ITEM 1. FINANCIAL STATEMENTS
Francesca’s Holdings Corporation
Unaudited Consolidated Balance Sheets
(In thousands, except share amounts)
|
|
May 3,
2014
|
|
|
February 1,
2014
|
|
|
May 4,
2013
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,413
|
|
|
$
|
37,498
|
|
|
$
|
33,763
|
|
Accounts receivable
|
|
|
10,822
|
|
|
|
8,984
|
|
|
|
7,645
|
|
Inventories
|
|
|
28,779
|
|
|
|
24,614
|
|
|
|
23,330
|
|
Deferred income taxes
|
|
|
4,643
|
|
|
|
4,565
|
|
|
|
3,567
|
|
Prepaid expenses and other current assets
|
|
|
6,179
|
|
|
|
6,764
|
|
|
|
4,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
75,836
|
|
|
|
82,425
|
|
|
|
73,077
|
|
Property and equipment, net
|
|
|
69,799
|
|
|
|
64,131
|
|
|
|
55,729
|
|
Deferred income taxes
|
|
|
3,113
|
|
|
|
2,335
|
|
|
|
2,893
|
|
Other assets, net
|
|
|
1,724
|
|
|
|
1,654
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
150,472
|
|
|
$
|
150,545
|
|
|
$
|
133,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,758
|
|
|
$
|
10,207
|
|
|
$
|
8,623
|
|
Accrued liabilities
|
|
|
9,640
|
|
|
|
9,823
|
|
|
|
14,010
|
|
Total current liabilities
|
|
|
19,398
|
|
|
|
20,030
|
|
|
|
22,633
|
|
Landlord incentives and deferred rent
|
|
|
32,333
|
|
|
|
27,448
|
|
|
|
26,151
|
|
Long-term debt
|
|
|
15,000
|
|
|
|
25,000
|
|
|
|
—
|
|
Total liabilities
|
|
|
66,731
|
|
|
|
72,478
|
|
|
|
48,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - $.01 par value, 80.0 million shares authorized; 45.4 million, 45.2 million and 44.0 million shares issued at May 3, 2014, February 1, 2014 and May 4, 2013, respectively.
|
|
|
454
|
|
|
|
452
|
|
|
|
440
|
|
Additional paid-in capital
|
|
|
103,574
|
|
|
|
101,192
|
|
|
|
86,464
|
|
Retained earnings (accumulated deficit)
|
|
|
39,856
|
|
|
|
31,296
|
|
|
|
(2,606
|
)
|
Treasury stock, at cost – 3.2 million, 2.9 million and 0 shares held at May 3, 2014, February 1, 2014 and May 4, 2013, respectively.
|
|
|
(60,143
|
)
|
|
|
(54,873
|
)
|
|
|
—
|
|
Total stockholders’ equity
|
|
|
83,741
|
|
|
|
78,067
|
|
|
|
84,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
150,472
|
|
|
$
|
150,545
|
|
|
$
|
133,082
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Operations
(In thousands, except per share data)
|
|
Thirteen Weeks Ended
|
|
|
|
May 3,
2014
|
|
|
May 4,
2013
|
|
Net sales
|
|
$
|
85,424
|
|
|
$
|
78,987
|
|
Cost of goods sold and occupancy costs
|
|
|
43,592
|
|
|
|
37,615
|
|
Gross profit
|
|
|
41,832
|
|
|
|
41,372
|
|
Selling, general and administrative expenses
|
|
|
27,812
|
|
|
|
23,351
|
|
Income from operations
|
|
|
14,020
|
|
|
|
18,021
|
|
Interest expense
|
|
|
(221
|
)
|
|
|
(116
|
)
|
Other income
|
|
|
103
|
|
|
|
83
|
|
Income before income tax expense
|
|
|
13,902
|
|
|
|
17,988
|
|
Income tax expense
|
|
|
5,342
|
|
|
|
7,051
|
|
Net income
|
|
$
|
8,560
|
|
|
$
|
10,937
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.20
|
|
|
$
|
0.25
|
|
Diluted earnings per common share
|
|
$
|
0.20
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
42,189
|
|
|
|
43,939
|
|
Diluted shares
|
|
|
42,362
|
|
|
|
44,880
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statement of Changes
in Stockholders’ Equity
(In thousands)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
Par
Value
|
|
|
Additional
Paid-in Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock, at cost
|
|
|
Total
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 1, 2014
|
|
|
42,349
|
|
|
$
|
452
|
|
|
$
|
101,192
|
|
|
$
|
31,296
|
|
|
$
|
(54,873
|
)
|
|
$
|
78,067
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,560
|
|
|
|
—
|
|
|
|
8,560
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
832
|
|
|
|
—
|
|
|
|
—
|
|
|
|
832
|
|
Stock options exercised and related tax benefit
|
|
|
150
|
|
|
|
2
|
|
|
|
1,550
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,552
|
|
Repurchases of common stock
|
|
|
(285
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,270
|
)
|
|
|
(5,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 3, 2014
|
|
|
42,214
|
|
|
$
|
454
|
|
|
$
|
103,574
|
|
|
$
|
39,856
|
|
|
$
|
(60,143
|
)
|
|
$
|
83,741
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Cash Flows
(In thousands)
|
|
Thirteen Weeks Ended
|
|
|
|
May 3,
2014
|
|
|
May 4,
2013
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,560
|
|
|
$
|
10,937
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
2,982
|
|
|
|
2,237
|
|
Stock-based compensation expense
|
|
|
832
|
|
|
|
990
|
|
Excess tax benefit from stock-based compensation
|
|
|
(581
|
)
|
|
|
(2,373
|
)
|
Loss on sale of assets
|
|
|
17
|
|
|
|
110
|
|
Amortization of debt issuance costs
|
|
|
61
|
|
|
|
73
|
|
Deferred income taxes
|
|
|
(855
|
)
|
|
|
(597
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,256
|
)
|
|
|
(5,141
|
)
|
Inventories
|
|
|
(4,164
|
)
|
|
|
(4,281
|
)
|
Prepaid expenses and other assets
|
|
|
453
|
|
|
|
93
|
|
Accounts payable
|
|
|
(1,039
|
)
|
|
|
265
|
|
Accrued liabilities
|
|
|
(185
|
)
|
|
|
5,717
|
|
