Women's specialty retailer Chico's (NYSE:CHS) announced strong second quarter earnings August 22, pushing its stock to a five-year high. Approximately 45 months ago it was trading for less than $2 as Chico's had hit a brick wall, losing $40 million, its first operating loss in over a decade. Some likely thought its days were numbered. Current CEO David Dyer took over from the retiring Scott Edmonds in January 2009; and the rest, as they say, is history.
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Those lucky enough to have bought its stock at its all-time low of $1.72 in November 2008 and still holding are sitting on a total return of 1,000%. A lot of hard work has gone into its transformation, including the timely acquisition of Boston Proper for $205 million almost one year ago to the day. The question for shareholders is whether the good news will continue. Let's explore the possibilities.
Probably the most impressive result in Chico's Q2 report is that earnings per share grew 28% year-over-year (YOY) to 32 cents, its 14th consecutive quarter of double-digit growth. Delivering almost four years of consistent earnings growth in a tough economic environment is nothing short of phenomenal. The second figure that jumps out is a 5.6% increase in same-store sales growth on top of a 12.8% increase over Q2 2011. Thirdly, on an annualized basis, free cash flow increased 122% YOY to $293 million. If it continues to produce profitable growth, its free cash flow in fiscal 2012 will be as high as it's ever been. Considering the company upped its revenue guidance for the rest of the year, it's a likely scenario.
Lastly, although Boston Proper's sales were a little soft in the quarter, Dyer did say in the conference call that it's been a net positive contributor to each quarter's results. According to Internet Retailer, Chico's 2011 online sales were $333 million with Boston Proper contributing $40 million in the one full quarter it was part of Chico's. Overall, Boston Proper's 2011 revenues were approximately $123 million. In 2012, look for Chico's online sales to hit 17% of overall revenue or approximately $446 million, which is better than many of its peers.
Portfolio of Brands
Dyer's comments regarding a question from analyst Margaret Whitfield during the conference call really struck a chord with me. The CEO was adding to the answer of CFO Pamela Knous as to why Boston Proper's revenues were a little soft in the quarter. Dyer suggested that it's really hard in fashion to be continuously "on", and sometimes no matter how successful you are, there will be times when you miss on the trends and take a breather. It's at that point that it pays to have a portfolio of brands where one or two pick up the slack. In that regard, Chico's is very similar to Ascena Retail Group (Nasdaq:ASNA), which consists of four main brands: Dress Barn, Maurices, Justice and Lane Bryant. Like a good sports team, there's always someone to deliver the goods. I like that approach to business.
Chico's hasn't traded above $20 since July 2007. Its all-time high was around $47 in February 2006. Assuming it continues to deliver double-digit earnings growth or close enough, I don't see why it couldn't test that all-time high sometime in the next 12-18 months. The downside here seems minimal. If you're still holding, I'd keep doing it. Good things lie ahead.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.