Francesca's Holdings (FRAN) is a specialty retailer with 671 boutiques in 48 states. E-commerce reports 7% of sales. Revenue by product is broken down as follows: Apparel 49%, jewelry 23%, accessories 15% and gifts 13%.
More specifically:
- Apparel 49% (dresses, fashion tops, sweaters, cardigans and wraps, bottoms, outerwear and jackets, tees and tanks, intimates).
- Jewelry 23% (necklaces, earrings, bracelets, rings).
- Accessories 15% (handbags, clutches, wallets, shoes, belts, hats, scarves, sunglasses, watches, hair accessories).
- Gifts 13% (fragrance, candles, bath and body, home accessories, books, wall art, nail polish, miscellaneous items).
I view Francesca's Holdings as low to medium risk. Today's price below $7 per share offers a potential one- to two-year high double-digit stock return. The risk is not in Francesca's Holdings' financial statements but instead its niche strategy that's contingent on successful implementation of its merchandise.
The boutiques are designed without deep low-cost inventory and instead try to offer a treasure hunt experience. The shallow inventory creates a must-buy-now experience for its core 18-to-35 female demographic.
That being said, Francesca's has enviable financial results compared to its industry competitors, historical valuations and intrinsic value. So with the A-plus financial strength, a few quarters of missed results are unlikely to have a large negative impact on the stock price. But its long-term success is 100% contingent on re-creating its treasure hunt moat.
This post is not on its inventory strategy or qualitative analysis. But instead share the financial discounts that create a margin of safety and offer a value trading opportunity.
Risks
- New CEO Steve Lawrence's inability to re-create its treasure hunt moat. This uncertain merchandise strategy is required to revert at or near its 52-week high of $22.39.
- Hurricane Harvey's direct hit in Houston. Francesca's corporate headquarters, e-commerce fulfillment, distribution center, 40 boutiques and employees in or around Houston. The storm's full impact not quantified. Irma affected the Florida locations. This quarter presents challenges, but the current stock price likely factors these events.
- Negative same-store comparisons, the revolving senior management team that has been struggling for several years. It must fix the treasure hunt moat. It can't continue to buy back shares.
- Shares short was 6.28 million or 19.57% of float on Aug. 31, 4.68 million on Sept. 29. A high short position coupled with recent negative brokerage sentiment continues to weigh on the stock price trading near its 52-week low.
Opportunities
Francesca's return is -57.80% over the TTM, three years annualized is -18.28%, five years annualized is -25.02%. The sickly stock returns are in direct contrast with the strong financial position, zero debt, consistently growing double-digit sales, deep historical and relative valuation discount. The discounted stable FCF indicates an intrinsic value greater than the current price.
Historical valuation deep discount
Income Statement
Revenue, Gross Profit:
Operating Income, EBIT, EBITDA:
Balance Sheet
Cash Flow
ROIC
Relative Valuation Deep Discount:
Intrinsic Value:
There were only 4 other Apparel Industry peers that had an enterprise value less than the discounted FCF. I took the annual prior 5 year average FCF. Then discounted that average annual FCF using an 8% rate for 10 years. Francesca's Holdings (FRAN, Financial) and 4 more passed this simple discount to intrinsic value test. The other 4 were CATO, EXPR, BKE and CHS.
Catalyst: Continued profitable growth above the cost of capital with share buybacks. Stable same store sales comparisons, steady margins, and investor confidence in new leadership. Financial evidence of an improved merchandise strategy.
Long: FRAN
