ITEM 1. BUSINESS
General
Francesca’s Holdings Corporation was incorporated in Delaware
in 2007. We are a holding company and all of our business operations are conducted through our subsidiaries. Our principal
executive office is located at 8760 Clay Road, Houston, Texas 77080, our telephone number is (713) 864-1358 and our fax number
is (713) 426-2751. We maintain a website at
www.francescas.com
. We may post information that is important to our investors
on our website. Information included or referred to on, or otherwise accessible through, our website is not intended to form part
or be incorporated by reference into this report. Except where the context otherwise requires or where otherwise indicated, the
terms “francesca’s
®
,” “we,” “us,”
“our,” “the Company,” and “our business” refer to Francesca’s Holdings Corporation and
its consolidated subsidiaries as a combined entity.
We operate on a fiscal calendar which, in a given fiscal year,
consists of a 52- or 53-week period ending on the Saturday closest to January 31st. The reporting periods contained in our audited
consolidated financial statements included in this Annual Report on Form 10-K contain 52 weeks of operations in fiscal year 2016,
which ended on January 28, 2017, 52 weeks of operations in fiscal year 2015, which ended on January 30, 2016, and 52 weeks of operations
in fiscal year 2014, which ended on January 31, 2015.
Our Company
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
January 28, 2017, francesca’s
®
operated 671 boutiques in 48 states and
the District of Columbia and also served its customers through www.francescas.com, our ecommerce website.
By offering a differentiated shopping experience and quality,
trend-right merchandise at a compelling value, our boutiques have been successful across a wide variety of geographic markets and
shopping venues. We believe we have an opportunity to continue to grow our boutique base to more than 900 boutiques in the United
States based on our flexible boutique format, the financial characteristics of our boutiques and our ongoing analysis of shopping
venues that meet our criteria for new boutiques.
Our Competitive Strengths
We believe the following strengths differentiate us from our
competitors and are key drivers of our success:
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·
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Trend-Right Merchandise Delivered at a Compelling Value
. Our boutiques carry a broad and shallow selection of quality,
trend-right apparel, jewelry, accessories and gifts at attractive prices that ‘surprise and delight’ our customers.
Our buyers closely monitor the marketplace to identify and source proven fashion trends we believe will appeal to our core
customers. We have a unique assortment as we primarily offer exclusive items under our proprietary labels. We also carry a small
selection of third-party, nationally recognized brands that we use opportunistically in certain categories. We offer a broad selection
of merchandise, but intentionally purchase small quantities of individual items for each boutique and we frequently replenish our
boutiques with new merchandise, keeping the shopping experience fresh and exciting for our customers. The short lead times of our
vendors maximizes our speed to market, as it generally takes four to twelve weeks from the time an order is placed to the time
merchandise is available on the boutique floor. With these short lead times, we are able to make more informed buying decisions
to meet customers’ merchandise expectations, and to react quickly to fashion trends. This approach, combined with our balanced
merchandise mix of approximately 50% apparel and 50% jewelry, accessories and gifts, is designed to encourage frequent visits by
our customers and mitigate the seasonal fluctuations in sales and merchandise margin.
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Differentiated Shopping Experience.
Each of our retail locations is designed and merchandised to feel like an upscale
boutique. Merchandise presentations, including display windows, tables and walls, are refreshed frequently to keep our boutiques
new and exciting. Each boutique feels individualized and our boutique associates strive to provide a personalized guest experience
by creating a high-touch service environment which increases guest engagement and enhances the shopping experience. We believe
these attributes, along with our strategy of carrying a broad selection but limited quantities of individual styles, create an
atmosphere that strongly appeals to our customers and differentiates us in the marketplace.
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Powerful Boutique Economics and Rigorous Real Estate Selection Process
. Our boutique format works across a wide variety
of shopping venues, market sizes, climates and demographics. Our boutiques average approximately 1,391 square feet, which is meaningfully
smaller than most specialty retailers. The performance of our boutiques and our flexible real estate format enhance our ability
to secure prominent, highly visible locations in regional malls, lifestyle centers, street locations, strip centers and outlet
centers. We deploy a rigorous real estate selection process with all new boutique opportunities measured against specific financial
and geographic criteria. We currently fund all of our growth from cash generated from operations, including tenant allowances.
In our real estate selection process, we assess the viability of potential sites by analyzing the demographics of the trade area
and the performance of the shopping venue, including selected relevant and adjacent retailers. Based on this analysis, we believe
the financial characteristics of our new boutiques, coupled with our ability to operate across different shopping venues and geographies,
provide us with a wide scope of new boutique opportunities and enhance our ability to profitably expand our boutique base.
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Solid and Scalable Infrastructure.
We continually invest in systems, controls and human resources to support our growth.
In recent years we have made significant improvements to the infrastructure of our finance, buying and planning, real estate, boutique
operations and IT departments. For instance, we believe that we have developed an integrated sourcing, distribution and merchandising
process that is scalable and will facilitate the continued growth in the number of boutiques we operate. This includes buyers who
work closely with an established and diverse group of vendors to identify trend-right, quality merchandise for our boutiques, as
well as delivery, distribution and merchandising processes that enable us to execute a broad and shallow or scarcity merchandising
approach as we grow.
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·
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Experienced Management Team with a Disciplined Operating Philosophy.
Our senior management has extensive experience
across a broad range of disciplines in the retail industry, including merchandising, real estate, supply chain and finance. Our
management team has built a solid operating foundation based on sound retail principles that define our culture. Our disciplined
operating philosophy is grounded in a relentless focus on providing great merchandise and a best-in class boutique experience supported
by uncompromising site selection and continual enhancements to our infrastructure.
|
Our Growth Strategy
We believe we can continue to grow our revenues and earnings
by executing on the following strategies:
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·
|
Invigorate Merchandising.
We plan to drive comparable sales by featuring trend-right, quality, and unique merchandise
at a compelling value. We plan to continue to maintain our broad and shallow or scarcity merchandising approach and leverage a
larger open-to-buy strategy to take advantage of fashion trends. We believe this will drive units and dollars per transaction and
protect margins. We are continuing to refine our buying and planning processes to improve inventory management, resulting in increased
flows of newness and appropriate allocations.
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·
|
Optimize Real Estate
. We believe there is an opportunity to increase the number of boutiques we operate, enhance our
existing boutiques and refine our outlet strategy. Based on our ability to open our flexible retail format in various shopping
venues, including outlet centers, in new and existing markets, the financial characteristics of our boutiques and our ongoing analysis
of shopping venues that meet our criteria for new boutiques, we believe we have the potential to grow our base to more than 900
boutiques in the United States. We opened 64 new boutiques and closed nine underperforming boutiques in fiscal year 2016.
We plan to open approximately 60 to 65 new boutiques and to close approximately 10 to 15 existing boutiques in fiscal year 2017.
We regularly review our existing boutiques for improvement opportunities or potential closures for the overall health of our fleet
without incurring material write-offs associated with such closures. We are in the process of developing a new flexible boutique
prototype and a targeted remodel program.
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Differentiate and Personalize Guest Experience.
Our goal is to make every visit at francesca’s® unique by
providing an experience that gives each guest a sense of discovery, reasons to return and something worth sharing with friends.
Our boutique associates are key to delivering the experience we strive to provide to our guests. Therefore, we plan to continuously
enhance our training programs and infrastructure necessary to further improve the shopping experience.
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Cultivate and Expand Marketing and Branding.
Historically, we have focused on organic, viral and in-boutique marketing
to increase customer loyalty and build our brand. We plan to strengthen, evolve and invest in marketing programs to build customer
loyalty. We are in the process of implementing a new customer relationship management system and conducting customer research which
we believe will allow us to communicate with our customers in a more personal manner. We plan to use the results of the customer
research to develop and launch the appropriate loyalty programs.
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Grow Ecommerce Penetration and Omni Channel Capabilities
. We complement our boutiques with a growing ecommerce
business. Our ecommerce business not only generates incremental sales and profits but also builds brand awareness, drives boutique
traffic and helps us access markets where we do not currently have a boutique. Our ecommerce sales represented 5.0% of our fiscal
year 2016 total net sales. We believe we have a much greater opportunity to significantly increase our ecommerce penetration. We
plan to continue to make appropriate marketing and infrastructure investments in our ecommerce website and omni channel capabilities
to further enhance our customers’ shopping experience as well as establish the framework of our long-term ecommerce strategies.
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Continuous Process Improvement and Refinement.
We plan to continue to increase operational efficiencies by improving
and refining our existing processes. We continuously scrutinize all operational disciplines to identify cost-saving opportunities.
We believe this will provide an opportunity for us to fund operational investments through rigorous expense controls.
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Our History
In 1999, our Company was founded and we opened our first boutique
in Houston, Texas. Initially, we focused on selling fashion jewelry, accessories and selected home décor. As our boutique
base grew across the United States we expanded our merchandise offering to include apparel, which has become our largest category
and, we believe, a significant driver of growing customer loyalty and return visits. In July 2011, we became a publicly-traded
company.
Our Market
Our distinct boutique environment and carefully selected, trend-right
merchandise attracts a wide demographic. Our unique merchandise combination of apparel, jewelry, accessories and gifts allows us
to participate in a number of large market segments. While our broad assortment appeals to women of varying ages and diverse backgrounds,
from value-conscious to the more affluent, our core guest is a fashion conscious woman between the ages of 18 and 35. She tends
to be college educated and has moderate to high disposable income. She enjoys shopping for the latest fashions and is attracted
to our upscale boutique shopping environment, compelling value proposition and highly personalized customer service. We believe
she spends a higher proportion of her income on fashion than the general population.
Our Merchandise Offering and Merchandising
Strategy
We offer a broad and shallow selection of fashion apparel, jewelry,
accessories and gifts targeted to our core customer, who seeks trend-right, quality merchandise at attractive prices. We use the
term broad and shallow or scarcity to refer to a diverse merchandise assortment with relatively small inventory of each product. We
have a well-balanced assortment of merchandise categories with approximately 50% of our fiscal year 2016 sales generated by non-apparel
items. Our diverse merchandise contributes to the ‘treasure hunt’ atmosphere in our boutiques. We carry a broad selection
but limited quantities of each style and we deliver new merchandise to our boutiques five days a week. This contributes to a sense
of scarcity and newness within our boutiques, mitigates fashion risk, reduces the seasonality of the inventory and protects margins.
Our wide range of apparel, jewelry and accessories fills the
various casual and dressy fashion needs of our customers and our selection of gifts ranges from the elegant to the irreverent.
