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Francesca's Holdings' Disheartening Decisions

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Jenks Jumps


  • Francesca's reported fiscal 2019 fourth quarter and full-year results on May 1st. Some considered the most disheartening factor was the retailer's employment of the "going concern" phrase.
  • In the third quarter, it had incurred atypical debt to upsize its inventory levels for the holiday quarter. But the decision turned out to be a poor one.
  • The retailer did report its second consecutive quarter of CSS growth. But this was achieved through decreases in AUR prices as a result of deeper markdowns and promotions.
  • It seems the last year spent under an interim CEO, a retail performance improvement expert, was a waste.
  • And, now, the COVID-19 pandemic has shut down the majority of the retailer's operations.

Investors heaved when Francesca's Holdings (NASDAQ:FRAN) employed the "ability to continue as a going concern" phrase in its fiscal 2019 fourth quarter report. The phrase simply means the business may not be able to pay its financial obligations as they come due.

Francesca's operated debt-free for years. But the interim CEO opted to increase its debt obligation to $18.9 million at the end of the fiscal 2019 third quarter. This was the first third quarter since 2013 where Francesca's had a debt obligation on its books heading into the holiday season. The funds were borrowed under the retailer's August 2019 term loan at an interest rate equal to LIBOR + 8% relevant to the loan period but at least 10%.

The interim CEO, Michael Prendergast, incurred the debt to build inventory for the holiday season.

With sales trends now performing in line or above inventory levels, we identified key categories that we chose to accelerate inventory receipts to benefit our sales. Based on our data analytics, we reacted to customer demand to supply appropriate inventory levels at the right time for holiday. The teams worked diligently with our vendor base to accelerate inventory shipments and shorten distribution time in preparation for the fourth quarter.

According to the balance sheet, inventory increased 19%, by $7.6 million compared to 2018 and by $17 million compared to the second quarter. In the decade, this represented the greatest inventory level at the end of a third quarter.

The inventory build and subsequent borrowing would be Mr. Prendergast's departing gestures. On February 13, 2020, Francesca's announced Andrew Clarke would take the reins on March 9th.

Interim CEO Tenure

Frankly, since the boutique-like retailer conducted its IPO in 2011, there's been a revolving door on the CEO office. Steven Lawrence was its longest-tenured CEO at two years and four

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Jenks Jumps profile picture
I am a self-taught investor. As a member of an investment club, I provide the majority of research to the club. When I started writing for SA, the club was interested in stocks offering growth at a reasonable price (GARP) and stocks that were undervalued. We have since adopted a dividend growth investing (DGI) strategy. We search for GRAVY - our acronym for "GR"owth "A"bility, "V"alue and "Y"ield. I am very interested in other active investors critiquing my research. I believe this critique will make me a better investor for my own interests as well as the club's.

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