ITEM 1. FINANCIAL STATEMENTS
Francesca’s Holdings Corporation
Unaudited Consolidated Balance Sheets
(In thousands, except share amounts)
|
|
July 30, 2016
|
|
|
January 30, 2016
|
|
|
August 1, 2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,021
|
|
|
$
|
56,224
|
|
|
$
|
48,840
|
|
Accounts receivable
|
|
|
10,791
|
|
|
|
9,580
|
|
|
|
9,061
|
|
Inventories
|
|
|
32,667
|
|
|
|
31,541
|
|
|
|
33,642
|
|
Deferred income taxes
|
|
|
6,728
|
|
|
|
6,411
|
|
|
|
5,537
|
|
Prepaid expenses and other current assets
|
|
|
6,715
|
|
|
|
7,013
|
|
|
|
5,915
|
|
Total current assets
|
|
|
82,922
|
|
|
|
110,769
|
|
|
|
102,995
|
|
Property and equipment, net
|
|
|
80,225
|
|
|
|
77,894
|
|
|
|
80,176
|
|
Deferred income taxes
|
|
|
4,640
|
|
|
|
3,847
|
|
|
|
5,426
|
|
Other assets, net
|
|
|
1,296
|
|
|
|
1,067
|
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
169,083
|
|
|
$
|
193,577
|
|
|
$
|
190,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,620
|
|
|
$
|
14,305
|
|
|
$
|
13,301
|
|
Accrued liabilities
|
|
|
14,327
|
|
|
|
16,328
|
|
|
|
13,465
|
|
Total current liabilities
|
|
|
30,947
|
|
|
|
30,633
|
|
|
|
26,766
|
|
Landlord incentives and deferred rent
|
|
|
38,673
|
|
|
|
36,552
|
|
|
|
37,404
|
|
Total liabilities
|
|
|
69,620
|
|
|
|
67,185
|
|
|
|
64,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - $0.01 par value, 80.0 million shares authorized; 45.9 million, 45.9 million and 45.5 million shares issued at July 30, 2016, January 30, 2016 and August 1, 2015, respectively.
|
|
|
459
|
|
|
|
459
|
|
|
|
455
|
|
Additional paid-in capital
|
|
|
106,916
|
|
|
|
107,693
|
|
|
|
105,843
|
|
Retained earnings
|
|
|
119,228
|
|
|
|
101,556
|
|
|
|
79,949
|
|
Treasury stock, at cost – 8.0 million, 4.8 million and 3.2 million shares at July 30, 2016, January 30, 2016 and August 1, 2015, respectively.
|
|
|
(127,140
|
)
|
|
|
(83,316
|
)
|
|
|
(60,143
|
)
|
Total stockholders’ equity
|
|
|
99,463
|
|
|
|
126,392
|
|
|
|
126,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
169,083
|
|
|
$
|
193,577
|
|
|
$
|
190,274
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Operations
(In thousands, except per share data)
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
Net sales
|
|
$
|
115,260
|
|
|
$
|
106,033
|
|
|
$
|
221,373
|
|
|
$
|
201,044
|
|
Cost of goods sold and occupancy costs
|
|
|
61,323
|
|
|
|
55,725
|
|
|
|
118,306
|
|
|
|
105,843
|
|
Gross profit
|
|
|
53,937
|
|
|
|
50,308
|
|
|
|
103,067
|
|
|
|
95,201
|
|
Selling, general and administrative expenses
|
|
|
36,815
|
|
|
|
35,133
|
|
|
|
74,481
|
|
|
|
68,136
|
|
Income from operations
|
|
|
17,122
|
|
|
|
15,175
|
|
|
|
28,586
|
|
|
|
27,065
|
|
Interest expense
|
|
|
(113
|
)
|
|
|
(112
|
)
|
|
|
(222
|
)
|
|
|
(222
|
)
|
Other income (expense)
|
|
|
39
|
|
|
|
(54
|
)
|
|
|
39
|
|
|
|
(120
|
)
|
Income before income tax expense
|
|
|
17,048
|
|
|
|
15,009
|
|
|
|
28,403
|
|
|
|
26,723
|
|
Income tax expense
|
|
|
6,457
|
|
|
|
5,705
|
|
|
|
10,731
|
|
|
|
10,178
|
|
Net income
|
|
$
|
10,591
|
|
|
$
|
9,304
|
|
|
$
|
17,672
|
|
|
$
|
16,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.27
|
|
|
$
|
0.22
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
Diluted earnings per common share
|
|
$
|
0.27
|
|
|
$
|
0.22
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
38,664
|
|
|
|
42,332
|
|
|
|
39,474
|
|
|
|
42,318
|
|
Diluted shares
|
|
|
38,755
|
|
|
|
42,433
|
|
|
|
39,580
|
|
|
|
42,425
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statement of Changes
in Stockholders’ Equity
(In thousands)
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Treasury
|
|
|
Total
|
|
|
|
Shares
Outstanding
|
|
|
Par
Value
|
|
|
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Stock, at
cost
|
|
|
Stockholders'
Equity
|
|
Balance, January 30, 2016
|
|
|
41,095
|
|
|
$
|
459
|
|
|
$
|
107,693
|
|
|
$
|
101,556
|
|
|
$
|
(83,316
|
)
|
|
$
|
126,392
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,672
|
|
|
|
-
|
|
|
|
17,672
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
(857
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(857
|
)
|
Restricted stocks issued, net of forfeitures
|
|
|
40
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock options exercised
|
|
|
28
|
|
|
|
-
|
|
|
|
280
|
|
|
|
-
|
|
|
|
-
|
|
|
|
280
|
|
Tax effect of stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
(200
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(200
|
)
|
Repurchases of common stock
|
|
|
(3,243
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(43,824
|
)
|
|
|
(43,824
|
)
|
Balance, July 30, 2016
|
|
|
37,920
|
|
|
$
|
459
|
|
|
$
|
106,916
|
|
|
$
|
119,228
|
|
|
$
|
(127,140
|
)
|
|
$
|
99,463
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Cash Flows
(In thousands)
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
Cash Flows Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,672
|
|
|
$
|
16,545
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,482
|
|
|
|
8,000
|
|
Stock-based compensation expense
|
|
|
(857
|
)
|
|
|
1,591
|
|
Excess tax benefit from stock-based compensation
|
|
|
(6
|
)
|
|
|
(61
|
)
|
Loss on sale of assets
|
|
|
155
|
|
|
|
282
|
|
Deferred income taxes
