Francesca Posts Weak Q2 Earnings, Cuts View

Zacks

Francesca's Holdings Corp (FRAN) reported earnings of 33 cents per share in the second quarter of 2013, missing the Zacks Consensus Estimate of 35 cents by 5.7%. Reported earnings were also management’s expectation of 35 cents to 36 cents due to soft sales and weak margins.  Earnings of this specialty retailer, however, grew 18% year over year.

Francesca's reported net sales of $89.6 million, missing the Zacks Consensus Estimate of $94 by 4.7%. Sales were also below management’s expectation of $94.5 million to $95.5 million due to lower-than-expected comparable sales growth (comps). Sales, however, increased 17.0% year over year. Francesca’s jewelry business did well during the quarter but was offset by weakness in the gifts category. 

Comps, including direct-to-consumer (:DTC) sales, decreased 1% in the second quarter as against a solid increase of 21% in the prior-year quarter due to lower consumer traffic, lower transactions and the lack of fashionable apparels. Excluding direct-to-consumer sales, comps decreased 3% in the current quarter.

Comps were also below management’s expectation of an increase of 1% to 2% for the quarter. Gross margin shrank 150 basis points (bps) to 53.3% due to lower merchandise margins caused by higher promotional spending.

Other Financial Updates

Francesca exited the second quarter of fiscal 2013 with cash and cash equivalents of $39.5 million compared with $7.3 million at the prior-quarter end. The company had no long-term debt at the end of the quarter.

Total inventories increased 32% over the prior year quarter as a result of lower sales in the second half of the quarter. For the third quarter of 2013, Francesca has plans to reduce inventory purchases and better align inventory to future sales.

The company’s board has also authorized a new share repurchase program of $100 million in the quarter.

Fiscal 2013 Outlook Slashed

Following sluggish results, the company has reduced its guidance for fiscal 2013. Francesca now expects net sales in the range of $343.0 million to $349.5 million for fiscal 2013, compared with the prior range of $365.0 million to $370.0 million.

Comps are expected to be flat to down 2% in fiscal 2013, lower than the previous expectation of 4% to 5%. Francesca also slashed its earnings outlook and now expects earnings per share in the range of $1.10 to $1.16 per share compared with the prior range of $1.27 to $1.30 per share.

Third Quarter Fiscal 2013 Outlook

In the third quarter, Francesca's expects net sales to range between $78.0 million and $80.0 million. Comps are expected to decline in the range of 2% to 5%. The company expects to open 11 new boutique stores in the quarter. Earnings per share are expected in the range of 19 cents to 21 cents for the third quarter.

Management believes that decline in traffic trends will take a toll on the third quarter and will eventually impact full year 2013 results. Though the company has taken initiatives to drive the company’s performance, these are expected to reap fruits over the long term. These initiatives include leveraging the DTC channel, strengthening visual presentations in boutiques and additional infrastructure improvements. The company will also need to work on its inventory levels and channelize them properly.

Francesca's currently carries a Zacks Rank #4 (Sell). Other stocks in the consumer discretionary sector that are worth considering are Skechers USA Inc (SKX), Iconix Brand Group Inc. (ICON) and Brown Shoe Company Inc. (BWS). While Skechers holds a Zacks Rank #1 (Strong Buy), Iconix and Brown Shoe hold a Zacks Rank #2 (Buy).

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Read the Full Research Report on SKX

Read the Full Research Report on ICON

Read the Full Research Report on BWS

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