The Future Of Francesca's Holdings: Fierce Or Fizzle?

| About: Francesca's Holdings (FRAN)
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Every year, the International Council of Shopping Centers surveys mall and shopping store managers to identify the hottest retail brands and chains. Looking through the Hot Retailers Award list for the last decade, only two apparel retailers made the list two years in a row: Hot Topic (NASDAQ:HOTT) in '03 and '04 and Chico's FAS (NYSE:CHS) in '02 and '03. Being "hot" may allow a retailer to sail through a few years. But, when being "hot" cools, good retailing and good relationships must take over.

Francesca's Holdings (NASDAQ:FRAN) is a specialty retailer targeting the 18-35 year-old female. FRAN's boutiques offer apparel, jewelry and accessories. Francesca's describes its current situation as being "in the early stages of a powerful growth trajectory". A comparison of Francesca's to Hot Topic and Chico's a decade ago (when they were labeled "hot") may help determine if Francesca's stands a chance at being a mall mainstay in 2022. Like Francesca's, Hot Topic and Chico's have targeted demographics: Hot Topic to music and pop culture-oriented young adults and Chico's to middle to upper-class women over 30 years old.

The following table summarizes pertinent information for comparing the three:

HOTT 2003

HOTT 2004



FRAN 2010

FRAN 2011

FRAN 2012 YTD2









Comp Store
Sales %








Number of Locations








Sales per square foot








Locations planned for next year


110- 1203





No long-term




Profit Margin








1Hot Topic was negatively impacted by a mainstream fashion stray away from the harder punk look.
2Third quarter results reported December 3rd, 2012.
3Planned for 2005.

Francesca's was founded in 1999 and went public July 22, 2011. Francesca's currently has 359 stores in 44 states. In the next five to seven years, they expect to reach the 900 mark. Even giving Francesca's the full seven years, reaching its target of 900 means opening an average of more than 77 boutiques a year. That's six to seven boutique openings every month for the next 84 months. Oh, and the company will hit its target only if very few boutiques close their doors along the way.

Does history support this future? In FRAN's 2011 third quarter report, Francesca's reported it had opened 76 stores in a year. In its 2012 third quarter report, the company reported the exact same number - 76 for the year. So, does two years of proof that FRAN can open 76 boutiques a year warrant buying into the seven year plan? Maybe. It's noteworthy the company managed to eliminate its long-term debt during this same timeframe.

On the other hand, Francesca's sales growth is stabilizing. At the Jeffries Global Consumer Conference in June, Francesca's projected comparable boutique sales for 2012 to decrease to a high single-digit rate from 15% in 2010 and 10% in 2011.

Checking in with Hot Topic and Chico's a decade later may help predict Francesco's retail road map. Hot Topic currently operates 620 stores averaging $429 in sales per square foot at a 2.27% profit margin. Hot Topic's maturity and cooling off from "hot" status hasn't seen a significant growth in store count, a 25% decrease in average sales per square foot and a 626% decrease in profit margin. Comparatively, Chico's now operates 1355 stores averaging $593 in sales per square foot at a 6.96% profit margin. Chico's maturity and cooling off from "hot" status is certainly less decided. Chico's has tallied a 258% growth in store count with further plans to grow by 110-120 stores a year for the next several. Its average sales per square foot has decreased by a similar 30% but profit margin has only decreased by 87%. It should be noted that, at this point, Chico's includes White House/Black Market, Soma and Boston Proper stores.

Using Hot Topic and Chico's as models, if Francesca's reaches its 900 boutique mark in seven years, the company could expect $503M in sales. This amount is based on an average boutique size of 1400 square feet and a median-derived 27.5% decrease in average sales per square foot to $399 (1400*900*399). Using an average profit margin based on Hot Topic's and Chico's histories results in a profit margin of 4.62% for Francesca's. That profit margin results in $23M in income and EPS of $0.53. At an industry average P/E of 16.2, Francesca's would trade at $8.59 - a dismal drop from its 52 week high of $37.09 and even its current 50 DMA of $25.68. According to their 2011 annual reports, five-year comparisons of cumulative total returns show $100 invested in Hot Topic and Chico's in 2007 would have had double-digit percentage losses by now (obviously this encompasses the market collapse of 2008). Will $100 invested in Francesca's today take a different route?

Currently, there is fanatical institutional interest in Francesca's - perhaps the tail-end of an IPO high? Yet, will the company start to fizzle? Reviewing its overarching philosophies may answer those questions to help identify just what does make Francesca's unique. Its merchandising strategy is to provide a broad and shallow assortment delivered in limited quantities to give customers a sense of urgency to "buy now". FRAN averages 3000 SKUs at any given time and average inventory per store is $45K. Its customer service philosophy is to service, not sell.

I had to see for myself if Francesca's was truly different. I visited a local boutique twice. On my first trial, I visited the store two distinct times. I was not greeted either time or offered any assistance. At least half the inventory SKUs in the store were jewelry items even though the 2011 annual report differentiates that apparel accounts for 51% of sales and jewelry only 20%. The apparel hanger count (not SKUs) was probably seven hundred (700). There were maybe seven (7) pair of footwear and seventy (70) handbags. There were easily one hundred (100) gift SKUs - mostly overpriced and superfluous (does anyone really need four painted clothespins for $12 as chip bag clips?). Because Francesca's touts it delivers new inventory five days a week to purposely engrain a "treasure hunt" experience, I visited again quickly after the first day. Yes, there were new items - most notably on the gift table (it is gift-giving season after all). The boutique was definitely busier the second day although both were mid-afternoon weekday visits. I wasn't greeted yet again nor offered assistance (so much for the customer service/good relationships philosophy).

Because they were all a stone's throw from each other, I strolled through White House/Black Market, Chico's and another boutique named Apricot Lane. My initial impression of Apricot Lane led to a nagging curiosity satisfied only by further research. Apricot Lane is privately-owned and received one of only four Hot Retailers Awards awarded in 2011. I was much more impressed with all three (WH/BM, Chico's and Apricot Lane) regarding their customer service and inventory. Comparing boutique to boutique, Apricot Lane's offerings were better quality and far more unique - admittedly, yes, its prices were higher. Francesca's offered the same primary-colored jeans, sleeveless silky, flimsy tops and felted jackets that are predominant on other retailer racks this season. Albeit, Francesca's is offering them at higher boutique prices (so much for the good retailing philosophy). Apricot Lane has nooks of apparel from young, new designers such as Whitney Port while Francesca's primarily stocks its own private label.

The title asks whether Francesca's future will find it as a fierce competitor or whether its boutiques and, subsequently, stock price will fizzle. I have surmised its current share price in the $26-$27 range is overvalued as is evident by its P/E of 29.53 (industry average is 16.2). I predict the company will continue to open boutiques at a frenzied pace for awhile (while the company is "hot" and as its cash allows). But, I don't predict FRAN will ever reach 900 locations. I suspect its profit margins will stabilize to industry range thus slowing its growth pace significantly. I realize it is a contrarian view at this point, but I don't believe Francesca's will be a mall mainstay in 2020. Short-term investors may want to experience the frenzy and try to escape before a fall. Long-term investors, however, should build themselves a more solid case for FRAN as my investigation found their claims too broad and shallow.

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