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Francesca’s Holdings Corporation (NASDAQ:FRAN)

Q4 2012 Earnings Conference Call

March 19, 2013; 04:30 p.m. ET

Executives

Neill Davis - Chief Executive Officer

Mark Vendetti - Chief Financial Officer

Theresa Backes - President & Chief Operating Officer

Randi Sonenshein - Vice President of Finance & Investor Relations

Analysts

Brian Senzack - Janney Capital Markets

Janet Kloppenburg - JJK Research

Howard Tubin - RBC Capital Markets

Lindsay Drucker Mann - Goldman Sachs

Laura Champine - Canaccord

Edward Yruma - KeyBanc Capital

Randal Konik - Jefferies

Jennifer Davis - Lazard Capital Markets

Liz Dunn - Macquarie Capital

Betty Chen - Wedbush Securities

John Kernan - Cowen

Brian Tunick - JP Morgan

Richard Jaffe - Stifel Nicolaus

Mark Montagna - Avondale Partners

Operator

Please stand by. Good day ladies and gentlemen. Thank you for standing by. Welcome to the Francesca’s Holdings Corporation, fourth quarter fiscal 2012 earnings conference call.

As a reminder today’s conference is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

I would now like to turn the conference over to Ms. Randi Sonenshein, Vice President of Finance and Investor Relations. Please go ahead.

Randi Sonenshein

Good afternoon and welcome to the FRAN, fourth quarter fiscal 2013 conference call. Earlier this afternoon the company issued a press release outlined in the finance and operating results for the 14-week period ending February 2, 2013.

The following discussions may include forward-looking statements. Please note that actually results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company’s filing with the Securities and Exchange Commission.

We will begin today’s call with Neill Davis, our Chief Executive Officer, who will comment on our strategic initiatives. Mark Vendetti, our Chief Financial Officer will then provide financial highlights for the fourth quarter, as well as details of our financial outlook for the first quarter and fiscal year 2013. Included on the call is Theresa Backes, President and Chief Operating Officer.

Following prepared remarks we will be pleased to address your questions. As usual, the text of today’s conference call along with the detailed management commentary will be posted to our corporate website at www.francescas.com.

I’ll now turn the call over to Neill.

Neill Davis

Thanks Randi and good afternoon everyone. I want to take advantage of the time we have with you today to accomplish three things. The first is to sharpen our communication surrounding the uniqueness of our business model that has consistently delivered above average and expected results.

Secondly, I want to share with you our plans for driving future growth and the progress we have made and are marking in the lesser-developed part of our business, the direct to consumer channel.

Finally, our new CFO, Mark Vendetti will walk you through the specifics of this past quarter’s performance and key elements of our financial expectations for fiscal 2013. So lets get started.

Francesca's differentiated business has consistently delivered results for customers and shareholders alike. During fiscal 2012 that translated into a 45% sales growth rate, driven by new boutique growth, but also meaningfully grounded with double digit increases and comparable boutique sales, significant cost leverage with operating margins now in excess of 25% and lastly significant flow through of that productivity to free cash flow. Our fourth quarter in fiscal 2012 produced similar financial characteristics and once again exceeded or initial exceptions.

At the core of these results is our emotional connection with our customer, which gives us the ability to quickly and effectively adjust to her changing needs and interest. That insight guides our growth strategies and drives our investment decision.

As you know, we offer a broad range of merchandise, from apparel to jewelry to accessories and gifts, with daily deliveries of one time items sent in limited quantities. This strategy satisfies our costumers’ interest in newness and novelty and appeals to her desire to be unique.

Our fashions follow established trends and are offered at a compelling value at price points for apparel generally below $50 and non-apparel below $25. Our customer can always find something she likes at Francesca's at great value. It is these strategies that are the fundamental drives to our business model.

As we consider future strategy to drive continued boutique productivity, talent and technology investments are top priorities. In 2013 we are investing in our merchandizing organization under the continued leadership with Sei Jin Alt. We are also expanding our technology team in order to drive greater productivity of our enterprise merchandizing and point of sale solutions.

Sei Jin Alt has led our merchandizing teams since joining Francesca's in June 2010 and has provided a creative vision and developed organizational structure and disciplines to grow our merchandizing operations to 900 locations. I am very pleased with the creative insight of our margins, which has and continue to impact productivity.

As an example, over the last years our merchants have been developing a portfolio of sub-brand product labels that were uniquely aligned with a variety of our customer lifestyles and will be assorted to across the range of our product offerings. We feel that these offerings will resonate with our customers and further our competitive positioning.

Boutique shopping is a special experience. It is almost always social and is often a part of a larger activity. She shops boutiques for things she can’t get anywhere else. Customers foresee Francesca's as a favorite boutique and are often surprised to discover multiple locations.