Landlord incentive and deferred rent
|
|
|
4,885
|
|
|
|
4,059
|
|
Net cash provided by operating activities
|
|
|
9,710
|
|
|
|
12,089
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Used in Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(8,078
|
)
|
|
|
(8,517
|
)
|
Net cash used in investing activities
|
|
|
(8,078
|
)
|
|
|
(8,517
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows Provided by (Used in) Financing Activities:
|
|
|
|
|
|
|
|
|
Repayments of borrowings under the revolving credit facility
|
|
|
(10,000
|
)
|
|
|
-
|
|
Repurchases of common stock
|
|
|
(5,270
|
)
|
|
|
-
|
|
Proceeds from the exercise of stock options
|
|
|
972
|
|
|
|
221
|
|
Taxes paid related to net settlement of equity awards
|
|
|
-
|
|
|
|
(2,280
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
581
|
|
|
|
2,373
|
|
Net cash provided by (used in) financing activities
|
|
|
(13,717
|
)
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(12,085
|
)
|
|
|
3,886
|
|
Cash and cash equivalents, beginning of year
|
|
|
37,498
|
|
|
|
29,877
|
|
Cash and cash equivalents, end of period
|
|
$
|
25,413
|
|
|
$
|
33,763
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
459
|
|
|
$
|
2,372
|
|
Interest paid
|
|
$
|
181
|
|
|
$
|
40
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements
.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
1.
|
Summary of Significant Accounting Policies
|
Nature of Business
Francesca’s Holdings Corporation
is a holding company incorporated in 2007 under the laws of the State of Delaware whose business operations are conducted
through its subsidiaries. Unless the context otherwise requires, the “Company,” refers to Francesca’s
Holdings Corporation and its consolidated subsidiaries. The Company operates a national chain of retail boutiques designed and
merchandised to feel like independently owned, upscale boutiques and provide its customers with an inviting, intimate and fun shopping
experience. The Company offers a diverse and balanced mix of apparel, jewelry, accessories and gifts at attractive prices. At May
3, 2014, the Company operated 513 boutiques, which are located in 46 states throughout the United States and the
District of Columbia, and its direct-to-consumer website.
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission
(“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, these unaudited financial statements include all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation of the Company’s financial position, results of operations, changes
in equity, and cash flows at the dates and for the periods presented. The financial information as of February 1, 2014 was derived
from the Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended February
1, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2014.
These unaudited interim consolidated financial
statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes as
of and for the fiscal year ended February 1, 2014 included in the Company’s Annual Report on Form 10-K.
Due to seasonal variations in the retail
industry, interim results are not necessarily indicative of results that may be expected for any other interim period or for a
full year.
Principles of Consolidation
The accompanying unaudited consolidated
financial statements include the accounts of the Company and all its subsidiaries. All inter-company balances and transactions
have been eliminated in consolidation.
Fiscal Year
The Company maintains its accounts on a
52- or 53-week year ending on the Saturday closest to January 31st. Fiscal years 2014 and 2013 each include 52 weeks of operations.
The fiscal quarters ended May 3, 2014 and May 4, 2013 refer to the thirteen-week periods ended as of those dates.
Management Estimates and Assumptions
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, net of estimated
sales return, and expenses during the reporting periods. Actual results could differ materially from those estimates.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
Recent Accounting Pronouncements
In May 2014 the Financial Accounting Standards
Board issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with
Customers.” This pronouncement was issued to improve the financial reporting of revenue and improve comparability of the
top line in financial statements globally and is effective for reporting periods beginning on or after December 15, 2016. The Company
is in the process of assessing the provisions of this new guidance and has not determined whether the adoption will have a material
impact on our consolidated financial statements.
Subsequent Event
In June 2014 management determined
that the Company should dispose of sufficient amounts of slow moving inventory during the second fiscal quarter to accelerate the
flow of new merchandise into its boutiques. The Company estimates that during the second quarter it will dispose of approximately
$2.5 to $3.5 million of inventory at cost before taxes or $0.04 to $0.05 diluted earnings per share.
