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BofA Skeptical Of Chico's Turnaround Prospects, Cuts Estimates After Q1 Report

BofA Skeptical Of Chico's Turnaround Prospects, Cuts Estimates After Q1 Report

Chico's FAS, Inc. (NYSE: CHS) reported disappointing first-quarter comps due to softness at its White House Black Market division and lowered its full-year guidance.

Ongoing issues at WHBM cast doubt on the retailer's turnaround, according to Bank of America Merrill Lynch.

The Analyst

Lorraine Hutchinson maintained an Underperform rating on Chico's FAS with an unchanged $3.50 price target.

The Thesis

With WHBM’s performance deteriorating in the quarter, Chico's FAS reported negative comps yet again Tuesday, despite strong comps at the Soma division, Hutchinson said in a Tuesday note. (See her track record here.) 

“WH had difficulties balancing color and pattern, which is a problem that brand has experienced intermittently through the years. There were also some fit and quality issues,” the analyst said. 

Markdowns at WHBM adversely impacted the company’s gross margin, which contracted 260bps in the first quarter, Hutchinson said. BofA expects this to continue into the second quarter and projects a gross margin contraction of 120bp for 2019, she said, adding that WHBM still has excess inventory and a turnaround is unlikely in the near-term.

Chico’s FAS lowered its full-year sales guidance from a low single-digit decline to a low-to-mid single-digit decline, the analyst said, adding that gross margin guidance has also been reduced and now reflects a 50-100 bps contraction to incorporate the WHBM woes.

BofA lowered its 2019 EPS estimate for Chico's by 2 cents for a loss of 8 cents per share, short of the retailer's guidance. 

Price Action

Chico's FAS shares were down by 3.52 percent at $3.56 at the time of publication Wednesday. 

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Photo courtesy of Chico's.

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