Our real-estate strategy is based on a small store format of approximately 1,200 to 1,400 square feet. That footprint allows for market positioning and a wide variety of venues, both geographic and property types that best matches her activities and engage here within her shopping circuit.

We have been successful in growing our physical presences to 360 boutiques this past year, our opening 80 boutiques this year, all of which are under executed leases and targeted to open over the first half of the year. In addition we have already identified 30 boutiques for fiscal 2014 openings. The runway in terms of future sites is clear and open and that we are confident of achieving our stated goal of 900 boutiques in the Untied States for a total of approximately 1.2 million square feet.

Turning to our direct to consumer initiatives, first I would like to say that the essence of our brand results from a collection of individual experiences that are attached to our physical boutique presence, the small format boutique. As our business grows, I believe there is room to grow the brand to meet new customer demands, to strengthen our value proposition, sharpen differentiation and to support our efforts in channels outside of the boutique.

The underlying objective within the digital space is to become a discovery experience, by leveraging the aspirational attributes of the boutique model. We envision a successful digital altering that creates a fun shopping experience, creates emotional connections with the brand, gives her a reason to keep coming back, it’s an experience worth sharing with friends and drive site traffic and ultimately sales.

In previous discussions concerning our DTC business, I made reference to what I believe to be a very undeveloped business at Francesca’s, specifically a sub 2% of penetration and below average conversion rates. I am here to tell you that I’m pleased with our progress since that time and now believe we are moving towards a best in class level of performance that we achieved in our brick and mortar presence.

However this is a multi year process and we are moving deliberately to maximize our current online performance, as well as develop our teams and infrastructure. We have been making a series of progressive changes to our existing presence to drive an easier and cleaner experience, as well as expending our style assortment. We are targeting a first phase re-launch in the first quarter of this year that should improve design and core functionality.

In the fourth quarter of fiscal 2012, our DTC business was up 55% over the prior year. Although we do not include our DTC business in comparable boutique sales growth rates as many other companies do, had we done so in the fourth quarter our comparable boutique sales growth rate would have been lifted by 100 basis points. I am seeing the business strengthen as we move into the first quarter of 2013 and I’m encouraged with continued meaningful increases and contributions to our overall business, which I expect to be accretive to our brick and mortar based business.

Let me now turn your attention to the financial details, our recent results and forward guidance and turn the call over to Mark. Mark has been onboard since March 4 and I’m extremely pleased to have him as a part of Francesca’s team. Welcome Mark and thanks.

Mark Vendetti

Thanks Neill and good afternoon everyone. The driver of Francesca’s strength and consistency of results is a differentiated and powerful business model. It is one of the key reasons I elected to join Neill and the team at Francesca’s.

As Neill outlined for you, our strategic growth plan positions us to leverage the boutique experience across brick and mortar formats and digital platforms. We have a great foundation and I look forward to being part of the team and contributing to its future success; and now to the financial details.

Total company net sales for the 14-week quarter increased by 41% to $86.7 million. This increase was driven by a $19.5 million increase in non-comparable boutique sales, which includes 77 new boutiques opened since the end of the fourth quarter of fiscal 2011, combined with comparable boutique sales growth of $5.5 million, which is a 9.2% increase over the prior year quarter’s 14.7% comp. Non-comparable sales include $3.9 million in sales for the additional 14th week.

Direct to consumer revenue grew 65% over the prior year’s quarter, representing 1.9% of total company sales. The increase in comparable sales was driven by an increase in transactions. From a merchandize category point of view, sales increases in the quarter were met by clothing and jewelry, although all merchandized categories had sales growth in excess of square footage growth.

Gross profit for the quarter increased by 43% to $46.3 million. The gross profit rate improved 92 basis points to 53.37%. The increase in gross profit rate was the result of leveraging boutique occupancy cost. Our merchandized margins were consistent with prior periods.

Selling, general and administrative expenses increased by 21% to $21.6 million compared to the prior year period. As a percentage of net sales, SG&A decreased by 408 basis points to 24.91%. The decrease in rate was due to leverage of cost and sales growth, significantly outpaced expense growth.

Income from operations for the quarter increased by 71% to $24.7 million, with an operating profit margin of 28.45%, an increase of 500 basis points over the fourth quarter of 2011. Net income was $14.9 million or $0.33 per diluted share, an increase of 74% over the prior year diluted earnings per share of $0.19.

Turning to the balance sheet, total inventories at the end of the quarter increased by $4.6 million to $19 million, a 32% increase versus the prior year comparable quarter. We ended the quarter with $29.9 million in cash and cash equivalents and a debt free balance sheet.

As we look forward to the first quarter and full year fiscal 2013, keep in mind that fiscal year 2012 was a 53-week year. The incremental 53rd week contributed $3.9 million in net sales and an approximate $0.03 per diluted share in net earnings to the fourth quarter and full year results for 2012.

