The IBD Screener's "Best Return On Equity under $10" filter finds low-priced stocks with strong or improving profitability. Retail stock Chico's FAS ranks high on this list and is Tuesday's pick for Screen of the Day.
This screen compares top-rated stocks under $10 with the highest return-on-equity percentage. ROE measures how efficiently a company uses its money.
Chico's has a high 26% ROE. The CAN SLIM investing strategy looks for a minimum 17% ROE, with super-performing growth stocks at 25% to 50%.
However, CHS stock also carries a 217% debt-to-equity ratio, much higher than its competitors. That marks a significant red flag.
The Fort Myers-Fla., retailer sells women's clothing and accessories in regular, petite and tall sizes. As of July, Chico's FAS operated 1,258 stores in 47 states and territories, with a strong online presence.
It sells under three private labels: Chico's, White House Black Market and Soma lingerie. In addition, Chico's Off The Rack disposes of excess inventory through 121 stores.
Retail Stock In A Base, Above Key Levels
The retail stock is grinding through a 50-week cup-with-handle base, with a buy point of 7.26. It found support at its 21-day exponential moving average and is 13% off its 52-week high.
Investors sold aggressively despite a positive Q3 earnings report in August, triggering a 11.4% decline in higher volume. It pierced the 50-day moving average, which remained an area of resistance until late October.
Retail stocks gained ground at that time as yields fell and investors hoped the Fed would loosen fiscal policy. Shares have remained above the 50-day line despite last week's sell-off.
CHS stock is a member of the Retail-Apparel/Shoes/Accessories industry group, which is ranked 85th out of 197 IBD industry groups. That's much better than the stock's 143rd ranking just four weeks ago.
Positive Q2 Earnings Surprise
Chico's beat Q2 top- and bottom-line estimates on Aug. 31 while raising full-year fiscal 2022 guidance. Comparable quarterly sales grew a healthy 19.5% year over year. Even so, sales growth dipped to 18% in Q2, from 39% in Q1 and 28% in Q4 2021.
"Our strong momentum continues. We posted another quarter of outstanding operating income and our highest-ever second-quarter EPS, driven by continued robust digital and store sales growth as well as significant year-over-year gross margin rate expansion," said Molly Langenstein, Chico's CEO and president. Gross margin increased to 41.4% from 38.4% last year.
Management now expects Q3 sales of $495 million to $510 million, with diluted earnings of 79 to 87 cents per share. Chico's projects a gross margin of 38.9% to 39.4%.
The company returned to profitability in 2022 after two years of losses. Analysts are projecting annual growth to continue, with 113% in 2023 and 12% in 2024.
Quarterly EPS has been erratic for the retail stock but grew to 34 cents in Q2, up from 28 cents and nine cents in the two prior quarters.
Chico's has a suboptimal 76 EPS Rating, which was pulled down by Covid-driven losses. It also holds a 93 Composite Rating and a 90 Relative Strength Rating, meaning it has outperformed 90% of stocks in the IBD database in the last 12 months.
The company is due to release Q3 earnings on Nov. 22.
Institutions Scooping Up Retail Stock
Mutual funds own 60% of CHS shares, with 351 funds holding the stock in September, up from 337 in June and 314 in March.
Heavy-hitter BlackRock Fund Advisors owned over 15% of shares as of Sept. 30, while second-largest fund owner Vanguard Group held 6%.
