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Cheap Price Makes Francesca's Holdings a Good Asset

- By shadowstock

Francesca's Holdings (FRAN) operates a nationwide chain of boutiques with a unique, diverse mix of apparel, jewelry, accessories and gifts. The company has 738 boutiques in 47 states with e-commerce.

Francesca is high risk! But, the price trades as if it's a going concern over the next six to 12 months. Francesca's Holdings is a cheap option for a year or so for the bear case, but it leans toward the bull case as a low probability turnaround.


Third quarter results (reported Dec. 11, 2018) showed a net loss of $16.2 million, or 47 cents diluted loss per share. The loss excluding noncash impairment charges was $6 million or 17 cents per share.

The non-apparel merchandise (jewelry, gifts, accessories) makes up 50% of sales, up 1% compared to the three quarters of the prior-year ending in November 2017. Yet, apparel declined 14% over the same three-quarter period. Management recognized that the clothing business remains the biggest challenge, so Francesca's is moving fast to ramp up changes and has seen positive customer response.

The current focus is on expense control, strong balance sheet, real estate portfolio and slow new-store growth. One strategy offered on the conference call was to close 30 to 40 stores versus opening or relocating around 10 new boutiques in fiscal year 2019. On a positive note, store remodels in 2018 outperformed but were put on pause. Projected capex for 2019 is $10 million versus $30 million in 2018.

The immediate goal is to improve the business as fast as possible through marketing adjustments, expense reduction, apparel merchandise refinements and real estate optimization. Impaired boutiques are 129, with 106 having a lease end over the next three years.

Closed stores during 2019 reduce fixed boutique costs. But this is coupled with the recapture of the sales in the remaining boutiques. The plan is to close 11 existing boutiques in January 2019. A total of 81 refreshed boutiques during 2018 continue to outperform, but the program is pausing for 2019 until business stabilizes. January has been a seasonal clearance month and will speed up markdowns. Another positive cash impact for 2019 is capital expenditures forecasted at $10 million and focused on e-commerce versus store enhancements during 2018 at $30 million.

Current valuation

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There was positive insider activity for 2018, with only buys and no sales. Insider shares purchased for 2018 were 47,000 for $230,950 or an average price of $4.91 per share.

Value institutional ownership all added shares for the most recent reported quarter ending Sept. 30.

Paradigm Capital (6.76%), Vanguard (6.15%), Chuck Royce (Trades, Portfolio) (4.81%), AQR Capital (3.20%), Hotchkis (2.25%) and Parametric (1.28%)

Relative valuation: Francesca's has the lowest valuation in the industry for price-BV, EV-sales and book value growth. It also has the best cash conversion, which doesn't reconcile with the industry's weakest stock performance.

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Data in the above table is taken from GuruFocus.

Risk and opportunity

Risk:

The risk is clear with little room for error: closing of impaired stores, 14% year-over-year decline in its largest merchandise category apparel, a troubling quick ratio and a growing large short position. It also has a low $10 million cash balance with $50 million in accrued expense and negative cash flow.

Opportunity:

The current price discounts the operational and financial uncertainty. Francesca's is in an industry outperforming for historical profits and free cash flow. It is unlikely to disappear because of the soft mall traffic. The $38 million credit line, A/R from taxes, year-end inventory clearance, store closings and other changes give investors a possible asymmetric payoff.

Disclosure: Long Francesca's.

This article first appeared on GuruFocus.