Flattering Figures

Flattering Figures

Chico's is the hottest women's retailer in America. But its founders are stepping back a third time. New CEO Scott Edmonds, a former plumbing wholesaler, must now prove the third time's a charm.

By Francis X. Gilpin

Associate Editor

They tried a numbers-cruncher who mistook himself for a designer. Then a fashion-savvy industry insider strayed too far from the basic concept. Neither lasted the 1990s.

So who did the aging founders of Chico's FAS Inc. turn to this fall when once again they tried to step back from what may be the smartest women's apparel chain in the country? Marvin J. Gralnick, 68, and Helene B. Gralnick, 55, picked a new chief executive who lacks a college degree and was selling plumbing fixtures when they met him.

Scott A. Edmonds and the next generation of Chico's leadership have their skeptics.

There are the short-sellers who have bet for two years now against the consistent double-digit jumps in same-store sales. Wall Street analysts are kinder, but their enthusiasm for the escalating stock is laced with caution. Can Edmonds extend the lightly promoted Chico's brand nationally at the same time the company absorbs a recent acquisition targeting an entirely different female shopper?

One person who doesn't seem worried is Edmonds.

"Three years ago, everybody thought we were a Mexican restaurant," says Edmonds. Sporting a golf shirt and khakis but no socks in his Fort Myers office, Edmonds had just returned from a spate of investment conferences. "There's not a hotter retailer in America than Chico's right now, period."

As long as Chief Merchandising Officer Patricia A. Murphy keeps pleasing the growing legions of Chico's fans, Edmonds says the company will be fine.

The vaguely counterculture Gralnicks stumbled upon an under-served American consumer when they started out selling folk art and a little clothing on Sanibel in 1983. Female Baby Boomers still want to dress stylishly into middle age and beyond - even if they can't spend four hours a day at the gym. The Gralnicks satisfied that demand with their own store label that offered snazzy designs that weren't too snug.

When Chico's has tripped up since going public in 1993, it usually was because "we got very small in our sizing, and the customer abandoned us," Edmonds says.

"The secret to the sauce at Chico's is it's a very forgiving fit," adds Edmonds. The two non-Gralnicks who were ousted from the executive suites forgot that. "Ever since then, we've had a clarity of concept," he says. "We know who the customer is. We know she wants that forgiving cut. And we have a clarity of concept from the guard at the guard gate to the CEO of the company, and everybody in between."

Outward and upward

This fall, Zacks Investment Research Inc. elevated Chico's into the top 5% of all the stocks that it reviews and rated it a strong buy. After August sales increased 43% over the previous year, Zacks commented: "Chico's looks to have found a solid niche and is currently making all the right moves." Sales in September, a bellwether month in the retail year, were even better, up 58%.

"Chico's management team has done a fantastic job producing one of the longest-running record growth rates in the fashion retail industry," says John Zolidis, who follows the company for Buckingham Research Group in New York.

Sales at Chico's outlets open a minimum of 12 months rose 22% in September. Analysts had forecast a 9% rise, according to a Thomson First Call survey. That was Chico's fifth straight month of double-digit increases in same-store sales, the single most-watched statistic in the retail business. That has generally been the pattern since 1997.

Analysts feel 1997 is significant because it is the year the Gralnicks last took back control over design from a floundering would-be successor. That executive was Melissa Payner, who moved on to Spiegel Catalog Inc. before turning up this year at Internet discounter Bluefly Inc. But Edmonds says the credit should be shared. "I think it certainly is not a coincidence that Pat Murphy was hired in 1997 and our same-store sales have been double-digit comp ever since," Edmonds says.

Murphy's staff travels the world in search of new fabrics and exotic patterns to bring back to Fort Myers to invigorate Chico's label.

Overall sales have doubled in two years to $531 million. Cash flow has turned into a flood. Net cash from operations, $39.2 million in fiscal 2000, was up to $108.8 million for fiscal 2002. That has enabled Chico's to report the elimination of long-term debt, despite opening 64 new company-owned stores in 2001 and 66 in 2002. Chico's is expanding at the rate of 15 to 25 new stores a quarter.

