Chico's: A SWOT Analysis

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Women's retail is a fickle business and several names have been struggling the last few years like Talbot's and Coldwater Creek. One name bucking the trend is their rival Chico's FAS (NYSE: CHS) a specialty retailer with four main brands under its fashion umbrella: White House/Black Market, Soma intimates, Boston Proper, and Chico's. Chico's operates 1355 stores in the US, Virgin Islands, and Puerto Rico. Chico's is a mid-cap at $2.93 billion with a 17.21 P/E and a 1.20% yield. The stock is outperforming the S&P 500 with appreciation of 53.51% over 52 weeks. Analysts expect 14.13% EPS growth over the next 5 years (yoy).

Strengths

  • With 15 consecutive quarters of earnings beats and the last four quarters reporting with an average earnings surprise of over 15%, Chico's has also managed to decrease inventory by over 5% in the last quarter and grow revenues.
  • Chico's main demographic is middle-to-upper class females over 30. With several teen retailers to every one mature ladies store in malls this demographic is somewhat underserved.
  • ​The company has no debt and $371.49 million in cash with cash per share at $2.28.
  • Return on equity has improved to 16.22% since Fellow Fool Dan Caplinger's report card on Chico's.
  • The company has a $200 million share repurchase program in place with $137.7 million remaining.
  • Chico's is very customer-centric and it doesn't need to discount as much as other stores as it maintains very tight inventory and is buying merchandise that its customers said they want.

Weaknesses

  • Chico's has many competitors with the three main ones being: Ann Taylor (NYSE: ANN), The Limited (NYSE: LTD) and Ascena Retail. Chico's competes with Ann Taylor mainly on its Boston Proper, WhiteHouse/Black Market and Chico's brands. The Limited with its Victoria's Secret and to a much lesser extent its Henri Bendel store is also a strong competitor. Chico's also competes with Ascena Retail's new Torrid line of plus size intimates and its lower end Dress Barns. Ann Taylor and The Limited are its most formidable competitors.
  • Victoria's Secret competes head to head with the Soma Intimates stores but it's the Victoria's Secret Pink collection aimed at collegiate females that has been doing the heavy lifting for The Limited. That is not Chico's target demographic and its Soma Intimates at similar price points would be on a level playing field if not for the huge brand recognition of Victoria's Secret. Their Facebook page has over 21 million fans.
  • To that same point Chico's doesn't have nearly the name brand recognition for any of its divisions that The Limited and Ann Taylor have.
  • Chico's has no international presence.
  • While gross margin stands at 57.2% as of the last quarter net margin at 6.54% is at best meh.
  • EPS growth even at 14.30% is still not as torrid as the 40% pace of years past. FBR Capital Markets analyst Anna Andreeva downgraded the stock from Outperform to Market Perform on November 26. She gave a new price target of $18 down from $20 based on a challenged economic environment for its customers and less room to cut costs.

Opportunities

  • Chico's could turn the weakness of lack of international exposure into a strength by expansion into Canada like competitor Ann Taylor has done, opening its first two stores in Toronto. While the company is expanding briskly with between 100-110 new US store openings a year for the next several years and currently earns sales of $593/sq. ft. Canada is a wide open market.
  • Chico's bought the Boston Proper website and catalog division in 2011 for $4 million and it's only accounting for 4.9% of sales currently. As a retail aficionado I had never heard of it to be honest so Chico's could definitely use some marketing in this division. Boston Proper will be opening its first bricks and mortar boutique this year.
  • The company is just beginning to advertise on television for its other divisions with a White House/Black Market campaign for the Emmys. The Soma division also did an on air bra makeover on the The Today Show with Kathie Lee and Hoda. All its divisions could use more marketing.
  • The success of Chico's So Slimming pants and the White House/Black Market work kit, an entire ensemble of career pieces that work together, has been very successful and mentioned on the Q3 call by CEO David Dyer. The company needs to build on the momentum of these offerings, especially the work kit that gives the career oriented Ann Taylor merchandise a run for the money.

Threats

  • As mentioned earlier Soma Intimates competes against Victoria's Secret but the PINK collection aimed at younger women isn't Soma's demographic, however, as noted on the call undergarment loyalty is very personal and women are loathe to change brands they are comfortable with. This was supported by same store comps at older Soma stores holding up almost as well as the newer ones as customers are more loyal than at other retail venues. As young women transition from PINK to the grown up lingerie Soma will have missed out on an entire generation of customers.
  • Like Chico's competitor Ann Taylor has devised a multi-channel sales strategy of outlets and e-commerce that JP Morgan analyst Brian Tunick thinks is the highest margin and fastest growing segments for these specialty retailers. The main threat to Chico's is Ann Taylor beating them at the same game.

Summary

Ann Taylor may have a lower P/E at 14.62 but it has no yield. It has been performing well also beating on its last earnings release in late November. It does have slightly better name recognition but The Limited's Victoria Secret is the Queen Bee of this clique with worldwide recognition and positive perception by US shoppers. The Limited has a 2.10% yield and a 20.88 P/E,  but only an 11.46% EPS growth rate going forward. The Limited also owns Bath & Body Works, La Senza, and Henri Bendel for over 3,320 stores worldwide.

Chico's has many strengths: no debt, a strategic expansion plan, and an outlet and e-commerce multi-channel strategy. To keep up its momentum it just needs to keep the cost-cutting in place while using some of its cash to promote its well-loved brands.


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