Shares of Fort Myers, FL-based specialty retailer, Chico's FAS, Inc. CHS fell 3% yesterday after the company posted disappointing first-quarter fiscal 2014 results. The company's earnings per share of 26 cents for the first quarter were approximately 18.8% lower than the year-ago comparable period adjusted earnings of 32 cents. The prior period adjusted earnings exclude the charge of a penny per share related to non-recurring acquisition and integration costs.
The year-over-year decline in the bottom line was mainly due to higher costs and expenses, which more than offset the benefit of an improved top line. Moreover, the company's earnings for the quarter missed the Zacks Consensus Estimate of 29 cents per share.
Net sales slightly increased to $681.6 million in the quarter from the year-ago sales of $670.7 million. However, it lagged the Zacks Consensus Estimate of $693.0 million. The year-over-year improvement in the top line was mainly driven by the opening of 99 net new stores over the last 12 months, partially offset by decline in comparable-store sales (comps).
Quarter in Detail
Comps in the quarter fell 2.6% against flat comps in the year-ago quarter. The decline was due to decreased traffic as a result of chilly and windy weather conditions as well as lower average dollar sale owing to a highly promotional retail environment.
In the reported quarter, Chico's/Soma Intimates comps grew 0.4% against a 2.8% decline in the prior-year quarter. White House | Black Market (WHBM) brands' same-store sales fell 8.6% compared with a 6.4% rise last year.
Gross profit fell to $382.9 million from $386.8 million reported in the year-ago quarter, while gross margin contracted 150 basis points (bps) from the year-ago quarter to 56.2%. The decline in gross margin was primarily due to increased promotion to drive traffic to stores, slightly offset by lower incentives as a percentage of sales.
Selling, general and administrative (SG&A) expenses in the reported quarter were $319.0 million, up 4.6% from the year-ago level. As a percentage of sales, SG&A expenses rose 130 bps from the prior-year quarter to 46.8% primarily due to increased occupancy expenses, along with the effect of investing in strategic initiatives. These were offset by lower incentive expenses as a percentage of net sales.
Operating income was roughly $63.7 million, compared with an adjusted operating income of $81.9 million in the year-ago quarter. The decline was primarily due to increased SG&A expenses and lower gross profit. Consequently, operating margin contracted 280 bps to 9.4% from 12.2% in the year-ago quarter.
Financial Update
Chico's ended the quarter with cash and marketable securities of $171.5 million, compared with $288.4 million in the year-ago quarter and shareholders' equity of $929.7 million.
The company did not spend on repurchasing its common stocks during the quarter. In Dec 2013, Chico's board of directors approved a $300 million share repurchase program, which has remained entirely available.
Store Update
During the quarter, this retailer of women's clothing and accessories opened 32 stores. As of May 3, 2014, Chico's operated 1,496 stores across the United States and Canada. Looking ahead, for fiscal 2014, the company has scaled down its planned store expansion program. Chico's now expects to open 107 stores and outlets during the fiscal as compared with its earlier projection of 120 to 130 stores.
Other Stocks to Consider
Currently, Chico's carries a Zacks Rank #3 (Hold). However, some better-ranked apparel/shoe retailers include American Apparel, Inc. APP, Foot Locker, Inc. FL and Genesco Inc. GCO, all of which have a Zacks Rank #2 (Buy).
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