For the first quarter we expect net sales to be between $79.5 million and $80.5 million, an increase of 30% to 31% over the prior year, assuming a 4% to 5% comparable boutique sales increase and the opening of approximately 50 additional new boutiques.

We recognize that many on this call will be interested in our business trending within the quarter, in light of a variety of external trade pressures by consumers. Let me say that the bulk of the first quarter business is traditionally done in the months of March and April and this year is not expected to be an exception. We believe we are on trend with our assortment and well positioned for the core of spring demand.

Net earnings per diluted share are expected to be in the range of $0.25 to $0.26, an increase of 25% to 30% over the same prior year period earnings for diluted share of $0.20.

For the 2013 fiscal year we expect net sales to be in the range of $365 million to $370 million, an increase of 25% to 27% over the prior 52-week period in 2012. Comparable boutique sales increased. Increases are expected to be 4% to 5% for the 2013 fiscal year period and as we have previously mentioned today, the opening of the 80 new boutiques, reaching a milestone of over 400 locations by the end of the first quarter. Half of the new boutique openings will be mall based and the balance non-mall based.

Earnings per diluted share are expected to be in the range of $1.27 to $1.30, an increase of 23% to 26% over the adjusted 52-week period in 2012.

This concludes our prepared comments for the quarter and we’ll now take your questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll go first to Brian Senzack with Janney Capital Markets.

Brian Senzack - Janney Capital Markets

Hi, good afternoon everyone. First let me say congratulations and also welcome to Mark.

Mark Vendetti

Thank you.

Brian Senzack - Janney Capital Markets

So I was wondering, so at ICR you guys spoke about the transitional time between winter and spring. You are confident in those transitional colors that you are going to offer to her and also how historically that was a good time for Francesca’s. I was wondering if you could maybe talk a little bit about how that played out relative to your expectations or historically. Also perhaps how weather that we saw in February may or may not have played a factor in that or continues to play a factor here in March. That would be great, thank you.

Neill Davis

Hi, this is Neill Davis. As it relates to the fourth quarter results for the business that we talked about at ICR, our guidance that we gave, updated at that time was seven day percent comp and as you see we’ve turned in a 9.2% comp, so we feel like we ended the balance of January cleaner than what we had envisioned and our ability to clear out during that normal clearance timeframe was better than what we had anticipated.

As it relates to February’s results, as Mark said in his prepared remarks, those actual results are taken into consideration in the overall guidance that we have given for the first quarter. So we are comfortable with where we are positioned in spite of what has clearly been a much colder and wetter and elongated time frame to get to the strange feeling, at lease in contrast to the last two years. So that transition has been taken into consideration.

Brian Senzack - Janney Capital Markets

Definitely. Okay great. Well best of luck in the first quarter and the rest of 2013.

Neill Davis

Thank you.

Operator

(Operator Instructions). We’ll go next to Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Good afternoon everyone and congratulations on a great quarter and a great year. Welcome to Mark.

Mark Vendetti

Thank you.

Janet Kloppenburg - JJK Research

I have a couple of questions on how we should be thinking about gross margin opportunity for fiscal ’13 and operating margin expectations. I know that you backed that out with your guidance that I don’t have. Plus Mark you could provide us with the tax rate and the share count that you think is appropriate for us to be using. But I was just wondering what Neill thought about the opportunity for further operating margin expansion and for the opportunity for gross margin expansion as well. Thank you.

Neill Davis

Hi Janet. Thanks for your questions. As it relates to the gross margin, as we look out to 2013 over 2012, the expectation, at least what we see today is that the fashion trends and cycles and our offerings and the mix will be generally consistent in 2013 as it was in 2012. So the variability then in terms of gross margin are going to solely rely in terms of leverage of this occupancy cost and we’ve guided 4% to 5%. Anything above that number clearly would have a positive influence in that regard.

As it concerns the operating margin for the full year, the expectation that’s embedded in our guidance is – and particularly I want to make a call on this point. This is a comparison on a 52 week to 52 week year and on that the expectation is that we would have some modest deleverage in our operating margin, but certainly maintaining the significant 25%-ish type of level where it is today.

And the objective is to make sure we’re funding the business in the right places as I mentioned in my prepared remarks to drive that top line performance, at the same time preserve our operating margin profile, so that we don’t get those things out of balance.

Mark, you have the details on the tax rate.

Mark Vendetti

Yes, so for this year average is 39% was the rate and then $44.9 million in average diluted shares for both the first quarter and the fiscal year.

Janet Kloppenburg - JJK Research

Okay great. And Neill just lastly on the comments you made about business, Neill I’m hearing, I think what I can take away from it is that your comp guidance is likely in line with your current trend and reflex effect that perhaps business has been constrained a bit by weather trends in some markets.

