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University of California, Berkeley | Intended Business Administration Lighthaven Capital Management LLC
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  • Francesca's Holdings Corporation - Not A Lucrative Investment 0 comments
    Sep 24, 2013 2:47 PM | about stocks: FRAN

    Francesca's Holdings Corporation (NASDAQ:FRAN) is a holding company whose business operations are conducted through its wholly owned indirect subsidiary, Francesca's Collections, Inc. The Company currently has an $800-900M dollar market cap and is priced at $19.19 as of the time of this writing. Francesca's operates a national chain of specialty retail boutiques in the United States. The Company's retail locations are designed and merchandised as upscale boutiques. Francesca's offers a range of fashion apparel, jewelry, accessories and gifts, primarily designed for female customers. The Company's merchandise is also available through its e-commerce Website,http://www.francescascollections.com. As of January, 2013, it operated 360 boutiques under the Francesca's name in 44 states in the United States. Francesca's Holdings Corporation was founded in 1999 and is headquartered in Houston, Texas. Although Francesca's currently has solid numbers and is worthy of investment by many investors, I question its ability to expand geographically and would rather invest in companies that can more likely become 10-baggers.

    In terms of store count, although dozens of Francesca's stores are being added per year, the pace of growth is slowing. Considering Francesca's stated goal is to open 900 stores in the U.S., this slowing growth is not a good sign. It could indicate that the company's goal may not be realistic and that its target areas are more saturated than previously thought. While this is a concern, the numbers still look great. Quarterly year-over-year revenue growth and annual revenue growth have been a constant 40-50% with the exception of the 2nd quarter of 2013 when revenues only grew 29%. Annual earnings per share grew 116%, from $0.43 to $0.93 in 2012. According to Reuters, analysts believe that Long Term Growth Rate for Francesca's is 19.4%. Historically, the company has grown earnings faster than this, but I believe that Francesca's should conservatively be valued at 19 P/E, in-line with analyst estimates. The company is currently at $19.519 and has a 17.2 P/E, implying that the stock is currently fairly valued.

    Francesca's has a moderate competitive edge. It offers a unique shopping experience and products at economical prices, but a competitor could replicate the model. The company offers a small boutique atmosphere and a limited collection that changes daily in order to give customers a "treasure hunt" feeling while shopping. Instead of implementing print or other media advertising, Francesca's uses strategic storefront locations and quaint displays that encourage customers to "discover" Francesca's. According to customer reviews, Francesca's is priced better than stores and boutiques selling similar products of similar quality and style. Its strategy of stocking a small number of items from a variety of styles hedges against "fashion misses" and promotes the uniqueness of their products. This is a different strategy to promote brand differentiation than what is used by many apparel retailers. Another unique strategy is not using traditional marketing such as print advertising. This could be effective, but it may be a competitive disadvantage over the long-term.

    Francesca's growth plans rely primarily on opening new boutiques each year. The success of this strategy is contingent upon many factors, which is concerning because a downturn in one factor could negatively affect the entire business strategy. Specifically, Francesca's must find a sufficient number of suitable locations and negotiate acceptable lease terms for these locations. The Company must hire, train, and retain qualified personnel to operate new boutiques. The Company must integrate new boutiques into the existing control structure and operations. Francesca's must also identify and satisfy the varying preferences of customers in new geographic locations. The company has a track record of successfully growing, but I believe that the company faces some headwinds that reduce the certainty of the company's future growth prospects.

    There are many large competitors that sell women's apparel and accessories. Also, the industry is notoriously competitive. According to my research, employees have given mixed reviews about the quality of management. Despite annual increases in store count and revenue, Francesca's is not a designer brand and would take years of collaboration, planning, and capital to become one.

    Concerns aside, looking purely at the upside potential of Francesca's, I like to invest in companies that can be 10-baggers. Francesca's currently has a $860M market cap. Even some of the most well-known brands have only a 1-3 billion dollar market cap, with Express at $1.8 billion and American Eagle at $3.2 billion. There are companies that have much larger market caps such as Nordstrom at $11.2 billion and the Gap at $20.3 billion, but these companies are mainstream and appeal to many demographics. Realistically, given Francesca's niche, it is hard to envision its stock price growing 10-fold with its current model and market cap.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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