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This is the story of how retailer Chico's targeted an untapped market and became a spectacular success. And now, with plummeting stock prices and slower sales, can the Fort Myers company duplicate its winning formula with other chains? The answer might not be ...

By MARK ALBRIGHT
Published August 13, 2006

After defying gravity for eight years, the folks who run Chico's FAS Inc. are getting a sobering glimpse at the ground.

The high-flying Fort Myers apparel retailer's stock took a 50 percent nosedive at the first hint that the chain might be losing its Midas touch. All it took was one quarter of softened sales and Wall Street forgot that $100 invested in Chico's stock had grown to $1,105 on Jan. 28. Now, it's clear Chico's stunning streak of eight straight years of double-digit sales gains in stores open more than a year is in jeopardy.

"We have a maturing brand in Chico's, but it's been a challenge for the investment community to understand that we are now a more complex company with some powerful growth vehicles in the pipeline," said Scott Edmonds, 48-year-old chief executive officer of the 802-store chain that added three brands to its stable since 2003. "The common theme that runs through all of them is catering to baby boomers, which has always been this company's true sweet spot with Chico's."

Indeed, it's a generational niche that few retailers - and no apparel retailers - have exploited as fully or as quickly as Chico's, experts say. Every day is dressy casual day for the 800 Fort Myers headquarter workers. They create the fashion amid the bare concrete walls and exposed duct work that's tastefully accented with oriental rugs and the familiar burnt-gold Mexican colonial furnishings seen in Chico's stores. One executive sports checkerboard Vans skateboard shoes. Edmonds, in stylish two-day-old stubble, is decked out in the company's charcoal-gray Fitigues brand shirt, cargo pants and black canvas low-tops.

"We're a casual clothing company," Edmonds explains before outlining how he spent two years building the logistical foundation to get the company's other chains poised to pick up the slack as Chico's begins to max out.

In addition to its bulwark 546-store Chico's, the company is ramping up its smaller 223-store White House/Black Market chain that has been running up same store gains as strong as Chico's once did. It's expanding Soma by Chico's, a new yet unprofitable chain that sells intimate apparel and sleepwear designed for the Chico's customer. In addition the company recently acquired Fitigues, a high end fitness-inspired line of casual wear suitable for women, men and kids that's sold in 11 stores in tony plazas from Boca Raton to Dallas.

The company is still deciding how to mold Fitigues to appeal to the White House customer and become a big chain on its own. White House is poised to be a legitimate growth vehicle, but "Soma remains in 'show-me' mode," remarked Neely Tamminga, an analyst with Piper Jaffray & Co.

That's life in the fickle women's apparel business. You're only as good as your most recent quarter. Knockoff artists crop up as competitors ranging from Coldwater Creek to J.Jill and the Gap's new Forth & Towne gear up to go after the long-ignored customer that Chico's won over. Indeed, analysts are mixed about whether the company, which gets 80 percent of its business from the core Chico's chain, will get back on track from fashion stumbles last winter and spring.

Chico's is one of the few chains that has resonated with mature, affluent women looking for moderate to better priced apparel during their peak wardrobe-building years. The chain's forgiving fit the sizes are numbered zero through four rather than four through 16 is made to flatter a customer whose average age is 52. But some of them must have thought they walked into the wrong store last winter. The familiar bold accent colors were in reduced supply. A few trendy braless styles and shoulder shrugs, which draw attention to the midriff, debuted to puzzled Chico's regulars.

"I see their sales continuing to weaken because current fashion just does not fit their style," said Ivan Feinseth, a securities analyst with Matrix USA.

"I think it's temporary," said Margaret Whitfield, a securities analyst with Ryan Beck & Co. who said "maybe her closets were full. But the Chico's customer will be back because so few other chains serve this customer as well."

In addition to compelling clothes, the Chico's formula leans on lots of customer-care training for the commissioned sales force. Like a catalog retailer, Chico's tracks customers' every purchase through a loyalty rewards program.

"They are very good at customer service and use their loyalty program to learn everything they can about their customer," said Bart Weitz, director of the University of Florida retailing program and co-author of the nation's bestselling retailing textbook. "I went to Chico's to buy my wife something. They knew her size and what she liked right off."

