Founded in 1983 as a small boutique selling Mexican folk art and cotton sweaters on Sanibel Island in Florida, Chico’s now operates more than 1,200 outlets and boutiques throughout the U.S., selling casual-to-dressy apparel and related accessories under the Chico’s brand, White House/Black Market and Soma Intimates names, catering mostly to women over the age of 35.

Although net sales for the third quarter ended October 29 increased 11.5% year-over-year to $539 million, the Fort Myers, Fla.-based retailer posted quarterly earnings of 16 cents per share, lower than the consensus analyst estimate of 20 cents. Absent traffic, the company was forced to increase promotional activities and offer aggressive discounts to move merchandise, especially at its namesake stores. Gross margin fell 100 basis points to 56% and inventory increased 38% to $247 million.

Though gross margin is forecast to fall 100 to 200 basis points in the fourth quarter (reflecting a need to push-out end-of-year merchandise through discounting), management insists the decline is not related to execution problems. Chief executive officer David Dyer pointed out on the third-quarter 2011 conference call with analysts that the White House and Soma brands “delivered record sales and margins in the third quarter, thanks to a more fashionable mix of lingerie, dresses and beauty.”

“It’s the economy, stupid!” ~ Democratic strategist James Carville

All four brands — from dinner party fashions at Boston Proper to pajamas and “Vanishing Back” bras available at Soma Intimates — are resonating with shoppers, said chief financial officer Pamela Knous on the earnings call. “And I am proud to say,” declared Knous, that the 11.5% increase in sales “represents the tenth consecutive quarter of positive comparables.”

What Knous did not say was that consolidated sales comparables grew only 3.7%. Her double-digit growth comment reflected increases from new store openings — not actual organic growth at locations open more than one year!

Even more troubling, although new traffic was up for the combined Chicos and Soma Intimates brands, which accounted for 66% of quarterly revenue, comparables grew only 0.6%, compared to sales growth of 3.6% last year. Knous said the slowdown reflected the Chico’s customer’s “cautious purchasing behavior in light of continuing uncertain economic conditions.”

“When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.” ~ American poet James Whitcomb Riley (1849 – 1916)

Notwithstanding, the Chico’s namesake brand, average dollar sales and transaction counts are supposed to be up across all other brands, according to management. Why, then, will the company not break out segment profit and loss (P&L) statements?

Looking to extend its customer’s experience to intimate apparel, a $13.5 billion market (led by Victoria’s Secret’s commanding 25% share), Chico’s has grown the Soma label from 10 stores in 2005 to more than 200. Given the company’s ambitions are no longer “a secret,” why should the brand’s contribution to P&L still be considered such — unless discount pricing is driving sales growth — and eating into profits?

Management contends that there is space for another specialty lingerie brand. Though sales and profits are sizzling these days at industry bellwether Victoria’s Secret, owned by Limited Brands (NYSE: LTD), the playing field is not level for an upstart like Chico’s: Soma Intimates does not have the real estate. With just one-fifth as many stores, the company cannot similarly leverage product campaigns (do not expect an NBC runway show in primetime anytime soon). Additionally, deep-discounters like Wal-Mart Stores (NYSE: WMT) and Kohls (NYSE: KSS), with respective market shares of 17% and 8%, are battling for the budget-constrained pocketbooks of shoppers (looking for bargains) too. Ergo, Chico’s promulgations of full pricing and fashion parading hand-in-hand at Soma Intimates, in my opinion, is just fantasy talk.

On the earnings call, Nomura retail analyst Paul Lejuez was ignored when he specifically asked Dyer or Knous to detail the P&L impact of Soma Intimates on quarterly income. The company did not return my call seeking comment, too.

Troubling Trends Ahead

There are stormy headwinds blowing toward Chico’s, which management — whether deliberately or blithely — refuses to address:

