Francesca's CEO Turnover Panic Offers Pullback To Load Up

| About: Francesca's Holdings (FRAN)

Francesca's (NASDAQ:FRAN) will continue to grow. Shares dropped a few percent after the close on the 4th despite another great quarter. I think people are being irrationally fearful about the announcement of CEO John De Meritt's retirement. (And irrational fear makes for the perfect time to be greedy!)

On the call De Meritt noted that he is leaving only after setting Francesca's up for continued future success. He had three goals that he wanted to accomplish: establishing a highly qualified senior management team, setting up a strong balance sheet, and setting up an infrastructure capable of handling the continued growth. During the Q&A part of the conference call Mr. Neill Davis, who will take over as CEO January 1st, noted that he plans to continue the vision and momentum the company is currently following. In regards to the balance sheet Mr. De Meritt noted that Francesca's plans to pay off its remaining debt in the next quarter and be debt free. This is remarkable because Francesca's is funding opening over 70 stores a year from its own cash and still increasing profits. Lastly was the infrastructure, which is covered by a new HQ/warehouse building as well as upcoming improvements to the ecommerce platform. The current price is unjustified because the company again beat earnings and has a solid strategy for continuing to grow. This is an excellent point to initiate a position or add more shares; I already have increased my position.

According to the press release on Francesca's website, Mr. Davis, "is a highly qualified and seasoned retail executive. His experience in helping Men's Wearhouse realize double-digit compound annual growth rates in sales and profitability." On top of those 15 years he has been with Francesca's for 5 years, most recently as president, and has been a clear player in developing and following the current success. The incoming president is the current COO, Ms. Backes. According to the same release she has been there since 2007 as well, and has 25 years of prior retail experience in director and executive level positions. Again, as COO she has clearly been involved in the vision and planning that has gotten Francesca's to where it is today. These two are not some rogue outsiders coming in to try and make a statement or turn a floundering company around. They are very experienced insiders that have stated they will not be making any drastic changes and will continue to focus on the great things already being done.

Looking at the numbers, Francesca's plans to have 77 new stores opened this FY and looks for a similar number in the next year. These stores will be split at about 50/50 mall and non-mall. There are currently 62 leases already done for the next FY. We also got some great insight into their growth strategy. It was noted that locations were carefully selected so that one year didn't have all premium locations and then the following year were just average stores. This helps us as investors know that we can expect increased growth each year because we know there will be a mix of stores that will all contribute positively to the bottom line. The first outlet store also opened, but it was noted that future outlet plans will likely be delayed until more results and feedback from the currently open location come in. Web business was also up 62% compared to the same quarter last year. Francesca's executives noted the company offers some expanded lines and options online that can't be offered in stores because of the limited space. As long as these offerings come in the same quantities and timeliness that the in store items do this shouldn't be a problem. This keeps people frequently checking the website and having to visit the stores to always see the new merchandise. While I personally think this would be too much work, my fashionista wife assures me that it is an addicting game to be constantly checking to see what new items have arrived.

Same store comps increased to 20.7% driven mainly by increased transactions and increased total sales per transaction. Gross margins increased by 2.5% and SG&A expense was down for the quarter. All the numbers are going the right way. The company increased guidance for the rest of FY12 and expects an EPS of $0.94 to $0.96. According to Yahoo! Finance, Francesca's has a P/E for the trailing 12 months of 38.98 and an EPS over the same period of $0.77. I think the P/E should end FY 13 around 50 (just slightly below the level prior to the CEO turnover scare) as the company still has over 500 stores to open over the next several years to meet its goal of 900. If the P/E were to drop to 50, before the end of FY13, given current EPS guidance of $0.94 at the high end, shares should be at $47 by the end of Francesca's current fiscal year. I can easily see shares there by the end of Francesca's FY13 at the latest.

The biggest hurdle to getting the share price back to where it belongs is restoring investor confidence. Over the next quarter or two we should continue to hear excellent results. We should also hear how Mr. Davis and Ms. Backes aren't making any drastic changes but only continuing down the excellent path that Francesca's has laid for itself: continuing to keep fresh, new products coming into stores, opening new stores in excellent locations, reducing SG&A expenses, and finish paying off the debt on its books.

Disclosure: I am long FRAN. 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.