Is Chico's Turning the Corner? (CHS)

February same store sales decline, again.

Fourth quarter profits fall more than 50% year over year.

And they close down a company that they only recently bought, forcing writeoffs.

And the shares are up close to 10% this morning?

That's the story of Chico's (CHS) today in a nutshell.

And that's the nice thing about being beaten down and having weak expectations -- any sign of a bottom being reached can bring new life. And clearly, investors are getting the sense that Chico's management may be on the verge of turning things around. Or at least, that the ship may no longer be taking on water.

Chico's has had a terrible year -- this darling of the stock market, one of the strongest growth stocks in the country for over a decade, finally hit a speed bump. Of course, they happened to hit that speed bump not long after I bought shares, so I'm continuing to hold stock that is significantly in the red with a cost basis of just over $31.

But I've maintained that this management team deserves a bit of slack -- this has been their most significant bad year in recent memory, and it's been based on several seasons of bad merchandising decisions -- and everyone has a bad year now and then.

So does that mean that this management team, the same one that put together two of the strongest growing brands in women's clothing and routinely churned out profit margins that were the envy of every other retailer, has lost the touch? Or that the company has grown too big to be effectively managed anymore? I don't really know for sure.

The risk, I think, is that the company ends up like the GAP, with no compelling reason for customers to visit their stores and a neverending series of shakeups in their merchandising mix in an effort to bring back lost customers. But I don't see that being a problem just yet, and Chico's is far from being as saturated as the Gap.

And I still get the sense that management is on the ball -- it's taking them a while to turn things around, but my guess is that they'll be able to do it. What makes me think that?

Well, the first positive indication is that they recognize the problems and are clearly willing to make changes -- they have consistently taken the blame for making bad merchandising decisions last Spring and Summer, which then snowballed into forced markdowns in subsequent months that clobbered those nice margins Chico's has been used to. They believe they've "cleared the fashion mistakes" with those markdowns and hope that their offerings in coming seasons have more appeal, though they don't believe they've turned the corner on this yet, based on their results for February.

Adjustments flowing from that include some management changes, with White House/Black Market (their younger-skewing, faster growing brand) getting its founder promoted to a stronger position, and two recent upper management hires from Ann Taylor and American Eagle getting leadership positions in merchandising and marketing.

And, perhaps more significantly, they're proving that they can shelve the "growth at all costs ego" that brings down so many maturing companies, in order to hopefully make future growth stronger. Chico's will remain a fairly fast growing company this year in some regards, as sales growth is still expected to remain strong (and clocked in at 15% in February even as same store sales growth remained slightly negative) and White House/Black Market has room for many new store openings nationwide (and I think Chico's does, too, especially since they've bought out all their franchisees and have some new underserved areas to expand, but that's not the consensus) -- but the company made some recent decisions that indicate they're willing to scale back some near-term growth in order to maintain profitability and rebuild a strong foundation.

The biggest decision is their move to drop the Fitigues chain entirely, closing the stores and moving on. They bought this small "fancy sweatpants" (for lack of a better term) retailer just over a year ago, and while I and several investors didn't understand the odd fashion offerings, I was willing to give management the benefit of the doubt thanks to their track record with revamping and growing their older acquisition, WHBM. Clearly, over the past year they've decided that the opportunities for expanding the concept were not what they had thought, and it wasn't worth detracting from the focus on "fixing" the Chico's brand. Since they never expanded Fitigues or put much money in, it's just a 5 cents/share writeoff and we can move on.

But perhaps as significantly, they're also taking a close look at Soma, their new intimate apparel line, and deciding to take a page from their own history to slow down and reconsider their growth plans for the concept. They still believe that Soma has a bright future, but want to make sure they can develop it as a stand-alone brand that has some strength on its own and doesn't just pull in Chico's customers for the occasional bra purchase. I think that makes a lot of sense, and to some extent it mirrors the early days of the Chico's brand mass expansion -- in the words of CEO Scott Edmonds from the earnings release:

"We have ... decided to slow down the Soma store growth somewhat so that we can focus on strengthening the management team, improving profitability and expanding Soma beyond the Chico's customer for the long term benefit of the Soma concept and our shareholders. This strategy was successful for us in the 1994/1995 time frame when we slowed the growth of the Chico's concept so that we could improve our operations and build a solid foundation to achieve much stronger growth long-term."