Our approximately 1,391 square foot boutiques carry in excess of 3,000 SKUs at any one time and we stock more than 12,000 different
styles during the course of a year. The majority of our merchandise is sold under our proprietary labels and we also sell a select
assortment of third-party, nationally recognized brands. Our ecommerce business features an edited selection of our boutique merchandise
and on-line exclusives. The table below shows the approximate breakdown of our fiscal year 2016 net sales by merchandise category:
Apparel
49% of Net Sales
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|
Jewelry
23% of Net Sales
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|
Accessories
15% of Net Sales
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|
Gifts
13% of Net Sales
|
Dresses, Fashion Tops, Sweaters, Cardigans and Wraps, Bottoms, Outerwear and Jackets, Tees and Tanks, Intimates
|
|
Necklaces, Earrings, Bracelets, Rings
|
|
Handbags, Clutches, Wallets, Shoes, Belts, Hats, Scarves, Sunglasses, Watches, Hair Accessories
|
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Fragrance, Candles, Bath and Body, Home Accessories, Books, Wall Art, Nail Polish, Miscellaneous Items
|
For additional information regarding net sales by merchandise
category, please refer to Note 10 to our audited consolidated financial statements included in “Financial Statements and
Supplementary Data” in Item 8 of this Annual Report, which is incorporated herein by reference.
Our buying and planning team is responsible for selecting and
sourcing our merchandise, managing inventory levels and allocating items to boutiques. Each merchandise category has a set of dedicated
buyers with oversight provided by our Chief Merchandising Officer. The buying and planning team holds weekly meetings to review
merchandise performance and identify new fashion trends. Our buyers also make regular trips to important industry markets and trade
shows. We have access to the expertise of hundreds of designers employed by our large vendor base who provide us with a large selection
of new styles for review each week. Our buyers collaborate with vendors to place special orders and to modify presented styles
based on current fashion trends and their in-depth knowledge of our customers’ preferences, which means most of our merchandise
is unique to francesca’s
®
. Before placing an order, every item is evaluated
for style, quality, fit, value and profitability to ensure it meets standards consistent with the francesca’s
®
brand. In order to clear slow moving inventory, in addition to normal promotional activities, we regularly mark
certain merchandise out-of-stock and dispose of such inventory at a pace suitable for our merchandising strategy.
Our Sourcing Strategy
Our ability to quickly make decisions on trend-right items combined
with the short production lead times of our vendors maximizes our speed to market. We primarily use vendors based in the United
States that source from both domestic and overseas markets and it generally takes four to twelve weeks from the time an order is
placed to the time merchandise is available on the boutique floor. With these short lead times, we are able to make more informed
buying decisions in terms of customers’ merchandise expectations, and to quickly react to changing fashion trends. This also
supports our merchandise strategy of offering a broad but limited assortment that is consistently refreshed. Due to the limited
quantity of our buys in any one style, we minimize material inventory positions in an individual style which enhances our ability
to quickly deliver trend-right merchandise and reduce the risk of fashion misses, which can lead to increased inventory markdowns
and diminished gross margins.
We do not own or operate any manufacturing facilities. We have
relationships with a diverse base of approximately 500 vendors and transact business on a purchase-order-by-purchase-order basis.
In fiscal year 2016, we sourced approximately 94% of our merchandise from 200 vendors while our top 10 vendors sourced approximately
30% of our merchandise, with no single vendor accounting for more than 6% of our purchases. We believe that the loss of any of
our current vendors will not result in a material disruption to our business.
We do not enter into exclusive contracts with our vendors and
we continue to optimize our vendor network. This provides us with access to an even more extensive variety of merchandise
from a greater number of vendors at competitive prices. We believe our vendors view us as an important customer given our growth
and market position. Our vendors utilize a network of domestic and overseas factories, providing them access to significant capacity.
Each of our vendors is required to adhere to our vendor standards,
which are designed to ensure that our vendors conduct their business in a legal, ethical and responsible manner. This also includes
the requirement that all of our vendors comply with the applicable laws and regulations of the United States, those of the respective
country of manufacture or exportation and all state and local laws and regulations.
Our Sales Channels
We conduct business through our boutiques and our ecommerce
website,
www.francescas.com
. We do not incorporate the information contained on, or accessible through, our investor relations
website into this Annual Report on Form 10-K, and it should not be considered a part of this Annual Report on Form 10-K.
Boutiques
In fiscal year 2016, our boutiques generated net sales of $463.1
million which represented 95.0% of total net sales. As of January 28, 2017, we operated 671 boutiques under the name francesca’s
®
in 48 states throughout the United States and the District of Columbia. The following list shows the number of boutiques operated
by state as of January 28, 2017, and demonstrates that we have been successful in opening boutiques in a wide range of geographies.
State
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Number of Boutiques
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State
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Number of Boutiques
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Alabama
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14
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Nebraska
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5
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Arizona
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11
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Nevada
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9
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Arkansas
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8
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New Hampshire
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4
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California
|
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55
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New Jersey
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25
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Colorado
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13
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New Mexico
|
|
2
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Connecticut
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10
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New York
|
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27
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Delaware
|
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4
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North Carolina
|
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19
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District of Columbia*
|
|
3
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North Dakota
|
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4
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Florida
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48
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Ohio
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25
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Georgia
|
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24
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Oklahoma
|
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7
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Idaho
|
|
2
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Oregon
|
|
8
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Illinois
|
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30
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Pennsylvania
|
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27
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Indiana
|
|
15
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Rhode Island
|
|
4
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Iowa
|
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5
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South Carolina
|
|
11
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Kansas
|
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7
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South Dakota
|
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2
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Kentucky
|
|
9
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Tennessee
|
|
16
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Louisiana
|
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12
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Texas
|
|
61
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Maine
|
|
1
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Utah
|
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3
|
Maryland
|
|
16
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Vermont
|
|
1
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Massachusetts
|
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20
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Virginia
|
|
20
|
Michigan
|
|
17
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|
Washington
|
|
13
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Minnesota
|
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16
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West Virginia
|
|
2
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Mississippi
|
|
8
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Wisconsin
|
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11
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Missouri
|
|
14
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Wyoming
|
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1
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Montana
|
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2
|
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*
Not considered a state.
Boutique Design and Environment
The differentiated shopping experience offered through our boutiques
is central to the francesca’s
®
brand. Our boutiques are designed and
merchandised to deliver a warm and inviting atmosphere that creates the sense for our customers that they are shopping in an upscale
boutique. We also aim to provide a personalized in-boutique guest experience by creating a high-touch service environment with
a focus on engaging, connecting and inspiring our customers. Although we strive to maintain a relatively consistent look and feel
in all of our boutiques, the intricacies of each boutique’s physical properties, geographic market and shopping venue make
each feel different and in tune with its local clientele.
Our boutiques typically range in size from 1,000 to 2,000 square
feet, with an average size of 1,391 square feet. We seek locations that have a boutique front that is at least 20 feet wide, which
we adorn with visually appealing architectural lighting, signage and display window presentations. Inside, we use a variety of
color palettes and soft lighting. Each boutique’s merchandise presentation, including display windows, tables and walls,
is refreshed frequently to keep our shopping experience new and exciting. We believe by constantly changing our visual merchandising
and presentation, we give our customers a reason to shop our boutiques frequently, building customer loyalty. Our boutique managers
also share best-practices with each other. We believe these grass-root interactions improve the sense of community among our boutique
managers and enhance the shopping experience for our customers.
Staffing in our boutiques consists of a boutique manager, an
assistant manager and a minimum of three part-time associates. Our compensation structure includes a bonus component payable upon
the achievement of certain financial goals. We endeavor to hire boutique personnel that are friendly and customer-service driven
individuals. In addition to training programs for visual merchandising, customer service and operations, boutique managers benefit
from ongoing field-level support and training updates as well as guides and manuals.
New Boutique Economics
We believe that our broad and shallow or scarcity merchandising
strategy and the differentiated shopping experience we provide to our customers contributes to the success of our boutiques and
generates attractive economic returns. During fiscal year 2015, we opened 83 boutiques with an average size of approximately 1,482
square feet. These boutiques generated average sales of approximately $681,000 in the first year and paid back our net investment,
on average, in less than 14 months. Our average pre-tax net investment consisted of $144,000 in average boutique build-out costs
(net of $77,000 average tenant allowance) and $49,000 in average inventory. The payback period for boutiques opened in fiscal year
2015 was slightly longer compared to the payback period for boutiques opened in prior years primarily due to increasing boutique
build-out costs as we opened more boutiques in outlet centers, which are generally larger in size compared to boutiques in other
venues.
Boutique Growth and Site Selection
We have consistently grown our boutique base. The table below
indicates certain historical information regarding our boutiques as of the end of each of the periods indicated below:
|
|
Fiscal
Year
2016
|
|
|
Fiscal
Year
2015
|
|
|
Fiscal
Year
2014
|
|
|
Fiscal
Year
2013
|
|
|
Fiscal
Year
2012
|
|
Mall
|
|
|
334
|
|
|
|
313
|
|
|
|
278
|
|
|
|
226
|
|
|
|
180
|
|
Non-mall
(1)
|
|
|
337
|
|
|
|
303
|
|
|
|
261
|
|
|
|
225
|
|
|
|
180
|
|
Total boutiques
|
|
|
671
|
|
|
|
616
|
|
|
|
539
|
|
|
|
451
|
|
|
|
360
|
|
Boutiques opened
|
|
|
64
|
|
|
|
83
|
|
|
|
88
|
|
|
|
91
|
|
|
|
77
|
|
Boutiques closed
|
|
|
9
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
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Total approximate gross square feet at the end of the period
|
|
|
933,000
|
|
|
|
843,000
|
|
|
|
728,000
|
|
|
|
613,000
|
|
|
|
499,000
|
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Average square feet per boutique at the end of the period
(2)
|
|
|
1,391
|
|
|
|
1,368
|
|
|
|
1,350
|
|
|
|
1,359
|
|
|
|
1,385
|
|
Net sales per average square foot for the period
(3)
|
|
$
|
545
|
|
|
$
|
543
|
|
|
$
|
545
|
|
|
$
|
592
|
|
|
$
|
632
|
|
|
1)
|
Non-mall includes boutiques in lifestyle centers, street locations, strip centers and outlet centers.
|
|
2)
|
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.
|
|
3)
|
Net sales per average square foot is calculated by dividing net sales for the period by the average total square feet during
the period. 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. 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.
|
Our flexible boutique format has enabled us to successfully
open boutiques across a variety of shopping venues, market sizes, climates and demographics. We believe this provides us with a
wide scope of real estate opportunities and enhances our ability to profitably expand our boutique base. Based on our rigorous
real estate selection process, our flexible boutique format and the financial characteristics of our boutiques, we believe that
the per boutique costs associated with opening new boutiques over the next twelve months should not be materially different from
our current costs for opening new boutiques. We expect to fund the costs of our boutique growth through cash flow generated by
our operations. We expect to open boutiques in both new and existing markets and across regional malls, lifestyle centers, street
locations, strip centers and outlet centers. We expect our overall boutique mix to consist of approximately 45% mall and 55% non-mall,
if we are successful in opening more than 900 boutiques.
