ITEM 1. BUSINESS
General
Francesca’s Holdings Corporation
was incorporated in Delaware in 2007. We are a holding company and all of our business operations are conducted through our subsidiaries.
Our principal executive office is located at 8760 Clay Road, Houston, Texas 77080, our telephone number is (713) 864-1358
and our fax number is (713) 426-2751. We maintain a website at
www.francescas.com
. We may post information that is
important to our investors on our website. Information included or referred to on, or otherwise accessible through, our website
is not intended to form part or be incorporated by reference into this report. Except where the context otherwise requires or where
otherwise indicated, the terms “francesca’s
®
,” “we,”
“us,” “our,” “the Company,” and “our business” refer to Francesca’s Holdings
Corporation and its consolidated subsidiaries as a combined entity.
We operate on a fiscal calendar which,
in a given fiscal year, consists of a 52- or 53-week period ending on the Saturday closest to January 31st. The reporting periods
contained in our audited consolidated financial statements included in this Annual Report on Form 10-K contain 52 weeks of operations
in fiscal year 2015, which ended on January 30, 2016, 52 weeks of operations in fiscal year 2014, which ended on January 31, 2015,
and 52 weeks of operations in fiscal year 2013, which ended on February 1, 2014. Our fiscal year 2012 included 53 weeks of operations,
which ended on February 2, 2013, and our fiscal year 2011 included 52 weeks of operations which ended on January 28, 2012.
Our Company
francesca’s
®
is a growing specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and differentiated
shopping experience. The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts. As of
January 30, 2016, francesca’s
®
operated 616 boutiques in 47 states and
the District of Columbia and also served its customers through www.francescas.com, our direct-to-consumer website.
By offering a differentiated shopping experience
and high-quality, trend-right merchandise at a compelling value, our boutiques have been successful across a wide variety of geographic
markets and shopping venues. We believe we have an opportunity to continue to grow our boutique base from 616 locations in 47 states
and the District of Columbia as of January 30, 2016 to approximately 900 boutiques in the United States over the next five years
based on our flexible boutique format, the financial characteristics of our boutiques and our ongoing analysis of shopping venues
that meet our criteria for new boutiques.
Our Competitive Strengths
We believe the following strengths differentiate
us from our competitors and are key drivers of our success:
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·
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Proven Trend-Right Merchandise Delivered at a Compelling Value
. Our boutiques carry a broad and shallow selection of
high-quality, trend-right apparel, jewelry, accessories and gifts at attractive prices. Our buyers closely monitor the marketplace
to identify and source proven fashion trends we believe will appeal to our core customers. We primarily offer exclusive items
under our proprietary labels, but carry a small selection of third-party, nationally recognized brands that we use opportunistically
in certain categories. We offer a broad selection of merchandise, but intentionally purchase small quantities of individual items
for each boutique such that we frequently replenish our boutiques with new merchandise, keeping the shopping experience fresh and
exciting for our customers. The short lead times of our vendors maximizes our speed to market, as it generally takes four to twelve
weeks from the time an order is placed to the time merchandise is available on the boutique floor. With these short lead times,
we are able to make more informed buying decisions to meet customers’ merchandise expectations, and to react quickly to changing
fashion trends. This approach, combined with our balanced product mix of approximately 50% apparel and 50% jewelry, accessories
and gifts, is designed to encourage more frequent visits by our customers and reduce the seasonal fluctuations in sales and merchandise
margin. We believe the expertise of our buyers and our broad base of vendors allows us to quickly identify and respond to
emerging fashion trends in apparel, jewelry, accessories and gifts to offer quality merchandise at prices that ‘surprise
and delight’ our customers.
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·
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Differentiated Shopping Experience.
Each of our retail locations is designed and merchandised to feel like an upscale
boutique. Merchandise presentations, including display windows, tables and walls, are refreshed frequently to keep our boutiques
new and exciting. Our boutique managers, with the support of corporate guidelines, individualize each boutique increasing their
engagement and enhancing the shopping experience. We believe these attributes, along with our strategy of carrying a broad selection
but limited quantities of individual styles, create an atmosphere that strongly appeals to our customers and differentiates us
in the marketplace.
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·
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Powerful Boutique Economics and Rigorous Real Estate Selection Process
. We have a proven boutique format that works
across a wide variety of shopping venues, market sizes, climates and demographics. Our boutiques average approximately 1,368 square
feet, which is meaningfully smaller than most specialty retailers. The performance of our boutiques and our flexible real estate
format enhance our ability to secure prominent, highly visible locations in regional malls, lifestyle centers, street locations,
strip centers and outlet locations. We deploy a rigorous real estate selection process with all new boutique opportunities measured
against specific financial and geographic criteria. We currently fund all of our growth from cash generated from operations, including
tenant allowances. In our real estate selection process, we assess the viability of potential sites by analyzing the demographics
of the trade area and the performance of the shopping venue, including selected relevant and adjacent retailers. Based on this
analysis, we believe the financial characteristics of our new boutiques, coupled with our ability to operate across different shopping
venues and geographies, provide us with a wide scope of new boutique opportunities and enhance our ability to profitably expand
our boutique base.
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·
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Solid and Scalable Infrastructure.
We continually invest in systems, controls and human resources to support our growth.
In recent years we have made significant improvements to the infrastructure of our finance, buying and planning, real estate, boutique
operations and IT departments. For instance, we believe that we have developed an integrated sourcing, distribution and merchandising
process that is scalable and will facilitate the continued growth in the number of boutiques we operate. This includes buyers who
work closely with an established and diverse group of vendors to identify trend-right, high-quality merchandise for our boutiques,
as well as delivery, distribution and merchandising processes that enable us to execute a broad and shallow merchandising approach
as we grow.
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·
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Experienced Management Team with a Disciplined Operating Philosophy.
Our senior management has extensive experience
across a broad range of disciplines in the retail industry, including merchandising, real estate, supply chain and finance. Our
management team has built a solid operating foundation based on sound retail principles that define our culture. Our disciplined
operating philosophy is grounded in a relentless focus on providing great merchandise and a best-in class boutique experience supported
by uncompromising site selection and continual enhancements to our infrastructure.
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Our Growth Strategy
We believe we can continue to grow our
revenues and earnings by executing on the following strategies:
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·
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Grow Our Boutique Base
. We believe there is an opportunity to optimize real estate and significantly increase the number
of boutiques we operate. Based on our proven ability to open our flexible retail format in various shopping venues, including outlet
centers, in new and existing markets, the financial characteristics of our boutiques and our ongoing analysis of shopping venues
that meet our criteria for new boutiques (including a third party research study), we believe we have the potential to grow our
base from 616 locations in 47 states and the District of Columbia as of January 30, 2016 to approximately 900 boutiques in the
United States over the next five years. We opened 83 new boutiques and closed six underperforming boutiques in fiscal year
2015. We plan to open approximately 50 to 60 new boutiques and to close 5 to 10 existing boutiques in fiscal year 2016.
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Drive Comparable Sales.
We intend to drive comparable sales by featuring high-quality, trend-right merchandise at a
compelling value, refining our distinctive boutique experience and strengthening our brand image. We intend to maintain our broad
and shallow merchandising approach, which we believe will drive units and dollars per transaction and protect margins. In addition,
we are increasing the sophistication of our buying and planning infrastructure, enhancing our buying team with additional category-specific
buyers, and augmenting the field leadership structure.
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Expand the Penetration and Presence of Our Direct-to-Consumer Business
. We complement our boutiques
with a growing direct-to-consumer business. Our direct-to-consumer business not only generates incremental sales and profits but
also builds brand awareness and boutique traffic and helps us access markets where we do not currently have a boutique. Our direct-to-consumer
sales grew by 18% in fiscal year 2015 and represented 3.9% of our total net sales. We will continue to make investments in our
direct-to-consumer website that will further enhance our customers’ shopping experience as well as establish the framework
of our long-term direct-to-consumer strategies. We expect direct-to-consumer sales growth to continue as consumers discover the
complementary nature of shopping with us online and through our boutiques.
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During fiscal 2015, the Company developed
a five-year plan to help implement these strategies. The plan is called “Vision 2020” and is composed of the following
pillars: (1) invigorate merchandising, (2) optimize real estate, (3) differentiate and personalize in-boutique guest experience,
(4) develop and integrate the digital ecosystem, (5) cultivate and expand branding and marketing, and (6) focus and drive outlets.
The Company believes the Vision 2020 plan will provide our teams the necessary focus and effectively execute our growth initiatives.
Our History
Our Company was founded in 1999. We opened
our first boutique in Houston, Texas that same year. Initially, we focused on selling fashion jewelry, accessories and selected
home décor. As our boutique base grew across the United States we expanded our merchandise offering to include apparel,
which has become our largest category and, we believe, a significant driver of growing customer loyalty and return visits. In July
2011, we became a publicly-traded company.
Our Market
Our distinct boutique environment and carefully
selected, trend-right merchandise attract a wide demographic. Our unique merchandise combination of apparel, jewelry, accessories
and gifts allows us to participate in a number of large market segments. While our broad assortment appeals to women of varying
ages and diverse backgrounds, from value-conscious to the more affluent, our primary targeted customer is a fashion conscious woman
between the ages of 18 and 35. She tends to be college educated and has moderate to high disposable income. She enjoys shopping
for the latest fashions and is attracted to our upscale boutique shopping environment, compelling value proposition and highly
personalized customer service. We believe she spends a higher proportion of her income on fashion than the general population.
Our Merchandise Offering and Merchandising
Strategy
We offer a broad and shallow selection
of fashion apparel, jewelry, accessories and gifts targeted to our core customer, who seeks trend-right, high-quality merchandise
at attractive prices. We use the term broad and shallow to refer to a diverse merchandise assortment with relatively small inventory
of each product. We have a well-balanced assortment of product categories with approximately 50% of our fiscal year 2015
sales generated by non-apparel items. Our diverse merchandise contributes to the ‘treasure hunt’ atmosphere in our
boutiques and is one which we aim to maintain as we grow. We carry a broad selection but limited quantities of each style and we
deliver new merchandise to our boutiques five days a week. This contributes to a sense of scarcity and newness within our boutiques,
mitigates fashion risk, reduces the seasonality of the inventory and protects margins.
