power outlined in early '09, when the stock was trading at $2 with $1+ in cash/share. It looks much closer to reality now.

    Opportunities in both sales & margins: CHS currently has about 1100 stores. It probably can open another 350 stores (100 Chico's in small markets, 150 WHBM, and 100 outlet stores across both concepts). In terms of store productivity, while $1100/sqft is history, even improving from $600/sqft to $750/sqft would be meaningful sales increase. And obviously there is the free option of Soma, which if successful could be a meaningful growth concept, although I put a very small probability on it.

    On margins, unlike many of its peers, CHS is not at peak merchandise/gross margin. Its current gross margin (ex occupancy) is still 400-500bps below prior peak. Inventory had trended below sales growth, although it is worth monitoring as mgmt had planned to boost inventory in 2H to drive sales. Mgmt is embarking on some sourcing initiatives, which should also add some upside in the out years. Online sales also hold some promise as it generally gets higher margin once sales hit critical mass. Lastly, Soma is still losing money (my estimate is 5-10c), and if it gets folded, the core Chico's/WHBM's margins are likely higher than currently reported. Net net, CHS is at 10% op margin at current run rate, vs. 20% prior peak.

    Putting everything together, I think CHS can do $1 EPS next year on 13% op margin (well below prior peak of 20%). In a best case scenario, company can do $1.25 EPS at 15% op margin on $2.2B sales in '11 in a best-case scenario.

      FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011E FY 2012E
                             
    # stores             920 1038 1076 1080 1136 1188
    SSS             2.1% -8.1% -15.0% 6.4% 6.7% 3.0%
        Chico's             0.0% -7.8% -16.9% 4.5% 7.8% 4.0%
        WHBM             11.0% -8.9% -8.0% 10.9% 9.4% 4.0%
    Revenue $259 $378 $531 $768 $1,067 $1,405 $1,641 $1,714 $1,582 $1,713 $1,919 $2,076
        yoy   45.7% 40.5% 44.7% 38.8% 31.7% 16.8% 4.5% -7.7% 8.3% 12.0% 8.2%
      - Cost of Revenue 109 154 210 297 412 548 674 745 763 753    
    Gross Profit 151 224 321 471 655 857 967 969 819 960    
    SG&A 105 157 215 310 431 559 703 848 835 837    
        yoy   48.6% 37.0% 44.6% 38.8% 29.8% 25.9% 20.5% -1.4% 0.1%    
    Operating Income 45 68 107 161 224 298 264 121 -16 123 203 271
    Pretax Income 46 68 108 162 227 307 274 139 -32 110 206 275
      - Tax 17 26 41 61 85 113 100 48 -13 40    
    Net Income $28 $42 $67 $100 $141 $194 $167 $89 -$19 $70 $131 $176
    EPS $0.17 $0.25 $0.39 $0.57 $1.17 $1.06 $0.93 $0.50 ($0.11) $0.39 $0.78 $0.98
    Shares 163.3 167.6 172.1 176.3 180.1 182.4 178.5 176.4 175.9 178.9 180.0 180.0
                             
    Gross Margin 58.1% 59.3% 60.5% 61.3% 61.4% 61.0% 58.9% 56.5% 51.8% 56.0% 57.4% 59.1%
    Operating Margin 17.5% 17.9% 20.1% 20.9% 21.0% 21.2% 16.1% 7.1% -1.0% 7.2% 10.6% 13.1%
    ROE                   7.4% 12.5% 14.7%
                             
    Cash Flow Statements                        
      + Net Income $28 $42 $67 $100 $141 $194 $167 $89 -$19 $70 $131 $176
      + D&A 6 10 16 23 36 49 69 92 98 96 96 96
    Cash From Operations $39 $65 $109 $145 $224 $268 $289 $209 $99 $215 $227 $272
      - Capex -40 -37 -65 -52 -93 -148 -218 -202 -105 -68 -85 -100
    FCF ($1) $28 $44 $93 $131 $121 $71 $6 ($5) $147 $142 $172
                             
    B/S                        
      Cash & Equivalents $18 $54 $100 $120 $266 $404 $276 $274 $269 $424 $606 $782
          per share                 $1.53 $2.37 $3.37 $4.35
      Inventories 24 29 45 55 73 95 111 144 132 139    
        yoy   18.5% 55.4% 22.2% 33.4% 30.3% 16.2% 30.2% -8.2% 4.6%    
      + Other Current Assets 5 8 13 16 21 31 74 56 51 34    
    Total Current Assets 51 93 160 198 365 538 474 487 486 600    
      + Net Fixed Assets 66 91 139 174 248 346 457 568 561 522    
    Total Assets 118 186 302 471 716 999 1061 1250 1226 1319    
                             
    Total Current Liabilities 25 35 55 72 95 123 140 181 147 195    
    Total Shareholders' Equity $85 $143 $240 $375 $561 $806 $804 $913 $902 $982 $1,113 $1,289

