francesca’s® Reports Second Quarter Fiscal Year 2014

Financial Results

 

 

·

Second quarter net sales increased 9% to $97.3 million

·

Second quarter comparable sales decreased 7%

·

Second quarter diluted earnings per share were $0.24

·

Opened 75 new boutiques through the end of the second quarter

 

 

HOUSTON, TEXAS — September 9, 2014 — Francesca’s Holdings Corporation (NASDAQ: FRAN) today reported net income of $10.3 million, or $0.24 diluted earnings per share, for the second quarter of 2014, compared to net income of $14.6 million, or $0.33 diluted earnings per share, for the second quarter of 2013.

 

Neill P. Davis, the Company’s Chief Executive Officer and President stated, “In spite of the challenging environment and after implementing the previously announced inventory disposal during the quarter, we were able to deliver diluted earnings per share of $0.24, grow net sales by 9% driven by new boutique sales and a 98% increase in our direct-to-consumer business, and open 13 new boutiques bringing the total to 75 for the year-to-date.”

 

“Our sales trends improved in apparel, accessories and gift in the second quarter; however, were offset by challenging results in our jewelry category. We are making progress in reversing the negative trends in jewelry as reflected in improved performance of new merchandise in late July and August. We expect the improving sales trend that started at the end of the second quarter to continue through the third quarter as jewelry sales continue to strengthen, and our customers increasingly respond to our seasonal gift and apparel assortments. Our balance sheet remains strong giving us the ability to continue to open new boutiques which are meeting our expectations of paybacks under one year while investing in the infrastructure to support our growth. Our business model remains strong and we have a significant opportunity to continue to drive improvements in sales and profits. I want to thank our team members for their hard work and dedicated service to our customers.”

 

SECOND QUARTER RESULTS

  

Net sales for the thirteen weeks ended August 2, 2014 were $97.3 million, compared to net sales of $89.6 million in the prior year quarter. The increase in second quarter sales was driven by 90 new boutiques opened since the end of the second quarter last year. 13 new boutiques were opened during the quarter bringing our year-to-date total to 75 new boutiques and a total boutique count to 526 at quarter end.

 

Total apparel sales increased 14%, accessories sales increased 14%, and our gift sales increased 25%. These gains were offset by a 12% decrease in jewelry sales, which contributed 6 percentage points of the total company comparable sales decrease of 7%.

 

Direct-to-consumer sales increased 98% versus the prior year quarter, continuing the strong performance achieved during the first quarter when sales improved 84% over the comparable period of the prior year.

 

Gross profit, as a percentage of net sales, decreased to 46.6% compared to 53.3% in the prior year quarter. This decrease included a 500 basis points decrease in merchandise margin due to a $2.9 million charge (300 basis points as a percentage of net sales) related to the disposal of certain slow-moving inventory, increased markdowns and promotional activities as well as a merchandise mix change to lower margin categories in the current year quarter as compared to the same period of the prior year. The remaining change is attributable to 170 basis points of deleveraging of fixed occupancy costs.

 

Selling, general and administrative expenses increased 21% to $28.7 million from $23.7 million in the prior year quarter. This increase was primarily due to higher boutique and corporate payroll expenses to support the larger boutique base and direct-to-consumer sales growth.

 

 

Income from operations was $16.7 million, or 17.1% of net sales, compared to income from operations of $24.1 million, or 26.9% of net sales, in the prior year quarter.

 

BALANCE SHEET SUMMARY

 

Total cash and cash equivalents at quarter end were $24.9 million compared to $39.6 million at prior year quarter end. The Company paid down $10.0 million of outstanding debt during the quarter under its revolving credit facility leaving a balance of $5.0 million at quarter end. As of September 9, 2014, there was no outstanding amount under the revolving credit facility.

 

We ended the quarter with $30.2 million of inventory on hand, an increase of 18%, compared to $25.6 million at the end of the second quarter of 2013. The increase in inventory was due to the 21% increase in the number of boutiques in operation as compared to the end of the second quarter of 2013. Ending inventory on a per boutique basis was down 2% for the quarter, compared to the same period in 2013.

 

THIRD QUARTER AND FULL FISCAL YEAR 2014 GUIDANCE

 

For the third quarter ending November 1, 2014, net sales are expected to be between $87.0 million and $92.0 million assuming a mid- to low-single digit decrease in comparable sales. This compares to the prior year comparable sales decrease of 3% versus the third quarter of 2012. The Company plans to open 13 new boutiques during the third quarter as compared to 10 boutiques opened during the prior year quarter. Diluted earnings per share are expected to be in the range of $0.17 to $0.22.

 

For the full year ending January 31, 2015, net sales are now expected to be in the range of $373.0 million to $383.0 million assuming a mid- to low-single digit decrease in comparable sales. The Company plans to open approximately 88 boutiques in the fiscal year 2014. Diluted earnings per share are now expected to be in the range of $0.88 to $0.98. The number of average diluted shares for the full year assumed in guidance is expected to be 42.4 million, which excludes the impact of potential additional share repurchases during the year. The effective tax rate is estimated to be 38.2% for both the third quarter and full year.

