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EX-31.1 - EXHIBIT 31.1 - Francesca's Holdings CORPv361416_ex31-1.htm
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EX-32.1 - EXHIBIT 32.1 - Francesca's Holdings CORPv361416_ex32-1.htm

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended November 2, 2013
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From             to             
 
Commission File Number: 001-35239
 
 
FRANCESCA’S HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Delaware
20-8874704
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
8760 Clay Road Houston, TX
77080
(Address of principal executive offices)
(Zip Code)
 
(713) 864-1358
(Registrant’s telephone number, including area code)
 
None
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨ No  x
 
The registrant had 42,011,957 shares (excluding 2,226,981 of treasury stock) of its common stock outstanding as of November 30, 2013.
 
 
 
 
 
Table of Contents
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
Item 2.
12
 
 
 
Item 3.
20
 
 
 
Item 4.
20
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
20
 
 
 
Item 1A.
21
 
 
 
Item 2.
21
 
 
 
Item 6.
22
 
 
 
 
 
2

 
PART I. FINANCIAL INFORMATION
 
 
Unaudited Consolidated Balance Sheets
(In thousands)
 
 
 
November 2,
 
February 2,
 
October 27,
 
 
 
2013
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
31,842
 
$
29,877
 
$
12,906
 
Accounts receivable
 
 
9,850
 
 
2,504
 
 
5,634
 
Inventories
 
 
30,638
 
 
19,049
 
 
23,523
 
Deferred income taxes
 
 
3,688
 
 
3,506
 
 
2,872
 
Prepaid expenses and other current assets
 
 
6,222
 
 
4,749
 
 
4,622
 
Total current assets
 
 
82,240
 
 
59,685
 
 
49,557
 
Property and equipment, net
 
 
57,359
 
 
49,559
 
 
43,021
 
Deferred income taxes
 
 
4,046
 
 
2,357
 
 
1,923
 
Other assets, net
 
 
2,555
 
 
1,573
 
 
2,372
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
146,200
 
$
113,174
 
$
96,873
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
8,570
 
$
8,358
 
$
12,369
 
Accrued liabilities
 
 
10,365
 
 
10,667
 
 
6,649
 
Total current liabilities
 
 
18,935
 
 
19,025
 
 
19,018
 
Deferred and accrued rents
 
 
27,554
 
 
22,092
 
 
21,895
 
Long-term debt
 
 
25,000
 
 
 
 
 
Total liabilities
 
 
71,489
 
 
41,117
 
 
40,913
 
 
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
Common stock – $.01 par value, 80.0 million shares authorized;
    44.2 million, 43.9 million and 43.9 million shares issued; 42.3
    million, 43.9 million and 43.9 million shares outstanding at
    November 2, 2013, February 2, 2013 and October 27, 2012,
    respectively.
 
 
442
 
 
439
 
 
438
 
Additional paid-in capital
 
 
90,511
 
 
85,161
 
 
83,935
 
Retained earnings (accumulated deficit)
 
 
20,684
 
 
(13,543)
 
 
(28,413)
 
Treasury stock, at cost – 1.9 million shares at November 2, 2013
 
 
(36,926)
 
 
 
 
 
Total stockholders’ equity
 
 
74,711
 
 
72,057
 
 
55,960
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
146,200
 
$
113,174
 
$
96,873
 
 
The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
 
 
3

 
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
 
 
 
Thirteen Weeks Ended
 
Thirty Nine Weeks Ended
 
 
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
 
 
2013
 
2012
 
2013
 
2012
 
Net sales
 
$
79,632
 
$
71,986
 
$
248,185
 
$
209,673
 
Cost of goods sold and occupancy costs
 
 
39,275
 
 
34,115
 
 
118,700
 
 
97,443
 
Gross profit
 
 
40,357
 
 
37,871
 
 
129,485
 
 
112,230
 
Selling, general and administrative expenses
 
 
25,766
 
 
20,144
 
 
72,800
 
 
58,960
 
Income from operations
 
 
14,591
 
 
17,727
 
 
56,685
 
 
53,270
 
Interest expense
 
 
(129)
 
 
(114)
 
 
(362)
 
 
(546)
 
Other income (expense)
 
 
(77)
 
 
105
 
 
127
 
 
257
 
Income before income tax expense
 
 
14,385
 
 
17,718
 
 
56,450
 
 
52,981
 
Income tax expense
 
 
5,714
 
 
6,921
 
 
22,223
 
 
20,790
 
Net income
 
$
8,671
 
$
10,797
 
$
34,227
 
$
32,191
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.20
 
$
0.25
 
$
0.78
 
$
0.74
 
Diluted earnings per common share
 
$
0.20
 
$
0.24
 
$
0.77
 
$
0.72
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic shares
 
 
43,281
 
 
43,825
 
 
43,759
 
 
43,700
 
Diluted shares
 
 
43,993
 
 
44,911
 
 
44,600
 
 
44,791
 
 
The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
 
 
4

 
Unaudited Consolidated Statement of Changes in Stockholders’ Equity
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
Retained
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 
Earnings
 
Treasury
 
Total
 
 
 
Shares
 
Par
 
Paid-in
 
(Accumulated
 
Stock,
 
Stockholders’
 
 
 
Outstanding
 
Value
 
Capital
 
Deficit)
 
at cost
 
Equity
 
Balance, February 2, 2013
 
43,880
 
$
439
 
$
85,161
 
$
(13,543)
 
$
 
$
72,057
 
Net income
 
 
 
 
 
 
 
34,227
 
 
 
 
34,227
 
Stock-based compensation
 
 
 
 
 
2,955
 
 
 
 
 
 
2,955
 
Restricted stock vested
 
2
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised and
    related tax benefit
 
357
 
 
3
 
 
2,395
 
 
 
 
 
 
2,398
 
Repurchases of common stock
 
(1,942)
 
 
 
 
 
 
 
 
(36,926)
 
 
(36,926)
 
Balance, November 2, 2013
 
42,297
 
$
442
 
$
90,511
 
$
20,684
 
$
(36,926)
 
$
74,711
 
 
The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
 
 
5

 
Unaudited Consolidated Statements of Cash Flows
(In thousands)
 
 
 
Thirty Nine Weeks Ended
 
 
 
November 2,
 
October 27,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
Net income
 
$
34,227
 
$
32,191
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation expense
 
 
7,421
 
 
5,458
 
Stock-based compensation expense
 
 
2,955
 
 
2,684
 
Excess tax benefit from stock-based compensation
 
 
(3,522)
 
 
(2,193)
 
Loss on sale of assets
 
 
343
 
 
89
 
Amortization of debt issuance costs
 
 
216
 
 
220
 
Deferred income taxes
 
 
(1,871)
 
 
(1,491)
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
 
 
(3,824)
 
 
(3,199)
 
Inventories
 
 
(11,589)
 
 
(9,061)
 
Prepaid expenses and other assets
 
 
(2,295)
 
 
(2,068)
 
Accounts payable
 
 
212
 
 
3,463
 
Accrued liabilities
 
 
(302)
 
 
(1,051)
 
Deferred and accrued rents
 
 
5,462
 
 
7,005
 
Net cash provided by operating activities
 
 
27,433
 
 
32,047
 
 
 
 
 
 
 
 
 
Cash Flows Used in Investing Activities:
 
 
 
 
 
 
 
