UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended August
2, 2014
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Transition Period From
to
Commission File Number: 001-35239
FRANCESCA’S HOLDINGS CORPORATION
(Exact name of registrant as specified
in its charter)
Delaware |
20-8874704 |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
|
|
8760 Clay Road Houston, TX |
77080 |
(Address of principal executive offices) |
(Zip Code) |
(713) 864-1358
(Registrant’s telephone number,
including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
x |
Accelerated filer |
¨ |
|
|
|
|
Non-accelerated filer |
¨ (Do not check if a smaller reporting company) |
Smaller reporting company |
¨ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The registrant had 42,297,832 shares (excluding 3,179,581
of treasury stock) of its common stock outstanding as of August 31, 2014.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Francesca’s Holdings Corporation
Unaudited Consolidated Balance Sheets
(In thousands, except share amounts)
| |
August 2, 2014 | | |
February 1, 2014 | | |
August 3, 2013 | |
ASSETS | |
| | | |
| | | |
| | |
Current assets: | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
$ | 24,861 | | |
$ | 37,498 | | |
$ | 39,550 | |
Accounts receivable | |
| 9,905 | | |
| 8,984 | | |
| 6,549 | |
Inventories | |
| 30,191 | | |
| 24,614 | | |
| 25,590 | |
Deferred income taxes | |
| 4,726 | | |
| 4,565 | | |
| 3,750 | |
Prepaid expenses and other current assets | |
| 6,965 | | |
| 6,764 | | |
| 5,011 | |
Total current assets | |
| 76,648 | | |
| 82,425 | | |
| 80,450 | |
Property and equipment, net | |
| 71,217 | | |
| 64,131 | | |
| 56,268 | |
Deferred income taxes | |
| 4,562 | | |
| 2,335 | | |
| 3,741 | |
Other assets, net | |
| 1,538 | | |
| 1,654 | | |
| 2,132 | |
TOTAL ASSETS | |
$ | 153,965 | | |
$ | 150,545 | | |
$ | 142,591 | |
| |
| | | |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | | |
| | |
Current liabilities: | |
| | | |
| | | |
| | |
Accounts payable | |
$ | 11,380 | | |
$ | 10,207 | | |
$ | 5,867 | |
Accrued liabilities | |
| 9,088 | | |
| 9,823 | | |
| 8,496 | |
Total current liabilities | |
| 20,468 | | |
| 20,030 | | |
| 14,363 | |
Landlord incentives and deferred rent | |
| 33,097 | | |
| 27,448 | | |
| 27,475 | |
Long-term debt | |
| 5,000 | | |
| 25,000 | | |
| — | |
Total liabilities | |
| 58,565 | | |
| 72,478 | | |
| 41,838 | |
| |
| | | |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | | |
| | |
Common stock - $.01 par value, 80.0 million shares authorized; 45.5 million, 45.2 million and 44.1 million shares issued at August 2, 2014, February 1, 2014 and August 3, 2013, respectively. | |
| 455 | | |
| 452 | | |
| 441 | |
Additional paid-in capital | |
| 104,925 | | |
| 101,192 | | |
| 88,299 | |
Retained earnings | |
| 50,163 | | |
| 31,296 | | |
| 12,013 | |
Treasury stock, at cost – 3.2 million, 2.9 million and 0 shares held at August 2, 2014, February 1, 2014 and August 3, 2013, respectively. | |
| (60,143 | ) | |
| (54,873 | ) | |
| — | |
Total stockholders’ equity | |
| 95,400 | | |
| 78,067 | | |
| 100,753 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 153,965 | | |
$ | 150,545 | | |
$ | 142,591 | |
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Operations
(In thousands, except per share data)
| |
Thirteen Weeks Ended | | |
Twenty Six Weeks Ended | |
| |
August 2, 2014 | | |
August 3, 2013 | | |
August 2, 2014 | | |
August 3, 2013 | |
Net sales | |
$ | 97,319 | | |
$ | 89,566 | | |
$ | 182,743 | | |
$ | 168,554 | |
Cost of goods sold and occupancy costs | |
| 52,004 | | |
| 41,810 | | |
| 95,596 | | |
| 79,426 | |
Gross profit | |
| 45,315 | | |
| 47,756 | | |
| 87,147 | | |
| 89,128 | |
Selling, general and administrative expenses | |
| 28,653 | | |
| 23,683 | | |
| 56,465 | | |
| 47,034 | |
Income from operations | |
| 16,662 | | |
| 24,073 | | |
| 30,682 | | |
| 42,094 | |
Interest expense | |
| (169 | ) | |
| (117 | ) | |
| (390 | ) | |
| (233 | ) |
Other income | |
| 56 | | |
| 121 | | |
| 159 | | |
| 204 | |
