Retail earnings have been a mixed bag over the past couple of weeks. With speciality retailer Chico's FAS (CHS) - Get Chico's FAS, Inc. Report set to report second-quarter earnings Wednesday, it would be wise to take some profits off the table. Shares trade around $11.80.
Although the Fort Myers, Fla.-based company has made some strides to solidify its brands and improve the consumer shopping experience, Chico's continue to suffer from high inventories and slowing same-store sales. This is likely to have a worsening effect on its profit margins Wednesday -- a point raised last week by Deutsche Bank analyst Paul Trussell.
In its most recent quarter, the company missed on revenue and earnings while Chico's same-store sales declined 4.2%, suggesting fewer customers are entering its stores. First-quarter inventories totaled $268 million, rising 4% from $257.7 million last year. The company blamed lower-than-planned sales of spring merchandise for the increase.
What's more, the company predicted weak traffic and soft revenue to continue for the rest of the year, including low-single digit declines in same-store sales. The fact that Chico's gross margins, which fell to 40.8% in the first quarter, compared to 42.4% a year ago, remain under pressure, CHS shares will have limited upside to expand.
To combat the pressure, the company has begun initiatives expected generate approximately $50 million to $70 million in annualized savings. While these measures, including realignment of the company's marketing and digital commerce functions, will help build cash flow, investors would be better served to wait for guidance on Wednesday and make sure the company is still on schedule.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.