|
|
|
(1,315
|
)
|
|
|
(3,940
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,205
|
)
|
|
|
3,279
|
|
Inventories
|
|
|
(1,126
|
)
|
|
|
(9,841
|
)
|
Prepaid expenses and other assets
|
|
|
(55
|
)
|
|
|
86
|
|
Accounts payable
|
|
|
2,599
|
|
|
|
2,466
|
|
Accrued liabilities
|
|
|
(2,001
|
)
|
|
|
1,561
|
|
Landlord incentives and deferred rent
|
|
|
2,121
|
|
|
|
4,527
|
|
Net cash provided by operating activities
|
|
|
25,464
|
|
|
|
24,495
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Used in Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(11,149
|
)
|
|
|
(14,959
|
)
|
Other
|
|
|
8
|
|
|
|
3
|
|
Net cash used in investing activities
|
|
|
(11,141
|
)
|
|
|
(14,956
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows (Used in) Provided by Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
280
|
|
|
|
169
|
|
Excess tax benefit from stock-based compensation
|
|
|
6
|
|
|
|
61
|
|
Repurchases of common stock
|
|
|
(44,812
|
)
|
|
|
-
|
|
Net cash (used in) provided by financing activities
|
|
|
(44,526
|
)
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(30,203
|
)
|
|
|
9,769
|
|
Cash and cash equivalents, beginning of year
|
|
|
56,224
|
|
|
|
39,071
|
|
Cash and cash equivalents, end of period
|
|
$
|
26,021
|
|
|
$
|
48,840
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
9,175
|
|
|
$
|
8,335
|
|
Interest paid
|
|
$
|
95
|
|
|
$
|
94
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements
.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
1.
|
Summary of Significant Accounting Policies
|
Nature of Business
Francesca’s Holdings Corporation is
a holding company incorporated in 2007 under the laws of the State of Delaware whose business operations are conducted
through its subsidiaries. Unless the context otherwise requires, the “Company,” refers to Francesca’s
Holdings Corporation and its consolidated subsidiaries. The Company operates a nationwide-chain of boutiques providing its customers
with a unique, fun and personalized shopping experience. The Company offers a diverse and balanced mix of apparel, jewelry, accessories
and gifts at attractive values. At July 30, 2016, the Company operated 652 boutiques, which are located in 48 states
throughout the United States and the District of Columbia, and its ecommerce 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, changes
in equity, and cash flows at the dates and for the periods presented. The financial information as of January 30, 2016 was derived
from the Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended January
30, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 25, 2016.
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 January 30, 2016 included in the Company’s Annual Report on Form 10-K.
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 intercompany 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 years 2016 and 2015 each include 52 weeks of operations.
The fiscal quarters ended July 30, 2016 and August 1, 2015 refer to the thirteen week periods ended as of those dates. The year-to-date
periods ended July 30, 2016 and August 1, 2015 refer to the twenty-six week periods ended as of those dates.
Management Estimates and Assumptions
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,
net of estimated sales returns, and expenses during the reporting periods. Actual results could differ materially from those estimates.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-9, “Improvements to
Employee Share-Based Payment Arrangements”, which amends Accounting Standards Codification (“ASC”) Topic 718, Stock
Compensation. The new guidance intends to simplify several aspects of the accounting for share-based payments, including income
tax consequences, classification of awards as either equity or liabilities, forfeitures and classification on the statement of
cash flows. ASU 2016-9 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within
that reporting period, with early adoption permitted. The new guidance
includes the
following adoption methods depending on the provision being adopted: (1) amendments related to the timing of when excess tax benefits
are recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition
method, (2) amendments related to the presentation of employee taxes paid on the statement of cash flows should be applied retrospectively,
(3) amendments requiring recognition of excess tax benefits and deficiencies in the income statement should be applied prospectively,
and (4) amendments related to the presentation of excess tax benefits on the statement of cash flows should be applied either prospectively
or retrospectively.
The Company is currently evaluating the impact of adopting the new guidance on the consolidated
financial statements.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
In March 2016, the FASB issued ASU 2016-4
“Liabilities - Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value
Products.” The new guidance allows a company to derecognize amounts related to expected breakage to the extent that it is
probable that a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-4 is effective for
annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted.
