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Chico’s: Profits Up, Spinoff Set

Chico’s FAS delivered double-digit increases in profits, sales and same-store sales in the fourth quarter and revealed plans for a new retail concept bowing in 2004.

NEW YORK — War worries and snowstorms may have given other retailers pause, but they couldn’t stop Chico’s FAS from delivering double-digit increases in profits, sales and comparable-store sales in the fourth quarter, or from unveiling plans for a new retail concept to make its debut in 2004.

The Fort Myers, Fla.-based specialty retailer, which sells casual clothing to female Baby Boomers, will begin testing a nameplate in four to 10 new and independent stores, featuring an equal mix of activewear and intimate apparel, during the first half of next year, Pat Murphy, general merchandise manger, told investors on a morning conference call.

Terri Campana, who previously worked at Federated Department Stores and Victoria’s Secret, will join the Chico’s team in mid-March as a senior merchant for the new concept and will report directly to Murphy.

Chico’s said net income for the three months ended Feb. 1 soared 53.3 percent to $15 million, or 17 cents a diluted share, a penny ahead of analysts’ estimates, compared with net income of $9.8 million, or 12 cents, in the year-ago quarter. Sales for the quarter increased 36.4 percent to $138.3 million from $101.4 million in the 2001 period and, driven by greater traffic and transactions that in many cases contradicted the experience of its peers, rose 11 percent on a comp basis.

The company also announced February comps increased 5 percent, hurt by the Presidents’ Day weekend blizzard, which forced store closures throughout the Northeast and Mid-Atlantic regions. Comps that week fell in the low-single-digit range, while the rest of the month was positive.

“Despite the weather, there is no question that response to the brand is incredibly positive,” Murphy said on the call.

While the company said March and April comps are expected to increase between 5 and 9 percent, analysts said there is upside potential, given the increased size of its March catalog circulation and the potential for strong sales from it. Key items so far this spring include tank tops, linen shirts and T-shirts, with sales running on or above plan, Murphy said.

With the broader markets falling, Chico’s shares finished Tuesday at $17.20, down 60 cents, or 3.4 percent, in New York Stock Exchange trading.

Chico’s is rapidly expanding its store base of Chico’s stores, adding between 70 and 75 net new stores in 2003, including 10 Pazo stores expected to open this quarter, three on March 6, compared with adding 67 in 2002 and 61 in 2000. At the end of the quarter, Chico’s operated 368 stores, while franchisees own 12 additional units.

The new concept was borne of the success of Chico’s C Wear loungewear and sleepwear collection, its soft, stretchy, pima cotton line, introduced to Chico’s just two months ago. It is aimed at the company’s 641,000 permanent and 2.3 million temporary Passport loyalty program participants, with stores to be located adjacent or close to existing Chico’s stores. While the name has yet to be determined, it will sport the credit “by Chico’s” on signs and labels.

“This is undoubtedly a natural extension of the Chico’s brand and something our customers are already looking for,” Murphy said. “We think she needs a destination.” Murphy also noted the targeted customers are probably shopping for intimates at department stores or Victoria’s Secret.

However, she added, “there is not any offering out there that gives her a true destination.”

Lauren Cooks Levitan, an analyst with SG Cowen Securities, said: “This is a natural. If you think about what is left for the Baby Boomer to go to department stores for, it is intimates. And she is not getting activewear at Niketown.”

Addressing the Chico’s demographic, Levitan noted: “People totally underestimate what is happening here. You have a complete migration of the single most attractive customer, who has money, time and likes to shop, but no one is paying attention. Chico’s has done a phenomenal job at addressing her needs and treating her with respect.”

What’s more is the segment is still virtually untapped, proven by new Chico’s units that are already generating sales per square foot of about $1,000, Levitan said.

Jennifer Black, an analyst at Wells Fargo Securities, said: “They have done an incredible job. They know their targeted customer and what she wants, as demonstrated by the strong reception of its recent 68-page catalog.” She also credited the consistency of Chico’s fashion — its resistance to the whims of sudden changes in color or other elements of fashion — for its success.

Although the company did not provide financial guidance, founder and chief executive officer Marvin Gralnick said in a statement: “We look forward to fiscal 2003 as we work to solidify our infrastructure with the launch of new and improved software and as we continue to pursue new brand extensions for Chico’s, including the launch of our new concept, Pazo, later this week. Fiscal 2003 promises to be an exciting year for us.”

For the full year, net income rose 58.2 percent to $66.8 million, or 78 cents a diluted share, compared with income in 2001 of $42.2 million, or 50 cents, which is adjusted for the 2-for-1 stock split in July 2002. Net sales for the 12 months rose 40.5 percent to $531.1 million, from $378.1 million last year, while comps rose 13.5 percent.