Chico's for the Man (CHS)

Well, thankfully my guesses worked out correctly, at least so far, and I had a chance to buy Chico's for my hoped-for price.

Bought Chico's (CHS) on August 26, 2005 at $35.05

The astute among you will note that that's nowhere near the bottom for today's trading -- it went down close to $33.50 at one point and may hit a lower point in the days ahead, which I think was a pretty wild swing given the earnings release and guidance provided by management. I bought as soon as it hit a price I was comfortable with in morning trading, because I honestly thought any drop was an overreaction to the news and I was expecting the price to bounce back pretty quickly (I am quite terrible at predicting these short term movements, as anyone who has read more than a few of my posts will have noticed).

I'm happy that they warned they'll be seeing somewhat tighter margins for a little while because of their rollout of Soma and some fairly minor problems at their outlets, because otherwise I expect we'd be back to the $40's and I'd still be sitting on the sidelines.

I wrote about Chico's just a couple days ago and provided much of my rationale for wanting to own the stock here. And I've noted before that my interest in buying growing companies on dips has led me to often try to catch a falling knife, to very mixed results. We'll see how it works out this time -- I really see a lot of expansion for Chico's, including significant growth for White House/Black Market as they apply their unique management style and skill to this growing retailer focused on the young professional woman, and I'm willing to give them the benefit of the doubt as they roll out the "Soma by Chico's" line as well. With such a pristine balance sheet even during such a spectacular growth period, I don't see much not to like.

As I wrote earlier, I think the days of being able to buy Chico's at a real bargain price are probably past us -- though if they decide to enter yet another niche by launching a new concept or buying an existing company, all bets are off. Chico's might possibly see some margin compression going forward when their growth tails off as some analysts fear might be coming soon, but I think they're still a pretty long way from saturating their markets and they have a good amount of growth to go.

The fact that they're sacrificing a little bit of margin in order to fuel this growth is not a signficant concern, especially since they have the best margin management in the business. This too shall pass, and I think they'll continue finding ways to separate women happily from their money. An analysts wrote in one of his reports on Chico's that "Retail is detail", and Chico's handles the details of the supply chain and the customer relationship as well as anyone I've ever seen. This type of customer service breeds loyal customers, and I think the Baby Boomer and rising Gen-X women with their active, traveling lifestyles will be loyal customers to Chico's for many years. There was a good article at the Fool today that focused on the margin issue, here.

I plan to hold this one for a very long time. I think if they do slow down their growth, we will see not an implosion but a gradual evolution into a massive and stable cash-generating machine. There may be hiccups along the way, of course, and I'll reserve the right to sell if this spectacular management team leaves the company or appears to be the victim of a brain transplant, but I expect to be profiting from my family's Chico's store purchases for many years.

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Sold Softer Side of Sears (SHLD)

Sold my shares of Sears Holdings (SHLD) today at $136.93, for a small loss [correction -- just looked back at my records. This is actually basically a break-even transaction. I had bought on May 13, 2005 for $136.24. Still technically a small loss with commissions and margin interest payments]. This is a little unusual for me, as I'd held the shares for only a couple months, much shorter than my planned holding period of several years for most stocks. And there are a couple unusual reasons.

First, my personal portfolio reasons. I already have significant exposure to this stock through my holdings in Third Avenue Real Estate Value Fund -- this and three other Third Avenue funds are massive holders of Sears Holdings thanks to their big bet on KMart a while back. While they have been paring back holdings a little bit (which also is of some concern, but not a big deal because their holdings had become outsized portions of the portfolio with multiple hundreds of percentage gains), they still hold major portions of the stock. I think I might be better off letting Marty Whitman and his cohort manage this investment, because ...

Second, I don't have a great handle on profitability or plans for Sears moving forward. I bought this in a fit of star-gazing as I watched Eddie Lampert bring them back from the brink and make some masterful moves, including the Sears merger/takeover, but I think I bought too late to capture the magic of the turnaround artist ... and going forward, without the cost cutting and real estate story propping up the earnings and share price, I'm not sure Sears is going to grow fast enough to make it worth it for me to try to track them. A fine company, and I'm sure they'll continue to do well with good management, and I do generally love to buy stocks that don't issue guidance or supply information to analysts to make their jobs easy, but I also prefer to search out stocks that I can understand a little better and that I think have the potential for more dramatic growth. Plus, it's more fun that way, and as I've said before, if it's not fun, why not just buy an index fund instead?