"Again, it all goes back to the product and the customer," says Edmonds. "There was a void in that customer niche, if you will."

Unlikely climb

The task of maintaining this impressive winning streak was given to Edmonds in September. His corporate ascent at Chico's was rather unlikely.

The 46-year-old Virginia native came to Southwest Florida in 1985 to open a division of Ferguson Enterprises Inc. Edmonds began working for Newport News, Va.-based Ferguson, now the world's largest plumbing wholesaler, in high school.

By 1993, his Ferguson territory, centered in Fort Myers, was doing about $25 million in annual sales. The newly public Chico's had sales of around $40 million. Edmonds heard about Chico's from a neighbor, a life insurance broker who had sold policies on key Chico's executives in conjunction with the initial public offering.

What did Edmonds know about women's clothes when the insurance salesman introduced him to the Gralnicks? "I didn't know anything about it," he says today. "But business is business. It's funny. One of the things that Ferguson Enterprises teaches you, starting day one, is how to run an ethical business, how to treat customers. That applies to any business that you're in."

At first, Edmonds stuck to distribution, his strongest suit, where Chico's needed immediate assistance. "They didn't really have any operational talent - that is, supply chain, distribution," he says. "When you're in an industry like Ferguson, it's a very low gross-margin industry. So you have to be very efficient throughout the supply chain."

The cost-consciousness instilled by Edmonds remains. Chico's recently moved distribution from remote Fort Myers to Winder, Ga., northeast of the transportation hub of Atlanta.

Chico's, circa 1993, had no contracts with United Parcel Service for shipping or with Sprint, the local telephone provider. "They had none of that," Edmonds says. "They were a very small company."

After the distribution system was established, Edmonds was put in charge of real estate and store site selection. The Gralnicks' first choice for CEO, Jeffrey Zwick, was getting the boot. But the couple hung onto Edmonds and piled on the responsibilities - store operations, human resources, legal.

The Gralnicks tried semi-retirement again in 1996, making Payner president. She was gone in a year. Edmonds thought he was the next logical choice. But nothing happened, at least for a while.

"I always felt for the longest time that I needed a college degree to really grow my career to the point where I could be a CEO," says Edmonds. He didn't attend college because he had to work overtime after high school. In 1972, while his father was away in Vietnam, he and his family lost their house. By the time he graduated from high school in 1975, Edmonds' three older brothers were on their own. He became a breadwinner for his mother and two younger sisters.

More than 20 years later, his insecurity about having just the high school diploma gnawed at him, as the Gralnicks prolonged his grooming for the top. "I was thoroughly disappointed and felt that part of that was because I didn't have a formal education," he says.

Payner left after same-store sales went negative again in 1996. Edmonds recalls he was buoyed when Marvin Gralnick announced that Chico's would not go outside for her replacement. "I felt like I truly had a shot at becoming CEO of the company," he says.

At last, in September 2001, Edmonds made president. Two years later, the CEO title was his.

"Obviously, now, being CEO of a company that has a market cap of $3 billion and is sometime in the very near future going to go over the $1 billion-in-revenue mark," says Edmonds, "I think I can finally put a lid on the concern of not having a formal education."

Run for The White House

Along with spectacular internal sales, Chico's has grown through acquisition this year.

Within days of Edmonds becoming CEO, Chico's closed on a $90 million purchase of The White House Inc., a privately held, 103-store women's apparel company based in Glen Burnie, Md.

"We know that trees don't grow to the sky," says Edmonds. "We want to protect the Chico's brand. Yet, at the same time, we want to take advantage of this tremendous brand momentum that we have right now."

With $145 million in cash, Chico's executives regularly fielded questions from Wall Street about dividends or stock buybacks. They were looking to do something else. "Because of our balance sheet, there isn't a company that's been for sale the past several years that hasn't been shopped across our boardroom table," says Edmonds. "I mean, we've looked at everything. But everything we looked at was broken, or too expensive."