Neill Davis

No, I wouldn’t extrapolate that the full quarter guidance is a reflection of heavy weight trends. What I want to make sure you understand is that the actual results of February are included in our overall first quarter outlook. There’s no question that this has been a wetter and colder season for everyone.

We are not immune to those things, but again the bulk of our business tends to come in the maple, March-April period and where we do see some early reaps of our business in the markets that aren’t as heavily weather impacted, she is responding quite nicely to our assortments that we have in our boutique.

Janet Kloppenburg - JJK Research

Great. Thanks so much and good luck.

Neill Davis

Thanks.

Operator

And we’ll go to our next question from Howard Tubin with RBC Capital Markets.

Howard Tubin - RBC Capital Markets

Thanks guys and great quarter. So it looks like inventories are in pretty good shape and up only 4% per store. How are you kind of playing in inventories over the course of the even next couple of quarters, in terms of an increase or decrease versus last year?

Neill Davis

Howard, thanks for the question. The cadence and approach to inventories versus our top line business is being planned and tracked consistent with where our experience has been over the last several years. You’ll see a very tight relationship between the top line and the investment that we have there and the only exception of that would be times where they are shipped in calendars where there is an earlier or later back to school season or an earlier or later Chinese New Year that impacts sourcing. Outside of those anomalies they are pretty tightly correlated to our top line. I don’t see any difference in that this year versus last.

Howard Tubin - RBC Capital Markets

Okay great. Thanks.

Operator

And we’ll go to our next question from Lindsay Drucker Mann with Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs

I guess if you could provide some detail on the composition of the comp. So traffic ticket conversion. And then did you see any diversions in comp trend between your on and off ball format and then finally, your nearing 400 boutiques. For your on-mall boutiques, can you give us a sense of the current split between A, B and C malls and how penetrated that is? Thanks.

Neill Davis

Hi Lindsay, it’s Neill. You kind of cut of initially with your question, so I didn’t get all of them, we can come back. But relative to the drivers to the comp, it is largely traffic, which has been consistent with our experience for the last year. The fourth quarter was no different.

As it relates to the comp productivity between the real estate types mall, non-mall, they were essentially the same. And the last question was A, B, C; it looks like a traditional bell curve.

Lindsay Drucker Mann - Goldman Sachs

Okay great, and then just a follow on. Neill, you referenced that conversion rates had improved in your D-to-C channel, can you give us a sense of what they are running out now. I think you said around 1% of ICR, but can you give us a sense of where they are at today.

Neill Davis

They were below 1% and that’s why when I used the under performing dialog and I will tell you that we are looking and moving north of that number. It’s a gradual process. We are getting significant growth in terms of traffic. So the real lever there is it’s coming out of a traffic source and a lot of that has to do with the expanded style. So we are offering online versus this time last year. So that’s helping drive that traffic and we seem to be leveraging the styles in the right category, in a manner that’s helping those convertibles stronger.

Lindsay Drucker Mann - Goldman Sachs

Great, thanks.

Operator

And we’ll go next to Laura Champine with Canaccord.

Laura Champine – Canaccord

Good afternoon. So my question Neill is since you haven’t done even the first phase of the re-launch of the website, I know you are working with a small base, but what drove the 65% growth in the DTC business in Q4.

Neill Davis

Its traffic, its traffic and it relates to incremental energy and putting more styles on our website, where it does quite well; dressers are doing well, jewelry is doing well. So the penetration, I’ll give you the statistics, the penetration of our styles online has compared to outbreak in orders; it’s up 15%. So we are more penetrated this time this year than we were last year. So I think that’s the key driver to what’s happening here, where she is responding to our store just as she responds to the brick and mortars, she is finding some newness in the novelty and excitement online.

Laura Champine – Canaccord

Got it and could you tell us what is in the plans, what we should see change in this first step of the re-launch of the website in Q1.

Neill Davis

A cleaner path to check out. Its been clumsy in the past and as I said in my prepared remarks, its been an additive progressive improvement and we’ll continue to do that up until a launch, which is in the first quarter, early part of April and the other element is just the esthetics of the design. Its cleaner, its brighter, you can see the product, the zoom capability as an example. So really bringing out the essence of the product categories is a key element to what you are going to see.

Laura Champine – Canaccord

Great, thank you.

Neill Davis

Welcome. Thanks.

Operator

We’ll go next to Edward Yruma with KeyBanc Capital.

Edward Yruma - KeyBanc Capital

Hi, thanks for taking my question. Can you provide a little bit more quantification as to the headwinds from some of those eComm investments, I guess both from initiating a perspective as well as CapEx.

And then I guess second, Neill in your prepared remarks you spoke a little bit about own brand. I know for some time you had 50 or so brands that you’ve used. Is there any material change in the way that you view your own brand and any margin application from some of these changes? Thanks.