About 1.8-million customers are members of Chico's Passport Club. That means they spent at least $500 there, so they qualify for discounts and free shipping. They are mailed catalogs like clockwork filled with coupons that have been tailored to their purchase history. Chico's often expresses appreciation to members who account for 78 percent of sales. Each of the past three Valentines Days, for example, the company delivered $60 boxes of chocolates to 3,000 randomly selected top spenders.

While the company netted 93,000 more names on the Passport Club roster last year, growth leveled off. Members' average spending slipped to $111 per trip, down from $132. And members who had been shopping there five to eight times a year, made five or six trips.

Chico's executives have warned for a year that it was only a matter of time before Chico's got big enough that its big percentage sales gains had to settle down. But they see plenty of room for growth: 250 to 300 more Chico's, expanded locations and the potential to someday offer shoes, handbags, cosmetics or more accessories under the Chico's brand.

Nonetheless, Edmonds ordered a re-evaluation of the Passport Club that might end up with multiple tiers of membership and a new look for Chico's advertising this fall.

"We haven't changed our marketing since 1999, so I want to be sure the program didn't get stale," he said.

Meanwhile Edmonds started searching for a replacement for Patricia Murphy Kerstein, the former Limited executive who has overseen Chico's merchandise through the glory years since 1997. She said she will retire in 2008.

Chico's revived investor interest in some of its other quirks.

The Chico's stores are half the size of most rival chains. But the selection is constantly churned by weekly and often daily deliveries.

By keeping the space small and turning inventory over five times a year, Chico's attained sales productivity of $1,038 a square foot last year. That's twice the industry average. That helped the chain maintain an operating profit higher than 20 percent, which is about five times the national average of 3.5 percent.

The debt-free company, which needed 21 years to hit $1-billion in sales, has invested in the infrastructure to get to $2-billion in only two years.

White House is a visually arresting, monochromatic store that hedges its fashion risk by selling only white and black apparel or neutrals such as cream or gray. (White House considers blue denim an exception to the rule).

"We're covered when the fashion editors declare white the new black, black the new white or black the new black," said Michael Smith, co-founder of the chain with his wife, Patricia Darrow-Smith, who leads the merchandising effort.

"White House/Black Market is about exactly where Chico's was three years ago: 230 stores and sales of a quarter-billion dollars," said Charles Kleman, Chico's chief financial officer. "It's a nice young brand that has years of growth in it."

It's aimed at baby boomer customers a decade younger than Chico's. The average customer is 42, and the chain reported 20 percent or better same-store sales gains the past year.

Said Ryan Beck analyst Whitfield: "White House is on fire."

Mark Albright can be reached at albright@sptimes.com or (727) 893-8252.

Chico's FAS Inc.

What is it: A Fort Myers women's apparel retailer with four brands and 802 stores operating under four marquees.

Performance: Wall Street darling after racking up eight consecutive years of double-digit sales increases in stores open more than a year. But stock pummeled this year after same-store sales slid to single-digit gains each of the past five months.

History: Started in 1983 from a store selling folk art and some women's clothes to Sanibel Island tourists, it went public in 1993 as a specialist in casual styles for affluent baby boomer women ages 35 to 55. Named after a parrot owned by a friend of the founding family.

2005 Revenues: $1.4-billion

Projected store growth in 2006: Up to 160 stores.

CHICO'S

Age-appropriate casual fashion for 35- to 55-year-olds, the average customer is 52 with average household income of $75,000. Loyalty program includes 1.8-million members, who contribute 78 percent of sales. Stores: 546, adding 45 to 55 this year.

WHITE HOUSE/ BLACK MARKET

All white or black clothes and neutral shades of gray and cream. Gave blue denim an exemption. Target customer is younger, fit is closer to the body and average age is 42 with average household income of $75,000. Loyalty program has 1.3-million customers, who are responsible for 55 percent of sales. Stores: 223, adding 65 to 70 this year.

SOMA

New venture that seeks to be the intimate apparel address for the Chico's customer, a sort of Victoria's Secret for baby boomers. Also sells sleep and activewear. Stores: 23, with 25 to 35 more this year.

FITIGUES

High-end fitness-inspired casual wear for women, men and children, sometimes made from soft military fatigues. Acquired wholesale business this year, but plans are still being formulated. Stores: 10.

[Last modified August 13, 2006, 01:21:31]