Francesca's Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Francesca's Holdings (FRAN)

Francesca’s Holdings Corporation (NASDAQ:FRAN)

Q4 2013 Earnings Conference Call

March 26, 2014 08:30 AM ET

Executives

Randi Sonenshein – Vice President-Finance and Investor Relations

Neill P. Davis – President and Chief Executive Officer

Mark J. Vendetti – Senior Vice President and Chief Financial Officer

Analysts

Edward J. Yruma – KeyBanc Capital Markets, Inc.

Simeon A. Siegel – Nomura Securities Co. Ltd.

Adrienne E. Tennant – Janney Montgomery Scott, LLC

Randal J. Konik – Jefferies LLC

Howard Tubin – RBC Capital Markets, LLC

Morry Brown – Wedbush Securities, Inc.

Brian J. Tunick – JPMorgan Securities, LLC

Janet J. Kloppenburg – JJK Research

Lizabeth Dunn – Macquarie Capital, Inc.

Lindsay B. Drucker Mann – Goldman Sachs & Co.

Laura A. Champine – Canaccord Genuity, Inc.

Jerry W. Gray – Cowen & Co. LLC

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Francesca's Holdings Corp Fourth Quarter 2013 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’ll conduct a question-and-answer session. Instructions will be provided at that time for you to queue-up for questions.

I'd now like to turn the conference over to Randi Sonenshein, Francesca’s Vice President of Finance and Investor Relations. Please go ahead.

Randi Sonenshein

Welcome to Francesca's fourth quarter 2013 fiscal conference call. Earlier this morning, the company issued a press release outlining the financial and operating results for the fourth quarter ending February 1, 2014. The following discussions may include forward-looking statements.

Please note that actual 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 filings with the Securities and Exchange Commission.

We will begin today's call with Neill Davis, our Chief Executive Officer, who will comment on our fourth quarter performance and strategic initiatives. Mark Vendetti, our Chief Financial Officer will then provide financial highlights of the fourth quarter, as well as details of our financial outlook for the first quarter up then fiscal 2014.

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

I'll now turn the call over to Neill.

Neill P. Davis

Thanks, Randi, and good morning, everyone. As we reported earlier this morning our sales results for the fourth quarter increased 11% from the prior year 13-week quarter. However that was below our revised guidance and was driven by the impact of 370 full and partial daily boutique closings during January due to the extreme weather conditions which directly reduced our quarterly comparable sales growth rate by an estimated 200 basis points.

Sales results in regions less affected by the extreme weather, performed within our revised fourth quarter guidance. Although we did not achieve our top line expectation for the quarter, we did achieve adjusted diluted earnings per share of $0.27, in line with our revised outlook and driven by lower selling, general, and administrative expenses.

For the fiscal year compared to the comparable 52 weeks in the prior year, sales increased 16%, driven by 91 new boutique openings, bringing our location count to 451 as well as continued strong growth in our direct-to-consumer business, specifically an increase of 92% with favorability across all key performance metrics. These results are not what we’d expected at the beginning of the year. The reasons that we’ve reported on throughout the year, our comparable sales performance was approximately 700 basis points below our initial targets.

However, our merchandize gross margins only declined 70 basis points for the year. This is a direct reflection of the underlying strength of our business model that’s predicated on a broad and shallow assortment strategy that enables adjustment contracted in fashion trends while end season restoring [ph] with short lead times thereby mitigating markdown exposure.

Although the lower sales volume coupled with building and supporting our infrastructure for the future, deleveraged our short-term operating results, we did still achieve operating income margins in excess of 20%.

The headwinds of our business experiences as we progressed to January have continued into the first quarter, impacting our ability to clear through seasonal falling on a product, resulting in the delay of spring season full-price selling. Although initial customer reaction to our spring apparel fashion is strong, clarity and timing of the spring 2014 buying trends remain uncertain.

Our outlook for the quarter is based on current trends and we expect to see continued top line and margin pressure from apparel and jewelry categories as we clear through carryover merchandize in the first quarter and complete mix shift transitions in the first half. Underpinning our full year outlook of double-digit growth rates in sales and diluted earnings per share, is an improving trend in the second half of the fiscal year based on new boutique openings and related sales productivity, improving comparable sales results aided by easier second half comparisons, and further leverage of prior year infrastructure investments.

The strategic things for Francesca’s that ground our planning for fiscal 2014 and beyond is a sharp focused on offering our guests a highly distinctive experience when shopping in the small format boutique environment. That focus is in line, but mostly constantly reviewed, renewed and modified from the product we offer to the overall in-store and online guest experience.

In terms of merchandising, our product mix continues to evolve and is driven by alignment to prevail in fashion trends. We are encouraged by the broad femininity and accessibility of emerging trends in 2014 that will possibly impact our apparel assortment. Specifically, we are planning a more dominant representation in tops and bottoms and adding a stronger diversification of fabrications and styles in fashion tops with less duplication than last year. We are also planning a lower penetration within dresses albeit with better diversity in fabrications and a better mix of special occasion dresses.

We continue to expect our sales mix, represented by apparel to be within historical ranges of approximately 50%. However penetration within our offerings will be more balanced between dresses and our separates business, which will help mitigate risk of concentrations.

Overall I’m pleased and encouraged with the level of newness represented in our spring assortment.

