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Chico's (CHS) Beats Q3 Earnings, Misses Sales; Stock Up

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Chico's FAS Inc. (CHS - Free Report) delivered better-than-expected bottom-line performance for the second straight quarter as it reported third-quarter fiscal 2016 results, following which shares of the company jumped 13.3%.

Chico’s adjusted earnings of 20 cents per share outpaced the Zacks Consensus Estimate of 13 cents and surged 53.8% on a year-over-year basis. On a GAAP basis, the company reported earnings of 18 cents a share as against a loss of 9 cents incurred in the year-ago quarter.

CHICOS FAS INC Price, Consensus and EPS Surprise

CHICOS FAS INC Price, Consensus and EPS Surprise | CHICOS FAS INC Quote

Net sales fell 7.5% year over year to $596.9 million, mainly owing to the absence of Boston Proper sales. On excluding Boston Proper from fiscal 2015, net sales declined 4.8%, due to soft comparable store sales (comps). Also, net sales fell short of the Zacks Consensus Estimate of $609.1 million.

Comps decreased 4.9% compared with a 3.3% drop recorded in the year-ago quarter. The decline was attributable to lower transaction count, along with a fall in average dollar sale. Going segment-wise, comps at Chico's and White House Black Market brands dropped 5.6% and 5.5%, respectively, partly offset by a 0.4% improvement in Soma comps.

Gross profit fell nearly 7.6% to $230.3 million, while the gross margin remained flat at 38.6% in the reported quarter. On excluding Boston Proper from fiscal 2015, gross margin contracted 40 basis points (bps). The decline was attributable to higher occupancy charges and incentive compensation, somewhat compensated by a rise in merchandise margin.

Selling, general and administrative (SG&A) expenses decreased 16.7% to $188.4 million, and as a percentage of sales, the same contracted 350 bps to 31.6%. This was backed by lower unproductive marketing and store labor costs, somewhat offset by a rise in incentive compensation.

Financial Update

Chico’s ended the quarter with cash and cash equivalents of $80.3 million, inventories of $261.3 million, long-term debt of $74.8 million, and shareholders’ equity of $619.1 million.

The company incurred $9 million as capital expenditure in the third quarter of fiscal 2016. In fiscal 2016, management anticipates incurring roughly $60 million as capital expenditure.

During the first nine months of fiscal 2016, it generated $144.4 million of cash from operating activities.

Also, during the quarter, Chico’s repurchased 1.7 million shares for $20.0 million under its $300 million buyback plan announced in Nov 2015. This left the company with buybacks worth $183.7 million under its standing authorization. Additionally, Chico’s paid dividends worth $11 million in the quarter, including which it returned nearly $31 million to shareholders.

Concurrently, the company announced  its quarterly cash dividend of 8 cents per share, payable on Dec 19, 2016, to shareholders of record as on Dec 5.
 
Store Update

During the reported quarter, Chico’s opened one new store and closed eight, taking the total store count to 1,510 as of Oct 29, 2016.

The company plans to shut down 35 stores in fiscal 2016.

Other Developments

Chico’s continued to make progress with regard to its cost control and operating efficiency endeavors, which were declared in May 2016. Management remains impressed with the continued progress of its strategic plan. Further, developments across the organization, new merchandising endeavors, recent hires, along with other brand-specific initiatives, are likely to help the company deliver robust top-and-bottom-line growth going forward. Also, these factors highlight that the company is well on track to achieve its double digit operating margin target.

Moving ahead, the company expects to improve profitability buoyed by its cost savings initiatives, as it is about to enter the third phase of its strategic plan. It expects to build solid growth platforms for its iconic brands which will be implemented in fiscal 2017.

Outlook

Following the mixed third-quarter fiscal 2016 results, the company provided its outlook for the fourth quarter.

The company expects comps to decline in the low single-digit range for the fourth quarter. Gross margin is estimated to decline as occupancy deleverage is anticipated to more than offset favorable merchandise margins. However, the company expects savings from the aforementioned cost reduction and operating efficiency plans to help lower SG&A expenses. Consequently, management expects operating margin to remain flat year over year.

Further, the decrease in marketing spend will be at a lower level than the third quarter. Inventories are anticipated to decline compared with the 2015 level.

Zacks Rank

Chico’s currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , Christopher & Banks Corporation (CBK - Free Report) and Boot Barn Holdings, Inc. (BOOT - Free Report) .

The Children's Place, with a long-term earnings growth rate of 10.3%, has jumped roughly 89% year to date. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Christopher & Banks Corporation, with a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 15%. The stock has gained 25.9% in the past one year.

Boot Barn Holdings, a Zacks Rank #2 stock, has a long-term earnings growth rate of 14.5%. The stock has surged nearly 122% in the past six months.

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