I recently added Chico's FAS (CHS) to both my Top 20 Model Portfolio as well as to my Conservative Growth/Balanced Model Portfolio. A client of mine had asked me about it a few months ago as it was in free-fall (not unlike a lot of specialty retailers), and we both listened to their Q2 Conference Call and liked what we heard. I had profiled the company for Management CV (an independent research firm that evaluates management teams) in April, 2009 and had been very impressed with their January 2009 hiring of new CEO Dave Dyer. The story had seemingly all of the elements one would like to see in a management change:
- Prior success
- Intimate knowledge of the company
- Fabulous financial resources
- Strong brand(s)
Dyer ran Land's End (acquired by Sears) and then turned around Tommy Hilfiger (sold to private equity) as its CEO. Not only can he fix, but he is good at direct marketing, which has been quite beneficial to Chico's, which is now enjoying strong online sales. He had joined the Board of Directors in 2007, so he was able to hit the ground running. CHS was (and still is) stuffed with cash and no debt. While the company's margins plunged as its core shoppers seemed to just quit spending rather than going elsewhere, Dyer has already improved them with seemingly more to go.
The company recently implemented a dividend (about a 2% yield) and just announced a share repurchase authorization. At the end of Q2, it had $480mm of cash (about 2.70 or 30% of the market cap) and no debt. After a stunning collapse from almost 50 in 2006 to <2 in late 2008, the stock recovered to as high as 16.50 in April. It now trades at slightly more than half of that recent peak and has retraced about 55% of the move off the low. It seems like a great time for investors to get in, with the stock trading at 1.8X tangible book value, just over 10X the January 2012 fiscal year consensus, 4X trailing EV/EBITDA and a market dividend yield:
If you get a chance to listen to the recent conference call, you can hear Dyer beat himself up for poor execution during the quarter (inventory issues). I admire his honesty, and I expect that he will fix the problems rather quickly.
During these challenging economic times, I don't want to have to count on strong top-line growth to drive results. CHS can do things better - it already is. The operating margin (9.2% ttm) is on the rebound but still well below the 20% that they consistently earned in the past several years. Maybe it gets only to 13% or so, who knows. But, looking out a few years and assuming modest sales growth, it's easy to see how the company can earn 1.25 or more in calendar 2013 (not even taking into account the share repurchases). I actually think that they can boost margins enough to do that in 2012 but will go with a more conservative .95 for that year, which is just 11% growth above analyst consensus for 2011 (FY12). Assuming a market multiple of 13 and adding back the cash (again, assuming no repurchase), that gets a target in excess of 15 by the end of 2011. Of course, the stock was just there a few months ago!
Disclosure: Long CHS in both models at Invest By Model