In jewelry on other hand, the trend has been moving away from bold, colorful and structured statement necklaces towards more of basic styles in metal particularly in bracelets and earrings, which isn’t a strong of a trend and doesn’t offer the same level of opportunity for continuing newness.

We are coming off of numerous years of double-digit comp jewelry growth and driving incremental comps on a more limited diversity in jewelry trend is challenging. Our forward planning is therefore on the conservative side as we expect jewelry performance to pressure the comp in the first half of 2014 and improve in the second half as we anniversary the fashion cycle.

In gift and home, a category represents approximately 10% of sales, improvements in non-comp offerings in stationary, entertainment and home as well as increased penetration and seasonal gifts is expected to drive positive comp performance throughout those spring and fall seasons. We have completed our transition of assortments in more and fun and functional offering and sell-throughs and new merchandise are encouraging.

We have seen a sequentially improving trend as of second quarter of last year. From our boutique operational standpoint, in the third quarter of this year, we expect to begin to leverage investments we made in our field organization in the second half of last year.

The back-half investments of 2013 included the expansion of our managerial field organization to include area managers which is one step above the boutique manager level. Local end-market leadership that can oversee guide and service individual boutique locations is our primary objective in achieving improved traffic conversion.

Secondarily, we would be enhancing our visual merchandising processes and adding web-based training tools to further build upon our guest experience. We are expanding our boutique base in 2014 with 85 new locations identified and 75 leases executed. The majority of those are planned to open in the first quarter and the balance in the second quarter.

We are also wearing in and more active remodeling program to ensure that our boutiques are updated, refreshed and can continue to deliver on a distinctive customer experience. We plan to remodel 50 boutiques in 2014, in addition to the 30 that we were remodeled in 2013. These remodels include expanded color pallets and enhancements to the flexibility and durability of our fixture solutions.

We continue to size the market at approximately 900 domestic locations. Our new boutiques continue to meet thresholds of sales productivity, return in invested capital and payback timing. We target new boutique productivity close to maturity levels, which are generally near 10% of chain average and we met those in fiscal 2013.

We are not satisfied with our current top line comp performance, but is important to note that our new boutiques are not disproportionately affected by the current environment.

In addition to our efforts in driving our in boutique experiences I’ve outlined, we are equally focused on extending the reach of the Francesca’s brand and are prioritizing doing so to our direct-to-consumer activities and organization.

Sales through francescas.com increased over 90% this past year and quarter. 40% of that growth was traffic driven with over 12 million visitors and the balance was from conversion and average order value.

In the fourth quarter, we initiated several customer engagement activities including an Instagram program and fashion sponsorship with the cable network lifetime and the launch of a Project Runway spin–off called Under the Gunn, which runs for 13 weeks through mid-April.

The Instagram program has resulted in a gain of over 1 million unique impressions and the Under the Gunn program sponsorship that captures over 1.5 million week of viewers. Last week’s episode of Under the Gunn featured a design challenge whereby the winner’s design will be sold exclusively at Francesca’s. Today the product was available online, our side exceeded our cyber money traffic thresholds and capacity. We will be building on our reach efforts throughout the year with internally developed programs centered on Mother’s day, back-to-school, and a variety of tier 3 weekend type campaigns.

Beyond these awareness opportunities, we’ll continue to be focused on building our online assortments to drive incremental conversion of expanding traffic volume. Key decisions and initiatives include optimizing our mobile solution to better convert our fastest growing traffic source, ongoing improvements in SEO and SEM, International shipping solutions, digital catalogs, easier to shop larger images in collection and buying round out our focused online efforts for the year.

Let me now turn your attention to the financial details in relation to results and our forward guidance and turn the call over to Mark.

Mark J. Vendetti

Thanks, Neill. And good morning, everyone. My comments today will be on an adjusted basis and I refer you to our press release issued earlier today for details on those adjustments. Total company net sales for the fourth quarter increased 6% to $92.1 million or 11% on a restated NRF retail calendar. This increase was driven by 91 new boutiques opened since the end of the fourth quarter fiscal 2012 with five openings during the fourth fiscal quarter of 2013.

Comparable sales decreased 6%, this compares to a 10% increase in comparable sales in the same period last year. The overall comparable sales decrease was driven by a 4% decrease in comparable transaction counts and a 2% decrease in average transaction size. We believe these reflect a combination of week and strong trends specific to the back half of 2013 mix transitions in certain of our offerings such as jewelry which diluted the comp by 4 percentage points in the fourth quarter, and dresses in lower transactions particularly during the month of January, which was negatively impacted by the harsh weather.

As Neill discussed extreme weather in January caused the direct loss of over 370 boutique selling days, we’re closing more than 10 times the level of selling days impacted by weather last year. In addition, we believe there was a broader reduction in traffic as unseasonably cold conditions impacted most regions of side from the Western United States.

During the fourth quarter, gross profit as a percentage of sales decreased 280 basis points to 50.6%, primarily due to deleverage from fixed occupancy costs. In addition, merchandise margins were lower by 100 basis points, reflecting higher markdown levels compared to the prior year, particularly in apparel and jewelry as we transition assortments as well as in a elevated level of promotional activity compared to the prior year. The mix shift out of jewelry sales was absorbed by accessory sales. Adjusted selling, general and admin expenses increased 28% to $27.70 million compared to the prior year 14 week period of $21.6 million.