The amended standard may be adopted on either a modified retrospective or a retrospective basis. The Company is currently evaluating
the impact of adopting the new guidance on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-2,
“Leases (Topic 842).” The new guidance, among other things, requires lessees to recognize the following for all leases
(with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation
to make lease payments arising from a lease, measured on a discounted basis and (ii) a right-of-use asset, which is an asset that
represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance,
lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with
the lessee accounting model and Topic 606, Revenue from Contracts with Customers. ASU 2016-2 will be effective for public
business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
application is permitted for all public business entities upon issuance. The Company is currently evaluating the impact of adopting
the new guidance on the consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
“Income Taxes – Balance Sheet Classification of Deferred Taxes.” The new guidance simplifies the presentation
of deferred income taxes by permitting classification of all deferred tax assets and liabilities as noncurrent on the consolidated
balance sheet. The new guidance is effective for annual periods beginning after December 15, 2016, including interim periods within
that fiscal year, with early adoption permitted. The amended standard may be adopted on either a prospective or a retrospective
basis. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
“Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes the measurement principle for inventory
from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable
value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. The new guidance must be applied on a prospective basis and is effective for periods beginning after
December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting the new guidance
on the consolidated financial statements.
In May 2014 the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers.” This pronouncement requires entities to recognize revenue in a way that depicts
the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to
be entitled to in exchange for those goods and services. In August 2015, the FASB deferred the effective date of ASU 2014-09. Accordingly,
this standard is effective for reporting periods beginning on or after December 15, 2017, including interim periods within that
fiscal year, with early adoption permitted for interim and annual periods beginning on or after December 15, 2016. Since the original
issuance of ASU 2014-09, the FASB has issued several amendments and updates to this guidance, and additional amendments and updates
are currently being considered by the FASB. The Company is currently evaluating the impact of adopting the new guidance, along
with the related amendments and updates, on the consolidated financial statements.
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.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
|
(in thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,591
|
|
|
$
|
9,304
|
|
|
$
|
17,672
|
|
|
$
|
16,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
|
38,664
|
|
|
|
42,332
|
|
|
|
39,474
|
|
|
|
42,318
|
|
Options and other dilutive securities
|
|
|
91
|
|
|
|
101
|
|
|
|
106
|
|
|
|
107
|
|
Weighted-average common shares outstanding - diluted
|
|
|
38,755
|
|
|
|
42,433
|
|
|
|
39,580
|
|
|
|
42,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.27
|
|
|
$
|
0.22
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
Diluted earnings per common share
|
|
$
|
0.27
|
|
|
$
|
0.22
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
Potentially issuable shares under the Company’s
stock-based compensation plans amounting to approximately 0.4 million and 0.3 million shares in the thirteen and twenty-six weeks
ended July 30, 2016, respectively, and 0.4 million and 0.5 million shares in the thirteen and twenty-six weeks ended August 1,
2015, respectively, were excluded in the computation of diluted weighted-average common shares outstanding due to their anti-dilutive
effect. The Company also excluded contingently issuable performance-based awards totaling 0.2 million shares in each of the thirteen
and twenty-six weeks ended July 30, 2016 and 1.1 million shares in each of the thirteen and twenty-six weeks ended August 1, 2015
from the computation of diluted earnings per share because the pre-established goals had not been satisfied as of the end of each
period.
|
3.
|
Fair Value Measurements
|
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 includes
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 provision for income taxes is based
on the Company’s current estimate of the annual effective tax rate. The effective income tax rates for the thirteen and twenty-six
weeks ended July 30, 2016 were 37.9% and 37.8%, respectively. The effective income tax rates for the thirteen and twenty-six weeks
ended August 1, 2015 were 38.0% and 38.1%, respectively. The difference between our effective tax rate and federal statutory tax
rate is primarily related to state income taxes.
|
5.
|
Revolving Credit Facility
|
On August 30, 2013, Francesca’s Collections,
Inc. (the “Borrower”), as borrower, and its parent company, Francesca’s LLC, a wholly owned subsidiary of the
Company, entered into a Second Amended and Restated Credit Agreement with Royal Bank of Canada, as Administrative Agent and Collateral
Agent, and the lenders party thereto. The credit facility provides capacity of $75.0 million (including up to $10.0 million
for letters of credit) and matures on August 30, 2018. The facility also contains an option permitting the Borrower,
subject to certain requirements and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate
of $25.0 million, subject to reductions in the event the Borrower has certain indebtedness outstanding. At July
30, 2016, no borrowings or letters of credit were outstanding under the credit facility.
The credit facility contains customary events
of default and requires the Borrower to comply with certain financial covenants. As of July 30, 2016, the Borrower was in compliance
with all covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can pay; provided
that the Borrower is permitted to pay dividends to the extent it has available capacity in its available 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 the Borrower is in pro forma compliance with a maximum secured leverage ratio. At July 30,
2016, the Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations under
the credit facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All obligations
under the facility are unconditionally guaranteed by, subject to certain exceptions, by Francesca’s LLC and each of the Borrower’s
existing and future direct and indirect wholly-owned domestic subsidiaries.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
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 grants that are not expected to
vest. The Company recognized $1.9 million and $0.9 million net reversal of stock-based compensation expense in the thirteen and
twenty-six weeks ended July 30, 2016, respectively, and $0.8 million and $1.6 million of stock-based compensation expense in the
thirteen and twenty-six weeks ended August 1, 2015, respectively. The net reversal of stock-based compensation expense during the
thirteen and twenty-six weeks ended July 30, 2016 was associated with the resignation of the Company’s Chairman, President
and Chief Executive Officer (“CEO”) discussed below.
