Chico's FAS Is Poised To Bounce Back Sharply Short-sellers hoping to cash in on a Chico's FAS (NYSE: CHS) implosion may have chosen the wrong target. The company's Q3 results reveal not only strength within the industry seen...

Did Short-Sellers Choose The Wrong Target In Chico's FAS?

Short-sellers hoping to cash in on a Chico's FAS (NYSE: CHS) implosion may have chosen the wrong target. The company's Q3 results reveal not only strength within the industry seen in other retailers but also the impact of turnaround efforts. Those efforts have the company operating above pre-COVID levels in every regard and at the highest levels in many years. What this means for the market is that a recent pullback in prices is turning into a buying opportunity. There may be some volatility in the near term but we expect to see short-covering begin and for this stock to move up and set a new multi-year high.

Chico's Turnaround In Full Swing

If there is one thing apparent in Chico's FAS Q3 earnings report it is that turnaround efforts and industry tailwinds are stronger than the impact of COVID-related headwinds and supply chain disruptions. The company reported $453.6 million in revenue which is up 29.1% and the highest net in five years. The revenue also beat the Marketbeat.com consensus by 645 basis points and is accompanied by widening margins. The company reports strong double-digit growth in all three brands with notable strength in SOMA.

Moving down the report, the company delivered strong margin gains at both the top and bottom lines driven by faster sell-through rates and more full-priced selling. The company's gross margin came in at 40.7% which is the highest since 2014 while SG&A, as a percentage of revenue, fell to 35.7% and the lowest since 2018. As for earnings, the company reported $0.15 in GAAP and $0.18 in adjusted earnings to deliver surprise profits in both comparisons and beat the consensus by roughly $0.20.

"Our third-quarter comparable sales growth of 28% was driven by outperformance in-store and digital sales channels. The sales growth was propelled by meaningful enhancements in product and marketing, which continued to significantly drive full-price selling," says Molly Langenstein, Chico's FAS CEO and president.

Looking forward, the company is expecting the strength to continue although the guidance is mixed. Chico's execs are expecting Q4 revenue in a range of $495 to $510 million which tops the Marketbeat.com consensus of $482 but the earnings are a bit off. The company is expecting GAAP EPS in the range of $0.00 to $0.05 compared to the consensus of $0.07 but the figures may not be directly comparable due to adjustment factors. Regardless, it is our opinion the company is exhibiting momentum and still investing in marketing/growth so we see upside potential in the guidance for both revenue and earnings.

The Technical Outlook: Chico's Falls Despite Solid Results

Shares of Chico's FAS are down in the wake of the Q3 report but it looks like the recent downdraft may be losing momentum. The price action fell to a new low, driven by short-selling, but support buying is evident in early trading. If price action is able to hold support and/or form a bottom at this level, we would expect to see short-covering begin and for price action to begin moving higher. Based on the results and the outlook, we think Chico's FAS could see a sustained rally aided by short-covering that could take it up above $7 and back to its 2019 highs.