I like the plan and am still willing to be patient -- I think the demographic niche they work in, the loyalty of Chico's and White House/Black Market customers, and the chains' strong customer relations programs, give them a great future if they can rediscover their misplaced merchandising magic touch.

There are certainly risks ahead for Chico's -- their core concept, that they can sell a line of private label clothing that they design themselves, providing a compelling and different fashion option and cutting out costs to keep margins high, has caught the attention of everyone else in recent years, too. One small bit of good news is that Gap's move into the Chico's demographic with the Forthe and Towne concept has fallen victim to Gap's other problems (much like Chico's wants to focus on their core and not throw money at Fitigues, Gap has cut Forthe and Towne loose). On the somewhat negative side of the demographic equation, if the movement of the baby boom generation through their target age group of the "middle aged" woman means that those women suddenly have a fashion mindchange and move on to the more conservative look of Talbots and the like, that's obviously a possible negative. I'm not that worried that the baby boomers are going to, as a group, suddenly start considering themselves to be old and toning down their wardrobes, but you never know.

Their fashion has been mimicked at times, and the success of their self-designed private label concept is probably part of the reason that much bigger companies like Federated Department Stores are pushing private label as well, and the resurgence of the department stores might be bad news for all the specialty retailers in the future.

But I'm a little stubborn and I like management, which gives me patience to wait for what I think will be a strong eventual turnaround. I think management is probably right to circle the wagons and stop providing specific annual and quarterly guidance, though they said they will continue to comment on street estimates as warranted (and of course, they'll still release plenty of data on monthly sales, etc.).

This year, Chico's management believes that a return to same store sales growth will make earnings of over a dollar a "reasonable" expectation. If so, and if this serves as the bottom of the curve while they build a foundation for renewed growth in the future, prices here in the low $20s might still provide a nice buying opportunity (though I'm not buying more just yet).

full disclosure: I own Chico's shares.

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Chico's: Still Holding, but Wary of WHBM Problems (CHS)

Chico's (CHS) released results yesterday that were more or less in line with the reduced expectations we've been forced to adopt for the women's fashion retailer.

Management continues to be quite honest in noting the disappointing results, as noted in this TheStreet.com article, which is always refreshing -- and they have consistently admitted over the last six months that their troubles have had as much to do with poor merchandising and marketing decisions as anything else.

But as Marek Fuchs writes in that article, honesty only takes you so far. We need to decide as investors whether Chico's is broken permanently, or only temporarily bent and undergoing appropriate repairs.

I don't really know -- most of what I know about the company makes me want to give them the benefit of the doubt. They've done such an excellent job of building a customer base and growing in the past that it would be unusual if they just suddenly stopped knowing how to merchandise. And if what I've seen at my house is any indication, their marketing efforts have only recently (the last two days) stepped up for the holidays, with special holiday receptions for frequent shoppers at every store planned for next week.

Two things make me want to keep holding my shares:

One, the company is continuing to grow rapidly as they ramp up their store base. Sales are growing well and the cash flow is funding new store openings and expansions -- the problems show up in same/comparable store sales, not in overall sales (overall sales for November were up 14.3%, comparable store sales down .4%).

Contrarians will point to that and say that the declining same store sales mean they've saturated their market and have nowhere to go but down, but I disagree -- I think they have the potential for continued solid growth in Chico's stores, and dramatic growth in the Soma and White House/Black Market lines that are still really in their infancy. There are still a lot of high quality malls in the US that don't have any of the Chico's brands yet.

And Two, management remains firmly in place and recognizes that they are having problems. This is the same management team that built the company and developed their distinctive niche, so I have some faith that they will be able (with the addition of more management talent, something they've already done) to restore the lustre.

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But there is one really big problem lurking, one with the potential to make me bail (though I'm not going to sell now).

Those of us who believe that Chico's can remain a strong grower know that the main growth driver going forward is going to be White House/Black Market, their smaller chain that appeals to a somewhat younger woman and that has had a couple years of truly dramatic growth in both store base and same store sales. In essence, the bet is that WHBM will become the kind of powperhouse that the core Chico's brand has been for ten+ years.