As a percentage of net sales, adjusted SG&A was 30% versus 24.9% of sales in the prior year quarter. This deleveraging adjusted SG&A is driven by 190 basis points of selling deleverage as a result of the negative comparable sales and from higher boutique payroll associated with our increased field leadership structure initiated in the third quarter of 2013.

G&A expense deleverage of 320 basis points was driven by increases in home office head count primarily in our merchandising and information technology organizations to support our growth and marketing initiatives designed to increase brand awareness. We expect to deleverage these investments in future periods.

Adjusted income from operations was $19.1 million with an operating profit margin of 20.7% compared to income from operations of $24.7 million with an operating profit margin of 28.5% in the prior year 14-week period.

Turning to the full year, net sales increased 16% to $340.3 million compared to the prior 52-week year period. The overall company increase in net sales was driven by new boutique growth with new boutiques contributing approximately $45 million in sales. Comparable sales decreased 2% compared to the prior year comparable sales increase of 16%.

Our merchandize margins decreased 70 basis points to last year due to more frequent promotions and higher levels of markdowns during the year. The incremental activities offer in a more competitive retail environment in 2013 lower to average unit retails and were offset by higher units per transaction. I would point out in our highlights that our merchandize margins to remain consistent within a range of 70 basis points in the last four years.

Adjusted net income was $46.2 million or $1.05 per diluted share based on $44.1 million weighted shares outstanding. This compares to adjusted net income of $47.9 million or $1.07 per diluted share based on $44.8 million weighted average shares outstanding in fiscal 2012. This includes the impact of a 53rd week which was worth an approximate $0.03 per fully diluted share.

Turning to the balance sheet; total inventories at the end of the quarter increased by $5.6 million to $24.6 million. Ending inventory was up 3% on a per boutique basis at the end of the quarter driven by an increase in clearance inventory which carried over to the first quarter.

We had open-to-buy entering the first quarter levels comparable to the prior year and our second quarter was opened more than 75% as we entered the first quarter.

We ended the quarter with $37.5 million in cash and cash equivalent, an increase from $29.9 million at the end of 2012. In addition, during the quarter, the company did not make any additional draw-downs on the revolving credit facility and $25 million remains outstanding at the end of the quarter.

During the quarter, the company repurchased approximately 1 million shares of company's common stock for $17.9 million at an average price of $18.84 million. To-date, the company repurchased $2.9 million shares for $54.8 million at an average price per share of $18.95.

Now turning to the first quarter and full year guidance; for the first quarter, the harsh weather that impacted January continued into February. As a result, transactions continued to be weak in February and we experienced a similar number of boutique selling days impacted in February as January.

Our expectation is that late start of spring will continue to weigh on traffics during the remainder of the quarter. As discussed earlier, January sales did not meet our internal expectations and it impacted our ability to move through seasonal merchandize, resulting in higher levels of clearance inventory as we started February which we project will depress merchandize margins during the first quarter by approximately 140 basis points.

Considering these trends, we expect net sales to be between $85 million and $90 million, an increase of 8% to 14% over the prior year period. Comparable sales are expected to be in the range of a negative high to low single-digit number compared to a 2% comparable sales increase in the first quarter of last year. Additionally, we plan to open approximately 60 new boutiques during the quarter.

Our first quarter SG&A spending is consistent with fourth quarter 2013 as the investments in the expanded field leadership and brand building activities from the fourth quarter extend into the first quarter.

Net earnings per diluted share are expected to be in the range of $0.20 to $0.24 compared to the first quarter 2013 adjusted earnings per diluted share of $0.26.

Moving to the full fiscal year of 2014, we now expect net sales to increase to $391 million to $409 million over the prior year. Comparable sales are expected to be in a range of low negative to low positive single-digit for 2014 fiscal year period compared to minus 2% for the 2013 fiscal year comparable sales.

We expect the back-half of 2014 EPS growth to be stronger than the front-half given our expectation of comparable sales improvement in the back-half of the year and the lot of investments paid in the third and fourth quarter of 2013 paced off our expanded field leadership structure and home office headcount particularly in our merchandising and information technology organizations.

And considering full year earnings, it is important to note that the quarterly earnings growth rate are affected by our expectations at the pace of selling, general and admin growth rates will decrease in the back-half as compared to the front half of the year. We expect consistent merchandising margins in the back-half as compared to the prior year. We plan to open approximately 85 new boutiques during the year, 60% of those will be mall-based.

Net earnings per diluted share are now expected in the range of $1.16 to $1.31; this compares to a prior year adjusted diluted earnings of $1.05. Capital expenditures for the full year are planned in the range of $25 million to $27 million. The number of average diluted shares for the full year assumed in guidance is expected to be $42.5 million, which excludes the potential impact of additional share repurchases during the year and effective tax rate is estimated at 38.6%.

This concludes our prepared comments for the quarter. We will now take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Edward Yruma of KeyBanc Capital Markets.

Edward J. Yruma – KeyBanc Capital Markets, Inc.

Hi thanks so much for taking my question. I know you guys did a lot more marketing this quarter, just trying to understand if you believe in the successful and kind of what is the longer-term trajectory of kind of marketing as a percent of sales given that I think you started this concept as a lower marketing concept? Thank you.

Neill P. Davis

Hi Ed, this Neill and good morning. As it relates marketing, this year our expectation is that the spend will approximate roughly 50 basis points of top line. These are largely organically driven initiatives that I described that M&A from our direct activity since the efficacy of our ability to reach a broader audience is much more efficient now through the digital space. I believe that our spend can be quite productive and even at a lower level than maybe others in the past.