Basic earnings per common share amounts
are calculated using the weighted-average number of common shares outstanding for the period. Diluted earnings per common share
amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact
of stock options and restricted stock grants using the treasury stock method.
The following table summarizes the potential
dilution that could occur if options to acquire common stock were exercised or if the restricted stock grants were fully vested
and reconciles the weighted-average common shares outstanding used in the computation of basic and diluted earnings per share:
|
|
Thirteen Weeks Ended
|
|
|
|
May 3, 2014
|
|
|
May 4, 2013
|
|
|
|
(in thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,560
|
|
|
$
|
10,937
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
|
42,189
|
|
|
|
43,939
|
|
Options and other dilutive securities
|
|
|
173
|
|
|
|
941
|
|
Weighted-average common shares outstanding - diluted
|
|
|
42,362
|
|
|
|
44,880
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.20
|
|
|
$
|
0.25
|
|
Diluted earnings per common share
|
|
$
|
0.20
|
|
|
$
|
0.24
|
|
Stock options to purchase common stock
in the amount of 0.8 million shares in each of the thirteen weeks ended May 3, 2014 and May 4, 2013 were not included in the computation
of diluted earnings per share due to their anti-dilutive effect.
|
3.
|
Fair value of Financial Instruments
|
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The carrying amount reflected in the consolidated balance sheets of financial assets and liabilities, which includes
cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their fair values due to
the short term nature of these financial assets and liabilities. The carrying amount of the Company’s debt approximates its
fair value primarily due to the variable component of interest on debt.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
The provision for income taxes is based
on the current estimate of the annual effective tax rate. The effective income tax rates for the thirteen weeks ended May 3, 2014
and May 4, 2013 were 38.4% and 39.2%, respectively. The difference between our effective tax rate and federal statutory rate primarily
relates to state income taxes.
|
5.
|
Revolving Credit Facility
|
On August 30, 2013, Francesca’s
Collections, Inc. (“Francesca’s Collections” or the “Borrower”), as borrower, and its parent
company, Francesca’s LLC, a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Credit
Agreement with Royal Bank of Canada, as Administrative Agent and Collateral Agent, and the lenders party thereto. The credit
facility provides capacity of $75.0 million (including up to $10.0 million for letters of credit) and matures
on August 30, 2018. The facility also contains an option permitting the Borrower, subject to certain
requirements and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate of
$25.0 million, subject to reductions in the event the Borrower has certain indebtedness outstanding. At May 3, 2014, $15.0 million was outstanding under the credit facility and no letters
of credit were outstanding.
The credit facility contains customary
events of default and requires the Borrower to comply with certain financial covenants. As of May 3, 2014, the Borrower was in
compliance with all covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can
pay; provided that the Borrower is permitted to pay dividends to the extent it has available capacity in its available investment
basket (as defined in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain
procedural requirements have been satisfied and the Borrower is in pro forma compliance with a maximum secured leverage ratio.
At May 3, 2014, the Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations
under the credit facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All
obligations under the facility are unconditionally guaranteed by, subject to certain exceptions, by Francesca’s LLC and
each of the Borrower’s existing and future direct and indirect wholly-owned domestic subsidiaries.
|
6.
|
Stock-based Compensation
|
The Company’s employees participate
in various stock-based compensation plans, including stock options and restricted stock awards.
Stock-based compensation cost is measured
at the grant date fair value and is recognized as an expense on a straight-line basis over the employee’s requisite service
period (generally the vesting period of the equity grant). The Company estimates forfeitures for grants that are not expected to
vest. The stock-based compensation cost recognized in the thirteen weeks ended May 3, 2014 and May 4, 2013 totaled $0.8 million
and $1.0 million, respectively.
Stock Options
During the thirteen weeks ended May 3,
2014 and May 4, 2013, the intrinsic value of stock options exercised totaled $2.0 million and $6.3 million, respectively, while
stock options were granted at a weighted average grant date fair value of $11.11 and $15.28, respectively.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
As of May 3, 2014 there was approximately
$6.9 million of unrecognized compensation cost related to non-vested stock options that is expected to be recognized over a weighted-average
period of 2.6 years.
Restricted Stock Awards
On April 11, 2014, the Company
awarded 158,451 service and performance-based restricted stock awards to certain executives and other key employees. These
awards entitle the grantee to receive a maximum of 1.5 shares of common stock per service and performance-based restricted
stock award if the Company achieves specified annual performance goals set at the beginning of each year over a three year
period. The grantee may earn a portion of the award based on the annual performance of each individual year but must remain
with the Company for the entire three year vesting period to receive such awards. Specified performance goals include the
achievement of certain levels of earnings per share and net sales growth. The fair value of the restricted stock awards is
based on the closing price of the Company’s common stock on the award date, which was $17.04 per share for those awards
related to the fiscal 2014 performance period. Compensation expense is recognized when it is probable that
specified performance goals will be achieved. Such compensation is recognized from the award date over the remaining vesting
period.
