Francesca's - Weak Quarter Creates Buying Opportunity

| About: Francesca's Holdings (FRAN)

On Wednesday morning, Francesca's (NASDAQ:FRAN), a women's retail boutique offering fashion apparel, jewelry, accessories and gifts reported its Q2 2013 results. The results were unimpressive to investors who sent the stock down $6.23 or 25.94% during the trading day. Although results were weak in the current quarter and the outlook for Q3 was below expectations, the beating the stock took creates a great opportunity for a long-term investor looking for an entry point.

There are a few things being overlooked in the report that should calm investor's fears about the stock. The company is still continuing on with its goal of expanding to 900 U.S. locations. Currently, the company plans to open 87 boutiques during the fiscal year bringing the total numbers of stores to 447. This represents only half of the company's goal. There is still room for major expansion and even if same-store sales trends remain flat or down, the company will expand sales by continuing to open up new stores.

Even though traffic was down in the quarter, with same-store sales down 4%, it was noted in the conference call by Lazard Capital analyst Jennifer Davis that specialty store traffic as a whole declined by 4% for the quarter, so Francesca's was actually in-line and fared better than a lot of other retailers during the quarter. One of the things that makes the company's business model stand apart from competitors is that being a boutique it is able to respond better to consumer trends. As CEO Neill Davis stated in the conference call, "one of the strengths and differentiating factors of our business model is our ability to be dynamic with our merchandise assortment and quickly adjust our offerings to align with changing trends while offering great value." It was noted that in the current quarter the company tried to respond to the current trends in the quarter, but was unable to chase into particular trends as much as it wanted due to what was available in the marketplace.

The last and arguably most important tidbit that came out of the report was management's share repurchase program. The Board of Directors authorized a $100 million dollar share repurchase program to commence immediately.

Neill P. Davis, Chief Executive Officer, commented, "We have built a very profitable business model which generates a considerable amount of free cash flow even after funding all of the investments required to fuel this growth. We will repurchase shares when our cash on hand, free cash flow, and debt capacity exceed the investment and other strategic needs of our business, and in our view, when the stock is trading below its intrinsic value. The share repurchase authorization reflects confidence in our growth plans as well as our commitment to return excess capital to our shareholders thereby enhancing shareholder returns."

According to the press release, the company expects shares outstanding to be 45 million for the full year, sans share repurchases. If the company repurchases all $100 million in company stock at the closing price of $17.79 (to make the math easy) it will be able to buy 5.6 million shares outstanding or 12.5% of the float. The company currently has an EPS of $1.09 and trades at a P/E of 16.32. Management also expects EPS to be in the range of $1.10-$1.16 for the year after the lowered guidance. If the company completes the $100 million dollar buyback by the end of the year, EPS could be in the range of $1.26-$1.33. It should be noted that this was the EPS range the company expected for the full year before it lowered guidance this quarter. At a P/E ratio of 16.32, this creates a PPS of $20.56-$21.70 or an upside of 15%-22% with the buyback alone.

With shares down about 40% over the last 3 months, investors should take a look at Francesca's for a great entry point at this level. The company may have had some near-term struggles, but the long-term investment thesis is still in tact for the company. The major buyback program of $100 million also provides downside protection from further stock price erosion.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FRAN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.