Francesca Sales & Earnings Miss, Outlook Bleak

Zacks

Francesca's Holdings Corp.’s (FRAN) earnings of 27 cents per share in the fourth quarter of 2013 missed the Zacks Consensus Estimate of 28 cents by a penny. It also fell 22.2% year over year due to soft comps and weak margins.

Results were at lower end of management’s expectation of 27 to 29 cents. Frequent shutdown of boutiques due to bad weather conditions in the last month of the quarter led to the lower-than-expected results.

Revenues & Margins

The specialty retailer reported net sales of $92.1 million, missing the Zacks Consensus Estimate of $94 million as well as management’s expectation of $93.0 to $95.0 million. The lower than expected sales was the result of 370 full and partial daily boutique closings during January due to the extreme weather conditions. However sales grew 6.2% from year ago level.

Comps, including direct-to-consumer (:DTC) sales, decreased 6% in the quarter as against a solid increase of 10.0% in the prior-year quarter due to lower consumer traffic and lower transactions.

Gross margin shrank 280 basis points (bps) to 50.6% lower merchandise margins caused by deleverage of occupancy cost. Operating margin shrank 800 bps to 20.5% due to weak gross margins higher payroll expenses and infrastructure expenses.

Fiscal Results

For fiscal 2013, earnings of $1.05 per share missed the Zacks Consensus Estimate of $1.06 by a penny and year ago results by 1.0% year over year due to soft comps and weak margins. However earnings were within management’s expectation of $1.03 to $1.07. Net sales of $340.3 million, missed the Zacks Consensus Estimate of $344 million. Sales went up 15.0% year over year and stayed within management’s expectation of $338.2 to $343.2 million.

Fiscal First-Quarter 2014 Outlook

Francesca has provided a conservative outlook for first quarter fiscal 2014 as it expects business headwinds to continue in the first quarter of fiscal 2014.

Lower sales in the fourth quarter of 2013 have raised the company’s inventory levels. The company was not able to clear the inventory and this resulted in delay of spring season full price selling. Management expects net sales to range between $85 million and $90 million in the first quarter. The company expects to open 60 boutique stores in the quarter compared with 56 opened a year ago. Earnings per share are expected in the range of 20 to 24 cents for the first quarter.

Fiscal 2014 Outlook

Management expects conditions to improve in the second half of fiscal 2014 and sales to accelerate during he later part of the year. For fiscal 2014, the company expects net sales in the range of $391 to $409 million. Earnings per share are expected in the range of $1.16 to $1.31 compared with prior-year earnings of $1.05.

However we feel absence of strong trends in fashion tops, jewelry offerings and the gift assortment affected comps for the past few quarters.

Other Financial Updates

Francesca’s exited the third quarter of fiscal 2013 with cash and cash equivalents of $37.5 million compared with $$31.8 million at the prior-quarter end. The company’s term debt remained flat with the prior quarter at $25 million.

Francesca's currently carries a Zacks Rank #3 (Hold). Other stocks in the shoes & relative apparel sector are Brown Shoe Company Inc. (BWS), Iconix Brand Group Inc. (ICON) and Skechers U.S.A Inc. (SKX). All these stocks carry a Zacks Rank #2 (Buy).

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