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Should You Buy Chico’s FAS, Inc. (CHS) or Fossil Group, Inc. (FOSL)?

Chico’s FAS, Inc. (NYSE:CHS) shares are up more than 22.00% this year and recently increased 3.36% or $0.35 to settle at $10.76. Fossil Group, Inc. (NASDAQ:FOSL), on the other hand, is up 151.09% year to date as of 05/16/2018. It currently trades at $19.51 and has returned 8.81% during the past week.

Chico’s FAS, Inc. (NYSE:CHS) and Fossil Group, Inc. (NASDAQ:FOSL) are the two most active stocks in the Apparel Stores industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CHS to grow earnings at a 13.00% annual rate over the next 5 years. Comparatively, FOSL is expected to grow at a 17.30% annual rate. All else equal, FOSL’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Chico’s FAS, Inc. (CHS) has an EBITDA margin of 10.58%. This suggests that CHS underlying business is more profitable CHS’s ROI is 12.80% while FOSL has a ROI of -46.40%. The interpretation is that CHS’s business generates a higher return on investment than FOSL’s.

Cash Flow



Cash is king when it comes to investing. CHS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.32. Comparatively, FOSL’s free cash flow per share was -0.17. On a percent-of-sales basis, CHS’s free cash flow was 1.81% while FOSL converted -0.3% of its revenues into cash flow. This means that, for a given level of sales, CHS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CHS has a current ratio of 1.90 compared to 2.20 for FOSL. This means that FOSL can more easily cover its most immediate liabilities over the next twelve months. CHS’s debt-to-equity ratio is 0.10 versus a D/E of 0.89 for FOSL. FOSL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CHS trades at a forward P/E of 11.75, a P/B of 2.05, and a P/S of 0.59, compared to a forward P/E of 54.65, a P/B of 1.82, and a P/S of 0.33 for FOSL. CHS is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CHS is currently priced at a -1.74% to its one-year price target of 10.95. Comparatively, FOSL is 44.52% relative to its price target of 13.50. This suggests that CHS is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CHS has a beta of 0.75 and FOSL’s beta is -0.02. FOSL’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. CHS has a short ratio of 3.85 compared to a short interest of 7.75 for FOSL. This implies that the market is currently less bearish on the outlook for CHS.

Summary

Chico’s FAS, Inc. (NYSE:CHS) beats Fossil Group, Inc. (NASDAQ:FOSL) on a total of 9 of the 14 factors compared between the two stocks. CHS is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. CHS is more undervalued relative to its price target. Finally, CHS has better sentiment signals based on short interest.

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