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Francesca's: Whether It's Time To Bet On Andrew Clarke


  • Francesca's appointed a highly talented and accomplished new CEO, Andrew Clarke, on March 9, 2020.
  • I was very impressed with Andrew's May 1, 2020 conference call, where had articulated his reasons for taking the job and his vision for executing a turnaround.
  • Despite Friday's going concern label (by E&Y), in its 10-K, I like the risk/reward profile.

These days, I feel like a kid in a candy store. Given the maximum uncertainty surrounding the direct fall out from COVID-19 combined with the future unknowable consumer behavior post eventual re-start, and we have an environment where stocks prices are on sale. The market simply hates uncertainty and market participants have no way of gauging probabilistic outcomes. When this happens, many investors simply throw up their hands and rush to hit the bid. Moreover, not only are there more sellers than buyers, you get a dynamic where buyers are reluctant to bid, for fear of catching a falling knife.

That said, for intrepid investors willing to attempt surfing the outer edges of the risk frontier, this is a sunny Socal day. Think of the classic movie: Point Break.

Source: Surfertoday

Deep value and contrarian investors were made for these types of markets because this is where the opportunity to cut through the noise can lead to outsized profits. However, I do fully acknowledge that you have to take a portfolio approach of adding a number of these lottery ticket type bets, as not all of them will survive the high calorie burning triathlon. For example, you might want to risk 20% to 30% of your overall portfolio in a basket of ten of these names. If you size them at 2% each (or 3% if you are risking 30% of the portfolio) then two or three very well could go bankruptcy, but if you hit one or two home runs, you could still generate a great return, on a portfolio basket basis.

This leads me to today's idea, Francesca's Holdings Corporation (FRAN). An investing friend of mine, a fellow deep value investor, and former hedge fund analyst (he now trades his PA for a living) bent my ear over the weekend on

This article was written by

Courage & Conviction has been investing for over twenty years and has spent five years working as a buy-side analyst within a $45 billion investment-grade bond department, 3.5 years as an energy analyst, in addition to various other corporate finance roles. He has been a full time investor and author since 2020. He leads the investing group Learn more.

Analyst’s Disclosure: I am/we are 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (30)

Courage & Conviction Investing profile picture
Hi Everyone,

$FRAN's 4/30/20 short interest jumped to 878,479 (28.7% of the entire float). Remember there are only 3.06 million shares.
bazooooka profile picture
@Courage & Conviction Investing Do you like it in the low 2s again for a potential squeeze; what is your current thoughts on this name?
@Courage & Conviction Investing

Thank again for another interesting idea.
not sure if I would buy just to bet on 1 guy....as Buffet would say, better to have a good biz with bad mgt, vs. a bad company with good mgt. On another note, the last time I invested in a stock that had an "ongoing concern" caveat, was with Crocs, in 2009 at around $2...accountants have to cover their but, although they should be looking at cash, not just net income/loss...at the time, Crocs had 0 debt, was blowing out old inventory with tons of cash coming in...just moving to expand outside of the traditional crocs shoe...having said that, would feel better about Fran if they would put a store in a store concept, sell in other venues, or massively boost online stores ,
maybe start a monthly subscription service? anything..to guarantee that people want them to be around 5 years from now....vs, becoming the next Dress barn..J Jill etc

Think they need to just right size the ship without going crazy on the expense side of things. Store within a store wouldn't really work as their footprint for the boutiques is something like 1400 sq ft avg. Wouldn't be here but the company's saving grace IMO is that they haven't bought this coming season's inventory yet. Pricing on inventory and selection SHOULD be much better. Getting the right merchandise will be system critical as well as culling some of the boutiques, nursing cash, some rent help, ect but there is a path nevertheless. Risk is high but return is massive. I agree with the author to not bet the farm on this but even a 1 to 2% allocation could move your portfolio meaningfully higher should management get through this.
Well said. Survive and adapt. Put some numbers around 10% sales growth and 500-600 bps of merchandise margin opportunity and the numbers can get silly. If he can impact the merchandise quickly with the 100% open to buy in a minimal CAPEX environment and get inventory levels back in line.............
ItsTheChabaChaba profile picture
Do you really think retail is coming back anytime this year ? No way we avoid another wave of shut downs once the 2nd surge in deaths / cases comes, guaranteed by “Morons Are Governing America”
I'm in my sixties. Everyone I know my age and older aren't going out unless they have to. Our married children shop for my wife and me.

The latest risk numbers indicate it's not very dangerous if you're under sixty. There will be deaths, but it won't be like we just experienced here in New York. People are going to go shopping just for the relative thrill of it; but they've been habituated into the social distancing protocols. Most rational people have learned from the unfortunate others.
CPA friend says When Going Concerns are issued, it is usually the death mill.. that any and all scenarios would have been presented and taken into consideration..

