By  on March 29, 2010

Like a philandering husband, Chico’s FAS Inc. betrayed its loyal customer by chasing after a younger woman. Then, when the retailer realized the error of its ways — selling tight jeans and snug-fitting jackets to Baby Boomers — it overcompensated by veering too far in the opposite direction with matronly styles. The Chico’s customer was like a woman twice scorned.

Chico’s is not likely to repeat those mistakes any time soon. A new management team has made getting inside its consumers’ heads a top priority — and so far the results are paying off, with a return to profit in the fourth quarter.

“I saw Chico’s in the glory days and the last few years when it fell off track,” said Cinny Murray, the company’s president since February 2009. “We moved away from what our customer wanted. About three years ago we went after a younger customer. [Our core] shopper didn’t want fashion that wasn’t appropriate for her needs.”

After she joined the company, Murray interviewed consumers — some 200 in all — who said the brand needed a more sophisticated aesthetic and higher taste level. Murray focused on unique fabrics with details such as trims, embroidery and beading that give items enough interest to warrant a place in a woman’s closet. For example, the Jolena jacket, which retails for $79, has intentionally wrinkled fabric with a slight sheen. The fabric of the Bouquet Narrie jacket is covered with textured appliqués shot with shimmery thread and a crochet cut-out ruana, $149, has intricate stitching around the hem.

While Chico’s customer craves fashion, she’s no slave to trends. “Not every trend out there is applicable to the brand,” Murray said. “We evolve the various trends. An example is slim pants and skinny jeans. The customer jumped on that. We have different leg openings on the jeans and make the adjustments for the body type.” Murray said petites and large sizes offer opportunities for new business.

Chico’s sales associates give plenty of guidance. “What’s wonderful about this brand is that we sell outfits,” Murray said. “[The customer] will buy a jacket, a layering piece, pants and a scarf. They love color. In the past couple of years, the color choices and percentage of color were a little off-brand. We sell color very well. We’ve shifted our assortment to elevated neutrals with pops of color.”

Chico’s is venturing beyond its casual comfort zone with dresses — news for a brand known for its pants and tunics — and dressier fabrications such as shantung. “We didn’t really have a skirt or dress business,” Murray said. “We’re just starting into it. The consumer wants the whole lifestyle piece. It’s not formal, but we’re evolving from just a casual brand.”

“Having strong product trumps all other initiatives,” said Roxanne Meyer, a retail analyst at UBS, in a research note. “Chico’s, White House|Black Market and Soma have never been so fashion current and relevant, while being as appropriate for the target customer, as they are right now.”

“Chico’s is one of the stories that we believe can continue to post sustainable positive comps and earnings upside,” said FBR Market Capital, reiterating its outperform rating. “[Chico’s] fundamentals continue to improve, and we believe will continue to support the higher valuation levels.”

For the fourth quarter ended Jan. 30, Chico’s reported net income of $17.5 million and earnings of 10 cents a share versus a net loss of $40.5 million, or 23 cents a share in the year-ago quarter. The earnings beat Wall Street’s forecast of 5 cents per share. Same-store sales in the quarter increased 14.6 percent. In the third quarter ended Oct. 31, 2009, Chico’s reported its first double-digit comp-store sales increase in three and a half years, a 12.8 percent gain compared with a 13.4 percent decline in the same 2008 period.

Chico’s executives said they want to return the company to its halcyon days, when earnings per share of $1 were not unheard of. “Chico’s is in the process of reinventing itself,” said Kent Kleeberger, chief financial officer. “We need to grow by 25 percent to 30 percent to get to Chico’s original productivity. We want to get back where we were in 2005 and 2006. We have a number of vehicles that will enable us to get back to $1 per share.”

One of those vehicles is the “woefully underplayed” direct-to-consumer segment. “I don’t think the company valued it as much as other retailers do,” Kleeberger said, noting direct to consumer accounts for just 6 percent of total sales. Chico’s last year earmarked $5 million to $6 million to create Web-only merchandise, expand sizes and expand product offerings online. Another $4 million to $5 million will be invested in the site this year with the goal of reaching 10 percent to 15 percent of sales.

