Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Why I'm Buying FRAN

|Includes: Francesca's Holdings Corp. (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.