Chico's FAS Inc. (CHS) reported robust first-quarter 2012 earnings per share of 32 cents, surpassing the Zacks Consensus Estimate by 2 cents. Moreover, quarterly earnings surged 23% from the prior-year quarter's earnings of 26 cents per share.
Sales
Net sales in the first quarter were $650.8 million, up 21.2% year over year from $537.2 million in the prior-year quarter. The increase in its top line reflected a comparable sales increase of 9.6%, square footage growth of 8% and $33.7 million in sales for Boston Proper. Moreover, first-quarter net sales also beat the Zacks Consensus Estimate of $627 million.
Comparable Store Sales
Including direct-to-consumer sales, consolidated comparable store sales in the quarter crept up 9.6% from a 7.7% increase in the prior-year quarter. The increase was driven by a surge in both average dollar sale and transaction count. In the reported quarter, Chico's/Soma Intimates brands' comparable store sales increased 8.8% and White House|Black Market (:WHBM) comparable store sales spiked 11.3%.
Operational Update
Cost of goods sold in the quarter increased 24% to $272.2 million, while gross profit jumped 19.2% to $378.6 million. However, gross margin declined 90 basis points from the prior-year quarter to 58.2%, largely due to planned strategic use of Chico's brand inventory for traffic-driving promotions during the quarter and the inclusion of Boston Proper's results.
Selling, general and administrative (SG&A) expenses in the reported quarter were $291.7 million, up 19.1% from the prior-year quarter. However, as a percentage of sales, SG&A expenses contracted 70 basis points from the prior-year quarter to 44.8%, primarily due to sales leverage impact on store expenses and the inclusion of Boston Proper's results, partially offset by increased marketing expenses.
Operating income, excluding acquisition and integration costs, was $86.9 million compared with $72.8 million in first-quarter 2011, while operating margin came in at 13.3%, a decline of 30 basis points primarily due to decreased gross margin.
Financial Update
Cash and marketable securities as of April 28, 2012 were $340.5 million, compared with $566.2 million as of April 30, 2011. During the quarter, the company used cash to fund capital expenditures to the tune of $40.9 million, to buyback $3.3 million worth of shares and toward dividend payments of $8.8 million.
As of first-quarter end 2012, total inventories were $213.7 million including $13.6 million of Boston Proper-related inventories compared with $198.5 million as of first-quarter end 2011.
Store Update
The company's Chico's brand currently operates 603 boutiques and 86 outlet stores, White House Black Market runs 372 boutiques and 30 outlet stores, and Soma Intimates operates 177 boutiques and 15 outlet stores – cumulatively a total of 1,283 stores. The company has operations in 48 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico.
Guidance
Bolstered by better-than-expected quarterly results, Chico’s raised its net sales expectation for fiscal 2012. Including Boston Proper, the company now anticipates net sales to increase in the mid-to-high teens percentage rate to roughly $2.5-$2.6 billion, instead of $2.5 billion forecasted earlier.
Moreover, the company still projects comparable store sales for the year to increase in the mid-single-digit rate, with store square footage growing nearly 9% and an additional sale of $30 million coming from the 53rd week included in fiscal 2012.
Further, Chico’s reiterates its gross margin expectation for fiscal 2012 to be down 50 basis points, with the same rate of decline also expected for SG&A expense, as a percentage of sales. Effective tax rate for the year is projected to be about 38%. Inventories at the end of fiscal 2012 are estimated to be in line with sales growth, while capital expenditures for the year is expected to approximately $150 million.
Chico's, which competes with Nordstrom Inc. (JWN), currently maintains a Zacks #3 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock remains Neutral.
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