Income before income tax expense | |
| 16,549 | | |
| 24,077 | | |
| 30,451 | | |
| 42,065 | |
Income tax expense | |
| 6,242 | | |
| 9,458 | | |
| 11,584 | | |
| 16,509 | |
Net income | |
$ | 10,307 | | |
$ | 14,619 | | |
$ | 18,867 | | |
$ | 25,556 | |
| |
| | | |
| | | |
| | | |
| | |
Basic earnings per common share | |
$ | 0.24 | | |
$ | 0.33 | | |
$ | 0.45 | | |
$ | 0.58 | |
Diluted earnings per common share | |
$ | 0.24 | | |
$ | 0.33 | | |
$ | 0.45 | | |
$ | 0.57 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic shares | |
| 42,252 | | |
| 44,050 | | |
| 42,220 | | |
| 43,995 | |
Diluted shares | |
| 42,367 | | |
| 44,905 | | |
| 42,364 | | |
| 44,894 | |
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 | |
| — | | |
| — | | |
| — | | |
| 18,867 | | |
| — | | |
| 18,867 | |
Stock-based compensation | |
| — | | |
| — | | |
| 1,629 | | |
| — | | |
| — | | |
| 1,629 | |
Stock options exercised and related tax benefit | |
| 232 | | |
| 3 | | |
| 2,104 | | |
| — | | |
| — | | |
| 2,107 | |
Repurchases of common stock | |
| (285 | ) | |
| — | | |
| — | | |
| — | | |
| (5,270 | ) | |
| (5,270 | ) |
Balance, August 2, 2014 | |
| 42,296 | | |
$ | 455 | | |
$ | 104,925 | | |
$ | 50,163 | | |
$ | (60,143 | ) | |
$ | 95,400 | |
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Cash Flows
(In thousands)
| |
Twenty Six Weeks Ended | |
| |
August 2, 2014 | | |
August 3, 2013 | |
Cash Flows From Operating Activities: | |
| | | |
| | |
Net income | |
$ | 18,867 | | |
$ | 25,556 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation expense | |
| 6,244 | | |
| 4,774 | |
Stock-based compensation expense | |
| 1,629 | | |
| 1,953 | |
Excess tax benefit from stock-based compensation | |
| (775 | ) | |
| (2,828 | ) |
Inventory write-off | |
| 2,731 | | |
| — | |
Loss on sale of assets | |
| 121 | | |
| 136 | |
Amortization of debt issuance costs | |
| 122 | | |
| 147 | |
Deferred income taxes | |
| (2,388 | ) | |
| (1,628 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (146 | ) | |
| (4,045 | ) |
Inventories | |
| (8,308 | ) | |
| (6,541 | ) |
Prepaid expenses and other assets | |
| (208 | ) | |
| (968 | ) |
Accounts payable | |
| 1,480 | | |
| (2,491 | ) |
Accrued liabilities | |
| (735 | ) | |
| 657 | |
Landlord incentive and deferred rent | |
| 5,649 | | |
| 5,383 | |
Net cash provided by operating activities | |
| 24,283 | | |
| 20,105 | |
| |
| | | |
| | |
Cash Flows Used in Investing Activities: | |
| | | |
| | |
Purchase of property and equipment | |
| (13,759 | ) | |
| (11,622 | ) |
Proceeds from sale of assets | |
| 2 | | |
| 3 | |
Net cash used in investing activities | |
| (13,757 | ) | |
| (11,619 | ) |
| |
| | | |
| | |
Cash Flows Provided by (Used in) Financing Activities: | |
| | | |
| | |
Repayments of borrowings under the revolving credit facility | |
| (20,000 | ) | |
| — | |
Repurchases of common stock | |
| (5,270 | ) | |
| — | |
Proceeds from the exercise of stock options | |
| 1,332 | | |
| 639 | |
Taxes paid related to net settlement of equity awards | |
| — | | |
| (2,280 | ) |
Excess tax benefit from stock-based compensation | |
| 775 | | |
| 2,828 | |
Net cash provided by (used in) financing activities | |
| (23,163 | ) | |
| 1,187 | |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
| (12,637 | ) | |
| 9,673 | |
Cash and cash equivalents, beginning of year | |
| 37,498 | | |
| 29,877 | |
Cash and cash equivalents, end of period | |
$ | 24,861 | | |
$ | 39,550 | |
| |
| | | |
| | |
Supplemental Disclosures of Cash Flow Information: | |
| | | |
| | |
Cash paid for income taxes | |
$ | 9,413 | | |
$ | 17,647 | |
Interest paid | |
$ | 288 | | |
$ | 81 | |
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 August
2, 2014, the Company operated 526 boutiques, which are located in 47 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 August 2, 2014 and August 3, 2013 refer to the thirteen-week periods ended as of those dates. The year-to-date
periods ended August 2, 2014 and August 3, 2013 refer to the twenty-six week periods ended as of those dates.