So in the 50 basis points growing on an absolute basis as we grow our top line businesses, I think a reasonable range for you to think about in the near-term as far as that.

Edward J. Yruma – KeyBanc Capital Markets, Inc.

Great, and one follow-up if I may, you’ve had this investment in the field organization I guess what benefits are you seeing that it’s driving and I guess at this point, is there any incremental SG&A investments we should be looking for from an headcount perspective? Thank you.

Neill P. Davis

Sure. As it relates to the changes we made within the – those changes were made in the third quarter of last fiscal year and they continue to match away, I mean you just don’t turn the light switch on, put the people in place and expect immediate return. This is an overall enhancement to the field and the intent here is to drive, improve conversion of the traffic that we do get. So it’s my expectation when I think about return on that performance that will manifest an improving longer term trend and outlook in terms of comps. So we are clearly still in the front-end of that process as we build-out that organization and give them the tools that they need to be incrementally productive over time.

Edward J. Yruma – KeyBanc Capital Markets, Inc.

Great, thanks so much.

Operator

Our next question comes from Simeon Siegel of Nomura Securities.

Simeon A. Siegel – Nomura Securities Co. Ltd.

Thanks good morning guys. Neill, in light of the promotional environment, can you just talk about your AUR expectations for the year and maybe thoughts around normalized margins looking further up?

Neill P. Davis

When you talk about normalized margins, are you talking about operating margins?

Simeon A. Siegel – Nomura Securities Co. Ltd.

More of the gross, but we can do operating as well.

Neill P. Davis

I mean, you heard me mention them and Mark talk about the 70 basis points movement or at least a round of core maintained margin which has recently included participation in a more aggressive promotional environment so that we are as corporately represented to the traffic as it does come to our stores. I think that you’ll expect us to continue to do that.

It will be a little more elevated in the first half of the year for the reasons that we alluded to in our prepared remarks, specifically the lightness in the traffic and our need to move through that seasonal end inventory, so it will be more pronounced in the first half and as we begin to anniversary some of that difficult comp comparisons and return to some degree of normalcy, I expect that our gross margin structure would improve, it would not be impacted by the 100 some odd basis points, it will move back down to a more normal range, which would be at least half of that is my expectation, but again that’s all predicated on some stabilization in our business in the back half of the year, which we feel good about at this point.

So longer term to answer your question about our merchandized product margins would be, I think these remain stable even in light of some mix shifts that’s occurring. We don’t have the double-digit momentum behind this in our jewelry offering, which is our strongest margin component, but we are getting strength in our other categories, our separates business has a better margin profile than our dress business and our accessories business while not near the margin structure jewelry, it is growing at a pace, it is better margin mostly everything else and it is growing at a pretty nice clip. It helps mitigate some of that mix shift.

So on balance, all that said, what you have seen us produce in terms of merchandize margins should be consistent as we look forward in the near-term.

Simeon A. Siegel – Nomura Securities Co. Ltd.

Great. And then just quickly as, I meant that you see what percent of sales online represented?

Neill P. Davis

Percent of sales online, the penetration Mark was…

Mark J. Vendetti

Was over 3%, I think like 3.4% for the fourth quarter and 2.6% for the fiscal year.

Simeon A. Siegel – Nomura Securities Co. Ltd.

Great, thanks a lot guys.

Operator

Your next question comes from Adrienne Tennant of Janney Capital Markets.

Adrienne E. Tennant – Janney Montgomery Scott, LLC

Good morning everybody.

Neill P. Davis

Good morning.

Adrienne E. Tennant – Janney Montgomery Scott, LLC

My question is, I was just wondering if you can give us anymore color on the quarter to-date or is it quarter to-date comps, the reason I’m asking is because there is this Easter shifts going on, so just wondering how much is predicated on that shift transpiring in April? Is it similar to kind of the January trend rates or more similar to the fourth quarter negative 6%, if you can give us any color on that?

And then Neill in your prepared remarks you said that spring fashion there were some strong reaction or positive reaction to some of the spring flows, I’m wondering if you can talk about is that by region or what you are seeing on DTC because I agree that a lot of the trends that are happening should be right up to your real house from a fashion perspective.

And then my final question is just the inventory and sorry if I missed did you give any color on what we should be expecting at the end of the first quarter? Thank you so much.

Neill P. Davis

Sure I’ll take the middle question, I’ll let Mark handle the comp dynamics and the inventory questions. You are absolutely right, the assortment isn’t our real house. Unfortunately, when it snows like it is doing today in the northeast, it’s difficult to create some desire to be aspired to move into spring, but that aside you are right, when I look west and when I look south, specifically Texas is an example and specifically the West Coast I am seeing the sell-throughs and I’m then seeing the performance that gives us the confidence of making the statements that we made in our prepared remarks that it’s regionally driven.

I will also tell you that when you think about our mix in terms of regions, if you just take a region, if you start at Chicago, you move over to Atlanta and then backup to Boston, that’s close to 50% of our store base and that has been a very challenged region. So as we see that abate which I do expect a timely abate, hopefully we’ll begin to pickup on some of those experiences we’re realizing right now and as a result April becomes a very important month for us in the quarter.

Adrienne E. Tennant – Janney Montgomery Scott, LLC

So do you think April is supposed to be above average temperatures supposedly?

Neill P. Davis

Yes, that's what I hear, but we’ll be ready.

