Chico's Gets Frayed

The retailer warns of a sales slowdown and forecasts earnings below Wall Street's targets.
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Chico's

(CHS) - Get Report

reported second-quarter earnings in line with Wall Street's expectation, but the retailer warned that it is facing a sales slowdown and lowered its earnings expectations for the next four quarters.

Investors ripped apart the specialty-apparel chain's stock in after-hours trading, with shares recently trading down 17% to $20.03.

The company, a fast-growing chain operator targeting Baby Boomer women, said late Wednesday that its second-quarter earnings rose to $54 million, or 30 cents a share, from $49 million, or 27 cents a share, a year earlier. The results matched analysts' mean estimate, as reported by Thomson First Call.

The retailer's total sales rose 18% to $405 million, while its same-store sales increased 5.7%. Chico's brand same-store sales were up 3%, while those for the White House|Black Market brand rose 19%.

But Chico's said it expects same-store sales, a key retail metric gauging sales at stores open for at least a year, to decline by 3% in August, as its namesake chain has been attracting fewer customers. At the Chico's stores, the company expects to record a 6% drop in same-store sales for the month.

"It appears we are facing our first negative same store sales results in some time," said President and CEO Scott Edmonds in a press release. "We believe this same store sales decline is due to a combination of factors including the lack of 'wear now' merchandise in our stores, a reduction in overall store traffic, and a pre-planned marketing effort that turned out not to inspire our customer to shop."

In the back half of the year and in 2007, the company expects its same-store sales to be flat or show a low single-digit increase. That would mark a significant slowdown from the double-digit gains that Chico's has posted in recent years.

"In light of the success our flagship brand has enjoyed over the past several years, our expansion and rapid growth have yielded some issues for us," said Edmonds, noting that the company still plans to pursue its growth strategy "aggressively."

In anticipation of these growing pains, Chico's said it is lowering its same-store sales and earnings expectations for the next four quarter. The company expects to earn 26 to 28 cents a share for the current quarter, below Wall Street's current estimate of 32 cents a share. For the fourth quarter, Chico's forecast earnings of 25 to 27 cents a share. Analysts were expecting earnings of 30 cents a share.

Chico's warnings about its future come as investors are eyeing the retail sector with skepticism. With the housing market running out of steam, the economy slowing and gas prices soaring, economists have warned that consumer spending will slow, and signs are emerging all throughout the industry that the slowdown is at hand.

"Although we foresee a year of lower operating margins, we still anticipate that our operating margin will remain one of the best in the industry," Chico's said.