I'll be the first to admit I have no fashion sense (and my wife would call that an understatement.) She however, is big into fashion and on top of new fashion trends. She happened across a Francesca's (FRAN) early last fall and came home excited about her new find. She loved the layout, the ambiance, the product lines, and the prices. Over subsequent (and frequent) visits she was always reporting new products on the shelves. I looked up the company, found the stock, and began my research. I loved everything about the story and bought in. I've been holding on ever since and considering adding to my position again because I think Francesca's still has a long way to go.
According to Francesca's model, each store is designed uniquely to enhance the boutique feel. It orders small quantities of a broad selection that hit shelves no later than 12 weeks from order date so the items are always trendy. Currently stores are paying back the investment pre-tax within the first year of operation. But, it admits it is taking advantage of the current economic state and having landlords pay for all or most of the location construction costs. An average new store grosses $750,000 in sales in a 1,400-sqft store that costs $306,000 (includes the average of $81,000 in allowances) to open.
As of its most recent annual report, it operated 283 retail locations across 41 states and plans to triple the number of locations over the next decade. Over the last two fiscal years the number of stores grew by a CAGR 38.8%, net sales grew by a CAGR of 60.4%, and income from operations grew by a CAGR of 57.8%. Comparable boutique sales increased by 10.4% in 2011.
So where is it going?
I look for store growth to drop to a CAGR of 26% through the end of 2013. This rate would put the company on track to meet approximately 900 stores in seven years. Its current operating margin is around 21%, which is well above competitors and the two closest industries. Ann Taylor (ANN) at 6.8% and Urban Outfitters (URBN) at 11.5%. Yahoo Finance puts the specialty retail industry margin at 4.8% at the apparel industry margin at 7%. This because competitors order large amounts of product and are forced to sell on clearance when the items are out of season. As mentioned, Francesca's would rather sell out and have customers wanting more and buying other newer and fresher products to reduce the need for markdowns and lowering margins.
Analysts are predicting 2012 EPS near $0.80 and 2013 EPS near $1. I think revenue will be closer to $300 million and that the profit margin will increase to 13% as more stores mean more volume discounts. With my prediction net income would be near $39 million for EPS of just under $0.90. If that holds true, even with a P/E drop to 40 shares still will see $36/share. Keeping with the 40% for 2013 and dropping the profit margin to 12% I think we'll see EPS closer to $1.15, which is a fair amount over analysts' $1.00 EPS estimate. With those ranges in mind I think by the end of 2012 shares will be in the $36-$40/share range and at the end of 2013 shares will be near $40-$48.
While we won't see the over 60% growth in share price that we have seen since October, it should grow another 12% this year and 12% in 2013 at a minimum. Once the company has sufficient cash on hand to meet the 2016 debt obligation of $22 million, I think a dividend could come around. Currently the company uses around $14 million to open new stores, while it generates $20.6 million in free cash flow and has $14 million in cash on hand.
I think it is still a good buy here. You can watch for a slight pull back, but make sure to buy in before next quarter's earnings are released because I expect a positive surprise and the stock will run again.