Purchase of property and equipment
 
 
(15,646)
 
 
(15,370)
 
Proceeds from sale of assets
 
 
82
 
 
 
Net cash used in investing activities
 
 
(15,564)
 
 
(15,370)
 
 
 
 
 
 
 
 
 
Cash Flows Used in Financing Activities:
 
 
 
 
 
 
 
Proceeds from borrowings under the revolving credit facility
 
 
25,000
 
 
 
Repayments of borrowings under the revolving credit facility
 
 
 
 
(22,000)
 
Payments of debt issuance costs
 
 
(376)
 
 
 
Repurchases of common stock
 
 
(36,926)
 
 
 
Proceeds from the exercise of stock options
 
 
1,156
 
 
1,990
 
Taxes paid related to net settlement of equity awards
 
 
(2,280)
 
 
 
Excess tax benefit from stock-based compensation
 
 
3,522
 
 
2,193
 
Net cash used in financing activities
 
 
(9,904)
 
 
(17,817)
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
1,965
 
 
(1,140)
 
Cash and cash equivalents, beginning of year
 
 
29,877
 
 
14,046
 
Cash and cash equivalents, end of period
 
$
31,842
 
$
12,906
 
 
 
 
 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
 
 
 
Cash paid for income taxes
 
$
28,352
 
$
26,182
 
Interest paid
 
$
125
 
$
405
 
 
The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
 
 
6

 
   
1.
Nature of Business and Summary of Significant Accounting Policies
 
Nature of Business
 
Francesca’s Holdings Corporation (the “Company”) is a holding company incorporated in 2007 under the laws of the State of Delaware. The Company’s business operations are conducted through its wholly-owned indirect subsidiary Francesca’s Collections, Inc. (“Francesca’s Collections”), a corporation formed and existing under the laws of the State of Texas. Francesca’s Collections is wholly-owned by Francesca’s LLC (the “Parent”), a limited liability company formed and existing under the laws of the State of Delaware. Parent is a wholly-owned subsidiary of the Company.
 
The Company operates a national chain of retail locations designed and merchandised to feel like independently owned, upscale boutiques and provide its customers with an inviting, intimate and fun shopping experience. The Company offers a diverse and uniquely balanced mix of apparel, jewelry, accessories and gifts at attractive prices. At November 2, 2013, the Company operated 446 boutiques, which are located in 45 states throughout the United States, and its direct-to-consumer website.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods presented.  The financial information as of February 2, 2013 was derived from the Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 2, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2013.  
 
These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the fiscal year ended February 2, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2013.
 
Due to seasonal variations in the retail industry, interim results are not necessarily indicative of results that may be expected for any other interim period or for a full year.
 
Principles of Consolidation
 
The accompanying unaudited consolidated financial statements include the accounts of the Company and all its subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
 
Fiscal Year
 
The Company maintains its accounts on a 52- or 53-week year ending on the Saturday closest to January 31st. Fiscal year 2013 is a 52-week year while fiscal year 2012 was a 53-week year.  The fiscal quarters ended November 2, 2013 and October 27, 2012 refer to the thirteen-week periods ended as of those dates.  The year-to-date periods ended November 2, 2013 and October 27, 2012 refer to the thirty nine week periods ended as of those dates.
 
Reclassification
 
A prior year amount has been reclassified to facilitate comparability with the current year presentation.  This reclassification did not impact the Company’s results of operations in any periods presented.
 
Gift Cards and Gift Card Breakage
 
The Company accounts for the sale of gift cards as a liability at the time a gift card is sold.  The liability is relieved and revenue is recognized upon redemption of the gift card.  The gift cards issued by the Company are owned by an unrelated third party.  The gift cards do not have expiration dates.  Income from gift card breakage is recognized when the likelihood of redemption is deemed to be remote.  During the first quarter of fiscal year 2013, the Company accumulated sufficient historical information to estimate the rate of gift card breakage.  Based on this historical information, the Company recognized less than $0.1 million and $0.4 million of gift card breakage income during the thirteen and thirty nine weeks ended November 2, 2013, respectively.  The gift card breakage income is included in net sales. 
 
 
7

 
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial Statements
 
Management Estimates and Assumption
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

2.
Earnings Per Share
 
Basic earnings per common share amounts are calculated using the weighted-average number of common shares outstanding for the period.  Diluted earnings per common share amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact of stock options and restricted stock grants using the treasury stock method.
 
The following table summarizes the potential dilution that could occur if options to acquire common stock were exercised or if the restricted stock grants were fully vested and reconciles the weighted-average common shares outstanding used in the computation of basic and diluted earnings per share:
 
 
 
Thirteen Weeks Ended
 
Thirty Nine Weeks Ended
 
 
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
(in thousands, except per share data)
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
8,671
 
$
10,797
 
$
34,227
 
$
32,191
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
 
 
43,281
 
 
43,825
 
 
43,759
 
 
43,700
 
Options and other dilutive securities
 
 
712
 
 
1,086
 
 
841
 
 
1,091
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - diluted
 
 
43,993
 
 
44,911
 
 
44,600
 
 
44,791
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.20
 
$
0.25
 
$
0.78
 
$
0.74
 
Diluted earnings per common share
 
$
0.20
 
$
0.24
 
$
0.77
 
$
0.72
 
 
Stock options to purchase shares of the Company’s common stock in the amount of 0.8 million shares in each of the thirteen and thirty nine weeks ended November 2, 2013, and 0.4 million in each of the thirteen and thirty nine weeks ended October 27, 2012, were not included in the computation of diluted earnings per share due to their anti-dilutive effect.

3.
Fair Value of Financial Instruments
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount reflected in the consolidated balance sheets of financial assets and liabilities, which include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their fair values due to the short term nature of these financial assets and liabilities.  The carrying amount of the Company’s debt approximates its fair value due to proximity of the debt issue date and the balance sheet date and the variable component of interest on debt.
 
 
8

 
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial Statements
 
4.
Income Taxes
 
The provision for income taxes is based on the current estimate of the annual effective tax rate. The effective income tax rate in each of the thirteen and thirty nine weeks ended November 2, 2013 was 39.7% and 39.4%, respectively. The effective tax rate in each of the thirteen and thirty nine weeks ended October 27, 2012 was 39.1% and 39.2%, respectively.  The difference between our effective tax rate and statutory rate primarily relates to state income taxes.

5.
Revolving Credit Facility
 
On August 30, 2013, Francesca’s Collections, as borrower, and the Parent entered into a Second Amended and Restated Credit Agreement (“Second Amended and Restated Credit Agreement”) with Royal Bank of Canada, as Administrative Agent and Collateral Agent, and the lenders party thereto, which amends and restates the existing Amended and Restated Credit Agreement, dated as of July 27, 2011, as amended by Amendment No. 1 to the Amended and Restated Credit Agreement, dated February 7, 2013.  The Second Amended and Restated Credit Agreement provides $75.0 million of credit facility (including up to $10.0 million for letters of credit) that matures on August 30, 2018.  The Second Amended and Restated Credit Agreement also contains an increase option permitting Francesca’s Collections, subject to certain requirements, to arrange with the lenders for additional incremental commitments up to an aggregate of $25.0 million, subject to reductions in the event Francesca’s Collections has certain indebtedness outstanding.  At November 2, 2013, $25.0 million was outstanding under the Second Amended and Restated Credit Agreement.
 
