Aug 31, 2017 by InvestorDestination Team
Chico's FAS Inc's (NYSE:CHS) spring offering didn’t resonate with customers, so the company had a lackluster performance in the first half. Apart from that, recent retail challenges have impacted the company negatively. For the last few years, Chico’s FAS revenue and margins have been on the decline. The company is experiencing negative comp sales. Even its fast growing Soma brand is experiencing a slow down. Right now, its stock is at a multiyear low.
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |
|---|---|---|---|---|---|---|---|---|---|
| Revenue (in millions) | 1,582 | 1,713 | 1,905 | 2,196 | 2,581 | 2,586 | 2,675 | 2,661 | 2,476 |
| EPS | (0.11) | 0.39 | 0.65 | 0.83 | 1.10 | 0.42 | 0.43 | 0.01 | 0.70 |
| Revenue Growth | (7.7%) | 8.3% | 11.2% | 15.2% | 17.5% | 0.2% | 3.5% | (0.5%) | (7%) |
| Operating Margin | (2.5%) | 6.3% | 9.3% | 10.1% | 11.1% | 5.5% | 4.4% | (0.5%) | 5.7% |
| Debt to Asset | 0% | 0% | 0% | 0% | 0% | 0% | 0% | 0% | 8% |
| FCF % Sale | (0.33%) | 8.61% | 8.74% | 5.62% | 7.89% | 3.80% | 6.08% | 4.42% | 7.38% |
The retail environment has been challenging and undergoing a transformation. Not all retailers will be able to successfully transform. Due to this concern, even when the stock market is roaring, retail stocks are selling at a discount. Neither mall traffic decline will reverse nor will everyone be sitting at home and buying everything from Amazon. The future of retail lies between these two extremes. Retailers that have clear value proposition and loyal customer base can successfully transform will survive this downturn. Now the question is, will Chico’s survive this downturn?
Chico’s FAS is a specialty retailer that offers quality women apparels and accessories. It owns three brands – Chico’s, White House Black Market, and Soma Intimates. It focuses on offering a boutique store experience to its customers. Chico’s and White House Back Market mainly offers women apparels and accessories, and as the name indicates Soma Intimates offers women’s intimates and apparels.
Even though, the company is recently talking about predictive analytics and omnichannel, it is lagging in technology implementation. For example, it maintained a journal about its preferred customers’ visits and used notes from previous visits to offer great customer experience. Until recently, it used paper and pen to maintain that journal. It was also slow in implementing an inventory management system. However, the company is making progress in implementing technology to improve its execution. It has implemented CRM systems and now customer journals are stored on cloud and its associates can access them from any store using an app.
The company is also making progress in its omnichannel efforts. In 2016, it generated around 19% of its revenue online. While some retailers have already implemented ship from stores, Chico’s is implementing that right now. It doesn’t have an app where consumers can buy from their smartphone. Unlike millennials, its customers may be happy to buy from online or stores rather than from an app.
The company is known for its exceptional customer service, and because of that it has a loyal customer base. It is focused on offering an unique experience to its loyal customer base. The company is trying to improve its operation efficiency and reduce its cost structure. However, it is not reducing cost at the expense of customer experience. Its customers are more focused on finding fashionable, quality products than finding a deal. Even in this challenging environment the company opted to reduce promotions and is trying to excite customers with new products. However, fashion misses are inevitable in this business and the company runs promotions to clear inventory. It is also trying to use predictive analytics and supply chain efficiency to excite its customers with newness. It is working on improving its lead time to replenish what is selling. Last year, the company reduced its lead time by 25%. However its lead time is still high compared to efficient players such as Zara, H&M.
The company is making progress in its restructuring efforts. It is improving its operation efficiency and even in the face of declining sales, its margins are improving.
It has a strong balance sheet and pays dividend. At the current price, the company pays around 4% in dividend. Like many retailers, the company was aggressively opening stores. Now it has put a brake on opening more stores and instead is closing some underperforming ones. It has reduced its cap ex and is conserving cash. It is regularly buying back shares.
Considering all these factors we think it is worth considering.
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