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Chico's No Bargain At Cash Value

Posted: Nov 25, 2008 14:33 PM by Eric Fox

Tickers in this Article: LIZ, JNY, TLB, ANN, CHS

Chico's FAS (NYSE:CHS) is a tempting investment to some value investors, who see it trading near its cash value, but the problems at the company predate the fiscal crisis as same-store sales have been dropping for two years.

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Chico's is a women's specialty retailer offering clothes and accessories. It has 1,083 stores located in 49 states. The chain operates under three brands: Chico's, which targets women 35 and over with a moderate to high-income; White House/ Black Market, which caters to 25 years and older, and Soma Intimates, which sells intimate apparel and sleepwear.

Ongoing Problems
Chico's has had problems for some time. Its operating margins peaked in the low 20% range in Fiscal 2005 and have dropped for three years. Selling, general and administrative (SG&A) expenses also jumped higher, and were 49.4% of sales in fiscal 2007, up from the low 40% range in previous years. The company announced third quarter results on November 25 which saw a decrease of 5.2% in sales to $394.2 million from the same quarter in 2007. Chico managed to cut costs compared to the same time frame last year; SG&A expenses decreased 2.8% to $213.1 million from $219.2 million.

The company's same-store sales went negative for the first time in August of fiscal 2006, and have been negative for 26 out of 27 months through October 2008. This dismal performance predates the credit crisis and recession, so certainly there is more at play here than weakness in the overall consumer.

The latest same-store sales number was for the thirteen weeks ending November 1, and saw sales drop 13.4%, compared to the same period in 2007.

The company does have solid financials and ended the third quarter on November 1, 2008, with $256 million in cash and marketable securities and no debt. This comes to $1.45 per share, compared to the closing price on November 24 of $2.35.

The Retail Wreck
Other retailers are also struggling.

AnnTaylor (NYSE:ANN) reported that it expects same-store sales to fall 25% during the holiday quarter, and would not give guidance. For its third quarter ending November 1, it reported a net income loss of $13.4 million, or a loss of 24 cents per share. This is well below the same period last year which had earnings per share of 66 cents.
Talbots (NYSE:TLB), another retailer catering to professional women, reported a drop in same store sales of 13.9% in the third quarter, and a 28 cents per share loss. Analysts polled by First Call were expecting a loss of only $0.22.

Several of the apparel companies, which supply retailers with goods, have also been crushed the last few months. Liz Claiborne (NYSE:LIZ) and Jones Apparel (NYSE:JNY) are down 93% and 83%, respectively year to date through November 20.

Bottom Line
Investing in a company at close to its cash value is always tempting, but Chico's has seen declining same-store sales for more than two years, a performance that pre dates the current recession and financial crisis.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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