Neill Davis

What was the first question? CapEx and the SG&A relative to our eCommerce initiatives; it is one of the areas that we are investing in. If I (inaudible) they would be probably number three on the list. The first as I indicated in my commentary would be merchandizing and our technology talent to be able to drive greater productivity; the two that we’ve already invested in.

A most significant spend in terms of eCommerce will begin to show up in the latter half of this year. Some of them will be capital in nature. And as we do that in 2014, rather than investing a significant amount in our merchandize organization, we’ll turn our attention to our direct to customer group and they’ll be the beneficiaries of our growth that we’ve been realizing in the course here then. So it will be more into 2014 when you’ll see that show-up.

What was the second question?

Theresa Backes

The margin implications of the set brands.

Neill Davis

The margin implications of the set brand. What we are doing is we are cleaning up some of the clutter if you will in terms of our brand base or sub-brand base and we think these will resonate more uniquely to the customers that do shop Francesca's. And quite frankly what I’m looking for and our merchants are looking for is productivity in terms of UPT’s.

While she may be a traditional shopper in a specific category, lets just call it dresses, we want to be able to capture her a little more broadly in terms of our assortment, so maybe accessories and some other categories that she might not have though about. So it just helps align our merchants in terms of they are buying and the creativity they put behind their buys to properly get a little better penetration with that category is what we are looking for here.

Edward Yruma - KeyBanc Capital

Okay, thanks so much.

Operator

And our next question comes from Randal Konik with Jefferies.

Randal Konik – Jefferies

Yes, great. Thanks a lot. Neill can you hear me?

Neill Davis

I can.

Randal Konik – Jefferies

Alright, great. So just to extend upon the sub-brand, is this more of a process change of systems of people change. I just want to get more clarity on what’s actually changing here, and then do we expect that to improve inventory turnover at a point where it would be more margin. Just trying to get a little more clarity there.

And then from Mark, now that you’ve gotten sort of your shoe laces wet a little bit here seeing your organization, where do you think you can put your imprint on the origination. Where do you see opportunity to add far more value there? Thanks.

Neill Davis

Randy, it’s Neill. I’m going to let Theresa take the first question and then Mark will answer for himself.

Theresa Backes

Sure. So we have an eclectic assortment of sub-brand names today. We actually have had them for about five years and they are anything from Emmelee to Criss Cross to Myon (ph) and that’s part of what we do in sort of creating that unique labeling for Francesca's.

Really what the merchants are doing is, they are doing what we’ve planned to do for a while, which is to add some substance to the naming of some of those sub-brands, the labeling. So if she’s a slightly sweeter girl there would be a label that would go across not only apparel categories, but even into the gift area. If she’s a slightly more fashion forward girl, there is one or two labels that kind of speak to the sensibility of those.

So it really kind of settles down some of the randomness and the clutter that having so many brands and having them not be connected at all. But its important to note that its not part of a branding strategy that would change at all the look and feel of the boutique. All it really does is, is sort of subliminally for the customer, sort of make her identify those things that she is resonated with on prior visits and in other purchasing categories.

And Mark, you can take this second question.

Mark Vendetti

I mean this is based off of two weeks of impressions and I’m sorry if it’s not an all-inclusive list. I hope that it is in an all inclusive list, but there are a couple of areas at least on kind of first impression given the really strong growth the company is experiencing with opening the new stores and the good comps.

I think I will be spending quite a bit of time at least initially on the infrastructure and scalability of the business. I have a lot of experience in that area given my previous two companies I worked for.

Second area would be again, I think focused on the eCommerce side and trying to be or the direct to consumer in trying to bring some of my experience from my previous position at Abercrombie with me in working with the team there and lastly, I think the third piece we will probably be spending a lot of time with you guys, the analyst community and working that area. So I see those as kind of short-term priorities and once I’m here for a couple of months, we’ll go beyond that.

Randal Konik – Jefferies

Great. Thanks a lot guys.

Operator

And we will go to Jennifer Davis with Lazard Capital Markets.

Jennifer Davis - Lazard Capital Markets

Hey guys, congratulations on a great end to the year and looks to be a very solid start to a difficult first two months, and welcome Mark.

First, Neill I believe you said all your leases for 2013 had been signed. So I was wondering, are the lease terms for 2013 similar to 2012? I’m asking because some investors believe you got favorable lease terms around the recession and going forward terms may not be as advantages. So, not asking for any details around the terms, just if they are similar to 2012.

And then along those same lines, there is some concerns that you cherry picked up that location and as you open new stores going forward, there’ll inherently be less productive and or less profitable location. So obviously some B and C locations can be less productive, but more profitable than some A locations. But I guess, can you give us some color around your mix of A, B and C locations now and what you expect that mix to look like in the future.

And then sorry one last one, could you talk about your plans for your growing cash balance since you paid off your debt and your stores generate an enviable cash return. I got your cash balance bubbling fairly quickly even though you’re opening new stores. So could you talk about your capital allocation plan and your thoughts around returning to the shareholders either in the form of dividends and share repurchases. Thanks.