Our real estate committee utilizes a disciplined approach to
site selection, which analyzes the prospective shopping venue for factors such as overall shopping venue productivity, competitive
environment and specific sales of other retailers deemed most relevant as well as the configuration of available space for potential
new boutique locations. We seek prominent locations in high-traffic areas of the shopping venue and in close proximity to other
retailers targeting similar customers. We also evaluate each new boutique location based on projected sales and determine whether
the capital investment and estimated boutique four-wall contribution satisfies our targeted return threshold, occupancy costs,
and boutique contribution.
We continuously review the overall economic performance of our
boutiques. As part of our economic review process, we evaluate a variety of factors such as expected future revenue, applicable
market conditions, unamortized portion of leasehold improvements, our ability to terminate the underlying lease obligation and
related cost of any such early termination. As a result of such review, we closed nine underperforming boutiques during fiscal
year 2016 and we plan to close approximately 10 to 15 existing boutiques in fiscal year 2017.
See Item 1A, “Risk Factors” for certain risks related
to our boutiques growth and site selection.
Ecommerce
Our ecommerce business consists of our
www.francescas.com
website. Through our website, our customers are able to purchase individual items, shop the latest jewelry, gift or fashion merchandise
and special promotions, create a wish list, sign up for our emailing list, connect and follow us on social media sites such as
Facebook, Twitter, Instagram and Pinterest, as well as obtain current information on our boutique locations. This channel enables
us to reach customers in all areas where we currently do not have a boutique and further build our brand. We currently obtain and
collect customer email information from our boutiques and website and use it to generate marketing programs, such as our email
campaign. We will continue to make investments to our website that will further enhance our customers’ shopping experience
as well as establish the framework for our long-term ecommerce strategies. We believe there is significant potential to expand
this channel over time.
Marketing and Advertising
We currently focus on organic, viral and in-boutique marketing
to increase customer loyalty and build our brand image. By locating our boutiques in prominent, high-traffic locations and our
limited use of traditional radio and print advertising, we encourage people to ‘discover’ francesca’s
®
. We believe that many of our customers develop a personal connection with our boutiques and become our ambassadors
in the local community by spreading the word about francesca’s
®
. Our
boutique managers are passionate about francesca’s
®
and contribute to
our marketing effort by hosting in-boutique activities, such as fashion shows and private parties. We also use email communications,
our website and, increasingly, social networking sites, such as Facebook, Twitter, Instagram and Pinterest and fashion related
blogs to achieve our marketing goals. We plan to strengthen and evolve our marketing programs to build customer loyalty.
Distribution
We distribute most of our merchandise from our distribution
center (located within our corporate headquarters) in Houston, Texas. Our current facility occupies approximately 218,000 square
feet, consisting of approximately 165,000 square feet of warehouse and distribution space, which services our boutiques and ecommerce
business, and approximately 53,000 square feet of office space for our corporate headquarters. Our merchandise is generally received,
inspected, managed, stored and distributed through our distribution warehouse. The majority of our merchandise is pre-ticketed
and pre-sorted by our vendors, which allows us to efficiently ship from our distribution center directly to our boutiques, thereby
reducing labor costs. Due to the relatively small size of our sales area, we ship smaller packages of fresh merchandise five days
a week. Hence, we are able to utilize third party shipping vendors to effectively distribute fresh merchandise on a continuous
basis, ensuring successful execution of our broad and shallow or scarcity merchandising strategy. We believe that our current facilities
will be sufficient to support our growth plans for several years.
Management Information Systems
Our management information technology systems provide support
and timely information to our management team. We believe our current systems provide us with operational efficiencies, scalability,
management control and timely reporting that allows us to identify and respond to operating trends in our business. We use a combination
of customized and industry-standard software systems to support boutique point-of-sale, merchandise planning and buying, ecommerce,
inventory management, financial reporting and administrative functions.
We are in the process 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 the 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, merchandise and supply
chain resulting in improved customer service, improved operational efficiency, enhanced management analytics and increased synergies
between our ecommerce and our boutique channels.
We will remain diligent in our efforts to continuously improve
the functionality and performance of our existing enterprise applications and infrastructure to support the Company’s continued
growth.
Competition
The women’s apparel, jewelry, accessories and gifts market
is large, fragmented and highly competitive. Our largest competitors include national and regional department stores, specialty
retailers, mass merchants and internet-based retailers. Due to the breadth of our merchandise, it is difficult to identify companies
that compete with us in every product category. We generally compete with individual, often owner-operated specialty shops in each
of the markets that we operate as well as broadly merchandised department stores and certain specialty stores. We may face new
competitors and increased competition from existing competitors as we expand into new markets and increase our presence in existing
markets.
The principal basis upon which we compete is by offering a differentiated
shopping experience through quality, trend-right merchandise at attractive prices in a warm and inviting boutique environment
with personalized customer service. Our manageable boutique size and flexible but disciplined real estate strategy provide us with
a competitive advantage that is not easily replicated by our major competitors. Our success also depends in substantial part on
our ability to respond quickly to fashion trends so that we can meet the changing demands of our customers.
Intellectual Property
We have registered our trademark francesca’s
®
with the United States Patent and Trademark Office. We own domain names, including
www.francescas.com
, and we own unregistered
copyright rights in our website content. We believe our trademarks have value, and we diligently protect them against infringement.
For instance, we have filed applications to register our trademark internationally. We will also continue to file new applications
as appropriate to protect our intellectual property rights.
Regulation and Legislation
We are subject to labor and employment laws, laws governing
advertising and promotions, privacy laws, product and other safety regulations, consumer protection regulations, environmental
requirements and other laws that regulate retailers and govern the promotion and sale of merchandise and the operation of boutiques
and warehouse facilities. We monitor changes in these laws and believe that we are in compliance with applicable laws in all material
respects.
Insurance
We use insurance for a number of risk management activities,
including workers’ compensation, general liability, automobile liability, cyber security and employee-related health care
benefits, a portion of which is paid by the employees. We evaluate our insurance requirements on an ongoing basis and believe we
maintain adequate levels of coverage.
Our Employees
As of January 28, 2017, we had 6,701 total employees. Of our
total employees, 252 were based at our corporate headquarters in Houston, Texas, and 6,449 were boutique employees. We had 1,287 full-time
employees and 5,414 part-time employees, who are primarily boutique employees. None of our employees are represented by a labor
union and we have had no labor-related work stoppages as of January 28, 2017. Our relationship with our employees is one of the
keys to our success and we believe that relationship is satisfactory.
Seasonality
Our wide-range of merchandise and our strategy of carrying a
broad selection but limited quantities of each item reduce our overall seasonality relative to other specialty retailers. Nevertheless,
our business is seasonal in nature and demand is generally the highest in the fourth fiscal quarter due to the year-end holiday
season and lowest in the first fiscal quarter. As a result of this seasonality and generally because of variation in consumer spending
habits, we experience fluctuations in net sales and working capital requirements during the year. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations-Seasonality” for more information.
Privacy Policy
In the course of our business, we collect information about
our customers, including customer data submitted to us in connection with purchases of our merchandise at boutiques as well as
from our ecommerce business. We respect the privacy of our customers and take steps to safeguard the confidentiality of the information
that they provide to us.
Securities and Exchange Commission Filings
We maintain a website at
www.francescas.com
. We
provide, free of charge, access to various reports that we file with, or furnish to, the SEC through our website, as soon as reasonably
practicable after they have been filed or furnished with the SEC. These reports include, but not limited to, our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports. The SEC maintains
a website that contains reports, proxy and information statements, and other information regarding our filings at
http://www.sec.gov
.
ITEM 1A. RISK FACTORS
If any of the following risks actually occurs, our business,
financial condition, results of operation, cash flow and prospects could be materially and adversely affected. As a result, the
trading price of our common stock could decline.
Our success depends on our ability to anticipate, identify
and respond quickly to new and changing fashion trends, customer preferences and other factors, and our inability to anticipate,
identify and respond to these changes and trends could have a material adverse effect on our business, financial condition and
results of operations.
Our core market, which is comprised of apparel, jewelry, accessories
and gifts for women from 18 to 35-year old, is subject to rapidly shifting fashion trends, customer tastes and demands. Accordingly,
our success is dependent on our ability to anticipate, identify and respond to the latest fashion trends and customer demands,
and to translate such trends and demands into appropriate, saleable product offerings in a timely manner. A small number of our
employees are primarily responsible for performing this analysis and making product purchase decisions. Our failure to anticipate,
identify or react swiftly and appropriately to new and changing styles, trends or desired image preferences or to accurately anticipate
and forecast demand for certain product offerings is likely to lead to lower demand for our merchandise, which could cause, among
other things, sales declines, disposing excess inventories and a greater number of markdowns resulting in a decreased merchandise
margin. Further, if we are not able to anticipate, identify and respond to changing fashion trends and customer preferences, we
may lose customers and market share to those of our competitors who are able to better anticipate, identify and respond to such
trends and preferences. Because our success depends on our brand image, our business could be materially adversely affected if
new product offerings are not accepted by our customers. Our new product offerings may not be met with the same level of acceptance
as our past product offerings and we may not be able to adequately respond to fashion trends in a timely manner or the preferences
of our customers. If we do not accurately forecast or analyze fashion trends and sales levels, our business, financial condition
and results of operations will be adversely affected.
If we are not able to successfully maintain a broad and
shallow merchandise assortment, we may be unable to attract a sufficient number of customers to our boutiques or sell sufficient
quantities of our merchandise through our ecommerce business, which could result in excess inventories and markdowns.
We use the term broad and shallow or scarcity to refer to a
diverse merchandise assortment with relatively small inventory of each product. We believe that our strategy to offer our customers
a broad and shallow merchandise assortment has contributed significantly to the success of our business. Among other things, we
believe that this strategy creates a constant sense of newness and scarcity value, which drives repeat boutique visits and increased
sales. We believe that this strategy helps us reduce markdowns. There can be no assurance that we will be able to continue to adequately
stock our boutiques with a sufficiently broad and shallow assortment of merchandise. As we increase order volumes in connection
with opening new boutiques and expanding our ecommerce business, it may become increasingly difficult for us to accurately forecast
the optimal amount of merchandise to order from our vendors and continue to offer a broad and shallow merchandise assortment at
each boutique. If we are unable to offer a broad and shallow merchandise assortment, customers may choose to visit our boutiques
less frequently, our brand could be impaired, our market share may decline and our results of operations could deteriorate. Further,
any failure to maintain a broad and shallow merchandise assortment could lead to excess inventories which could lead to markdowns
and increased marked out-of-stock charges and promotions, which would result in a decrease in our merchandise margin.
