Last July, I highlighted Francescas Holdings (FRAN, Financial), which at the time was trading around $9 a share. Today it’s just below $5, but again, this is when you dollar cost average to the downside.
The company has definitely not lived up to its sales projections during 2017, only managing $480 million during the last 12 months as the company posted two straight quarters of horrific same-store sales, and its stock has fallen by almost 50%. However, that hasn’t scared off all the big name investors.
While Joel Greenblatt (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have sold out of the stock, both Mariko Gordon (Trades, Portfolio) of Daruma Capital Management, Jim Simons (Trades, Portfolio) and Ken Griffin’s Citadel Advisors all have significant stakes in the stock, at 8.6%, 3.11% and 2.39%, respectively.
And, now that the market capitalization has dropped to $170 million, the company’s current sales and profit alone justify a higher value. However, all the analysts are mum with the last rating from FBR at Neutral with an $8 target. That was in September when the stock was north of $7.
Yet, Francescas’ continues to produce solid returns on equity, assets and invested capital. It’s profitable and growing on the top-line, and despite one year of declines, the long-term outlook remains. While the company is an apparel retailer, arguably the hardest segment of the industry, it generates $40 million in cash flow on $480 million in sales on zero debt with $19 million in cash. It’s fair to say, the company should survive this storm.
In the last year, it has also done a good job increasing its fan base across social media.
July 2017
Twitter: 15.9 thousand followers
Facebook: 338.9 thousand followers
Instagram: 290 thousand followers
Pinterest: 52 thousand followers
March 2018
Twitter: 18.3 thousand followers
Facebook: 396 thousand followers
Instagram: 343 thousand followers
Pinterest: 56 thousand followers
Comps in the industry would have Francescas valued in the 8 to 12 times cash flow range. For example, The Gap (GPS, Financial) trades at 8.9x cash flow, and while Francescas doesn’t have the same brand power, it’s grown at a faster rate in the last five years, with top line up 20% and book value up 43% annually.
Francescas is priced at 4.2x cash flow right now. This would be a great buyout for a smaller private equity firm. Of course, then it would come back to the public markets loaded with debt and sell for 11x cash flow to the public.
For now, investors that bought in at $9 can dollar cost average at $4.82 (12 p.m. EST) to get their cost basis down to roughly $6.30. However, this trade only works if Francescas’s stock rebounds, which considering what I’ve just laid out, I believe it can - only time will tell.
Disclosure: I am long FRAN.
