CHS - Chico's FAS: Repeating Fiscal 2022 Growth Will Be Difficult

2023-05-17 08:16:03 ET

Summary

• 2022 Net profit gets a timely boost due to strong online and offline growth numbers coupled with a higher gross margin.
• Customer count as well as average spend per customer both increase to reflect strong sales growth.
• Consensus though is wary of what may be coming down the track as growth seems to be softening.
• Higher costs also could eat into the company's margins if trading conditions do not stack up in fiscal 2023.

Technical Analysis

If we pull up a long-term chart of Chico's FAS, Inc. ( CHS ), we can see that shares actually remain in a long-term bear market despite the strong rally in recent years out of the stock's 2020 lows. Studying long-term charts is a worthwhile exercise (because history repeats itself many times in financial markets) no matter how appealing a stock's current valuation or profitability may be. In fact, shares would need to break above the multi-year downcycle trend line to confirm a new bull market in Chico's FAS which based on the stock's current trajectory comes in at just under $8 a share.

When we transition to a shorter-term chart, we see that a sustained move above long-term overhead resistance does not look likely any time over the near term. As we see below, shares have been trading in a consolidated range for some time now with significant resistance just above the $7 level. Shares did receive a timely boost at the of February on the announcement of the company's Q4 & full-year earnings but the rally was short-lived as shares began to roll over once more by mid-March. In fact, recent stagflation in Chico's FAS has resulted in the popular ADX trend-following indicator stooping to around the 12 level which obviously is not conducive to a strong trending move happening any time soon.

When it comes down to it, shares have not been able to break out of their present consolidation area because investors believe that the relationship between Chico's FAS' valuation & profitability does not provide an attractive risk/reward setup at present. Furthermore, short interest of close to 10% demonstrates that there are plenty of sophisticated speculators in this play who are banking on a lower share price going forward.

Fiscal 2022 Numbers

We did see however some encouraging trends in fiscal 2022 with gross margin surpassing 39% and Chico's FAS' net profit of $109 million being the best bottom-line number the company has reported in many years. 'White House Black Market' & 'Chico's' comparable growth numbers came in well above average and have clearly taken up the baton from Soma whose own growth metrics improved in the fourth quarter. As we see below, the company reported growth across a whole host of metrics in fiscal 2022 which begs the question - why did shares turn over rather quickly post the announcement of these numbers?

Remember, the market is a predictive mechanism that aims to predict Chico's FAS' forward-looking growth path at every opportunity. For example, the two trends presently which are not favorable for long-term gains in the company are the following.

Poor Upcoming Earnings Revisions

As we see below, analysts who cover this stock have dialed down their bottom-line expectations over the past 30 days for the next three quarters (Q1, Q2 & Q3) with the latter two quarters in particular down some significant percentages. Earnings growth is the principal reason why stocks rally on Wall Street so any further dialing down of forward-looking EPS numbers will continue to pressurize the stock.

Uncertainty Remains Due To High Costs & Unstable Earnings

Although Chico's FAS expanded its gross margin in fiscal 2022 and generated almost $162 million in operating cash flow in the same year, the jury is still out on whether similar positive trends can be generated in fiscal 2023. Management continues to invest in its 'Four Strategic Pillar Plan' (where customer engagement remains key) in order to stay at the cutting edge of what it does as well as take market share. This though also is taking its toll as operating costs almost totaled $700 million in fiscal 2022 with digital spending in particular expected to remain elevated going forward. Therefore forward-looking growth is crucial to ensure these higher costs can be covered and cash flow can continue to be generated.

Suffice it to say, with an operating margin of approximately 6.7% and with earnings revisions continuing to fall, we would not share management's confidence in its cash-flow projections and overall investment outlook. Although long-term debt fell by $50 million in fiscal 2022 and inventory management was excellent in the face of higher sales, there is no guarantee that these trends will repeat once more in fiscal 2023. In fact, Chico's FAS' long-term chart would confirm this premise.

Conclusion

To sum up, although Chico's FAS reported a sound fourth quarter and fiscal 2022 alike, some worrying trends are developing with respect to the company's expected future earnings as well as costs on the income statement. Management is confident that cash flow and EBITDA will remain elevated. Let's see how the company's upcoming Q1 earnings fare out. We look forward to continued coverage.

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