Our growth strategy depends in large part upon our ability
to successfully open and operate new boutiques each year in a timely and cost-effective manner.
Our strategy to grow our business depends in large part on continuing
to successfully open new boutiques each year for the foreseeable future. The success of this strategy will depend largely upon
our ability to find a sufficient number of suitable locations, our ability to recruit, hire and train qualified personnel to operate
our new boutiques and our ability to scale our infrastructure to successfully integrate our new boutiques.
Our ability to successfully open and operate new boutiques depends
on many factors that may be outside of our control including, among others, our ability to:
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identify desirable boutique locations, primarily in malls, lifestyle centers, street locations and strip centers, as well as
other types of shopping venues and outlet malls, which may be difficult and costly, particularly, in an improving real estate environment
and as customer shopping patterns evolve;
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negotiate acceptable lease terms, including favorable levels of tenant allowances, which may be difficult, particularly in
an improving real estate environment;
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maintain out-of-pocket, build-out costs in line with our boutique economic model, including by receiving expected levels of
tenant allowances for a portion of our construction expenses, and managing these construction expenses at reasonable levels, which
may be difficult, particularly in an improving real estate environment;
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efficiently source and distribute additional merchandise;
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hire, train and retain a growing workforce of boutique managers, boutique associates and other personnel;
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successfully integrate new boutiques into our existing control structure and operations, including our information technology
systems;
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efficiently expand the operations of our distribution facility to meet the needs of a growing boutique network;
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identify and satisfy the merchandise and other preferences of our customers in new geographic areas and markets; and
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address competition, merchandising, marketing, distribution and other challenges encountered in connection with expansion into
new geographic areas and markets.
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Our expansion plans have us opening new boutiques in or near
the areas where we have existing boutiques. To the extent that we open boutiques in markets where we already have existing boutiques,
we may experience reduced net sales at those existing boutiques. Also, as we expand into new geographic areas, we will need to
successfully identify and satisfy the fashion preferences of customers in those areas. We will need to address competition, merchandising,
marketing, distribution and other challenges encountered in connection with any expansion and our limited brand recognition in
new markets may limit our expansion strategy and cause our business and growth to suffer. New geographic areas may also have
different operational characteristics, including employment and labor, logistics, real estate and legal requirements which may
divert financial, operation and managerial resources from our existing operations.
Finally, newly opened boutiques may not be received as well
as, or achieve net sales, profitability levels or payback period on our net investment comparable to those of, our existing boutiques
in our estimated time periods, or at all. If our boutiques fail to achieve, or are unable to sustain, acceptable net sales and
profitability levels, our business may be materially harmed and we may incur significant costs associated with closing or relocating
boutiques. Our current expansion plans are only estimates, and the actual number of boutiques we open or close each year and the
actual number of suitable locations for our new boutiques could differ significantly from these estimates. If we fail to successfully
open and operate new boutiques and execute our growth plans, the price of our common stock could decline.
We may not be able to efficiently source and distribute
the additional merchandise quantities necessary to support our growth.
Our success depends on our ability to source and distribute
merchandise efficiently. The sourcing of our merchandise is dependent, in part, on our relationships with our vendors. If we are
unable to maintain these relationships, we may not be able to continue to source merchandise at competitive prices that appeal
to our customers. If we do not succeed in maintaining good relationships with our vendors or if our growth outpaces the ability
of our vendors to scale up and the company cannot identify new vendors to meet the demand for additional merchandise production,
the company could see its costs go up or the delivery time on its new orders substantially increase.
Increases in the cost of the raw materials or other inputs
used in the production of our merchandise could result in the loss of suppliers, increase our cost of goods sold and occupancy
costs and adversely affect our financial results.
The success of our business is in part driven by the compelling
price-value proposition we offer our customers. If the costs of the raw materials, particularly cotton, leather and synthetics,
used in producing our merchandise increase, our vendors would look to pass these cost increases along to us. The price and availability
of such raw materials may fluctuate significantly, depending on many factors which are outside of our control, including commodity
prices, crop yields and weather patterns. If our vendors attempt to pass any cost increases on to us and we refuse to pay the increases,
we could lose certain vendors as suppliers, resulting in the risk that we could not fill our orders in a timely manner or at all.
If we pay the increases, we could either attempt to raise retail prices, which could adversely affect our sales and our brand image,
or choose not to raise prices, which could adversely affect the profitability of our merchandise sales.
Changes in laws affecting our supply chain and portions of the
Dodd-Frank Wall Street Reform and Consumer Protection Act relating to conflict minerals, may adversely affect the sourcing, availability
and pricing of certain materials which may be used in the manufacture of some of our products.
If we are unable to effectively operate, replace or upgrade
any of our existing information technology systems, our operations could be disrupted which could adversely affect our financial
results.
The efficient operation of our business is significantly dependent
on our information technology systems, including our ability to operate them effectively and successfully implementing new systems
and controls, including, for example, our planned replacement of our point-of-sale system in fiscal year 2017. Any failure
of these systems to operate effectively or any difficulty in implementing information technology systems changes could disrupt
and adversely impact the promptness and accuracy of our merchandise distribution, transaction processing, financial accounting
and reporting, including the implementation of our internal controls over financial reporting, the efficiency of our operations
and our ability to properly forecast earnings and cash requirements. Any resulting disruptions could harm our business, prospects,
financial condition and results of operations.
Our current growth plans will place a strain on our existing
resources and could cause us to encounter challenges we have not faced before.
As our number of boutiques and our ecommerce sales grow, our
operations will become more complex. While we have grown substantially as a company since inception, much of this growth occurred
in recent years. As we move forward, we expect our growth to bring new challenges that we have not faced before. Among other difficulties
that we may encounter, this growth will place a strain on our existing infrastructure, including our distribution facilities, information
technology systems, financial controls, real estate and boutique operations staff, and may make it more difficult for us to adequately
forecast expenditures, such as real estate and construction expenses, and budgeting will become more complex. We may also
place increased burdens on our vendors, as we will likely increase the size of our merchandise orders. The increased demands that
our growth plans will place on our infrastructure may cause us to operate our business less efficiently, which could cause deterioration
in the performance of our existing boutiques. New order delivery times could lengthen as a result of the strains that growth will
place on our existing resources and our growth may make it otherwise difficult for us to respond quickly to changing trends, consumer
preferences and other factors. This could impair our ability to continue to offer trend-right merchandise which could result in
excess inventory, greater markdowns, loss of market share and decreased sales.
Our planned expansion is expected to place increased demands
on our existing operational, managerial, administrative and other resources. Specifically, our inventory management and personnel
processes may need to be further upgraded to keep pace with our current growth strategy. We cannot anticipate all of the
demands that our expanding operations will impose on our business, and our failure to appropriately address these demands could
have an adverse effect on us.
Our business is sensitive to consumer spending and economic
conditions.
Consumer purchases of discretionary retail items and specialty
retail products, which include our apparel, jewelry, accessories and gifts, may be adversely affected by economic conditions such
as employment levels, salary and wage levels, the availability of consumer credit, inflation, high interest rates, high tax rates,
high fuel prices and consumer confidence with respect to current and future economic conditions. Consumer purchases may decline
during recessionary periods or at other times when unemployment is higher or disposable income is lower. These risks may be exacerbated
for retailers like us that focus significantly on selling discretionary fashion merchandise. Consumer willingness to make discretionary
purchases may decline, may stall or may be slow to increase due to national and regional economic conditions. Our financial performance
is particularly susceptible to economic and other conditions in regions or states where we have a significant number of boutiques.
There remains considerable uncertainty and volatility in the national and global economy. Further or future slowdowns or disruptions
in the economy could adversely affect mall traffic and new mall and shopping center development and could materially and adversely
affect us and our growth plans. We may not be able to maintain our recent rate of growth in net sales if there is a decline in
consumer spending.
A deterioration of economic conditions and future recessionary
periods may exacerbate the other risks faced by our business, including those risks we encounter as we attempt to execute our growth
plans. Such risks could be exacerbated individually or collectively.
We operate in the highly competitive specialty retail
apparel and accessories industry and the size and resources of some of our competitors may allow them to compete more effectively
than we can, which could adversely impact our growth and market share.
We face intense competition in the specialty retail apparel
and accessories industry. We compete on the basis of a combination of factors, including price, breadth, quality and style of merchandise,
as well as our in-boutique experience and level of customer service, our brand image and our ability to anticipate, identify and
respond to new and changing fashion trends. While we believe that we compete primarily with specialty retailers and internet businesses
that specialize in women’s apparel and accessories, we also face competition from department stores, mass merchandisers and
value retailers. We believe our primary competitors include specialty apparel and accessories retailers that offer their own private
labels. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors
into our markets could have an adverse effect on our business.
We also compete with a wide variety of large and small retailers
for customers, vendors, suitable boutique locations and personnel. The competitive landscape we face, particularly among specialty
retailers, is subject to rapid change as new competitors emerge and existing competitors change their offerings. We cannot provide
assurance that we will be able to compete successfully and navigate the shifts in our market.
Many of our competitors are, and many of our potential competitors
may be, larger and have greater name recognition and access to greater financial, marketing and other resources. Therefore, these
competitors may be able to adapt to changes in trends and customer desires more quickly, devote greater resources to the marketing
and sale of their products, generate greater brand recognition or adopt more aggressive pricing policies than we can. As a result,
we may lose market share, which could reduce our sales and adversely affect our results of operations. Many of our competitors
also utilize advertising and marketing media, including advertising through the use of direct mail, newspapers, magazines, billboards,
television and radio, which may provide them with greater brand recognition than we have given our very limited use of traditional
advertising.
Our competitors may also sell certain products or substantially
similar products through the Internet or through outlet centers or discount stores, increasing the competitive pressure for those
products. Additionally, the internet and other new technologies facilitate competitive entry and comparison shopping. We cannot
assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into
markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have
a material adverse effect on us. Competitive forces and pressures may intensify as our presence in the retail marketplace grows.