Resignation of the Chairman, President and Chief Executive
Officer
On May 15, 2016, Michael W. Barnes resigned
from his positions as Chairman, President and CEO of the Company. As a result of such resignation, the following outstanding and
unvested stock-based awards previously granted to him were forfeited.
|
·
|
Market- and service-based employee stock options providing Mr. Barnes with the right to purchase 1.0 million shares of the
Company’s common stock granted in connection with his appointment as Chairman, President and CEO of the Company in December
2014; and
|
|
·
|
Performance-and service-based restricted stock awards providing Mr. Barnes with the contingent right to receive 0.3 million
shares of the Company’s common stock (based on the target number of shares for performance periods that have not yet been
completed and the number of earned shares for awards that relate to completed performance periods and are subject only to time-based
vesting).
|
The resignation of Mr. Barnes resulted in
the reversal of $2.6 million of previously accrued stock-based compensation expense related to these unvested awards. This reversal
was recorded during the thirteen weeks ended July 30, 2016.
Performance-based restricted stock awards
The Company granted approximately 358,000
and 115,000 target shares of performance-based restricted stock to certain executives and key employees in March 2016 and March
2015, respectively. Awards are considered “granted” when the performance goals related to those awards have been established.
The number of shares that may ultimately vest will equal 0% to 150% of the target shares subject to the achievement of pre-established
performance goals during the applicable performance period and the employees’ continued employment through the third year
anniversary of the date on which the award was originally approved by the Compensation Committee.
In connection with the performance-based
restricted stock awards, the Company recognized $0.2 million net reversal of stock-based compensation expense in the thirteen weeks
ended July 30, 2016 and $0.2 million of stock-based compensation expense in the twenty-six weeks ended July 30, 2016. The net reversal
of stock-based compensation expense was associated with the resignation of the Company’s Chairman, President and CEO discussed
above. The stock-based compensation expense in each of the thirteen and twenty-six weeks ended August 1, 2015 totaled $0.2 million.
On September 3, 2013, the Company’s
Board of Directors authorized a $100.0 million share repurchase program (“Previous Repurchase Plan”) commencing
on the same date. In April 2016, the authorized amount was fully exhausted.
On March 15, 2016, the Company’s Board
of Directors authorized an additional $100.0 million share repurchase program (“New Repurchase Plan”), which commenced
immediately upon the exhaustion of the Previous Repurchase Plan. This authorization has no expiration date. Under the
New Repurchase Plan, 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 July 30,
2016, the Company repurchased 2.3 million shares of its common stock at a cost of $27.0 million or an average price (including
brokers’ commission) of $11.66 per share. During the twenty-six weeks ended July 30, 2016, the Company repurchased 3.2
million shares of its common stock at a cost of $43.8 million or an average price (including brokers’ commission) of
$13.51 per share. No common stock repurchases were made in the thirteen and twenty-six weeks ended August 1, 2015. The cost
of repurchased shares is presented as treasury stock in the unaudited consolidated balance sheets.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
8.
|
Commitments and Contingencies
|
Operating Leases
The Company leases boutique space and office
space under operating leases expiring in various years through the fiscal year ending 2027. 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 July 30, 2016, are as follows:
Fiscal year
|
|
Amount
|
|
|
|
(In thousands)
|
|
Remainder of 2016
|
|
$
|
21,046
|
|
2017
|
|
|
42,329
|
|
2018
|
|
|
41,025
|
|
2019
|
|
|
38,328
|
|
2020
|
|
|
32,502
|
|
Thereafter
|
|
|
82,430
|
|
|
|
$
|
257,660
|
|
Legal Proceedings
The Company, from time to time, is subject
to various claims and legal proceedings, including employment claims, wage and hour claims, intellectual property claims, contractual
and commercial disputes and other matters that arise in the ordinary course of business. While the outcome of any such
claim cannot be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse
effect on the Company’s business, results of operations or financial condition.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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 ecommerce business; our ability to successfully open and operate new boutiques each year; our ability
to efficiently source and distribute additional merchandise quantities necessary to support our growth, and our ability to attract
and integrate a new President and Chief Executive Officer. 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 January 30, 2016 and
filed with the Securities and Exchange Commission (“SEC”) on March 25, 2016, Part II, Item 1A. “Risk Factors”
contained in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and any risk factors contained in subsequent
Quarterly Reports on Form 10-Q or other filings we file with the SEC.
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 publicly after the date of this report whether
as a result of new information, future developments or otherwise.
Overview
Unless the context otherwise requires, the
“Company,” “we,” “our,” “ours,” “us” and “francesca’s®”
refer to Francesca’s Holdings Corporation and its consolidated subsidiaries.
francesca’s
®
is
a growing specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized
shopping experience. The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts. As of
July 30, 2016, francesca’s
®
operated 652 boutiques in 48 states and the District of Columbia and
also served its customers through www.francescas.com, its ecommerce website. The information contained on our ecommerce website
is not incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information contained on our
ecommerce website to be part of this Quarterly Report on Form 10-Q.
During the thirteen weeks ended July 30,
2016, our net sales increased 9% to $115.3 million from $106.0 million, income from operations increased by 13% to $17.1 million
from $15.2 million and net income increased 14% to $10.6 million, or $0.27 per diluted share based on 38.8 million weighted average
diluted shares outstanding, from $9.3 million, or $0.22 per diluted share based on 42.4 million weighted average diluted shares
outstanding, over the comparable prior year period. During the twenty-six weeks ended July 30, 2016, our net sales increased 10%
to $221.4 million from $201.0 million, income from operations increased by 6% to $28.6 million from $27.1 million and net income
increased 7% to $17.7 million, or $0.45 per diluted share based on 39.6 million weighted average diluted shares outstanding, from
$16.5 million, or $0.39 per diluted share based on 42.4 million weighted average diluted shares outstanding, over the comparable
prior year period.
