Janney sees challenging Q4 for Francesca's

Janney downgrades Francesca's Holdings (FRAN) to Neutral from Buy, lowering its price target to $22 from $24. Analyst Adrienne Tennant is cautious given the poor environment and sees potential margin pressures.

"We are downgrading shares of FRAN to Neutral from Buy based on the following: 1) challenging mall traffic and promotional environment that we believe will continue to pressure margins over the next 12 months, 2) potential for sustained negative comps in the near-to-medium-term, and 3) apparel and accessory trends that are not as strong as prior year."

Checks suggest that Francesca's could be succumbing to the promotional pressure in the Young Adult/Young Women's sector and may need to run store-wide promotions in Q4. Checks also suggest that both apparel and accessory inventory is beginning to build.

"We believe there is potential for the company to guide Q4 below the current consensus of $0.34; we are currently at $0.29. We do acknowledge that last year, in Q4, FRAN was increasingly promotional as well. We believe comps could continue to be negative, and there could be continued merchandise margin pressure due to the highly competitive nature of the mall, as well as building inventory entering the quarter based on our channel checks. In the near-term, we are cautious based on tough growth compares and the challenging mall environment, and we expect comps to remain negative for the foreseeable future as the sector remains under pressure."

FRAN closed at $20.04 yesterday, with a 52-week range of $16.40-$32.43.

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