We do not possess exclusive rights to many of the elements that
comprise our in-boutique experience and merchandise offerings. Some specialty retailers offer a personalized shopping experience
that in certain ways is similar to the one we strive to provide to our customers. Our competitors may seek to emulate facets of
our business strategy and in-boutique experience, which could result in a reduction of any competitive advantage or special appeal
that we might possess. Some of our merchandise offerings are sold to us on a non-exclusive basis. As a result, our current and
future competitors, especially those with greater financial, marketing or other resources, may be able to duplicate or improve
upon some or all of the elements of our in-boutique experience or merchandise offerings that we believe are important in differentiating
our boutiques and our customers’ shopping experience. If our competitors were to duplicate or improve upon some or all of
the elements of our in-boutique experience or product offerings, our competitive position and our business could suffer.
Our inability to maintain or increase our comparable sales
could adversely impact our net sales, profitability, cash flow and stock price.
We may not be able to sustain or increase comparable sales.
If our future comparable sales decline or fail to meet market expectations, our profitability could be harmed and the price of
our common stock could decline. The aggregate comparable sales levels of our boutiques have fluctuated in the past and can be expected
to fluctuate in the future. A variety of factors affect comparable sales, including fashion trends, competition, current national
and regional economic conditions, pricing, changes in customer shopping patterns, changes in our merchandise mix, prior period
comparable sales levels, inventory shrinkage, the timing and amount of markdowns, the success of our marketing programs, holiday
timing and weather conditions. Our planned expansion may cause additional pressure on our comparable sales. These factors may cause
our comparable sales results to be materially lower than in recent periods and lower than market expectations, which could harm
our business and our earnings and result in a decline in the price of our common stock.
Our inability to maintain our operating margins could
adversely affect the price of our common stock.
We aim to increase our operating margins through scale efficiencies,
improved systems, continued cost discipline and enhancements to our merchandise offerings. If we are unable to successfully manage
the potential difficulties associated with our growth plans, we may not be able to capture the scale efficiencies that we expect
from expansion. If we are not able to capture scale efficiencies, improve our systems, continue our cost discipline and enhance
our merchandise offerings, we may not be able to achieve our goals with respect to operating margins. If we do not adequately refine
and improve our various ordering, tracking and allocation systems, we may not be able to increase sales and reduce inventory shrinkage.
As a result, our operating margins may stagnate or further decline, which could adversely affect the price of our common stock.
Our ability to attract customers to our boutiques depends
on locating our boutiques in suitable locations. Conditions or changes affecting boutique locations, including any decrease in
customer traffic, could cause our sales to be less than expected.
Boutique locations and related sales and customer traffic may
be adversely affected by, among other things, economic conditions in a particular area, competition from nearby retailers or online
selling similar merchandise, changing lifestyle choices of consumers in a particular market and the closing or decline in popularity
of other businesses located near our boutiques. For example, numerous retailers have recently announced the closure of a significant
number of their stores, mainly in mall and anchor store locations. Changes in areas around our boutique locations or changes in
consumer shopping patterns, including a shift of consumer spending from brick-and-mortar to online, that result in reductions in
customer foot traffic or otherwise render the locations unsuitable could cause our sales to be less than expected.
Our business depends on a strong brand image, and if we
are not able to maintain and enhance our brand, particularly in new markets where we have limited brand recognition, we may be
unable to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise.
We believe that our brand image and brand awareness has contributed
significantly to the success of our business. We also believe that maintaining and enhancing our brand image particularly in new
markets where we have limited brand recognition is important to maintaining and expanding our customer base. Maintaining and enhancing
our brand image may require us to make substantial investments in areas such as merchandising, marketing, boutique operations,
community relations, boutique promotions and employee training. These investments may be substantial and may not ultimately be
successful.
We are dependent on shopping malls and other retail centers
to attract customers to our boutiques.
Many of our boutiques are located in shopping malls and other
retail centers that benefit from the ability of “anchor” retail tenants, generally large department centers, and other
attractions, to generate sufficient levels of consumer traffic in the vicinity of our boutiques. Any decline in the volume
of consumer traffic at these shopping centers, whether because of economic slowdown, severe weather, a decline in the popularity
of shopping centers, the closing of anchor stores or otherwise, could result in reduced sales at our boutiques and excess inventory. For
example, numerous retailers have recently announced the closure of a significant number of their stores, mainly in mall and anchor
store locations. We may have to respond by increasing markdowns or increasing promotions to reduce excess inventory in certain
boutiques, which could have a material adverse effect on our margins and operating results.
Our use of traditional advertising channels is limited
and if we fail to adequately continue to connect with our customer base, our business could be adversely affected.
We currently focus on organic, viral and in-boutique marketing
to capture the interest of our customers and drive them to our boutiques and website. We limit our use of traditional advertising
channels, such as newspapers, magazines, billboards, television and radio, which are used by some of our competitors. Although
we are currently working to strengthen and evolve our marketing programs, there is no guarantee that such efforts will be successful.
We expect to increase our use of social media, such as Facebook, Instagram, Pinterest and Twitter, in the future. If our marketing
efforts are not successful, there may be no immediately available or cost effective alternative marketing channel for us to use
to build or maintain brand awareness. As we execute our growth strategy, our ability to successfully integrate new boutiques into
their surrounding communities or to expand into new markets will be adversely impacted if we fail to connect with our target customers.
Failure to successfully connect with our target customers in new and existing markets could harm our business, results of operations
and financial condition.
We depend on our senior management personnel and may not
be able to retain or replace these individuals or recruit additional personnel, which could harm our business.
Our future success is substantially dependent on the continued
service of our senior management, particularly Mr. Steven P. Lawrence, our President and Chief Executive Officer since October
10, 2016. The loss of services of one or more of our named executive officers could impair our ability to manage our business effectively
and could have an adverse effect on our business, as we may not be able to find suitable individuals to replace them on a timely
basis or at all. Any departures of key personnel could be viewed in a negative light by investors and analysts, which could cause
our common stock price to decline. We do not maintain key person insurance on any employee.
In addition to these key employees, we have other employees
in positions, including those employees responsible for our merchandising and operations departments that, if vacant, could cause
a temporary disruption in our business until such positions are filled.
If we are unable to find, train and retain key personnel,
including new boutique employees that reflect our brand image and embody our culture, we may not be able to grow or sustain our
operations.
Our success depends in part upon our ability to attract, motivate
and retain a sufficient number of boutique employees, including boutique managers, who understand and appreciate our customers,
brand and corporate culture, and are able to adequately and effectively represent our culture and establish credibility with our
customers. Like most retailers, we experience significant employee turnover rates, particularly among boutique employees. Our planned
growth will require us to hire and train even more personnel to manage such growth. If we are unable to hire and retain boutique
personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture,
understanding of our customers and knowledge of the merchandise we offer, our ability to open new boutiques may be impaired, the
performance of our existing and new boutiques could be materially adversely affected and our brand image may be negatively impacted.
There is a high level of competition for experienced, qualified personnel in the retail industry and we compete for personnel with
a variety of companies looking to hire for retail positions. Historically, we have prided ourselves on our commitment to employee
growth and development and we focus on promoting from within our team. Our growth plans will strain our ability to staff our new
boutiques, particularly at the boutique manager level, which could have an adverse effect on our ability to maintain a cohesive
and consistently strong team, which in turn could have an adverse impact on our business. If we are unable to attract, train and
retain employees in the future, we may not be able to serve our customers effectively, thus reducing our ability to continue our
growth and to operate our existing boutiques as profitably as we have in the past.
Union attempts to organize our employees could negatively
affect our business.
None of our employees are currently subject to a collective
bargaining agreement. As we continue to grow and enter different regions, unions may attempt to organize all or part of our employee
base at certain boutiques or within certain regions. Responding to such organization attempts may distract management and employees
and may have a negative financial impact on individual boutiques, or on our business as a whole.
We have one corporate headquarters and distribution facility
and have not yet implemented disaster recovery procedures. Disruptions to the operations at that location could have an adverse
effect on our business operations.
Our corporate headquarters and our only distribution facility
are located in Houston, Texas. Our distribution facility supports both our boutiques and our ecommerce business. A majority of
our merchandise is shipped from our vendors to the distribution facility and then packaged and shipped from our distribution facility
to our boutiques and our ecommerce customers. The success of our boutiques depends on the timely receipt of merchandise because
they must receive merchandise in a timely manner in order to stay current with the fashion preferences of our customers. The efficient
flow of our merchandise requires that we have adequate capacity and uninterrupted service in our distribution facility to support
both our current level of operations, and the anticipated increased levels that may follow from our growth plans. We believe that
our current distribution facility is capable of supporting our growth plans for several years.
If we encounter difficulties associated with our distribution
facility or if it were to shut down for any reason, including fire, hurricanes or other natural disaster or severe weather, we
could face inventory shortages resulting in “out-of-stock” conditions in our boutiques, and delays in shipments to
our customers, resulting in significantly higher costs and longer lead times associated with distributing our merchandise. See
“
The current geographic concentration of our boutiques creates an exposure to local economies, regional downturns and
severe weather or other catastrophic occurrences that may materially adversely affect our financial condition and results of operations
”
below. Also, most of our computer equipment and senior management, including critical resources dedicated to merchandising, financial
and administrative functions are located at our corporate headquarters. Our management and our operations and distribution staff
would need to find an alternative location, causing further disruption and expense to our business and operations.
We recognize the need for, and are in the early stages of, developing
disaster recovery, business continuity and document retention plans that would allow us to be operational despite casualties or
unforeseen events impacting our corporate headquarters or distribution center. Without disaster recovery, business continuity and
document retention plans, if we encounter difficulties or disasters with our distribution facility or at our corporate headquarters,
our critical systems, operations and information may not be restored in a timely manner, or at all, and this could have an adverse
effect on our business.
Our business requires that we lease substantial amounts
of space and we may not be able to continue to lease space on terms as favorable as the leases negotiated in the past.
We do not own any real estate. Instead, we lease all of our
boutique locations, as well as our corporate headquarters and distribution facility in Houston, Texas. Our boutiques are leased
from third parties, with initial lease terms of five to ten years. Many of our lease agreements also have additional five-year
renewal options. We believe that we have been able to negotiate favorable rental rates and tenant allowances over the last few
years due in large part to the state of the economy and higher than usual vacancy rates in a number of regional malls and shopping
centers. These trends may not continue, and there is no guarantee that we will be able to continue to negotiate such favorable
terms. Many of our leases have early cancellation clauses, which permit the lease to be terminated by us or the landlord if certain
sales levels are not met in specific periods or if the shopping venue does not meet specified occupancy standards. In addition
to fixed minimum lease payments, most of our boutique leases provide for additional rental payments based on a percentage of sales,
or “percentage rent,” if sales at the respective boutiques exceed specified levels, as well as the payment of common
area maintenance charges, real property insurance and real estate taxes. Many of our lease agreements have defined escalating rent
provisions over the initial term and any extensions. Increases in our already substantial occupancy costs and difficulty in identifying
economically suitable new boutique locations could have significant negative consequences, which include:
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requiring that a greater portion of our available cash be applied to pay our rental obligations, thus reducing cash available
for other purposes and reducing our profitability;
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increasing our vulnerability to general adverse economic and industry conditions; and
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limiting our flexibility in planning for, or reacting to changes in, our business or in the industry in which we compete.