We increased our boutique count to 652
boutiques as of July 30, 2016 from 608 boutiques as of August 1, 2015. We plan to open approximately 14 to 24 boutiques and
close one to five during the remainder of the fiscal year.
On May 15, 2016, Michael W. Barnes resigned
from his positions as Chairman, President and Chief Executive Officer (“CEO”) of the Company. As a result of such resignation,
each of Mr. Barnes’ then-outstanding and unvested equity awards were forfeited. This forfeiture resulted in the reversal
of $2.6 million of previously recognized stock-based compensation expense related to those unvested awards recorded during the
second quarter of fiscal year 2016. Additionally, we incurred $0.6 million of professional expenses in connection with the related
search process during the same period. On May 16, 2016, the Board of Directors appointed Richard Kunes, a member of the Board of
Directors, to serve as the Company’s Interim Chairman, President and Chief Executive Officer effective immediately.
We are in the early stages of deploying
a new technology suite of systems to enhance our omni-channel and customer engagement capabilities as part of our long-term strategic
plan. This includes replacing our legacy point-of-sale system and introduction of a new order management system and a new customer
relationship management system. The point-of-sale system is expected to be implemented during fiscal year 2017. Throughout the
installation and stabilization of these new systems, we will continue to run our existing platform to ensure continuity during
the conversion process. We expect that these new systems will enhance our visibility into our customers’ preferences, products
and supply chain resulting in improved customer service, improved operational efficiency, enhanced management analytics and increased
synergies between our ecommerce and our boutique channels.
Results of Operations
The following represents operating data
for the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015.
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
2016
|
|
|
August 1,
2015
|
|
|
July 30,
2016
|
|
|
August 1,
2015
|
|
Net sales growth for period
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
Comparable sales results for the period
(1)
|
|
|
0
|
%
|
|
|
(4
|
)%
|
|
|
1
|
%
|
|
|
(3
|
)%
|
Number of boutiques open at end of period
|
|
|
652
|
|
|
|
608
|
|
|
|
652
|
|
|
|
608
|
|
Net sales per average square foot for period
(2)
|
|
$
|
130
|
|
|
$
|
130
|
|
|
|
250
|
|
|
$
|
256
|
|
Average square feet per boutique
(3)
|
|
|
1,378
|
|
|
|
1,363
|
|
|
|
1,378
|
|
|
|
1,363
|
|
Total gross square feet at end of period
|
|
|
899,000
|
|
|
|
829,000
|
|
|
|
899,000
|
|
|
|
829,000
|
|
|
(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. If a boutique is permanently closed, we exclude sales from that
boutique from comparable sales on the first day of the fiscal month that it did not register full month of sales. Comparable sales
include our ecommerce sales.
|
|
(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 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 the sum of total gross square feet at the beginning and end of the period divided by 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
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
Number of boutiques open at beginning of period
|
|
|
637
|
|
|
|
589
|
|
|
|
616
|
|
|
|
539
|
|
Boutiques added
|
|
|
19
|
|
|
|
19
|
|
|
|
41
|
|
|
|
69
|
|
Boutiques closed
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
Number of boutiques open at the end of period
|
|
|
652
|
|
|
|
608
|
|
|
|
652
|
|
|
|
608
|
|
Thirteen Weeks Ended July 30, 2016 Compared to Thirteen
Weeks Ended August 1, 2015
|
|
Thirteen Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
Variance
|
|
|
|
In USD
|
|
|
As a %
of Net
Sales
(1)
|
|
|
In USD
|
|
|
As a %
of Net
Sales
(1)
|
|
|
In USD
|
|
|
%
|
|
|
Basis
Points
|
|
|
|
(In thousands, except percentages and basis points)
|
|
Net sales
|
|
$
|
115,260
|
|
|
|
100.0
|
%
|
|
$
|
106,033
|
|
|
|
100.0
|
%
|
|
$
|
9,227
|
|
|
|
9
|
%
|
|
|
-
|
|
Cost of goods sold and occupancy costs
|
|
|
61,323
|
|
|
|
53.2
|
%
|
|
|
55,725
|
|
|
|
52.6
|
%
|
|
|
5,598
|
|
|
|
10
|
%
|
|
|
60
|
|
Gross profit
|
|
|
53,937
|
|
|
|
46.8
|
%
|
|
|
50,308
|
|
|
|
47.4
|
%
|
|
|
3,629
|
|
|
|
7
|
%
|
|
|
(60
|
)
|
Selling, general and administrative expenses
|
|
|
36,815
|
|
|
|
31.9
|
%
|
|
|
35,133
|
|
|
|
33.1
|
%
|
|
|
1,682
|
|
|
|
5
|
%
|
|
|
(120
|
)
|
Income from operations
|
|
|
17,122
|
|
|
|
14.9
|
%
|
|
|
15,175
|
|
|
|
14.3
|
%
|
|
|
1,947
|
|
|
|
13
|
%
|
|
|
60
|
|
Interest expense
|
|
|
(113
|
)
|
|
|
(0.1
|
)%
|
|
|
(112
|
)
|
|
|
(0.1
|
)%
|
|
|
(1
|
)
|
|
|
(1
|
)%
|
|
|
-
|
|
Other income (expense)
|
|
|
39
|
|
|
|
0.0
|
%
|
|
|
(54
|
)
|
|
|
(0.1
|
)%
|
|
|
93
|
|
|
|
172
|
%
|
|
|
10
|
|
Income before income tax expense
|
|
|
17,048
|
|
|
|
14.8
|
%
|
|
|
15,009
|
|
|
|
14.2
|
%
|
|
|
2,039
|
|
|
|
14
|
%
|
|
|
60
|
|
Income tax expense
|
|
|
6,457
|
|
|
|
5.6
|
%
|
|
|
5,705
|
|
|
|
5.4
|
%
|
|
|
752
|
|
|
|
13
|
%
|
|
|
20
|
|
Net income
|
|
$
|
10,591
|
|
|
|
9.2
|
%
|
|
$
|
9,304
|
|
|
|
8.8
|
%
|
|
$
|
1,287
|
|
|
|
14
|
%
|
|
|
40
|
|
|
(1)
|
Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.