• “Excluding $3.5 million of non-recurring, after-tax Boston Proper acquisition and integration cost, earnings per diluted share were $0.18 compared to $0.16 last year, a 13% increase,” said Knous. “Our best third quarter earnings per share results since 2006.” If this is Chicos’ best — I’d hate to see “average” performance. The quality of the company’s earnings is suspect. Actual net income year-on-year fell 8.2% to $26.46 million, according to regulatory filings. Share-net income received an artificial boost because actual (weighted) share count outstanding fell by 10 million in the last year due to open-market stock repurchases.
• In total, the company should exit the year at 1,250 stores, an increase of about 8% in square footage. However, in-store inventory is up some 17% per square foot, which suggests a continued reliance on aggressive promotions to push out seasonal merchandise — and a delay in margin turnarounds.
• Further evidence of a disconnect with female shoppers is found in days inventory outstanding (DIO), a performance metric that measures how long it takes inventory to be replaced on store shelves. In the third quarter, DIO rose year-over-year from 73.5 days to 81 days. Part of the cash conversion cycle, an increase in DIO whispers a liquidity crisis could be in the wind, as Chico’s inventory accounts for almost 46% of current assets (of $543.5 million).

“The best offense is having the right product for the customers.” ~ Chicos CEO David Dyer

Management believes that Chico’s has sufficient capital — cash flow from operations and existing cash and marketable securities balances — needed for the 100 (plus) new store openings in 2012 ($100 – 120 million), plus continued investment associated with the Soma brand, store remodel/expansions and cash required for inventory levels associated with this growth. Additionally, the company has no long-term debt and, if necessary, an untapped bank credit-line totaling $70 million.

Cash and equivalents totaling $195 million plus year-to-date operations that threw off $181 million suggest that liquidity should be sufficient to weather more of the same soft retail environment predicted for 2012 (including continued pressure on margins from promotional activities). That said, the company is spending money like a drunken sailor: $212 million acquisition of Boston Proper last fall, $70 million in dividend payouts, $176 million stock repurchases of 13.7 million shares (since August 2010) and the just-announced $200 million new stock buyback program.

Strong quarterly results at Limited Brands and Ann Inc (NYSE: ANN), parent company of Ann Taylor and LOFT brands, demonstrate that even in a weak economy customers will pay “full-price” for the right products. However, in my opinion, the company has overestimated its own pricing power. Consequently, if trouble follows the company into 2013, build-outs planned for Boston Proper and Soma could grind to a halt. As the share price of Chico’s FAS is down some 36% from its 52-week high of $16.60, consensus among investors would be to agree — and flee.

David J Phillips

Bank of America Corporation (NYSE: BAC) is actually indicated higher this morning by over 1% at $5.57 despite reports that it has been warned by regulators to bolster its financial position.

Brocade Communications Systems Inc. (NASDAQ: BRCD) may have turned in a net loss after items and options, but non-GAAP earnings were $0.16 EPS and $550 million versus estimates of $0.14 EPS and $527.4 million.  Shares were up 6% last night and the $4.48 close of Monday is still up 6.7% at $4.78 on Tuesday morning. 

Campbell Soup Company (NYSE: CPB) reported that normalized earnings were down nominally from a year earlier at $0.82 EPS and that sales fell 1% to $2.16 billion; estimates were $0.79 EPS on $2.2 billion in sales.

Chico’s FAS, Inc. (NYSE: CHS) reported that its third-quarter earnings was $0.16 EPS but after $0.02 in acquisition costs, while estimates were $0.20 EPS.  Sales were $538.5 million versus estimates of $548.5 million. Same-store sales in the quarter rose 3.7% versus 5% or more expected and it turned in another $0.05 dividend for a 1.8% or so dividend yield.

Focus Media Holding Ltd. (NASDAQ: FMCN) was crushed yesterday with roughly a 40% drop after short seller Muddy Waters raised concerns about the company.  The company has denied the allegations and said that the information provided was misrepresented.  Shares are trading up 12% at $17.40 so far this morning, but this is a fluid situation and the “Muddy Waters” stocks tend to remain highly volatile for a period after a report of this sort is issued.

Market Vectors Egypt Index ETF (NYSE: EGPT) has not traded but trading on the Egyptian Exchange was halted after a 4.5% broad market drop due to continues protests and violence in Cairo after reports of dozens of deaths.

Harman International (NYSE: HAR) had its CEO featured on a Jim Cramer interview last night and Cramer said it is now getting to be a bargain at barely 10-times earnings with 20% growth possibilities.  Zacks also named it the value stock of the day this morning. 

Hewlett-Packard Co. (NYSE: HPQ) is now down 1% at $26.59 despite having been up almost 4% after earnings.  Some wanted a better path to a return of growth but frankly the report and even the lower guidance should have been enough to quell at least some fears about the company.

