Francesca's Holdings Corp (FRAN) reported earnings of 20 cents per share in the third quarter of 2013, in line with the Zacks Consensus Estimate. Earnings were within management’s expectation of 19 cents to 21 cents. Earnings, however, fell 16.6% year over year due to soft comps and weak margins.
Revenues & Margins
The specialty retailer reported net sales of $79.6 million, beating the Zacks Consensus Estimate of $79 million. Sales went up 11% year over year and stayed within management’s expectation of $78.0 million to $80.0 million as boutique openings made up for the lower-than-expected comps during the quarter. Decent sales in accessories, apparel and jewelry were partially offset by decline in gift items sales.
Comps, including direct-to-consumer (DTC) sales, decreased 3% in the quarter as against a solid increase of 16.7% in the prior-year quarter due to lower consumer traffic and lower transactions. Excluding DTC sales, comps decreased 3% in the current quarter. Comps were also within management’s expectation of a decline of 2% to 5%.
Gross margin shrank 190 basis points (bps) to 50.7% due to lower merchandise margins caused by higher promotional spending. Operating margin shrank 630 bps to 18.3%.
Other Financial Updates
Francesca’s exited the third quarter of fiscal 2013 with cash and cash equivalents of $31.8 million compared with $39.5 million at the prior-quarter end. The company had $25 million of term debt at the end of the quarter compared to no debt at the end of the prior quarter.
Total inventories increased 30% over the prior-year quarter as a result of lower sales and increase in number of boutiques. Average inventory per boutique also went up 5% year over year.
Fiscal 2013 Outlook Slashed
Following sluggish results in Nov 2013 and a slow start to the the holiday season, Francesca’ reduced its guidance for fiscal 2013. The company now expects net sales in the range of $338.2 million to $343.2 million for fiscal 2013, compared with the prior range of $343.0 million to $349.5 million. Absence of strong trends in fashion tops, jewelry offerings and the gift assortment has been responsible for the lower comps for the past few quarters, and management expects the trend to continue during the fourth quarter of fiscal 2013.
Comps are expected to be down by 3% to 1% in fiscal 2013, lower than the previous expectation of flat to down 2%. Francesca’s also slashed its earnings outlook and now expects earnings per share in the range of $1.03 to $1.07 compared with the prior range of $1.10 to $1.16.
Fourth-Quarter Fiscal 2013 Outlook
Management expects net sales to range between $90 million and $95 million, up 9% to 15% over the prior-year period. Comps are expected to decline in the range of 3% to 8%, much weaker than10% increase in the fourth quarter of last year. The company expects to open five boutique stores in the quarter. Earnings per share are expected in the range of 25 cents to 29 cents for the fourth quarter, as against 33 cents in the comparable period the previous year.
Management believes that declining traffic trends will take a toll on the fourth quarter results and will eventually impact full-year 2013 results. The company has undertaken several initiatives to drive its performance such as strengthening visual presentations in boutiques and additional infrastructure improvements. However, these are expected to yield results over the long term. The company will also need to work on its inventory levels and channelize them properly.
Francesca's currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the shoes & relative apparel sector are Sequential Brands (SQBG), Iconix Brand Group Inc. (ICON) and Anta Sports Product Limited (ANPDF). All these stocks carry a Zacks Rank #2 (Buy).
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