|
Net Sales
Net sales increased 9% to $115.3 million
in the thirteen weeks ended July 30, 2016 from $106.0 million in the thirteen weeks ended August 1, 2015. This increase was
due to the addition of 44 net new boutiques since the comparable prior year period. Our comparable sales were flat compared to
the same period of the prior year as the increase in transaction count offset the decrease in average transaction value. Ecommerce
comparable sales increased 37% to $4.8 million compared to the same prior year period driven by higher website traffic and conversion
rates. There were 578 comparable boutiques and 74 non-comparable boutiques open at July 30, 2016 compared to 513 and 95, respectively,
at August 1, 2015.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs increased
10% to $61.3 million in the thirteen weeks ended July 30, 2016 from $55.7 million in the thirteen weeks ended August 1, 2015. Cost
of merchandise and freight expenses increased by $3.6 million compared to the same period of the prior year primarily due to increased
sales volume. Occupancy costs increased by $2.0 million due to the increase in the number of boutiques in operation during the
thirteen weeks ended July 30, 2016 compared to the same period of the prior year.
As a percentage of net sales, cost of goods
sold and occupancy costs increased to 53.2% in the thirteen weeks ended July 30, 2016 from 52.6% in the thirteen weeks ended August
1, 2015, an unfavorable variance of 60 basis points. This change was driven by 30 basis points of lower merchandise margin and
30 basis points deleveraging of occupancy costs. The decrease in merchandise margin was primarily attributable to sales mix change
to the lower margin categories.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased 5% to $36.8 million in the thirteen weeks ended July 30, 2016 from $35.1 million in the thirteen weeks ended August
1, 2015. This increase was due to higher corporate and boutique payroll to support the larger boutique base and strategic initiatives,
as well as an increase in marketing and depreciation expenses. The increase in marketing expense was due to the implementation
of new marketing initiatives while the higher depreciation was due to continuing investments in technology and infrastructure.
These increases were partially offset by a $2.0 million net benefit associated with the resignation of our CEO and the related
search process. As a percentage of net sales, selling, general and administrative expense decreased to 31.9% in the thirteen weeks
ended July 30, 2016 as compared to 33.1% in the thirteen weeks ended August 1, 2015 primarily due to the net benefit associated
with the resignation of our CEO.
Income Tax Expense
The increase in provision for income taxes
of $0.8 million in the thirteen weeks ended July 30, 2016 compared to the thirteen weeks ended August 1, 2015 was primarily due
to the increase in pre-tax income. The effective tax rates were 37.9% and 38.0% in the thirteen weeks ended July 30, 2016 and August
1, 2015 respectively.
Twenty-Six Weeks Ended July 30, 2016 Compared to Twenty-Six
Weeks Ended August 1, 2015
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
Variance
|
|
|
|
In USD
|
|
|
As a %
of Net
Sales
(1)
|
|
|
In USD
|
|
|
As
a %
of Net
Sales
(1)
|
|
|
In USD
|
|
|
%
|
|
|
Basis
Points
|
|
|
|
(In thousands, except percentages and basis points)
|
|
Net sales
|
|
$
|
221,373
|
|
|
|
100.0
|
%
|
|
$
|
201,044
|
|
|
|
100.0
|
%
|
|
$
|
20,329
|
|
|
|
10
|
%
|
|
|
-
|
|
Cost of goods sold and occupancy costs
|
|
|
118,306
|
|
|
|
53.4
|
%
|
|
|
105,843
|
|
|
|
52.6
|
%
|
|
|
12,463
|
|
|
|
12
|
%
|
|
|
80
|
|
Gross profit
|
|
|
103,067
|
|
|
|
46.6
|
%
|
|
|
95,201
|
|
|
|
47.4
|
%
|
|
|
7,866
|
|
|
|
8
|
%
|
|
|
(80
|
)
|
Selling, general and administrative expenses
|
|
|
74,481
|
|
|
|
33.6
|
%
|
|
|
68,136
|
|
|
|
33.9
|
%
|
|
|
6,345
|
|
|
|
9
|
%
|
|
|
(30
|
)
|
Income from operations
|
|
|
28,586
|
|
|
|
12.9
|
%
|
|
|
27,065
|
|
|
|
13.5
|
%
|
|
|
1,521
|
|
|
|
6
|
%
|
|
|
(60
|
)
|
Interest expense
|
|
|
(222
|
)
|
|
|
(0.1
|
)%
|
|
|
(222
|
)
|
|
|
(0.1
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other income (expense)
|
|
|
39
|
|
|
|
0.0
|
%
|
|
|
(120
|
)
|
|
|
(0.1
|
)%
|
|
|
159
|
|
|
|
132
|
%
|
|
|
10
|
|
Income before income tax expense
|
|
|
28,403
|
|
|
|
12.8
|
%
|
|
|
26,723
|
|
|
|
13.3
|
%
|
|
|
1,680
|
|
|
|
6
|
%
|
|
|
(50
|
)
|
Income tax expense
|
|
|
10,731
|
|
|
|
4.8
|
%
|
|
|
10,178
|
|
|
|
5.1
|
%
|
|
|
553
|
|
|
|
5
|
%
|
|
|
(30
|
)
|
Net income
|
|
$
|
17,672
|
|
|
|
8.0
|
%
|
|
$
|
16,545
|
|
|
|
8.2
|
%
|
|
$
|
1,127
|
|
|
|
7
|
%
|
|
|
(20
|
)
|
|
(1)
|
Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.