     

    Valuation

      Now 2011
    # shares 178.8 178.8
    Stock price  $    9.30  $    9.30
    Mkt Cap  $   1,663  $  1,663
    Cash  $     482  $     606
    EV  $   1,181  $  1,057
    P/E 11.9 9.5
    P/E ex-cash 8.5 6.0
         
    Cash/sh $2.7 $3.4
    fwd EV/Sales 0.6 0.5
    fwd EV/EBITDA 4.0 2.9
    fwd FCF Yield 12% 16%

    Why the opportunity: Stock ran up significantly in '09 and early '10 to a high of $16, and arguably was ahead of itself, fully pricing in the $1 EPS power number. CHS then reported a "disappointing" Q1, where mgmt invested the upside into TV marketing. Investors abandoned the stock, and there were a couple of downgrades this week, citing reasons like slowing momentum, incremental promotion, and BP oil spill. I do not have a strong view on the NT results, although dept stores like M & JWN have generally reported decent SSS in recent months. I think the street is too myopic on near term earning momentum while completely ignoring the balance sheet, FCF and valuation. To me, the story hasn't changed too much in 3 months, but stock at $9 is a completely different proposition from stock at $16.

    I realize 6 months sounds like a long time in this market, but if we fast forward 6 months, this stock will have close to $3.5 in cash, and trades at single digit EPS/FC ex-cash at below average margin. I think the stock has $5-6 upside (12x '11 + cash) and $1-2 downside from here. I do realize the stock had traded a lot lower during '08, although the same can be said about most other stocks, and CHS has $2 more in cash/share, which has to count something.

    Risks:

     

    Catalyst

    Decent results.
    Less fear about double-dip and end of world for consumers.

    Messages


    SubjectCash
    Entry08/01/2010 11:13 AM
    MemberRotin
    Have they said what they are going to do with it? Is there a reason there is so much of it? I assume they wanted a strong balance sheet during the turnaround? Do I need to adjust for working capital seasonality?
    I don't follow the comps but are the other specialty retailors much more expensive than CHS or is the entire group priced like this for a reason?

    SubjectCanucks, has anything changed to your thesis?
    Entry09/13/2010 01:44 PM
    Membertyler939
    I was just wondering if anything has changed in your view on  his name.  Thanks?

    SubjectRE: Cash
    Entry09/13/2010 01:56 PM
    Membergocanucks97
    sorry, didn't see the question until now. they need a bit of cash for inventory, but not a lot. interestingly, their Q4 is the smallest Q unlike many other retailers.
     
    they have since started a buyback program. if you look at what cfo ken kleeberger did at DLTR, he bought shares very aggressively when fundamentals were so so but stock was cheap. i think he will do the same here.

    SubjectRE: RE: Cash
    Entry09/13/2010 01:59 PM
    Membergocanucks97

    tyler, i still own the name, although admitedly i am a little less bullish, especially in the near term. SSS had turned negative in July, and trend persisted into Q3, although mgmt was adamant that the trend would reverse (Chico's due to hot weather and WHBM due to low inventory). Inventory also looks somewhat heavy, growing 13% vs. expected 6% sales growth next Q. Mgmt also has some seemingly good explanation for inventory, but we should assume for the worst in this situation. Stock is not expensive at 4x trailing EBITDA on non-peak margin, although my conviction in margin improvement has weakened. Company initiated a sizable $200M buyback program, and stock may find some support here after a 45% decline from the peak in 3 months.

    hope that helps.

     
     

    SubjectRE: RE: RE: Cash
    Entry09/13/2010 03:23 PM
    Membertyler939
    Gocanucks, thanks for the update.  This may sound strange, but ovet he last 8 months, I have tried to follow every idea on VIC (I can't think of a better way to educate myself).  I don't have anywhere close to the competence level to actually act on most ideas or contribute to most of the discussions, so updates are really helpful.  Can you recommend a good source for learning about the pitfalls of investing in the retail sector?  You seem to have a lot of expertise in the area.

    SubjectRE: RE: RE: RE: RE: Cash
    Entry09/13/2010 06:17 PM
    Membertyler939
    Thanks, much appreciated.

    SubjectRE: Author Exit Recommendation
    Entry02/25/2011 12:21 PM
    MemberNails4
    Can you let us know why the exit recommendation? CHS's last call seemed fairly good, and the company was targeting $1.50 a share in EPS in 2013.

    SubjectRE: RE: RE: Author Exit Recommendation
    Entry09/26/2011 04:05 PM
    Membercnm3d
    Any take on the name here? I am looking short as intentory issues, 25% off sale currently on their Chicos website (including brand new inventory, never a good sign), Soma still unproven and unprofitable, Chicos and WHBM basically at saturation. Come in a bit, but the sale is the thing that does it for me.
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