Chico’s FAS (NYSE:CHS) has impressed investors with strong earnings growth in the fourth quarter – which exceeded analysts’ consensus estimates by $0.05 per share. CHS shares rose 15% after earnings beat; the company’s earnings also increased substantially when compared to the year-ago period. Chico’s is an apparel retailer that sells private label woman accessories and clothing.
Margin Improvement Strengthened Earnings Potential
Apparel stores have been experiencing slow to negative revenue growth over the past couple of years, amid strong market competition. Chico’s net sales declined almost 2% year on year in the fourth quarter to 587 million; the company blamed lower average transactions and stiff competition for depressed sales performance.
Its comparable sales declined 5.2% Y/Y in the fourth quarter, due to lower average dollar sale and flat transaction count. Comparable sales growth by brand: White House Black Market -9.3%, Chico’s -3.2%, Soma -2.3%.
Despite negative sales growth, Chico’s strategy of cutting the cost structure and improving their operational efficiencies allowed it to boost its margins and earnings potential.
Chico’s gross margin landed in the range of 37.7% of net sales, representing year on year growth of 220 basis points – thanks to 170 basis point increases in merchandise margin amid lower average unit costs and a reduction in store occupancy costs. The company has also successfully lowered SG&A in the fourth quarter by $13 million compared to the year-ago period
Consequently, Chico’s management turned negative revenue growth into big profits – which increased more than 100% to $0.22 per share from $0.10 in the past year period.
Dividends Are Safe
Chico’s offers a quarterly dividend of $0.085 per share, yielding above 3.5%. The company’s dividends are safe considering the huge gap in free cash flows and dividend payments. It generated free cash flow $118 million in fiscal 2017 when its dividend payments accounted for only $42 million. It has also been working on the strategy of reducing outstanding shares. Chico’s repurchased $10 million of outstanding stock in fiscal 2017.
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Moving forward, the management expects a mid-single-digit decline in comparable sales; its earnings are likely to get the support from margin improvement of 125 to 150 basis points over fiscal 2017.
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