Our wide range of apparel, jewelry, accessories
and gifts fills the various casual and dressy fashion needs of our customers and our selection of gifts ranges from the elegant
to the irreverent. Our approximately 1,368 square foot boutiques carry in excess of 3,000 SKUs at any one time and we stock approximately
15,000 different styles during the course of a year. The majority of our merchandise is sold under our proprietary labels and we
also sell a select assortment of third-party, nationally recognized brands. Our direct-to-consumer business features an edited
selection of our boutique merchandise and on-line exclusives. The table below shows the approximate breakdown of our fiscal year
2015 net sales by product category:
Apparel
49% of Net Sales
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Jewelry
22% of Net Sales
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Accessories
16% of Net Sales
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Gifts
13% of Net Sales
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Dresses, Fashion Tops, Sweaters, Cardigans and Wraps, Bottoms, Outerwear and Jackets, Tees and Tanks, Intimates
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Necklaces, Earrings, Bracelets, Rings
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Handbags, Clutches, Wallets, Shoes, Belts, Hats, Scarves, Sunglasses, Watches, Hair Accessories
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Fragrance, Candles, Bath and Body, Home Accessories, Books, Wall Art, Nail Polish, Miscellaneous Items
|
Our buying and planning team is responsible
for selecting and sourcing our merchandise, managing inventory levels and allocating items to boutiques. Each product category
has a set of dedicated buyers with oversight provided by our Chief Merchandising Officer. The buying and planning team holds weekly
meetings to review merchandise performance and identify new fashion trends. Our buyers also make regular trips to important industry
markets and trade shows. We have access to the expertise of hundreds of designers employed by our large vendor base who provide
us with a large selection of new styles for review each week. Our buyers collaborate with vendors to place special orders and to
modify presented styles based on current fashion trends and their in-depth knowledge of our customers’ preferences, which
means most of our merchandise is unique to francesca’s
®
. Before placing
an order, every item is evaluated for style, quality, fit, value and profitability to ensure it meets standards consistent with
the francesca’s
®
brand. In order to clear slow moving inventory, in addition
to normal promotional activities, we regularly mark certain merchandise out-of-stock and dispose of such inventory at a pace suitable
for our merchandising strategy.
Our Sourcing Strategy
Our ability to quickly make decisions on
trend-right items combined with the short production lead times of our vendors maximizes our speed to market. We primarily use
vendors based in the United States that source from both domestic and overseas markets and it generally takes four to twelve weeks
from the time an order is placed to the time merchandise is available on the boutique floor. With these short lead times, we are
able to make more informed buying decisions in terms of customers’ merchandise expectations, and to quickly react to changing
fashion trends. This also supports our merchandise strategy of offering a broad but limited assortment that is infused with new
items five days a week. Due to the limited quantity of our buys in any one style, we minimize material inventory positions in individual
style which enhances our ability to quickly deliver trend-right merchandise and reduce the risk of fashion misses, which can lead
to increased inventory markdowns and diminished gross margins.
We do not own or operate any manufacturing
facilities. We have relationships with a diverse base of over 500 vendors and transact business on a purchase order-by-purchase
order basis. In fiscal year 2015, we sourced approximately 91% of our merchandise from 200 vendors while our top 10 vendors sourced
approximately 24% of our merchandise, with no single vendor accounting for more than 5% of our purchases. We believe that the loss
of any of our current vendors will not result in a material disruption to our business.
We do not enter into exclusive contracts
with our vendors and we continue to expand our vendor network. This provides us with access to an even more extensive variety
of merchandise from a greater number of vendors at competitive prices. We believe our vendors view us as an important customer
given our growth and market position. Our vendors utilize a network of domestic and overseas factories, providing them access to
significant capacity.
Each of our vendors is required to adhere
to our vendor standards, which are designed to ensure that our vendors conduct their business in a legal, ethical and responsible
manner. This also includes the requirement that all of our vendors comply with the applicable laws and regulations of the United
States, those of the respective country of manufacture or exportation and all state and local laws and regulations.
Our Sales Channels
We conduct business through our boutiques
and our direct-to-consumer website,
www.francescas.com
. We do not incorporate the information contained on, or accessible
through, our website into this Annual Report on Form 10-K, and it should not be considered a part of this Annual Report on Form
10-K.
Boutiques
In fiscal year 2015, our boutiques generated
net sales of $422.3 million which represented 96.1% of total net sales. As of January 30, 2016, we operated 616 boutiques under
the name francesca’s
®
in 47 states throughout the United States and the
District of Columbia. The following list shows the number of boutiques operated by state as of January 30, 2016, and demonstrates
that we have been successful in opening boutiques in a wide range of geographies.
State
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Number of
Boutiques
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State
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Number of
Boutiques
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Alabama
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15
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Montana
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2
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Arizona
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11
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Nebraska
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5
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Arkansas
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8
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Nevada
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9
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California
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52
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New Hampshire
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3
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Colorado
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10
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New Jersey
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24
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Connecticut
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10
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New Mexico
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2
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Delaware
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4
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New York
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23
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District of Columbia*
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3
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North Carolina
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17
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Florida
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43
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North Dakota
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4
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Georgia
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22
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Ohio
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19
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Idaho
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2
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Oklahoma
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8
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Illinois
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27
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Oregon
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8
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Indiana
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12
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Pennsylvania
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26
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Iowa
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5
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Rhode Island
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4
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Kansas
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6
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South Carolina
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10
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Kentucky
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7
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South Dakota
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2
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Louisiana
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12
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Tennessee
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13
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Maine
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1
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Texas
|
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51
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Maryland
|
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14
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Utah
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3
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Massachusetts
|
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21
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Vermont
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|
1
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Michigan
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17
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Virginia
|
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19
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Minnesota
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16
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Washington
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12
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Mississippi
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6
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West Virginia
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2
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Missouri
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14
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Wisconsin
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11
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*
Not considered a state.
Boutique Design and Environment
The differentiated shopping experience
offered through our boutiques is central to the francesca’s
®
brand. Our
boutiques are designed and merchandised to deliver a warm and inviting atmosphere that creates the sense for our customers that
they are shopping in an upscale boutique. We also aim to provide a personalized in-boutique guest experience. Although we strive
to maintain a relatively consistent look and feel in all of our boutiques, the intricacies of each boutique’s physical properties,
geographic market and shopping venue, as well as the limited autonomy we provide to our boutique managers in visually merchandising
the boutiques, make each feel different and in tune with its local clientele.
Our boutiques typically range in
size from 1,000 to 2,000 square feet, with an average size of approximately 1,368 square feet. We seek locations that have a boutique
front that is at least 20 feet wide, which we adorn with visually appealing architectural lighting, signage and display window
presentations. Inside, we use a variety of color palettes and soft lighting. Each boutique’s merchandise presentation, including
display windows, tables and walls, is refreshed frequently to keep our shopping experience new and exciting. We believe by constantly
changing our visual merchandising and presentation, we give our customers a reason to shop our boutiques frequently, building customer
loyalty. Our boutique managers also use our intranet website to share best-practices with each other. We believe these grass-root
interactions improve the sense of community among our boutique managers and enhance the shopping experience for our customers.
Staffing in our boutiques consists of a
boutique manager, an assistant manager and a minimum of three part-time associates. Our compensation structure includes a bonus
component payable upon the achievement of certain financial goals. We endeavor to hire boutique personnel that are friendly and
customer-service driven individuals. In addition to training programs for visual merchandising, customer service and operations,
boutique managers benefit from ongoing field-level support and training updates as well as guides and manuals.
New Boutique Economics
We believe that our broad and shallow merchandising
strategy and the differentiated shopping experience we provide to our customers contributes to the success of our boutiques and
generates attractive economic returns. During fiscal year 2014, we opened 88 boutiques with an average size of approximately 1,318
square feet. These boutiques generated average sales of approximately $598,000 in the first year and paid back our net investment,
on average, in less than 14 months. Our average pre-tax net investment consisted of $113,000 in average boutique build-out costs
(net of $87,000 average tenant allowance) and $51,000 in average inventory. The payback period for boutiques opened in fiscal year
2014 was slightly longer compared to the payback period for boutiques opened in prior years primarily due to lower than expected
first year sales and increasing boutique build-out costs. We continue to refine our real estate strategy and selection process
to improve the payback period of our investment in new boutiques.
Boutique Growth and Site Selection
We have a proven track record of increasing
our boutique base. The table below indicates certain historical information regarding our boutiques as of the end of each of the
periods indicated below:
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Fiscal
Year
2015
|
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Fiscal
Year
2014
|
|
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Fiscal
Year
2013
|
|
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Fiscal
Year
2012
|
|
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Fiscal
Year
2011
|
|
Mall
|
|
|
313
|
|
|
|
278
|
|
|
|
226
|
|
|
|
180
|
|
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128
|
|
Non-mall
(1)
|
|
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303
|
|
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261
|
|
|
|
225
|
|
|
|
180
|
|
|
|
155
|
|
Total Boutiques
|
|
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616
|
|
|
|
539
|
|
|
|
451
|
|
|
|
360
|
|
|
|
283
|
|
Boutiques Opened
|
|
|
83
|
|
|
|
88
|
|
|
|
91
|
|
|
|
77
|
|
|
|
76
|
|
Boutiques Closed
|
|
|
6
|
|
|
|
–
|
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|
|
–
|
|
|
|
–
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|
|
–
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Total Gross Square Feet at the end of the period (in thousands)
|
|
|
843
|
|
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728
|
|
|
|
613
|
|
|
|
499
|
|
|
|
399
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Average Square Feet Per Boutique at the end of the period
(2)
|
|
|
1,368
|
|
|
|
1,350
|
|
|
|
1,359
|
|
|
|
1,385
|
|
|
|
1,409
|
|
Net Sales Per Average Square Foot for the period
(3)
|
|
$
|
543
|
|
|
$
|
545
|
|
|
$
|
592
|
|
|
$
|
632
|
|
|
$
|
554
|
|
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1)
|
Non-mall includes boutiques in lifestyle centers, street locations, strip centers and outlet locations.
|
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2)
|
Average square feet per boutique is calculated by dividing total gross square feet at the end of the period by the number of
boutiques open at the end of the period.