That means we have to see WHBM continue to be "special" and different from other women's retailers. No one has been able to touch Chico's for profit margin or customer loyalty for many years, and we need for WHBM to follow in those footsteps. And to some extent, that is happening -- the company reports that members of the loyalty programs for both brands are climbing well (Passport Club for Chico's, Black Book for WHBM), and clearly since acquiring the brand Chico's has done an excellent job of driving same store sales growth and maintaining good (though not as good as Chico's) margins.

But this earnings release called attention to a little problem at White House/Black Market, and if that little problem becomes a big problem than a large part of my investment thesis in CHS may fall apart.

That problem is well stated by Scott Edmonds in the earnings release:

"Although the Chico's November same store sales were essentially in line with guidance, our overall November same store sales were below guidance mostly because the White House | Black Market same store sales fell short of plan. We are currently finding that the combination of the more promotional retail environment along with our own fashion errors have resulted in a higher than anticipated markdown rate."

After WHBM has consistently helped to buttress the problems in the Chico's brand during a difficult year which has seen two seasons of poor sales at Chico's, they're now dragging down results ... at least a little bit.

Now this isn't necessarily dire -- it looks like WHBM has suffered from an overall trend toward markdowns in the sector during November, probably particularly in the early days of the holiday shopping season. And that might be OK, since prior to the markdowns they had had some success in driving average prices a little higher.

But if this is a chink in the armor, and WHBM is going to be like any other women's retailer with frequent markdowns that cut into margins ... that means this brand is not "another Chico's." That's definitely something to keep an eye on, even if I'm not yet letting it worry me too much.

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The Unmitigated Gall of This Week (UBS, CHS, EXEL, PDS)

I expect very bad results from my portfolio companies to come along every once in a while. That's part of why I maintain a very broadly diversified portfolio, and why I focus on a very long time horizon for most of my holdings.

But this week has been abysmal for the short term prospects of several of my investments.

As I wrote yesterday, Precision Drilling (PDS) -- my most recent purchase -- got caught up in the new Canadian tax proposals for trusts, bringing an immediate haircut of 15% or so. Still thinking about the long term prospects on that one, and whether it's worth holding on for what I think will be a good business, and for four more years of low-tax, high-yield dividends before the new law goes into effect.

Earlier in the week, UBS (UBS) disappointed -- their trading results were weak and brought down the earnings for this most recent quarter, and it is starting to look like their investments in expansion are going to put the kibosh on the full exercise of their buyback and on any significant increases in the dividend in the near term. Although the same trading problems impacted most of the major foreign banks and that kind of thing is certainly to be expected from time to time, I may need to look for an alternative investment in this space -- UBS has shown some nice gains over the past year, but the future is looking a little murkier for me in this name.

Then today, both Chico's and Exelixis get pantsed ...

Chico's (CHS) is wearing a bit on my patience -- I fully expect even a company with a history of excellent merchandising to make some marketing or merchandising mistakes on occasion, and with a company as excellent as I've thought Chico's is, I'd consider most of these mistakes to be buying opportunities. But the tought times have really piled up for this retailer -- same store sales growth disappointed through the Spring, and again at the end of the Summer and for the last several months the same store sales have declined, which is unheard of for this company prior to this year. That's led to reduced third quarter guidance today from the company, and another decline by more than 8% in the share price.

Call me crazy, but I'm planning to hold through at least the next earnings call and see exactly what management is doing to fix their problems in same store sales growth. The fact that they are still successfully opening stores, as evidenced by their overall sales growth of about 10%, is encouraging, and I continue to believe that there is ample room for significant expansion for at least their Soma and White House/Black Market concepts (and I really wish they would buy out Lucy, the activewear company that has venture backing from Chico's, Maveron and others, before it gets too expensive).

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Just as an aside, Maveron has got to be the most interesting venture firm out there -- using Howard Shultz's money, among others, they've backed not only Lucy, but the Motley Fool, Potbelly Sandwich Works, iFloor, Drugstore.com, and Eos airlines. I don't know what their record is, but they definitely are funding some fun companies.

And back to the bad news, today also brought about a 15% decline in Exelixis (EXEL), one of my larger speculative biotech holdings. EXEL doesn't have any drugs in production yet, and an investment in this company is a bet that their excellent scientific reputation and well-stocked pipeline of cancer drugs is going to bring at least one significant drug to the market.