On
September 3, 2013, the Company’s Board of Directors authorized a $100.0 million share repurchase program commencing
on the same date. This authorization has no expiration date. Under the repurchase program, purchases can
be made from time to time in the open market, in privately negotiated transactions, under Rule 10b5-1 plans or through other available
means. The specific timing and amount of the repurchases is dependent on market conditions, securities law limitations
and other factors. During the thirteen weeks ended May 3, 2014, the Company repurchased 285,000 shares
of its common stock at a cost of approximately $5.3 million or an average price (including brokers’ commission) of $18.49 per
share. The cost of repurchased shares is presented as treasury stock in the unaudited consolidated balance sheets. As
of May 3, 2014, the remaining balance available for future share repurchase was approximately $39.9 million.
|
8.
|
Commitment and Contingencies
|
Operating Leases
The Company leases boutique space and office
space under operating leases expiring in various years through the fiscal year ending 2025. Certain of the leases provide that
the Company may cancel the lease, with penalties as defined in the lease, if the Company’s boutique sales at that location
fall below an established level. Certain leases provide for additional rent payments to be made when sales exceed a base amount.
Certain operating leases provide for renewal options for periods from three to five years at their fair rental value at the time
of renewal.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
Minimum future rental payments under non-cancellable operating
leases as of May 3, 2014, are as follows:
Fiscal year
|
|
Amount
|
|
|
|
(In thousands)
|
|
Remainder of 2014
|
|
$
|
24,089
|
|
2015
|
|
|
32,654
|
|
2016
|
|
|
31,920
|
|
2017
|
|
|
30,595
|
|
2018
|
|
|
28,609
|
|
Thereafter
|
|
|
80,042
|
|
|
|
$
|
227,909
|
|
Legal Proceedings
On September 27, 2013 and November 4, 2013,
two purported class action lawsuits entitled
Ortuzar v. Francesca’s Holdings Corp., et al.
and
West Palm Beach
Police Pension Fund v. Francesca’s Holdings Corp., et al.
were filed in the United States District Court for the
Southern District of New York against the Company and certain of its current and former directors and officers for alleged violations
of the federal securities laws arising from statements in certain public disclosures regarding the Company’s current and
future business and financial condition. On December 19, 2013, the Court consolidated the actions and appointed Arkansas
Teacher Retirement System as lead plaintiff. On March 14, 2014, lead plaintiff filed a consolidated class action complaint purportedly
on behalf of shareholders that purchased or acquired the Company’s publicly traded common stock between July 22, 2011 and
September 3, 2013 against the Company and certain of its current and former directors and officers. The consolidated complaint
asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a) (2), and 15 of the
Securities Act of 1933 for allegedly false and misleading statements in the Company’s public disclosures concerning,
among other things, the Company’s relationship with certain vendors. The lawsuit seeks damages in an unspecified amount.
On May 13, 2014 defendants moved to dismiss the consolidated complaint. The Company believes that the allegations contained in
the consolidated complaint are without merit and intends to vigorously defend itself against all claims asserted therein. A reasonable
estimate of the amount of any possible loss or range of loss cannot be made at this time and, as such, the Company has not recorded
an accrual for any possible loss.
On December 11, 2013, a purported shareholder derivative action
entitled
Daniell v. De Merritt, et al.
, was filed on behalf of the Company in the District Court of Harris County, Texas,
naming certain of the Company’s current and former officers and directors as defendants and naming the Company as a nominal
defendant. The complaint alleges breaches of fiduciary duty including the dissemination of false and misleading statements, failure
to maintain internal controls, and insider selling and misappropriation of information, unjust enrichment, abuse of control, and
gross mismanagement. The derivative action seeks damages in an unspecified amount, an order directing the Company “to reform
and improve” corporate governance and internal controls, restitution and disgorgement from the defendants, and costs and
attorneys’ fees. On January 30, 2014, the Company and defendants moved to dismiss the complaint, on May 9, 2014, plaintiff
filed an amended petition alleging the same causes of action and adding CCMP Capital, LLC as a defendant. On May 16, 2014, plaintiff
filed a notice of nonsuit seeking an order dismissing his claims without prejudice. On May 28, 2014, plaintiff filed a substantially
similar complaint in the Court of Chancery of the State of Delaware alleging the same causes of action against the same parties
as the amended petition in Texas.
The
Company, from time to time, is subject to various claims and legal proceedings arising in the ordinary course of business. While
the outcome of any such claim cannot be predicted with certainty, in the opinion of management, the outcome of these matters is
unlikely to have a material adverse effect on the Company’s business, results of operations or financial condition.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements
concerning our business, operations and financial performance and condition as well as our plans, objectives and expectations for
our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other
than statements of historical fact included in this report are forward-looking statements. These statements may include words such
as “aim”, “anticipate”, “assume”, “believe”, “can have”, “could”,
“due”, “estimate”, “expect”, “goal”, “intend”, “likely”,
“may”, “objective”, “plan”, “potential”, “positioned”, “predict”,
“should”, “target”, “will”, “would” and other words and terms of similar meaning
in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends.
For example, all statements we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth
rates, market share and financial results, our plans and objectives for future operations, growth or initiatives, strategies or
the expected outcome or impact of pending or threatened litigation are forward-looking statements.
These
forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry
in which we operate and our management’s beliefs and assumptions. These statements are not guarantees of future performance
or development and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control.