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3)
|
Net sales per average square foot are calculated by dividing net sales for the period by the average total 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. Average square feet is calculated as (a) the
sum of total gross square feet at the beginning of the period and total gross square feet at the end of each fiscal quarter within
the period, divided by (b) the number of fiscal quarters within the period plus one (which, for a fiscal year, is five). There
may be variations in the way in which some of our competitors and other retailers calculate sales per square foot or similarly
titled measures. As a result, average square feet and net sales per average square foot for the period may not be comparable to
similar data made available by other retailers.
|
Our flexible boutique format has enabled
us to successfully open boutiques across a variety of shopping venues, market sizes, climates and demographics. We believe this
provides us with a wide scope of real estate opportunities and enhances our ability to profitably expand our boutique base. Based
on our rigorous real estate selection process, our flexible boutique format and the financial characteristics of our boutiques,
we believe that the per boutique costs associated with opening new boutiques over the next twelve months should not be materially
different from our current costs for opening new boutiques. We expect to fund the costs of our boutique growth through cash flow
generated by our operations and through our revolving credit facility, if necessary. We expect to open boutiques in both new and
existing markets and across regional malls, lifestyle centers, street locations, strip centers and outlet locations. We expect
our overall boutique mix to consist of approximately 45% mall and 55% non-mall, if we are successful in opening 900 boutiques.
In order to optimize real estate,
our real estate committee utilizes a disciplined approach to site selection, which analyzes the prospective shopping venue for
factors such as overall shopping venue productivity, competitive environment and specific sales of other retailers deemed most
relevant as well as the configuration of available space for potential new boutique locations. We seek prominent locations in high-traffic
areas of the shopping venue and in close proximity to other retailers targeting similar customers. We also evaluate each new boutique
location based on projected sales and determine whether the capital investment and estimated boutique four-wall contribution satisfies
our targeted return threshold, occupancy costs, and boutique contribution.
We continuously review the overall economic
performance of our boutiques. As part of our economic review process, we evaluate a variety of factors such as expected future
revenue, applicable market conditions, unamortized portion of leasehold improvements, our ability to terminate the underlying lease
obligation and related cost of any such early termination. As a result of such review, we closed six underperforming boutiques
during fiscal year 2015 and we plan to close approximately 5 to 10 existing boutiques in fiscal year 2016.
See Item 1A, “Risk Factors”
for certain risks related to our boutique growth and site selection.
Direct-to-Consumer
Our direct-to-consumer business consists
of our
www.francescas.com
website. Through our website, our customers are able to purchase individual items, shop the latest
jewelry, gift or fashion merchandise and special promotions, create a wish list, sign up for our emailing list, connect and follow
us on social media sites such as Facebook, Twitter, Instagram and Pinterest, as well as obtain current information on our boutique
locations. This channel enables us to reach customers in all states and further build our brand. We currently obtain and collect
customer email information from our boutiques and website and use it to generate marketing programs, such as our email campaign.
We will continue to make investments to our website that will further enhance our customers’ shopping experience as well
as establish the framework for our long-term direct-to-consumer strategies. We believe there is significant potential to expand
this channel over time.
Marketing and Advertising
We currently focus on organic, viral and
in-boutique marketing to increase customer loyalty and build our brand image. By locating our boutiques in prominent, high-traffic
locations and by making very limited use of traditional television and print advertising, we encourage people to ‘discover’
francesca’s
®
. We believe that many of our customers develop a personal
connection with our boutiques and become our ambassadors in the local community by spreading the word about francesca’s
®
.
We also use email communications, our website and, increasingly, social networking sites, such as Facebook, Twitter, Instagram
and Pinterest and fashion related blogs to achieve our marketing goals. Our boutique managers are passionate about francesca’s
®
and contribute to our marketing effort by hosting in-boutique activities, such as fashion shows and private parties.
Distribution
We distribute most of our merchandise from
our distribution center (located within our corporate headquarters) in Houston, Texas. Our current facility occupies approximately
218,000 square feet, consisting of approximately 165,000 square feet of warehouse and distribution space, which services our boutiques
and direct-to-consumer business, and approximately 53,000 square feet of office space for our corporate headquarters. Our merchandise
is generally received, inspected, managed, stored and distributed through our distribution warehouse. The majority of our merchandise
is currently pre-ticketed and pre-sorted by our vendors, which allows us to efficiently ship from our distribution center directly
to our boutiques, thereby reducing labor costs. Due to the relatively smaller size of our sales area, we ship smaller packages
of fresh merchandise five days a week. Hence, we are able to utilize third party shipping vendors to effectively distribute fresh
merchandise on a continuous basis, ensuring successful implementation of our broad and shallow merchandising strategy. We believe
that our current facilities will be sufficient to support our growth plans for several years.
Management Information Systems
Our management information technology systems
provide support and timely information to our management team. We believe our current systems provide us with operational efficiencies,
scalability, management control and timely reporting that allows us to identify and respond to operating trends in our business.
We use a combination of customized and industry-standard software systems to support boutique point-of-sale, merchandise planning
and buying, direct-to-consumer, inventory management, financial reporting and administrative functions. We will remain diligent
in our efforts to continuously improve the functionality and performance of our existing enterprise applications and infrastructure
to support the Company’s continued growth.
Competition
The women’s apparel, jewelry, accessories
and gifts market is large, fragmented and highly competitive. Our largest competitors include national and regional department
stores, specialty retailers, mass merchants and internet-based retailers. Due to the breadth of our merchandise, it is difficult
to identify companies that compete with us in every product category. We generally compete with individual, often owner-operated
specialty shops in each of the markets that we operate as well as broadly merchandised department stores and certain specialty
stores. We may face new competitors and increased competition from existing competitors as we expand into new markets and increase
our presence in existing markets.
The principal basis upon which we compete
is by offering a differentiated shopping experience through high-quality, trend-right merchandise at attractive prices in a warm
and inviting boutique environment with excellent customer service. In addition, our manageable boutique size and flexible but disciplined
real estate strategy provide us with a competitive advantage that is not easily replicated by our major competitors. Our success
also depends in substantial part on our ability to respond quickly to fashion trends so that we can meet the changing demands of
our customers.
Intellectual Property
We have registered our trademark francesca’s
®
with the United States Patent and Trademark Office. In addition, we own domain names, including
www.francescas.com
, and
we own unregistered copyright rights in our website content. We believe our trademarks have value, and we diligently protect them
against infringement. For instance, we have filed applications to register our trademark internationally. We will also continue
to file new applications as appropriate to protect our intellectual property rights.
Regulation and Legislation
We are subject to labor and employment
laws, laws governing advertising and promotions, privacy laws, product and other safety regulations, consumer protection regulations,
environmental requirements and other laws that regulate retailers and govern the promotion and sale of merchandise and the operation
of boutiques and warehouse facilities. We monitor changes in these laws and believe that we are in compliance with applicable laws
in all material respects.
Insurance
We use insurance for a number of risk management
activities, including workers’ compensation, general liability, automobile liability, cyber security and employee-related
health care benefits, a portion of which is paid by the employees. We evaluate our insurance requirements on an ongoing basis and
believe we maintain adequate levels of coverage.
Our Employees
As of January 30, 2016, we had approximately
5,211 total employees. Of our total employees, approximately 265 were based at our corporate headquarters in Houston, Texas, and
approximately 4,946 were boutique employees. We had approximately 1,316 full-time employees and approximately 3,895 part-time
employees, who are primarily boutique employees. None of our employees are represented by a labor union, and we have had no labor-related
work stoppages as of January 30, 2016. Our relationship with our employees is one of the keys to our success, and we believe that
relationship is satisfactory.
Seasonality
Our wide-range of merchandise and our strategy
of carrying a broad selection but limited quantities of each item reduce our overall seasonality relative to other specialty retailers.
Nevertheless, our business is mildly seasonal in nature and demand is generally the highest in the fourth fiscal quarter due to
the year-end holiday season and lowest in the first fiscal quarter. As a result of this seasonality and generally because of variation
in consumer spending habits, we experience fluctuations in net sales and working capital requirements during the year. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations-Seasonality” for more information.
Privacy Policy
In the course of our business, we collect
information about our customers, including customer data submitted to us in connection with purchases of our merchandise at boutiques
as well as from our direct-to-consumer business. We respect the privacy of our customers and take steps to safeguard the confidentiality
of the information that they provide to us.
Securities and Exchange
Commission Filings
We maintain a website at
www.francescas.com
.
We provide, free of charge, access to various reports that we file with, or furnish to, the SEC through our website, as soon as
reasonably practicable after they have been filed or furnished with the SEC. These reports include, but not limited to, our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports.
The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings
at
http://www.sec.gov
.
ITEM 1A. RISK FACTORS
If any of the following risks actually
occurs, our business, financial condition, results of operation, cash flow and prospects could be materially and adversely affected.
As a result, the trading price of our common stock could decline.
Our success depends on our ability to anticipate, identify
and respond quickly to new and changing fashion trends, customer preferences and other factors, and our inability to anticipate,
identify and respond to these changes and trends could have a material adverse effect on our business, financial condition and
results of operations.