|
Net Sales
Net sales increased 10% to $221.4 million
in the twenty-six weeks ended July 30, 2016 from $201.0 million in the twenty-six weeks ended August 1, 2015. This increase
is due to a 1% increase in comparable sales driven by the increase in transaction count at the boutiques and on-line as well as
the addition of 44 net new boutiques since the comparable prior year period. Ecommerce comparable sales increased 38% to $10.1
million driven by higher website traffic and conversion rate. There were 578 comparable boutiques and 74 non-comparable boutiques
open at July 30, 2016 compared to 513 and 95, respectively, at August 1, 2015.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs increased
12% to $118.3 million in the twenty-six weeks ended July 30, 2016 from $105.8 million in the twenty-six weeks ended August 1, 2015.
Cost of merchandise and freight expenses increased by $8.1 million compared to the same period of the prior year due to increased
sales volume. Occupancy costs increased by $4.4 million due to the increase in the number of boutiques in operation during the
twenty-six weeks ended July 30, 2016 compared to the same period of the prior year.
As a percentage of net sales, cost of goods
sold and occupancy costs increased to 53.4% in the twenty-six weeks ended July 30, 2016 from 52.6% in the twenty-six weeks ended
August 1, 2015, an unfavorable variance of 80 basis points. This change was driven by 50 basis points of lower merchandise margin
and 30 basis points deleveraging of occupancy costs. The decrease in merchandise margin was primarily attributable to a sales mix
change to the lower margin categories.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased 9% to $74.5 million in the twenty-six weeks ended July 30, 2016 from $68.1 million in the twenty-six weeks ended
August 1, 2015. This increase was due to higher corporate and boutique payroll to support the larger boutique base and strategic
initiatives, as well as an increase in marketing and depreciation expenses. The increase in marketing expense was due to the implementation
of new marketing initiatives while the higher depreciation was due to continuing investments in technology and infrastructure.
These increases were partially offset by a $2.0 million net benefit associated with the resignation of our CEO and the related
search process. As a percentage of net sales, selling, general and administrative expense decreased to 33.6% in the twenty-six
weeks ended July 30, 2016 as compared to 33.9% in the twenty-six weeks ended August 1, 2015 primarily due to the net benefit associated
with the resignation of our CEO.
Income Tax Expense
The increase in provision for income taxes
of $0.6 million in the twenty-six weeks ended July 30, 2016 compared to the twenty-six weeks ended August 1, 2015 was primarily
due to the increase in pre-tax income. The effective tax rates were 37.8% and 38.1% in the twenty-six weeks ended July 30, 2016
and August 1, 2015, respectively.
Sales by Merchandise
Department
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
|
(in thousands, except percentages)
|
|
Apparel
|
|
$
|
61,081
|
|
|
|
53.2
|
%
|
|
$
|
56,441
|
|
|
|
53.5
|
%
|
|
$
|
115,973
|
|
|
|
52.4
|
%
|
|
$
|
104,611
|
|
|
|
52.1
|
%
|
Jewelry
|
|
|
25,368
|
|
|
|
22.1
|
%
|
|
|
23,442
|
|
|
|
22.2
|
%
|
|
|
49,430
|
|
|
|
22.4
|
%
|
|
|
45,415
|
|
|
|
22.6
|
%
|
Accessories
|
|
|
15,136
|
|
|
|
13.2
|
%
|
|
|
14,537
|
|
|
|
13.8
|
%
|
|
|
31,182
|
|
|
|
14.1
|
%
|
|
|
29,891
|
|
|
|
14.9
|
%
|
Gifts
|
|
|
13,209
|
|
|
|
11.5
|
%
|
|
|
11,069
|
|
|
|
10.5
|
%
|
|
|
24,536
|
|
|
|
11.1
|
%
|
|
|
20,924
|
|
|
|
10.4
|
%
|
Merchandise sales
(1)
|
|
$
|
114,794
|
|
|
|
100.0
|
%
|
|
$
|
105,489
|
|
|
|
100.0
|
%
|
|
$
|
221,121
|
|
|
|
100.1
|
%
|
|
$
|
200,841
|
|
|
|
100.0
|
%
|
|
(1)
|
Excludes 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 July 30, 2016. On July 30, 2016, we had $26.0 million of cash and cash equivalents and
$75.0 million in borrowing availability under our revolving credit facility. There were no borrowings or letters of credit outstanding
under our revolving credit facility at July 30, 2016.
