According to the Morgan Stanley report, “Management attributed meaningful sales weakness in the first three weeks of September to the Labor Day calendar shift, warmer y/y temperatures, and a volatile stock market.”
Analyst Kimberly Greenberger mentioned that since September is usually the month when Chico’s FAS sees the highest sales volume, sales improvement in October, driven by promotions, were inadequate to offset the weakness seen in September.
“Impressively, however, management decisively cleared through excess 3Q inventory with thoughtful promotions. Given these strategic promotions and an already leaner inventory posture at the end of 2Q, 3Q gross margin ended flat y/y despite the significant sales miss,” Greenberger said.
Looking Ahead: Guidance
Management has guided to flat gross margins for 4Q. However, given that the inventory is clean and higher airfreight costs in 2014 are expected to provide a $4 million tailwind, there could be upside to the guidance.
In addition, despite the significant top-line miss, Chico’s FAS was able to limit SG&A growth to $6 million year-on-year.
“As sales slowed, management scrutinized various expense categories such as store labor hours and headquarter expenses to ensure resources were allocated most appropriately and cost effectively,” the report stated.
Greenberger believes that this expense modification intra-quarter was impressive and demonstrated management’s ability to react rapidly to a volatile environment and adapt accordingly.
“We also remain very encouraged by the more rigorous approach to managing the store fleet,” Greenberger added.
Image Credit: By Dwight Burdette (Own work) [CC BY 3.0 or CC BY 3.0], via Wikimedia Commons© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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