There are several stocks with huge potential that investors might miss, and Francesca’s Holdings Corp. (FRAN, Financial) is one of them. It posted excellent quarterly results including a 15.17% increase in net sales. Net sales for the first nine months increased 11.83%. During the quarter, Francesca's opened 18 boutiques and closed one boutique, totalling 669 at the end of the quarter.
Francesca's is a specialty retailer that operates a nationwide chain of boutiques. The company operates 674 boutiques in 48 states and the District of Columbia and also serves its customers online. Further, Francesca's has significant presence in California, Texas and Florida. Approximately 80% and 76% of the company’s mall and nonmall boutiques are in A/B locations.
Francesca's provides an array of apparel, jewelry, accessories and gifts for its customers. The company’s core targeted customers are fashion-conscious women between 18 and 35. Secondary targeted customers include girls between 12 and 17 and mothers older than 35 .
Strong third-quarter results
On Dec. 6, 2016, the Houston-based company reported its financial results for the third quarter ended Oct. 29. Net sales increased 15.17% to $119.47 million compared to $103.73 million for the comparable prior-year period. Sales of apparel, jewelry, accessories and gifts increased 17.67%, 22.95%, 2.05% and 7.28% to $63.93 million, $26.14 million, $17.43 million and $11.64 million.
Gross profit for the reported quarter increased 19.14% to $57.63 million compared to $48.37 million in the prior-year period. The gross profit margin increased to 48.24% from 46.63% in the same period last year.
Francesca's operating income increased 42.15% to $15.75 million compared to $11.08 million in the year-ago quarter. Operating income as a percentage of net sales increased 13.18% from 10.68% in the same period last year. Net income increased 39.42% to $9.69 million, or 26 cents per diluted share, compared to $6.95 million, or 16 cents per diluted share for the comparable prior-year period. Net income as a percentage of net sales increased 8.11% from 6.7% in the prior-year period. The company’s EBITDA increased 42.48% to $42.82 million, compared to $11.11 million for the comparable prior-year period.
Francesca's cost of goods sold increased 11.7% to $106.3 million compared to $61.84 million. On the other hand, the cost of goods sold as a percentage of net sales decreased to 51.76% from 53.37% in the prior-year period. Selling, general and administrative expenses and net interest expense for the reported quarter increased 12.28% to $41.87 million and 8.33% to $130,000 compared to $37.29 million and $120,000 in the same period last year.
Francesca's ended the quarter with cash and cash equivalents of $24.72 million, a decrease of 56.03% compared to $56.22 million in January 2016. Inventories and total current liabilities for the reported quarter increased 35.6% to $42.77 million and 8.32% to $33.18 million, compared to $31.54 million and $30.63 million in January 2016.
Attributes of the quarter
Net sales increased primarily due to an increase in the number of transactions both at boutiques and online. Increase in merchandise margin is the main reason behind the increase in gross profit. Selling, general and administrative expenses increased chiefly due to higher boutique and corporate payroll, professional fees, software costs and depreciation compared to the prior-year quarter.
Share repurchase
During the reported quarter, Francesca's repurchased 263 million shares for $4.2 million, and the total number of shares repurchased to date is 3.51 billion.
First nine months results overview
The following chart shows Francesca's financial results for first nine months of 2016.
| Metrics | Nine months ended October 2016 | Nine months ended October 2015 | % change |
| Net sales | $340.84 million | $304.77 million | 11.83% |
| Gross profit | $160.69 million | $143.57 million | 11.92% |
| Operating income | $44.34 million | $38.14 million | 16.25% |
| Net income | $27.37 million | $23.5 million | 16.47% |
| EBITDA | $44.46 million | $38.05 million | 16.85% |
| Cost of goods sold | $180.15 million | $161.2 million | 11.75% |
| Selling, general and administrative expenses | $116.35 million | $105.42 million | 10.37% |
| Net interest expense | $350,000 | $340,000 | 2.94% |
| Net cash provided by operating activities | $35.47 million | $30.37 million | 16.79% |
Projections
Francesca's updated its guidance; for the upcoming fourth quarter, the company expects its net sales in the range of $144 million to $146 million and comparable store sales will either decrease or increase by 1%. The company expects diluted EPS in the range of 35 cents to 37 cents. Additionally, Francesca's plans to open five new boutiques and close three boutiques in the fourth quarter.
For fiscal 2016, the company expects its net sales and diluted EPS in the range of $484 million to $489 million and $1.05 to $1.07. Capital expenditures are projected in the range of $25 million to $28 million. The company plans to open 64 new boutiques and close nine boutiques in fiscal 2016.
Strategy
Francesca's long-term plans are:
- The company is improving its inventory management by increasing the flow of newness and providing compelling value.
- To attract more and more customers, Francesca's is updating its boutique count. Further, the company plans to remodel 10% and 15% of its existing boutiques annually starting in 2018.
- Francesca's is focusing on training and development and is creating a high-touch service environment.
- The company is increasing its marketing investment from less than 1% to approximately 3% of sales over five years.
- Francesca's is growing its e-commerce penetration and optimizing its boutique allocation process.
Management
On Sept. 20, 2016, Francesca's appointed Steven P. Lawrence president and CEO. Lawrence’s 26 years of retail experience will help Francesca's create a niche in the specialty retailer arena.
On a concluding note
Overall, Francesca's is a rock-solid company with a strong balance sheet, remarkable white space opportunity, flexible process improvement and refinement and an experienced management team. It is poised to deliver greater shareholder returns.
Disclosure: I do not hold any position in the company.
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