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We depend on cash flow from operations to pay our lease expenses
and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities to fund these
expenses and needs and sufficient funds are not otherwise available to us, we may not be able to service our lease expenses, grow
our business, respond to competitive challenges or fund our other liquidity and capital needs, which could harm our business. Additional
sites that we lease may be subject to long-term non-cancelable leases if we are unable to negotiate our current standard lease
terms. If an existing or future boutique is not profitable, and we decide to close it, we may nonetheless be committed to perform
our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term.
Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation
under that lease. If we are not able to enter into new leases or renew existing leases on terms acceptable to us, this could have
an adverse effect on our results of operations.
Our ability to obtain merchandise on a timely basis at
competitive prices could suffer as a result of any deterioration or change in our vendor relationships or events that adversely
affect our vendors or their ability to obtain financing for their operations.
We have many important vendor relationships that we believe
provide us with a competitive advantage. We do not own or operate any manufacturing facilities. Instead, we purchase our merchandise
from third-party vendors. Our top 10 vendor vendors sourced approximately 30% of our merchandise in fiscal year 2016 with no single
vendor accounting for more than 6% of our purchases. Our business and financial performance depend in large part on our ability
to evaluate merchandise quickly for style and then modify any undesirable designs or to improve the quality, look, and fit of the
item. We do not have long-term contracts with any of these vendors and we generally operate without any contractual assurances
of continued supply, pricing or access to new products. Rather, we receive and review samples almost daily for fit and fashion
evaluation. Any of our vendors could discontinue supplying us with desired products in sufficient quantities for a variety of reasons.
The benefits we currently experience from our vendor relationships
could be adversely affected if our vendors:
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choose to stop providing merchandise samples to us or otherwise discontinue selling merchandise to us;
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raise the prices they charge us;
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change pricing terms to require us to pay on delivery or upfront, including as a result of changes in the credit relationships
some of our vendors have with their various lending institutions;
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reduce our access to styles, brands and merchandise by entering into broad exclusivity arrangements with our competitors or
otherwise in the marketplace;
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sell similar merchandise to our competitors with similar or better pricing, many of whom already purchase merchandise in significantly
greater volume and, in some cases, at lower prices than we do;
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lengthen their lead times; or
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initiate or expand sales of apparel and accessories to retail customers directly through their own stores, catalogs or on the
internet and compete with us directly.
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We historically have established good working relationships
with many small- to mid-sized vendors that often have more limited resources, production capacities and operating histories. Market
and economic events that adversely impact our vendors could impair our ability to obtain merchandise in sufficient quantities.
Such events include difficulties or problems associated with our vendors’ business, finances, labor, ability to import merchandise,
costs, production, insurance and reputation. There can be no assurance that we will be able to acquire desired merchandise in sufficient
quantities on acceptable terms or at all in the future, especially if we need significantly greater amounts of inventory in connection
with the growth of our business. We may need to develop new relationships with larger vendors, as our current vendors may be unable
to supply us with needed quantities and we may not be able to find similar merchandise on the same terms from larger vendors. If
we are unable to acquire suitable merchandise in sufficient quantities, at acceptable prices with adequate delivery times due to
the loss of or a deterioration or change in our relationship with one or more of our key vendors or events harmful to our vendors
occur, it may adversely affect our business and results of operations.
A failure in our ecommerce operations could significantly
disrupt our business and lead to reduced sales, growth prospects and reputational damage.
While accounting for only 5.0% and 3.9% of our net sales in
fiscal years 2016 and 2015, respectively, our ecommerce business is growing and is an important element of our brand and relationship
with our customers. Net sales attributable to our ecommerce business increased 42% and 18% in fiscal years 2016 and 2015, respectively.
Further expanding our ecommerce business is an important part of our growth strategy. In addition to changing consumer preferences,
shifting traffic patterns and related customer acquisition costs and buying trends in our ecommerce business, we are vulnerable
to certain additional risks and uncertainties associated with ecommerce sales, including rapid changes in technology, diversion
of sales from our boutiques, credit card fraud, website downtime and other technical failures, security breaches, consumer privacy
concerns, changes in state tax regimes and government regulation of internet activities. Our failure to successfully respond to
these risks and uncertainties could reduce our ecommerce sales, increase our costs, diminish our growth prospects, and damage our
brand, which could negatively impact our results of operations and stock price.
There is no guarantee that we will be able to further expand
our ecommerce business. Many of our competitors already have ecommerce businesses that are substantially larger and more developed
than ours, which places us at a competitive disadvantage. Moreover, online shopping has benefitted from technology improving the
online shopping experience and, in many cases, has resulted in a shift of consumer spending from brick-and-mortar to online where
competition is even greater since “pure play” internet retailers do not have significant occupancy costs and boutique
payroll expenses like we do. If we are unable to further expand our ecommerce business, our growth plans will suffer and
the price of our common stock could decline.
System security risk issues, including our failure to
protect our customers’ privacy and disruption of our internal operations or information technology systems, could harm our
reputation and adversely affect our financial results and stock price.
Experienced computer programmers and hackers, or even internal
users, may be able to penetrate or create systems disruptions or cause shutdowns of our network security or that of third-party
companies with which we have contracted to provide services. We generally collect and store customer information for marketing
purposes and any compromise of customer information could subject us to customer or government litigation and harm our reputation,
which could adversely affect our business and growth. Breaches of our system, which would compromise our customers’ private
information, might cause our customers to lose confidence in our ability to protect their personal information, which could cause
them to discontinue usage of our website or stop shopping with us altogether. The loss of confidence from a significant data security
breach involving employees could also hurt our reputation, cause employee recruiting and retention challenges, increase our labor
costs and adversely affect our business and financial results. Moreover, we could incur significant expenses or disruptions of
our operations in connection with system failures or data breaches. An increasing number of websites and retailers, including several
large internet companies and retailers, have disclosed breaches of their security, some of which have involved sophisticated and
highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade
service or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate preventative measures. Sophisticated hardware and operating system software
and applications that we buy or license from third-parties may contain defects in design or manufacture, including “bugs”
and other problems that could unexpectedly interfere with the security and operation of the systems. The costs to us to eliminate
or alleviate security problems, viruses and bugs, or any problems associated with the outsourced services provided to us, could
be significant, and efforts to address these problems could result in interruptions, delays or cessation of service that may impede
our sales, distribution or other critical functions.
Almost all states have adopted breach of data security statutes
or regulations that require notification to consumers if the security of their personal information is breached, and at least one
state has adopted regulations requiring every company that maintains or stores personal information to adopt a comprehensive written
information security program. Governmental focus on data security may lead to additional legislative action, and the increased
emphasis on information security may lead customers to request that we take additional measures to enhance security or restrict
the manner in which we collect and use customer information to gather insights into customer behavior and craft our marketing programs.
As a result, we may have to modify our business systems and practices with the goal of further improving data security, which would
result in reduced net sales, increased expenditures and operating complexity. Any compromise of our security or accidental loss
or theft of customer data in our possession could result in a violation of applicable privacy and other laws, significant legal
and financial exposure and damage to our reputation, which could adversely impact our business, results of operations and stock
price.
Our inability or failure to recognize, respond to and
effectively manage the accelerated impact of social media could materially adversely impact our business.
There has been a marked increase in the use of social media
platforms, including weblogs (blogs), social media websites (such as Facebook, Twitter and Instagram), and other forms of internet-based
communications which allow individuals access to a broad audience of consumers and other interested persons. Many social media
platforms immediately publish the content to their subscribers and participants posts, often without filters or checks on accuracy
of the content posted. The dissemination of information online could harm our business, prospects, financial condition and
results of operations, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity
for redress or correction.
Other risks associated with the use of social media include
improper disclosure of proprietary information, negative comments about our business, fraud and out-of-date information.
The inappropriate use of social media by our customers or employees could increase our costs, lead to litigation or result in negative
publicity that could damage our reputation.
The current geographic concentration of our boutiques
creates an exposure to local economies, regional downturns and severe weather or other catastrophic occurrences that may materially
adversely affect our financial condition and results of operations.
We operated 61 boutiques in Texas as of January 28, 2017, making
Texas our largest market, representing approximately 9% of our total boutiques. We also have boutique concentration in California,
Florida and the Northeast region, operating 55 boutiques, 48 boutiques and 119 boutiques in these regions, respectively, as of
January 28, 2017. As a result, our business is currently more susceptible to regional conditions than the operations of more geographically
diversified competitors, and we are vulnerable to economic downturns in those regions. Any unforeseen events or circumstances that
negatively affect these areas could materially adversely affect our sales and profitability. These factors include, among other
things, changes in demographics and population and severe weather or natural disasters.
Further, our corporate headquarters and only distribution center
are currently located at a single facility in Houston, Texas. Our single distribution center receives, stores and distributes merchandise
to all of our boutiques and fulfills all sales for our ecommerce business. Most of our computer equipment and senior management,
including critical resources dedicated to merchandising and financial and administrative functions, are located at our corporate
headquarters. As described elsewhere in the risk factors in this report, we do not have adequate disaster recovery systems and
plans at our corporate headquarters and distribution facility. As a result, our business may be more susceptible to regional natural
disasters, severe weather and catastrophes than the operations of more geographically diversified competitors. See “
We
have one corporate headquarters and distribution facility and have not yet implemented disaster recovery procedures. Disruptions
to the operations at that location could have an adverse effect on our business operations
” above.
A substantial number of our boutiques are located in the northeastern
and southeastern United States. These regions of the United States, Texas and other states along the Gulf Coast, in particular,
are prone to severe weather conditions. For example, hurricanes have passed through these regions and caused extensive damage.
Adverse weather conditions impacting these regions of the United States generally could harm our business, results of operations
and financial condition. Severe weather can also result in weather-related supply disruptions, which could impact our ability
to supply boutiques. Weather conditions can affect our net sales because inclement weather may discourage travel or require
temporary boutique closures, thereby reducing customer traffic. Unseasonably warmer weather during typically colder months
or unreasonably colder weather during typically warmer months can also affect the seasonal composition and demand for our merchandise,
which could harm our business, results of operations and financial condition.
