Chico's FAS Inc. (CHS) reported robust second-quarter 2012 earnings per share of 32 cents, surpassing the Zacks Consensus Estimate of 30 cents. Moreover, quarterly earnings surged 28% from the prior-year quarter's earnings of 25 cents per share.
Sales
Net sales climbed 16.4% to $641.7 million from the prior-year quarter and were almost in line with the Zacks Consensus Estimate of $641 million. Top line in the quarter mainly benefited from a comparable store sales (comps) increase of 5.6%, square footage growth of 7.4% and $32.6 million in sales from Boston Proper.
Comps gains in the quarter resulted from a rise in both average dollar sale and transaction count. Innovative marketing plans, favorable customer response to its merchandise offerings and new product launches also contributed to the comps growth.
In the reported quarter, Chico's/Soma Intimates brands' comparable store sales increased 7.2% and White House|Black Market (WHBM) comparable store sales inched up 2.3%.
Operational Update
Cost of goods sold in the quarter increased 15.4% to $279.5 million, while gross profit jumped 17.1% to $362.2 million. Gross margin expanded 30 basis points from the prior-year quarter to 56.4%, largely due higher full-price selling and effective promotional activities, partially offset by the inclusion of Boston Proper's results.
Selling, general and administrative (SG&A) expenses in the reported quarter were $276.1 million, up 14.9% from the prior-year quarter. However, as a percentage of sales, SG&A expenses contracted 60 basis points from the prior-year quarter to 43.0%, primarily due to sales leverage impact on store expenses and the inclusion of Boston Proper's results.
Operating income was $85.8 million compared with $69.0 million recorded in the second quarter of 2011, while operating margin came in at 13.4%, an increase of 90 basis points primarily due to increased gross margin and lower expenses.
Financial Update
Cash and marketable securities as of July 28, 2012 were $357.9 million, compared with $504.3 million as of July 30, 2011. For the six months ended July 28, 2012, the company used cash to fund capital expenditures to the tune of $78.8 million, share buybacks worth $29.0 million and dividend payments of $17.5 million.
At the end of the quarter, total inventories were $191.7 million including $12.6 million of Boston Proper-related inventories compared with $190.7 million at the end of second-quarter 2011.
Store Update
The company's Chico's brand currently operates 607 boutiques and 92 outlet stores, White House Black Market runs 388 boutiques and 38 outlet stores, and Soma Intimates operates 186 boutiques and 16 outlet stores – cumulatively a total of 1,327 stores. The company has operations in 48 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico.
Guidance
On the back of robust first half performance, Chico’s guides net sales for fiscal 2012 in the range of $2.55 billion - $2.6 billion. Moreover, the company projects comparable store sales for the year to increase in the mid-single-digit percentage range.
Further, Chico’s anticipates gross margin for fiscal 2012 to remain unchanged from the 2011 level, while SG&A expense, as a percentage of sales, is expected to decline 50 basis points compared with 2011. 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 be approximately $155 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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