Chico's Good News Is Actually Full of Holes

Don't be fooled by the jump in Chico's CHS stock Thursday. The retailer's latest quarter was another disappointment.

This onetime best-of-breed women's clothing seller has seen its days as a Wall Street darling come to a crashing halt. The company warned last summer that its growth was slowing sharply, and the stock has fallen nearly 50% from its high in February 2006.

Shares, however, recently were up $1.64, or 6.4%, to $27.26 after the company exceeded first-quarter earnings estimates. Still, the report did little to convince me that the situation is improving at the Chico's.

While the profit may have topped low expectations, same-store sales dropped and are slipping again in May. Operating margin shrank as well -- and I expect further declines.

Chico's is yesterday's news. As far as your portfolio is concerned, it shouldn't be today's or tomorrow's stock.

Where Are the Customers?

Chico's should be congratulated for maintaining its gross margin in the first quarter despite a 1.6% decline in same-store sales. Operating margin, however, fell for the sixth consecutive quarter when measured year over year.

The higher operating expenses in the first quarter were primarily due to the costs of running and staffing larger stores. But the income statement benefited from a smaller-than-expected expenditure on marketing, and those dollars will be pushed out to later in the year.