All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially
from our expectations. These risks and uncertainties include, but are not limited to, the following: the risk that we cannot anticipate,
identify and respond quickly to changing fashion trends and customer preferences; our ability to attract a sufficient number of
customers to our boutiques or sell sufficient quantities of our merchandise through our direct-to-consumer business; our ability
to successfully open and operate new boutiques each year; and our ability to efficiently source and distribute additional merchandise
quantities necessary to support our growth.
For additional information
regarding these and other risks and uncertainties that could cause actual results to differ materially from those contained in
our forward looking statements, please refer to “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the
fiscal year ended February 1, 2014 and filed with the Securities and Exchange Commission (“SEC”) on March 28, 2014
and any risk factors contained in subsequent Quarterly Reports on Form 10-Q we file with the SEC.
We derive many of our forward-looking statements
from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions
are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate
all factors that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this report as well as
other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate
all forward-looking statements made in this report in the context of these risks and uncertainties.
Potential investors and other readers
are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place
undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this report.
Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly after the
date of this report whether as a result of new information,
future developments or otherwise.
Overview
Unless the context otherwise requires,
the “Company,” “we,” “our,” “ours,” “us” and “francescas ®
” refer to Francesca’s Holdings Corporation and its consolidated subsidiaries.
francesca’s
®
is a growing specialty retailer with retail locations designed and merchandised to feel like independently owned, upscale boutiques
providing customers a fun and differentiated shopping experience. The merchandise assortment is a diverse and balanced mix of apparel,
jewelry, accessories and gifts. As of May 3, 2014, francesca’s
®
operated 513 boutiques in 46 states and the
District of Columbia and also served its customers through www.francescas.com,
its
direct-to-consumer website. The information contained on our website is not incorporated by reference into this Quarterly Report
on Form 10-Q and you should not consider information contained on our website to be part of this Quarterly Report on Form 10-Q.
Our net sales increased 8% to $85.4 million
in the thirteen weeks ended May 3, 2014 from $79.0 million in the thirteen weeks ended May 4, 2013. Over the same period, income
from operations decreased by 22% to $14.0 million from $18.0 million in the prior year. Net income decreased 22% to $8.6 million,
or $0.04 per diluted share, in the first quarter of fiscal year 2014 compared to net income of $10.9 million, or $0.24 per diluted
share, in the comparable prior year period.
We have increased our boutique count to
513 boutiques as of May 3, 2014 from 416 boutiques as of May 4, 2013. To complete our planned boutique openings for
the fiscal year 2014, we plan to open 23 boutiques during the remainder of the fiscal year.
Results of Operations
The following represents operating data
for the thirteen weeks ended May 3, 2014 and May 4, 2013.
|
|
Thirteen Weeks Ended
|
|
|
|
May 3,
2014
|
|
|
May 4,
2013
|
|
Total net sales growth for period
|
|
|
8
|
%
|
|
|
29
|
%
|
Comparable sales growth for period
(1)
|
|
|
(7
|
)%
|
|
|
2
|
%
|
Number of boutiques open at end of period
|
|
|
513
|
|
|
|
416
|
|
Net sales per average square foot for period (not in thousands)
(2)
|
|
$
|
131
|
|
|
$
|
148
|
|
Average square feet per boutique (not in thousands)
(3)
|
|
|
1,341
|
|
|
|
1,368
|
|
Total gross square feet at end of period (in thousands)
|
|
|
688
|
|
|
|
569
|
|
|
(1)
|
A boutique is included in comparable sales on the first day of the fifteenth full month following the boutique’s opening.
When a boutique that is included in comparable sales is relocated, we continue to consider sales from that boutique to be comparable
sales. If a boutique is closed for thirty days or longer for a remodel or as a result of weather damage, fire or the like, we no
longer consider sales from that boutique to be comparable sales. Comparable sales results include our direct-to-consumer sales.
|
|
(2)
|
Net sales per average square foot are calculated by dividing net sales for the period by the average square feet during the
period. Because of our rapid growth, for purposes of providing net sales per square foot measure, we use average square feet during
the period as opposed to total gross square feet at the end of the period. For individual quarterly periods, average square feet
is calculated as (a) the sum of total gross square feet at the beginning and end of the period, divided by (b) two. There
may be variations in the way in which some of our competitors and other retailers calculate sales per square foot or similarly
titled measures. As a result, average square feet and net sales per average square foot for the period may not be comparable to
similar data made available by other retailers.
|
|
(3)
|
Average square feet per boutique is calculated by dividing total gross square feet at the end of the period by the number of
boutiques at the end of the period.
|
Boutique Count
The following table summarizes the number
of boutiques open at the beginning and end of the periods indicated.