Our core market, which is comprised of
apparel, jewelry, accessories and gifts for women from 18 to 35-years old, is subject to rapidly shifting fashion trends, customer
tastes and demands. Accordingly, our success is dependent on our ability to anticipate, identify and respond to the latest fashion
trends and customer demands, and to translate such trends and demands into appropriate, saleable product offerings in a timely
manner. A small number of our employees are primarily responsible for performing this analysis and making product purchase decisions.
Our failure to anticipate, identify or react swiftly and appropriately to new and changing styles, trends or desired image preferences
or to accurately anticipate and forecast demand for certain product offerings is likely to lead to lower demand for our merchandise,
which could cause, among other things, sales declines, disposing excess inventories and a greater number of markdowns resulting
in a decreased merchandise margin. Further, if we are not able to anticipate, identify and respond to changing fashion trends and
customer preferences, we may lose customers and market share to those of our competitors who are able to better anticipate, identify
and respond to such trends and preferences. In addition, because our success depends on our brand image, our business could be
materially adversely affected if new product offerings are not accepted by our customers. Our new product offerings may not be
met with the same level of acceptance as our past product offerings and we may not be able to adequately respond to fashion trends
in a timely manner or the preferences of our customers. If we do not accurately forecast or analyze fashion trends and sales levels,
our business, financial condition and results of operations will be adversely affected.
If we are not able to successfully maintain a broad and
shallow merchandise assortment, we may be unable to attract a sufficient number of customers to our boutiques or sell sufficient
quantities of our merchandise through our direct-to-consumer business, which could result in excess inventories and markdowns.
We use the term broad and shallow to refer
to a diverse merchandise assortment with relatively small inventory of each product. We believe that our strategy to offer our
customers a broad and shallow merchandise assortment has contributed significantly to the success of our business. Among other
things, we believe that this strategy creates a constant sense of newness and scarcity value, which drives repeat boutique visits
and increased sales. In addition, we believe that this strategy helps us reduce markdowns. There can be no assurance that we will
be able to continue to adequately stock our boutiques with a sufficiently broad and shallow assortment of merchandise. As we increase
order volumes in connection with opening new boutiques and expanding our direct-to-consumer business, it may become increasingly
difficult for us to accurately forecast the optimal amount of merchandise to order from our vendors and continue to offer a broad
and shallow merchandise assortment at each boutique. If we are unable to offer a broad and shallow merchandise assortment, customers
may choose to visit our boutiques less frequently, our brand could be impaired, our market share may decline and our results of
operations could deteriorate. Further, any failure to maintain a broad and shallow merchandise assortment could lead to excess
inventories which could lead to markdowns and increased promotions, which would result in a decrease in our merchandise margin.
Our growth strategy depends in large part upon our ability
to successfully open and operate new boutiques each year in a timely and cost-effective manner.
Our strategy to grow our business depends
in large part on continuing to successfully open a substantial number of new boutiques each year for the foreseeable future. The
success of this strategy will depend largely upon our ability to find a sufficient number of suitable locations, our ability to
recruit, hire and train qualified personnel to operate our new boutiques and our ability to scale our infrastructure to successfully
integrate our new boutiques.
Our ability to successfully open and operate
new boutiques depends on many factors that may be outside of our control including, among others, our ability to:
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identify desirable boutique locations, primarily in malls, lifestyle centers, street locations and strip centers, as well as
other types of shopping venues and outlet malls, which may be difficult and costly, particularly in an improving real estate environment;
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negotiate acceptable lease terms, including favorable levels of tenant allowances, which may be difficult, particularly in
an improving real estate environment;
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maintain out-of-pocket, build-out costs in line with our boutique economic model, including by receiving expected levels of
tenant allowances for a portion of our construction expenses, and managing these construction expenses at reasonable levels, which
may be difficult, particularly in an improving real estate environment;
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efficiently source and distribute additional merchandise;
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hire, train and retain a growing workforce of boutique managers, boutique associates and other personnel;
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successfully integrate new boutiques into our existing control structure and operations, including our information technology
systems;
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efficiently expand the operations of our distribution facility to meet the needs of a growing boutique network;
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identify and satisfy the merchandise and other preferences of our customers in new geographic areas and markets; and
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address competitive, merchandising, marketing, distribution and other challenges encountered in connection with expansion into
new geographic areas and markets.
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Our expansion plans have us opening new
boutiques in or near the areas where we have existing boutiques. To the extent that we open boutiques in markets where we already
have existing boutiques, we may experience reduced net sales at those existing boutiques. Also, as we expand into new geographic
areas, we will need to successfully identify and satisfy the fashion preferences of customers in those areas. In addition, we will
need to address competition, merchandising, marketing, distribution and other challenges encountered in connection with any expansion
and our limited brand recognition in new markets may limit our expansion strategy and cause our business and growth to suffer.
New geographic areas may also have different operational characteristics, including employment and labor, logistics, real estate
and legal requirements which may divert financial, operation and managerial resources from our existing operations.
Finally, newly opened boutiques may not
be received as well as, or achieve net sales, profitability levels or payback period on our net investment comparable to those
of, our existing boutiques in our estimated time periods, or at all. If our boutiques fail to achieve, or are unable to sustain,
acceptable net sales and profitability levels, our business may be materially harmed and we may incur significant costs associated
with closing or relocating boutiques. In addition, our current expansion plans are only estimates, and the actual number of boutiques
we open or close each year and the actual number of suitable locations for our new boutiques could differ significantly from these
estimates. If we fail to successfully open and operate new boutiques and execute our growth plans, the price of our common stock
could decline.
We may not be able to efficiently source and distribute
the additional merchandise quantities necessary to support our growth.
Our success depends on our ability to source
and distribute merchandise efficiently. The sourcing of our merchandise is dependent, in part, on our relationships with our vendors.
If we are unable to maintain these relationships we may not be able to continue to source merchandise at competitive prices that
appeal to our customers. If we do not succeed in maintaining good relationships with our vendors or if our growth outpaces the
ability of our vendors to scale up and the company cannot identify new vendors to meet the demand for additional merchandise production,
the company could see its costs go up or the delivery time on its new orders substantially increase.
Increases in the cost of the raw materials or other inputs
used in the production of our merchandise could result in the loss of suppliers, increase our cost of goods sold and occupancy
costs and adversely affect our financial results.
The success of our business is in part
driven by the compelling price-value proposition we offer our customers. If the costs of the raw materials, particularly cotton,
leather and synthetics, used in producing our merchandise increase, our vendors would look to pass these cost increases along to
us. The price and availability of such raw materials may fluctuate significantly, depending on many factors which are outside of
our control, including commodity prices, crop yields and weather patterns. If our vendors attempt to pass any cost increases on
to us and we refuse to pay the increases, we could lose certain vendors as suppliers, resulting in the risk that we could not fill
our orders in a timely manner or at all. If we pay the increases, we could either attempt to raise retail prices, which could adversely
affect our sales and our brand image, or choose not to raise prices, which could adversely affect the profitability of our merchandise
sales.
In addition, changes in laws affecting
our supply chain and portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to conflict minerals, may
adversely affect the sourcing, availability and pricing of certain materials which may be used in the manufacture of some of our
products.
If we are unable to effectively operate, replace or upgrade
any of our existing information technology systems, our operations could be disrupted which could adversely affect our financial
results.
The efficient operation of our business
is significantly dependent on our information technology systems, including our ability to operate them effectively and successfully
implementing new systems and controls. Any failure of these systems to operate effectively or any difficulty in implementing
information technology systems changes could disrupt and adversely impact the promptness and accuracy of our merchandise distribution,
transaction processing, financial accounting and reporting, including the implementation of our internal controls over financial
reporting, the efficiency of our operations and our ability to properly forecast earnings and cash requirements. Any resulting
disruptions could harm our business, prospects, financial condition and results of operations.
Our current growth plans will place a strain on our existing
resources and could cause us to encounter challenges we have not faced before.
As our number of boutiques and our direct-to-consumer
sales grow, our operations will become more complex. While we have grown substantially as a company since inception, much of this
growth occurred in recent years. As we move forward, we expect our growth to bring new challenges that we have not faced before.
Among other difficulties that we may encounter, this growth will place a strain on our existing infrastructure, including our distribution
facilities, information technology systems, financial controls, real estate and boutique operations staffs, and may make it more
difficult for us to adequately forecast expenditures, such as real estate and construction expenses, and budgeting will become
more complex. We may also place increased burdens on our vendors, as we will likely increase the size of our merchandise orders.
The increased demands that our growth plans will place on our infrastructure may cause us to operate our business less efficiently,
which could cause deterioration in the performance of our existing boutiques. New order delivery times could lengthen as a result
of the strains that growth will place on our existing resources and our growth may make it otherwise difficult for us to respond
quickly to changing trends, consumer preferences and other factors. This could impair our ability to continue to offer trend-right
merchandise which could result in excess inventory, greater markdowns, loss of market share and decreased sales.
In addition, our planned expansion is expected
to place increased demands on our existing operational, managerial, administrative and other resources. Specifically, our inventory
management and personnel processes may need to be further upgraded to keep pace with our current growth strategy. We cannot
anticipate all of the demands that our expanding operations will impose on our business, and our failure to appropriately address
these demands could have an adverse effect on us.
Our business is sensitive to consumer spending and economic
conditions.
Consumer purchases of discretionary retail
items and specialty retail products, which include our apparel, jewelry, accessories and gifts, may be adversely affected by economic
conditions such as employment levels, salary and wage levels, the availability of consumer credit, inflation, high interest rates,
high tax rates, high fuel prices and consumer confidence with respect to current and future economic conditions. Consumer purchases
may decline during recessionary periods or at other times when unemployment is higher or disposable income is lower. These risks
may be exacerbated for retailers like us that focus significantly on selling discretionary fashion merchandise. Consumer willingness
to make discretionary purchases may decline, may stall or may be slow to increase due to national and regional economic conditions.
