Barington Capital Advisors isn’t just agitating for a fight with Chico’s FAS — it’s aiming for a battle, with new demands for cost cutting and plans on how to improve the retailer’s operations.
Those plans, including stock buybacks in lieu of an acquisition and growing the retailer’s Soma intimates apparel concept, could help Chico’s double its earnings, the hedge fund said. Further, those are moves that Barington said could translate into a stock price of between $25 and $27 a share over a three-year period. Chico’s stock on Thursday closed up 3.9 percent to $11.43 in Big Board trading.
Barington said the shares are down 33 percent over the past 12 months and down 78 percent from their high of $48.90 on Feb. 21, 2006.
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The hedge fund outlined its demands in a letter Thursday that was sent by James A. Mitarotonda, chairman and chief executive officer, to David F. Walker, chairman of Chico’s board.
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Barington owns 1.5 percent of the outstanding shares of Chico’s. On May 24, it began a proxy fight against the retailer in connection with the election of two directors to its board. Barington is proposing to nominate Mitarotonda and former Macy’s Inc. vice chairman Janet E. Grove to the Chico’s board.
The fight comes at a time when Shelley Broader — Chico’s relatively new president and ceo, who started on Dec. 1 — has begun making changes. She’s instituted cost-cutting measures to realign marketing and digital commerce functions and supply chain initiatives that are expected to generate between $65 million and $85 million in annual savings, with $15 million in savings in fiscal 2016 and the balance to be fully implemented during 2017.
The company also noted two corporate governance enhancements: 1) a recommendation at the annual shareholders’ meeting to declassify the board by class over a three-year period so the entire board would stand for election at the 2019 annual meeting, and 2) the adoption of a corporate policy limiting directors to serving on no more than four boards, in addition to their service on Chico’s board.
Although Barington last month said it has had communication with Chico’s since March regarding ways to reduce its “substantial corporate overhead,” the latest missive notes that there’s much more that Chico’s can do. The hedge fund said the retailer can reduce expenses by “at least $100 million in the aggregate, and that as much as $75 million of these expense reductions are separate and distinct from the cost reduction initiatives that Chico’s has announced.”
The letter noted that most of Chico’s stores are in upscale locations, with 65 percent located in premium, off-mall sites and many with sales of $700 a square foot, but revenue can be enhanced with better execution, merchandising and store productivity at each brand. Chico’s operates three concepts: Chico’s, White House|Black Market and Soma.
As for Soma, the hedge fund said the concept has the potential to be a $1 billion business, and even a possible spin-off opportunity. Consequently, it is recommending that management grow the business by opening an additional 200 to 300 stores over the next five years. At the end of the first quarter, Chico’s operated 272 Soma boutiques and 19 Soma outlets.
Barington prefers that the company invest in Soma instead of making an acquisition. It noted in the letter that Chico’s took a $215 million charge for its Boston Proper operation. The retailer acquired the business in 2011 for $205 million, but sold it last year for around $10 million range, an industry source said. Securities and Exchange Commission filings indicate that a majority of the directors who approved the former management’s purchase of the business still hold board seats.
The hedge fund also said in its letter that each brand should have its own president with strong merchandising skills who can focus solely on that specific brand and targeted customer. “Pushing more authority to the brand presidents will improve operating efficiency and make each brand more nimble and better able to respond to customer demand,” the letter said.
Barington has experience investing in the retail and apparel space. Previous investments include Nautica, Warnaco and The Jones Group.
Mitarotonda in a telephone interview said he believes all three concepts under Chico’s umbrella are good brands that have loyal customers. “These are loyal customers that Chico’s can have for 20 or 30 years, unlike the teen retailers where they have a customer for four or five years and then constantly have to go and get new ones,” he said.
A spokeswoman for Chico’s said, “Many of Chico’s FAS shareholders recognize the positive change under way. Our operating improvements began in 2015, following the appointment of a new chief financial officer, and have accelerated since December 2015, when Shelley Broader joined as the company’s new ceo.
“Notably, many — if not all — of Barington’s suggestions are already under consideration or being executed on as part of the four new focus areas that Ms. Broader introduced in February, well before Barington began engaging with the company. We recognize Mr. Mitarotonda’s interest in serving on the board. Chico’s FAS already has a catalyst for change with Ms. Broader, and with her new team and our new board candidates, we are confident that Chico’s FAS has leaders with the most relevant skills, expertise and record to continue executing on our new plan to fully realize the value of the company and enhance value for shareholders,” she said.
The company posted first-quarter results last week for the period ended April 30 and said profits slipped 4.4 percent to $31.1 million, or 23 cents a diluted share, on a 7.9 percent decline in total net sales to $643 million.
The company’s annual shareholders’ meeting is scheduled for July 21.