Should I Do It? Chico's FAS Not a Good Fit

But the air started coming out of the balloon last March, when the company warned that growing investments in its smaller Soma brand would cut into earnings. At that time, the fiscal 2007 consensus analyst estimate for Chico's was $1.32 a share. But by the time the books were closed for the year, the retailer had earned just 95 cents.

Despite this disappointing result, management still has an aggressive growth strategy for the company in fiscal 2008. Chico's is targeting 15% annual square-footage expansion and is planning to open 105 to 115 new locations. While down from its historical growth rate of 22% to 25%, investors buying the stock now need to believe that management can achieve this growth target while simultaneously trying to reverse the trend of five months of declining same-store sales.

Taking that leap of faith and assuming that everything falls into place, the company is expected to post a 20% rebound in fiscal 2008 earnings to $1.14 a share. That said, Chico's already trades at 21.9 times this figure, compared with an industry average price/earnings multiple of 20.2 times full-year earnings.

While discounting prices can help move excess inventory, it doesn't always come cheaply. The company reduced inventory per square foot by 11% in the January quarter, though gross margin also fell to 54% from 59.7% in the October quarter and 59.4% a year ago.