Cross-marketing of retail and direct to consumer is a focus at the 76-unit Soma division. “When I [worked at] Limited Brands, it was very clear how the Victoria’s Secret stores and catalogue feed off each other,” said Kleeberger, who was vice president and controller at Victoria’s Secret catalogue. “Victoria’s Secret store does $3.7 billion in sales and direct does $1.7 billion. We really have an opportunity to accelerate Soma’s growth by ramping up direct to consumer, which has operating margins as much as 10 percent” higher than retail. Soma, potentially a 500-unit chain, is expected to break even this year and turn a profit in 2011. Outlets are also primed for expansion. Chico’s could grow its 40-unit outlet business into a 125-unit chain in three to four years, Kleeberger said. The company plans to open at least 20 outlets for Chico’s and a handful for White House|Black Market. Soma will begin unveiling outlet stores next year.

Murray has been on a mission to remodel Chico’s 614 stores — boutiques, in the brand’s parlance — with neutral walls, sisal rugs, decorative screens, palm trees, headless mannequins and bust forms and display cases to highlight the exploding jewelry category that “beat all records,” said Murray. “It was our best year ever. Now with jewelry, we’re seeing new customers coming into stores.” Shoppers bought into the statement pieces such as necklaces with hanging tiers of metal, acrylic and wood, she said.

“We completely overhauled how we merchandise the boutiques,” Murray said. “We had divided the store into career and casual. Our customer shops like a closet. We set up the boutiques by color story.” The changes will result in a dramatic shift, said Murray, adding, “There will be less [visual] noise, but it will still feel like Chico’s.”

About 13 to 15 White House|Black Market stores are planned in 2010. Soma will open 40 to 45 full-price stores this year, 30 to 35 of which will be pop-up stores with short term leases that allow the company to save money on rent and construction. “Given the real estate environment, we can spend a quarter of the cost of building a normal store while kicking the tires of the locations,” Kleeberger said. Chico’s interest in an 1,100-square-foot shop at 75 Main Street in East Hampton is strictly seasonal, however. Set to open one week before Memorial Day, the store will operate through Labor Day.

White House|Black Market, which targets a younger, trendier customer than Chico’s, launched a wedding boutique earlier this month. So far, the collection consists of one strapless wedding gown for $498, shoes and accessories. More wedding gowns and bridesmaid dresses are in the works. Gowns can be tried on only at stores in New York, Los Angeles, Chicago and Houston, but online orders get free shipping and receive free return shipping packaging. White House|Black Market, with 330 stores, could eventually become a 450-unit chain, said Kleeberger, noting WHBM is entering major shopping centers, such as the Prudential Center in Boston and Mall at Short Hills in Short Hills, N.J., where stores are capable of generating $2.5 million in volume.

“As we pile up significant chunks of free cash flow we are not averse at looking at an acquisition or another brand story,” Kleeberger said.

Right now, the company is committed to telling the Chico’s story to as many people as possible. Chico’s FAS launched an aggressive media campaign in the fall that included print ads for its three brands and television commercials for Chico’s. A TV campaign for Soma will bow in the fall. Rochelle Udell, who became Chico’s creative director in May, visited stores to get to know the customer. “I describe her as a self-expressionist,” she said. “She enjoys being an individual within a group of people. She’s the person you want to sit next to at a dinner.”

Udell came across a photo of a group of girls in a ballet class, all wearing black tights, except for one, who is wearing a yellow tutu, and something clicked. “When someone asks me who is our customer, I take out that picture. I recognize our woman instantly as this 7-year-old girl.” Udell and Lee Eisenberg, executive vice president and director of creative strategy of Chico’s FAS, developed an ad campaign with the tagline, “Why are some women destined to wear Chico’s?” A print portfolio opens with the copy, “Quite early on, she realized she had a knack for making an entrance,” and the image of a precocious-looking dark-haired girl wearing oodles of necklaces that clearly belong to her mom. On the next pages, Chico’s Magali Amadei, a model-actress with an Ines de la Fressange-style haircut andmischievous brown eyes cavorts in the looks from the spring collection, raising her arms over her head, throwing her head back, rolling her eyes. “We cast a very wide net,” Eisenberg said of the model search. “We were looking for personalities.”

“We’ve emotionally connected with this customer,” Udell said. “I’ve been in stores and met this customer. I’ve written letters to our customers. One woman told me she took a 52-day boat trip with only our Travelers clothes. There’s a woman in California who owns 72 Chico’s jackets.”

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