Our financial performance is particularly susceptible to economic and other conditions in regions or states where we have a significant
number of boutiques. There remains considerable uncertainty and volatility in the national and global economy. Further or future
slowdowns or disruptions in the economy could adversely affect mall traffic and new mall and shopping center development and could
materially and adversely affect us and our growth plans. We may not be able to maintain our recent rate of growth in net sales
if there is a decline in consumer spending.
In addition, a deterioration of economic
conditions and future recessionary periods may exacerbate the other risks faced by our business, including those risks we encounter
as we attempt to execute our growth plans. Such risks could be exacerbated individually or collectively.
We operate in the highly competitive specialty retail
apparel and accessories industry and the size and resources of some of our competitors may allow them to compete more effectively
than we can, which could adversely impact our growth and market share.
We face intense competition in the specialty
retail apparel and accessories industry. We compete on the basis of a combination of factors, including price, breadth, quality
and style of merchandise, as well as our in-boutique experience and level of customer service, our brand image and our ability
to anticipate, identify and respond to new and changing fashion trends. While we believe that we compete primarily with specialty
retailers and internet businesses that specialize in women’s apparel and accessories, we also face competition from department
stores, mass merchandisers and value retailers. We believe our primary competitors include specialty apparel and accessories retailers
that offer their own private labels. In addition, our expansion into markets served by our competitors and entry of new competitors
or expansion of existing competitors into our markets could have an adverse effect on our business.
We also compete with a wide variety of
large and small retailers for customers, vendors, suitable boutique locations and personnel. The competitive landscape we face,
particularly among specialty retailers, is subject to rapid change as new competitors emerge and existing competitors change their
offerings. We cannot provide assurance that we will be able to compete successfully and navigate the shifts in our market.
Many of our competitors are, and many of
our potential competitors may be, larger and have greater name recognition and access to greater financial, marketing and other
resources. Therefore, these competitors may be able to adapt to changes in trends and customer desires more quickly, devote greater
resources to the marketing and sale of their products, generate greater brand recognition or adopt more aggressive pricing policies
than we can. As a result, we may lose market share, which could reduce our sales and adversely affect our results of operations.
Many of our competitors also utilize advertising and marketing media, including advertising through the use of direct mail, newspapers,
magazines, billboards, television and radio, which may provide them with greater brand recognition than we have given our very
limited use of traditional television and print advertising.
Our competitors may also sell certain products
or substantially similar products through the Internet or through outlet centers or discount stores, increasing the competitive
pressure for those products. Additionally, the internet and other new technologies facilitate competitive entry and comparison
shopping. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors.
Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our
markets could have a material adverse effect on us. Competitive forces and pressures may intensify as our presence in the retail
marketplace grows.
We do not possess exclusive rights to many
of the elements that comprise our in-boutique experience and merchandise offerings. Some specialty retailers offer a personalized
shopping experience that in certain ways is similar to the one we strive to provide to our customers. Our competitors may seek
to emulate facets of our business strategy and in-boutique experience, which could result in a reduction of any competitive advantage
or special appeal that we might possess. In addition, some of our merchandise offerings are sold to us on a non-exclusive basis.
As a result, our current and future competitors, especially those with greater financial, marketing or other resources, may be
able to duplicate or improve upon some or all of the elements of our in-boutique experience or merchandise offerings that we believe
are important in differentiating our boutiques and our customers’ shopping experience. If our competitors were to duplicate
or improve upon some or all of the elements of our in-boutique experience or product offerings, our competitive position and our
business could suffer.
Our inability to maintain or increase our comparable sales
could adversely impact our net sales, profitability, cash flow and stock price.
Our comparable sales declined in fiscal
years 2014 and 2013 as compared to the prior year periods. We may not be able to sustain or increase the levels of comparable
sales that we have experienced in the recent past. If our future comparable sales continue to decline or fail to meet market expectations,
our profitability could be harmed and the price of our common stock could decline. In addition, the aggregate comparable sales
levels of our boutiques have fluctuated in the past and can be expected to fluctuate in the future. A variety of factors affect
comparable sales, including fashion trends, competition, current national and regional economic conditions, pricing, changes in
our merchandise mix, prior period comparable sales levels, inventory shrinkage, the timing and amount of markdowns, the success
of our marketing programs, holiday timing and weather conditions. Our planned expansion may cause additional pressure on our comparable
sales. These factors may cause our comparable sales results to be materially lower than in recent periods and lower than market
expectations, which could harm our business and our earnings and result in a decline in the price of our common stock.
Our inability to maintain our operating margins could
adversely affect the price of our common stock.
Our operating margins declined in fiscal
years 2014 and 2013 as compared to the prior year periods. We aim to increase our operating margins through scale efficiencies,
improved systems, continued cost discipline and enhancements to our merchandise offerings. If we are unable to successfully manage
the potential difficulties associated with our growth plans, we may not be able to capture the scale efficiencies that we expect
from expansion. If we are not able to capture scale efficiencies, improve our systems, continue our cost discipline and enhance
our merchandise offerings, we may not be able to achieve our goals with respect to operating margins. In addition, if we do not
adequately refine and improve our various ordering, tracking and allocation systems, we may not be able to increase sales and reduce
inventory shrinkage. As a result, our operating margins may stagnate or further decline, which could adversely affect the price
of our common stock.
Our ability to attract customers to our boutiques depends
on locating our boutiques in suitable locations. Conditions or changes affecting boutique locations, including any decrease in
customer traffic, could cause our sales to be less than expected.
Boutique locations and related sales and
customer traffic may be adversely affected by, among other things, economic conditions in a particular area, competition from nearby
retailers selling similar merchandise, changing lifestyle choices of consumers in a particular market and the closing or decline
in popularity of other businesses located near our boutiques. Although we have opened many boutiques in mall locations, our approach
to identifying locations for our boutiques has historically favored street locations and lifestyle centers. As a result, many of
our boutiques are located outside of malls near other retailers or public venues that we believe are consistent with our customers’
lifestyle choices. Changes in areas around our boutique locations that result in reductions in customer foot traffic or otherwise
render the locations unsuitable could cause our sales to be less than expected. Boutiques located in street locations and lifestyle
centers may be more susceptible to such changes than boutiques located in malls.
Our business depends on a strong brand image, and if we
are not able to maintain and enhance our brand, particularly in new markets where we have limited brand recognition, we may be
unable to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise.
We believe that our brand image and brand
awareness has contributed significantly to the success of our business. We also believe that maintaining and enhancing our brand
image particularly in new markets where we have limited brand recognition is important to maintaining and expanding our customer
base. Maintaining and enhancing our brand image may require us to make substantial investments in areas such as merchandising,
marketing, boutique operations, community relations, boutique promotions and employee training. These investments may be substantial
and may not ultimately be successful.
We are dependent on shopping malls and other retail centers
to attract customers to our boutiques.
Many of our boutiques are located in shopping
malls and other retail centers that benefit from the ability of “anchor” retail tenants, generally large department
centers, and other attractions, to generate sufficient levels of consumer traffic in the vicinity of our boutiques. Any decline
in the volume of consumer traffic at these shopping centers, whether because of economic slowdown, severe weather, a decline in
the popularity of shopping centers, the closing of anchor stores or otherwise, could result in reduced sales at our boutiques and
excess inventory. We may have to respond by increasing markdowns or increasing promotions to reduce excess inventory, which
could have a material adverse effect on our margins and operating results.
Our use of traditional advertising channels is very limited
and if we fail to adequately continue to connect with our customer base, our business could be adversely affected.
We currently focus on organic, viral
and in-boutique marketing to capture the interest of our customers and drive them to our boutiques and website. We limit our use
of traditional advertising channels, such as newspapers, magazines, billboards, television and radio, which are used by some of
our competitors. We expect to increase our use of social media, such as Facebook and Twitter, in the future. If our marketing efforts
are not successful, there may be no immediately available or cost effective alternative marketing channel for us to use to build
or maintain brand awareness. As we execute our growth strategy, our ability to successfully integrate new boutiques into their
surrounding communities or to expand into new markets will be adversely impacted if we fail to connect with our target customers.
Failure to successfully connect with our target customers in new and existing markets could harm our business, results of operations
and financial condition.
We depend on our senior management personnel and may not
be able to retain or replace these individuals or recruit additional personnel, which could harm our business.
Our future success is substantially dependent
on the continued service of our senior management, particularly Mr. Michael Barnes, the Chairman of our Board of Directors
and our Chief Executive Officer and President since December 4, 2014. The loss of services of one or more of our named executive
officers could impair our ability to manage our business effectively and could have an adverse effect on our business, as we may
not be able to find suitable individuals to replace them on a timely basis or at all. In addition, any departures of key personnel
could be viewed in a negative light by investors and analysts, which could cause our common stock price to decline. We do not maintain
key person insurance on any employee.
In addition to these key employees, we
have other employees in positions, including those employees responsible for our merchandising and operations departments that,
if vacant, could cause a temporary disruption in our business until such positions are filled.
If we are unable to find, train and retain key personnel,
including new boutique employees that reflect our brand image and embody our culture, we may not be able to grow or sustain our
operations.
Our success depends in part upon our ability
to attract, motivate and retain a sufficient number of boutique employees, including boutique managers, who understand and appreciate
our customers, brand and corporate culture, and are able to adequately and effectively represent our culture and establish credibility
with our customers. Like most retailers, we experience significant employee turnover rates, particularly among boutique employees.