 

Capital expenditures for fiscal year 2014 are now expected to be in the range of $25.5 million to $27.5 million which will be primarily spent on boutique openings and remodels, as well as investments in our merchandising and direct-to-consumer information technology systems.

 

Conference Call Information

  

A conference call to discuss second quarter 2014 results is scheduled for September 9, 2014, at 8:30 a.m. EDT. A live web cast of the conference call will be available in the investor relations section of the Company's website, www.francescas.com. In addition, a replay of the call will be available after the call and remain available until September 16, 2014. To access the telephone replay, listeners should dial (877) 870-5176. The access code for the replay is 5526695. A replay of the web cast will also be available shortly after the call and will remain on the website for ninety days.

 

Forward-Looking Statements

  

Certain statements in this release are "forward-looking statements" made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements reflect the Company's current expectations or beliefs concerning future events and are subject to various risks and uncertainties that may cause actual results to differ materially from those that we expected. 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. 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 "Risk Factors" in our Annual Report on Form 10-K for the year ended February 1, 2014 filed with the Securities and Exchange Commission on March 28, 2014 and any risk factors contained in subsequent quarterly and annual reports we file with the SEC. We undertake no obligation to publicly update or revise any forward- looking statement. Financial schedules are attached to this release.

 

 

About Francesca's Holdings Corporation

 

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. Today francesca's® operates 531 boutiques in 47 states and the District of Columbia and also serves its customers through francescas.com. For additional information on francesca's®, please visit www.francescas.com.

 

CONTACT:

 

ICR, Inc.	Company
Jean Fontana	Mark Vendetti
646-277-1214	832-494-2315
	Mark.Vendetti@francescas.com

 

   

 

Francesca’s Holdings Corporation

Unaudited Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts and Percentages)

   

		Thirteen Weeks Ended
		August 2, 2014								August 3, 2013								Variance
		In USD				As a % of Net Sales(1)				In USD				As a % of Net Sales(1)				In USD				%				Basis Points
Net sales		$	97,319				100.0	%		$	89,566				100.0	%		$	7,753				9	%			-
Cost of goods sold and occupancy costs			52,004				53.4	%			41,810				46.7	%			10,194				24	%			670
Gross profit			45,315				46.6	%			47,756				53.3	%			(2,441	)			(5	)%			(670	)
Selling, general and administrative expenses			28,653				29.4	%			23,683				26.4	%			4,970				21	%			300
Income from operations			16,662				17.1	%			24,073				26.9	%			(7,411	)			(31	)%			(980	)
Interest expense			(169	)			(0.2	)%			(117	)			(0.1	)%			(52	)			44	%			(10	)
Other income			56				0.1	%			121				0.1	%			(65	)			(54	)%			-
Income before income tax expense			16,549				17.0	%			24,077				26.9	%			(7,528	)			(31	)%			(990	)
Income tax expense			6,242				6.4	%			9,458				10.6	%			(3,216	)			(34	)%			(420	)
Net income		$	10,307				10.6	%		$	14,619				16.3	%		$	(4,312	)			(29	)%			(570	)

  

(1)

Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.

 

Diluted earnings (loss) per common share		$	0.24				$	0.33
Weighted average diluted shares outstanding:			42,367					44,905
Comparable sales change			(7	)%				(1	)%

  

		Twenty Six Weeks Ended
		August 2, 2014								August 3, 2013								Variance
		In USD				As a % of Net Sales(1)				In USD				As a % of Net Sales(1)				In USD				%				Basis Points
Net sales		$	182,743				100.0	%		$	168,554				100.0	%		$	14,189				8	%			-
Cost of goods sold and occupancy costs			95,596				52.3	%			79,426				47.1	%			16,170				20	%			520
Gross profit			87,147				47.7	%			89,128				52.9	%			(1,981	)			(2	)%			(520	)
Selling, general and administrative expenses			56,465				30.9	%			47,034				27.9	%			9,431				20	%			300
Income from operations			30,682				16.8	%			42,094				25.0	%			(11,412	)			(27	)%			(820	)
Interest expense			(390	)			(0.2	)%			(233	)			(0.1	)%			(157	)			67	%			(10	)
Other income			159				0.1	%			204				0.1	%			(45	)			(22	)%			-
Income before income tax expense			30,451				16.7	%			42,065				25.0	%			(11,614	)			(28	)%			(830	)
Income tax expense			11,584				6.3	%			16,509				9.8	%			(4,925	)			(30	)%			(350	)
Net income		$	18,867				10.3	%		$	25,556				15.2	%		$	(6,689	)			(26	)%			(490	)

 

(1)

Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.

