Francesca’s Holdings Corp (FRAN) Downgraded to Strong Sell

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Zacks Investment Research downgraded Francesca’s Holdings Corp (FRAN) to a Zacks Rank #5 (Strong Sell) on Dec 26. Soft comps in the third quarter of fiscal 2013 and a cut in fiscal guidance led to the downgrade.

Why the Downgrade?

On Dec 6, Francesca reported dismal third quarter of fiscal 2013 (ending Aug 3, 2013) results. Though earnings of 20 cents per share were in line with the Zacks Consensus Estimate and within management’s expectation of 19 cents to 21 cents, it fell 16.6% year over year due to soft comps and weak margins.

Francesca’s sales increased 11.0% year over year, but were lower than prior-quarter sales growth of 17% due to lower-than-expected comparable store sales (comps) during the quarter, offset to an extent by boutique openings. Decent sales in accessories, apparel and jewelry were partially offset by a decline in gift items sales.

Comps, including direct-to-consumer (DTC) sales, decreased 3% in the quarter as against a solid increase of 16.7% in the prior-year quarter due to lower consumer traffic and lower transactions. Excluding DTC sales, comps decreased 3% in the current quarter. Comps decline was also within management’s expectation of a decline of 2% to 5%.

Gross margin shrank 190 basis points (bps) to 50.7% due to lower merchandise margins caused by higher promotional spending. Operating margin shrank 630 bps to 18.3%.

Management believes that the decline in traffic trends will take a toll on the fourth quarter and will eventually impact fiscal 2013 results. Though the company has taken initiatives to drive the company’s performance, these are expected to reap benefits over the long term. Lower-than- expected sales have also increased the company’s inventory levels. The company thus needs to work on its inventory levels and channelize them properly.

Following sluggish third quarter results, the company reduced its guidance for fiscal 2013. The company now expects net sales in the range of $338.2 million to $343.2 million for fiscal 2013, compared with the prior range of $343.0 million to $349.5 million. Absence of strong trends in fashion tops, jewelry offerings and the gift assortment has been responsible for lower comps in the past few quarters and management expects the trend to continue in the fourth quarter of fiscal 2013.

Comps are expected to be down by 1% to 3% in fiscal 2013, lower than the previous expectation of flat to down 2%. Francesca’s also slashed its earnings outlook and now expects earnings per share in the range of $1.03 to $1.07 compared with the prior range of $1.10 to $1.16.

This specialty retailer witnessed sharp downward estimate revisions after announcing its third quarter fiscal 2013 results. Most of the estimates declined for the fourth quarter and fiscal 2013 over the past 30 days. The Zacks Consensus Estimate for the fourth quarter decreased 20.6% and that for fiscal 2013 went down 6.2% over the last 30 days.

Other Stocks to Consider

Not all stocks are performing as poorly as Francesca’s. Better-ranked stocks in the consumer discretionary sector include Iconix Brand Group Inc. (ICON), Sequential Brands Group Inc(SQBG) and Deckers Outdoor Corp (DECK). All of them hold a Zacks Rank #2 (Buy).

DECKERS OUTDOOR (DECK): Free Stock Analysis Report

FRANCESCAS HLDG (FRAN): Free Stock Analysis Report

ICONIX BRAND GP (ICON): Free Stock Analysis Report

SEQUENTIAL BRND (SQBG): Free Stock Analysis Report

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