What's not known is if the designation has taken any of the post CV world into consent... ie new terms and relationship with landlord.... Chicos said they are going to a base plus percent with their LLs..
Or it is a CYA for the CPA.
Jamm Systems profile picture
@Mike Stayley Mike, you got me wondering if there's much research about the "hit rate" of bankruptcies versus Going Concern audit report.

I found one paper from 2015 that stated-

"In the U.S., historical data shows that approximately half of the companies going bankrupt do not receive a prior GCO. In contrast, over two thirds of companies with a GCO do not subsequently go bankrupt (e.g., Carson, Fargher, Geiger, Lennox, Raghunanadan and Willekens 2013)."

This was a multi-country study written by Elizabeth Gutierrez of the Universisidad of Chile, and Jake Krupa and Miguel Minutti-Meza of the University of Miami.
Jamm Systems profile picture
@courage & Conviction Investing Hey Courage, I'm wondering what you think of TLRD? Management looks great on paper (well, the CEO got dinged the last time around but certainly has good credentials, and the rest of the C Suite is outstanding); last quarter showed signs of turnaround; steady rental business; lots of cash generation last year. It's another intriguing option IMO.
Courage & Conviction Investing profile picture
@Jamm Systems I have a 3% sized bet in TLRD. Unfortunately, my cost basis is $4.29 : (

If we have a wedding season in the U.S. then TLRD will fly. That is the big risk.
Jamm Systems profile picture
@Courage & Conviction Investing Hey Courage, I'm wondering what you think of TLRD? Management looks great on paper (well, the CEO got dinged the last time around but certainly has good credentials, and the rest of the C Suite is outstanding); last quarter showed signs of turnaround; steady rental business; lots of cash generation last year. It's another intriguing option IMO.
Thanks again for taking the time to dig out these uncut diamonds for us. If he is the right jeweller for the job it may just be a gem. 😉
Courage & Conviction Investing profile picture
@Luck of the Irish Sure and thanks for reading. We shall find out over the next few weeks.
Is this a better bet than ASNA
Courage & Conviction Investing profile picture
@dennis rfm It is totally different. ASNA has great brands, but a messed up balance sheet. it is unclear how much debt ASNA was able to buyback over the past six weeks, as this could be super accretive for shareholders. Ann and Loft are iconic brands.

However, they both need to manage their balance sheets.

Both have massive upside, should the bull case take place.
FRAN's CEO used to run Ann Taylor and Justice. Use him as your guide!!
Any chance we have feedback re: his time with Loft? I understand Loft is only a part of ASNA portfolio but the stock dove 80% in his 1 year with Loft. Appreciate the article and the finds @courage & Conviction Investing, loved your analysis on AR, it came in handy :)
If (key word being "IF'") they get this right given the past few years, the stock will get back to the highs from the fall. They paid down $10M on their line in Q4 and have only redrawn $5M. The A/P to inventory ratio at year end is quite low, so most of the product on hand has likely been paid for. Even at increased markdown rates, they are therefore generating cash from their e-commerce sales. When stores reopen, they will move quickly to liquidate product on hand and then take advantage of their 100% open to buy to restock their inventory positions at appropriate levels at what would seem to be lower merchandise costs given the excess product out there. I'm not saying this is anything close to the best apparel retailer out there, but they are most likely positioned better than most.

Sales per square foot were $390 in 2019 vs. $545 in 2016. Can on trend (and perhaps higher quality) product get sales back to $425-$450 psf? Then they've got a merchandise margin opportunity of 500-600bps compared to a few years ago as well. This thing did $50M in EBITDA in 2017 vs. about $10M in 2019. Get half that back and put a 2x multiple and that's $60M plus cash - I'll use $10M to be conservative but with limited CAPEX this business will generate cash. $70M divided by 3.1m shares = $23.33. A 3x multiple would be $100M divided by 3.1m shares = $32.25. Hard not to take a shot here given the risk/reward profile.
isn't there $200 MM of operating lease liabilities that make the operating leverage quite high (cuts both ways)
If you want to call the leases debt, then you need to treat the entire annual rent expense as you would interest and use an EBITDAR metric. That expense is pretty much fixed. So if the business stinks, than EBITDA/EBITDAR margins decline and the downside scenario comes into play. If the business improves, then there's potential for considerable upside from $2.40.
My thought is that the business has been run like crap for quite a few years, so a competent CEO can make considerable improvements. Given the 100% open to buy and shorter lead times for this business, he can make an impact sooner than at other apparel companies where it takes 9-12 months for changes to show up inside the stores/online. Can he pull it off? TBD, but the downside scenario is obvious and the upside is ridiculous if he makes it happen.
Do you know what happened in Sep 2019 (spike up from $5 to $20) and Dec 2019 ($20 down to $10 ...)
Courage & Conviction Investing profile picture
@MG1234 They had better than expected earnings and then a short squeeze ensued.

BTW- there are over 700K shares sold short, as of 4/15/20. Looks of jet fuel for a squeeze.
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