Cheap Price Makes Francesca's Holdings (FRAN) a Good Asset

Francesca’s Holdings (FRAN) operates a nationwide chain of boutiques. A unique, diverse mix of apparel, jewelry, accessories, and gifts. The Company has 738 boutiques in 47 states with e-commerce.

Francesca is high risk! But, the price trades as if it's a going concern over the next six to twelve months. Francesca’s Holdings is a cheap one plus year option for the bear case but leans toward the bull case as a low probability turnaround.

Third quarter results reported 12/11/2018 — a net loss of $16.2 million, or a 47-cent diluted loss per share. The loss excluding noncash impairment charges was $6 million or 17 cents per share.One strategy offered during the conference call is to close 30 to 40 stores in fiscal year 2019, which begins 02/03/2019. 

The non-apparel merchandise (Jewelry, Gifts, Accessories) makes up 50% of sales. It was up 1% compared to the prior year three quarters ending in 11//2017. Yet, apparel declined 14% over the same three-quarter period. Management recognizes the clothing business remains the biggest challenge. So, FRAN is moving fast to ramp up changes and seen positive customer responses.

The current focus is on expense control, strong balance sheet, real estate portfolio and slow new-store growth. One strategy offered on the conference call. Close 30 to 40 stores versus opening or relocating around ten new boutiques in the fiscal year 2019 which begins 02/03/2019. On a positive note, store remodels performance in 2018 outperformed but put on pause. Projected CapEx for 2019 is $10 million versus $30 million in 2018.

Immediate goal is to improve the business as fast as possible — marketing adjustments, expense reduction, apparel merchandise refinements, and real estate optimization. Impaired boutiques are 129 with 106 having a lease end over the next three years. Closed stores during 2019 reduce fixed boutique costs. But it is coupled with the recapture of the sales in the remaining boutiques. The plan is to close 11 existing boutiques in January 2019. A total of 81 refreshed boutiques during 2018 continue to outperform, but the program is pausing for 2019 until business stabilizes. January has been a seasonal clearance month and will speed up markdowns. Another positive cash impact for 2019 is capital expenditures forecasted at 10M and focused on e-commerce versus store enhancements during 2018 at 30M.

Current Valuation

Positive insider activity for 2018, only buys no sales. Insider shares purchased for 2018 were 47,000 shares purchased for $230,950 or an average price of $4.91 per share.  

Value institutional ownership all adding shares for the most recent reported quarter ending 09/30/18.

PARADIGM CAPITAL (6.76%) ,VANGUARD (6.15%),Chuck Royce (4.81%), AQR CAPITAL (3.20%), HOTCHKIS (2.25%),Parametric (1.28%)


Relative Valuation: FRAN has the lowest valuation in its industry for price to BV, EV to Sales,BV growth, and best cash conversion that doesn't reconcile the industry's weakest stock performance. 

Data in the above taken from Guru Focus

Risk and Opportunity

The risk is clear with little room for error. Closing impaired stores, 14% YOY decline in their largest merchandise category apparel, troubling quick ratio,growing large short position. A low 10M cash balance with 50M in accrued expense and negative cash flow. 

The current price discounts the operational and financial uncertainty. FRAN is an industry outperforming for historical profits and free cash flow. Its unlikely to disappear because of the soft mall traffic. The 38M credit line, A/R from taxes, year end inventory clearance, store closings  and other changes give investors a possible asymmetric payoff.

Long: FRAN