Charming Shoppes' Loss Widens, Shutters 240 Stores, Stock Soars?

Charming Shoppes' Loss Widens, Shutters 240 Stores,

Stock Soars?

arch 16

, 201

Staff

The parent company of Lane Bryant, Fashion Bug and Catherine’s saw its stock close

near a 52 week low recently on March 23 at $2.97. The following morning, Charming

Shoppes released its fourth quarter results that included a pretty substantial loss, but

also included more revenue than most had expected. The stock immediately popped,

and has climbed ever since, getting as high as $4.92 on April 20, a more than 65%

premium to the March 23 close.

Volatility is nothing new to this stock, which has fluctuated between $18 and $0.70 for
the last 25 years. The stock had not fallen below $2.00 until late 2008, and has
traded as high as $6.47 since then. Volume tailed off dramatically early this year, but
has picked up once again over the past month.

Shares outstanding have not budged over the past ten years, and remain at just over
100 million. The company earned 76 cents a share during 2005 and again in 2006.
2007 saw a slight loss, but then Charming Shoppes lost $1.57 a share in 2008,
$0.67 a share in 2009 and $0.47 a share in 2010. Since 2007, the owner of plus size
apparel stores began closing underpeforming units and beefing up their online
presence. The balance sheet shows the results of this fat trimming with assets
shrinking from $1.6 billion to just over $1 billion, liabilities diminishing from $880
million to $600 million and perhaps most importantly, long-term debt was more than
cut in half from $306 million to $128 million.

During the last fully reported four years, revenues have gone from $2.7 billion to just
over $2 billion, similar to what they were back in 2001. Revenues did pick up
dramatically during the most recently recorded quarter that includes the holiday
season. $575 million tops last years comparable quarterly revenue of $540 million,
however, gross margins shrank by a full percentage point. Selling, general and
administrative expenses slowly shrank all year-long, but an unusual expense of $21
million caused the company to lose $0.26 a share for the period ending January 29,
2011.

So what is all the fuss about, and why is this stock up 60% in less than a month?
Investors are apparently excited about the 7% revenue growth, 9% same store sales
growth and growth of 41% from the online division. Adding to the speculative
excitement has been the appointment of a new CEO, the closing of 240 unprofitable
stores (mainly Fashion Bug units) and a couple of new product lines, including a deal
with Inter Parfums.

Despite these positive signs, and potentially profitable moves, Charming Shoppes'
revenue growth is still expected to be flat for the foreseeable future. Analysts expect
earnings of 12 cents this quarter on a non-GAAP basis, 15 cents for all of 2011 and
32 cents for all of 2012. So even if we look at 2012, CHRS has a forward P/E of 15.
Keep in mind that retailers as a whole currently have an average trailing P/E of 10.

A potential return to profitability on the non-GAAP front has this stocks near term
earnings growth rates in the 100% plus range, perhaps a reason for all the buying.
The problem with this is the stocks PEG ratio, which is its P/E ratio divided by its five
year projected earnings growth rate. The average PEG for retailers is 0.86. The PEG
ratio for CHRS is near 15.

So despite all the anecdotally positive evidence, it makes sense to be cautious with
this stock. There was clearly a lot of value at $3, but at $5, things look a lot different.
For the stock to get to $10, one would think that there would need to be a lot more
revenue and earnings growth than what is currently expected. At 10 bucks, even with
$0.50 of earnings per share, the P/E would still be twice that of its peers.

Despite our concerns and projection that this stock simply cannot double in the next
year or two, a solid balance sheet and plenty of liquidity might allow enough safety for
either short-term trading opportunities, or a very long-term buy and hold approach.
Book value is at $3.59 a share, and this company has a history of keeping its balance
sheet in order. 90% of the company is owned by institutions, and surprisingly, only
five percent of the shares are currently sold short.

There has been quite a bit of insider buying lately which has helped the stock price
and hurt the valuation. One thing that could help would be a reduction to the 115
million share count, which is by no means excessive and has remained consistent.
The company is currently sitting on over a dollar per share in cash.

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