All obligations under the Second Amended and Restated Credit Agreement are unconditionally guaranteed by, subject to certain exceptions, the Parent and each of Francesca’s Collections’ existing and future direct and indirect wholly owned domestic subsidiaries.  There are currently no subsidiary guarantors for the Second Amended and Restated Credit Agreement because Francesca’s Collections does not currently have any subsidiaries.  All obligations under the Second Amended and Restated Credit Agreement, and the guarantees of those obligations (as well as cash management obligations and any interest rate hedging or other swap agreements), are secured by substantially all of Francesca’s Collections’ assets as well as the assets of any subsidiary guarantor.  Additionally, the Second Amended and Restated Credit Agreement contains customary events of default and requires Francesca’s Collections to comply with certain financial covenants. Francesca’s Collections is permitted to pay dividends to the extent it has available capacity in its investment basket (as defined in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain procedural requirements have been satisfied and Francesca’s Collections is in pro forma compliance with a maximum secured leverage ratio.     As of November 2, 2013, Francesca’s Collections was in compliance with all covenants under the Second Amended and Restated Credit Agreement.
 
The borrowings under the Second Amended and Restated Credit Agreement bear interest at a rate equal to an applicable margin plus, at the option of Francesca’s Collection’s, either (a) in the case of base rate borrowings, a rate equal to the highest of (1) the prime rate of Royal Bank of Canada, (2) the federal funds rate plus 1/2 of 1%, and (3) the LIBOR for an interest period of one month plus 1.00%, or (b) in the case of LIBOR borrowings, a rate equal to the LIBOR for the interest period relevant to such borrowing. The applicable margin for borrowings under the Second Amended and Restated Credit Agreement ranges from 0.75% to 1.25% with respect to base rate borrowings and from 1.75% to 2.25% with respect to LIBOR borrowings, in each case based upon the achievement of specified levels of a ratio of consolidated total debt to consolidated EBITDA.  During the thirteen weeks ended November 2, 2013, amounts outstanding under the Second Amended and Restated Credit Agreement accrued interest at an average rate of 2.1%.

6.
Stock-based Compensation
 
Stock-based compensation cost is measured at the grant date fair value and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant). The Company estimates forfeitures for option grants that are not expected to vest. Stock-based compensation cost recognized in the thirteen and thirty nine weeks ended November 2, 2013 totaled $1.0 million and $3.0 million, respectively.  Stock-based compensation cost recognized in the thirteen and thirty nine weeks ended October 27, 2012 totaled $1.0 million and $2.7 million, respectively.
 
 
9

 
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial Statements
 
Stock Options
 
The following table summarizes stock option activity during the thirty nine weeks ended November 2, 2013.  
 
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
Weighted
 
Average
 
 
 
 
 
 
 
 
Average
 
Remaining
 
Aggregate
 
 
 
Number of
 
Exercise
 
Contractual
 
Intrinsic
 
 
 
Shares
 
Price
 
Life
 
Value
 
 
 
(In thousands)
 
(Per share)
 
(In years)
 
(In thousands)
 
Outstanding as of February 2, 2013
 
2,823
 
$
12.23
 
 
 
 
 
 
Options granted
 
73
 
 
23.94
 
 
 
 
 
 
Options exercised
 
(442)
 
 
3.26
 
 
 
 
 
 
Options forfeited or expired
 
(42)
 
 
8.25
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding as of November 2, 2013
 
2,412
 
$
14.29
 
7
 
$
17,282
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at November 2, 2013
 
1,332
 
$
9.41
 
7
 
$
13,234
 
 
During the thirty nine weeks ended November 2, 2013, the intrinsic value of stock options exercised totaled $9.9 million, while stock options were granted at a weighted average grant date fair value of $13.82.   The number of options exercised in the above table includes shares withheld to satisfy certain employees’ obligation for exercise price and minimum statutory withholding requirements. 
 
As of November 2, 2013, there was approximately $9.7 million of unrecognized compensation cost related to non-vested stock options that is expected to be recognized over a weighted-average period of 3 years.

7.
Share Repurchases
 
On September 3, 2013, the Company’s Board of Directors authorized a $100.0 million share repurchase program commencing on the same date.  This authorization has no expiration date.  Under the repurchase program, purchases can be made from time to time in the open market, in privately negotiated transactions, under Rule 10b5-1 plans or through other available means.  The specific timing and amount of the repurchases is dependent on market conditions, securities law limitations and other factors.    During the thirteen weeks ended November 2, 2013, the Company repurchased 1,942,081 shares of its common stock at a cost of approximately $36.9 million or an average price (including brokers’ commission) of $19.00 per share.  The cost of repurchased shares is presented as treasury stock in the unaudited consolidated balance sheets.  As of November 2, 2013, the remaining balance available for future share repurchase was approximately $63.1 million.  
 
Subsequent to November 2, 2013 and through December 6, 2013, the Company repurchased 371,100 shares of common stock for approximately $7.0 or an average price (including brokers’ commission) of $18.79 per share.

8.
Commitment and Contingencies
 
Operating Leases
 
The Company leases boutique space and office space under operating leases expiring in various years through the fiscal year ending 2025. Certain of the leases provide that the Company may cancel the lease, with penalties as defined in the lease, if the Company’s boutique sales at that location fall below an established level. Certain leases provide for additional rent payments to be made when sales exceed a base amount. Certain operating leases provide for renewal options for periods from three to five years at their fair rental value at the time of renewal.
 
Minimum future rental payments under non-cancellable operating leases as of November 2, 2013, are approximately as follows:
 
 
10

 
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial Statements
 
Fiscal year
 
Amount
 
 
 
(In thousands)
 
Remainder of 2013
 
$
6,878
 
2014
 
 
29,566
 
2015
 
 
29,549
 
2016
 
 
28,719
 
2017
 
 
27,321
 
Thereafter
 
 
93,638
 
 
 
$
215,671
 
 
Legal Proceedings
 
On September 27, 2013, the Company and certain of its current directors and officers were named as defendants in an action entitled Ortuzar v. Francesca’s Holdings Corp., et al., which was filed in the United States District Court for the Southern District of New York. This action purports to have been brought on behalf of purchasers of the Company’s publicly traded securities between March 20, 2013 and September 3, 2013 and alleges that the defendants made false and misleading statements in certain public disclosures regarding the Company’s current and future business and financial condition in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A substantially related class action lawsuit, entitled West Palm Beach Police Pension Fund v. Francesca’s Holdings Corp., et al., was filed on November 4, 2013 in the United States District Court for the Southern District of New York, on behalf of purchasers of the Company’s publicly traded securities between January 10, 2012 and September 3, 2013 alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a) and 15 of the Securities Act of 1933. This action added additional defendants, including certain of the Company’s current and former directors and officers. Both of the purported class action lawsuits seek damages in an unspecified amount. The Company believes that the allegations contained in these complaints are without merit and intends to vigorously defend itself against all claims. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
 
The Company, from time to time, is subject to various claims and legal proceedings arising in the ordinary course of business.  While the outcome of any such claim cannot be predicted with certainty, in the opinion of management, the outcome of these matters will not have a material adverse effect on the Company’s business, results of operations or financial conditions.
 