The odds dipped a little bit today, as EXEL announced a very dramatic safety concern with XL999, one of their drugs in Phase II clinical studies, and from the initial announcement it's not at all far-fetched to assume that this drug will be dropped (nor is it a guarantee, since they are still continuing the study with existing participants even as they pause new enrollments).

They basically found that close to a third of newly enrolled patients in this study had "serious cardiovascular adverse events", and that about 10% of all enrolled patients had similar "events". That sounds awful to me, though I'm not a doctor and I suppose it's possible that the drug may still have some future.

But although this is certainly negative news, it's far from catastrophic for the company -- XL999 was among the more advanced EXEL drugs, one of four in early Phase II studies (there's one in Phase III, though it carries pretty limited financial expectations), so this cuts the chances that one of those drugs will make it through -- but the company also aims to file IND applications to enter the clinic with three new drugs each year, and they have three Phase I drugs and one IND lined up just behind the lead group already.

So if you bought EXEL because you thought XL999 would be a blockbuster, which is unlikely given that none of these cancer drugs have really progressed far enough to wow investors with their efficacy, you are very disappointed today.

If, on the other hand, you bought EXEL because the pipeline is strong and deep, this isn't much of a reason to sell even if the 10-15% haircut is fair -- after all, you'd have had to predict that at least half of their Phase II drugs were unlikely to gain approval.

If you do the math, there is a certain logic to today's decline -- they have eight drugs in the clinic, so -- all else being equal -- one failed drug could conceivably make it fair to downgrade the value of the pipeline by 12.5%, roughly where we are today. Given that it might take 15 years to develop a drug, and that somewhere between 10-20% of all drugs that make it as far as Phase I eventually get approved, you could really get carried away with valuing these companies based solely on probability ... but EXEL, with their strong history in target identification and drug discovery, and their deep pipeline, remains in my portfolio and I hope they'll have better results with some of their other Phase II drugs.

So ... one cruddy week on the back of a women's retailer, an oil and natural gas driller, a biotech company, and a megacap international bank -- if anyone had predicted for me that all of these would get pounded at about the same time, and for different reasons, I'd have thought it very unlikely. Shows what I know.

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An awful year for Chico's (CHS)

2006 is by far the worst year Chico's FAS (NYSE: CHS) has ever had as a public company. Several readers wrote to me after their drastically reduced earnings outlook was announced yesterday afternoon and asked what I thought.

Well, I'm not sure.

The facts are pretty grim for the near future -- this company, one of the finest growers and highest margin retailers of the last ten years, is, not unlike the Fed, pausing. And just as with Bernanke, it's very hard to tell whether that pause is the precursor to a resumed climb or a surprising fall.

The details of the earnings release were that they enjoyed 18% sales growth and 10% earnings growth in the last quarter -- which is the flip side of what we have grown accustomed to seeing with Chico's, where their excellent margins generally have led to earnings growing faster than sales. That's no great surprise given their tepid same store sales growth in the mid-single-digits over the past several months. So, they essentially hit the current earnings estimates even as they were slightly light on the sales numbers.

What was truly surprising was the outlook -- Chico's now looks like it will have its first negative same store sales growth number in many years, as August SSS are now down about 6%, and management indicated that they're going to have to work hard to recover steady sales growth by sacrificing margins and reducing their earnings expectations for the next year. The low end of their earnings estimates for 2007, which after this bad news has sunk in should, I expect, be very conservative, is $1.28 a share.

It's encouraging in a way, because management is clearly aware that there is a problem and is investing in solutions by way of reducing costs (they're shipping more by sea than by air now), acknowledging the failure of recent marketing campaigns, and bringing in more merchandising expertise to help increase sales and store traffic.

I have given Chico's the benefit of the doubt as they had merchandising troubles this Spring, but have we now gotten to the point that these problems go beyond merchandising?

That's the real question -- has Chico's reached a saturation point, or have their core customers lost interest in the brand?

I'm still inclined to give them the benefit of the doubt to some degree, and to chalk their same store sales stagnation and poor forecast up to some serious merchandising hiccups in a company that has been growing very quickly for ten years without any serious problems.