|
|
Thirteen Weeks Ended
|
|
|
|
May 3,
2014
|
|
|
May 4,
2013
|
|
Number of boutiques open at beginning of period
|
|
|
451
|
|
|
|
360
|
|
Boutiques added
|
|
|
62
|
|
|
|
56
|
|
Number of boutiques open at the end of period
|
|
|
513
|
|
|
|
416
|
|
Thirteen Weeks Ended May 3, 2014 Compared to Thirteen
Weeks Ended May 4, 2013
|
|
Thirteen Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
May 3, 2014
|
|
|
May 4, 2013
|
|
|
Variance
|
|
|
|
In
USD
|
|
|
As
a %
of Net
Sales
(1)
|
|
|
In
USD
|
|
|
As
a % of
Net
Sales
(1)
|
|
|
In USD
|
|
|
%
|
|
|
Basis
Points
|
|
|
|
(In thousands, except percentages)
|
|
Net sales
|
|
$
|
85,424
|
|
|
|
100.0
|
%
|
|
$
|
78,987
|
|
|
|
100.0
|
%
|
|
$
|
6,437
|
|
|
|
8
|
%
|
|
|
-
|
|
Cost of goods sold and occupancy costs
|
|
|
43,592
|
|
|
|
51.0
|
%
|
|
|
37,615
|
|
|
|
47.6
|
%
|
|
|
5,977
|
|
|
|
16
|
%
|
|
|
340
|
|
Gross profit
|
|
|
41,832
|
|
|
|
49.0
|
%
|
|
|
41,372
|
|
|
|
52.4
|
%
|
|
|
460
|
|
|
|
1
|
%
|
|
|
(340
|
)
|
Selling, general and administrative expenses
|
|
|
27,812
|
|
|
|
32.6
|
%
|
|
|
23,351
|
|
|
|
29.6
|
%
|
|
|
4,461
|
|
|
|
19
|
%
|
|
|
300
|
|
Income from operations
|
|
|
14,020
|
|
|
|
16.4
|
%
|
|
|
18,021
|
|
|
|
22.8
|
%
|
|
|
(4,001
|
)
|
|
|
(22
|
%)
|
|
|
(640
|
)
|
Interest expense
|
|
|
(221
|
)
|
|
|
(0.3
|
)%
|
|
|
(116
|
)
|
|
|
(0.1
|
)%
|
|
|
(105
|
)
|
|
|
91
|
%
|
|
|
(10
|
)
|
Other income
|
|
|
103
|
|
|
|
0.1
|
%
|
|
|
83
|
|
|
|
0.1
|
%
|
|
|
20
|
|
|
|
24
|
%
|
|
|
-
|
|
Income before income tax expense
|
|
|
13,902
|
|
|
|
16.3
|
%
|
|
|
17,988
|
|
|
|
22.8
|
%
|
|
|
(4,086
|
)
|
|
|
(23
|
%)
|
|
|
(650
|
)
|
Income tax expense
|
|
|
5,342
|
|
|
|
6.3
|
%
|
|
|
7,051
|
|
|
|
8.9
|
%
|
|
|
(1,709
|
)
|
|
|
(24
|
%)
|
|
|
(270
|
)
|
Net income
|
|
$
|
8,560
|
|
|
|
10.0
|
%
|
|
$
|
10,937
|
|
|
|
13.8
|
%
|
|
$
|
(2,377
|
)
|
|
|
(22
|
%)
|
|
|
(380
|
)
|
(1)
Percentage totals or differences in the above
table may not equal the sum or difference of the components due to rounding.
Net Sales
Net sales increased 8% to $85.4
million in the thirteen weeks ended May 3, 2014 from $79.0 million in the thirteen weeks ended May 4, 2013. This
increase is primarily attributable to the increase in non-comparable sales, which in turn is due to the increase in the
number of boutiques in operation in the first quarter of fiscal year 2014 as compared to the same period of the prior year.
This change was partially offset by a 7% decrease in comparable sales. The decrease in comparable sales was driven by a 7%
decrease in transactions partially offset by an increase in direct-to-consumer sales of 84%. There were 360 comparable
boutiques and 153 non-comparable boutiques open at May 3, 2014 compared to 283 and 133, respectively, at May 4, 2013. Our
boutique sales were impacted by severe winter weather conditions in the quarter which caused temporary boutique closures
throughout a large number of geographic regions.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs
increased 16% to $43.6 million in the thirteen weeks ended May 3, 2014 from $37.6 million in the thirteen weeks ended May 4, 2013.
Cost of merchandise and freight expenses increased by $3.6 million driven by the increased sales volume. Occupancy costs increased
by $2.3 million due to the increase in the number of boutiques in operation during the thirteen weeks ended May 3, 2014 compared
to the same period of the prior year.
As a percentage of net sales, cost of goods
sold and occupancy costs increased to 51.0% in the thirteen weeks ended May 3, 2014 from 47.6% in the thirteen weeks ended May
4, 2013. This unfavorable variance included a 180 basis point decrease in merchandise margins primarily as a result of increased
markdowns and promotional activity related to the sale of carryover clearance inventory from the fourth quarter and the general
competitive sales environment. Additionally, occupancy costs increased 160 basis points primarily due to the deleveraging of fixed
expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased 19% to $27.8 million in the thirteen weeks ended May 3, 2014 from $23.4 million in the thirteen weeks ended May
4, 2013. As a percentage of net sales, selling, general and administrative expense increased to 32.6% in the thirteen weeks ended
May 3, 2014 as compared to 29.6% in the thirteen weeks ended May 4, 2013. This increase was primarily due to general deleveraging
of expenses due to lower sales growth as well as the higher boutique and corporate payroll associated with expansion of the field
leadership structure during late 2013 to support the larger boutique base.
