By Alex Gavrish, Etalon Investment Research; author of Wall Street Back To Basics

Chico's FAS

Leonard Green & Partners, a private equity firm, disclosed in SEC on April 8th, 2014, that as of September 30th, 2013 it owned 2.05 million shares which represent a stake of 1.34% in the company.

Leonard Green & Partners acquires stake in Chico’s FAS

On April 8th, 2014, Leonard Green & Partners, a private equity firm, disclosed in SEC filing that as of September 30th, 2013 it owned 2.05 million shares of Chico’s FAS, Inc. (NYSE:CHS). The stake represents a small holding of 1.34% in the company, and based on a recent market price is valued at about $34 million dollars. The share price reacted favorably to the news and rose 8.4% on April 8th, 2014. Leonard Green & Partners is one of the nation’s preeminent private equity firms with over $15 billion of private equity capital raised since inception. The firm, founded in 1989, has invested in 70 companies with aggregate value of $74 billion. Located in Los Angeles, California, the firm invests in established companies that are leaders in their markets.

Blue Harbour Group stake

In September 2013, Blue Harbour Group disclosed a 5.6% stake in company. According to the latest SEC filing, the firm owned 9.21 million shares of Chico’s FAS which currently represents a stake of 6%. Blue Harbour Group is known for its activist investments, while working in a collaborative and supportive manner with companies and management (as opposed to more “active” activist investors who might engage in proxy fights, etc.). Clifton Robbins, CEO of Blue Harbour Group called Chico’s FAS a “growth stock being valued as a value stock”. Based on media reports, Chico’s FAS is also seen as a potential buyout candidate because it has no debt and provides attractive growth prospects. The recent M&A wave in the apparel retail sector clearly makes this a reasonably probable scenario.

Chico’s FAS: Company profile

Chico’s FAS is a specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other items. The company operates through Chico’s, White House Black Market, Soma Intimates and Boston Proper brand names. While each of its brands has a distinct customer base, the overall portfolio caters to a broad age and economic demographic, with customer ages from 35 and older and household incomes ranging from $50,000 to well over $100,000. Chico’s FAS operates 1,472 stores across 48 states, and also mails catalogs and operates e-commerce websites and call centers which sell merchandise nationally and internationally.

Chico’s FAS: Current valuation

As of April 10th, 2014 close, Chico’s FAS, Inc. (NYSE:CHS) had a market capitalization of $2,496 million and an enterprise value of $2,343 million. For the full fiscal 2013 year, the company generated $2,586 million in revenues, $141 mil in operating income, $237 mil in cash flow from operations and $101 million in free cash flow. In terms of valuation, the company is currently trading at an EV/EBITDA multiple of x7.1, P/E multiple of x37.9, and has a free cash flow yield of about 4.1% percent. During 2013, Chico’s FAS repurchased $252 million worth of shares which equals to a buyback yield of 10% (based on current market capitalization). The company currently has a $300 million stock repurchase authorization program. Chico’s FAS also pays regular dividends which were recently increased and currently stand at $0.075 per share quarterly or $0.30 per share annually, which represents a dividend yield of 1.84%.

Example of a put-write position for a more conservative investor

Based on April 10th 2014 closing prices, one could sell an out-of-the-money put option with a maturity of about nine months (January 17, 2015) and exercise price of $15 for a premium of $1.15 per share. By doing this, the investor agrees to purchase Chico’s FAS shares for $15 per share in case the stock price declines below this price. Actual cost and breakeven price of shares for investor would be $13.85 as the investor receives $1.15 per share in premium upfront. At such purchase price Chico’s FAS, Inc. (NYSE:CHS) would be valued at an EV/EBITDA multiple of x5.9. In percentage terms, a decline of 15% from the current market price is required to get to this price – a nice downside cushion during uncertain times. If, on the other hand, Chico’s FAS, Inc. (NYSE:CHS) shares trade sideways or rise, the investor will earn an annualized premium income of about 11% for taking the risk.

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