Management Estimates and Assumptions
The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues,
net of estimated sales 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 August 2014, the Financial
Accounting Standards Board ( “FASB” ) issued Accounting Standards Update ( “ASU” ) No. 2014-15,
“Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern,” which requires management to evaluate, at each annual and interim reporting period,
whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going
concern within one year after the date the financial statements are issued and provide related disclosures. This guidance is
effective for annual periods ending after December 15, 2016 and for annual and interim periods thereafter. The adoption of
this guidance is not expected to have a material effect on the Company’s consolidated financial statements or
disclosures.
In May 2014 the FASB issued
ASU No. 2014-09, “Revenue from Contracts with Customers.” This pronouncement was issued
to improve the financial reporting of revenue and improves 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.
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 more dilutive of the treasury stock method or the two-class method.
The following table summarizes the potential
dilution that could occur if options to acquire common stock were exercised or if 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 | | |
Twenty Six Weeks Ended | |
| |
August 2, 2014 | | |
August 3, 2013 | | |
August 2, 2014 | | |
August 3, 2013 | |
| |
(in thousands, except per share data) | |
Numerator: | |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 10,307 | | |
$ | 14,619 | | |
$ | 18,867 | | |
$ | 25,556 | |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted-average common shares outstanding - basic | |
| 42,252 | | |
| 44,050 | | |
| 42,220 | | |
| 43,995 | |
Options and other dilutive securities | |
| 115 | | |
| 855 | | |
| 144 | | |
| 899 | |
Weighted-average common shares outstanding - diluted | |
| 42,367 | | |
| 44,905 | | |
| 42,364 | | |
| 44,894 | |
| |
| | | |
| | | |
| | | |
| | |
Per common share: | |
| | | |
| | | |
| | | |
| | |
Basic earnings per common share | |
$ | 0.24 | | |
$ | 0.33 | | |
$ | 0.45 | | |
$ | 0.58 | |
Diluted earnings per common share | |
$ | 0.24 | | |
$ | 0.33 | | |
$ | 0.45 | | |
$ | 0.57 | |
Potentially issuable shares under the Company’s
stock-based compensation plans amounting to 0.9 million shares in each of the thirteen and twenty six weeks ended August 2, 2014
and 0.8 million shares in each of the thirteen and twenty six weeks ended August 3, 2013 were excluded in the computation of diluted
earnings per share due to their anti-dilutive effect.
To accelerate the flow of new merchandise
into its boutiques, the Company disposed of certain slow-moving inventory during the second quarter of fiscal year 2014 at a net
cost of $2.9 million.
| 4. | 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 value 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 and twenty six weeks
ended August 2, 2014 were 37.7% and 38.0%, respectively. The effective tax rates for both the thirteen and twenty six weeks ended
August 3, 2013 was 39.3%. The difference between our effective tax rate and federal statutory rate primarily relates to state income
taxes.
| 6. | 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 August 2, 2014, $5.0 million was outstanding under the credit facility and no letters of credit
were outstanding. See Note 10, “Subsequent Event” for additional information.
The credit facility contains customary
events of default and requires the Borrower to comply with certain financial covenants. As of August 2, 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 August 2, 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.
| 7. | 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 and twenty six weeks ended August 2, 2014 totaled $0.8 million
and $1.6 million, respectively. The stock-based compensation cost recognized in the thirteen and twenty six weeks ended August
3, 2013 totaled $1.0 million and $2.0 million, respectively,
Stock Options
During the twenty six weeks ended August
2, 2014 and August 3, 2013, the intrinsic value of stock options exercised totaled $2.8 million and $7.7 million, respectively,
while stock options were granted at a weighted average grant date fair value of $8.03 and $15.55, respectively.
As of August 2, 2014 there was approximately
$6.4 million of unrecognized compensation cost related to non-vested stock options that is expected to be recognized over a weighted-average
period of 3 years.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
Restricted Stock Awards
On April 11, 2014, the Company awarded
a total of 158,450 service and performance-based restricted stock awards to certain executives and other key employees. These awards
entitle the grantee to receive up to a maximum of 1.5 shares of the Company’s common stock per service-based and performance-based
restricted stock award if the Company achieves specified annual performance goals set at the beginning of each of the fiscal years
2014, 2015 and 2016. The grantee may earn a portion of the award based on the annual performance during each individual year but
must remain continuously employed with the Company for the entire three year vesting period to receive such awards. The 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. As of
August 2, 2014, no compensation expense has been recognized related to these awards.