Adrienne E. Tennant – Janney Montgomery Scott, LLC

Exactly.

Mark J. Vendetti

Adrienne, on the question regarding comps, as we have moved through the quarter, February worked in sort awful lot like January just in terms of the environment from a weather perspective and the reliance is January never really materialize and pushing into higher level of clearance sales that we would have expected to have completed in January moved into February.

Our perspective as we think about that combined March, April or May is I guess dissimilar to where we would have been from a kind of fourth quarter number. We’re still expecting a challenged environment from a traffic perspective as we think that the spring season again has been delayed due to the weather and then on the inventory side, we head for the quarter, fourth quarter targeted kind of that flat inventory on per boutique basis, as we try to move as we move through the first quarter that again would be kind of our target to get the number of back down to that flat inventory on per boutique basis in terms of ended Q1 number.

Adrienne E. Tennant – Janney Montgomery Scott, LLC

Okay. Not with the down 140 is based on flat with…

Mark J. Vendetti

Yes.

Adrienne E. Tennant – Janney Montgomery Scott, LLC

Great. Thank you very much and good luck.

Mark J. Vendetti

Thank you.

Operator

Next question comes from Randal Konik of Jefferies.

Randal J. Konik – Jefferies LLC

Hey, how are you? I would like to more of a CapEx question. The CapEx guidance looks like its up slightly on a year-over-year basis going into 2014 calendar versus 2013, yet there is six less stores, so can we get some CapEx breakout between what's being spend on the store base versus the remodels?

And then I guess my question is on the remodels, why remodel now? I heard you mentioned a couple of things, but about what you are changing just give little bit more color on those changes and any type of measurable impact on remodels you done so for? Thanks.

Mark J. Vendetti

Randy, I will take the first of part of that and I will let Neill take the second part of that. We finished the year roughly with $25 million in CapEx and as we think about 2014, although we have fewer stores opened, we’re making a significant increase in the number of remodels in general remodel will be in 50,000 range if it’s a full remodel and then the current year we have expectations for capital in terms of some continued in some of our merchandising systems, project and JDA area.

So net-net, I don’t view the difference between the kind of $25 million where we finished the year and the kind of $25 million to $27 million we’re providing guidance significantly different and there is always some timing at the end of the fiscal year relative to where we spend for new boutique and how they come in online. So, I really think the numbers are pretty similar with the biggest change being with the 50 remodels versus roughly 30 remodels we did during the course of this year.

Neill P. Davis

Good morning, Randy, it’s Neill. As your question on remodels why now, there are approximately 150 boutiques in the mix that are nearing end of lease life and/or reaching our renewal period and as we do that quite frankly most of that boutiques are performing well on a four-wall basis, but I am not satisfied with how well those boutiques are presented to the customer. A boutique can get abated properly on a more frequent basis, I think than a more contemporary, current type, pallet that a design protocol has and so I won’t doing is updating, these are color pallet changes, this is refreshing, taking opportunities to enhance the flow of the boutique and so what's just sustaining the brands.

So we are getting into a level of maturity in our store base as I said with the leases that get us and a desire and a need to just begin to elevate our focus in that regard. And these remodels range anywhere from a basic re-color [indiscernible] complete take the inventory there closed down for three or four days and redid it, which include floor etcetera. Are we seeing in returns and what is the response that we are getting back from our customers?

When I look at them to discretely, we are seeing some nice impact. Our customers really are calling out, our fresh to new models are more productive, it is for them from shop-ability standpoint. So I think my customers like it. I’m seeing it show-up in some of the numbers and therefore we’ll continue to do this in a very needful and dedicated way going forward.

Randal J. Konik – Jefferies LLC

Can you hear me?

Neill P. Davis

Now I can.

Randal J. Konik – Jefferies LLC

Okay great. Just one more question, I guess related to share repurchase; you guys repurchased a fair amount of shares during the 2013 calendar year. How do you think about go-forward potential share re-purchase and/or leverage ratios? And that’s my last question. Thank you.

Mark J. Vendetti

Simplistically, we view from our cash flow, our operating cash flow, I mean our primary use of that is continuing to invest in growth of the business, new boutique free models CapEx, that excess cash flow we’ll either use to repurchase share and/or paydown the existing $25 million of revolver we have. We don’t expect to use any additional debt during the year.

We continue to be highly cash efficient and I have talked about having minimum cash on the balance sheet at any point in time of at least $25 million, but don’t need much more than that to manage and run the business on a day-to-day basis and as I look forward to 2014, our share repurchase activity is going to be driven by a variety of things including what the market conditions are and our share price and the general direction of the business and the cash flow we are throwing off.

Randal J. Konik – Jefferies LLC

Thanks very much. I appreciate it.

Mark J. Vendetti

Okay.

Operator

We’ll go next to Howard Tubin of RBC Capital.

Howard Tubin – RBC Capital Markets, LLC

Thanks guys. Maybe just in terms of your promotional plans for kind of the first quarter and the second quarter, I know you don’t like doing full store events that are not effective for you, which we can expect to see in stores to help get inventories down a little bit?

Neill P. Davis

I mean it’s BOGO handle always works quite well. Our customer onset to be the cleanest of the most efficient shoppable handle that we can deliver and that is the handle that will deploy and as we move into second more type area, we’ll get a little more aggressive, consolidate those by price points that also make it more productive for her to shop and see discretely the value and we can do that quite clearly and as you can see it quite clearly in a 1400 square foot box. So it’s consolidating the moving on that second more faster than the first and then ongoing promotions, it helps clear before we get to those points would be the BOGO handle.