Jack in the Box Inc. (NASDAQ: JACK) was up 4% in the after-hours on Monday after beating earnings estimates with higher same-store sales. Volume is very light and the stock is only indicated up 1% so far in early bird trading.

Medtronic Inc. (NYSE: MDT) has reported earnings of $0.84 EPS adjusted on $4.13 billion in sales; estimates were $0.82 EPS and $4.1 billion in sales. The medical devices giant has guided its fiscal year (April-2012) to $3.43 to $3.50 EPS versus estimates of $3.44 EPS.

Netflix, Inc. (NASDAQ: NFLX) had its secondary and placement offering announcement last night and now shares are getting hit all over again after a SELL rating was slapped on the stock.  Netflix is trading down 5.2% at $70.60 in active trading.

Shanda Interactive Entertainment Ltd. (NASDAQ: SNDA) is getting acquired after receiving a “going private” letter a month ago.  Monday’s ADS close in New York was $39.39 and the buyout price $41.35 per ADS.

JON C. OGG

Big Lots Inc. (NYSE: BIG) Raised to Outperform at Wedbush.
Chico’s FAS Inc. (NYSE: CHS) Cut to Neutral at Citigroup.
Delta Air Lines (NYSE: DAL) Raised to Outperform as Bull of the Day at Zacks.
Energy Recovery Inc. (NASDAQ: ERII) Started as Neutral at Credit Suisse.
PPG Industries, Inc. (NYSE: PPG) named as Value stock of the Day at Zacks.
Plexus Corporation (NASDAQ: PLXS) named Bear of the Day at Zacks.
Randgold Resources Limited (NASDAQ: GOLD) Cut to Hold at Canaccord Genuity.
Royal Gold, Inc. (NASDAQ: RGLD) Cut to Sector Perform at National Bank.
SandRidge Energy, Inc. (NYSE: SD) Cut to Hold at Stifel Nicolaus.
Stanley Black & Decker Inc. (NYSE: SWK) Raised to Buy at Argus.
SunPower Corporation (NASDAQ: SPWRA) Cut to Underperform at Macquarie.
Transocean Ltd. (NYSE: RIG) Cut to Underperform at Macquarie.
Trina Solar Limited (NYSE: TSL) Cut to Neutral at Macquarie.
Vical Inc. (NASDAQ: VICL) Started as Outperform with $7 target at Credit Suisse.
VIVUS, Inc. (NASDAQ: VVUS) Started as Outperform with $15 target at Credit Suisse.
YRC Worldwide Inc. (NASDAQ: YRCW) Raised to Hold fro Sell at Stifel Nicolaus.

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Alcoa, Inc. (NYSE: AA) Cut to Hold at Deutsche Bank.
Amazon.com Inc. (NASDAQ: AMZN) Raised to Buy at Stifel Nicolaus.
Athenahealth, Inc. (NASDAQ: ATHN) Started as Outperform as Bull of the Day at Zacks.
Chico’s FAS Inc. (NYSE: CHS) Cut to Hold at KeyBanc.
CF Industries Holdings, Inc. (NYSE: CF) named value stock of the day at Zacks.
First Solar Inc. (NASDAQ: FSLR) Cut target to $80 from $135 at Credit Suisse.
Gap Inc. (NYSE: GPS) Cut to Hold at KeyBanc.
Goldcorp Inc. (NYSE: GG) Raised to Buy at Deutsche Bank.
LinkedIn Corporation (NYSE: LNKD) Started as Hold at Citigroup.
NetApp, Inc. (NASDAQ: NTAP) Raised to Buy at Citigroup.
Priceline.com Incorporated (NASDAQ: PCLN) Raised to Overweight at Morgan Stanley.
Qihoo 360 Technology Co. Ltd. (NYSE: QIHU) Started as Buy with $24 target at BofA/ML.
Sears Holding Corporation (NASDAQ: SHLD) maintained Underperform as Bear of the Day at Zacks.
State Street Corporation (NYSE: STT) Cut to Hold at Jefferies.
United Continental Holdings, Inc. (NYSE: UAL) Cut to Hold at Citigroup.

Here is a detailed summary list of the top analyst calls from Wall Street last week.  Many were cautious.

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We have compiled the news summaries and the moves on each.

