Seeking Alpha • Feb 16
Chico's FAS: Attractive Valuation But No Catalysts To Grow
Summary
The dynamics of consumer spending on clothing continues to be under pressure.
Chico's FAS announced a reduction in guidance in view of macro headwinds.
The company is trading below fair growth, however, I do not see any catalysts for the growth of the stock in the coming quarters.
Introduction
Chico's FAS (CHS) shares have risen 4% YTD. Despite the fact that the company is cheaply priced according to multiples, and the DCF model indicates that there is fundamental upside potential for CHS stock, I believe that now is not the best time to go long. In my personal opinion, rising inflation and a decline in real incomes will continue to affect the company's revenue dynamics in 2023, while the effect of traffic recovery in the chain's stores may have already been exhausted. Thus, I expect pressure on the company's operating and financial performance in 2023.
The survey of current trends
Rising inflation and declining real disposable income continue to weigh on consumer spending. Thus, total consumer spending on "Nondurable goods" is in the negative zone during 2-4 quarters of 2022. Clothing and footwear spending is one of the Nondurable Goods segments where consumer spending looks a bit better, but the pressure is still there. I believe that in 2023 we will see how lower consumer spending in the discretionary segment will put pressure on the company's revenue dynamics, as the effect of store openings and traffic recovery will be exhausted. On the charts below, you can see the details of consumer spending.
Personal expenditures (bea.gov)
Projections
I made my own assumptions about the future cash flows of the business in order to evaluate the company. You can see the main assumptions of my forecasts below:
Revenue growth: in my model, I conservatively assume revenue growth of 5% by the end of 2023 due to rising inflation and a decrease in real income, then I predict stable revenue growth of about 7% per year until 2026.
Gross margin: I predict slight pressure in 2023 due to a weakening consumer, so I assume that the gross margin in 2023 will decrease to 39%, then I predict a recovery to 41% by 2026.
SGA: I believe that by the end of 2023 we will see a slight increase in spending on SGA (% of revenue) to 33.5% due to reduced economies of scale, then I predict a gradual decrease to 32.5% by 2026.
You can see the results of my predictions in the chart below.
Yearly projections:
Forecast (Personal calculations)
Valuation
I prefer to use the DCF approach to value a company. First, the company operates in a stable market where the use of DCF is most preferred. Secondly, using the DCF model allows me to make assumptions about the future growth rates and operating profitability of the business. Also, when forecasting, I can rely on management comments and guidance.
The main inputs in my model are:
WACC: 12.8%
Terminal growth rate: 3%
DCF model (Personal calculations)
Multiples
In addition, I calculated the current and future P/S and P/E multiples for the company based on my sales and net income forecasts. You can see the results of my predictions in the chart below.
Multiples (Personal calculations)
Risks
Competition: increased competition could lead to lower market share, lower revenue growth and lower operating margins due to higher marketing costs, competition for labor and failure to raise prices for key products.
Margin: decreasing economies of scale due to reduced store traffic and lower average check, as well as rising operating costs, could put pressure on the business's operating margin going forward.