By  on August 27, 2014

Shares of Chico’s FAS Inc. surrendered 4.6 percent Wednesday as the Fort Myers, Fla.-based women’s specialty retailer’s heavy promotions eroded margins but failed to clear inventory.

Gross margin fell 240 basis points while inventories rose 12.8 percent over year-ago levels to $238.1 million.

In the three months ended Aug. 2, net income dropped 30.9 percent to $30.1 million, or 20 cents a diluted share, from $43.6 million, or 20 cents, in the 2013 period.

Net sales rose 3.3 percent to $671.1 million from $649.5 million in the year-ago quarter and comparable sales rose 0.3 percent. Gross margin contracted to 52.4 percent of sales from 54.8 percent a year ago as the company worked through its inventories. On a conference call Wednesday morning, David Dyer, president and chief executive officer, said current inventory levels were $5 million to $10 million higher “than we would like.”

On average, analysts tracking the firm expected earnings per share of 26 cents on revenues of $678.6 million.

Sales for the Chico’s and Soma brands were up 4.1 percent to $431.9 million and White House|Black Market’s were up 4.3 percent to $213.9 million. Boston Proper’s sales declined 14.7 percent to $25.3 million. On a comparable basis, sales at Chico’s/Soma were up 1.4 percent, with Chico’s up less than 1 percent and Soma up in the midsingle digits, while White House|Black Market’s were down 1.9 percent.

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Dyer attributed weakness in the apparel retailing sector to a shift to durable goods rather than a lack of fashion newness, which he said has been bolstered by the trend toward “long-over-lean” silhouette combinations that are showing signs of life in the early stages of fall selling.

Dyer said third-quarter sales to date are up 3 percent despite a 1 percent decline in comps.

Todd Vogensen, promoted in June to chief financial officer, told analysts, “We expect the promotional environment to persist in the second half and, as a result, we have planned promotional events to remain competitive, which may pressure gross margins in the short term. However, we bought and ticketed key merchandise categories in a proactive manner that will allow us to protect our gross margin rate more than we experienced in the first half.”

Comparing the challenges to those faced by Ann Inc., Wells Fargo Securities senior analyst Paul Lejuez noted recent improvements at Boston Proper, strength at the Soma innerwear unit and promising initiatives in Canada and Mexico, but failed to see signs of an imminent turnaround.

“Recent trends have been choppy, and [White House|Black Market] has experienced significant deceleration,” he wrote, “and we do not see a near-term catalyst to move the stock higher. We believe the highly promotional environment is unlikely to abate, placing [Chico’s] relatively high merchandise margins at risk.”

Shares, which drifted as low as $15.11 in morning trading, recovered to $15.29 as trading ended.

Year-to-date net income slipped 26.1 percent to $70 million, or 46 cents a diluted share, as revenues rose 2.5 percent to $1.35 billion.

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