Howard Tubin – RBC Capital Markets, LLC

Got it, thanks. Any update on your outlook store test?

Neill P. Davis

I am sorry, what’s the question?

Howard Tubin – RBC Capital Markets, LLC

Sorry, any update on the stores you are testing in outlet centers?

Neill P. Davis

Well, while we had opened three outlets in this past fiscal year, I have opened another five so far and we only have one of them moving into the comp base and we are satisfied with those results. These outlets are being strategically positioned throughout the country on a regional basis wherever our brand is best developed and I would tell you on balance, our new boutique productivity that we are seeing out of the outlets is consistent with the new boutique productivity of a mainline non-outlet boutique that we’ve seen this year and we saw in 2013.

So we will continue to move forward with developing that type of property and I think it will do nothing, but help us also facilitate clearance tightening beyond promotions and more advance as we move forward just having more space to accommodate appropriate transfers in specific regions which we did do with the limited boutiques that we did have in 2013, now just have a greater space to leverage that. We’re happy with the properties and its performance and how are customers responding to it.

Howard Tubin – RBC Capital Markets, LLC

Got it, thanks.

Operator

We’ll go next to Morry Brown of Wedbush.

Morry Brown – Wedbush Securities, Inc.

Thank you for taking my question. Just to follow-up on quarter to-date trends and the weather. For the warmer weather stores that are outperforming, are they trending towards the high-end of your comp guidance or would they even be slightly above that range?

Neill P. Davis

That’s a really specific question in terms of getting into the regional. We have generally without going into which is the high-end or which is the low-end, we have generally seen and this goes into the Q4 and Q1, the parts of the country that have been less weather impacted have been performing well within our guidance range.

That was the case in Q4 and that's the case within Q1 and we talked about approximately 200 basis points of weather impact throughout the entire Q4 with most of that being concentrated in the month of January and so we continue to see a similar divergence or we saw that similar divergence in performance during the month of February.

Morry Brown – Wedbush Securities, Inc.

Okay, thanks that's helpful. One follow-up, you talked recently about mall stores outperforming non-mall stores in the last few quarters. Did that trend become more or less pronounced during the fourth quarter and quarter to-date periods?

Neill P. Davis

During Q4, it was similar. The magnitude of the difference was from a transaction basis was couple of 100 basis points not large and again it was very pronounced in the non-mall locations that were in highly weather impacted areas.

Morry Brown – Wedbush Securities, Inc.

Got it, thank you.

Operator

Next question comes from Brian Tunick of JPMorgan.

Brian J. Tunick – JPMorgan Securities, LLC

Thanks, good morning guys. Two questions; one, on the SG&A step-up over the last couple of quarters, can you maybe talk about some of the payback you expect and sales trend below plan sort of what variability do you have to continue to look at that line item and then on the DTC growth, can you maybe talk about what do you still see as the greatest opportunities in the coming year, that’d be spoken why there are assortments online, what are you seeing in terms of average ticket online versus stores anything you could tell us about the DTC business? Thanks very much.

Mark J. Vendetti

So Brian on the SG&A area, the big investments, first we’ll talk about the field structure, we put that in place really starting in the third quarter and fully leverage it during the fourth quarter but fully implemented during the fourth quarter.

So from a pure expense perspective, we really don’t start to lap that until we hit the third quarter of this year and from a pure leverage perspective, the actual leadership structure from the area managers up through our zone vice presidents, we will really start getting leverage out of that because that group is predominately fixed in the short-term, we are not adding new regions or zones and we think the growth in area managers will be far less than the growth in our boutique, so we should expect to see leverage in that part of our organization as we hit third quarter of this year.

From a home office perspective, particularly in the merchandise organization and the IT organization, the headcount we added if the home office also really built into the third and fourth quarter and we expect our home office G&A spending to be far more leveled this year than it was last year and the key investments having been made last year.

So again as we start moving to the back half of the year from just a pure dollar basis, but we’ll start seeing much slower growth on a dollar basis in that area.

And then Neill talked a little bit about marketing, would be Under the Gunn program and some of the initiatives that we talked about, we’re spending at a level similar in the first quarter as we did in the fourth quarter and that should moderate a little bit in the back-half of the year and then probably pick up again in the fourth quarter as you have the higher sales volume in the holiday going further.

Neill P. Davis

Good morning, it's Neill. To your question on our direct consumer business, as I mentioned in my prepared remarks, recent growth is, 40% is coming from traffic and 60% is coming through better efficiency of that traffic. As I look forward it’s our expectation that we continue to realize the similar level of traffic growth and that the improvements in terms of our average order value and conversion will more likely come from improved conversion as opposed to higher average order values.

The average order value is higher online than it is in our offline spaces and as large because it’s a much higher mix of clothing. In terms of merchandise to try to expand the opportunities for our customer online, one of the areas is within our accessories category specifically footwear.

We have developed plans to be more aggressive with that online this year and we can do as we don’t have the space constraints and it’s just the more productive and we’ve seen it’s a more productive category for us with our experiences past year.

So there are opportunities with that and doing continue with our organic activities and driving that traffic. I think the growth rates while it’s maybe difficult to replicate a near 100% growth rate, now anything north of 30% which is faster than what we are growing our boutique basis, what we would be looking for this year and next year.