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. There were no share repurchases during the thirteen weeks ended
August 2, 2013. During the twenty six weeks ended August 2, 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 August 2, 2014, the remaining
balance available for future share repurchase was approximately $39.9 million.
| 9. | Commitments and Contingencies |
Operating Leases
The Company leases boutique space and office
space under operating leases expiring in various years through the fiscal year ending 2025. Certain of the leases provide that
the Company may cancel the lease, with penalties as defined in the lease, if the Company’s boutique sales at that location
fall below an established level. Certain leases provide for additional rent payments to be made when sales exceed a base amount.
Certain operating leases provide for renewal options for periods from three to five years at their fair rental value at the time
of renewal.
Minimum future rental payments under non-cancellable
operating leases as of August 2, 2014, are as follows:
Fiscal year | |
Amount | |
| |
(In thousands) | |
Remainder of 2014 | |
$ | 16,376 | |
2015 | |
| 33,948 | |
2016 | |
| 33,309 | |
2017 | |
| 32,278 | |
2018 | |
| 30,054 | |
Thereafter | |
| 86,450 | |
| |
$ | 232,415 | |
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
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. That motion was fully briefed as of August 13, 2014. 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 alleged 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. This derivative action sought 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 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 alleging the
same causes in the Delaware Court of Chancery. 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 July 8, 2014, a purported shareholder
derivative action entitled Murphy v. Davis, et al. was filed on behalf of the Company in the Delaware Court of Chancery, naming
certain of the Company’s current and former officers and directors as defendants and naming the Company as a nominal defendant.
The Murphy complaint alleges claims of breaches of fiduciary duty, waste, and unjust enrichment. The Murphy complaint seeks damages
in an unspecified amount, an order directing the Company “to reform and improve” corporate governance and internal
controls, equitable and/or injunctive relief, restitution and disgorgement from the defendants, and costs and attorneys’
fees. The Company, Defendants, the Daniell plaintiff, and the Murphy plaintiff have agreed, subject to Court approval, to the consolidation
of the Daniell and Murphy cases and the filing of a consolidated complaint.
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.
Subsequent to quarter-end, the Borrower
paid the outstanding balance on its revolving credit facility totaling $5.0 million. As of September 10, 2014, there was no outstanding
amount under the revolving credit facility.
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 August 2, 2014, francesca’s ® operated 526 boutiques in 47
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.
During the thirteen weeks ended August
2, 2014, our net sales increased 9% to $97.3 million from $89.6 million, income from operations decreased by 31% to $16.7 million
from $24.1 million and net income decreased 29% to $10.3 million, or $0.24 per diluted share, from $14.6 million, or $0.33 per
diluted share, over the comparable prior year period. During the twenty six weeks ended August 2, 2014, our net sales increased
8% to $182.7 million from $168.6 million, income from operations decreased by 27% to $30.7 million from $42.1 million and net income
decreased 26% to $18.9 million, or $0.45 per diluted share, from $25.6 million, or $0.57 per diluted share, over the comparable
prior year period.
We have increased our boutique count to
526 boutiques as of August 2, 2014 from 436 boutiques as of August 3, 2013. To complete our planned boutique openings for the fiscal
year 2014, we plan to open approximately 13 boutiques during the remainder of the fiscal year.
Results of Operations
The following represents operating data
for the thirteen and twenty six weeks ended August 2, 2014 and August 3, 2013.
| |
Thirteen Weeks Ended | | |
Twenty Six Weeks Ended | |
| |
August 2, 2014 | | |
August 3, 2013 | | |
August 2, 2014 | | |
August 3, 2013 | |
Total net sales growth for period | |
| 9 | % | |
| 17 | % | |
| 8 | % | |
| 22 | % |
Comparable sales growth for period(1) | |
| (7 | )% | |
| (1 | )% | |
| (7 | )% | |
| 0 | % |
Number of boutiques open at end of period | |
| 526 | | |
| 436 | | |
| 526 | | |
| 436 | |
Net sales per average square foot for period (not in thousands)(2) | |
$ | 140 | | |
$ | 154 | | |
| 273 | | |
$ | 304 | |
Average square feet per boutique (not in thousands)(3) | |
| 1,345 | | |
| 1,361 | | |
| 1,345 | | |
| 1,361 | |
Total gross square feet at end of period (in thousands) | |
| 707 | | |
| 594 | | |
| 708 | | |
| 594 | |
| (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 is 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 open at the end of the period. |
Boutique Count
The following table summarizes the number
of boutiques open at the beginning and end of the periods indicated.
