Francesca's: IPO Price Above Range at $17

Jul.22.11 | About: Francesca's Holdings (FRAN)

Francesca’s Holding Corp. (NASDAQ:FRAN), aka Francesca’s Collections, priced its IPO of 10 million shares at $17.00, above the indicated range of $14.00-16.00. Of the 10 million shares offered, 3.33 million were company or primary shares and 6.67 million were from selling shareholders (which includes 5.7 million shares from CCMP Capital, of which Greg Brenneman is Chairman, and he is also the Chairman of the Board of Francesca’s). At the $17.00 price the market capitalization will be approximately $746 million. The company plans to use the proceeds, together with borrowings under its new revolving credit facility to repay its existing senior secured credit facility. Lead underwriters for the offering are Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM), and Jefferies (JEF).

Francesca’s collections is a specialty retailer targeting 18 to 35 year old women with a differentiated boutique shopping environment. Through 249 stores, or “boutiques” as the company refers to them, across 38 states, the company offers a diverse assortment of merchandise: Apparel (represents approximately 50%); and Accessories, Gifts and Jewelry (represents the other 50%). It offers what the company calls trend right merchandise at a compelling value.

The company operate under what it calls a broad and shallow merchandising strategy, with its average boutique offering approximately 3000 SKUs with approximately 15,000 different styles offered each year. This enables them to offer the latest fashion trends and creates an urgency to buy as all the merchandise is offered in limited quantities. Its boutiques are located either in a street location/life style center (59% of the locations) or within a mall (41%).

Francesca’s has grown its store count rapidly from 64 in 2006 to 207 in 2010. It expects to add an additional 75 this year and next (with 55 of those 75 for 2011 opened as of May, including 2 additional states). The company believes it can grow to a total store count of approximately 900 over the next 7 to 10 years. The new store economics are also very compelling with a total initial investment of approximately $155k (including inventory), Average sales of $650-750 thousand, cash on cash return of approximately $150%, and an average payback period of about 8 months.

Revenue has grown at a 61% CAGR, from $52.3 million in 2008 to $135.2 million in 2010 (fiscal year end is January 31). For 2010 the company had an operating margin of 21.9% and net income of $16.9 million. It has also had positive comparable store sales growth for the last 8 quarters.

While the offering appears to be in line to the higher end of the peer group based on our estimates of forward earnings, based on the anticipated growth rate the current level appears more than reasonable. The books were said to have been multiple times oversubscribed, and Francesca’s appears to have the right mix of unit growth, same store sales growth and operating margins north of 20% to garner plenty of institutional interest. Expect a nice day one premium.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FRAN over the next 72 hours.