Chico’s FAS, Inc. (CHS) has managed to generate exceptionally strong sales growth in a difficult retail environment. Same-store sales rose an incredible 12.8% in the second quarter of 2011, for instance.
Analysts expect this success to continue over the next couple of years as the company takes market share from its weaker rivals. Based on consensus estimates, analysts project 38% EPS growth this year and 18% growth next year.
These estimates have been rising too after the company reported a positive earnings surprise for the second quarter of 2011. It is a Zacks #2 Rank (Buy).
Chico’s FAS has also been buying back its stock and pays a dividend that yields 1.5%. Valuation is attractive too, with shares trading well below their historical averages.
Company Description
Chico’s FAS is a women’s specialty retailer that operates three brands: Chico’s, The White House | Black Market, and Soma Intimates.
The Chico’s brand currently has 598 boutiques and 78 outlet stores. The White House | Black Market currently has 354 boutiques and 25 outlet stores, and Soma Intimates has 150 boutiques and 16 outlet stores.
The company was founded in 1983 and has a market cap of $2.3 billion.
Second Quarter Results
Chico’s FAS reported better than expected results for the second quarter of 2011 on August 17. Net sales jumped 18.5% to $551.4 million in the quarter, beating the Zacks Consensus Estimate of $536.0 million. Consolidated same-store sales rose a remarkable 12.8% on top of a 7.6% increase last year.
The Chico’s/Soma Intimates brands saw same-store sales growth of 11.9%, while the White House | Black Market brand saw a 14.9% increase.
Despite fears of rising commodity costs squeezing margins at retailers, the company’s gross margin actually increased 40 basis points to 56.1% of net sales. Meanwhile, higher sales led Chico’s FAS to leverage its selling, general and administrative expenses, which fell 190 basis points to 43.6% of net sales.
These factors led to a stellar 45.6% increase in operating income. Earnings per share increased 47.1% to 25 cents, ahead of the Zacks Consensus Estimate by a penny.
Outlook
Analysts mostly raised their estimates for both 2011 and 2012 following the strong second quarter. This sent the stock to a Zacks #2 Rank (Buy).
Despite a challenging overall retail environment, analysts project strong growth for Chico’s FAS over the next two years. Based on consensus estimates, analysts expect 38% EPS growth in 2011 and 18% in 2012.
Analysts expect Chico’s FAS to continue its strong same-store sales growth and take market share from its weaker competitors in the near term. The company also recently announced it will be acquiring online/catalog retailer Boston Proper. The deal is expected to be accretive to EPS in the next 12 months.
Returning Value to Shareholders
Chico’s FAS has a solid balance sheet with no long-term debt. This has allowed the company to use its free cash flow to return value to shareholders through stock buybacks and dividends.
In the second quarter, for instance, the company bought back 4.3 million shares for $61.2 million. It has $84.2 million remaining under its original $200 million authorization approved in August 2010.
Chico’s FAS also began paying a dividend in early 2010 and raised it by 25% earlier this year. It currently yields 1.5%.
Valuation
Shares of CHS have declined around 20% from their 52-week highs seen in mid-July as the overall market has pulled back. This has led to some compelling valuations, however.
Shares trade at just 13.3x 12-month forward earnings, essentially in-line with the industry average, but a significant discount to its 10-year median of 21.8x.
Additionally, its price to free cash flow ratio of 14.2 is well below its historical median of 37.3.
The Bottom Line
With strong same-store sales growth, rising earnings estimates and shareholder-friendly management, Chico’s FAS looks very attractive at just 13.3x forward earnings.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.
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