| |
Thirteen Weeks Ended | | |
Twenty Six Weeks Ended | |
| |
August 2, 2014 | | |
August 3, 2013 | | |
August 2, 2014 | | |
August 3, 2013 | |
Number of boutiques open at beginning of period | |
| 513 | | |
| 416 | | |
| 451 | | |
| 360 | |
Boutiques added | |
| 13 | | |
| 20 | | |
| 75 | | |
| 76 | |
Number of boutiques open at the end of period | |
| 526 | | |
| 436 | | |
| 526 | | |
| 436 | |
Thirteen Weeks Ended August 2, 2014 Compared to Thirteen
Weeks Ended August 3, 2013
| |
Thirteen Weeks Ended | | |
| | |
| | |
| |
| |
August 2, 2014 | | |
August 3, 2013 | | |
Variance | |
| |
In USD | | |
As a % of Net Sales(1) | | |
In USD | | |
As a % of Net Sales(1) | | |
In USD | | |
% | | |
Basis Points | |
| |
(In thousands, except percentages) | |
Net sales | |
$ | 97,319 | | |
| 100.0 | % | |
$ | 89,566 | | |
| 100.0 | % | |
$ | 7,753 | | |
| 9 | % | |
| — | |
Cost of goods sold and occupancy costs | |
| 52,004 | | |
| 53.4 | % | |
| 41,810 | | |
| 46.7 | % | |
| 10,194 | | |
| 24 | % | |
| 670 | |
Gross profit | |
| 45,315 | | |
| 46.6 | % | |
| 47,756 | | |
| 53.3 | % | |
| (2,441 | ) | |
| (5 | )% | |
| (670 | ) |
Selling, general and administrative expenses | |
| 28,653 | | |
| 29.4 | % | |
| 23,683 | | |
| 26.4 | % | |
| 4,970 | | |
| 21 | % | |
| 300 | |
Income from operations | |
| 16,662 | | |
| 17.1 | % | |
| 24,073 | | |
| 26.9 | % | |
| (7,411 | ) | |
| (31 | )% | |
| (980 | ) |
Interest expense | |
| (169 | ) | |
| (0.2 | )% | |
| (117 | ) | |
| (0.1 | )% | |
| (52 | ) | |
| 44 | % | |
| (10 | ) |
Other income | |
| 56 | | |
| 0.1 | % | |
| 121 | | |
| 0.1 | % | |
| (65 | ) | |
| (54 | )% | |
| — | |
Income before income tax expense | |
| 16,549 | | |
| 17.0 | % | |
| 24,077 | | |
| 26.9 | % | |
| (7,528 | ) | |
| (31 | )% | |
| (990 | ) |
Income tax expense | |
| 6,242 | | |
| 6.4 | % | |
| 9,458 | | |
| 10.6 | % | |
| (3,216 | ) | |
| (34 | )% | |
| (420 | ) |
Net income | |
$ | 10,307 | | |
| 10.6 | % | |
$ | 14,619 | | |
| 16.3 | % | |
$ | (4,312 | ) | |
| (29 | )% | |
| (570 | ) |
(1) Percentage totals or differences in the
above table may not equal the sum or difference of the components due to rounding.
Net Sales
Net sales increased 9% to $97.3 million
in the thirteen weeks ended August 2, 2014 from $89.6 million in the thirteen weeks ended August 3, 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 second 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 driven by a 7% decrease in transactions. Our direct-to-consumer sales increased 98%
to $3.6 million from $1.8 million during the prior year quarter. There were 416 comparable boutiques and 110 non-comparable boutiques
open at August 2, 2014 compared to 313 and 123, respectively, at August 3, 2013.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs
increased 24% to $52.0 million in the thirteen weeks ended August 2, 2014 from $41.8 million in the thirteen weeks ended August
3, 2013. Cost of merchandise and freight expenses increased by $7.5 million due to increased sales volume as well as the disposal
of certain slow-moving inventory during the second quarter of fiscal year 2014. Occupancy costs increased by $2.7 million due to
the increase in the number of boutiques in operation during the thirteen weeks ended August 2, 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 53.4% in the thirteen weeks ended August 2, 2014 from 46.7% in the thirteen weeks ended August
3, 2013, an unfavorable variance of 670 basis points. During the quarter, the disposal of certain slow-moving inventory accounted
for 350 basis points while deleveraging of fixed occupancy costs accounted for 170 basis points respectively of the total unfavorable
variance. The remaining unfavorable variance arose from increased markdowns and promotional activities and a merchandise mix change
to the lower margin categories.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased 21% to $28.7 million in the thirteen weeks ended August 2, 2014 from $23.7 million in the thirteen weeks ended August
3, 2013. As a percentage of net sales, selling, general and administrative expense increased to 29.4% in the thirteen weeks ended
August 2, 2014 as compared to 26.4% in the thirteen weeks ended August 3, 2013. This increase was primarily due to 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 $3.2 million in the thirteen weeks ended August 2, 2014 compared to the thirteen weeks ended August 3, 2013 was primarily due
to the decrease in pre-tax income. The effective tax rate of 37.7% in the thirteen weeks ended August 2, 2014 was comparable to
the effective tax rate of 39.3% in the thirteen weeks ended August 3, 2013.