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:
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
|
(In thousands)
|
|
Provided by operating activities
|
|
$
|
25,464
|
|
|
$
|
24,495
|
|
Used in investing activities
|
|
|
(11,141
|
)
|
|
|
(14,956
|
)
|
(Used in) provided by financing activities
|
|
|
(44,526
|
)
|
|
|
230
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(30,203
|
)
|
|
$
|
9,769
|
|
Operating Activities
Operating activities consist of net income
adjusted for non-cash items, including depreciation and amortization, deferred taxes, the effect of working capital changes and
tenant allowances received from landlords. Net cash provided by operating activities was $25.5 million and $24.5 million in
each of the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively. The increase in cash provided by operating activities
in the current period as compared to the same period of the prior year was primarily due to higher net income partially offset
by the timing of payments for inventory purchases, payroll and income taxes as well as changes in landlord incentives and deferred
rent in connection with new boutiques.
Investing Activities
Investing activities consist primarily of
capital expenditures for new boutiques, improvements to existing boutiques, as well as investments in information technology and
our distribution facility.
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30, 2016
|
|
|
August 1, 2015
|
|
|
|
(In thousands)
|
|
Capital expenditures for:
|
|
|
|
|
|
|
|
|
New boutiques
|
|
$
|
6,202
|
|
|
$
|
9,424
|
|
Existing boutiques
|
|
|
2,354
|
|
|
|
3,776
|
|
Technology
|
|
|
2,002
|
|
|
|
1,157
|
|
Corporate and distribution
|
|
|
591
|
|
|
|
602
|
|
|
|
$
|
11,149
|
|
|
$
|
14,959
|
|
Our total capital expenditures for the twenty-six
weeks ended July 30, 2016 and August 1, 2015 were $11.1 million and $15.0 million, respectively, with new boutiques accounting
for most of our spending at $6.2 million and $9.4 million, respectively. Spending for new boutiques included amounts associated
with boutiques that will open subsequent to the end of each fiscal quarter. We opened 41 boutiques in the twenty-six weeks ended
July 30, 2016 compared to 69 boutiques in the twenty-six weeks ended August 1, 2015. The average cost of the leasehold improvements,
equipment, furniture and fixtures, excluding tenant allowances which are reflected in operating cash flows, for new boutiques opened
in the twenty-six weeks ended July 30, 2016 and August 1, 2015 was $226,000 and $218,000, respectively, while the average tenant
allowance per new boutique was $76,000 and $79,000 over the same periods, respectively. 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. As a result, we fund the cost of new boutiques with cash flow from operations, build-out allowances from our
landlords, or borrowings under our revolving credit facility. Our spending for existing boutiques totaled $2.4 million and $3.8
million during the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively. The majority of the amount spent for
existing boutiques in the current period was used in remodeling and relocating 20 boutiques while the prior year amount was spent
on upgrading display fixtures and equipment across many of our boutiques as well as remodeling 13 boutiques.
Management anticipates that capital expenditures
for the remainder of fiscal year 2016 will be approximately $16.9 million to $19.9 million. The majority of this amount will be
spent on new and existing boutiques as well as investments in our technology systems.
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 in financing activities totaled
$44.5 million during the twenty-six weeks ended July 30, 2016 which consists of $44.8 million repurchases of common stock and $0.3
million proceeds from stock option exercises and the related tax benefit. Net cash provided by financing activities totaled $0.2
million during the twenty-six weeks ended August 1, 2015 which consists of proceeds from stock option exercises and the related
tax benefit.
Revolving Credit Facility
On August 30, 2013, Francesca’s Collections,
Inc. (the “Borrower”), as borrower, and its parent company, Francesca's LLC, a wholly owned subsidiary of the Company,
entered into a Second Amended and Restated Credit Agreement with Royal Bank of Canada, as Administrative Agent and Collateral Agent,
and the lenders party thereto. The credit facility provides capacity of $75.0 million (including up to $10.0 million for letters
of credit) and matures on August 30, 2018. The facility also contains an option permitting the Borrower, subject to certain requirements
and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate of $25.0 million, subject
to reductions in the event the Borrower has certain indebtedness outstanding. At July 30, 2016, no borrowings or letters of credit
were outstanding under the credit facility.
The credit facility contains customary events
of default and requires the Borrower to comply with certain financial covenants. As of July 30, 2016, the Borrower was in compliance
with all covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can pay; provided
that the Borrower is permitted to pay dividends to the extent it has available capacity in its available 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 the Borrower is in pro forma compliance with a maximum secured leverage ratio. At July 30,
2016, the Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations under
the credit facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All obligations
under the facility are unconditionally guaranteed by, subject to certain exceptions, by Francesca’s LLC and each of the Borrower’s
existing and future direct and indirect wholly-owned domestic subsidiaries.
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 January 30, 2016.
Certain of the Company’s accounting
policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of the
Company’s consolidated financial statements and require significant, difficult, or complex 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 January
30, 2016. As of July 30, 2016, 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 January 30, 2016.
Recent Accounting Pronouncements
For information regarding recent accounting
pronouncements, please refer to Note 1 to our unaudited consolidated financial statements included in Part I of this Report, which
is incorporated herein by reference.
Contractual Obligations
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 January
30, 2016, other than those which occur in the normal course of business.
Off Balance
Sheet Arrangements
We are not party to any off balance sheet
arrangements.