Chico's (NYSE:CHS) Misses Q2 Revenue Estimates

Adam Hejl /
2023/08/29 6:53 am EDT

Women’s apparel and accessories retailer Chico’s FAS (NYSE:CHS) missed analysts' expectations in Q2 FY2023, with revenue down 2.43% year on year to $545.1 million. Chico's made a GAAP profit of $59.3 million, improving from its profit of $42 million in the same quarter last year.

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Chico's (CHS) Q2 FY2023 Highlights:

  • Revenue: $545.1 million vs analyst estimates of $554.9 million (1.76% miss)
  • Revenue Guidance for Q3 2023 is $515 million at the midpoint, below analyst estimates of $524.6 million
  • The company dropped its revenue guidance for the full year from $2.19 billion to $2.16 billion at the midpoint, a 1.37% decrease
  • Free Cash Flow of $19.8 million, down 71.2% from the same quarter last year
  • Gross Margin (GAAP): 39.8%, down from 41.4% in the same quarter last year
  • Same-Store Sales were down 3% year on year (miss vs. expectations of down 0.3% year on year)

Molly Langenstein, Chico's FAS Chief Executive Officer and President, commented, "We delivered another quarter of strong operating income and earnings performance, which was consistent with our outlook.

With a style that ranges from casual to dressy, Chico’s FAS (NYSE:CHS) is a women’s apparel and accessories retailer that operates multiple brands.

Apparel sales are not driven so much by personal need but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Sales Growth

Chico's is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.

As you can see below, the company's annualized revenue growth rate over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was flat, or 0.86% as its store count dropped, signaling that growth was driven by more sales at existing, established stores.

Chico's Total Revenue

This quarter, Chico's reported a rather uninspiring 2.43% year-on-year revenue decline, missing analysts' expectations. The company is guiding for a 0.64% year-on-year revenue decline next quarter to $515 million, a reversal from the 14.3% year-on-year increase it recorded in the same quarter last year. Looking ahead, the analysts covering the company expect sales to grow 2.67% over the next 12 months.

While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

A retailer's store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.

When a retailer like Chico's is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. As of the most recently reported quarter, Chico's operated 1,258 total retail locations, in line with its store count a year ago.

Chico's Operating Retail Locations

Taking a step back, the company has generally closed its stores over the last two years, averaging a 1.34% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at its remaining stores as well as e-commerce sales to fuel revenue growth.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Chico's demand has been spectacular for a consumer retail business over the last eight quarters. On average, the company has increased its same-store sales by an impressive 22.9% year on year. Given its declining store count over the same period, this performance could stem from higher e-commerce sales or increased foot traffic at existing stores, which is sometimes a side effect of reducing the total number of stores.

Chico's Year On Year Same Store Sales Growth

In the latest quarter, Chico's same-store sales fell 3% year on year. This decline was a reversal from the 19.5% year-on-year increase it posted 12 months ago. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.

Key Takeaways from Chico's Q2 Results

Sporting a market capitalization of $632.1 million, Chico's is among smaller companies, but its more than $150.7 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

Overall, this was a mediocre quarter for Chico's. The company missed Wall Street analysts' expectations for same-store sales and revenue. However, adjusted EPS beat slightly. The major negative was that the company reduced its full year revenue and EPS guidance. Next quarter's revenue and EPS guidance are also below expectations. The stock is up 2.54% after reporting and currently trades at $5.25 per share, perhaps reflecting low expectations going into the earnings report.

So should you invest in Chico's right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.