Analog Devices, Inc. (NYSE: ADI) is lower after reporting a rise in third quarter profits but warning that Q4 will be weak due to global uncertainty.  Shares closed at $31.35 and shares are down about 2% at $30.78.

Blue Coat Systems Inc. (NASDAQ: BCSI) is getting crushed after it is forecasting a loss or gain of -$0.04 to $0.04 EPS versus estimates of $0.20 and higher.  It has also been downgraded or seen target cuts at many brokerage firms in research calls.  Shares are down 24% at $13.30, under the 52-week low of $14.91 and versus a $17.68 close yesterday.

Chico’s FAS Inc. (NYSE: CHS) is up after reporting a 42% rise in earnings and word that it is making an acquisition of a retailer in Florida.  Shares are up over 7% at $13.50 in pre-market trading.

Dell Inc. (NASDAQ: DELL) beat on the bottom line but turned in light revenues and guidance was light on sales as well.  Shares are down close to 6% at $14.85 or so this morning on active volume.

Eastman Kodak Co. (NYSE: EK) may be worth more in a breakup according to Bloomberg as it discusses $3 billion value for the patents alone.  Shares are indicated up more than 10% above $2.50 this morning.

First Solar, Inc. (NASDAQ: FSLR) is down on news that one of its top executives named Jens Meyerhoff is leaving the company after September 30.  Shares are down about 3% at $101.75 this morning.

NYSE Euronext, Inc. (NYSE: NYX) is getting a bit of a bounce of 2.3% to $27.15 after a substantial loss on Tuesday after Merkel and Sarkozy proposed a financial transaction tax of some sort. Shares were as high as $28.52 yesterday and closed down at $26.54.

Photronics Inc. (NASDAQ: PLAB), which manufactures photomasks for the chip sector, managed to post earnings gains and shares are responding handily.  Shares closed at $5.62 and the pre-market trading is up 9% at $6.13 on thin volume.

Regeneron Pharmaceuticals, Inc. (NASDAQ: REGN) is down on news that the FDA is extending its review of EYLEA (aflibercept injection) by three months.  Shares are down almost 5% at $54.68 in pre-market trading.

Staples, Inc. (NASDAQ: SPLS) is getting a big bounce after the office supplies retailer beat earnings and managed to forecast solid results ahead too.  This one has been sold off big from highs and shares are up about 8.5% at $15.43 on active pre-market volume.

Sunrise Senior Living, Inc. (NYSE: SRZ) popped last night and is indicated higher this morning after Jim Cramer on CNBC’s MAD MONEY said that it is a small and under-followed speculative company that could potentially make homegamers a lot of money.  Shares closed at $6.84 and the stock is indicated up around $7.25 this morning.

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JON C. OGG

Drug store forecasts are down 20 basis-points to 2.7% due to Walgreen Co. (NYSE: WAG).  Retail Metrics sees slightly higher expectations for Limited Brands, Inc. (NYSE: LTD), The TJX Companies, Inc. (NYSE: TJX), and even for Ross Stores Inc. (NASDAQ: ROST).  Gap Inc. (NYSE: GPS) comparable projections moved lower.  Expectations for Hot Topic moved up helping the teen group tick higher.

Retail Metrics did highlight some of the extreme gains expected, in order, as follows: Lululemon Athletica Inc. (NASDAQ: LULU) at +16.5%, PriceSmart Inc. (NASDAQ: PSMT) at +16.0%, Body Central Corp. (NASDAQ: BODY) at +11.8%, Buckle Inc. (NYSE: BKE) at 11.0%, Chico’s FAS Inc. (NYSE: CHS) at +10.4%, and Tiffany & Co. (NYSE: TIF) at +10.2%.  These expected gains are not helping many of these stocks on Tuesday, but double-digit same-store sales growth is likely going to be more than impressive in this environment.  We noted a drop expected in Gap Inc. (NYSE: GPS) and that is now expected to come in at -0.8% in same-store sales growth.

What is driving the gains despite a slowing economy? Traffic levels at stores have remained solid, higher-end retailers are faring better, 4th of July weekend was a good start for the month, hot weather favored mall traffic, gas prices are down, and more.  Higher unemployment, weaker consumer confidence, apparel price hikes, and weaker housing data are all potential drags per the Retail Metrics data.

Many retail same-store sales do sometimes come out much different than expected and the reasons can literally be from a discrepancy of one day’s reporting.  It is good to see that growth is still being seen somewhere, and more important is that the growth is expected to remain in place despite weak data being seen on most other fronts.

