Oppenheimer Downgrades Chico's On Sales Misses, Leadership Transition Risk

In a report published Monday, Oppenheimer analyst Anna Andreeva downgraded the rating on

from Outperform to Perform, while lowering the price target from $20 to $16. Although the stock has risen substantially since the company's started its inventory reduction initiatives in 2H14, the lack of earnings upside could lead to some contraction. In addition, the retirement of CEO Dave Dryer at the end of 2015 could lead to some transition risk, although the analyst believes that a private equity buyout is unlikely. "While tightly managed inventories are pressuring sales, recent heightened promotional activity at both Chico's and WHBM could drive less than expected margin expansion. In addition, LSD comp guide for '15 could be at risk after miss in 1Q15 and likely another negative comp 2Q15," Andreeva stated. Although the company has stepped up its promotional activity, both in terms of front of store and clearance, the analyst believes that the uptick in promotions so far in 2Q15 could be indicative of weaker product acceptance. Contrary to its competition, Chico's FAS has been witnessing weakening trends across its core dress category. The analyst believes that this weakness could be attributed to the company's higher pricing architecture and younger aesthetic. The company's goal of achieving 10 percent EBIT margins, from the current 6 percent, indicates gross margin recovery of about 200-250 bps. However, according to the Oppenheimer report, "In '15, despite $38M in savings from re-alignment, SG&A expected to deleverage (more normalized incentive comp); next year, lapping inventory cuts means product must deliver." In addition, the women's apparel segment is becoming increasingly competitive, while Chico's FAS' balance sheet inventories at the end of 2Q15 are still elevated. The 2Q15, 2015 and 2016 estimates have been lowered.