Chico's (CHS) Stock Tumbles On Q1 Earnings & Sales Miss

Chico's FAS, Inc. (NYSE:CHS) reported first-quarter 2017 financial results, wherein both the top and bottom line missed the Zacks Consensus Estimate. The company broke its three-quarter long trend of positive earnings surprise.

Following the release, shares of the Zacks Rank #4 (Sell) company plunged 11.3% yesterday. In the past three months, Chico’s has underperformed the Zacks categorized Retail–Apparel/Shoe industry with its shares declining 33.2% compared with the industry’s decline of 17.1%.

Coming to the quarterly results, Chico’s earnings of 26 cents per share missed the Zacks Consensus Estimate of 29 cents. However, it improved 13% from 23 cents reported in the year-ago quarter, driven by profitable and flexible operating models.

Chico's FAS, Inc. Price, Consensus and EPS Surprise

Net sales dropped 9.2% year over year to $583.7 million, owing to soft comparable store sales (comps), falling short of the Zacks Consensus Estimate of $625.4 million.

Comps declined 8.7% emerging out of lower transaction count. Segment wise, Chico's and White House Black Market brands witnessed a drop of 10% and 9.7%, respectively, partly offset by a 0.2% improvement in Soma comps. Store traffic in the accessories and apparel retail segment remained low throughout March, negatively impacting Chico’s top line. Additionally, product issues at White House Black Market and Choco’s store dented results.

Gross profit declined approximately 9% to $237.4 million, while gross margin dipped 10 basis points (bps) to 40.8% due to store occupancy expenses deleverage that was considerably offset by increase in merchandise margin.

Selling, general and administrative (SG&A) expenses fell 12.3% to $182.5 million, and as a percentage of sales, the same contracted 110 bps to 31.3%. This was backed by reduced store and marketing expenses and benefits from the ongoing cost reduction actions. There were no strategic and restructuring charges during the quarter. Consequently, income from operations as a percentage of sales increased 150 bps.

Financial Update

Chico’s ended the quarter with cash and cash equivalents of $119.1 million, inventories of $273.9 million, long-term debt of $64.8 million, and shareholders’ equity of $613.1 million.

During the first quarter, the company generated $16.7 million of cash from operating activities.

Further, Chico’s repurchased 0.7 million shares for $9.5 million under its $300 million buyback plan announced in Nov 2015. As of Apr 29, 2017, the company had $154.1 million worth authorization remaining for repurchase. The company also spent nearly $10.7 million in dividends in the quarter.

Store Update

During the reported quarter, Chico’s opened two new stores and closed 11. The company’s total store count stands at 1,492 as of Apr 29.

Other Developments

Chico’s continued to make progress with regard to its cost control and operating efficiency endeavors which were declared last year. The company expects to achieve annualized savings of $100–$110 million by mid-2018. In this regard, the company has achieved savings worth $30 million in fiscal 2016, and expects to generate $50 million worth of savings in fiscal 2017. In the first quarter, the company generated savings worth $15 million. Further, in fiscal 2017, the company expects savings of $35 million from redesigning the organizational policies, controlled non-merchandise expenses and efficient supply chain operations resulting in lower cost of goods of sold.

Outlook

For fiscal 2017, management expects comps to decline to a mid single-digit percentage. Chico’s also anticipates gross margin to range between flat to up 30 bps. SG&A are expected to remain flat in fiscal 2017.

Management now anticipates capital expenditure of $60–$70 million for fiscal 2017, down from the previous guidance of $70–$80 million. Since the company actively manages its inventory, on-hand inventory is predicted to remain low for each quarter in fiscal 2017.

Stocks to Consider

Better-ranked stocks in the retail sector include Best Buy Co. Inc. (NYSE:BBY) , Burlington Stores Inc. (NYSE:BURL) and Five Below Inc. (NASDAQ:FIVE) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Best Buy has a long-term growth rate of 10.8% and an average positive earnings surprise of 27.7% for the trailing four quarters.

Burlington Stores has a long-term growth rate of 15.9% and has recorded an average positive surprise of 26.3% for the trailing four quarters.

Five Below has a long-term growth rate of 28.5%. Moreover, the company has an average positive earnings surprise of 9.5% for the trailing four quarters.

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