Neill Davis

I’ll be more than happy to go through those. Very simply our real-estate terms are consistent with 2012. Our real-estate team has done an absolutely fabulous job of keeping a proper balance with the terms and the economies that we’ve enjoyed in the past and see that continuing certainly with what we signed up in terms of the LIOs that have now manifested into executed leased for 2013 and that’s continuing into 2014 as well.

As it relates to the mix of our business, we haven’t cherry picked. We’ve been following a very balanced approach and finding and picking our spots, the most productively as we believe are best for growing the brand as we build out across the various geographies.

I mean our plan right now for this year as Mark said in this comments, it’s about 50% mall and 50% non-mall. What you should understand is that 50% non-mall is a rather diverse group of real-estate locations, lifestyle centers both anchored, unanchored, power strip centers anchored, unanchored, urban street locations and a lot of those can be more productive than a mall locations and we are getting into the outlook strategy and that’s in part of our mix in 2013. We’ll continue to be growing in 2014 and beyond and that’s even a more productive type real estate as well.

So, we’ve been balanced. I don’t see the scales tipping over as we round out our build out to the 900, because of much lower productive stores. I think our real estate team’s done a very good job at that and its very balanced.

And the cash balances, we got I think a very modest level of cash right now. We have a lot of activity going on relative to the operations. That was probably at a fourth item or fifth item to Mark’s agenda. He and I will work more closely this year, rounding out a longer term point of view of our business, digesting what capital requirements will be needed for the future and needed for the day and once we get our points of view and opinions developed, that is something that will be rounded up with the board and then we’ll make deliberate decisions in that property in time.

Jennifer Davis - Lazard Capital Markets

Great, thanks. So Neill, I’m sorry, did you say that you were going to expand outlets this year.

Neill Davis

Yes, two of the 80 outlets. We opened one last weekend and the second is opening this Saturday, and they are both in Texas and they are opened only last week. It was one of the strongest weekend openings of any boutique that we’ve had; certainly top tier. So we are excited to see that come to the table.

Jennifer Davis - Lazard Capital Markets

Alright, great. Congratulations and best of luck.

Neill Davis

Thanks.

Operator

And our next question comes from Liz Dunn with Macquarie Capital.

Liz Dunn - Macquarie Capital

Hi, thanks for taking my question. Let me add my congratulations. Just as a follow up question, I apologies my phone dropped, but relative to some of the things you are talking about in the private label, there is no change in the density of the product, sort of the formula on small buys going forward with this change in how you are thinking about the brand, is there?

Theresa Backes

No, there is not. I think it might be easier if you just think of it as a labeling initiative, to get the individual brand labeling, to just be less random and a little more thoughtful and concise and consistent. But it doesn’t change anything regarding the tense of the merchandise model that we have.

Liz Dunn - Macquarie Capital

Okay great, and then my follow-up question is just, can you provide from the analyst day, just kind of now that the management team is in place and you have a lot more confidence and conviction in expressing how this model is different, can you just give us a little bit of a preview of what to expect.

Neill Davis

What you are going to see is, well you have an opportunely to meet all of the individuals that are behind the topics and subject matters we talk about on this call today. I think its an extremely strong team and what you’ll do is since you’ll be able to see and here from them directly and talk about our broad strategies in a little more detail, so it’s a full day to allow the community to better know who their operators are at Francesca’s.

Liz Dunn - Macquarie Capital

Alright, great. Looking forward to it. Thanks.

Operator

And our next question comes from Betty Chen with Wedbush Securities.

Betty Chen - Wedbush Securities

Thank you. Good afternoon everyone. Congrats on a great quarter and a year-end. Welcome to Mark as well. I was wondering if can talk a little bit about some of the investments Neill that you alluded to. It seems like this year will be focused around the merchandising team.

How should we think about the timing of some of those hires, whether we should just assume for now that it could be pretty significant across the quarters or any color around that? And then separately on the outlet strategy, could you remind us, is that basically products that are similar to the retail channel or should we be expecting from the out products over the longer term and whether the store opportunity in the outlet real estate area is also included in the 900 store opportunity that you talked about for the longer term. Thanks.

Neill Davis

Hi Betty. As it relates to the investments that I referred to in my prepared remarks, the timing is yesterday. So we are actively looking to fill those out, so it will happen within the first quarter and if it doesn’t, it will flow though the balance of the year. So it’s a pretty aggressive active foreseen plan. I’ll Theresa talk about the outlet question.

Theresa Backes

To the outlet strategy with regard to merchandize, right now we are not doing any purchase for outlook. We don’t have any shot terms plans to do that. So the outlet basically consists of about 40% regular price merchandize in all categories and about 60% of sale merchandize.

