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Jonathan Poland
Jonathan Poland
Articles (199)  | Author's Website |

A Solid Women's Retail Trade

No stock is recession proof, but at 6 times forward earnings, Francesca's looks like a bargain

July 24, 2017 | About:

Since Francesca’s Holdings Corp. (NASDAQ:FRAN) opened its first store in Houston, Texas less than 20 years ago, it has grown to over 670 boutiques in 48 states. The company is known for upscale, fashion-forward women’s apparel and accessories with a consumer age range between 18 and 35 years old. The boutiques stock new merchandise every five days and turns over the inventory eight to nine times a year. By comparison, Lululemon Athletica Inc. (NASDAQ:LULU) turns over four times a year, Express Inc. (EXPR) turns over six times a year and H&M (OSTO:HMB) turns over at three times a year.

The retailer has seen significant financial growth since going public in 2011, increasing sales from $135 million to $489 million with EPS moving up to $1.03 from 41 cents. The company also spends just $21 million of its $39 million net income on capital expenditures, has super high returns on both assets and equity and has $48 million in cash with zero debt. As its financial performance grew stronger, however, the stock price was cut down more than 65%, from $27 to $9 and change.

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When a stock’s price-earnings multiple drops below 10, I start paying attention, especially when the underlying financials paint a picture of stability and potential long-term growth.

The company recently reduced its 2017 outlook by about 2% to project sales in the $518 million to $537 million range with EPS targeted for $1.07 to $1.17. This still represents an increase of 6% to 10% year over year, yet all retailers are scrambling to transition and adjust in the digital marketing age.

Francesca’s is on the slower end of fast fashion and offers considerably higher-quality products. All in all, the retail industry grew store counts extremely fast with cheap money over the last 10 to 15 years.

Social media

The company could do a lot better on social media. With less than a million total followers, it should start focusing on building its brand using influencer marketing.

Francesca’s social media presence:

  • Twitter: 15.9 thousand followers
  • Facebook: 338.9 thousand followers
  • Instagram: 290 thousand followers
  • Pinterest: 52 thousand followers

Social media is where 50% of consumer attention is going, and it is only getting more heavily geared in this direction. What makes America great is our open-mindedness to buy and try new products. Shopping will remain a big deal until all the Peter Schiff-style fears of currency collapse come to fruition, which could be some time from now.

Until then, following Mariko Gordon (TradesPortfolio)'s Daruma Capital, Joel Greenblatt (TradesPortfolio), Jim Simons (TradesPortfolio), PRIMECAP Management (TradesPortfolio), Paul Tudor Jones (TradesPortfolio) and Barrow, Hanley, Mewhinney & Strauss into Francesca's with a small stake could prove to be a wise move.

Of course, it is hard not to be greedy when others are fearful, especially when there is not a global crisis as a catalyst. Think of the internet as that catalyst for retailers - the compelling factor has changed the industry. The best retailers will not be out of business because people will still buy from them. These companies, however, must evolve. That means not just getting the product mix right or inventory ratios, but also knowing how to get the attention of buyers to drive profitable sales.

If Francesca’s can continue its upward progression financially, its stock price will rebound significantly in time. This is a company with a $346 million market cap that will generate $44 million net earnings this year on zero debt. If you were the sole owner of the company at $350 million, would you be unhappy with that kind of result? I seriously hope not.

Disclosure: I am not long or short any stock mentioned in this article.

About the author:

Jonathan Poland
Thanks for reading! Since 2001, I've spent over 40,000 hours analyzing and forecasting the world's leading investments, helping investors significantly outperform the S&P 500. A few key distinctions kept coming to my attention: (1) position management matters as much as what stock you buy; and (2) buying a company's stock based on the timeframe until payback is a winning framework for both the long-term and short term gains; and (3) leveraging long term cash positions to make short term risk arbitrage trades is a practice that many top money managers engage in.

Visit Jonathan Poland's Website


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