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I currently work full time in corporate finance as a financial consultant. In my spare time I exercise, read and invest. My readings are almost always related to finance, economics and investments. I spent 5 years in the US Navy (3 yrs aboard the prestigious USS Constellation aircraft carrier)... More
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  • Francesca's, A Growing Retailer At Bargain Basement Price

    If you thought I liked Francesca's (NASDAQ:FRAN) at $28, well I like it even better at $24. I know the star traders of the world would crucify me for that, but the Francesca's story is starting to get better.

    At the end of first quarter 2013, there were 416 locations with opportunities to expand the current boutique concept to about 900 locations. At roughly 1,400 square feet per boutique, each location is relatively small with a communal feel to it. I had an opportunity to visit a few locations with each being somewhat different in appearance, but beautifully laid out and fitting nicely with the surrounding areas. It kind of feels like you are in an independently owned boutique in a walkable resort town, think Aspen, Colorado without the high prices. If there was one common theme, each store was jam packed.

    Over the past three years, annual compound average sales growth was 49%. First quarter 2013 sales growth of 29% is still significant and meets one of my criteria for purchasing a stock, which is sales growth of at least 25%. There has been some recent weakness in the stock price due to comp sales (growth in sales of boutiques open at least one year) of only 2% year over year being well below last year's 16%. Over the past three years, average comp sales increased 13.5%. I believe last year was an anomaly and comps were higher than expected due to unseasonably warm spring weather last year. This year has been more of a normal year as far as weather is concerned, and I would look at comps over two years, or roughly 8%.

    EBITDA, sometimes called cash earnings, is a metric I like to use to determine a company's operating efficiency. There are other metrics when included with this metric that can provide a better picture, especially when combined with the balance sheet. However, I typically start here and noticed 1st quarter EBITDA increased 25.5% year over year. 1st quarter earnings also increased in the 25% range. EBITDA and earnings growth should be similar in the 2nd quarter, and probably higher as the company sees a full quarter worth of benefits from boutiques open in the 1st quarter.

    From a technical standpoint, the stock appears to be getting support slightly below $24. Combined with fundamentals, $24 seems like a really good bargain here. I choose a stock to buy based on the fundamentals, but will not buy until the technicals favor buying. With technical analysis, you also get an idea of how the institutional community views the stock, which is kind of wait and see right now. I also like to use moving averages such as 5, 10, 20, 50, 100, and 200 day. The 5 day moving average is still trending below the 10 day moving average. Once they cross, which should happen really soon as the gap is narrowing and the 5 day is starting to turn, jump on in, or else you might miss out on an early Christmas gift.

    Disclosure: I am long FRAN.

    Tags: FRAN
    Aug 13 3:26 PM | Link | Comment!
  • Why I'm Buying FRAN

    Last weekend I happened to stop in the local Francescas (NASDAQ:FRAN) boutique in Center Valley, Pa. only to see an awesome place that was packed to the door with shoppers. I was pleasantly surprised since I have never seen this store. My first FRAN investment was about two months ago as I ran through my screenings and processes only to have this diamond in the rough kick out.

    What did I do with it? Ease in, ease in, then boom!! I loaded up on ole Frannie.

    My research tells me same store sales increased only 2% year over year… My research and my gut says so what!!! I have been doing this for years and my gut is right 90% of the time and I'm 90% sure my gut is right this time too… Last year was probably an anomaly as many retailers experienced stronger than expected consumer demand as well as good weather. I think that was blip and same store sales will increase a few basis points year over year in the near future. Management also has been pretty efficient at opening new stores while keeping costs relatively low as they have been using FRAN's cash flow to open new stores.

    Free cash flows increased almost 13% in 2012 (compared to 2011) and I believe will be in the same range or slightly higher in 2013 assuming capex continues to run at about 8% of revenue or less. Unless there's a sudden change in strategy there's no need to see capex at anything higher than 8% for a company like this, especially with revenue increasing like it has.

    So at about $26 I start buying in. At a P/E of 24x, some might think FRAN is relatively expensive vs the S&P 500 (about 17x)… I have news for you, many of the biggest winners in the history of the market looked expensive at a certain point only to get even more expensive (using P/E as a valuation metric) as prices ran into the stratosphere. I'm not here to say FRAN will give you stratospheric returns, but you should get some nice returns if you buy shares wisely. At $25.50, I bought more… At $25 I bought a lot more… Averaging down kills, but that's definitely not the case here.

    From a technical standpoint FRAN has support at $26 from the institutional community as anything below is an added bonus for a small investor like me. A stock like this with top line growth over 30%, growing free cash flows, and EBITDA margins increasing every year for the past 3 years should not be trading so far below the $28 200 day moving average unless the broader market crashed. I personally like EBITDA for retailers since it provides a nice picture of where a company was and where it is going. From a technical standpoint, I would not be surprised to see FRAN hit $30 within the next 2-3 months as prices have already moved into the $27 range on high volume. If we keep seeing more buyers than sellers, the price increase could be steep and hit $30 much sooner rather than later. The 5 day moving average just crossed the 20 day moving average and FRAN tends to stay on one side of the line other for some time before reversing. So I'm very bullish short term, not so much intermediate term, and bullish long term. Price is going to fluctuate in the near future, but at some point I wouldn't be surprised to see a significant run up in price to about the $40 range and show a long term uptrend. As for the fundamentals, I don't see EBITDA margins higher than 30%, but if they do get to 30% or better, that's a bonus. EPS should improve, but management should put a lid on new share issues. I don't see any need to buy back shares right now (they haven't), but there is also no need to issue shares like they have done the past few years as they can keep growing the company through operations.

    Disclosure: I am long FRAN.

    Tags: FRAN
    Jun 30 2:58 PM | Link | Comment!
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