And third, I want the money for some other investments that look more promising, and that are smaller companies (which is my general preference, all other things being equal). I may get a good price on Chico's tomorrow and if so I'll likely buy. I'm also looking at some other possibilities, including re-upping in some of my other holdings -- possibly Myriad Genetics (MYGN) or Protein Design Labs (PDLI) or Akamai (AKAM), all of which look very attractive to me at today's prices. I've also been looking into the companies that contract out to provide services and clinical trial management to the pharma and biotech sectors because I consider that sector to have significant growth potential with the expanding numbers of biotech drugs hitting the clinic, including Covance (CVD) and Parexel (PRXL), so if I get myself comfortable with those or other companies they'll be candidates as well. PRXL looks like it has the advantage of being much smaller and nimbler and a partial turnaround story, while CVD looks like the market leader with good sustained growth potential.

In all likelihood I'll be making a buy of some sort on Friday and will let you know what it is then.

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To buy this week? -- Chico's (CHS)

There are a few stocks that I'm interested in adding to my portfolio now that I haven't yet purchased -- still hemming and hawing a bit, for different reasons.

Chico's (CHS) is at the top of that list. This is probably the best apparel retailer in the country in terms of repeat customers, sales growth, and well-managed expansion. I have been wanting to buy in for a long time, my Mother and Wife shop there as often as they can and by all accounts this is among the more popular retailers for baby boomer women -- which happens to be a pretty big demographic. Their product is still very differentiated, which I think is key for retailers, and they definitely have a unique image and marketing approach -- their salespeople offer great service in my experience, and the catalog is beautiful and definitely stands out in the stack of mail.

But they've been growing so fast there haven't been any times this year that it looked like they were going to give a bargain entry point. It appears that Chicos is so successful that they might never to give us a nice cheap entry point again ... so what's an investor to do? I'm no techical analyst, but the chart looks nice -- up and up and up -- as long as you already own the stock (don't be fooled by ADVFN's mistake in the chart on the right, they had a 2:1 split, not a 50% drop in price back in the end of February). Are there any down times coming for me to buy?

Well, they have pulled back by almost 20% from their highs, so that's promising and maybe a dip worth buying on. But the thing holding me back right now is that they report tomorrow and their great success has led analysts to continue raising estimates over the past several months -- average earnings estimates are I believe up to 27 cents EPS now for the quarter. I'm holding out hope that when they report earnings tomorrow afternoon they will disappoint by one or two cents so I can get a somewhat better price to buy in.

I could, of course, be left watching it climb further if earnings beat estimates, but in this case I'll take the chance, even though Chico's has reported great summer sales so far -- Chico's doesn't routinely (recently, at least) blow through estimates, even though growth is very good, in part because the analysts have been pretty aggressive about keeping up. If they just meet estimates and stay more or less flat I'll still likely buy in, perhaps by selling some of my Sears Holdings shares in exchange for a better (and more comprehensible) retail growth story in Chicos. Chico's forward PE is about 27, which is awfully close to their growth rate. In a market that is starving for growth, this stock is making a lot of people, including me, salivate. Now if only everyone else will poor-mouth retail stocks tomorrow and Chico's please please has a slightly underperforming quarter, then I might get myself a nice bargain. Will let you know.

Good Chico's article from the Fool is here.

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Proflowers will Provide (PRVD)

Provide Commerce (PRVD)

Bought January 27, 2005 at $34, and May 3, 2005 at $17.92


Finally I write about one of the more volatile stocks I own, and one that is one of my favorite companies as a consumer.

To tell the truth, I bought PRVD as soon as I found out that Proflowers was publicly traded. I don't know whether it was the strangely generic umbrella name of the company, Provide Commerce, or just my ignorance, but the IPO passed me by. Nothing wrong with that, it's usually silly to invest in IPOs at the first blush anyway.

But I did buy in as soon as I found out -- literally, that same day. I found out that Provide Commerce was the parent company, read their important SEC filings and searched quickly for other info, found what I saw to be reasonable, and bought a small position.

Almost as soon as I bought it, Proflowers announced that Valentine's Day quarter earnings disappointed, and sales hadn't climbed as much as they hoped. The stock cratered over a several month period and I eventually thought the knife had fallen far enough and bought in again. I never stopped believing in the business plan, and I still think it's a winner.

Then Mother's Day came, Proflower's second biggest day of the year. They came out and announced great sales growth for that holiday. The price started to climb again.

