The Fort Myers, Fla.-based operator of 409 women’s specialty stores, which sells casual clothing to female Baby Boomers, said net income for the first quarter ended May 3 soared 18.2 percent to $23.4 million, or 27 cents a diluted share, compared with income of $19.8 million, or 23 cents, in the prior year’s quarter. Total sales for the three-month period climbed 29.5 percent to $169 million over $130.5 million, and advanced 7.8 percent on a comparable-store sales basis.
During the quarter, Chico’s increased its marketing investments to help ensure store traffic in light of the war in Iraq, the cool spring weather and the struggling economy. Last year, the firm front-loaded its marketing costs and the move paid off when new members of its Passport program continued to shop Chico’s stores throughout the year.
“Chico’s continues to lead the industry with its operating margins, leaving little room for doubt that our business is incredibly strong and our future is indeed promising,” Scott Edmonds, president and chief operating officer, said. “Even after six years of double-digit same-store sales, Chico’s continues to post impressive positive results.”
Still, results came in a penny short of Wall Street’s expectations of 28 cents, due to higher expenses, reflecting the company’s decision in early February to spend more money on marketing than anticipated. Never fond of surprises, investors sent shares of Chico’s down $1.15, or 5.3 percent, to close Thursday at $20.45 on New York Stock Exchange trading.
Operating margin declined to 22.1 percent of sales from 24.3 percent in the year-ago quarter, and Edmonds said the investment in its new Pazo concept cost about 0.7 percent in margin, or about a third of the decrease.
In March, the company rolled out 10 Pazo test stores, which offer European-influenced casual, active, career and intimate apparel styles, and are geared for 25- to 35-year-olds. Although Edmonds said it was too early to draw any conclusions, executives at the company are “learning a lot from the Pazo customer and have been making certain changes to the product and store presentation.”With its current market penetration somewhere around 10 percent, Chico’s executives as well as industry watchdogs say the firm is still early in its growth cycle. In addition, the company said it has several ideas about where it might take the Chico’s brand, including its plans to test an intimate apparel line in 2004, as well as its direct and accessories businesses, the latter of which brought in $65 million in sales in 2002.
Pat Murphy, chief merchandise officer, said that the reception to spring-summer merchandise has been very positive, as good sell-throughs on regular-priced merchandise resulted in a well-balanced assortment with fresh, new receipts for the current second quarter.
“At present, we see no weak spots in our inventory, as all classifications are pretty much selling to or slightly above plan,” she said. In addition, she said certain categories have shown particular strength, including linen and linen blends, sheer fabrics, denim, novelty jackets, shirting and layering pieces, cropped pants and printed bottoms.
Other merchandise categories which performed well were its Travellers collection, C wear and Spa by Chico’s, its active-inspired separates line.
In an effort to bring in new customers, James Frain, senior vice president of marketing, said he is anticipating 3.5 to 4 percent of sales to be spent on marketing this year, including greater spending in May, as well as additional prospecting in September, October and November.
Chico’s has an active database of more than 3.2 million, with 716,000 Passport customers and more than 2.5 million “preliminaries.” It had more than 195,000 sign-ups in the first quarter and an average of 25,000 each month converted to full membership. Passport members, both full and preliminary, account for more than 90 percent of sales.
Although the company was mute on earnings guidance, with its May catalog merchandise well received and warmer weather helping to relieve pent-up demand for wear-now apparel, it maintained its upbeat mantra for May and the second quarter. To date, May comps are running in the positive high-single-digit range.
“If we were able to achieve this level of success during these tough economic times, what will the business be like for Chico’s as consumer confidence improves and the economy rebounds?” Edmonds asked rhetorically.
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