 
11

 
 
FORWARD-LOOKING STATEMENTS
 
This report contains forward-looking statements concerning our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. These statements may include words such as “aim”, “anticipate”, “assume”, “believe”, “can have”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “likely”, “may”, “objective”, “plan”, “potential”, “positioned”, “predict”, “should”, “target”, “will”, “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth rates, market share and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements.
 
These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions about our business and industry. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations.  These risks and uncertainties include, but are not limited to, the following: the risk that we cannot anticipate, identify and respond quickly to changing fashion trends and customer preferences; our ability to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise through our direct-to-consumer business; our ability to successfully open and operate new boutiques each year; and our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth. For additional information regarding these and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and filed with the Securities and Exchange Commission (“SEC”) on March 22, 2013, and under “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q.
 
We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this report as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.
 
Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise any forward-looking statements after the date of this report to reflect actual results or future events or circumstances whether as a result of new information, future developments or otherwise.
 
Overview
 
Unless the context otherwise requires, the “Company,” “we,” “our,” “ours,” “us” and “francescas®” refer to Francesca’s Holdings Corporation and its consolidated subsidiaries.
 
francesca’s® is a growing specialty retailer with retail locations designed and merchandised to feel like independently owned, upscale boutiques providing customers a fun and differentiated shopping experience. The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts.  As of November 2, 2013, francesca’s® operated 446 boutiques in 45 states and also served its customers through www.francescas.com, its direct-to-consumer website.  The information contained on our website is not incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information contained on our website to be part of this Quarterly Report on Form 10-Q.
 
During the thirteen weeks ended November 2, 2013, our net sales increased 11% to $79.6 million from $72.0 million, income from operations decreased by 18% to $14.6 million from $17.7 million and net income decreased 20% to $8.7 million, or $0.20 per diluted share, from $10.8 million, or $0.24 per diluted share, over the comparable prior year period.  During the thirty nine weeks ended November 2, 2013, our net sales increased 18% to $248.2 million from $209.7 million, income from operations increased by 6% to $56.7 million from $53.3 million and net income increased 6% to $34.2 million, or $0.77 per diluted share, from $32.2 million, or $0.72 per diluted share, over the comparable prior year period.
 
 
12

 
The 53rd week in fiscal 2012 caused a one-week shift in our 2013 fiscal calendar, resulting in the first quarter of fiscal year 2013 being later by one week relative to the quarter-ending date in fiscal year 2012 (“retail calendar shift”). If there are seasonal influences near quarter-end dates, year-over-year comparisons may be impacted by the retail calendar shift. Our reported comparable sales results for fiscal 2012 are being adjusted for the retail calendar shift.  Accordingly, our comparable sales results for the thirteen and thirty nine weeks ended November 2, 2013 are compared with our comparable sales results for the thirteen and thirty nine weeks ended November 3, 2012, respectively.
 
We have increased our boutique count to 446 boutiques in 45 states as of November 2, 2013 from 359 boutiques in 44 states as of October 27, 2012.  We plan to open five additional boutiques in the fourth quarter of fiscal year 2013.  We have an opportunity to take possession of four additional boutiques during January 2014. These boutiques were previously planned to be opened during the first quarter of 2014. The acceleration of these openings should allow us to capitalize on additional revenue opportunities as well as the ability to keep the number of openings during fiscal 2014 at the full planned number by back filling the four accelerated openings during fiscal 2014. 
 
Results of Operations
 
The following represents operating data for the thirteen and thirty nine weeks ended November 2, 2013 and October 27, 2012.
 
 
 
Thirteen Weeks Ended
 
 
Thirty Nine Weeks Ended
 
 
 
November 2,
 
 
October 27,
 
 
November 2,
 
 
October 27,
 
 
 
2013
 
 
2012
 
 
2013
 
 
2012
 
Comparable sales growth for period(1)
 
 
(3)
%
 
 
17
%
 
 
(1)
%
 
 
18
%
Number of boutiques open at end of period
 
 
446
 
 
 
359
 
 
 
446
 
 
 
359
 
Net sales per average square foot for the period (2)
 
$
133
 
 
$
145
 
 
$
438
 
 
$
454
 
Average square feet per boutique(3)
 
 
1,361
 
 
 
1,387
 
 
 
1,361
 
 
 
1,387
 
Total gross square feet at end of period (in thousands)
 
 
607
 
 
 
498
 
 
 
607
 
 
 
498
 
 
 
 
 
 
(1)
A boutique is included in comparable sales on the first day of the fifteenth full month following the boutique’s opening. When a boutique that is included in comparable sales is relocated, we continue to consider sales from that boutique to be comparable sales. If a boutique is closed for thirty days or longer for a remodel or as a result of weather damage, fire or the like, we no longer consider sales from that boutique to be comparable sales. Beginning in the first quarter of fiscal year 2013, comparable sales results include our direct-to-consumer sales. To facilitate comparability with the prior year period, prior year comparable sales growth was recalculated and now includes direct-to-consumer sales growth.  Due to the retail calendar shift, comparable sales results for the thirteen and thirty nine weeks ended November 2, 2013 are compared with comparable sales results for the thirteen and thirty nine weeks ended November 3, 2012, respectively.
 
 
 
 
(2)
Net sales per average square foot are calculated by dividing net sales for the period by the average square feet during the period. Because of our rapid growth, for purposes of providing net sales per square foot measure, we use average square feet during the period as opposed to total gross square feet at the end of the period. For individual quarterly periods, average square feet is calculated as (a) the sum of total gross square feet at the beginning and end of the period, divided by (b) two.  For periods consisting of more than one fiscal quarter, average square feet is calculated as (a) the sum of total gross square feet at the beginning of the period and total gross square feet at the end of each fiscal quarter within the period, divided by (b) the number of fiscal quarters within the period plus one (which, for a fiscal year, is five).  There may be variations in the way in which some of our competitors and other retailers calculate sales per square foot or similarly titled measures. As a result, average square feet and net sales per average square foot for the period may not be comparable to similar data made available by other retailers. 
 
 
 
 
(3)
Average square feet per boutique is calculated by dividing total gross square feet at the end of the period by the number of boutiques open at the end of the period.
 
Boutique Count
 
The following table summarizes the number of boutiques open at the beginning and end of the periods indicated.
 
 
 
Thirteen Weeks Ended
 
Thirty Nine Weeks Ended
 
 
 
August 3,
 
October 27,
 
August 3,
 
October 27,
 
 
 
2013
 
2012
 
2013
 
2012
 
Number of boutiques open at beginning of period
 
436
 
357
 
360
 
283
 
Boutiques added
 
10
 
2
 
86
 
76
 
Number of boutiques open at the end of period
 
446
 
359
 
446
 
359
 
 
 
13

 
Thirteen Weeks Ended November 2, 2013 Compared to Thirteen Weeks Ended October 27, 2012
 
 
 
Thirteen Weeks Ended
 
 
 
 
 
 
 
 
 
 
 
 
November 2, 2013
 
 
October 27, 2012
 
 
Variance
 
 
 
 
 
 
As a %
 
 
 
 
 
As a %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
of Net
 
 
 
 
 
of Net
 
 
In
 
 
 
 
Basis
 
 
 
In Dollars
 
Sales(1)
 
 
In Dollars
 
Sales(1)
 
 
Dollars
 
%
 
 
Points(1)
 
 
 
(in thousands, except percentages)
 
