Shares of Chico’s FAS Inc. shot up 10.4 percent in after-hours trading Tuesday, following reports that the company might be taken private.
The shares, which were down 0.6 percent to $17.25 when the markets closed, rose to $19.05 on the news. The Wall Street Journal reported that private equity firm Sycamore Partners is in advanced talks to buy Chico’s.
Sycamore declined comment Tuesday, but it seems the ideal potential partner given its penchant for struggling chains. A purchase would give it some sourcing synergies, since it also owns Talbots and last year acquired the intellectual property assets of Coldwater Creek after it filed for bankruptcy. Coldwater Creek is back in operation as an e-tail business. Talbots, Coldwater and the core Chico’s brand each target the same female demographic group.
Chico’s FAS has long been rumored to be a takeout target since private equity firm Leonard Green & Partners disclosed in April that it acquired a 1.3 percent stake, or nearly 2.1 million shares, in the women’s specialty chain. The purchase of shares was in September 2013.
Two months later, in June, rumors began circulating that the chain had held preliminary talks with several private equity firms. It was unclear whether Chico’s was exploring a complete sale of the company or a so-called strategic partnership, nor was it ever clear which firms Chico’s may have held discussions with, although the Leonard Green stake made it the prime buyout candidate at the time. A 1.3 percent stake is considered paltry had Leonard Green sought to do a takeover, and sources Tuesday didn’t think a Chico’s buyout was seriously under consideration at the Los Angeles-based firm.
Activist investor Blue Harbour Group, holding the seventh-largest stake in Chico’s, is believed to have had some influence in trying to find ways to increase shareholder value, and a takeout of the retailer is always one option.
While some of the retailer’s brands remain solid, such as Boston Proper and Soma, the core Chico’s brand has had some merchandising problems and the company overall suffers from margin issues and competitive challenges. Wells Fargo analyst Paul Lejuez last year wrote in a research note after the Leonard Green stake was disclosed that “many are wondering what the [private equity] community might see in Chico’s.” The analyst said each Chico’s concept “faces challenges.”
Lejuez last week wrote in a note: “While 2014 has certainly been tough on both core divisions [Chico’s and White House|Black Market], we estimate EBIT [earnings before interest and tax] margins of 6 to 8 percent are no worse (and in fact better) than many of their current and former women’s retail peers. So while we believe the smaller divisions at Chico’s (Soma, Boston Proper) could help improve overall EBIT margin in the future, we believe management’s double-digit EBIT margin goal is aggressive.”
Last month, Randal J. Konik, analyst at Jefferies, did a leveraged buyout analysis of some apparel firms and retailers. He used an IRR analysis, or internal rate of return, that projects growth rates. In his analysis, Chico’s was one of the companies that looked favorable from a “pure LBO math perspective.”
David Dyer, who could not be reached for comment Tuesday, has experience taking a company private. He was chief executive officer at Tommy Hilfiger Corp. when it was sold to Apax Partners in December 2005. He was also ceo at Lands’ End when it was sold to Sears, Roebuck & Co. in May 2002.
In the most recently reported quarter, third-quarter results at Chico’s ended Nov. 1 saw net income of $26.5 million, or 17 cents a diluted share, matching analysts’ estimates. In the year-ago period, the retailer recorded a net loss of $29.5 million, or 18 cents. Stripping out charges for goodwill and trade name impairment for Boston Proper, the 2013 quarter’s earnings per share were 22 cents.
Sales rose 1.5 percent to $665.6 million from $655.6 million. While Soma recorded its 22nd consecutive quarter of positive comps, with a midsingle-digit increase, the Chico’s brand’s comps were down in the low-single-digits and the combined businesses’ comps fell 1.6 percent, while net sales were up 0.6 percent to $418.2 million.
White House|Black Market’s comps fell 1.4 percent, while net sales grew 2.9 percent to $224.6 million. Boston Proper recorded a 5.7 percent increase, landing at $22.8 million.
Gross margin fell to 54.7 percent of sales from 55.5 percent a year ago, while the year-over-year increase in inventory was 10 percent, to $294.2 million.
The company is set to post fourth-quarter and full-year results on Feb. 26.