But I'm not yet jumping in to buy more. Certainly, the shares got repriced almost instantly today for a much lower growth rate and they look much more appealing today than they were at twice this price a year ago -- but I need to watch this a little more before I decide to add to my Chico's position.

The problems at Chico's are solely with the core brand -- the Chico's stores themselves. Soma is growing well and Fitigues performing well, albeit from extremely tiny starting points, and, more importantly, White House/Black Market (WHBM) is continuing to shoot out the lights, racking up the kind of growth that the core Chico's stores had five years ago (this past month, Chico's same store sales growth was a near-record-low 3%, but WHBM was at 19%).

There are some good signs -- I'm tentatively optimistic about the fact that they hired another industry veteran with a good track record to focus on rebuilding growth at Chico's. They still have an excellent relationship with their consumers, but they've clearly had trouble this year in stocking the right designs at the right time.

Michelle Delahunty, who was hired a few days ago as head merchandiser for the Chico's brand, might help -- she was at Ann Taylor in 2003 and 2004 when that company really began the recovery that they're enjoying today, and I think more talent has every chance of being a benefit for a company that may have outgrown the capabilities of the core management team that has led their growth for more than ten years (assuming it doesn't lead to the kind of internal strife that tore New York & Company's management apart).

But with continued growth ... albeit slow growth, I think Chico's has every opportunity to return to its winning ways. The company remains small in the grand scheme of retailing chains, with (and this is an argument I've made before) room for at least a couple hundred more Chico's stores and 500 more White House/Black Market shops before they reach full saturation across the American mallscape, and the fact that they are continuing to see great success with WHBM makes me quite optimistic that this management team will be able to solve whatever problems the Chico's brand may have.

The company is having sales growth trouble, but is not itself a troubled company. Chico's has buckets of cash and no debt, and while one concept may be slowing or maturing somewhat their other three have yet to hit the first turn on the track. I can be patient with these shares, so while I'm going to wait and see how their initiative to restore growth in the Chico's brand performs before I add to my position, I am confident enough to hold on to the shares I already own. In my opinion, this is still a quality company that has every chance of regaining its lost lustre.

If we assume that they hit that conservative earnings estimate next year, we're dealing with a company that -- after the selloff of the last six months -- has a PE of about 14 on 2007 numbers, and an earnings growth rate from 2006 to 2007 of about 14%. If you think management will be able to restore growth to the Chico's brand as WHBM continues to shoot out the lights, that's a bargain ... if you think that the Chico's brand will merely continue to muddle along with mediocre growth, it still seems to me that it's a fair price.

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Chico's Disappoints, Shares Climb? (CHS)

Want a clear indication of how much pessimism has been baked into shares of Chico's (CHS) over the last six months?

Today, same store sales were released for July -- and they were well below Wall Street Estimates.

But CHS is up by several percent today so far.

That tells me that investors had all but given up on this one ... and the fact that they have even come close to hitting same store sales targets (low ones, for them, of around 5%) means perhaps this is a safe one to own again.

I have held Chico's for about a year now, buying at what seemed to me to be excellent prices in the low to mid 30s. If I had cash in the account where I hold my CHS shares, I very likely would have bought some more by now -- I think the dip in same store sales is a red herring, frankly, and I'm not that worried.

Now, that's a pretty optimistic statement to make for a company that has had massive same store sales growth for decades, almost without letup, and that has grown to the point where further dramatic growth might be difficult -- one need look no further than Starbucks or Whole Foods to see what happens with retailers that investors think are losing the growth magic.

But I don't accept the argument that further growth will be extraordinarily difficult. I fully expect the magical merchandisers at Chico's to find a way to revamp their fashions to correct the recent slowing of sales growth, and with their target audiences and price points I think they'll continue to grow, albeit more slowly, even in a recession.

The CFO certainly agrees -- he strenuosly defended the company's growth prospects in the last conference call when he said "Certainly the Chico's brand is more mature than it was three to five years ago, but we do not believe it is by any means mature" (more on this in a Pittsburgh Post Gazette article, FYI).

And even if the Chico's core brand does slow down, the growth from White House Black Market should be dramatic. I've written about all this before in some detail and don't want to repeat myself, but they're still opening new stores at a dramatic rate (that's why sales growth is in the high teens even with same store sales growth at a low point around 5%). They have something in the neighborhood of 700 stores now, and with two proven concepts that we know will work in almost every good mall or retail area of the country, there is certainly potential to open close to a thousand more stores. That's plenty of growth for me for the next five years.