The exception was The White House, which does business as White House/Black Market and sells trendy fashions in mostly white and black color schemes to a slightly younger shopper. Edmonds had gotten to know The White House's founder and watched Richard Sarmiento take the chain from 10 to 100 stores with ease.

When Sarmiento first considered going public, Edmonds took The White House owner on a personal tour of the New York Stock Exchange, where Chico's stock is traded. All the while, Edmonds discouraged Sarmiento. Dealing with the public capital markets was expensive and time-consuming, Edmonds told Sarmiento.

Last spring, nevertheless, an investment banker sent over a copy of The White House's securities registration statement. The audited financials caught his eye, and Edmonds dropped the document on Chief Financial Officer Charles J. Kleman's desk.

Whereas Sarmiento had indicated a few years earlier that his operating margin fell in the range of 6% to 8%, the 2003 White House filing showed it had broken 10%. "We saw they had some stores that were doing north of a million dollars," recalls Edmonds. "Their average store was doing $800,000, which is where we were in 1997." Most amazingly, Edmonds says: "They'd never done any marketing."

On June 25, Edmonds met with Chico's board, which includes Siesta Key resident Verna K. Gibson. She was the first woman to head a Fortune 500 company, and the first CEO of any gender to put an American specialty retailer over $1 billion in sales at The Limited Stores. Chico's directors authorized a ceiling price for The White House, and Edmonds was on a plane to Baltimore the next day.

Chico's already had everything The White House was going to use the IPO proceeds to obtain. The distribution center recently opened in Georgia. All new software installed throughout the merchant pipeline, starting at the cash register.

The deal went through right after Labor Day.

Pulling the plug on Pazo

September was a busy month around Chico's. Sales went through the roof again. Edmonds was promoted. The White House became a Chico's property. But it wasn't all good news.

After The White House was safely in the fold, Chico's closed out a 10-store pilot called Pazo. The venture was supposed to be aimed at a younger, less affluent demographic than Chico's typical 35- to 55-year-old with household income of $100,000 and above. But the intent was muddled, and the execution flawed, Edmonds now acknowledges.

"There was a disconnect between the product, the store site selection and design, and the marketing," he says. "We started out going to a more moderate customer. Yet we designed the store to look much like a European boutique. And we had very low price points in there. So it was very confusing."

Incongruously, Pazo opened in cities such as Boca Raton and Scottsdale, Ariz. "That's not where the moderate shopper spends her time," says Edmonds. If she happened to be there, she probably doubted she could afford to walk in the store.

When an upper-income shopper wandered in and saw the prices, she might think she had taken a wrong turn as well. A mere $58 price tag on a blouse that didn't carry a well-known designer label probably sent the upscale shopper back out Pazo's door.

The 10 Pazo stores have been converted into Chico's or White House/Black Market locations. There were 14 employees supervising the experiment from a separate building at Chico's headquarters on Metro Parkway in Fort Myers. They've been shifted to other duties. The Pazo shutdown is forecast to shave a penny or two off Chico's diluted-share earnings for the quarter ending this week.

"The whole Pazo test was to provide an additional growth vehicle for Chico's," says Edmonds. "I think we miscalculated how difficult it was to launch an entire new brand."

The bonus growth now is expected from The White House.

Edmonds believes Chico's won't get flummoxed again tending to a pair of distinct shopper profiles. Scanning the customer databases of Chico's and The White House, company marketers found only 12% of the names duplicated.

Chico's won't cross-merchandise. "Our focus was more on, 'how big can The White House brand be?' not, 'is it going to start feeding customers to Chico's?'" Edmonds adds. "We don't want to start cannibalizing our own customer. We don't want to mix up, confuse our customers."

Analyst John Zolidis is optimistic about Chico's. "It's got a business firing on all cylinders now. Their challenge is to remain focused," says Zolidis "They've probably covered their bases with The White House by keeping the management in place."