Our planned growth will require us to hire and train even more personnel to manage such growth. If we are unable to hire and retain
boutique personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for
our culture, understanding of our customers and knowledge of the merchandise we offer, our ability to open new boutiques may be
impaired, the performance of our existing and new boutiques could be materially adversely affected and our brand image may be negatively
impacted. There is a high level of competition for experienced, qualified personnel in the retail industry and we compete for personnel
with a variety of companies looking to hire for retail positions. Historically, we have prided ourselves on our commitment to employee
growth and development and we focus on promoting from within our team. Our growth plans will strain our ability to staff our new
boutiques, particularly at the boutique manager level, which could have an adverse effect on our ability to maintain a cohesive
and consistently strong team, which in turn could have an adverse impact on our business. If we are unable to attract, train and
retain employees in the future, we may not be able to serve our customers effectively, thus reducing our ability to continue our
growth and to operate our existing boutiques as profitably as we have in the past.
Union attempts to organize our employees could negatively
affect our business.
None of our employees are currently subject
to a collective bargaining agreement. As we continue to grow and enter different regions, unions may attempt to organize all or
part of our employee base at certain boutiques or within certain regions. Responding to such organization attempts may distract
management and employees and may have a negative financial impact on individual boutiques, or on our business as a whole.
We have one corporate headquarters and distribution facility
and have not yet implemented disaster recovery procedures. Disruptions to the operations at that location could have an adverse
effect on our business operations.
Our corporate headquarters and our only
distribution facility are located in Houston, Texas. Our distribution facility supports both our boutiques and our direct-to-consumer
business. A majority of our merchandise is shipped from our vendors to the distribution facility and then packaged and shipped
from our distribution facility to our boutiques and our direct-to-consumer customers. The success of our boutiques depends on the
timely receipt of merchandise because they must receive merchandise in a timely manner in order to stay current with the fashion
preferences of our customers. The efficient flow of our merchandise requires that we have adequate capacity and uninterrupted service
in our distribution facility to support both our current level of operations, and the anticipated increased levels that may follow
from our growth plans. We believe that our current distribution facility is capable of supporting our growth plans for several
years.
In addition, if we encounter difficulties
associated with our distribution facility or if it were to shut down for any reason, including fire, hurricanes or other natural
disaster or severe weather, we could face inventory shortages resulting in “out-of-stock” conditions in our boutiques,
and delays in shipments to our customers, resulting in significantly higher costs and longer lead times associated with distributing
our merchandise. See “-The current geographic concentration of our boutiques creates an exposure to local economies, regional
downturns and severe weather or other catastrophic occurrences that may materially adversely affect our financial condition and
results of operations” below. Also, most of our computer equipment and senior management, including critical resources dedicated
to merchandising, financial and administrative functions are located at our corporate headquarters. Our management and our operations
and distribution staff would need to find an alternative location, causing further disruption and expense to our business and operations.
We recognize the need for, and are in the
early stages of, developing disaster recovery, business continuity and document retention plans that would allow us to be operational
despite casualties or unforeseen events impacting our corporate headquarters or distribution center. Without disaster recovery,
business continuity and document retention plans, if we encounter difficulties or disasters with our distribution facility or at
our corporate headquarters, our critical systems, operations and information may not be restored in a timely manner, or at all,
and this could have an adverse effect on our business.
Our business requires that we lease substantial amounts
of space and we may not be able to continue to lease space on terms as favorable as the leases negotiated in the past.
We do not own any real estate. Instead,
we lease all of our boutique locations, as well as our corporate headquarters and distribution facility in Houston, Texas. Our
boutiques are leased from third parties, with initial lease terms of five to ten years. Many of our lease agreements also have
additional five-year renewal options. We believe that we have been able to negotiate favorable rental rates and tenant allowances
over the last few years due in large part to the state of the economy and higher than usual vacancy rates in a number of regional
malls and shopping centers. These trends may not continue, and there is no guarantee that we will be able to continue to negotiate
such favorable terms. Many of our leases have early cancellation clauses, which permit the lease to be terminated by us or the
landlord if certain sales levels are not met in specific periods or if the shopping venue does not meet specified occupancy standards.
In addition to fixed minimum lease payments, most of our boutique leases provide for additional rental payments based on a percentage
of sales, or “percentage rent,” if sales at the respective boutiques exceed specified levels, as well as the payment
of common area maintenance charges, real property insurance and real estate taxes. Many of our lease agreements have defined escalating
rent provisions over the initial term and any extensions. Increases in our already substantial occupancy costs and difficulty in
identifying economically suitable new boutique locations could have significant negative consequences, which include:
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requiring that a greater portion of our available cash be applied to pay our rental obligations, thus reducing cash available
for other purposes and reducing our profitability;
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increasing our vulnerability to general adverse economic and industry conditions; and
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limiting our flexibility in planning for, or reacting to changes in, our business or in the industry in which we compete.
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We depend on cash flow from operations
to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating
activities to fund these expenses and needs and sufficient funds are not otherwise available to us, we may not be able to service
our lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which could
harm our business. Additional sites that we lease may be subject to long-term non-cancelable leases if we are unable to negotiate
our current standard lease terms. If an existing or future boutique is not profitable, and we decide to close it, we may nonetheless
be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the
balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements
for early cancellation under that lease. In addition, if we are not able to enter into new leases or renew existing leases on terms
acceptable to us, this could have an adverse effect on our results of operations.
Our ability to obtain merchandise on a timely basis at
competitive prices could suffer as a result of any deterioration or change in our vendor relationships or events that adversely
affect our vendors or their ability to obtain financing for their operations.
We have many important vendor relationships
that we believe provide us with a competitive advantage. We do not own or operate any manufacturing facilities. Instead, we purchase
our merchandise from third-party vendors. Our top 10 vendor vendors sourced approximately 24% of our merchandise in fiscal year
2015 with no single vendor accounting for more than 5% of our purchases. Our business and financial performance depend in large
part on our ability to evaluate merchandise quickly for style and then modify any undesirable designs or to improve the quality,
look, and fit of the item. We do not have long-term contracts with any of these vendors and we generally operate without any contractual
assurances of continued supply, pricing or access to new products. Rather, we receive and review samples almost daily for fit and
fashion evaluation. Any of our vendors could discontinue supplying us with desired products in sufficient quantities for a variety
of reasons.
The benefits we currently experience from
our vendor relationships could be adversely affected if our vendors:
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choose to stop providing merchandise samples to us or otherwise discontinue selling merchandise to us;
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raise the prices they charge us;
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change pricing terms to require us to pay on delivery or upfront, including as a result of changes in the credit relationships
some of our vendors have with their various lending institutions;
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reduce our access to styles, brands and merchandise by entering into broad exclusivity arrangements with our competitors or
otherwise in the marketplace;
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sell similar merchandise to our competitors with similar or better pricing, many of whom already purchase merchandise in significantly
greater volume and, in some cases, at lower prices than we do;
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lengthen their lead times; or
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initiate or expand sales of apparel and accessories to retail customers directly through their own stores, catalogs or on the
internet and compete with us directly.
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We historically have established good working
relationships with many small- to mid-sized vendors that often have more limited resources, production capacities and operating
histories. Market and economic events that adversely impact our vendors could impair our ability to obtain merchandise in sufficient
quantities. Such events include difficulties or problems associated with our vendors’ business, finances, labor, ability
to import merchandise, costs, production, insurance and reputation. There can be no assurance that we will be able to acquire desired
merchandise in sufficient quantities on acceptable terms or at all in the future, especially if we need significantly greater amounts
of inventory in connection with the growth of our business. We may need to develop new relationships with larger vendors, as our
current vendors may be unable to supply us with needed quantities and we may not be able to find similar merchandise on the same
terms from larger vendors. If we are unable to acquire suitable merchandise in sufficient quantities, at acceptable prices with
adequate delivery times due to the loss of or a deterioration or change in our relationship with one or more of our key vendors
or events harmful to our vendors occur, it may adversely affect our business and results of operations.
A failure in our direct-to-consumer operations could significantly
disrupt our business and lead to reduced sales, growth prospects and reputational damage.
While accounting for only 3.9% and 3.8%
of our net sales in fiscal years 2015 and 2014, respectively, our direct-to-consumer business is growing and is an important element
of our brand and relationship with our customers. Net sales attributable to our direct-to-consumer business increased 18% and 64%
in fiscal years 2015 and 2014, respectively. Further expanding our direct-to-consumer business is an important part of our growth
strategy. In addition to changing consumer preferences, shifting traffic patterns and related customer acquisition costs and buying
trends in our direct-to-consumer business, we are vulnerable to certain additional risks and uncertainties associated with direct-to-consumer
sales, including rapid changes in technology, diversion of sales from our boutiques, credit card fraud, website downtime and other
technical failures, security breaches, consumer privacy concerns, changes in state tax regimes and government regulation of internet
activities. Our failure to successfully respond to these risks and uncertainties could reduce our direct-to-consumer sales, increase
our costs, diminish our growth prospects, and damage our brand, which could negatively impact our results of operations and stock
price.
In addition, there is no guarantee that
we will be able to further expand our direct-to-consumer business. Many of our competitors already have direct-to-consumer businesses
that are substantially larger and more developed than ours, which places us at a competitive disadvantage. Moreover, online shopping
has benefitted from technology improving the online shopping experience and, in some cases, has resulted in a shift of consumer
spending from brick-and-mortar to online where competition is even greater since “pure play” internet retailers do
not have significant occupancy costs and boutique payroll expenses like we do. If we are unable to further expand our direct-to-consumer
business, our growth plans will suffer and the price of our common stock could decline.
System security risk issues, including our failure to
protect our customers’ privacy and disruption of our internal operations or information technology systems, could harm our
reputation and adversely affect our financial results and stock price.