Twenty Six Weeks Ended August 2, 2014 Compared to Twenty
Six Weeks Ended August 3, 2013
| |
Twenty Six Weeks Ended | | |
| | |
| | |
| |
| |
August 2, 2014 | | |
August 3, 2013 | | |
Variance | |
| |
In USD | | |
As a % of Net Sales(1) | | |
In USD | | |
As a % of Net Sales(1) | | |
In USD | | |
% | | |
Basis Points | |
| |
(In thousands, except percentages) | |
Net sales | |
$ | 182,743 | | |
| 100.0 | % | |
$ | 168,554 | | |
| 100.0 | % | |
$ | 14,189 | | |
| 8 | % | |
| — | |
Cost of goods sold and occupancy costs | |
| 95,596 | | |
| 52.3 | % | |
| 79,426 | | |
| 47.1 | % | |
| 16,170 | | |
| 20 | % | |
| 520 | |
Gross profit | |
| 87,147 | | |
| 47.7 | % | |
| 89,128 | | |
| 52.9 | % | |
| (1,981 | ) | |
| (2 | )% | |
| (520 | ) |
Selling, general and administrative expenses | |
| 56,465 | | |
| 30.9 | % | |
| 47,034 | | |
| 27.9 | % | |
| 9,431 | | |
| 20 | % | |
| 300 | |
Income from operations | |
| 30,682 | | |
| 16.8 | % | |
| 42,094 | | |
| 25.0 | % | |
| (11,412 | ) | |
| (27 | )% | |
| (820 | ) |
Interest expense | |
| (390 | ) | |
| (0.2 | )% | |
| (233 | ) | |
| (0.1 | )% | |
| (157 | ) | |
| 67 | % | |
| (10 | ) |
Other income | |
| 159 | | |
| 0.1 | % | |
| 204 | | |
| 0.1 | % | |
| (45 | ) | |
| (22 | )% | |
| — | |
Income before income tax expense | |
| 30,451 | | |
| 16.7 | % | |
| 42,065 | | |
| 25.0 | % | |
| (11,614 | ) | |
| (28 | )% | |
| (830 | ) |
Income tax expense | |
| 11,584 | | |
| 6.3 | % | |
| 16,509 | | |
| 9.8 | % | |
| (4,925 | ) | |
| (30 | )% | |
| (350 | ) |
Net income | |
$ | 18,867 | | |
| 10.3 | % | |
$ | 25,556 | | |
| 15.2 | % | |
$ | (6,689 | ) | |
| (26 | )% | |
| (490 | ) |
(1) Percentage totals or differences in the
above table may not equal the sum or difference of the components due to rounding.
Net Sales
Net sales increased 8% to $182.7 million
in the twenty six weeks ended August 2, 2014 from $168.6 million in the twenty six weeks ended August 3, 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 twenty six weeks ended August 2, 2014 as compared to the same period of the prior year. This change was partially
offset by a 7% decrease in comparable sales driven by a 7% decrease in transactions. Our direct-to-consumer sales increased 91%
to $6.6 million from $3.5 million over the same period. There were 416 comparable boutiques and 110 non-comparable boutiques open
at August 2, 2014 compared to 313 and 123, respectively, at August 3, 2013.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs
increased 20% to $95.6 million in the twenty six weeks ended August 2, 2014 from $79.4 million in the twenty six weeks ended August
3, 2013. Cost of merchandise and freight expenses increased by $11.1 million due to increased sales volume as well as the disposal
of certain slow-moving inventory during the second quarter of fiscal year 2014. Occupancy costs increased by $5.0 million due to
the increase in the number of boutiques in operation during the twenty six weeks ended August 2, 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 52.3% in the twenty six weeks ended August 2, 2014 from 47.1% in the twenty six weeks ended
August 3, 2013, an unfavorable variance of 520 basis points. During the year-to-date period, the disposal of certain slow-moving
inventory accounted for 190 basis points while deleveraging of fixed occupancy costs accounted for 160 basis points respectively
of the total unfavorable variance. The remaining unfavorable variance arose from increased markdowns and promotional activities
and a merchandise mix change to the lower margin categories.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased 20% to $56.5 million in the twenty six weeks ended August 2, 2014 from $47.0 million in the twenty six weeks ended
August 3, 2013. As a percentage of net sales, selling, general and administrative expense increased to 30.9% in the twenty six
weeks ended August 2, 2014 as compared to 27.9% in the twenty six weeks ended August 3, 2013. This increase was primarily due to
deleveraging of expenses due to lower sales growth as well as the higher boutique and corporate payroll expenses 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 $4.9 million in the twenty six weeks ended August 2, 2014 compared to the twenty six weeks ended August 3, 2013 was primarily
due to the decrease in pre-tax income. The effective tax rate of 38.0% in the thirteen weeks ended August 2, 2014 was comparable
to the effective tax rate of 39.3% in the thirteen weeks ended August 3, 2013.
