Chico's Beats on Q2 Earnings, Plans to Exit Boston Proper

After reporting in-line earnings in the first quarter of fiscal 2015, Chico's FAS Inc.'s CHS offered investors a reason to cheer by delivering better-than-expected second-quarter results. Consequently, shares of this omni-channel specialty retailer of women's private branded, casual-to-dressy clothing and intimates rose 6.7% yesterday.

The company posted adjusted earnings of 25 cents a share that beat the Zacks Consensus Estimate of 22 cents and surged 25% year over year. However, including net charges related to the plan to exit the Boston Proper direct-to-consumer business and other restructuring costs, earnings came in at 2 cents a share, significantly down from 20 cents in the year-ago quarter.

Net sales climbed 1.4% year over year to $680.4 million in the second quarter. The year-over-year improvement in the top line was mainly driven by the opening of 23 net new stores and comparable sales growth. Net sales also came in ahead of the Zacks Consensus Estimate of $675 million.

Comparable sales inched up 0.5%, reflecting higher average dollar sale, partly offset by a decline in transaction count. Soma and Chico's brand comparable sales grew 5.1% and 0.9%, respectively. However, comparable sales at White House | Black Market fell 1.9%.

Gross profit advanced 4.1% to $366 million, while the gross margin improved 140 basis points to 53.8%. The expansion in gross margin was primarily due to cost containment efforts and lower promotional activity on account of effective inventory management.

Financial Update

Chico's ended the quarter with cash and cash equivalents of $109 million, long-term debt of $87.2 million, and shareholders' equity of $710.2 million.

During the first six months of fiscal 2015, the company generated $112.1 million of cash from operating activities and incurred $42.8 million as capital expenditure. Management now plans to incur capital expenditure of $100 million in the fiscal.

Under the accelerated share repurchase agreement entered into in the first quarter, the company received 3.9 million additional shares. Upon completion of the program in the reported quarter, the company bought back a total of 14.6 million shares for $250 million.

Store Update

During the quarter, Chico's opened 8 new stores and closed 12, taking the total store count to 1,548 as of Aug 1, 2015.

The company plans to open approximately 40 new stores this year and shutter 160–165 stores over the next three years. The company expects to close about 70–75 stores in fiscal 2015.

Outlook

Management projects moderate increase in comparable sales during the rest of fiscal 2015 and anticipates gross margin rate improvement during the period.

Zacks Rank

Chico's carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include American Eagle Outfitters Inc. AEO, Aéropostale, Inc. ARO and Citi Trends Inc. CTRN, all carrying a Zacks Rank #2 (Buy).

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