All of our boutique locations expose us to additional diverse
risks, given that natural disasters or other unanticipated catastrophes, such as telecommunications failures, cyber-attacks, fires
or terrorist attacks, can occur anywhere and could cause disruptions in our operations. Extensive or multiple disruptions in our
operations, whether at our boutiques or our corporate headquarters and distribution center, due to natural disasters, severe weather or
other catastrophes could have an adverse effect on our business, results of operations and stock price.
Our results may be adversely affected by fluctuations
in energy costs.
Energy costs have fluctuated dramatically in the past and may
fluctuate in the future. These fluctuations may result in an increase in our transportation costs for distribution, utility costs
for our retail boutiques and costs to purchase product from our vendors. A continual rise in energy costs could adversely affect
consumer spending and demand for our merchandise and increase our operating costs and we may be unable to pass along to our customers
such increased cost, all of which could have a material adverse effect on our business, results of operations and stock price.
Our net sales and merchandise fluctuate on a seasonal
basis, leaving our operating results susceptible to adverse changes in seasonal shopping patterns, weather and related risks.
Due to the seasonal nature of the retail industry, we have historically
experienced and expect to continue to experience some fluctuations in our net sales and net income. Our net sales and earnings
are typically highest in the fourth fiscal quarter due to the year-end holiday season. Net sales during this period cannot be used
as an accurate indicator of annual results. Likewise, as is the case with many retailers of apparel, jewelry, accessories and gifts,
we typically experience lower net sales in the first fiscal quarter relative to other quarters. If for any reason, including for
example poor weather conditions, soft economic environments and loss of consumer confidence, our net sales were below seasonal
norms or expectations during typically higher-volume time periods, our net sales, inventory levels and results of operations could
be adversely affected. In order to prepare for these periods, we must order and keep in stock significantly more merchandise than
we carry during other parts of the year. This inventory build-up may require us to expend cash faster than is generated by our
operations during these periods. Any unanticipated decrease in demand for our merchandise during peak shopping periods could result
in excess inventory levels which could require us to sell or dispose excess inventory at a substantial markdown, which could have
an adverse effect on our business, profitability and brand image. We may experience variability in net sales as a result of a variety
of other factors, including the timing of new boutique openings, boutique events, other marketing activities, sales tax holidays
and other holidays, which may cause our results of operations to fluctuate on a quarterly basis and relative to corresponding periods
in prior years.
If our vendors fail to comply with applicable laws, including
a failure to use acceptable labor practices, or if our vendors suffer disruptions in their businesses, we could suffer adverse
business consequences.
Our vendors source the merchandise sold in our boutiques and
our ecommerce website from manufacturers both inside and outside of the United States. Although each of our purchase orders is
subject to our vendor manuals or policies, which require compliance with labor, immigration, manufacturing and product safety,
environmental and other laws, we do not supervise, control or audit our vendors or the manufacturers that produce the merchandise
we sell. The violation, or perception of any violation, of any labor, immigration, manufacturing safety or other laws by any of
our vendors or their U.S. and non-U.S. manufacturers, such as use of child labor, or the divergence of the labor practices followed
by any of our vendors or these manufacturers from those generally accepted in the United States, could damage our brand image or
subject us to boycotts by our customers or activist groups.
Any event causing a sudden disruption of manufacturing or imports,
including the imposition of additional import restrictions, could interrupt, or otherwise disrupt the shipment of finished products
to us by our vendors and materially harm our operations. Political and financial instability outside the United States, strikes,
adverse weather conditions or natural disasters that may occur or acts of war or terrorism in the United States or worldwide, may
affect the production, shipment or receipt of merchandise. These factors, which are beyond our control, could materially hurt our
business, financial condition and results of operations or may require us to modify our current business practices or incur increased
costs.
Changes in laws, including employment laws and laws related
to our merchandise could make conducting our business more expensive or otherwise cause us to change the way we do business.
We are subject to numerous regulations, including labor and
employment, truth-in-advertising, consumer protection, product safety, environmental and zoning and occupancy laws and ordinances
that regulate retailers generally or govern the promotion and sale of merchandise and the operation of boutiques and warehouse
facilities. If these regulations were to change or were violated by our management, employees or vendors, the costs of certain
goods could increase, or we could experience delays in shipments of our goods, be subject to fines, penalties or other liabilities
or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations.
In addition to increased regulatory compliance requirements,
changes in laws could make the ordinary conduct of our business more expensive or require us to change the way we do business.
Laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours, immigration
laws, child labor laws, supervisory status, leaves of absence, mandated health benefits or overtime pay, could also negatively
impact us, such as by increasing compensation and benefits costs for overtime and medical expenses. Moreover, changes in product
safety or other consumer protection laws could lead to increased costs to us for some merchandise, or additional labor costs associated
with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to applicable laws,
and future actions or payments related to these changes could be material to us.
The new administration may make substantial changes to
policies, including fiscal, trade, regulatory and tax policies, that may adversely affect our business.
The new administration has called for substantial change to
policies, including, fiscal, trade, regulatory and tax policies, which may include comprehensive tax reform. We cannot predict
the impact, if any, of these changes to our business. However, it is possible that these changes could adversely affect our business.
It is likely that some policies adopted by the new administration will benefit us and others will negatively affect us. Until we
know what changes are enacted, we will not know whether in total we benefit from, or are negatively affected by, the changes. Any
negative economic effects of instability resulting from the transition to a new administration, including changes in the political
environment and policy changes, may negatively impact our business, financial condition and results of operations.
We will require significant capital to fund our expanding
business, which may not be available to us on satisfactory terms or at all. We plan to use cash from operations to fund our operations
and execute our growth strategy. If we are unable to maintain sufficient levels of cash flow, we may not meet our growth expectations
or we may require additional financing which could adversely affect our financial health and impose covenants that limit our business
activities.
We plan to continue our growth and expansion, including opening
a number of new boutiques, remodeling existing boutiques and upgrading our information technology systems and other infrastructure
as opportunities arise. Our plans to expand our boutique base may not be successful and the implementation of these plans may not
result in expected increases in our net sales even though they increase our costs. To support our expanding business and execute
on our growth strategy, we will require significant capital.
We currently primarily depend on cash flow from operations and
our revolving credit facility to fund our business and growth plans. If our business does not generate sufficient cash flow from
operations to fund these activities, and sufficient funds are not otherwise available to us from our revolving credit facility,
we may need additional equity or debt financing. If such financing is not available to us, or is not available on satisfactory
terms, our ability to operate and expand our business or respond to competitive pressures would be curtailed and we may need to
delay, limit or eliminate planned boutique openings or operations or other elements of our growth strategy. If we raise additional
capital by issuing equity securities or securities convertible into equity securities, your ownership would be diluted.
We may incur additional indebtedness in the future, which
may require us to use a substantial portion of our cash flow to service debt and limit our financial and operating flexibility
in important ways.
We may incur additional indebtedness in the future. Any borrowings
under any future debt financing will require interest payments and need to be repaid or refinanced, could require us to divert
funds identified for other purposes to debt service and would create additional cash demands and could impair our liquidity position
and add financial risk for us. Diverting funds identified for other purposes for debt service may adversely affect our business
and growth prospects. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance
our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we would be able to take any of these
actions on a timely basis, on terms satisfactory to us, or at all.
Our level of indebtedness has important consequences to you
and your investment in our common stock. For example, our level of indebtedness may:
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require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would
reduce the funds available to us for working capital, capital expenditures and other general corporate purposes;
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limit our ability to pay future dividends;
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limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments,
which may limit our ability to implement our business strategy;
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heighten our vulnerability to downturns in our business, the specialty apparel and accessories retail industry or in the general
economy and limit our flexibility in planning for, or reacting to, changes in our business and the specialty apparel and accessories
retail industry; or
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prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our
boutique base and product offerings.
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Our business may not generate sufficient cash flow from operations
and future borrowings may not be available to us in amounts sufficient to enable us to make payments on our indebtedness or to
fund our operations.
The terms of our revolving credit facility do, and the
terms of any additional debt financing may, restrict our current and future operations, which could adversely affect our ability
to manage our operations and respond to changes in our business.
Our revolving credit facility contains, and any additional debt
financing we may incur would likely contain, covenants that restrict our operations, including limitations on our ability to incur
additional debt, grant liens, make certain investments, acquisitions loans and advances, sell assets, pay dividends or make
distributions or other restricted payments, prepay other indebtedness, engage in mergers or consolidations, change the business
conducted by Francesca’s Collections and its subsidiaries, engage in certain transactions with affiliates, enter into
agreements that restrict dividends from subsidiaries or amend certain charter documents and material agreements governing subordinated
and junior indebtedness. A failure by us to comply with the covenants or financial ratios contained in our revolving credit facility
or any additional debt financing we may incur could result in an event of default, which could adversely affect our ability to
respond to changes in our business and manage our operations. Upon the occurrence of an event of default, the lenders could elect
to declare all amounts outstanding to be due and payable and exercise other remedies. If the indebtedness under our revolving credit
facility or any additional debt financing we may incur were to be accelerated, our future financial condition could be materially
adversely affected.
We are involved on an ongoing basis in litigation arising
in the ordinary course of 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 litigation 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.
We may be unable to protect our trademarks or other intellectual
property rights.
We believe that our trademarks are integral to our boutique
design, our ecommerce business and our success in building our brand image and customer loyalty. We rely on trademark registrations
and common law trademark rights to protect the distinctiveness of our brand and have registered those trademarks that we believe
are important to our business with the United States Patent and Trademark Office. We cannot provide assurance that these registrations
will prevent imitation of our name, merchandising concept, boutique design or private label merchandise, or the infringement of
our other intellectual property rights by others. In most cases, the merchandise we sell is purchased on a non-exclusive basis
from vendors that also sell to our competitors. While we use our brand name on these items, our competitors may seek to replicate
aspects of our business strategy and in-boutique experience, thereby diluting the experience we offer and adversely affecting our
brand and competitive position. Imitation of our name, concept, boutique design or merchandise in a manner that projects lesser
quality or carries a negative connotation of our brand image could have an adverse effect on our business, financial condition
and results of operations.
We are not aware of any claims of infringement upon or challenges
to our right to use any of our brand names or trademarks in the United States. Nevertheless, we cannot be certain that the actions
we have taken to establish and protect our trademarks will be adequate to prevent imitation of our merchandise by others or to
prevent others from seeking to block sales of our merchandise as a violation of the trademarks or proprietary rights of others.
Although we cannot currently estimate the likelihood of success of any such lawsuit or ultimate resolution of such a conflict,
such a controversy could have an adverse effect on our business, financial condition and results of operations. If disputes arise
in the future, we may not be able to successfully resolve these types of conflicts to our satisfaction.