Brian J. Tunick – JPMorgan Securities, LLC

If I could just drove in maybe just one last one on the jewelry transition, just curious what kind of lead times you have in jewelry and how your vendor base is set up, usually you have a very fast testing on that model, so just wondering what’s a reasonable timeframe do you think for jewelry to move in the right direction given the business model?

Neill P. Davis

Well, I mean jewelry I mean as I said, I expect to see because of the headache that we have relative to January and February that Mark has referred to and the weather and the incremental clearance, elongates our realization of stabilized performance in terms of jewelry into the second half of the year.

We will see sequential improvements from the second quarter, but it will show up more pronounced in the back half and again nothing has changed with our business model, nothing has changed with our ability to test and react. What you should understand is that, a metal oriented, metal dominated theme in terms of jewelry is a softer fashion callout, it’s not as aggressive for her when she walks in, it requires more consideration, it’s more of a muted stock and so, it doesn’t just sell off the rack as strong as any colors theme has in the past.

So even as we are moving into the category and better positioning our offerings, we will need time to learn how we can effectively grow those silhouettes in a way that category has performed in the past, but it will be a learning process for us.

I think our boutiques are well represented and if you walk our boutiques, you will begin to see the gold and the silvers enhancements in terms of earrings and bracelets and we are beginning to see her response to them, but it is a cycle change and we are taking a conservative approach as what we said earlier about what that potentially means for us and we still expect that category to be 20%-ish of our business.

The question is, it just how fast does it grow the historical standards. I think we have got great value for the category and I think we are well positioned and moving the right direction as we can.

Brian J. Tunick – JPMorgan Securities, LLC

Terrific, super helpful, good luck for spring guys.

Neill P. Davis

Thank you.

Operator

We will go next to Janet Kloppenburg of JJK Research.

Janet J. Kloppenburg – JJK Research

Hi everybody.

Neill P. Davis

Hi Janet.

Janet J. Kloppenburg – JJK Research

Just to follow up on the jewelry question, I know it represents 20% of the business, so should we think of that category should start the comp positive in the back half, is that underlying in your assumptions or are you expecting the accessory and apparels and I guess gift categories to offset that shift in contribution from jewelry? I’m just wondering what your guidance contemplates and how we should be thinking about trends in that category throughout the year? I know you are up against some pretty significant comp gains from last year.

And also I was wondering on the SG&A level trying to understand that there is a step up in SG&A in the first half versus last year and that it moderates in the back half. So at the upper-end of your comp guidance plus low single-digits, are you able to leverage SG&A there as is exact how we should be thinking and just lastly on the comp guidance as minus low to plus low single-digit guidance, I think the trend feel likes it will be down more than that in the first half and then perhaps the lift in comps could be greater than first low single-digit than the back half, is that a fair assumption? Thank you.

Neill P. Davis

Good morning, Jan, it’s Neill

Janet J. Kloppenburg – JJK Research

Hi.

Neill P. Davis

Hi how are you? On your question on jewelry, you are exactly right. The expectation is that our jewelry category would begin to contribute to the comps positively in the back half as they will be challenged in the front half. As it relates to the margin implications of that dynamic, yes, we do expect improvements in our separate business as well as our accessories business that help mitigate the less energetic, stronger margin category of jewelry such that it fits close to a neutral point of view.

Mark J. Vendetti

So that’s the high-end of the comps since we’re talking about on ability to leverage the SG&A. We’re right at that point where, yes, we do start to leverage the SG&A component and then on the comp movement as we go through the year, it doesn’t improve sequentially as we move through the first and second quarter into the back half. We are the large part of that aided by again the easier comparison in the back half of the year and the commentary we alluded to on the jewelry business in terms of improvement in the back-half of the year as well.

Janet J. Kloppenburg – JJK Research

Okay. And Neill just another question on jewelry, given the change the fashion shift that’s occurring there, are you shifting inventories, inventory investment out of jewelry and into the gift or apparel categories?

Neill P. Davis

No.

Janet J. Kloppenburg – JJK Research

No, so you think that should be maintained at that level of sales, 20% of total?

Neill P. Davis

Right. It’s just the degree of growth that we are able to achieve with that, the comp rate of 2%, as put in the high end of March range, I don’t expect to see a dramatic shift in the overall mix of this year.

Janet J. Kloppenburg – JJK Research

Okay. And do you think given what your spring and spring trends beyond having the clear the carryover winter merchandise, do you think one, we get to some normalized weather trend that promotional activity at Francesca’s should be began to moderate?

Neill P. Davis

That’s certainly my objective, Sei Jin, our chief merchant and I have these conversations frequently about our desire to drive relevance of products as the primary effort to move and I think she has done a great job in positioning that, it’s just not that clear for us if the moment for all these, obvious traffic constrain reasons from weather, but my expectations and our focus and our objective is to try to be less promotional in driving that uniqueness and newness in product into our traffic. I am sure a lot of people would like to do something similar, but we are focused on that and I hope that that transpires into little bit either.

Janet J. Kloppenburg – JJK Research

It’s a little more specific Neill, because last year you were saying that in the fall that the fashion trends weren’t favorable to the Francesca’s brand, but I think you are saying that color and femininity that you see in the spring trends are more favorable and distinct for our franchise is beneficial for your comp, so I’m wondering if you still feel that way and if that should help the promotional levels to mitigate?