Net sales
 
$
79,632
 
100.0
%
 
$
71,986
 
100.0
%
 
$
7,646
 
11
%
 
0
 
Cost of goods sold and occupancy costs
 
 
39,275
 
49.3
%
 
 
34,115
 
47.4
%
 
 
5,160
 
15
%
 
190
 
Gross profit
 
 
40,357
 
50.7
%
 
 
37,871
 
52.6
%
 
 
2,486
 
7
%
 
(190)
 
Selling, general and administrative expenses
 
 
25,766
 
32.4
%
 
 
20,144
 
28.0
%
 
 
5,622
 
28
%
 
440
 
Income from operations
 
 
14,591
 
18.3
%
 
 
17,727
 
24.6
%
 
 
(3,136)
 
(18)
%
 
(630)
 
Interest expense
 
 
(129)
 
(0.2)
%
 
 
(114)
 
(0.2)
%
 
 
(15)
 
13
%
 
0
 
Other income (expense)
 
 
(77)
 
(0.1)
%
 
 
105
 
0.1
%
 
 
(182)
 
(174)
%
 
(20)
 
Income before income tax expense
 
 
14,385
 
18.1
%
 
 
17,718
 
24.6
%
 
 
(3,333)
 
(19)
%
 
(650)
 
Income tax expense
 
 
5,714
 
7.2
%
 
 
6,921
 
9.6
%
 
 
(1,207)
 
(17)
%
 
(240)
 
Net income
 
$
8,671
 
10.9
%
 
$
10,797
 
15.0
%
 
 
(2,126)
 
(20)
%
 
(410)
 
 
(1)   
Percentage totals or basis points variances in the above table may not equal the sum or difference of the components due to rounding.
 
Net Sales
 
Net sales increased 11% to $79.6 million in the thirteen weeks ended November 2, 2013 from $72.0 million in the thirteen weeks ended October 27, 2012.  This increase is attributable to the increase in non-comparable sales, which in turn is due to the increase in the number of boutiques in operation in the third quarter of fiscal year 2013 as compared to the same period of the prior year.  This change was partially offset by a 3% decrease in comparable sales due to a decrease in comparable boutique transactions.  Our direct-to-consumer sales increased 87% to $2.2 million in the thirteen weeks ended November 2, 2013 from $1.2 million in the thirteen weeks ended October 27, 2012.  There were 347 comparable boutiques and 99 non-comparable boutiques open at November 2, 2013 compared to 268 and 91, respectively, at October 27, 2012.
 
Cost of Goods Sold and Occupancy Costs
 
Cost of goods sold and occupancy costs increased 15% to $39.3 million in the thirteen weeks ended November 2, 2013 from $34.1 million in the thirteen weeks ended October 27, 2012. Cost of merchandise increased by $2.7 million driven by the increased sales volume. Occupancy costs increased by $2.4 million due to the increase in the number of boutiques in operation during the thirteen weeks ended November 2, 2013 compared to the same period of the prior year. As a percentage of net sales, cost of goods sold and occupancy costs increased to 49.3% in the thirteen weeks ended November 2, 2013 from 47.4% in the thirteen weeks ended October 27, 2012. This unfavorable variance was due to 160 basis points of deleveraging of fixed occupancy costs as well as 30 basis points of lower merchandise margins.  Decrease in margin was due to elevated markdowns compared to the prior year quarter.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses increased 28% to $25.8 million in the thirteen weeks ended November 2, 2013 from $20.1 million in the thirteen weeks ended October 27, 2012. This increase was due to the higher boutique and corporate payroll associated with expansion of the field leadership structure for the long-term and those needed to support the larger boutique base and sales growth.  As a percentage of net sales, selling, general and administrative expense increased to 32.4% in the thirteen weeks ended November 2, 2013 as compared to 28.0% in the thirteen weeks ended October 27, 2012 due to deleverage in boutique expenses as well as increased boutique and corporate payroll.
 
Income Tax Expense
 
The decrease in provision for income taxes of $1.2 million in the thirteen weeks ended November 2, 2013 compared to the thirteen weeks ended October 27, 2012 was primarily due to the decrease in pre-tax income. The effective tax rate of 39.7% in the thirteen weeks ended November 2, 2013 was comparable to the effective tax rate of 39.1% in the thirteen weeks ended October 27, 2012.
 
 
14

 
Thirty Nine Weeks Ended November 2, 2013 Compared to Thirty Nine Weeks Ended October 27, 2012
 
 
 
Thirty Nine Weeks Ended
 
 
 
 
 
 
 
 
 
 
 
 
November 2, 2013
 
 
October 27, 2012
 
 
Variance
 
 
 
 
 
 
As a % 
 
 
 
 
 
As a %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
of Net
 
 
 
In 
 
of Net
 
 
In
 
 
 
 
Basis
 
 
 
In Dollars
 
Sales(1)
 
 
Dollars
 
Sales(1)
 
 
Dollars
 
%
 
 
Points(1)
 
 
 
(in thousands, except percentages)
 
Net sales
 
$
248,185
 
100.0
%
 
$
209,673
 
100.0
%
 
$
38,512
 
18
%
 
0
 
Cost of goods sold and occupancy costs
 
 
118,700
 
47.8
%
 
 
97,443
 
46.5
%
 
 
21,257
 
22
%
 
140
 
Gross profit
 
 
129,485
 
52.2
%
 
 
112,230
 
53.5
%
 
 
17,255
 
15
%
 
(140)
 
Selling, general and administrative expenses
 
 
72,800
 
29.3
%
 
 
58,960
 
28.1
%
 
 
13,840
 
23
%
 
120
 
Income from operations
 
 
56,685
 
22.8
%
 
 
53,270
 
25.4
%
 
 
3,415
 
6
%
 
(260)
 
Interest expense
 
 
(362)
 
(0.1)
%
 
 
(546)
 
(0.3)
%
 
 
184
 
(34)
%
 
10
 
Other income
 
 
127
 
0.1
%
 
 
257
 
0.1
%
 
 
(130)
 
(50)
%
 
(10)
 
Income before income tax expense
 
 
56,450
 
22.7
%
 
 
52,981
 
25.3
%
 
 
3,469
 
7
%
 
(250)
 
Income tax expense
 
 
22,223
 
9.0
%
 
 
20,790
 
9.9
%
 
 
1,433
 
7
%
 
(100)
 
Net income
 
 
34,227
 
13.8
%
 
$
32,191
 
15.4
%
 
$
2,036
 
6
%
 
(160)
 
 
(1)   
Percentage totals or basis points variances in the above table may not equal the sum or difference of the components due to rounding.
 
Net Sales
 
Net sales increased 18% to $248.2 million in the thirty nine weeks ended November 2, 2013 from $209.7 million in the thirty nine weeks ended October 27, 2012.  This increase is attributable to the increase in non-comparable sales, which in turn is due to the increase in the number of boutiques in operation in the thirty nine weeks ended November 2, 2013 as compared to the same period of the prior year.  Our comparable sales decreased 1% when compared to the prior year period primarily due to a decrease in comparable boutique transactions.  Our direct-to-consumer sales increased 91% to $5.7 million in the thirty nine weeks ended November 2, 2013 from $3.0 million in the thirty nine weeks ended October 27, 2012.  There were 347 comparable boutiques and 99 non-comparable boutiques open at November 2, 2013 compared to 268 and 91, respectively, at October 27, 2012.
 
