Chico Beats on Solid Sales - Analyst Blog

Chico's FAS Inc. (CHS) reported third-quarter 2010 earnings of 16 cents per share, just about beating the Zacks Consensus Estimate of 15 cents. The result also compares favorably with 13 cents earned in the second quarter of 2009. Net income was $28.8 million, compared with $22.7 million in the prior-year quarter.

Sales

Net sales in the third quarter 2010 were $483.0 million, up 8.1% year over year from $446.9 million in the prior-year period. The advance reflects a 5.7% year-over-year increase in Chico's/Soma Intimates sales coupled with a 14.2% year-over-year increase in White House Black Market (WHBM) sales. Net sales beat the Zacks Consensus Estimate of $477.0 million. Direct-to-consumer sales were $34.4 million, up 41% year over year.

Comparable Store Sales

Consolidated comparable store sales in the quarter increased 3.1%, compared with a 12.8% increase in the prior-year quarter. Chico's/Soma Intimates brands' comparable store sales increased 1.5% compared with a 12.2% increase in third-quarter 2009. Meanwhile, WHBM comparable store sales increased 7.1%, compared with a 14.4% increase in the year-ago quarter.

Operational Update

Cost of goods sold in the quarter increased 7.0% year over year to $207.9 million. Gross margin decreased 60 basis points year over year to 57.0%, largely due to increased markdowns at Chico's frontline stores.  However, perked up margins at outlet stores offered a partial offset.

Selling, general and administrative expenses were $230.9 million in the third quarter, up from $220.9 million in the prior-year quarter. Increase in store and direct operating costs related to 64 new stores opened in the past twelve months and the planned increase in marketing expenses resulted in the hike.

Higher occupancy expenses, store labor costs and higher credit card fees associated with the opening of stores, and higher sales volume led to the increase in store and direct operating expenses to $169.7 million in the reported quarter. Despite cost inflation, operating income was $44.2 million, compared with $36.3 million in third-quarter 2009.

Financial Update

Cash and cash equivalents at the end of third-quarter 2010 declined to $21.9 million from $60.9 million at the end of third-quarter 2010.

Year to date, net cash from operation came in at $176.9 million, compared with $200.3 million for the same period last year. Purchases of property and equipment were $58.5 million compared with $51.1 million in the prior-year period.

Dividend

The board of directors of Chico's FAS declared a quarterly cash dividend of 4 cents per share to shareholders of record as of December 7, 2010. The dividend will be payable on December 21.

Share Repurchase

The board also authorized a share repurchase of up to $200 million of the outstanding common stock through January 2013. The company expects to fund the repurchase program from cash on hand. The timing, actual number and value of shares to be bought back will depend on the performance of Chico's stock price and other market conditions. During the third quarter, the company repurchased 2.1 million shares for $18.7 million.

Store Update

The company's Chico's brand currently operates 598 boutique and 63 outlet stores, White House Black Market runs 344 boutiques and 21 outlet stores, and Soma Intimates operates 119 boutique stores and 8 outlet stores – cumulatively a total of 1,153 stores. The company has operations in 48 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico.

We currently have a short-term Zacks #3 Rank (Hold) rating and a long-term Neutral recommendation on the company.