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Based in Houston, Texas, Francesca's Holdings (proposed FRAN) scheduled a $150 million IPO with a market capitalization of $659 million at a price range mid-point of $15 for Friday, July 22, 2011. The full IPO calendar for the week of July 18th includes seven IPOs.

Even though we expect FRAN to rise to an opening day premium, it has three potential red flags

  • 100% of the IPO proceeds to shareholders and underwriter affiliates. This is the most pure insider bailout we have seen in some time. 23% of the total shares are expected to be sold in the IPO.
  • Negative book value, customary for a leveraged buyout, puts FRAN’s growth plan at a competitive disadvantage relative to public competitors.
  • The admirable increase in same store sales -- +9.8% for the fiscal year ended January 2010, and +15.2% for the fiscal year ended January 2011 -- just cannot continue at the same rate of growth.

GROWTH ESTIMATE -- To juice IPO excitement FRAN says it “sees an opportunity to grow its boutique base from 249 locations in 38 states as of April 30, 2011, to 900 boutiques in the United States over time.”

Most specialty retailers on a fast growth track make similar IPO statements, so we’ll believe it when we see it. It certainly seems plausible that other specialty retailers, especially with stronger balance sheets, are already targeting FRAN and its defined markets.

VALUATION -- Based in the price range mid-point of $15 and annulazing the three months ended April 2011, FRAN is valued at 4.3 times sales, 35 times earnings and -83 times book value (because FRAN has a negative book value)

Compared with others in the industry, FRAN's price-to-earnings ratio of 35 is the highest, and its price-to-book value is the lowest.

COMPARE

Mrkt

Price /

Price /

Price /

Price /

Gross

For the qtr ended April 2011

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

Profit %

Francescas Hld (NASDAQ:FRAN)

$659

4.3

35

-82.3

-83.3

52%

Urban Outfitters (NASDAQ:URBN)

$5,000

2.4

32

3.8

3.8

37%

rue21 (NASDAQ:RUE)

$831

1.2

22

7.4

0.6

39%

Chico's FAS (NYSE:CHS)

$2,790

1.3

15

2.1

2.1

59%

Ann Taylor (NYSE:ANN)

$1,390

0.7

13

3.8

3.8

57%

bebe stores (NASDAQ:BEBE)

635

1.5

-60

1.8

1.8

37%

Other valuaton metrics for FRAN

BUSINESS -- Francesca’s collections® is one of the fastest growing specialty retailers in the United States. Retail locations are designed and merchandised to feel like independently owned, upscale boutiques and provide customers with an inviting, intimate and differentiated shopping experience.

FRAN believes it offers compelling value with a diverse and uniquely balanced mix of high-quality, trend-right apparel, jewelry, accessories and gifts at attractive prices.

Assortments are tailored to appeal to a core 18-35 year-old, fashion conscious female customer, although FRAN finds that women of all ages are attracted to its eclectic and sophisticated merchandise selection and boutique setting.

GROWTH PLAN -- FRAN believes it has an opportunity to continue to grow its boutique base from 249 locations in 38 states as of April 30, 2011, to 900 boutiques in the United States over time. FRAN merchandise is also available through an e-commerce website, francescascollections.com.

HISTORY -- FRAN opened its first boutique in Houston, Texas, in 1999. John De Meritt, President and Chief Executive Officer, and Kyong Gill, Executive Vice Chairperson, are two of the original four Founders of francesca’s collections®.

LEVERAGED BUYOUT -- In February 2010, CCMP acquired a controlling interest in the company with the goal of supporting Mr. De Meritt and the management team in accelerating growth, which sounds like a nice statement.

However, CCMP proceeded to cripple FRAN’s balance sheet by borrowing as much as possible, and paying the borrowed proceeds to stockholders as dividends.

COMPETITION -- Publicly held competition includes White House | Black Market, a division of Chico's FAS (CHS); Ann Talorr (ANN); Anthropologie, a division of Urban Outfitters (URBN); bebe stores (BEBE) and rue21 (RUE).

SHAREHOLDERS -- Upon the completion of the IPO, affiliates of CCMP Capital Advisors, LLC will own 65% of FRAN. The founders, Mr. Chong Yi, Ms. Kyong Gill, Ms. Insuk Koo and Mr. John De Meritt will own about 10% of FRAN.

CCMP is a private equity firm specializing in buyouts and growth equity investments in companies ranging from $500 million to more than $3 billion in size. With offices in New York, Houston, and London, CCMP focuses on four primary industries: Consumer, Industrial, Energy and Healthcare. Investments under management in its current fund, CCMP Capital Investors II, L.P. include, in addition to the investment in our company, ARAMARK Holdings Corporation, Chaparral Energy Inc., Edwards Group PLC, Generac Holdings Inc., Infogroup Inc. and LHP Hospital Group.

USE OF PROCEEDS -- 6.7 million shares are expected to be sold by selling shareholders. FRAN itself expects to sell 3.3 million shares to raise $44 million, to repay debt advance by affiliates of the underwriters including Goldman, Sachs & Co. (NYSE:GS), J.P. Morgan Securities LLC (NYSE:JPM) and Jefferies & Company, Inc. that will each receive $9.56 million of the net proceeds. An affiliate of RBC Capital Markets, LLC (OTC:RBCPF) will receive $6.62 million of net proceeds and affiliates of Stifel, Nicolaus & Company, Incorporated and KeyBanc Capital Markets Inc will each receive $4.41 million of net proceeds

Source: IPO Preview: Francesca's Holdings