Stifel Remains Neutral on Chicos (CHS) Post-Q2 Report; Sees New Merchandising Strategy as Positive
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Stifel affirms Chicos FAS (NYSE: CHS) with a Hold rating following Q2 results and outlook issued on Tuesday night.
Analyst Richard Jaffe offered the following key points on Chicos today:
- New Cost Reduction Initiatives Announced – The company announced an organizational redesign which is expected to generate $25 million in annualized savings. The redesign clarified roles, responsibilities and processes across the brands and shared services center. New positions were created in digital and business analytics, while the company reduced corporate and field leadership headcount by 200 or 13% to create a flatter organization. Additionally, Cynthia Murray, Chico’s Brand President has left the company. The company has commenced a search for her replacement. The redesign combined with the cost reduction initiatives which include improving its supply chain, optimizing marketing expenses and reducing non-merchandise procurement expenses will result in annual savings of $90-$110 million.
- Updating Merchandising Strategy - Management’s merchandising and inventory management strategy for the Chico’s division, in which customer choices will drop up to 20% and new floorsets will drop up to 30%, is an aggressive effort to focus the store offerings, take markdowns less frequently and therefore to sell more product at regular price. We applaud the focusing of the offerings as we believe that recently, the stores were over-assorted and trying to appeal to every woman, not just the Chico’s customer.
- Uninspiring Merchandise Assortment Holds Back Sales – While the company is making progress in cutting costs and reducing inventory levels, weak sales continue to hold back results. This is due to uninspiring assortments at both Chicos and WHBM. We believe results will continue to be challenged due to lack of improvement in product. Additionally, the absence of a brand president at the Chicos division will likely create disruption in the near term.
- Update to 2016 Guidance – The company provided an update to its guidance for 2016. It expects comp sales to decline in the low single digits in 2H given the current retail environment, a lower gross margin rate (occupancy cost deleverage partially offset by merchandise margin expansion) and a decline in SG&A dollars resulting from the cost reduction initiatives. Total inventory is expected to be in line with LY. We have revised our GM and SG&A estimates to reflect this updated outlook.
- Inventory Levels in Better Shape – Inventory levels are current heading into 3Q, down 1% y/y, when excluding Boston Proper. This reflects better managed levels as the company took necessary markdowns in 2Q, particularly at WHBM. The leaner levels will likely contribute to modest merchandise margin expansion in 2H.
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