Cost of Goods Sold and Occupancy Costs
 
Cost of goods sold and occupancy costs increased 22% to $118.7 million in the thirty nine weeks ended November 2, 2013 from $97.4 million in the thirty nine weeks ended October 27, 2012. Cost of merchandise increased by $14.1 million driven by the increased sales volume. Occupancy costs increased by $7.1 million due to the increase in the number of boutiques in operation during the thirty nine weeks ended November 2, 2013 compared to the same period of the prior year. As a percentage of net sales, cost of goods sold and occupancy costs increased to 47.8% in the thirty nine weeks ended November 2, 2013 from 46.5% in the thirty nine weeks ended October 27, 2012.  This unfavorable variance was due to deleverage in fixed occupancy costs as well as increased level of promotions and markdowns. 
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses increased 23% to $72.8 million in the thirty nine weeks ended November 2, 2013 from $59.0 million in the thirty nine weeks ended October 27, 2012. This increase was due to the increase in boutique and corporate payroll to support the larger boutique base and sales growth.  As a percentage of net sales, selling, general and administrative expense increased to 29.3% in the thirty nine weeks ended November 2, 2013 as compared to 28.1% in the thirty nine weeks ended October 27, 2012 primarily due to deleverage in boutique expenses.
 
Income Tax Expense
 
The increase in provision for income taxes of $1.4 million in the thirty nine weeks ended November 2, 2013 compared to the thirty nine weeks ended October 27, 2012 was primarily due to the increase in pre-tax income. The effective tax rate was 39.4% and 39.2% in each of the thirty nine weeks ended November 2, 2013 and October 27, 2012, respectively.
 
 
15

 
Sales by Merchandise Category
 
 
 
Thirteen Weeks Ended
 
 
Thirty Nine Weeks Ended
 
 
 
 
November 2, 2013
 
 
October 27, 2012
 
 
November 2, 2013
 
 
October 27, 2012
 
 
 
 
 
 
 
As a %
 
 
 
 
 
As a %
 
 
 
 
 
As a %
 
 
 
 
 
As a %
 
 
 
 
In 
 
of Net
 
 
 
 
 
of Net
 
 
In
 
of Net
 
 
 
 
 
of Net
 
 
 
 
Dollars
 
Sales
 
 
In Dollars
 
Sales
 
 
Dollars
 
Sales
 
 
In Dollars
 
Sales
 
 
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Apparel
 
$
41,604
 
52.2
%
 
$
38,013
 
52.8
%
 
$
127,064
 
51.2
%
 
$
111,171
 
53.0
%
 
Jewelry
 
 
17,335
 
21.8
%
 
 
15,844
 
22.0
%
 
 
59,764
 
24.1
%
 
 
45,926
 
21.9
%
 
Accessories
 
 
13,771
 
17.3
%
 
 
10,854
 
15.1
%
 
 
39,148
 
15.8
%
 
 
31,540
 
15.1
%
 
Gifts
 
 
6,540
 
8.2
%
 
 
7,139
 
9.9
%
 
 
21,643
 
8.7
%
 
 
21,142
 
10.1
%
 
Merchandise sales
 
 
79,250
 
99.5
%
 
 
71,850
 
99.8
%
 
 
247,619
 
99.8
%
 
 
209,779
 
100.1
%
 
Other(1)
 
 
382
 
0.5
%
 
 
136
 
0.2
%
 
 
566
 
0.2
%
 
 
(106)
 
(0.1)
%
 
Net sales
 
$
79,632
 
100.0
%
 
$
71,986
 
100.0
%
 
$
248,185
 
100.0
%
 
$
209,673
 
100.0
%
 
 
      (1)
 Includes gift card breakage income, shipping and change in return reserve.
 
Liquidity and Capital Resources
 
Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility. Our primary cash needs are for capital expenditures in connection with opening new boutiques and remodeling existing boutiques, investing in improved technology and distribution facility enhancements, funding normal working capital requirements, and payments of interest and principal, if any, under our revolving credit facility. We may use cash or our revolving credit facility to issue letters of credit to support merchandise imports or for other corporate purposes. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable and other current liabilities. Our working capital position benefits from the fact that we generally collect cash from sales to customers the day of or, in the case of credit or debit card transactions, within several days of the related sales and we typically have up to 30 days to pay our vendors.  
 
We were in compliance with all covenants under our revolving credit facility as of November 2, 2013. On November 2, 2013, we had $31.8 million of cash and cash equivalents and $50.0 million in borrowing availability under our revolving credit facility. There were no letters of credit outstanding at November 2, 2013.
 
We expect that our cash flow from operations along with borrowings under our revolving credit facility and tenant allowances for new boutiques will be sufficient to fund capital expenditures and our working capital requirements for at least the next twelve months.
 
Cash Flow
 
A summary of our operating, investing and financing activities are shown in the following table:
 
 
 
Thirty Nine Weeks Ended
 
 
 
November 2, 2013
 
October 27, 2012
 
 
 
(In thousands)
 
Provided by operating activities
 
$
27,433
 
$
32,047
 
Used in investing activities
 
 
(15,564)
 
 
(15,370)
 
Used in financing activities
 
 
(9,904)
 
 
(17,817)
 
Net increase (decrease) in cash and cash equivalents
 
$
1,965
 
$
(1,140)
 
 
Operating Activities
 
Operating activities consist of net income adjusted for non-cash items, including depreciation and amortization, stock-based compensation, deferred taxes, the effect of working capital changes and tenant allowances received from landlords.
 
Net cash provided by operating activities was $27.4 million and $32.0 million in each of the thirty nine weeks ended November 2, 2013 and October 27, 2012, respectively.  Cash provided by operating activities decreased $4.6 million in the thirty nine weeks ended November 2, 2013 as compared to the same period of the prior year due to timing of payments made on our accounts payable, higher merchandise inventories due to the increase in the number of boutiques in operation, and higher accounts receivable due to an increase in income tax receivable.  Additionally, tenant allowances received were lower in the thirty nine weeks ended November 2, 2013 as compared to the same period of the prior year. These changes were partially offset by higher net income and accrued expenses, principally due to increases in accrued payroll and gift card liability, in the third quarter of fiscal year 2013 as compared to the same period of the prior year. 
 
 
16

 
Investing Activities
 
Investing activities consist primarily of capital expenditures for new boutiques, improvements to existing boutiques, as well as investment in information technology and our distribution facility.
 