Sales by Merchandise
Category
| |
Thirteen Weeks Ended | | |
Twenty Six Weeks Ended | |
| |
August 2, 2014 | | |
August 3, 2013 | | |
August 2, 2014 | | |
August 3, 2013 | |
| |
In Dollars | | |
As a % of Net Sales | | |
In Dollars | | |
As a % of Net Sales | | |
In Dollars | | |
As a % of Net Sales | | |
In Dollars | | |
As a % of Net Sales | |
| |
(in thousands, except percentages) | |
Apparel | |
$ | 52,128 | | |
| 53.7 | % | |
$ | 45,613 | | |
| 50.9 | % | |
$ | 96,892 | | |
| 53.0 | % | |
$ | 85,461 | | |
| 50.7 | % |
Jewelry | |
| 20,594 | | |
| 21.2 | % | |
| 23,448 | | |
| 26.1 | % | |
| 38,914 | | |
| 21.3 | % | |
| 42,428 | | |
| 25.2 | % |
Accessories | |
| 14,526 | | |
| 15.0 | % | |
| 12,763 | | |
| 14.2 | % | |
| 28,670 | | |
| 15.7 | % | |
| 25,377 | | |
| 15.1 | % |
Gifts | |
| 9,865 | | |
| 10.1 | % | |
| 7,874 | | |
| 8.8 | % | |
| 18,287 | | |
| 10.0 | % | |
| 15,103 | | |
| 9.0 | % |
Merchandise sales(1) | |
$ | 97,113 | | |
| 100.0 | % | |
$ | 89,698 | | |
| 100.0 | % | |
$ | 182,763 | | |
| 100.0 | % | |
$ | 168,369 | | |
| 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 August 2, 2014. On August 2, 2014, we had $24.9 million of cash and cash equivalents
and approximately $70.0 million in borrowing availability under our revolving credit facility. Subsequent to August 2, 2014, we
paid the outstanding balance on the revolving credit facility and, as of September 10, 2014, there were no amounts outstanding
under the revolving credit facility. There were no letters of credit outstanding at August 2, 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:
| |
Twenty Six Weeks Ended | |
| |
August 2, 2014 | | |
August 3, 2013 | |
| |
(In thousands) | |
Provided by operating activities | |
$ | 24,283 | | |
$ | 20,105 | |
Used in investing activities | |
| (13,757 | ) | |
| (11,619 | ) |
Provided by (used in) financing activities | |
| (23,163 | ) | |
| 1,187 | |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
$ | (12,637 | ) | |
$ | 9,673 | |
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 $24.3 million and $20.1 million in
each of the twenty six weeks ended August 2, 2014 and August 3, 2013, respectively. The increase in cash provided by operating
activities in the current quarter was primarily due to timing changes with respect to accounts receivable, accounts payable and
accrued liabilities. This change was partially offset by an increase in inventories due to the increase in our boutique count and
a decrease in net income.
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.
| |
Twenty Six Weeks Ended | |
| |
August 2, 2014 | | |
August 3, 2013 | |
| |
(In thousands) | |
Capital expenditures for: | |
| | | |
| | |
New boutiques | |
$ | 10,134 | | |
$ | 8,871 | |
Existing boutiques | |
| 2,783 | | |
| 829 | |
Technology | |
| 696 | | |
| 1,390 | |
Corporate and distribution | |
| 146 | | |
| 532 | |
Total capital expenditures | |
$ | 13,759 | | |
$ | 11,622 | |
Our total capital expenditures for
the twenty six weeks ended August 2, 2014 and August 3, 2013 were $13.8 million and $11.6 million, respectively, with new
boutiques accounting for most of our spending at $10.1 million and $8.9 million, respectively. $2.8 million was paid during
the twenty-six weeks ended August 2, 2014 in connection with existing boutiques. The majority of this amount was spent on
remodeling 34 existing boutiques. Spending for new boutiques included amounts associated with boutiques that will
open subsequent to the end of each fiscal quarter. We opened 75 boutiques in the twenty six weeks ended August 2, 2014
compared to 76 boutiques in the twenty six weeks ended August 3, 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 twenty-six weeks ended August 2, 2014 and August 3, 2013 was $199,000 and $179,000, respectively. The average
tenant allowance per new boutique in the twenty six weeks ended August 2, 2014 and August 3, 2013 was $90,000 and
$74,000, respectively. The increase in average boutique build-out costs and average tenant allowances was principally due to
opening more boutiques in mall locations in the current year-to-date period as compared to the prior year period. 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 $11.7 million to $13.7 million. The majority of this amount will be
spent on investments in new and existing boutiques
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
$23.2 million during the twenty six weeks ended August 2, 2014 compared to net cash provided by financing activities of $1.2 million
during the twenty six weeks ended August 3, 2013. The increase in net cash used in financing activities is attributable to repayments
of borrowings under our revolving credit facility totaling $20.0 million and repurchases of our common stock amounting to $5.3
million.
