I formed a contrarian view of retailer Francesca's Holdings (FRAN), even considering the institutional support, in December 2012. My research is purposed primarily for providing information to my investment club. Therefore, a compelling attribute for a stock is longevity. Francesca's is currently a growth story -- so it's easy to imply and hope for a bright, and even long, future. However, when viewing it in the context of its industry, I questioned its longevity prospects.
At the time, it appeared that comparable same-store sales growth rates were on a downward slide from 15% in 2010 to 10% in 2011. In June 2012, Francesca's projected a high single-digit growth rate for the full year 2012. As it turned out, Francesca's reported in February 2013 that it ended the year at 14.7%. At first glance, that would seem to be good news, even great news. But in the same press release, management set projections for 2013 at 4% to 5%.
There are unquestionably impressive statistics relative to Francesca's. It is debt-free. It has plans to open 80 stores in 2013, 50 in the first quarter. Operating margin is, impressively, greater than 25%, and profit margin is greater than 15%.
Mixed in with what appears to be positive attributes are the concerns. Comparable same-store sales growth projections for 2013 are a 66% drop from the 2012 rate. While Francesca's considers itself an "economical" retailer, profit margins fall more in line with high-end retailers such as The Buckle (BKE), Michael Kors (KORS) and Lululemon Athletica (LULU). Economical retailers (as defined by Francesca's) find their profit margins, at best, managing to achieve only half the level of Francesca's. Just as same-store sales are not expected to maintain historical levels, profit margins will likely settle into industry ranges. Obviously, compressing profit margins will compress earnings per share.
In February 2010, CCMP Capital Advisors acquired 84% of Francesca's shares. In July 2011, Francesca's went public, selling 11.5 million shares, some supplied from CCMP. In February 2012, Francesca's offered another 11.3 million shares, again with CCMP supplying shares. Francesca's offered another 9 million shares in April 2012. By year-end 2012, CCMP held 17%. Francesca's Chairman of the Board, Greg Brenneman, is Chairman of CCMP Capital Advisors. Another board member, Richard Zannino, is a Director with CCMP. Through a portion of 2012, yet another director of CCMP served as a third board member for the company. Two of Francesca's primary suppliers, Stony Leather and KJK Trading, are owned and operated by family members of Francesca's former Executive Vice Chairperson (who recently retired in July 2012). While Stony Leather has multiple customers, KJK Trading is solely dependent on Francesca's. Through 2012, Francesca's inner circle was fairly small and fairly tight.
Effective January 1, 2013, Neill Davis, who previously held several senior executive positions at The Men's Wearhouse (MW), took over the reins from the retiring CEO. A new CFO, previously from Abercrombie and Fitch (ANF), was added in February. Additionally, in the past two months, Francesca's added three members (see here and here) to its Board of Directors. Each member has impressive credentials with experience from retailers Estee Lauder (EL), PetSmart (PETM) and Spanx. In late March, CCMP divested all of its holdings in Francesca's.
Much has changed, already, in 2013. It is somewhat paradoxical, the sudden influx of industry experience. In fact, "talent acquisition" is specifically addressed in the April investor presentation as a "key future investment." Key future investments of talent will almost certainly impact personnel expense costs. In other words, talent won't be cheap. Turnover rates are notoriously high in the retail industry. And the investor presentation details talent is needed both for headquarters and the field teams.
No doubt, for the short-term trader, Francesca's has offered many opportunities to trade in and out as its share price bounces around the upper $20 range. The long-term investor should consider that Francesca's operates in a crowded industry with many mature competitors. Its marketing primarily targets only the 18 to 35 year-old female demographic, a fairly fickle subset. Francesca's is turning a corner relative to leadership and ownership. The rest of 2013 should prove whether Francesca's culture stands. Though Francesca's is still on a growth trajectory, signs of maturity are already setting in. Francesca's path forward looks more fuzzy than defined to me.
For me and for my investment club recommendations, there are still just too many question marks in Francesca's to wager that the reward will outweigh the risk when there are, alternatively, intriguing prospects with growth potential in evolving industries.