We do that for a couple of reasons; one, there is a certain percentage that needs to satisfy the agreement of the lease, but the other is because that’s what she is looking for at the outlet. So what we have is sort of a regionalized strategy, as we grow the outlet to take some sales inventory from existing boutiques and bring it into the outlet and offer that to the customer in a space with kind of a fun environment that really seeks to value and the entity of the brand.

So that balance seems to be working with three, we’ll have three by Saturday. We are clearly still in the testing phase of this initiative. As Neill said, the retail part’s been quite good and she sees value in both the newness and in the sale merchandise, and so we are going to continue somewhat on that vein, because I think that’s going to be the right direction for us.

Betty Chen - Wedbush Securities

Great, that’s really helpful. I was wondering, I just wanted to clarify something you may have said earlier. It sounds like you are seeing some performance differences between maybe some of the core areas versus the hotter climate region. Could you elaborate on that or perhaps maybe I have misheard earlier.

Neill Davis

No, I mean look at the North East. I means its where you see the weather patterns that are at the extreme level that have impacted where we’ve seen some of the weakens and when you get to the southwest or the deeper southeast, you don’t. So it’s just nothing more than that.

Betty Chen - Wedbush Securities

Thank you so much and best of luck.

Operator

We’ll go next to John Kernan with Cowen.

John Kernan - Cowen

Good afternoon guys. Thanks for taking my questions. Neill, its pretty impressive SG&A leverage in the back half of 2012. As you made investments in the stores and the point of sales systems, what type of SG&A dollar growth should we expect relative to sales going forward; not just in 2013, but beyond. Is there an opportunity to continue to bring SG&A expenses as a percent of sales done as you continue to comp up mid to high single digits and I have one quick follow-up.

Neill Davis

Over time I expect that to continue to get leverage. And since its just a matter of the time to when that happens, we want to be appropriately aggressive, making those investments from the front-end timely in the places that we think that can benefit the business most quickly and those are the areas that we’ve already talked about. But over time it’s a declining trend and I expect it to continue to be leveraged at the SG&A level particularly, at the level of comps that you just mentioned.

John Kernan - Cowen

Great, that’s helpful. And then the mall-based stores continue to grow and I know you’ve talked a little bit about it on the call already. But is there any meaningful delta between the sales productively between the mall based stores and the street location and lifestyle centers. Can you remind us what the delta is between your most productive boutiques and some of the less productive boutiques in terms of sales productivity? Thanks.

Neill Davis

There is really no meaningful difference between the higher performing non-mall locations than malls and the other question was.

Theresa Backes

When you look at the delta between the highest performing and the lowest performing in terms of productivity, there is a four times range in performance.

John Kernan - Cowen

The four times range between the high and low.

Neill Davis

Yes.

John Kernan - Cowen

Okay, thank you.

Operator

And we’ll go next to Brian Tunick with JP Morgan.

Brian Tunick - JP Morgan

Great, thanks. I’ll add my congrats to the team as well. I guess three quick questions; first was jewelry. I know it was very strong last year, a nice comp in margin drivers. So just curious to know how you are thinking about this category, whether it’s penetration or how do you think about jewelry in 2013.

Second questions in the store maturity ramp. Maybe you could just talk about the comps in 2012 for stores that are three, four, five years old, just trying to understand that.

And then the third part, I know marketing as a percentage of sales and spending obviously very low and having people expect that to ramp in the next couple of years. Neill, can you just maybe talk about how you think about where marketing dollars need to be allocated and how you think about new customer acquisitions. Thanks very much.

Theresa Backes

Hi, this is Theresa. I’ll take part one of the question regarding jewelry. Randy will answer the store maturity and then Neill will answer the last question regarding marketing.

So jewelry, you are correct. It has continued to be a favorite of our customer and we continue to see some really nice results from jewelry, necklaces in particular. You will see that in fashion that necklaces, both statement necklaces and some other sort of tribal prince and some other things, etcetera are an assortment, are still sort of dominant in the category.

I think we will and we’ll continue to be very careful about the balance of penetration of any one item within the jewelry category and within any one category within our overall store assortment.

Randi Sonenshein

Hi Brian. Turning to a discussion on store maturity, looking at the performance levels of boutiques that are in the three to five years age range really can be expanded across the various vintages. Our comps and our performance levels in the comp are very homogeneous across the vintages that we see. So looking at whether it’s the fourth quarter or at the year, the overall comp that we guided to is just very hear to what you would see for those types of vintages.

Neill Davis

And Brian on the marking question, what I would say is what’s driving our comp sale performance is the fact that we can deliver what she’s looking for, its newness, its excitement, it keeps her coming to the store every week. I mean we have a very high percentage of our customers that shop every week. Some were less frequent than that, and to a degree that we can invest our dollars into the business and know there is and continue to support that and drive it, that’s essentially where our marketing dollars are.