Experienced computer programmers and hackers,
or even internal users, may be able to penetrate or create systems disruptions or cause shutdowns of our network security or that
of third-party companies with which we have contracted to provide services. We generally collect and store customer information
for marketing purposes and any compromise of customer information could subject us to customer or government litigation and harm
our reputation, which could adversely affect our business and growth. Breaches of our system, which would compromise our customers’
private information, might cause our customers to lose confidence in our ability to protect their personal information, which could
cause them to discontinue usage of our website or stop shopping with us altogether. The loss of confidence from a significant data
security breach involving employees could also hurt our reputation, cause employee recruiting and retention challenges, increase
our labor costs and adversely affect our business and financial results. Moreover, we could incur significant expenses or disruptions
of our operations in connection with system failures or data breaches. An increasing number of websites and retailers, including
several large internet companies and retailers, have disclosed breaches of their security, some of which have involved sophisticated
and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade
service or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate preventative measures. In addition, sophisticated hardware and operating system
software and applications that we buy or license from third-parties may contain defects in design or manufacture, including “bugs”
and other problems that could unexpectedly interfere with the security and operation of the systems. The costs to us to eliminate
or alleviate security problems, viruses and bugs, or any problems associated with the outsourced services provided to us, could
be significant, and efforts to address these problems could result in interruptions, delays or cessation of service that may impede
our sales, distribution or other critical functions.
In addition, almost all states have adopted
breach of data security statutes or regulations that require notification to consumers if the security of their personal information
is breached, and at least one state has adopted regulations requiring every company that maintains or stores personal information
to adopt a comprehensive written information security program. Governmental focus on data security may lead to additional legislative
action, and the increased emphasis on information security may lead customers to request that we take additional measures to enhance
security or restrict the manner in which we collect and use customer information to gather insights into customer behavior and
craft our marketing programs. As a result, we may have to modify our business systems and practices with the goal of further improving
data security, which would result in reduced net sales, increased expenditures and operating complexity. Any compromise of our
security or accidental loss or theft of customer data in our possession could result in a violation of applicable privacy and other
laws, significant legal and financial exposure and damage to our reputation, which could adversely impact our business, results
of operations and stock price.
Our inability or failure to recognize, respond to and
effectively manage the accelerated impact of social media could materially adversely impact our business.
There has been a marked increase in the
use of social media platforms, including weblogs (blogs), social media websites (such as Facebook, Twitter and Instagram), and
other forms of internet-based communications which allow individuals access to a broad audience of consumers and other interested
persons. Many social media platforms immediately publish the content to their subscribers and participants posts, often without
filters or checks on accuracy of the content posted. The dissemination of information online could harm our business, prospects,
financial condition and results of operations, regardless of the information’s accuracy. The harm may be immediate
without affording us an opportunity for redress or correction.
Other risks associated with the use of
social media include improper disclosure of proprietary information, negative comments about our business, fraud and out-of-date
information. The inappropriate use of social media by our customers or employees could increase our costs, lead to litigation
or result in negative publicity that could damage our reputation.
The current geographic concentration
of our boutiques creates an exposure to local economies, regional downturns and severe weather or other catastrophic occurrences
that may materially adversely affect our financial condition and results of operations.
We operated 52 boutiques in California
as of January 30, 2016, making California our largest market, representing approximately 8% of our total boutiques. We also have
boutique concentration in Texas, Florida and the Northeast region, operating 51 boutiques, 43 boutiques and 113 boutiques in these
regions, respectively, as of January 30, 2016. As a result, our business is currently more susceptible to regional conditions than
the operations of more geographically diversified competitors, and we are vulnerable to economic downturns in those regions. Any
unforeseen events or circumstances that negatively affect these areas could materially adversely affect our sales and profitability.
These factors include, among other things, changes in demographics and population and severe weather or natural disasters.
Further, our corporate headquarters and
only distribution center are currently located at a single facility in Houston, Texas. Our single distribution center receives,
stores and distributes merchandise to all of our boutiques and fulfills all sales for our direct-to-consumer business. Most of
our computer equipment and senior management, including critical resources dedicated to merchandising and financial and administrative
functions, are located at our corporate headquarters. As described elsewhere in the risk factors in this report, we do not have
adequate disaster recovery systems and plans at our corporate headquarters and distribution facility. As a result, our business
may be more susceptible to regional natural disasters, severe weather and catastrophes than the operations of more geographically
diversified competitors. See “-We have one corporate headquarters and distribution facility and have not yet implemented
disaster recovery procedures. Disruptions to the operations at that location could have an adverse effect on our business operations”
above.
In addition, a substantial number of our
boutiques are located in the northeastern and southeastern United States. These regions of the United States, Texas and other states
along the Gulf Coast, in particular, are prone to severe weather conditions. For example, hurricanes have passed through these
regions and caused extensive damage. Adverse weather conditions impacting these regions of the United States generally could harm
our business, results of operations and financial condition. Severe weather can also result in weather-related supply disruptions,
which could impact our ability to supply boutiques. In addition, weather conditions can affect our net sales because inclement
weather may discourage travel or require temporary boutique closures, thereby reducing customer traffic. Unseasonably warmer
weather during typically colder months or unreasonably colder weather during typically warmer months can also affect the seasonal
composition and demand for our merchandise, which could harm our business, results of operations and financial condition.
All of our boutique locations expose us
to additional diverse risks, given that natural disasters or other unanticipated catastrophes, such as telecommunications failures,
cyber-attacks, fires or terrorist attacks, can occur anywhere and could cause disruptions in our operations. Extensive or multiple
disruptions in our operations, whether at our boutiques or our corporate headquarters and distribution center, due to natural disasters,
severe weather or other catastrophes could have an adverse effect on our business, results of operations and stock price.
Our results may be adversely affected by fluctuations
in energy costs.
Energy costs have fluctuated dramatically
in the past and may fluctuate in the future. These fluctuations may result in an increase in our transportation costs for distribution,
utility costs for our retail boutiques and costs to purchase product from our vendors. A continual rise in energy costs could adversely
affect consumer spending and demand for our merchandise and increase our operating costs and we may be unable to pass along to
our customers such increased cost, all of which could have a material adverse effect on our business, results of operations and
stock price.
Our net sales and merchandise fluctuate on a seasonal
basis, leaving our operating results susceptible to adverse changes in seasonal shopping patterns, weather and related risks.
Due to the seasonal nature of the retail
industry, we have historically experienced and expect to continue to experience some fluctuations in our net sales and net income.
Our net sales and earnings are typically highest in the fourth fiscal quarter due to the year-end holiday season. Net sales during
this period cannot be used as an accurate indicator of annual results. Likewise, as is the case with many retailers of apparel,
jewelry, accessories and gifts, we typically experience lower net sales in the first fiscal quarter relative to other quarters.
If for any reason, including for example poor weather conditions, soft economic environments and loss of consumer confidence, our
net sales were below seasonal norms or expectations during typically higher-volume time periods, our net sales, inventory levels
and results of operations could be adversely affected. In addition, in order to prepare for these periods, we must order and keep
in stock significantly more merchandise than we carry during other parts of the year. This inventory build-up may require us to
expend cash faster than is generated by our operations during these periods. Any unanticipated decrease in demand for our merchandise
during peak shopping periods could result in excess inventory levels which could require us to sell or dispose excess inventory
at a substantial markdown, which could have an adverse effect on our business, profitability and brand image. In addition, we may
experience variability in net sales as a result of a variety of other factors, including the timing of new boutique openings, boutique
events, other marketing activities, sales tax holidays and other holidays, which may cause our results of operations to fluctuate
on a quarterly basis and relative to corresponding periods in prior years.
If our vendors fail to comply with applicable laws, including
a failure to use acceptable labor practices, or if our vendors suffer disruptions in their businesses, we could suffer adverse
business consequences.
Our vendors source the merchandise sold
in our boutiques and our direct-to-consumer website from manufacturers both inside and outside of the United States. Although each
of our purchase orders is subject to our vendor manuals, which require compliance with labor, immigration, manufacturing and product
safety, environmental and other laws, we do not supervise, control or audit our vendors or the manufacturers that produce the merchandise
we sell. The violation, or perception of any violation, of any labor, immigration, manufacturing safety or other laws by any of
our vendors or their U.S. and non-U.S. manufacturers, such as use of child labor, or the divergence of the labor practices followed
by any of our vendors or these manufacturers from those generally accepted in the United States, could damage our brand image or
subject us to boycotts by our customers or activist groups.
Any event causing a sudden disruption of
manufacturing or imports, including the imposition of additional import restrictions, could interrupt, or otherwise disrupt the
shipment of finished products to us by our vendors and materially harm our operations. Political and financial instability outside
the United States, strikes, adverse weather conditions or natural disasters that may occur or acts of war or terrorism in the United
States or worldwide, may affect the production, shipment or receipt of merchandise. These factors, which are beyond our control,
could materially hurt our business, financial condition and results of operations or may require us to modify our current business
practices or incur increased costs.
Changes in laws, including employment laws and laws related
to our merchandise could make conducting our business more expensive or otherwise cause us to change the way we do business.
We are subject to numerous regulations,
including labor and employment, truth-in-advertising, consumer protection, product safety, environmental and zoning and occupancy
laws and ordinances that regulate retailers generally or govern the promotion and sale of merchandise and the operation of boutiques
and warehouse facilities. If these regulations were to change or were violated by our management, employees or vendors, the costs
of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines, penalties or other
liabilities or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations.
In addition to increased regulatory compliance
requirements, changes in laws could make the ordinary conduct of our business more expensive or require us to change the way we
do business. Laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours,
immigration laws, child labor laws, supervisory status, leaves of absence, mandated health benefits or overtime pay, could also
negatively impact us, such as by increasing compensation and benefits costs for overtime and medical expenses. Moreover, changes
in product safety or other consumer protection laws could lead to increased costs to us for some merchandise, or additional labor
costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to
applicable laws, and future actions or payments related to these changes could be material to us.
We will require significant capital to fund our expanding
business, which may not be available to us on satisfactory terms or at all. We plan to use cash from operations to fund our operations
and execute our growth strategy. If we are unable to maintain sufficient levels of cash flow, we may not meet our growth expectations
or we may require additional financing which could adversely affect our financial health and impose covenants that limit our business
activities.