And last week, their earnings release justified the more recent enthusiasm the stock market has had for this issue. After poormouthing the year's earnings earlier on and rejiggering guidance, the earnings came in quite nicely at 65 cents/share. Guidance is not spectacular, but at this point I'm not really confident in the ability of management to precisely predict their sales during the few key holiday periods where they make all of their profits. They haven't successfully predicted them to Wall Street's criteria before, and I expect that the lower end of their guidance is much too conservative.

This company has survived the bust, they survived years as a private company, they built up a very loyal customer base of more than four million customers, with reportedly well over 60% returning customers, and they have a truly differentiated product -- how many companies can say that these days?

Why do I love Proflowers as a customer (and, thanks to Peter Lynch, thereby feel inclined to love them as an investor)?

The product is better and fresher -- the flowers they sell come direct from the grower, which means they are at least several days fresher and have received less handling than the stuff that teenagers have bouncing around in the back of the florist delivery van. They also give very specific examples of the flowers avaialable on their website, and have a much wider variety of always-available flowers than your local florist.

The prices are better -- because they are cutting out the boutique florist middleman, Proflowers can provide better flowers at a better price than their competitors.

The service is excellent -- I have used Proflowers for years and been very happy with the professional customer service I received. In the one case when flowers I ordered were not delivered on time, I got an apology from the CEO via email, the flowers free, and credit for a future purchase. I came back.

This has passed the viral marketing test, too, at least in my family -- not only does Proflowers advertise heavily, as any web consumer or XM radio subscriber knows quite well -- but everyone who receives flowers in this method notes it and often uses the service themselves. This is not a generic florist arriving at your door with a greasy driver holding his mitt out for a tip, it's a branded box that stands out as different. You do have to put the water in the vase yourself, but you pay attention and see that these flowers are higher quality, the lilies are just beginning to open and you've never seen such spectacular birds of paradise before, and you think of that the next time you need to send flowers.

Unfortunately, then the person you sent flowers to eventually finds out that Proflowers is a lot cheaper than the local florist. Hopefully they don't hold that against you, because after two weeks they're still going to see that among all the flowers they received that day, the Proflowers ones are the only ones that still sit proudly on the table, the rest having long since wasted away and been dumped in the compost heap.

So that's why I'm a happy customer -- why am I a happy owner, and one who is keeping an eye out for a chance to buy more?

Growth and scalability

Provide is growing much more quickly than its competitors. There are some specialty niche providers who seem to be growing well, too, like Callyx and Corolla, but they price themselves into a very small market ... and Proflowers has in the past provided the branded service for some of its competitors, like Martha Stewart Flowers, so those aren't really competition. The big outfit that is trying to hold Provide off is 1-800-Flowers, which has some "direct from the grower" services, but they still mostly work through their member florists for delivery. No thanks.

Provide Commerce is also building up "fresh direct" service in two other areas: premium meats, and fruit/gift baskets. In this area I'm not as sanguine about their chances -- the competitors provide a service that isn't obviously lower quality than Provide can offer, as the standard florist product is, though Provide may be able to supply equivalent quality for a better price. They migth be able to match Omaha Steaks on price, but it will be tough to take on that brand and tough to say that one frozen steak is fresher than another -- they're both frozen. In gift baskets and the like, Harry and David have been doing this for eons and aren't likely all that worried about this new upstart.

But I don't much care. I like Provide Commerce even if their only successful venture is Proflowers. They are not investing very heavily in either Cherry Moon or Uptown Prime (the two other services), and the business is indeed very scalable, they can use the same basic infrastructure to supply flowers or steaks or peaches ... the only real investment on their part is the relationships they're building with growers and providers. If they're able to build the business, that's all gravy on top of the successful and fast-growing Proflowers franchise.

Market Share

Fresh flowers are hot,more affordable and more available in greater variety than ever before, which, depending on who you talk to, is driving up overall consumption. But more importantly, Proflowers is growing about twice as fast as its major competitor, 1-800-Flowers.com, which means they're taking market share. For a company that has been around this long and is still increasing its numbers of repeat purchasers pretty significantly (50%+ last year, 60%+ this year), that's great news for the future as well as the present.

Provide Commerce may provide some better points for purchasing additional shares, but in this range I would happily consider buying more. They have provided guidance whose low end is right around this past year's actual earnings, which turned a few folks off, but a lot of that is accounting for stock-related compensation, which is still quite high at this recently public company. I plan to keep an eye out for buying opportunities when management muffs their projections for a holiday by a couple of percentage points -- the market overreacts wildly to those short term blips and might put Provide on sale again. But long term, I'm a happy consumer and investor.

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