Neill P. Davis

Yes, I tried to allude to that in my prepared remarks. I feel very good about the profile and as Adrienne commented in her question about [indiscernible] we likewise deal similarly and therefore, are optimistic as we move into some degree of turns in all of the season.

Operator

And we will take our next question from Liz Dunn with Macquarie.

Lizabeth Dunn – Macquarie Capital, Inc.

Hi, thanks for taking my question. Most of my questions have been answered, but I just wanted to circle back on this jewelry thing, but I am just trying to understand, are you happy with how you are positioned now and it’s just that the trend has moved away from you or is there still some movement in the repositioning and you expect to be better positioned as we move through the year and then are you currently seeing jewelry trend sort of in line with the rest of your comp or is it, are we seeing a big negative shift in jewelry and in the back half I know you commented that merchandize margins would be flattish in the back half, does that assume some stabilization in some of these mix related issues as well as a more normalized promotional environment? Thanks.

Neill P. Davis

Well, there are a lot of new ones questions within jewelry. Here is what I would say about jewelry. I am satisfied and comfortable with our merchants interpretation of the current trends that’s labored these kind of silhouettes we referred to and the receipts and the flow are addressing those and the floors are being set accordingly. What is putting pressure on us in the first half of this year is what has happened in January that continues into February. I still have a fair amount of clearance product, and I got to move through.

So what I have seen in terms of the new receipts and the planning, I think we are on trend. So it’s transitional of moving through the clearance in a way that best positions the floor where I forward set a ret price on trend in terms of our interpretation that we are looking for and as we move into the second half of the year, the expectation is that we are beyond a lot of the clearance that we do have that fuller, proper set of the category and then move on from that and determine what we can build on it and how our customers responding and then how it sails inside our boutique is where it goes from there.

Operator

And we will take our next question from Lindsay Drucker Mann of Goldman Sachs.

Lindsay B. Drucker Mann – Goldman Sachs & Co.

Thanks, good morning everyone.

Neill P. Davis

Good morning.

Lindsay B. Drucker Mann – Goldman Sachs & Co.

I just have one question; first, Neill I was hoping if you comment on the very strong new store productivity that you are seeing just to confirm you are looking for something that’s like 90% of fleet average for your new stores that you opened in fiscal 2014 and why do you think that new store productivity does remain so strong when your awareness relative to other specialty retailers is still pretty low?

Neill P. Davis

Well, I think it’s two-fold. For this year to go into it, our real state positioning and selections are quite good. It gives us the exposure to traffic and visibility that is not I guess uniform and it’s ability with other type brands and so there is part of that and then we do open up new, the floor is set with a full complement of the season are not challenged by the communist dynamics as what we’ve talked about on the call so far.

And what I’m seeing is a relatively strong performance of the 30 some odd boutiques we’ve opened so far this year and as someone alluded to that in my prepared remarks about new boutiques are not as constrained as our comps are, because they’ve better positioned as before, they are more ready sort of speak and we are better able to see the customer respond to our fashion choices for the spring. So it’s a combination of all three of those that continue.

Operator

And we’ll take our next question from Laura Champine of Canaccord.

Laura A. Champine – Canaccord Genuity, Inc.

Good morning, so Neill if I interpreted your comments correctly all the new stores you are launching already five launched in the first half, does that mean and I think most of those leases were signed early last year. Does that mean that you stopped signing new leases, it’s one point and what does that imply for a square footage growth in 2015?

Neill P. Davis

No it doesn’t imply. I’m actually aware of what we have pretty much circled in the current year, the pipelines there as I think Mark said, actually said in prepared remarks, 75 or 85 have been executed and others are still in negotiations and I don’t see any reason why those wouldn’t be rounded out, but we continue to have internal discussions about 2015, the ongoing profile of the pipeline that exists and I’m standing up for new opportunities for 2015 as we speak and I will continue to do that throughout this fiscal year.

It’s the 900 boutiques, worth 450 into it and I think as we said over the six, next six to seven years, we’ll continue to pursue that. So the implications if you just do that math that’s 60, the 75 stores and as we articulated in the past that can be plus or minus, it depends on what our real estate team is able to identify in terms of properties that they believe are best works for us and we’ve been in a situation of finding some properties that we want to pursuit and I’d rather pursuit than now rather than later to get best positioning from the competitive standpoint.

Operator

And we have time for one final question. That question comes from John Kernan of Cowen and Company.

Jerry W. Gray – Cowen & Co. LLC

This is Jerry Gray on for John. Thanks for taking my question. I was wondering if you could talk a little bit about any differences in profitability between the e-commerce platform in your stores and just kind of how we should think about the margin contribution from e-commerce, does that becomes a larger proportion of your sale?

Neill P. Davis

Good morning Jerry. I’ll call marginal variable profits between DTC and our store is fairly similar. So as we move forward and that platform grows as a percent of total company business, we are looking at any type of margin dilution as DTC business growth. They are similar in upwards, not a key factor in how we think about the business.

Operator

And at this time, I would like to turn the conference back over to Francesca’s for any additional or closing remarks.

Neill P. Davis

This is Neill again. Thank you everyone for taking time and ongoing interest in Francesca’s and we look forward to a warm and inviting spring, I know everybody else does and we will look forward to talking to you next quarter. Thanks.

Operator

That does conclude today's conference. We appreciate everyone’s participation today.

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