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.
Here's what worries me. Chico's has lost its place in the forefront of its customers' minds. As I
wrote a few months ago, the company has lost market share to Federated ( FD) Macy's, Nordstrom ( JWN) and Kohl's ( KSS). The company's admission that May's comps will be down in the mid-single digits is further evidence that Chico's brands and merchandise no longer resonate with customers the way they used to. So when Chico's ramps its marketing spending, perhaps it can stabilize the business or even garner some small upside. But if the marketing doesn't drive customers to Chico's cash registers, operating margin will continue to deteriorate, leading to an earnings miss. On the earnings call, management said gross margin is expected to slip in the second and third quarter. My concern is that with slow sales in May, we could see more markdowns that would further erode gross margin. Gross margin was the one bright spot in the quarter. If analysts don't have that to hang their hat on, we could see the already bearish analyst community cut their estimates.