 

Diluted earnings (loss) per common share		$	0.45				$	0.57
Weighted average diluted shares outstanding:			42,364					44,894
Comparable sales change			(7	)%				0	%

   

 

Francesca’s Holdings Corporation

Unaudited Consolidated Balance Sheets

(In thousands)

  

		August 2,  2014				February 1,  2014				August 3,  2013
ASSETS
Current assets:
Cash and cash equivalents		$	24,861			$	37,498			$	39,550
Accounts receivable			9,905				8,984				6,549
Inventories			30,191				24,614				25,590
Deferred income taxes			4,726				4,565				3,750
Prepaid expenses and other current assets			6,965				6,764				5,011
Total current assets			76,648				82,425				80,450
Property and equipment, net			71,217				64,131				56,268
Deferred income taxes			4,562				2,335				3,741
Other assets, net			1,538				1,654				2,132
TOTAL ASSETS		$	153,965			$	150,545			$	142,591
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	11,380			$	10,207			$	5,867
Accrued liabilities			9,088				9,823				8,496
Total current liabilities			20,468				20,030				14,363
Landlord incentives and deferred rent			33,097				27,448				27,475
Long-term debt			5,000				25,000				—
Total liabilities			58,565				72,478				41,838
Commitments and contingencies
Stockholders’ equity:
Common stock - $.01 par value, 80.0 million shares authorized; 45.5 million, 45.2 million and 44.1 million shares issued at August 2, 2014, February 1, 2014 and August 3, 2013, respectively.			455				452				441
Additional paid-in capital			104,925				101,192				88,299
Retained earnings			50,163				31,296				12,013
Treasury stock, at cost – 3.2 million, 2.9 million and 0 shares held at August 2, 2014, February 1, 2014 and August 3, 2013, respectively.			(60,143	)			(54,873	)			—
Total stockholders’ equity			95,400				78,067				100,753
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	153,965			$	150,545			$	142,591

 

  

Francesca’s Holdings Corporation

Unaudited Consolidated Statements of Cash Flows

(In thousands)

 

		Twenty Six Weeks Ended
		August 2,  2014				August 3,  2013
Cash Flows From Operating Activities:
Net income		$	18,867			$	25,556
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense			6,244				4,774
Stock-based compensation expense			1,629				1,953
Excess tax benefit from stock-based compensation			(775	)			(2,828	)
Inventory write-off			2,731				—
Loss on sale of assets			121				136
Amortization of debt issuance costs			122				147
Deferred income taxes			(2,388	)			(1,628	)
Changes in operating assets and liabilities:
Accounts receivable			(146	)			(4,045	)
Inventories			(8,308	)			(6,541	)
Prepaid expenses and other assets			(208	)			(968	)
Accounts payable			1,480				(2,491	)
Accrued liabilities			(735	)			657
Landlord incentive and deferred rent			5,649				5,383
Net cash provided by operating activities			24,283				20,105
Cash Flows Used in Investing Activities:
Purchase of property and equipment			(13,759	)			(11,622	)
Proceeds from sale of assets			2				3
Net cash used in investing activities			(13,757	)			(11,619	)
Cash Flows Provided by (Used in) Financing Activities:
Repayments of borrowings under the revolving credit facility			(20,000	)			—
Repurchases of common stock			(5,270	)			—
Proceeds from the exercise of stock options			1,332				639
Taxes paid related to net settlement of equity awards			—				(2,280	)
Excess tax benefit from stock-based compensation			775				2,828
Net cash provided by (used in) financing activities			(23,163	)			1,187
Net increase (decrease) in cash and cash equivalents			(12,637	)			9,673
Cash and cash equivalents, beginning of year			37,498				29,877
Cash and cash equivalents, end of period		$	24,861			$	39,550
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes		$	9,413			$	17,647
Interest paid		$	288			$	81

 

 

Francesca’s Holdings Corporation

Supplemental Information

  

Sales by Merchandise Category

 

		Thirteen Weeks Ended								Variance
		August 2, 2014				August 3, 2013				In Dollars				%
		(in thousands, except percentages)
Apparel		$	52,128			$	45,613			$	6,515				14	%
Jewelry			20,594				23,448				(2,854	)			(12	)%
Accessories			14,526				12,763				1,763				14	%
Gifts			9,865				7,874				1,991				25	%
Merchandise sales			97,113				89,698				7,415				8	%
Others(1)			206				(132	)			338				(256	)%
Net sales		$	97,319			$	89,566			$	7,753				9	%

 

(1)

Includes gift card breakage income, shipping and change in return reserve.

  

Quarterly Comparable Transactions Results

 

		FY 2014
		Transactions (1)				Average Transaction Value (2)
Q1			(7	)%			0	%
Q2			(7	)%			0	%

 

(1)

The number of comparable transactions (including merchandise and gift card purchases, returns and gift card redemptions) processed through our point-of-sale system for which a receipt was issued.

(2)

Average transaction value is calculated by dividing total comparable sales by the number of comparable transactions during the period.

 

Quarterly Comparable Sales

 

		FY 2012(1)				FY 2013(2)				FY 2014
Q1			16	%			2	%			(7	)%
Q2			21	%			(1	)%			(7	)%

 

(1)

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 results was recalculated and now includes direct-to-consumer sales results.

(2)

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”). Our reported comparable sales results for fiscal 2012 were adjusted for this retail calendar shift.