Last week, Francesca's Holdings (NASDAQ:FRAN) posted some of the best quarterly numbers I have ever seen in the retail space.
Second quarter earnings rose 87% to .28 a share. Sales rose 49% to $76.3 million . Comparable store sales were up an astounding 20.9% over last year.
Despite the dramatic numbers the stock actually dropped almost 30% last week because the CEO John De Meritt, announced he was retiring effective December 31.
Taking over as CEO next year will be Neill Davis the current President, who has been with the company for 5 years and before that was with the Men's Warehouse for 15 years as a senior executive. Theresa Backes will be taking over as president. She has also been with he company for five years and before that was a senior executive with David's Bridal and Target.
As I will now explain, the Francesca's concept is a very unique story and the most compelling I feel in all of retail This goes beyond one person and the company should continue to thrive beyond MR Demeritt's departure at years end.
Francesca's is a chain of 340 stores which sells clothing gifts and jewelry to the 18-35 year old female demographic. Each store has a unique exciting boutique vibe with contemporary music and scented candles. The stores are small ranging from 1200-1500 square feet.
What makes the experience unique is that the stores carry very trendy merchandise but keep the price points low at $70 and under. They also have a unique concept called "broad shallow" which is that they sell many different products, but each product will only make one appearance per store. In fact, most stores only get five pieces of every item. Once the item is gone it will never be sold again. Every store also gets new shipments every day and restocks the store with brand new product on a constant basis.
This "broad shallow" idea has many advantages. First of all, it keeps the customer coming back to see what is new and a returning customer is what every retail chain relishes. Second of all, the newness of inventory keeps the store feeling fresh and exciting. Third, because customers know the items will not be restocked they can't wait for a sale and it gives them the urgency to buy now.
From the company's perspective, the constant refresh of inventory allows them to avoid stocking a warehouse and allows them to ship at times straight from the manufacturer to the store. They can also avoid mark down sales which hurt margins. And when styles change they don't get caught with inventory that they are unable to sell.
Francesca's has been criticized with high profit margins that are "too good to be true" by some. What they don't understand is that the small store size allows them to carry fewer employees & pay less rent. The broad shallow concept allows them to not have to carry inventory or make major mark downs. They also do not advertise, instead they rely on word of mouth and the fact that the clothes speak for themselves.
The company also uses private label brands and many vendors who all vie for the company's business which allows the company to get product at lower price points.
The company also has a unique relationship with their employees. Every employee is highly incentivized to reach monthly sales goals and every store has someone from the management team directly involved with every store, something that one does not see at most public corporations. Also, every store manager is given some autonomy on the look and feel of the boutique which makes the manager feel as is if she is a part owner. The autonomy in the look and design of each store allows each store to look different which is another way to give each Francesca's store a more boutique feel.
Despite the rapid growth at Francesca's over the last few years, the company still has lots of room to grow. The company has plans to grow from the current 340 store level to 900 stores here in the United States. There are no current plan to go out of the U.S. but I can see this concept working in other countries as well.
Francesca's has only just begun investing in its web presence and mobile marketing. Despite 60% growth this year, web sales account for less than 2% of overall sales. They have been investing a lot of money this year in improving the web site and email and social media marketing.
I bought a large position in the stock this past Friday. I feel that the 30% drop last week will end up being a great opportunity to be able to buy the best concept in retail at a significant discount to its growth rate. Although obviously the company will not be able to grow sales at near 50% and earnings near 90% forever, 30-50% eps growth for the next several years is not out of the question.
While the departure of Mr. De Merritt at year's end is certainly a loss, I feel the company is in able hands with the current management.
Neill Davis helped build Men's Warehouse into a national brand during a time when men's suits were under siege. Since he has come on board at Francesca's the company's growth has only accelerated.
Certainly Mr Davis feels he has what it takes to do the job as he bought 25,000 shares in the open market at $28.37 on Friday. As Peter Lynch used to say, "insiders sell for many reasons but they only buy for one".
Ms. Backes in particular is very impressive. I heard Ms. Backes speak at a conference this past June and came away feeling she had intimate knowledge of the details of every particular detail of the Francesca's concept, and was emotionally in tune with the brand as much as any retail executive I had ever heard.
With these two executives at the helm, I feel confident that the company can continue to grow and thrive as it has been for the last several years.
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.