 
 
Thirty Nine Weeks Ended
 
 
 
November 2, 2013
 
October 27, 2012
 
 
 
(In thousands)
 
Capital expenditures for:
 
 
 
 
 
 
 
New boutiques
 
$
10,638
 
$
9,159
 
Existing boutiques
 
 
2,017
 
 
916
 
Technology
 
 
2,242
 
 
850
 
Corporate and distribution
 
 
749
 
 
4,445
 
Proceeds from sale of assets
 
 
(82)
 
 
 
Net cash used in investing activities
 
$
15,564
 
$
15,370
 
 
Our total capital expenditures for the thirty nine weeks ended November 2, 2013 and October 27, 2012 were $15.6 million and $15.4 million, respectively, with expenditures for new boutiques accounting for $10.6 million and $9.2 million, respectively. Spending for new boutiques included amounts associated with boutiques that will open subsequent to the end of each fiscal quarter. We opened 86 boutiques in the thirty nine weeks ended November 2, 2013 compared to 76 boutiques in the thirty nine weeks ended October 27, 2012. The average cost of the leasehold improvements, equipment, furniture and fixtures, excluding tenant allowances, for new boutiques opened in the thirty nine weeks ended November 2, 2013 and October 27, 2012 was $178,000 and $185,000, respectively, while  average tenant allowance per new boutique was $70,000 and $92,000 over the same periods, respectively.  The decrease in average tenant allowance per new boutique was principally due to opening more boutiques in non-mall locations in the thirty nine weeks ended November 2, 2013 as compared to the same period of the prior year.  Tenant allowances are amortized as a reduction in rent expense over the term of the lease. The average collection period for these allowances is approximately six months after boutique opening. We fund the cost of new boutiques with cash flow from operations, tenant allowances from our landlords, or borrowings under our revolving credit facility. Capital expenditures for corporate and distribution decreased $3.7 million due to prior year capital expenditures related to the relocation of our corporate and distribution facilities not incurred in the current year.  Technology related capital expenditures increased $1.4 million due to the re-launch of our direct-to-consumer website as well as the implementation of an enterprise planning software.  We expect that our cash flow from operations along with borrowings under our revolving credit facility and tenant allowances for new boutiques will be sufficient to fund our capital expenditures for the rest of fiscal year 2013.
 
Expected capital expenditures for the fiscal year 2013 have increased to a range of $25.0 to $26.0 million. Of these amounts, approximately $9.0 million to $10.0 million are expected to be spent in the fourth quarter.  The increase in our capital expenditures is primarily due to expected investments in our direct-to-consumer platform and additional boutique openings during the fourth quarter.
 
Financing Activities
 
Financing activities consist of borrowings and payments under our revolving credit facility, repurchases of our common stock and proceeds from the exercise of stock options and the related tax consequence.
 
Net cash used by financing activities in the thirty nine weeks ended November 2, 2013 was $9.9 million.  This consisted of cash outflows for repurchases of our common stock and payment of debt issuance costs offset by proceeds from borrowings under our revolving credit facility as well as proceeds from the exercise of stock options and the related tax consequence.  Net cash used by financing activities in the thirty nine weeks ended October 27, 2012 amounted to $17.8 million.  This consisted of cash outflows for the repayments of borrowings under our revolving credit facility offset by proceeds from exercise of stock options and the related tax consequence.
 
 
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Revolving Credit Facility
 
On August 30, 2013, Francesca’s Collections, Inc. (“Francesca’s Collections”), our wholly owned indirect subsidiary, as borrower, and Francesca’s LLC (the “Parent”) entered into a Second Amended and Restated Credit Agreement (“Second Amended and Restated Credit Agreement”) with Royal Bank of Canada, as Administrative Agent and Collateral Agent, and the lenders party thereto, which amends and restates the existing Amended and Restated Credit Agreement, dated as of July 27, 2011, by and among Francesca’s Collections, the Parent, Royal Bank of Canada, as Administrative Agent and Collateral Agent, and the lenders party thereto, as amended by Amendment No. 1 to the Amended and Restated Credit Agreement, dated February 7, 2013. 
 
The Second Amended and Restated Credit Agreement provides an aggregate amount of $75.0 million in credit facility (including up to $10.0 million for letters of credit) and matures on August 30, 2018.  The Second Amended and Restated Credit Agreement also contains an increase option permitting Francesca’s Collections, subject to certain requirements, to arrange with the lenders for additional incremental commitments up to an aggregate of $25.0 million, subject to reductions in the event Francesca’s Collections has certain indebtedness outstanding.  At November 2, 2013, there was $25.0 million outstanding under the Second Amended and Restated Credit Agreement.
 
All obligations under the Second Amended and Restated Credit Agreement are unconditionally guaranteed by, subject to certain exceptions, the Parent and each of Francesca’s Collections’ existing and future direct and indirect wholly owned domestic subsidiaries.  There are currently no subsidiary guarantors for the Second Amended and Restated Credit Agreement because Francesca’s Collections does not currently have any subsidiaries. All obligations under the Second Amended and Restated Credit Agreement, and the guarantees of those obligations (as well as cash management obligations and any interest rate hedging or other swap agreements), are secured by substantially all of Francesca’s Collections’ assets as well as the assets of any subsidiary guarantor.
 
The borrowings under the Second Amended and Restated Credit Agreement bear interest at a rate equal to an applicable margin plus, at the option of Francesca’s Collections, either (a) in the case of base rate borrowings, a rate equal to the highest of (1) the prime rate of Royal Bank of Canada, (2) the federal funds rate plus 1/2 of 1%, and (3) the LIBOR for an interest period of one month plus 1.00%, or (b) in the case of LIBOR borrowings, a rate equal to the LIBOR for the interest period relevant to such borrowing.  The applicable margin for borrowings under the Second Amended and Restated Credit Agreement ranges from 0.75% to 1.25% with respect to base rate borrowings and from 1.75% to 2.25% with respect to LIBOR borrowings, in each case based upon the achievement of specified levels of a ratio of consolidated total debt to consolidated EBITDA.  During the thirteen weeks ended November 2, 2013, amounts outstanding under the Second Amended and Restated Credit Agreement accrued interest at an average rate of 2.1%.
 
The Second Amended and Restated Credit Agreement contains customary affirmative and negative covenants, including limitations on the ability of Francesca’s Collections and its subsidiaries to (i) incur additional debt; (ii) create liens; (iii) make certain investments, acquisitions, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii) engage in mergers or consolidations; (viii) change the business conducted by Francesca’s Collections and its subsidiaries; (ix) engage in certain transactions with affiliates; (x) enter into agreements that restrict dividends from subsidiaries; and (xi) amend certain charter documents and material agreements governing subordinated and junior indebtedness. However, Francesca’s Collections is permitted to pay dividends to the extent it has available capacity in its investment basket (as defined in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain procedural requirements have been satisfied and Francesca’s Collections is in pro forma compliance with  a maximum secured leverage ratio.  
 
In addition, the Second Amended and Restated Credit Agreement requires Francesca’s Collections to comply with the following financial covenants:
 
 
·
A maximum ratio of (i) lease-adjusted consolidated total debt (as defined in the Second Amended and Restated Credit Agreement) to (ii) consolidated EBITDAR of 4.25 to 1.00.
 
 
 
 
·
Maximum capital expenditures of $30.0 million per fiscal year, with any unused portion allowed to be carried over to the next two fiscal years subject to a 50.0% cap.
 
 
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As of November 2, 2013, Francesca’s Collections was in compliance with all covenants under the Second Amended and Restated Credit Agreement.
 
The Second Amended and Restated Credit Agreement also contains customary events of default, including: (i) failure to pay principal, interest, fees or other amounts under the Second Amended and Restated Credit Agreement when due taking into account any applicable grace period; (ii) any representation or warranty proving to have been incorrect in any material respect when made; (iii) a cross default with respect to other material indebtedness; (iv) bankruptcy and insolvency events; (v) unsatisfied material final judgments; (vi) a “change of control”; (vii) certain defaults under the Employee Retirement Income Security Act of 1974; (viii) the invalidity or impairment of any loan document or any security interest; and (ix) the subordination provisions of any material subordinated debt or junior debt shall cease to be in full force.
 
