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.
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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) 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.
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