Chico’s FAS: Trading This Bad Beat (NYSE:CHS)

Chico’s FAS (NYSE:CHS) remains on a turnaround path. Two years ago we called this stock a lottery ticket that we thought could generate some serious returns, but it was a dice roll. Those who took the chance saw returns of 500%. Winning. This is another specialty retailer dealing with intense competition and working to adapt to a transitioning market landscape. Inflation is out of control, labor costs are up, and higher rates may soon weigh on consumer spending habits. The name is in a crowded space, competing for every dollar. The stock is pulling back today following earnings, but we think it’s a bad beat. That is, the stock beat estimates, and is getting crushed, despite the outlook being rather decent, in our opinion. Let us discuss.

The play

Target entry 1: $6.00-$6.15 (20% of position)

Target entry 2: $5.55-$5.60 (35% of position)

Target entry 3: $5.00-$5.10 (45% of position)

Stop loss: $4.00

Target exit: $7.50

This is the exact type of crystal-clear trading we do at our service. We are not currently recommending options approaches on single dollar stocks. We think that the chart has heavy support around $5.00. The stock has been volatile, let it come down and do some buying. We like the performance here.

Discussion

This is a great trading name, and others are on the short side, with short interest a pretty sizable 12.5% of the float. That high level of short interest, however, sets the stock up for a big bounce on any momentum. Scale into the stock, then wait for the gains.

The just reported quarter certainly was much better than expected. With retail, we often care more about the top line, despite the fact that in general investing is about increasing profits.

The top line was a beat in the Q3 report and we see big improvement as likely in Q4 when it is reported next year. There are questions about how the holiday quarter will look generally speaking, but we think Chico’s can perform in this holiday quarter. If there is a strong holiday season, we think the stock could catch another sizable bid along with other retailers. It really is a stock picker’s sector. Let it come down and this could set up as a winning stock for you to end 2022 and start 2023 off right. But do not buy all at once. That is a cardinal sin in our eyes.

This company is bringing in solid revenues and earnings, and growing both lines here. In fact, this was the best Q3 in a decade. This is quite impressive. There is a renewed demand for the products it sells, and management’s transformation plan that it has put into place the last two years has clearly worked. The turnaround is real.

We think that if the company can do well in the current Q4 holiday quarter, and we see no reason why the consumer will suddenly stop shopping in the next few weeks, it is possible the stock sees another sizable rebound after this drop from $7-plus. We believe expectations have cautiously been rising, but there remains risk here.

Sales were stronger than expected overall. They came in at $518.3 million and beat estimates by $10.3 million. What is key to note is that these sales were up 15% from last year. The comparable sales for Q3 2022 compared to Q3 2021 jumped 16.5%. That is so strong. However, Soma saw a drop of 6.1%. following a huge 30% rise from 202 a year ago. Chico’s and White House Black Market both spiked, rising 28.8% and 17.0%, respectively. Folks, this is incredible performance.

How did it do this? Well, Chico’s had some enhanced marketing campaigns which continued to drive traffic as well as attract new customers. Chico’s FAS continued to elevate its marketing efforts, allocating more resources to digital advertisement, as well as bringing on more influencers, and pushing social media. We also love that despite all of the investment to boost sales, the company has controlled costs. The company continued its profitable growth in 2022, with EPS of $0.20 in the quarter, compared to a $0.15 per share result a year ago, rising 33%. Folks, this is the 7th consecutive quarter of double-digit earnings growth. Winning.

The company is also a rare combination of growth and value. Seeking Alpha’s quant ratings assign a grade of B- for growth, and B+ for value. That is attractive.

Forward view is bullish, especially the improving balance sheet

So what now? We have good value and growth, and a stock that is falling. What could make this more of a buy? How about the balance sheet that is also being cleaned up. As we look ahead for the full-year 2022, we think the cash position is strong. At the end of the quarter, cash and marketable securities totaled $141 million, up $4 million from a year ago. Oh, and did we mention that debt at the end of quarter totaled $69.0 million, and this down $30 million from a year ago, and down $80 million from Q3 2020. Awesome.

As we look ahead, we think that if the company can do well in the current Q4 holiday quarter, and we see no reason why the consumer will suddenly stop shopping in the next few weeks, it is possible the stock sees another sizable rebound after this drop from $7-plus. We believe expectations have cautiously been rising, and we think you should scale into this name. This is a smart play. New money can consider coming in if this decline in shares is extended. A bet could pay off well here once again.

The stock is declining because the Q4 outlook was a touch below consensus. Still, we think the expectations are strong, even if consensus got a little too bullish. The company guided for $535-$555 million in sales, the midpoint being below consensus. Margins will be above 35% and still strong, but we would love to see the retailer push this to 40%, though the holiday quarter is of course promotional. The earnings will come in at $0.07 to $0.10, but the Street wanted $0.10. We do not mind the lower outlook, because for the year EPS will be about $0.90, which means the stock is less than 7X earnings. With the growth on display, the valuation, and improving balance sheet, we think you should scale in for a trade.