Guzzo the Contrarian

It’s stock price just reached my limit order for Chico’s FAS (CHS) at close of market. I now own 1000 shares at $1.75/share.

I’ve been following CHS, and the apparel sector, for a few years. As a matter of fact, it’s been almost one year since my first post about CHS and about six months since my follow-up post.

The economy has taken it’s toll of Chico’s FAS, but I believe it’s gotten to the point that the upside potential of CHS far outweighs any potential it has to fall to zero.

So, I took a position with the intention of trading it. However, it’s possible that I could fall into the trap that my friend HarleyDog at Prudens Speculari uses as a tagline after each of his blog posts, and might hold onto it as an investment.

For those unfamiliar with the name:

Chico’s FAS, Inc. (together with its subsidiaries, the “Company”), in business since 1983, is a specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items under the Chico’s, White House | Black Market (“WH | BM”) and Soma Intimates (“Soma”) brand names.

The Company is a specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items. The Company operates 1,077 women’s specialty stores, including stores in 48 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico operating under the Chico’s, White House | Black Market and Soma Intimates names. The Company has 619 Chico’s front-line stores, 41 Chico’s outlet stores, 327 White House | Black Market front-line stores, 19 White House | Black Market outlet stores, 70 Soma Intimates front-line stores and 1 Soma Intimates outlet store.

The once high-flying retailer which once traded in the upper $40.00 range as late as 2006, now trades at less than $2.00 per share. Sales have been falling dramatically year over year.

According to their August, 2008 10Q:

Since fiscal 2005, the Company’s rate of growth (measured by overall growth in sales, growth in comparable store sales, and other factors) has decreased from the rate of overall sales growth experienced in earlier years (which had been in the range of 30-40%), reflecting in large part the Company’s significantly increased size, its decision to adopt more manageable net square footage growth goals (7-8% for fiscal 2008 and 2-4% for fiscal 2009) and the more recent experience of negative same store sales.

As of October, the company also now views itself in defensive mode, while comparable store sales are still falling.

I’d like to believe that tightening purse strings in a worsening economy is what’s mostly contributing to decreasing sales, especially now, but the economy was still chugging along in 2005-06. I suspect that perhaps poor management may also be contributing a portion. We’ll find out much more on this Tuesday’s 3rd quarter earnings announcement. However, I don’t want to delve into this area, important as it is.

The reasons why I bought CHS are twofold.

1. Chico’s FAS is a very fundamentally sound company, currently trading at less than half of it’s book value. CHS carries almost as much cash as it’s current trading price, it has no long term debt, a price/sales of 0.2, price/cash flow of 2, and still manages to eke out a profit. With a large amount of cash on hand, no debt and a current ratio of 3.4, CHS can survive a very long economic downturn.

2. I believe a panicking market has severely undervalued it’s stock price. Any amount of good news could easily cause it’s stock price to quickly double. With time, an improving economy and improving sales, CHS could also easily and quickly climb back over $10.00/share.

So, like I first said, the upside potential far outweighs any downside potential. It’s worth the risk to me.

BTW: Morningstar.com is offering unlimited FREE access to their premium membership services this week if there are any stocks or funds you want to research there.