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 August
2, 2014, $5.0 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 August 2, 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 August 2, 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 and twenty six weeks
ended August 2, 2014, amounts outstanding under the credit facility accrued interest at an average rate of 2.0%.
Share Repurchase Program
There were no share repurchases in the
thirteen weeks ended August 2, 2014. For additional information regarding our share repurchase program, please refer to Note 8
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 August 2, 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Our principal exposure to market risk relates
to changes in interest rates. Our revolving credit facility carries floating interest rates that are tied to LIBOR, the federal
funds rate and the prime rate, and therefore, our statements of operations and our cash flows could be exposed to changes in interest
rates to the extent that we do not have effective hedging arrangements in place. We historically have not used derivative financial
instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in
the future. At August 2, 2014, we had $5.0 million of borrowings outstanding under our revolving credit facility and the weighted
average interest rate during the period was 2.0%. Based on a sensitivity analysis at August 2, 2014, assuming the loan balance
would be outstanding for the remainder of the fiscal year, a 100 basis point increase in interest rates would increase annual interest
expense by less than $0.1 million.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed,
recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information
is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
At the end of the period covered by this
Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our Disclosure
Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design
and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective at the reasonable assurance level as of August 2, 2014.
There were no changes in our internal control
over financial reporting during the quarter ended August 2, 2014 that materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding legal proceedings
involving us, please refer to Note 9 to our unaudited consolidated financial statements included in Part I of this Report, which
is incorporated herein by reference.
ITEM 1A. RISK FACTORS
There have been no material changes to
our risk factors as previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the fiscal year ended
February 1, 2014 and filed with the SEC on March 28, 2014.
ITEM 6. EXHIBITS
Exhibit No. |
|
Description |
|
|
|
31.1* |
|
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
31.2* |
|
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
32.1** |
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101* |
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Unaudited Consolidated Balance Sheets as of August 2, 2014, February 1, 2014 and August 3, 2013, (ii) the Unaudited Consolidated Statements of Operations for the Thirteen and Twenty Six Weeks Ended August 2, 2014 and August 3, 2013, (iii) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Twenty Six Weeks Ended August 2, 2014, (iv) Unaudited Consolidated Statements of Cash Flows for the Twenty Six Weeks ended August 2, 2014 and August 3, 2013 and (v) the Notes to the Unaudited Consolidated Financial Statements. |
* Filed herewith.
** Furnished herewith.
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Francesca’s Holdings Corporation |
|
(Registrant) |
|
|
Date: September 10, 2014 |
/s/ Mark Vendetti |
|
Mark Vendetti |
|
Chief Financial Officer (duly authorized officer and Principal Financial and Accounting Officer) |
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Neill P. Davis, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Francesca’s Holdings Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined by Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: September 10, 2014 |
|
|
/s/ Neill Davis |
|
Neill Davis |
|
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Mark Vendetti, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Francesca’s Holdings Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined by Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: September 10, 2014 |
|
|
/s/ Mark Vendetti |
|
Mark Vendetti |
|
Chief Financial Officer (duly authorized officer and Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C.
SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Neill P. Davis, the Chief Executive
Officer of Francesca’s Holdings Corporation, certify that (i) the quarterly report on Form 10-Q for the fiscal
quarter ended August 2, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of Francesca’s Holdings Corporation as of the dates and for the periods
set forth therein.
|
/s/ Neill Davis |
|
Neill Davis |
|
Chief Executive Officer |
|
|
|
September 10, 2014 |
|
Date |
I, Mark Vendetti, the Chief Financial Officer
of Francesca’s Holdings Corporation, certify that (i) the quarterly report on Form 10-Q for the fiscal quarter
ended August 2, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of Francesca’s Holdings Corporation as of the dates and for the periods
set forth therein.
|
/s/ Mark Vendetti |
|
Mark Vendetti |
|
Chief Financial Officer (duly authorized officer and Principal Financial and Accounting Officer) |
|
|
|
September 10, 2014 |
|
Date |
The foregoing certifications are being
furnished solely to accompany the Quarterly Report on Form 10-Q pursuant to 18 U.S.C. § 1350 and Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended. These certifications shall not be deemed “filed” for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be incorporated
by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended, except to the extent that the Company specifically incorporates it by reference.
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