NEW YORK (TheStreet) - Francesca's Holdings (FRAN - Get Report) surged as much as 7% on Wednesday before retreating after the retailer tempered Wall Street's expectations for its fourth quarter financial results.
Given the continued "challenging retail environment and aggressive promotional activity throughout the holiday season, in addition to the expectation that our apparel business will remain challenged," Francesca's warned during its third-quarter earnings report, that it may take "aggressive markdowns" in the current quarter to clear excess inventory.
The markdowns would result in gross profit margin to decline between 475-525 basis points.
The Houston-based chain now expects fourth quarter EPS between 13-19 cents a share, compared to 27 cents a share expected by analysts, due to the margin declines combined with expectations of same-store sales declines between 5-10% in the quarter.
Francesca's reported third-quarter net income of $7.3 million, or 17 cents a share, down from $8.7 million, or 20 cents a share. Third-quarter net sales rose 9% to $87.1 million, despite same-store sales decreasing 6% in the quarter at the Houston-based chain.
Shares of Francesca's are up more than 30% since last Thursday - the day before the specialty retailer announced that CEO Neill Davis had resigned and that Michael Barnes, formerly the chief executive of Signet Jewelers (SIG - Get Report) was stepping in to replace him.
The stock was trading up 1% to $15.21 at last check. Here's what analysts said.
Randal Konik, Jefferies (Buy; $19 PT)
We like the management change here and that we are starting to get quarters that don't miss expectations, which signals to us better visibility on business trends. A softer than expected outlook for the balance of the year is not a surprise given the CEO transition. Looking ahead, we anticipate fundamentals will start to base out and get better into 2015 as new leadership improves operations and merchandise initiatives take hold. Maintain Buy rating, $19 PT. Product is key and we think FRAN's is getting better.
3Q earnings results highlight small victories in key focus areas of Francesca's product assortment, particularly in jewelry and gifts, though apparel and accessories fell a bit short of expectations. Traffic remains a concern, but we believe changes being made to the product assortment, compounded by improvements in visual merchandising and store presentation under the direction of a new head of stores, should improve conversions and ultimately return the company to positive SSS territory. Easy compares provide an additional tailwind into FY'16.
Richard Jaffe, Stifel (Hold)
Francesca's Holdings Corp. reported 3Q EPS of $0.17 (at the low end of its initial guidance range of $0.17-$0.22), in-line with our recently updated estimate and consensus, representing a 13% decrease from EPS of $0.20 LY. Comp store sales including direct decreased 6% versus (3)% LY. On December 5, the company announced that Michael Barnes was named the new CEO. We believe that change is good for the company, given the weak results since 3Q LY and that Barnes, with his strong background in the industry and proven track record, can help improve the business longer term. However, near term, we believe the outlook is uncertain, so the challenge for us is timing and valuation. Therefore, we reiterate our Hold rating as we believe reward potential is limited near term, and risk, given the current fashion, merchandising, and retail consumer challenges, remains significant.
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 good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and a generally disappointing performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 8.9%. Since the same quarter one year prior, revenues slightly increased by 8.7%. 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 0.05 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 1.70, which demonstrates the ability of the company to cover short-term liquidity needs.
- 49.92% is the gross profit margin for FRANCESCAS HOLDINGS CORP which we consider to be strong. 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 10.59% compares favorably to the industry average.
- FRANCESCAS HOLDINGS CORP's earnings per share declined by 27.3% in the most recent quarter compared to the same quarter a year ago. Earnings per share have declined over the last year. We anticipate that this should continue in the coming year. During the past fiscal year, FRANCESCAS HOLDINGS CORP reported lower earnings of $1.02 versus $1.05 in the prior year. For the next year, the market is expecting a contraction of 9.8% in earnings ($0.92 versus $1.02).
- 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 significantly decreased by 29.5% when compared to the same quarter one year ago, falling from $14.62 million to $10.31 million.
- You can view the full analysis from the report here: FRAN Ratings Report