After strong double-digit increases in sales and operating income in 2012, Chico’s FAS, Inc. (NYSE:CHS) hasn’t fared as well in fiscal year 2013. The company’s profitability has been hurt by lower comparable store sales and a more promotional pricing environment that has negatively affected its gross margin. Despite this, Chico’s FAS, Inc. (NYSE:CHS) continues to generate solid operating cash flow that is allowing it to build out its retail footprint, with plans for roughly 120 new stores in 2013.
Also on the competitive threat list is The TJX Companies, Inc. (NYSE:TJX), the largest off-price retailer of apparel and home fashions through its TJ Maxx and Marshall chains. The company has been a strong beneficiary of customers’ desire to pay lower price points for name brand apparel, offering products at 20% to 60% below traditional retailers’ prices. The TJX Companies, Inc. (NYSE:TJX)’s strategy of using low prices to bring customers into its sparsely decorated stores has been a winning formula, as its operating margin hit a five-year high in 2012.
Unlike Chico’s FAS, Inc. (NYSE:CHS), TJX has continued to grow in FY2013, aided by a 3% gain in comparable store sales and a further expansion of its overall store base. In addition, the company’s operating margin has remained near last year’s high level, despite the costs of pursuing growth through an enhanced online presence. TJX’s strong profitability allows it to operate debt free on a net basis, and provides the financial firepower to opportunistically purchase large volumes of inventory on terms that its smaller competitors can’t match.
The bottom line
Christopher & Banks is a nice turnaround story, with recent increases in per store sales production that seem to be a function of its more focused merchandising strategy. However, it still has a tough road ahead to get its operating margin to meet management’s goal of a high single-digit level, which would put it closer to those of Chico’s FAS, Inc. (NYSE:CHS) and TJX. Until the proof shows up in Christopher & Banks’ results, investors might want to keep this retailer on the bench in favor of its larger, more efficient competitors.
Finding Winners in Retail
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they’ll handsomely reward those investors who understand the landscape.
The article After a Triple Digit Gain, Can This Retailer Continue its Momentum? originally appeared on Fool.com and is written by Robert Hanley.
Robert Hanley owns shares of Christopher & Banks. The Motley Fool has no position in any of the stocks mentioned.
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