Francesca's Holdings Corp.’s (FRAN) earnings of 24 cents per share in the second quarter of 2014 missed the Zacks Consensus Estimate of 27 cents by 11.1%. It also fell 27.3% year over year due to soft comps and weak margins.
Results were at the lower end of management’s guided range of 24 to 29 cents.
Revenues & Margins
The specialty retailer reported net sales of $97.3 million, missing the Zacks Consensus Estimate of $100 million by 2.7% as well as management’s expectation of $98.0 to $103.0 million. Declining transactions within comparable boutiques dented sales during the quarter. However, sales for the second quarter increased 9% year over year backed by 90 boutiques opened since the end of second quarter fiscal 2013. The company opened 13 boutiques during the quarter.
Lower sales in the last two quarters raised Francesca's’ inventory levels. The company was not able to clear the inventory and this delayed spring season full-price selling.
Comps, including direct-to-consumer sales decreased 7% in the quarter, as against an increase of 2% in the prior-year quarter, due to lower consumer traffic and lower transactions. The jewelry segment reported the steepest decline of 12% year over year during the quarter. However, apparel merchandise sales increased 14% backed by strong performance of the fashion tops, Kimono wraps, shorts, pants and maxi dress offerings.
Gross margin shrank 670 basis points (bps) to 46.6% year over year due to a 500 bps decrease in merchandise margin and 170 bps higher fixed occupancy costs. Operating margin shrank 980 bps to 17.1% due to 21% higher selling, general and administrative expenses compared with the previous year.
Fiscal Third-Quarter 2014 Outlook
Management plans to clear up the piling inventory in the upcoming quarter and expects net sales to range within $87 to $92 million in the third quarter compared with $79.6 million in the prior-year quarter. The guidance takes into consideration mid-to-low single-digit decline in comps during the quarter as against a decline of 3% in the previous year.
The company expects to open 13 boutiques in the quarter compared with 10 opened a year ago. Earnings per share are expected in the range of 17 to 22 cents for the third quarter compared with 20 cents in the prior-year quarter. The company plans to open 8 boutiques in fiscal 2014.
Fiscal 2014 Outlook
Management expects top line conditions to improve in the second half of fiscal 2014 and sales to accelerate during the later part of the year. For fiscal 2014, the company expects net sales in the range of $373 to $383 million. Earnings per share are expected in the range of 88 to 98 cents compared with $1.02 per share in fiscal 2013.
Other Stocks to Consider
Francesca's currently carries a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the shoes & relative apparel sector include Carter’s Inc. (CRI), Iconix Brand Group Inc. (ICON) and Rocky Brands Inc. (RCKY). All these stocks have a Zacks Rank #2 (Buy).
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