We are currently in the process of registering our trademarks
in several foreign countries to seek protection outside the United States. However, international protection of our brand image
and the use of these marks may be unavailable or could be limited. Also, other entities may have rights to trademarks that contain
portions of our marks or may have registered similar or competing marks for merchandise in foreign countries in which our vendors
source our merchandise. There may also be other prior registrations of trademarks identical or similar to our trademarks in other
foreign countries of which we are not aware. Accordingly, it may be possible for others to prevent the manufacture of our branded
goods in certain foreign countries or the sale or exportation of our branded goods from certain foreign countries to the United
States. If we were unable to reach a licensing arrangement with these parties, our vendors may be unable to manufacture our merchandise
in those countries. Our inability to register our trademarks or purchase or license the right to use our trademarks or logos in
these jurisdictions could limit our ability to obtain supplies from less costly markets or penetrate new markets should our business
plan change to include selling our merchandise in those foreign jurisdictions.
Litigation may be necessary to protect our trademarks and other
intellectual property rights or to enforce these rights. Any litigation or claims brought by us could result in substantial costs
and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations
or cash flows.
We may be subject to liability and other risks if we,
our vendors or the manufacturers of our merchandise infringe upon the trademarks or other intellectual property rights of third
parties, including the risk that we could acquire merchandise from our vendors without the full right to sell it.
We purchase merchandise that may be subject to design copyrights,
design patents or otherwise may incorporate protected intellectual property. While we are not involved in the manufacture of any
of the merchandise we purchase from our vendors for sale to our customers, we may be subject to liability if our vendors or the
manufacturers of our merchandise infringe upon the trademarks or other intellectual property rights of third parties. We do not
independently investigate whether our vendors or the manufacturers with whom they do business legally hold intellectual property
rights to the merchandise we purchase. Third parties may bring legal claims, or threaten to bring legal claims, against us that
their intellectual property rights are being infringed or violated by our use of intellectual property. Litigation or threatened
litigation could be costly and distract our senior management from operating our business. If we were to be found liable for any
such infringement, we could be required to pay substantial damages and could be subject to injunctions preventing further infringement.
Any payments we are required to make and any injunctions with which we are required to comply as a result of infringement claims
could be costly and thereby adversely affect our financial results.
If a third party claims to have licensing rights with respect
to merchandise we purchased from a vendor, or if we acquire unlicensed merchandise, we may be obligated to remove this merchandise
from our boutiques, incur costs associated with this removal if the distributor or vendor is unwilling or unable to reimburse us
and be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royalties and
other damages and injunctions. Additionally, we will be required to purchase new merchandise to replace any we remove.
We rely upon independent third-party transportation providers
for substantially all of our merchandise shipments.
We currently rely upon independent third-party transportation
providers for substantially all of our merchandise shipments, including shipments to all of our boutiques and our direct customers.
Our use of outside delivery services for shipments is subject to risks, including increases in fuel prices, which would increase
our shipping costs, and employee strikes and inclement weather, which may impact a shipper’s ability to provide delivery
services that adequately meet our shipping needs. If we change shipping companies, we could face logistical difficulties that could
adversely impact deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not
be able to obtain terms as favorable as those received from the independent third-party transportation providers we currently use,
which would increase our costs.
Disruptions in transportation, including disruptions at
shipping ports through which our merchandise are imported, could prevent us from timely distribution and delivery of merchandise,
which could reduce our net sales and operating margin.
From time to time, shipping ports experience capacity constraints,
labor strikes, work stoppages or other disruptions that may delay the delivery of imported products. A lengthy contract dispute
may lead to protracted delays in the movement of our merchandise, which could further delay the delivery of merchandise to our
boutiques and impact net sales and operating margin. Other conditions outside of our control, such as adverse weather conditions
or acts of terrorism, could significantly disrupt operations at shipping ports or otherwise impact transportation of the imported
merchandise we sell.
Future disruptions in transportation services or at a shipping
port at which our merchandise are received may result in delays in the transportation of such merchandise to our distribution center
and may ultimately delay the distribution to our boutiques resulting in reduced net sales and / or profitability.
Our ability to source our merchandise efficiently and
profitably could be hurt if new trade restrictions are imposed, existing trade restrictions become more burdensome, or the countries
where our merchandise are sourced experience political instability.
We currently purchase all of our inventory from domestic vendors,
who source our merchandise both domestically and internationally. We believe most of the merchandise sourced by our vendors was
produced outside the United States. These vendors, to the extent they obtain merchandise from outside of the United States, are
subject to trade restrictions, including tariffs, safeguards or quotas, changes to which could increase the cost or reduce the
supply of merchandise available to us. Under the World Trade Organization Agreement, effective January 1, 2005, the United
States and other World Trade Organization member countries removed quotas on goods from World Trade Organization members, which
in certain instances we believe afford our vendors greater flexibility in importing textile and apparel products from World Trade
Organization countries from which they source our merchandise. However, as the removal of quotas resulted in an import surge from
China, the United States imposed safeguard quotas on a number of categories of goods and apparel from China, and may impose additional
quotas in the future. The new administration has called for substantial changes to the United States trade agreements, including
imposing tariffs or border-adjusted taxes on imports to the United States of good manufactured outside the United States. These
and other trade restrictions could have a significant impact on our vendors’ sourcing patterns in the future. The extent
of this impact, if any, and the possible effect on our purchasing patterns and costs, cannot be determined at this time. We cannot
predict whether any of the countries in which our vendors’ merchandise is currently manufactured or may be manufactured in
the future will be subject to additional trade restrictions imposed by the United States or foreign governments, nor can we predict
the likelihood, type or effect of any restrictions. Trade restrictions, including increased tariffs or quotas, embargoes, safeguards
and customs restrictions against items we offer in our boutiques, as well as United States or foreign labor strikes, work stoppages
or boycotts, could increase the cost or reduce the supply of merchandise to our vendors, and we would expect the costs to be passed
along in increased prices to us, which could hurt our profitability.
Additionally, political instability or acts of terrorism, significant
fluctuations in the value of the U.S. dollar against foreign currencies and restrictions on the transfer of funds between the U.S.
and foreign jurisdictions, any of which if they effect the countries where our merchandise are sourced, could adversely affect
our merchandise flow and, consequently, cause our sales to decline.
We may be subject to sales tax in states where we operate
our ecommerce business, which could have an adverse effect on our business, financial condition and results of operations.
Under current state and federal laws, we are not required to
collect and remit sales tax in some states where we sell through our ecommerce business. Legislation is pending in some states
that may require us to collect and remit sales tax on ecommerce sales or institute use tax reporting. If states pass sales or use
tax laws, we may need to collect and remit current and past sales tax and could face greater exposure to income tax and franchise
taxes in these states. Any increase in sales tax or use tax reporting on our internet sales could discourage customers from purchasing
through our ecommerce business, which could have an adverse effect on growth prospects.
Increases in the minimum wage could have an adverse effect
on our financial results.
From time to time, legislative proposals are made to increase
the federal minimum wage in the United States, as well as the minimum wage in a number of individual states and municipalities.
Legislation to increase the minimum wage is currently pending or being contemplated in some states in which we operate. Base wage
rates for many of our employees are at or slightly above the minimum wage. As federal or state minimum wage rates increase, we
may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly employees
as well. Any increase in the cost of our labor could have an adverse effect on our operating costs, financial condition and results
of operations.
Anti-takeover provisions of Delaware law and our certificate
of incorporation and bylaws could delay and discourage takeover attempts that stockholders may consider to be favorable.
Our amended and restated certificate of incorporation and amended
and restated bylaws contain provisions that make it difficult for our stockholders to change the composition of our board of directors,
preventing them from changing the composition of management. The same provisions may discourage, delay or prevent a merger or acquisition
that our stockholders may consider favorable. These provisions, among other things:
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establish a staggered, or classified, board of directors so that not all members of our board of directors are elected at one
time;
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prohibit cumulative voting in the election of directors;
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authorize the issuance by our board of directors of “blank check” preferred stock, the terms of which may be established
and the shares of which may be issued without stockholder approval, and which may include super-majority voting, special approval,
dividend or other rights or preferences superior to the rights of the holders of common stock;
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limit the persons who may call special meetings of stockholders;
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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
and
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establish advance notice requirements for stockholder nominations for elections to our board of directors or for proposing
matters that can be acted upon by stockholders at stockholder meetings.
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These anti-takeover provisions and other provisions under Delaware
law could substantially impede the ability of our common stockholders to benefit from a change in control and, as a result, could
materially adversely affect the market price of our common stock and your ability to realize any potential change-in-control premium.
Our costs to comply with changing regulations applicable
to public companies are significant and our management is required to devote substantial time in complying with these public company
regulations.
As a public company, we are required to incur additional legal,
accounting, compliance and other expenses that private companies do not incur. We are obligated to file with the SEC annual and
quarterly information and other reports that are specified in Section 13 and other sections of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). We are also subject to other reporting and corporate governance requirements,
including certain requirements of The NASDAQ Stock Market, certain provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”),
certain provisions of the Dodd-Frank Act of 2010 (“Dodd-Frank”) and the regulations promulgated thereunder, which impose
significant compliance obligations upon us. We must be certain that we have the ability to institute and maintain a comprehensive
compliance function; established internal policies; ensure that we have the ability to prepare financial statements that are fully
compliant with all SEC reporting requirements on a timely basis; design, establish, evaluate and maintain a system of internal
controls over financial reporting in compliance with Sarbanes-Oxley; involve and retain outside counsel and accountants in the
above activities and maintain an investor relations function.
Sarbanes-Oxley and Dodd-Frank, as well as rules subsequently
implemented by the SEC and The NASDAQ Stock Market, have imposed increased regulation and disclosure and have required enhanced
corporate governance practices of public companies. Our efforts to comply with evolving laws, regulations and standards in this
regard have resulted and will likely continue to result in increased administrative expenses and a diversion of management’s
time and attention from revenue-generating activities to compliance activities. These require a significant commitment of additional
resources. We may not be successful in implementing or maintaining these requirements, any failure of which could materially adversely
affect our business, results of operations and financial condition. If we fail to implement or maintain the requirements with respect
to our internal accounting and audit functions, our ability to continue to report our operating results on a timely and accurate
basis could be impaired. If we do not implement or maintain such requirements in a timely manner or with adequate compliance, we
might be subject to sanctions or investigation by regulatory authorities, such as the SEC or The NASDAQ Stock Market. Any such
action could harm our reputation and the confidence of investors and customers in our company and could materially adversely affect
our business and cause our share price to fall.