Income Tax Expense
The decrease in provision for income taxes
of $1.7 million in the thirteen weeks ended May 3, 2014 compared to the thirteen weeks ended May 4, 2013 was primarily due to the
decrease in pre-tax income. The effective tax rate of 38.4% in the thirteen weeks ended May 3, 2014 was comparable to the effective
tax rate of 39.2% in the thirteen weeks ended May 4, 2013.
Sales by Merchandise Category
|
|
Thirteen Weeks Ended
|
|
|
|
May 3, 2014
|
|
|
May 4, 2013
|
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
|
(in thousands, except percentages)
|
|
Apparel
|
|
$
|
44,764
|
|
|
|
52.3
|
%
|
|
$
|
39,849
|
|
|
|
50.7
|
%
|
Jewelry
|
|
|
18,321
|
|
|
|
21.4
|
%
|
|
|
18,981
|
|
|
|
24.1
|
%
|
Accessories
|
|
|
14,144
|
|
|
|
16.5
|
%
|
|
|
12,614
|
|
|
|
16.0
|
%
|
Gifts
|
|
|
8,399
|
|
|
|
9.8
|
%
|
|
|
7,230
|
|
|
|
9.2
|
%
|
Merchandise sales
(1)
|
|
$
|
85,628
|
|
|
|
100.0
|
%
|
|
$
|
78,674
|
|
|
|
100.0
|
%
|
|
(1)
|
Excludes gift card breakage income, shipping and change in return reserve.
|
Liquidity and Capital Resources
Our primary sources of liquidity are cash
flows from operations and borrowings under our revolving credit facility. Our primary cash needs are for capital expenditures in
connection with opening new boutiques and remodeling existing boutiques, investing in improved technology and distribution facility
enhancements, funding normal working capital requirements and payments of interest and principal, if any, under our revolving credit
facility. We may use cash or our revolving credit facility to issue letters of credit to support merchandise imports or for other
corporate purposes. The most significant components of our working capital are cash and cash equivalents, merchandise inventories,
accounts payable and other current liabilities. Our working capital position benefits from the fact that we generally collect cash
from sales to customers the day of or, in the case of credit or debit card transactions, within several days of the related sales
and we typically have up to 30 days to pay our vendors.
We were in compliance with all covenants
under our revolving credit facility as of May 3, 2014. On May 3, 2014, we had $25.4 million of cash and cash equivalents and approximately
$60 million in borrowing availability under our revolving credit facility. There were no letters of credit outstanding at May 3,
2014.
We expect that our cash flow from operations
along with borrowings under our revolving credit facility and tenant allowances for new boutiques will be sufficient to fund capital
expenditures and our working capital requirements for at least the next twelve months.
Cash Flow
A summary of our operating, investing and
financing activities are shown in the following table:
|
|
Thirteen Weeks Ended
|
|
|
|
May 3, 2014
|
|
|
May 4, 2013
|
|
|
|
(In thousands)
|
|
Provided by operating activities
|
|
$
|
9,710
|
|
|
$
|
12,089
|
|
Used in investing activities
|
|
|
(8,078
|
)
|
|
|
(8,517
|
)
|
Provided by (used in) financing activities
|
|
|
(13,717
|
)
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(12,085
|
)
|
|
$
|
3,886
|
|
Operating Activities
Operating activities consist of net
income adjusted for non-cash items, including depreciation and amortization, deferred taxes, the effect of working capital
changes and tenant allowances received from landlords. Net cash provided by operating activities was $9.7 million and
$12.1 million in each of the thirteen weeks ended May 3, 2014 and May 4, 2013, respectively. The decrease in cash provided by
operating activities in the current quarter was primarily due to lower net income as well as timing changes with respect to
accounts payable, accrued liabilities and accounts receivable.
Investing Activities
Investing activities consist primarily
of capital expenditures for new boutiques, improvements to existing boutiques, as well as investment in information technology
and our distribution facility.
|
|
Thirteen Weeks Ended
|
|
|
|
May 3, 2014
|
|
|
May 4, 2013
|
|
|
|
(In thousands)
|
|
Capital expenditures for:
|
|
|
|
|
|
|
|
|
New boutiques
|
|
$
|
6,663
|
|
|
$
|
7,350
|
|
Existing boutiques
|
|
|
1,309
|
|
|
|
337
|
|
Technology
|
|
|
61
|
|
|
|
627
|
|
Corporate and distribution
|
|
|
45
|
|
|
|
203
|
|
Net cash used in investing activities
|
|
$
|
8,078
|
|
|
$
|
8,517
|
|
Our total capital expenditures for the
thirteen weeks ended May 3, 2014 and May 4, 2013 were $8.1 million and $8.5 million, respectively, with new boutiques accounting
for most of our spending at $6.7 million and $7.4 million, respectively. $1.3 million was paid during the period in connection
with the remodeling of 19 existing boutiques. Spending for new boutiques included amounts associated with boutiques that will open
subsequent to the end of each fiscal quarter. We opened 62 boutiques in the thirteen weeks ended May 3, 2014 compared to 56 boutiques
in the thirteen weeks ended May 4, 2013. The average cost of the leasehold improvements, equipment, furniture and fixtures, excluding
tenant allowances which are reflected in operating cash flows, for new boutiques opened in the thirteen weeks ended May 3, 2014
and May 4, 2013 was $182,000 and $172,000, respectively. The average tenant allowance per new boutique in the thirteen weeks ended
May 3, 2014 and May 4, 2013 was $89,000 and $72,000, respectively. Tenant allowances are amortized as a reduction in rent expense
over the term of the lease. The average collection period for these allowances is approximately six months after boutique opening.