And also a lot resides in our real estate spend. We got a long way to go to get to 900 and being properly positioned in her shopping circuit will also add to that. So we are spending marketing dollars at this stage of our development and I think we are having a significant impact and if we can continue that for the near-term, that’s exactly what Theresa and I want to try to do and to avoid spending anything in terms of traditional marketing dollars that you might see other soft line specialty guys do.

Brian Tunick - JP Morgan

Right, so I guess to that point, while other retailers are 3% to 4% of their sales on marking, I guess you guys don’t feel like that, you get the higher ROI on that.

Neill Davis

No.

Brian Tunick - JP Morgan

Great. Good luck to spring.

Neill Davis

Thank you.

Operator

We’ll take our next question from Richard Jaffe with Stifel.

Richard Jaffe - Stifel Nicolaus

Well, thanks very much guys and an impressive quarter. A follow on to the built out of the merchandising team; do you anticipate adding categories, broadening the offering in-store and/or in-line and if you could give us a sense of what directions you might be heading in.

Neill Davis

The short answer to that is, no. What you see in terms our primary product departments and the sub-classes within it we think are well positioned for our boutique presence. What we want to do is to get greater visibility for our merchants within those classes to better position with inside the boutique. So we think we have a very robust offering and we see no incremental expansion beyond where you see it today.

Richard Jaffe - Stifel Nicolaus

So, you’ll take existing categories and just slice them more narrowly for the new merchants.

Neill Davis

Good, better, best, cleaning up the labeling as Theresa described earlier. The sell through as we see that’s been through those activates are quite compelling. So the ROI is where we need to be.

Theresa Backes

And some additional attention in the digital space for merchandize.

Neill Davis

Right.

Richard Jaffe - Stifel Nicolaus

But still within the same category.

Neill Davis

Yes.

Richard Jaffe - Stifel Nicolaus

Got it, thank you.

Operator

And we’ll go next to Mark Montagna with Avondale Partners.

Mark Montagna - Avondale Partners

Hi, just a question on first quarter comps. I was wondering, does your comparison easer as that seems to be case with most retailers. I’m curious if the same holds for you.

Neill Davis

No. I mean you need to look at a two-month time for. I mean this is a March and April period as guided, so they are both strong.

Mark Montagna - Avondale Partners

Okay, and than how about your comp leverage points or occupancy cost and then SG&A for the New Year.

Neill Davis

Well, I mean occupancy as we talked about is in the lower to mid single digit range. And then SG&A, you already get a sense as to where we expect that leverage point coming from based on our earlier comments. I’ll be able to answer that question more clearly when we get much closer to maturity and when we are well away from that right now.

Mark Montagna - Avondale Partners

Okay and then regarding the fourth quarter, SG&A has a really good improvement, 400 basis points. How much of that was due to the 53rd week?

Neill Davis

Mark, I don’t have that number of the top of my head, but you have what the earnings per share impact is and clearly back into that. I just don’t that on top of my head right now.

Mark Montagna - Avondale Partners

So would you put the whole $0.09 into that or…

Neill Davis

Its only $0.03.

Mark Montagna - Avondale Partners

I’m sorry, I’m confusing with.

Neill Davis

$0.03 on 44 million shares at a $3.9 million top line. You can get a sense as to what that did to the operating margin and most of its up in cost of goods sold anyway.

Mark Montagna - Avondale Partners

Okay. And then just a last question; e-commerce, you had mentioned multi-year process. It seems like you’ve got a little bit this year, a lot next year. Is there a big step to do in 2015 also?

Neill Davis

No, I don’t envision that. It’s the ’13, ’14 process. That was the implication of my comment about multi-year.

Mark Montagna - Avondale Partners

Okay good. Thank you.

Operator

And we’ll take our final question from Jennifer Davis with Lazard Capital Markets.

Jennifer Davis - Lazard Capital Markets

Yes, just a quick clarification. On the four times delta, if there was the productivity between the high and the low performing stores, I just want to clarify that the profitability of those that’s similar to the four-wall contribution margin is still similar, thanks.

Theresa Backes

There is distribution that will always occur in the four-wall contribution. On those what I gave are the extremes of the ranges for them. Generally our productivity tend to cluster, far towards the middle of the low deviation around the main.

Jennifer Davis - Lazard Capital Markets

Okay thanks and best of luck.

Operator

And that concludes our question-and-answer session. I would like to turn the call back over to Mr. Davis for any additional or closing remarks.

Neill Davis

I want to thank everyone for your interest and continuing interest in Francesca’s. The team at Francesca’s is doing an outstanding job; a lot of hard work here. I think you are seeing it in our fourth quarter results. Hopefully you got a sense of our enthusiasm for 2013. There is more to come and I look forward to working with Mark more closely over the course of the year and we’ll be talking to you in a couple of months. Thank you.

Operator

That does conclude today’s call. Thank you all for your participation.

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