Monday, March 13, 2006

Chico's Eats Its Own Cooking

Last week, investors and analysts murdered our #1 specialty retail play, Chico's (CHS). Mercilessly did they punish shares after weaker than expected sales data hit the tape, but we thought it was a great buying opportunity:
In the retail space, our favorite contender is Chico's, which has a stranglehold on the female/35 & older apparel niche and spits out 22% operating margins (compared to Gap's 11%). Chicos's also makes better use of its assets and shareholder equity. Not only is Chico's more efficient than Gap, it has much more room for growth -- Gap has 3,000 stores running, whereas Chico's has just 660. Lastly, we're big fans of Chico's new intimacy line, Soma, although we can't say we wear the stuff ourselves.

Chico's revenue has grown an average of 47% annually over the past five years, comps have been in the double digits every year since 98, and operating profits have grown at an annualized average rate of 50% over the past 5 years. Chico's targets arguably the most appealing demographic extant. Chico's doesn't just target baby boomers -- it targets female baby boomers, who are the most loyal customers in the retail arena. 75% of sales come from Chico's Passport Club, a unique concept that drives up repeat sales, the meat and bones of any good retail operation, in our opinion. We think Chico's is done getting "dissed."
On Monday, not only was Chico's upgraded by Nollenberger Capital (who said that although margins and earnings are being restrained in 2006 due to increased investment spending, they believe the co has enhanced its potential future growth rate), the company also declared it's going to taste its own cooking and buy back $100M worth of its own stock.

Chico's thinks its stock is a good investment -- shouldn't we?

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