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Chico's Reports Big Third Quarter

The apparel retailer rallies after hours as both top- and bottom-line results best the Street.

Updated from 4:48 p.m. EST

Chico's FAS

(CHS) - Get Chico's FAS, Inc. Report

posted a 67% increase in per-share earnings in the third quarter, blowing through analysts' estimates.

The apparel retailer earned $26.8 million, or 30 cents a share, on $210.57 million in sales in its quarter ended Nov. 1. In the year-ago period, the company earned $15.5 million, or 18 cents a share, on sales of $137.26 million.

Analysts polled by Thomson First Call had forecast that Chico's would earn 27 cents a share on $198.84 million in revenue.

Although the company did not give guidance for the fourth quarter of 2004, investors and analysts appeared confident in the company's future.

"They're just in a really good spot," said Lisa Ketrick, a buy-side analyst who covers the company for TCW. (TCW owns 105,100 shares of Chico's and is long the stock.)

Following the company's report, investors sent its shares up 90 cents, or 2.4%, to $39.25 in after-hours trading. Chico's shares closed regular trading down 65 cents, or 1.7%, to $38.35.

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Chico's strong quarter was driven by outstanding sales. Not only did the company's overall sales grow 53.4%, but its same-store sales grew 20.9% in the quarter. Same-store sales, which compare like results at outlets open for more than one year, are widely watched by analysts as an indicator of a company's profitability and its ability to take or lose market share. Chico's same-store sales results put it near the top of the retail sector.

The company's bottom line also benefited from an increase in its gross margin. Gross margin is the difference between what a company charges customers for its products and the direct costs of selling those products, including supplier and occupancy costs.

Chico's gross margin increased 1.4 percentage points in the third quarter to 61.4% of sales. On a conference call with analysts and investors, company officials attributed the rise in Chico's gross margin to increased initial markups on its products and decreased distribution and product development costs.

The company also saw a decrease in its operation costs as a portion of sales in the quarter. Such costs, which include general, administrative, store opening and depreciation expenses, dropped by 90 basis points to 41% of sales.

Chico's officials did caution investors that the company's gross and operating margins will likely decline in the next three quarters. The company's recently acquired White House chain has lower gross margins and higher operating costs than the company's core stores, company officials said. Those costs will weigh in on Chico's results in coming quarters, they said.

Company officials also warned that they expected Chico's to post lower same-store sales growth going forward. Such sales will likely grow in the midsingle digits in coming quarters, they said.

That forecast is nothing to worry about, said TCW's Ketrick, noting that Chico's comparable store sales grew by 16.3% in November.

"I wouldn't bet the farm that they'll continue these high double-digit comps till 2010, but I think they're being conservative," she said.

Wall Street is calling for Chico's to earn 24 cents a share in the holiday quarter on $197.93 million in sales. Next year, analysts expect the company to post profits of $1.30 a share on $946.83 million in revenue.