The next Chico's

With The White House, Chico's is positioned to surpass venerable women's clothiers such as Talbots Inc. In business 36 years longer, Hingham, Mass.-based Talbots has twice as many stores as Chico's. But the gaps in revenue and earnings are closing. Talbots had three times the revenue of Chico's in 2002 but only twice the profit.

In some respects, Chico's efficiency already has pushed the Florida upstart past Talbots, which caters to more conservative tastes. Chico's 2002 return on assets was 22% versus Talbots' 14%. Operating margins also favor Chico's, 20% to 11%.

Following his recent give-and-take with securities analysts, however, Edmonds is aware that Wall Street's infatuation with Chico's could be fleeting. "Everybody's trying to knock us off," he says. "Who wouldn't want to emulate what Chico's is doing?"

Edmonds hears two names, Coldwater Creek Inc. and J. Jill Group Inc., which could overtake Chico's. But he has his doubts. "That's who the investment community constantly brings up," says Edmonds. "But it truly shows how disconnected the investment community is to the business that we're in."

Sandpoint, Idaho-based Coldwater Creek is dismissed by Edmonds as "a cataloguer getting into the retail bricks-and-mortar business."

J. Jill in Quincy, Mass., goes after "a younger customer, lower-income, and much more a granola customer than us," says Edmonds, "30, 32, pushing a baby stroller." Edmonds prefers his shopper older and presumably better-heeled. "Most Chico's customers, if they have a baby stroller in the store, it's a grandchild," he says.

Edmonds says Chico's main competitors are the better department stores. But Chico's has no interest in providing the vast quantity of a Nordstrom.

"Our merchandising philosophy is to bring it to you in breadth, not in depth," says Edmonds. "You're not going to walk into our store and see tables and tables of sweaters and tables and tables of tees."

Edmonds picked up a copy of Chico's October catalogue. He pointed to a fashion model on the cover, wearing a $268 suede jacket with a Mongolian-lamb collar. The reaction of those belonging to Chico's 778,000-member Passport Club who might take a fancy to it? "When she gets this book and she sees this fifi jacket on the cover," says Edmonds, "she knows if I don't get in there, it's gone."

Chico's hopes to inspire the same kind of urgency with a new line of intimate apparel for the 50-year-old-and-up market.

Edmonds says Chico's can stay ahead in fast-moving women's wear, even from Lee County. "Travel is much more difficult than being in Tampa, Atlanta, Charlotte, Memphis, Dallas," he says. But Chico's has fractional ownership of a corporate jet at nearby Page Field.

Attracting talent to Fort Myers hasn't been impossible. Pat Murphy came from Lane Bryant as did Jim Frain, senior vice president for marketing, who also spent time at Gucci.

Taking potential recruits back to where it all began is normally on the itinerary, jokes Edmonds.

"What we generally do is bring 'em in and take 'em across the causeway about 10 minutes before the paper says the sun's going to set," he says. "And we take 'em over to Mr. Gralnick's restaurant that he owns on Sanibel, called Traders. We get the red-carpet treatment there. We leave there and go by and listen to a little reggae music. Wait till the moon is up fully on the other side of the causeway and come back."

Many a harried visitor from Manhattan has been known to remark after a Sanibel sojourn: "Ah, that's not too bad."

For Chico's earnings to continue the same way, Maribeth Holland, a Goldsmith & Harris Inc. analyst in New York, says Edmonds has to stay the course mapped out by the Gralnicks. "They've always been the visionaries," says Holland.

And they've always wished to retire. Maybe they have this time, for good.

By the numbers

For the year ending February 2003CHICO'S FAS INCTALBOTS INC

HeadquartersFort MyersHingham, Mass.

Year Founded19831947

Retail Stores378886

Full-time Employees2,2084,500

Total Assets (000s)$301,544$871,925

Net Sales (000s)$531,108$1,595,325

Net income (000s)$66,759$120,759

Cash Flow from Operations (000s)$108,807$222,383

Earnings per Diluted Share$0.78$2.01

Return on Assets22.14%13.85%