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Francesca's Slips to Strong Sell on Poor Q1, Bleak Outlook

Zacks Equity Research

Zacks Investment Research downgraded Francesca’s Holdings Corp. (FRAN) to a Zacks Rank #5 (Strong Sell) on Jun 13, 2014 after the company reported poor first-quarter fiscal 2014 results.

Why the Downgrade?

Francesca’s witnessed sharp downward estimate revisions after reporting disappointing results on Jun 10.

This specialty retailer reported earnings of 20 cents per share in the first quarter, missing the Zacks Consensus Estimate and declining from the prior-year quarter earnings by 9.1% and 16.7%, respectively. The primary reason behind the weakness was lower sales in the company’s boutiques.

Francesca’s’ net sales of $85.4 million missed the Zacks Consensus Estimate by 2.9% and were at the lower end of management’s expectation of $85.0 to $90.0 million. The lower-than-expected sales resulted from lower comps in the company’s stores as 360 boutiques were full/partially closed during February due to extreme weather conditions.

Comps, including direct-to-consumer sales, decreased 7% in the quarter as against an increase of 2.0% in the prior-year quarter due to lower consumer traffic and lower transactions. Inclement weather in February that resulted in frequent store closures throughout a large number of Southern, Northeast and Central regions, particularly in the Gulf Coast, Mid-Atlantic, Northeast, and New England areas impacted comps by 200 basis points (bps).

Moreover, lower sales for the first three months of calendar year 2014 resulted in high level of inventory in the stores. As a result, stores were unable to offer fresh stocks to customers, thereby affecting transactions.

Weak Outlook for Second Quarter

Lower sales in the last two quarters raised Francesca’s’ inventory levels. The company was unable to clear the inventory in turn delaying spring season full-price selling.

Management plans to clear up the piling inventory in the second quarter and expects net sales to range within $98 to $103 million. Comps are expected to decline in a mid-to-single digit range in the quarter versus worse than a shortfall of 1% in the comparable quarter last year.

Most of analysts also revised their estimates downward in the last seven days after weak first quarter fiscal 2014 results. As a result Zacks Consensus Estimate for fiscal second quarter fiscal 2014 slipped 25% to 27 cents.

Other Stocks to Consider

Better-ranked stocks in the shoes and retail apparel sector include Carters Inc. (CRI), Iconix Brand Group Inc. (ICON) and Rocky Brands Inc. (RCKY). All these stocks sport a Zacks Rank #2 (Buy).

Read the Full Research Report on ICON
Read the Full Research Report on FRAN
Read the Full Research Report on RCKY
Read the Full Research Report on CRI

Zacks Investment Research