NEW YORK (TheStreet) - Francesca's Holdings (FRAN - Get Report) is suffering from the same ailments as other mall-based retailers catering to the teen space, namely that of declining store traffic, a slow execution of e-commerce initiatives and merchandise that customers that can find elsewhere, and at a lower cost.
On Tuesday, shares of the accessories retailer slumped 4.2% to $13.38 following disappointing quarterly results and a sluggish outlook for the remainder of 2014. Despite Francesca's second-quarter net sales rising 9% to $97.3 million, the figure was short of consensus estimates of $99.79 million, as comparable sales decreased 7%. The company reported net income of $10.3 million, or 24 cents a share, down from $14.6 million, or 33 cents a share, in the year-earlier quarter. Earnings also fell short of expectations calling for EPS of 26 cents.
Francesca's management forecast that "a mid- to low-single digit decrease in comparable sales" for the third quarter and the same decline in comps for the full year. Third-quarter earnings per share were forecast between 17 cents and 22 cents a share, below expectations of 24 cents a share. For the full year, Francesca's expects an EPS range between 88 cents and 98 cents a share compared to estimates of $1.03 a share, according to Thomson Reuters.
As shares fell, volume traded on Francesca's shares was more than triple the average daily trading volume of 1 million shares. Here's what analysts said about Francesca's.
Randal Konik, Jefferies (Buy; $19 PT)
In 2Q, FRAN saw tough sales and a miss to earnings, compounded by a poor outlook for 2H. However, we see green shoots beginning to appear as non-jewelry categories improve and jewelry trends are better post 2Q. With what looks like the kitchen sink thrown at the go-forward guidance, we believe shares are now ripe to buy. We are taking down our PT modestly from $21 to $19. Maintain Buy.
We are lowering our Q3 EPS estimate for FRAN by $0.07 to $0.17, versus prior consensus of $0.25. Our forecast calls for a SSS decline of 5% on top of -3%. We had previously anticipated a 1% gain as the company began to lap easier yr./yr. comparisons. FRAN indicated improving sales trends in jewelry (21% of total sales) at the end of Q2, but the category remains the weakest link, and SSS declines should persist in H2. We are reducing our gross margin estimate by 290bps to reflect an ongoing elevated promotional environment, a lower mix of high-margin jewelry, and occupancy deleverage. Our SG&A expense rate forecast moves 170bps higher on the lower sales. Our BUY rating is predicated on sustained double-digit EBIT margins and above-average square footage growth. At roughly 14x our lowered 2015E EPS estimate of $0.94, we think Francesca's should suit value investors.
Richard Jaffe, Stifel (Hold)
While we remain positive on FRAN's long-term prospects for growth given its visible square footage expansion, e-commerce roll-out and possible leverage on operating expense, at the current share price, with inflated inventory levels and weak store traffic, we are comfortable waiting to see how the quarter plays out. We believe that the reward potential is limited near term, and risk, given the current fashion, merchandising and retail consumer challenges, remains significant.
The depressed traffic levels and the resultant decline in impulse buying, evident throughout the mall has hurt FRAN. This has led to an increase in promotional activity which is reflected in management's more conservative outlook for 2H. While we believe FRAN's business model will prove to be effective longer term, the challenge for us is timing and valuation. With decelerating growth, with an operating model that has shown itself vulnerable to the vagaries of fashion and a business that appears to be increasingly challenged (as it grows) to source the right quantity of the right product at the right price, the recent P/E multiple correction seems appropriate.
TheStreet Ratings team rates FRANCESCAS HOLDINGS CORP as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:
"We rate FRANCESCAS HOLDINGS CORP (FRAN) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, weak operating cash flow and a generally disappointing performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- FRAN's revenue growth has slightly outpaced the industry average of 0.3%. Since the same quarter one year prior, revenues slightly increased by 8.1%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- FRAN's debt-to-equity ratio is very low at 0.18 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, FRAN has a quick ratio of 1.87, which demonstrates the ability of the company to cover short-term liquidity needs.
- The gross profit margin for FRANCESCAS HOLDINGS CORP is rather high; currently it is at 52.46%. Regardless of FRAN's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, FRAN's net profit margin of 10.02% compares favorably to the industry average.
- Net operating cash flow has decreased to $9.71 million or 19.67% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Specialty Retail industry. The net income has decreased by 21.7% when compared to the same quarter one year ago, dropping from $10.94 million to $8.56 million.
- You can view the full analysis from the report here: FRAN Ratings Report
--Written by Laurie Kulikowski in New York.