Sunday, February 05, 2006

Chicos (CHS) Analysis Update

Chicos is in the specialty retailer business including women's clothing, apparel, gifts and under garments. Chicos caters primarily to baby boomer women who are thirty five or older. Chicos operates under the Chico's, White House, Black Market and Soma brands. Chicos operated 743 retail stores as of October 29, 2005 and plans to expand the retail space by 20% in 2005 and between 20-30% in 2006. The company grew same store sales by 16% year over year while opening new stores.

We analyzed Chicos ( http://finnews.blogspot.com/2006/01/chico-chs-analysis-chicos-has-been.html ) in the prior article. Recently there have been some stories suggesting that Chicos is overpriced and its stock price has overtaken its growth.

In the morningstar article (http://news.morningstar.com/article/article.asp?id=155248&pgid=wwhome1a), the authors conclude that the stock will return less than the government bond in the long run. Let us look at the Chicos numbers again to see if this is correct.

From a strict earnings point of view, the earnings per share are expected to increase by 25% year over year. However, the P/E of the stock is close to 40 - so there is definitely some mismatch here. For the first thirty nine weeks of 2005, the earnings grew by ~38% compared to 2004 and sales by 31%. The share dilution increased by 1.1% year over year. The analysts are expecting 1.34 per share in 2007 where as the expected earnings this year is 1.07 a share. The growth rate is 25% for the next year. Although the stock risk dilution is minimal, there is the risk of P/E contraction which in turn poses a risk to the stock price.

1 comment:

AndysAlley said...

I like your blog... your perspective seems to be more based in fundamentals than my own - I'm more of a technical trader. This article confuses me though. You refered to an article that you posted a couple of weeks ago that said "The numbers look good for Chicos and it has a good growth story. Chicos, although not underpriced looks like a buy for 2006."

But in your reference to that article, you said "Although the stock risk dilution is minimal, there is the risk of P/E contraction which in turn poses a risk to the stock price."

What is your real position with CHS? FWIW, I'm bullish on the company but don't currently hold a position. I think it will hit $47 before the end of March.

Happy trading,

AA

(My blog if you are interested - http://3greensandvolume.blogspot.com/ )