As a result, we fund the cost of new boutiques with cash flow from operations, build-out allowances from our landlords, or borrowings
under our revolving credit facility.
Management anticipates that capital expenditures
for the remainder of fiscal year 2014 will be approximately $17 million to $19 million. The majority of this amount will be spent
on new boutique leasehold improvements at approximately $11 million to $13 million. Additionally, we plan to complete remodels
for approximately 30-35 boutiques during the fiscal year. The remaining capital expenditures are expected to be used for our technology
initiatives as well as corporate office and distribution center enhancements.
Financing Activities
Financing activities consist of borrowings
and payments under our revolving credit facility, repurchases of our common stock, and proceeds from the exercise of stock options
and the related tax consequence.
Net cash used in financing activities was
$13.7 million during the thirteen weeks ended May 3, 2014 compared to net cash provided by financing activities of $0.3 million
during the thirteen weeks ended May 4, 2013. During the quarter, we repaid $10.0 million of borrowings under our revolving credit
facility and additionally repurchased $5.3 million of common stock.
Revolving Credit Facility
On August 30, 2013, Francesca’s Collections,
Inc. (“Francesca’s Collections” or the “Borrower”), as borrower, and its parent company, Francesca's
LLC, a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement with Royal Bank of Canada,
as Administrative Agent and Collateral Agent, and the lenders party thereto. The credit facility provides capacity of $75.0 million
(including up to $10.0 million for letters of credit) and matures on August 30, 2018. The facility also contains an option permitting
the Borrower, subject to certain requirements and conditions, to arrange with the lenders for additional incremental commitments
up to an aggregate of $25.0 million, subject to reductions in the event the Borrower has certain indebtedness outstanding. At May
3, 2014, $15.0 million was outstanding under the credit facility and no letters of credit were outstanding.
The credit facility contains customary
events of default and requires the Borrower to comply with certain financial covenants. As of May 3, 2014, the Borrower was in
compliance with all covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can
pay; provided that the Borrower is permitted to pay dividends to the extent it has available capacity in its available investment
basket (as defined in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain
procedural requirements have been satisfied and the Borrower is in pro forma compliance with a maximum secured leverage ratio.
At May 3, 2014, the Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations
under the credit facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All
obligations under the facility are unconditionally guaranteed by, subject to certain exceptions, by Francesca’s LLC and
each of the Borrower’s existing and future direct and indirect wholly-owned domestic subsidiaries.
During the thirteen weeks ended May 3,
2014, amounts outstanding under the credit facility accrued interest at an average rate of 2.0%.
Share Repurchase Program
For information regarding our share repurchase
program, please refer to Note 7 to our unaudited consolidated financial statements included in Part I of this report, which is
incorporated herein by reference.
Critical Accounting Policies
The preparation of financial statements
in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent
assets and liabilities at the date of the financial statements. A summary of the Company’s significant accounting policies
is included in Note 1 to the Company’s annual consolidated financial statements included in the Company’s Annual Report
on Form 10-K for the fiscal year ended February 1, 2014.
Certain of the Company’s accounting
policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of the
company’s consolidated financial statements and require significant, difficult, or complex judgments, often about the effect
of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended February
1, 2014. As of May 3, 2014, there were no significant changes to any of our critical accounting policies and estimates as disclosed
in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.
Recent Accounting Pronouncements
For information regarding recent accounting
pronouncements, please refer to Note 1 to our unaudited consolidated financial statements included in Part I of this Report, which
is incorporated herein by reference.
Subsequent Event
We regularly review our inventory balances
to identify slow moving merchandise. We generally use markdowns to clear this type of merchandise. However, due to the negative
impact of various macro conditions on our planned sales levels within primarily the apparel and jewelry categories, inventory balances
have outpaced sales. We believe that regular markdowns are insufficient to clear slow moving inventory at a pace that is suitable
for our merchandising strategy. A primary reason our customer shops our boutiques, we believe, is her love for new fashion. Accordingly,
in June 2014 we determined that we should dispose of sufficient amount of slow moving inventory during the second fiscal quarter
to accelerate the flow of new merchandise into our boutiques. We believe that this strategy will adequately address our customers’
desire for new fashion and will likely allow us to attain improved results through the back half of 2014.We estimate that during
the second quarter we will dispose of approximately $2.5 to $3.5 million of inventory at cost before taxes or $0.04 to $0.05 diluted
earnings per share.
Contractual Obligations
There were no significant changes to our
contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended February
1, 2014, other than those which occur in the normal course of business.
Off Balance Sheet Arrangements
We are not party to any off balance sheet
arrangements.