As a reminder, these figures will set the tone for the retail earnings reports that will kick off in the next two weeks as retailers have a one-month lag compared to most other companies in reporting earnings.

JON C. OGG

What is interesting is that some of the estimates may change today and even on Wednesday as the last tweaks to numbers are calculated.  Risk Metrics noted, “The aggregate result was a 40 basis point rise in our Retail Metrics SSS Index to 3.7% projected growth.”

Cited is positive guidance from several retailers along with teh recent earnings reports.  Limited Brands, Inc. (NYSE: LTD), Kohl’s Corporation (NYSE: KSS), J.C. Penney Company, Inc. (NYSE: JCP), Chico’s FAS Inc. (NYSE: CHS), and The TJX Companies, Inc. (NYSE: TJX) were all cited by Retail metrics as having February same store sales ahead of plan and raised expectations.

As far as Kohl’s is concerned, the retail department store would not have initiated a higher dividend than we were calling for if there was risk to its earnings scenario.

TJX is the one we’d be looking for in the discount section because the Retail Metrics data shows that the discount sector likely led the same-store sales with gains of 4.7% versus 2010.  Another leader that was noted was Costco Wholesale Corporation (NADAQ: COST) with an expected 6.6% increase, and Costco is on this week’s earnings calendar.

What is interesting is that this comes at a time whenb gasoline prices have shot higher and when international geopolitical risks have risen that challenge even higher oil prices ahead.  At least the weather was a bit more cooperative in February than in December and January.

Wal-Mart Stores, Inc. (NYSE: WMT) no longer offers monthly sales data, but Retail Metrics is following the world’s largest retailer with a lame outlook of -0.4% in February.

Stay tuned.

JON C. OGG

Chico’s FAS Inc. (NYSE: CHS) Started as Neutral at Janney Capital Markets (late Monday).
Duke Energy Corporation (NYSE: DUK) Cut to Hold at Citigroup.
Eldorado Gold Corp. (NYSE: EGO) Cut to Sector Perform at National Bank.
Kinross Gold Corp. (NYSE: KGC) Raised To Outperform at National Bank.
National Bank of Greece SA (NYSE: NBG) Cut to Strong Sell at S&P Equity Research.
OpenTable, Inc. (NASDAQ: OPEN) Cut to Hold at Stifel Nicolaus.
OptionsXpress Holdings, Inc. (NASDAQ: OXPS) Cut to Underperform at Macquarie.
Pepco Holdings, Inc. (NYSE: POM) Cut to Market Perform at Wells Fargo.
Semtech Corp. (NASDAQ: SMTC) Reiterated Buy and $22.50 Target at Gleacher.
TradeStation Group Inc. (NASDAQ: TRAD) Raised to Outperform at Macquarie.
Urban Outfitters Inc. (NASDAQ: URBN) Started as Buy at Janney Capital Markets (late Monday).

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Alcatel-Lucent (ALU) Raised to Buy at BofA/Merrill.
Chico’s FAS (CHS) Started as Buy at Jefferies.
Children’s Place (PLCE) Started as Buy at BofA/Merrill.
Deutsche Bank (DB) Started as Outperform at FBR.
Goldman Sachs (GS) Raised to Outperform at KBW.
International Game Tech (IGT) Raised to Buy at Janney Montgomery.
Intercontinental Exchange (ICE) Raised to overweight at Barclays.
Moody’s (MCO) Raised to Hold at Jefferies.
Waste Services (WSII) Started as Neutral at JPMorgan.
3PAR (PAR) Cut to Neutral at Merriman Curhan Ford.

Jon C. Ogg
July 15, 2009

Cardinal Health (CAH) Started as Buy at Jefferies.
Central Garden (CENT) Raised to Hold at Jefferies.
Chico’s FAS (CHS) Raised to Equal Weight at Barclays.
Gap Inc. (GPS) Raised to Equal Weight at Barclays.
Helen of Troy (HELE) Raised to Hold at Jefferies.
Principal Financial (PFG) Raised to Neutral at Credit Suisse.
STEC (STEC) Raised to Overweight at Thomas Weisel.
TJX Cos. (TJX) Raised to Overweight at Barclays; Raised to Neutral at Credit Suisse.

JON C. OGG