Markdowns, Margins Squeeze into Chico’s Q3 Profit

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Actress Diane Keaton appears in Chico's “Live for the Present” holiday ad campaign.

Fort Myers,FL—Chico’s FAS reported today that its third quarter profit suffered as the specialty retailer saw its margins squeezed as markdown grew.

For the quarter ended Oct 29,Chico’s said its net income declined 8.2% to $26.47 million, or 16 cents a share, compared to $28.84 million or 16 cents a share in the same quarter last year. Excluding 2 cents a share related to the costs of its Boston Proper acquisition, earnings totaled 18 cents.

Net sales rose 11.5% to $538.5 million from $483.02 million a year ago. Comparable store sales rose 3.7% compared to a 5.5% increase last year, reflecting an increase in average dollar sale and transaction count.

The results missed analysts’ average forecast for earnings of 20 cents a share on sales of $548.9 million.

Operating margin contracted 140 basis points to 7.8% as gross margin declined 100 basis points to 56% and total selling, general and administrative expenses grew 40 basis points.

The margin pressure came about as the company’s Chico’s division was forced to take markdowns to clear out inventory, a move that was partially offset by higher margins at White House|Black Market and Soma Intimates. The company reported $247 million of inventory on hand at the end of the quarter, up from $179 million a year ago.

Margin Pressure to Continue For Holiday

Moreover, the company warned that its margins will remain under pressure in the holiday season as the company, along with many others, offer higher discounts to lure in recession-weary shoppers.

“Gross margin will decline 100 to 200 basis points in the fourth quarter…reflecting a highly promotional missy sector along with a need to align end of year inventories,” Pamela Knous, chief financial officer, told analysts on a conference call.

By division, sales at Chico’s/Soma Intimates rose to $357 million from $338 million last year. Comparable store sales edged up 0.6%. White House/Black Market posted net sales of $170 million, up from $145.05 million last year with comparable store sales increasing 11%.

“The company is clearly in a tough spot especially at Chico’s brand… although management is taking corrective measures, we remain cautious given the ongoing difficult economy and highly promotional retail environment,” Jefferies analyst Randal Konik wrote to clients today.

During the quarter, Chico’s FAS completed the $205 million acquisition of Boston Proper, which will operate as a stand alone business.

The company also declared a quarterly cash dividend of 5 cents, payable on December 19 toChico’s FAS shareholders of record at the close of business on December 5.

Additionally, its board authorized repurchase of up to $200 million of the company’s outstanding common stock, effective Wednesday. The company noted that this program replaces the $200 million program announced in August 2010, which now stands canceled, having $24.2 million remaining. During the third quarter, the company repurchased 4.7 million shares for $60 million.