Share Repurchase Program
 
For information regarding our share repurchase program, please refer to Note 7 to our unaudited consolidated financial statements included in Part I of this report, which is incorporated herein by reference.
 
Critical Accounting Policies
 
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. A summary of the Company’s significant accounting policies is included in Note 1 to the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and filed with the SEC on March 22, 2013.
 
Certain of the Company’s accounting policies and estimates are considered critical, as these policies and estimates are important to adequately reflect the Company’s consolidated financial results.  The formulation of these policies and estimates require judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 filed with the SEC on March 22, 2013. Except as set forth below, as of November 2, 2013, there were no significant changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 filed with the SEC on March 22, 2013.
 
Gift Cards and Gift Card Breakage
 
The Company accounts for the sale of gift cards as a liability at the time a gift card is sold.  The liability is relieved and revenue is recognized upon redemption of the gift card.  The gift cards issued by the Company are owned by an unrelated third party. The gift cards do not have expiration dates.  Income from gift card breakage is recognized when the likelihood of redemption is deemed to be remote.  Based on historical information, the Company recognized less than $0.1 million and $0.4 million of gift card breakage income during the thirteen and thirty nine weeks ended November 2, 2013, respectively.  The gift card breakage income is included in net sales. 
 
Contractual Obligations
 
Except as set forth below, there were no significant changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and filed with the SEC on March 22, 2013 other than those which occur in the normal course of our business.
 
 
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At November 2, 2013, there was $25.0 million outstanding under the Second Amended and Restated Credit Agreement which matures on August 30, 2018.  Assuming an outstanding balance of $25.0 million and an effective interest rate of 2.1%, the estimated annual interest expense during the remainder of the term is $0.5 million.
 
Off Balance Sheet Arrangements
 
We are not party to any off balance sheet arrangements.
 
 
Our principal exposure to market risk relates to changes in interest rates. Our revolving credit facility carries floating interest rates that are tied to LIBOR, the federal funds rate and the prime rate, and therefore, our statements of operations and our cash flows could be exposed to changes in interest rates to the extent that we do not have effective hedging arrangements in place. We historically have not used derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future. At November 2, 2013, we had $25.0 million outstanding under the Second Amended and Restated Credit Agreement and the average interest rate on our borrowings was 2.1%. Based on a sensitivity analysis at November 2, 2013, assuming the loan balance would be outstanding for a full fiscal year, a 100 basis points increase in interest rates would increase our annual interest expense by approximately $0.3 million.
 
 
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including our Chief Executive Officer, Chief Financial Officer and Chief Administrative Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including the Chief Executive Officer, the Chief Financial Officer and the Chief Administrative Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Chief Executive Officer, the Chief Financial Officer and the Chief Administrative Officer concluded that the Company’s disclosure controls and procedures were effective as of November 2, 2013.
 
There were no changes in our internal control over financial reporting during the quarter ended November 2, 2013 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.  
 
PART II. OTHER INFORMATION
 
 
For information regarding legal proceedings involving us, please refer to Note 8 to our unaudited consolidated financial statements included in Part I of this report, which is incorporated herein by reference.
 
 
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There are no material changes to our risk factors as previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and filed with the SEC on March 22, 2013, other than the addition of the below risk factor.
 
We are involved on an ongoing basis in ligation arising in the ordinary course of our business or otherwise that could distract management from our business activities and result in significant liability or damage to our brand.
 
As a growing company with expanding operations, we increasingly face the risk of litigation and other claims against us. We are involved on an ongoing basis in ligation arising in the ordinary course of our business or otherwise, which may include class actions involving consumers, shareholders or employees, and claims relating to employees, commercial disputes, landlord-tenant disputes, intellectual property issues, product-oriented allegations and slip and fall claims. These actions and claims can raise complex factual and legal issues that are subject to risks and uncertainties and could require significant management time. Litigation and other actions and claims against us could result in unexpected expenses and liabilities, which could materially adversely affect our operations and our reputation.
 
 
The following table provides information about the Company’s share repurchase activity during the thirteen weeks ended November 2, 2013.
 
 
 
 
 
 
 
 
Total number of
 
Approximate
 
 
 
 
 
 
 
 
Shares
 
dollar value of
 
 
 
 
 
Average
 
purchased as
 
shares that may
 
 
 
Total number
 
price paid
 
part of a publicly
 
yet be purchased
 
 
 
of shares
 
per
 
announced plans
 
under the plans or
 
Period (1)
 
purchased
 
share(2)
 
or programs  (3)
 
programs
 
 
 
 
 
 
 
 
 
 
 
 
 
August 4 ,2013 - August 31, 2013
 
 
 
 
 
 
 
September 1, 2013 - October 5, 2013
 
1,602,081
 
$
19.31
 
1,602,081
 
$
69,084,526
 
October 6, 2013 - November 2, 2013
 
340,000
 
 
17.52
 
340,000
 
$
63,131,736
 
Total
 
1,942,081
 
$
19.00
 
1,942,081
 
 
 
 
 
 
(1)
Periodic information is presented by reference to our fiscal monthly periods during the third quarter of fiscal year 2013.
 
 
(2)
Average price paid per share includes brokers’ commission.
 
 
(3)
On September 3, 2013, the Company's Board of Directors authorized a $100 million share repurchase program commencing on the same date.  This authorization has no expiration date.  Under the repurchase program, purchases can be made from time to time through open market purchases, in privately negotiated transactions, under a Rule 10b5-1 plans or through other available means.  The specific timing and amount of repurchases is dependent on market conditions, securities law limitations and other factors. 
   
 
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Exhibit No. 
 
Description 
 
 
 
10.1
 
Second Amended and Restated Credit Agreement, dated as of August 30, 2013, between Francesca’s Collections, Inc., as Borrower, Francesca’s LLC, as Parent, the guarantors party thereto, the lenders party thereto, and Royal Bank of Canada, as Administrative Agent, Collateral Agent Joint Lead Arranger and Co-Bookrunner and KeyBank National Association, as Syndication Agent, Joint Lead Arranger and Co-Bookrunner (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Francesca’s Holdings Corporation on September 4, 2013)
 
 
 
10.2
 
Letter Agreement, dated September 4, 2013 between Francesca’s Holdings Corporation and Sei Jin Alt (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by Francesca’s Holdings Corporation of September 5, 2013)
 
 
 
10.3
 
Letter Agreement, dated September 4, 2013 between Francesca’s Holdings Corporation and Kal Malik (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K filed by Francesca’s Holdings Corporation of September 5, 2013)
 
 
 
31.1
 
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)
 
 
 
31.2
 
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)
 
 
 
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Unaudited Consolidated Balance Sheets as of November 2, 2013, February 2, 2013 and October 27, 2012, (22) the Unaudited Consolidated Statements of Operations for the thirteen and thirty nine weeks ended November 2, 2013 and October 27, 2012, (iii) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the thirty nine weeks ended November 2, 2013, (iv) Unaudited Consolidated Statements of Cash Flows for the thirty nine weeks ended November 2, 2013 and October 27, 2012 and (v) the Notes to the Unaudited Consolidated Financial Statements.
 
 
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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Francesca’s Holdings Corporation
 
(Registrant)
 
 
Date:  December 9, 2013
/s/ Mark Vendetti
 
Mark Vendetti
 
Chief Financial Officer (duly authorized officer and Principal Financial and Accounting Officer)
 
 
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