And if they turn around same store sales, as I certainly expect them to do over the next several months, and apply the margin management to White House Black Market that has allowed the Chico's brand to lead the industry in profitability, the shares should reflect that quite quickly.

The Chico's of the 1990s is gone, and this is not going to be the single strongest stock of the next decade as they were of the last, but this is also the first time in a very long time that you can look at Chico's and say with a straight face that it's cheap (forward PEG of .6 and PE of 14 if the analysts are right, and a very low -- for Chico's -- TTM PE of 20). Analysts have spent the last several months cutting their estimates for CHS, I expect by this time next year they'll be climbing all over themselves to raise them.

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Best Management?

A reader emailed today to ask what I think about Berkshire Hathaway, and, more generall, which management teams most impress me. I thought I'd answer for everyone in case anyone else is interested.

Berkshire Hathaway is still in my portfolio, and has been for about a year and a half ... but it's at roughly the same price today as it was when I bought it. I have the utmost respect for Warren Buffett, and I'm pleased that they have further clarified the Berkshire succession plan.

I like Berkshire because Buffett has done more with "free money" than anyone else -- his use of the "float" to fund long term investments has clearly been brilliant, as evidenced by his trouncing of the S&P 500 over the last several decades. My position on Berkshire is that I expect it to continue to plod along, acquiring solid companies and using their clout to be the insurer of last resort for many high risk enterprises, at significant profit. But I don't expect any rapid growth -- my fear is that Berkshire will end up so large that it effectively works as an index fund with cheap leverage from the insurance float, and even that is a fine scenario. With new money today, however, I'd be more tempted to put additional funds into Markel, as they have the kind of potential growth ahead of them that Berkshire had 25 years ago, assuming they make the right decisions ... Berkshire just can't grow that fast anymore.

And as for management -- perhaps it would be simplest to just list some of the things I like about some of the managers I trust the most:

In terms of trusting someone to make investment decisions for you, I do think it's hard to go wrong with Warren Buffett -- but if I ever sold my Berkshire shares and wanted a similar value-investing exposure in my portfolio I would have no qualms about giving the money to the investment team at Dodge and Cox Stock, which I already have some retirement money invested in, or with Martin Whitman at Third Avenue Value, who I would consider the single smartest long term stock picker available right now (but he's nearing retirement, too, I expect).

In terms of sharing information fully with investors, and making small investors feel they are on the same page as the management team, I'd trust the Oliveira family, controlling shareholders of Gol Linhas Aereas Inteligentes. Without playing a self-serving game with analysts to lowball and then beat their projections, they manage to clearly open up the books and explain their business, including monthly updates on their business performance -- it's rare for an American company to do that with such enthusiasm, and it's rarer still for what most would consider to be a risky emerging market investment.

Another thing I like to see from management is insider buying -- it always encourages me when executives put their own money, not options, into the company they know best. Of course, they know that, too, so it can be self serving ... but when executives aggressively purchase their own stock I think we'd be wise to follow. On this point, it's worth taking a look at Chesapeake Energy, of which I own preferred shares, and see CEO Aubrey McClendon buying up well over a million shares on the open market in the last couple of months at prices right around where it stands today (mostly higher, in fact). Add to that the fact that he has led the company to make strategic natural gas acquisitions now, when prices are relatively low and pessimism high, and I think you have the makings of a manager who's looking out for the long term interests of shareholders.

There are others who I like as well, for some good reasons. I am a big fan of Selim Bassoul at Middleby, who has shown a real talent for bringing focus and drive to a small company that was too diversified ... and then being aggressive about making acquisitions to shore up their core business in commercial kitchen equipment with Nu-Vu and, perhaps, Enodis if they stay in the bidding for that company.

And if you're looking for a management team that is relentless customer-focused, continuing to bring out product lines that their core consumers will buy and treating those customers like royalty, you need look no further than Chico's -- the shares are taking a beating lately, but I'd trust this management team more than any other in retail to recover from their merchandising hiccup and continue delighting customers. I don't think any other CEO cares as much about the soft side of customer service as Scott Edmonds does at Chico's, and their focus on their "lifetime passport members" and on personally writing to their best customers clearly creates some fiercely loyal consumers. I'm tempted to buy more here, now that it's on clearance.

