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Chico's May Be the Last Brand Standing for Older Women

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Any slipup could result in a sell-off -- opportunity for an entry point.

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Last year, it appeared as if baby boomer-age women would be faced with a shortage of stylish retail options. Every retailer targeting older women was falling apart. Not only did its target market reign in spending at an unprecedented rate, but companies were missing major fashion trends and not offering attractive merchandise.

For the most part, that still stands as the case today. However, two companies -- Talbots (TLB) and Chico's (CHS) -- have demonstrated some success in their turnaround programs. An update from Chico's arrived yesterday in its fourth quarter and fiscal year-end results.

Sales increased 16.7% and comps increased 14.6%. Keep in mind, though, that that comps decreased 15.1% in 2008 and 8.1% in 2007. Total sales for the year fell just below those in fiscal 2007.

The quarterly gross margin expanded a whopping 1,000 basis points to 56%. Sounds impressive, but a little digging into the historical records shows that Chico's posted a 59% margin in 2006 and over 60% margins in the first half of the decade. Same story for its operating margin; it posted a 6% operating margin compared to last year, but its five-year average is over 11%.

Like its clientale, Chico's slowed down with age and will never return to its spunky growth days. But in comparison to its peers, Chico's may be the last brand standing. In addition to Talbots, Coldwater Creek (CWTR) and Ann Taylor (ANN) have achieved far less gross margin in the last 12 months. Neither Coldwater Creek nor Ann Taylor has posted an operating profit.

Save for Coldwater Creek, all are expected to return to profitability next year, but Chico's has been the first to show signs of life. And with no debt and plentiful liquidity, it has the necessary balance-sheet strength to continue turning around.

Like its peers, Chico's stock has had an enormous run over the past year, returning 220%. However, it was an anomaly caused by a correction from a mass sell-off due to internal problems combined with the financial crisis. Two years ago, I didn't think Chico's stood a chance either.

The company's turnaround progress certainly warranted a higher stock price, but I'm concerned that too much optimism has been priced in. According to the historical price-to-sales ratio, Chico's still appears quite cheap. But on a forward P/E ratio basis, the stock seems expensive.

If the stock returns a more rationale 15% this year, a reasonable expectation given the stock's risk, and it meets earnings expectations, Chico's will still sell at 18 times earnings -- an expensive price to pay for a recovering retailer facing years of slumped consumer spending.

Chico's deserves attention for its progress. At current prices though, any slipup could result in a sell-off; a sell-off I recommend watching for as an entry point.

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No positions in stocks mentioned.
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