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U.S.-based specialty retailer, Chico's FAS Inc. (CHS - Snapshot Report) reported second-quarter fiscal 2013 earnings per share of 27 cents that was down 15.6% from the year-ago quarter and fell short of the Zacks Consensus Estimate of 32 cents. The year-over-year decline in bottom line was primarily due to higher markdown and increased operating expenses.

Quarter in Detail

Net sales inched up 1.2% year over year to $649.5 million in the quarter but missed the Zacks Consensus Estimate of $679.0 million. The top line in the quarter mainly benefited from the opening of 112 new stores, which led to square footage growth of 8.8%.

Comparable-store sales (comps) in the quarter fell 2.6% against a 5.6% increase reported in the year-ago quarter. Sales at the company’s stores were impacted mainly due to decrease in both transactions and average dollar sales as well as strong year-ago comparisons. In the reported quarter, Chico's/Soma Intimates and White House Black Market (WHBM) brands' comparable store sales declined 3.1% and 1.5%, respectively.

Gross profit for this Zacks Rank #4 (Sell) company dropped 1.7% to $356.1 million while gross margin contracted 160 basis points (bps) from the year-ago quarter to 54.8%. The decline in gross margin was primarily due to increased promotion to improve traffic at stores and investment to implement the new distribution automation, slightly offset by lower incentives as a percentage of sales.

Selling, general and administrative (SG&A) expenses in the reported quarter were $286.3 million, up 3.7% from the year-ago level. As a percentage of sales, SG&A expenses expanded 100 bps from the prior-year quarter to 44.0%, primarily due to increased occupancy and marketing expenses as a percent of net sales, along with the impact of spending on strategic initiatives. These were offset by lower incentive expenses.

Operating income was $69.9 million compared with $85.8 million in the year-ago quarter, while operating margin came in at 10.8%, marking a decline of 260 bps. The contraction in operating margin was primarily due to lower gross margin and increased operating expenses as a percentage of sales.

Financial Update

Cash and marketable securities as of Aug 3, 2013, were $301.9 million, compared with $357.9 million as of Jul 28, 2012. At the quarter-end, inventories reflected an increase of 10.1% to $211.1 million from $191.7 million as of the end of the year-ago quarter. During the first six months of fiscal 2013, the company made a capital expenditure of $71.7 million, mainly related to its ongoing store growth initiatives.

The company spent $25 million during the quarter to buy back 1.4 million shares under its ongoing $300 million share repurchase program authorized in Feb 2013. Currently, the company has shares worth nearly $215 million remaining under its share repurchase program.

Outlook

Going forward, in a move to make the most of the holiday season, the company has planned many merchandizing initiatives to attract more traffic to its stores. With the successful execution of these measures, Chico’s is expecting 3.7% growth in comparable store sales and a 90 bps improvement in gross margin in the fourth quarter of fiscal 2013.

The company also intends to go ahead with other strategic initiatives for 2013 that will help boost future growth. These include omni-channel capabilities, expansion in Canada, and the opening of 135 to 140 new stores. For fiscal 2013, Chico’s expects capital expenditures to be approximately $140 million.  

Other Stocks to Consider

Stocks performing well among apparel/shoe retailers include Citi Trends, Inc. (CTRN - Analyst Report), The Buckle, Inc. (BKE - Snapshot Report) and Express Inc. (EXPR - Snapshot Report). While Citi Trends has a Zacks Rank #1 (Strong Buy), both The Buckle and Express carry a Zacks Rank #2 (Buy).

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