On a more strictly financial point, I also should mention John Fredriksen, whose right-hand-man Tor Olav Troim heads SeaDrill. Often described as a viking raider, Fredriksen is not someone I'd probably like, and I don't know that he's the person I'd want managing my business if it was something I wanted to hold forever, but as a controlling shareholder he has a track record of being extremely aggressive in unlocking value in high priced assets and returning cash flow directly to shareholders ... including himself, of course. Sometimes his massive dividending out of cash might not be the best long term move for the companies he owns, but it certainly benefits shareholders immensely when he times it right, as he did with Frontline a couple years ago ... and as I hope he'll do with SeaDrill over the next two or three years.

Those are just a few things I like about management -- a focus on investing your money wisely, a propensity for insider buying, eagerness to share information with investor without trying to manipulate them with pointless press releases, a strong focus on their customers and a track record of pleasing them, and a desire to return cash to shareholders. It's not often, if ever, that I find all those things in one company ... but even one of those things, if the story fits well enough, can be enough to get me interested,

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Un Poquito de Chico's (CHS)

I took advantage of a sale price in another company that I really like today, picking up some additional shares in Chico's (CHS) at $29.30.

I was hoping that the downdraft would continue unabated, and since I bought shares there's a good chance that it will, but I missed on the limit order I had sitting on my account for a few days at $28.76, and after reassessing the company this morning I decided I was happy to pay a few cents more than that at this point -- especially after they announced a new (smallish) buyback that might perk up the shares a bit (their past $100 million authorization was fulfilled, and they've authorized $100 million more).

Chico's is, I would argue, the single best apparel retailer in the country. The Chico's stores are incredibly successful and have hugely loyal employees and customers, and they are still growing at a good clip -- around 8% store growth this year by my count, and incredibly good margins for retail (since they design their own clothing and can charge reasonable prices). I'm willing to buy that -- even if they do have an occasional fashion slipup, which is what appears to have happened with their April same store sales numbers that got everyone freaked out and started this latest decline on the heels of their one-penny earnings miss last quarter.

But the Chico's brand isn't even the real growth driver here anymore -- that honor falls to White House/Black Market, which has less than half as many stores as Chico's but is growing much faster (close to 15% store growth this year), and potentially to their Soma by Chico's line of lingerie and sleepwear (with lots of separate stores opening, as well as some value-added boutiques within traditional Chico's shops). White House/Black Market will open significantly more stores than the flagship Chico's brand this year, and there is a huge amount of room for growth.

I've seen retail consultants and marketers posit that there are roughly 800 high quality malls in the US where retailers generally want to get space. Chico's, which also has a lot of non-mall stores, has about 520 stores as of early this year (of which they own 508) ... White House/Black Market has 205 stores ... Soma has fewer than 20. The company believes that there is room for between 700-850 Chico's and WH/BM stores, which lines up with what I hear from retail analysts, and they also believe that there is room for a Soma store everywhere that they have a "strong" Chico's store. Some recent new malls are opening up with one each of these three concepts.

Chico's also has some other holdings that may become significant -- Fitigues was purchased by the company last year and is being evaluated as a potential new growth engine. I don't understand the fashion of this one myself, but apparently the stores have been very successful so far. And Chico's has a significant investment in Lucy's activewear stores, a concept that works well with the Chico's look and skews a bit younger. Either of these companies, with fashions skewed more to activewear and perhaps a bit younger, might end up being good in the long run ... I don't know, but after their success in building the Chico's brand over 20 years and in very quickly revitalizing and ramping up WH/BM, I trust this management to do the right thing with growing new concepts.

Chico's has had a few uneven spots in its history as a public company. They've missed on earnings on occasion (as with the past quarter), had a few months (like last month) of uneven sales or slight fashion miscues, and when they were a bit smaller they took some hits for hurricanes that closed stores in their stronger markets ... so far, each of these have been tremendous buying opportunities.

I've written before about why I like Chico's -- but really, almost everyone likes Chico's, the only question is whether you're getting the right price and whether their growth will slow significantly. Their margins blow away almost everyone in retail and, while they'll probably dip a bit with their weaker sales growth last month and the encroaching maturity of the Chico's line, I think the continued rapid growth of WH/BM will bring continued strong margins as well. Being in the mid-Atlantic region, where WH/BM got its start and has been a presence for decades, it's easy for me to forget that much of the country doesn't have one of these popular stores easily accessible -- that's going to change in the next few years.

I purchased Chico's initially last summer when I was delighted to see a tepid earnings report (hit analyst estimates, but didn't beat, and margins were a bit lower than usual) push the shares under $35 (I got my shares at $35.05) -- I saw their problems as temporary, with costs increasing with the Soma rollout and with some of their outlets.

Shares then climbed to $45 or so before dipping again when they missed estimates by one cent in March, and they've been gradually falling since. I think this is far overdone, and I'm very happy to pick up shares near $30 now that some panic has set in.

Even with the decline we've seen, Chico's is not what I would call a truly cheap company -- but it has almost never been cheap. The forward PE is in the mid-20s, and most analysts have them growing earnings at about 15% this year and more than 20% in 2007. Growth continues to be significant, even if same store sales growth is somewhat uneven this Spring, and there is every sign that they'll be able to successfully expand their two biggest concepts dramatically over the coming years (and maybe get some gravy if Fitigues or Soma are big hits).

This company has proven that they can merchandise to women very effectively, and grow with great margins. I continue to believe that they'll be able to do that going forward, and I think every dip like this is a chance to buy more.

Even if growth does slow markedly, and I don't believe that will happen within the next five years, I think the company could transition to a cash flow machine that throws off huge dividends -- if they stopped using their cash to expand, their debt-free balance sheet would allow a huge amount of that cash flow to go right to investors. Again, I don't see that happening anytime soon, but I think that's a nice fallback position if they do manage to saturate their markets and fail to add new productive concepts. I see a slow maturation ahead, but I'm in no hurry for it to arrive.

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Slip into something less comfortable (CHS)

Well, it had to happen eventually ... Chico's (CHS -- click to register for free RT streaming quote) finally missed and disappointed, and the Street decided to take back the extra billion dollars or so of market cap that CHS had picked up over the past month of torrid growth. While I'm surprised to see such a drop on a minor miss of a penny, I haven't heard anything to argue against my long-term rationale for owning this wonderful company.

Those of you who have watched Chico's at all over the years know that this is the single best performer in the stock market over the past ten years -- a truly remarkable run that has included many moments like this when investors suddenly lost faith in their ability to continue growing at a rapid rate.

Of course, at some point they will slow down markedly ... but I'm not so sure that this moment has come. I bought into Chico's at about $35 last year because I was delighted to see the stock dip into what I considered a reasonable price range. We're looking at the single best retailer in the US -- highest margins, two great concepts that appeal to people who will always want to shop, and a management team that has earned the respect of everyone in retailing with their uncanny ability to merchandise, attract and retain customers, and control costs.

So is this a buying opportunity? Not yet for me ... I still love the company, but I'm not interested in adding to my position just yet. If some actual bad news comes along (not just a one penny "miss"), then hopefully we'd see a more significant decline that would make a purchase worthwhile. Above $40, I'm happy to just hold my shares -- I expect that over the long term Chico's will continue both build new concepts and acquire and boost undermanaged brands (like White House Black Market, which they revitalized with incredible speed, and hopefully Fitigues in the coming years) and build out their empire. Unlike the Gap, which has nowhere left to expand in my opinion, Chico's various concepts have a tremendous amount of potential. Even if Chico's itself is (arguably) starting to reach saturation, the other brands are still just getting going.

And on that last point -- every time we begin to think Chico's has saturated the market, they find a way to continue to improve their business ... not only are sales still climbing but margins and earnings for 2005 climbed even faster than sales. The fact that they were able to increase their operating margins without sacrificing sales tells me all I need to know about their excellent management team.

Analyst downgrades and a warning that they'll be pressured a bit on gross margins have brought us this decline ... but I'm not worried just yet, they can afford to give back some margin in the short term and I trust this management more than any other in the industry to manage those margins and their growth effectively. If we do make it back down near my original purchase price over the coming months I'll have to consider whether another buy is warranted.

Previous Chico's articles:

Chico's buys more growth potential
Annual Checkup -- CHS
Chico's for the Man

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