We plan to continue our growth and expansion,
including opening a number of new boutiques, remodeling existing boutiques and upgrading our information technology systems and
other infrastructure as opportunities arise. Our plans to expand our boutique base may not be successful and the implementation
of these plans may not result in expected increases in our net sales even though they increase our costs. To support our expanding
business and execute on our growth strategy, we will require significant capital.
We currently primarily depend on cash flow
from operations and our revolving credit facility to fund our business and growth plans. If our business does not generate sufficient
cash flow from operations to fund these activities, and sufficient funds are not otherwise available to us from our revolving credit
facility, we may need additional equity or debt financing. If such financing is not available to us, or is not available on satisfactory
terms, our ability to operate and expand our business or respond to competitive pressures would be curtailed and we may need to
delay, limit or eliminate planned boutique openings or operations or other elements of our growth strategy. If we raise additional
capital by issuing equity securities or securities convertible into equity securities, your ownership would be diluted.
We may incur additional indebtedness in the future, which
may require us to use a substantial portion of our cash flow to service debt and limit our financial and operating flexibility
in important ways.
We may incur additional indebtedness in
the future. Any borrowings under any future debt financing will require interest payments and need to be repaid or refinanced,
could require us to divert funds identified for other purposes to debt service and would create additional cash demands and could
impair our liquidity position and add financial risk for us. Diverting funds identified for other purposes for debt service may
adversely affect our business and growth prospects. If we cannot generate sufficient cash flow from operations to service our debt,
we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we would
be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.
Our level of indebtedness has important
consequences to you and your investment in our common stock. For example, our level of indebtedness may:
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require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would
reduce the funds available to us for working capital, capital expenditures and other general corporate purposes;
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limit our ability to pay future dividends;
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limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments,
which may limit our ability to implement our business strategy;
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heighten our vulnerability to downturns in our business, the specialty apparel and accessories retail industry or in the general
economy and limit our flexibility in planning for, or reacting to, changes in our business and the specialty apparel and accessories
retail industry; or
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prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our
boutique base and product offerings.
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Our business may not generate sufficient
cash flow from operations and future borrowings may not be available to us in amounts sufficient to enable us to make payments
on our indebtedness or to fund our operations.
The terms of our revolving credit facility do, and the
terms of any additional debt financing may, restrict our current and future operations, which could adversely affect our ability
to manage our operations and respond to changes in our business.
Our revolving credit facility contains,
and any additional debt financing we may incur would likely contain, covenants that restrict our operations, including limitations
on our ability to incur additional debt, grant liens, make certain investments, acquisitions loans and advances, sell assets,
pay dividends or make distributions or other restricted payments, prepay other indebtedness, engage in mergers or consolidations,
change the business conducted by Francesca’s Collections and its subsidiaries, engage in certain transactions with affiliates,
enter into agreements that restrict dividends from subsidiaries or amend certain charter documents and material agreements governing
subordinated and junior indebtedness. A failure by us to comply with the covenants or financial ratios contained in our revolving
credit facility or any additional debt financing we may incur could result in an event of default, which could adversely affect
our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default, the lenders
could elect to declare all amounts outstanding to be due and payable and exercise other remedies. If the indebtedness under our
revolving credit facility or any additional debt financing we may incur were to be accelerated, our future financial condition
could be materially adversely affected.
We are involved on an ongoing basis in litigation arising
in the ordinary course of business or otherwise that could distract management from our business activities and result in significant
liability or damage to our brand.
As a growing company with expanding operations,
we increasingly face the risk of litigation and other claims against us. We are involved on an ongoing basis in litigation arising
in the ordinary course of our business or otherwise, which may include class actions involving consumers, shareholders or employees,
and claims relating to employees, commercial disputes, landlord-tenant disputes, intellectual property issues, product-oriented
allegations and slip and fall claims. These actions and claims can raise complex factual and legal issues that are subject to risks
and uncertainties and could require significant management time. Litigation and other actions and claims against us could result
in unexpected expenses and liabilities, which could materially adversely affect our operations and our reputation.
We may be unable to protect our trademarks or other intellectual
property rights.
We believe that our trademarks are integral
to our boutique design, our direct-to-consumer business and our success in building our brand image and customer loyalty. We rely
on trademark registrations and common law trademark rights to protect the distinctiveness of our brand and have registered those
trademarks that we believe are important to our business with the United States Patent and Trademark Office. We cannot provide
assurance that these registrations will prevent imitation of our name, merchandising concept, boutique design or private label
merchandise, or the infringement of our other intellectual property rights by others. In most cases, the merchandise we sell is
purchased on a non-exclusive basis from vendors that also sell to our competitors. While we use our brand name on these items,
our competitors may seek to replicate aspects of our business strategy and in-boutique experience, thereby diluting the experience
we offer and adversely affecting our brand and competitive position. Imitation of our name, concept, boutique design or merchandise
in a manner that projects lesser quality or carries a negative connotation of our brand image could have an adverse effect on our
business, financial condition and results of operations.
We are not aware of any claims of infringement
upon or challenges to our right to use any of our brand names or trademarks in the United States. Nevertheless, we cannot be certain
that the actions we have taken to establish and protect our trademarks will be adequate to prevent imitation of our merchandise
by others or to prevent others from seeking to block sales of our merchandise as a violation of the trademarks or proprietary rights
of others. Although we cannot currently estimate the likelihood of success of any such lawsuit or ultimate resolution of such a
conflict, such a controversy could have an adverse effect on our business, financial condition and results of operations. If disputes
arise in the future, we may not be able to successfully resolve these types of conflicts to our satisfaction.
We are currently in the process of registering
our trademarks in several foreign countries to seek protection outside the United States. However, international protection of
our brand image and the use of these marks may be unavailable or could be limited. Also, other entities may have rights to trademarks
that contain portions of our marks or may have registered similar or competing marks for merchandise in foreign countries in which
our vendors source our merchandise. There may also be other prior registrations of trademarks identical or similar to our trademarks
in other foreign countries of which we are not aware. Accordingly, it may be possible for others to prevent the manufacture of
our branded goods in certain foreign countries or the sale or exportation of our branded goods from certain foreign countries to
the United States. If we were unable to reach a licensing arrangement with these parties, our vendors may be unable to manufacture
our merchandise in those countries. Our inability to register our trademarks or purchase or license the right to use our trademarks
or logos in these jurisdictions could limit our ability to obtain supplies from less costly markets or penetrate new markets should
our business plan change to include selling our merchandise in those foreign jurisdictions.
Litigation may be necessary to protect
our trademarks and other intellectual property rights or to enforce these rights. Any litigation or claims brought by us could
result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial
condition, results of operations or cash flows.
We may be subject to liability and other risks if we,
our vendors or the manufacturers of our merchandise infringe upon the trademarks or other intellectual property rights of third
parties, including the risk that we could acquire merchandise from our vendors without the full right to sell it.
We purchase merchandise that may be subject
to design copyrights, design patents or otherwise may incorporate protected intellectual property. While we are not involved in
the manufacture of any of the merchandise we purchase from our vendors for sale to our customers, we may be subject to liability
if our vendors or the manufacturers of our merchandise infringe upon the trademarks or other intellectual property rights of third
parties. We do not independently investigate whether our vendors or the manufacturers with whom they do business legally hold intellectual
property rights to the merchandise we purchase. Third parties may bring legal claims, or threaten to bring legal claims, against
us that their intellectual property rights are being infringed or violated by our use of intellectual property. Litigation or threatened
litigation could be costly and distract our senior management from operating our business. If we were to be found liable for any
such infringement, we could be required to pay substantial damages and could be subject to injunctions preventing further infringement.
In addition, any payments we are required to make and any injunctions with which we are required to comply as a result of infringement
claims could be costly and thereby adversely affect our financial results.
If a third party claims to have licensing
rights with respect to merchandise we purchased from a vendor, or if we acquire unlicensed merchandise, we may be obligated to
remove this merchandise from our boutiques, incur costs associated with this removal if the distributor or vendor is unwilling
or unable to reimburse us and be subject to liability under various civil and criminal causes of action, including actions to recover
unpaid royalties and other damages and injunctions. Additionally, we will be required to purchase new merchandise to replace any
we remove.
We rely upon independent third-party transportation providers
for substantially all of our merchandise shipments.
We currently rely upon independent third-party
transportation providers for substantially all of our merchandise shipments, including shipments to all of our boutiques and our
direct customers. Our use of outside delivery services for shipments is subject to risks, including increases in fuel prices, which
would increase our shipping costs, and employee strikes and inclement weather, which may impact a shipper’s ability to provide
delivery services that adequately meet our shipping needs. If we change shipping companies, we could face logistical difficulties
that could adversely impact deliveries and we would incur costs and expend resources in connection with such change. Moreover,
we may not be able to obtain terms as favorable as those received from the independent third-party transportation providers we
currently use, which would increase our costs.
Disruptions in transportation,
including disruptions at shipping ports through which our merchandise are imported, could prevent us from timely distribution and
delivery of merchandise, which could reduce our net sales and operating margin.
From time to time,
shipping ports experience capacity constraints, labor strikes, work stoppages or other disruptions that may delay the delivery
of imported products. A lengthy contract dispute may lead to protracted delays in the movement of our merchandise, which could
further delay the delivery of merchandise to our boutiques and impact net sales and operating margin. In addition, other conditions
outside of our control, such as adverse weather conditions or acts of terrorism, could significantly disrupt operations at shipping
ports or otherwise impact transportation of the imported merchandise we sell.
Future disruptions
in transportation services or at a shipping port at which our merchandise are received may result in delays in the transportation
of such merchandise to our distribution center and may ultimately delay the distribution to our boutiques resulting in reduced
net sales and / or profitability.
Our ability to source our merchandise efficiently and
profitably could be hurt if new trade restrictions are imposed, existing trade restrictions become more burdensome, or the countries
where our merchandise are sourced experience political instability.
We currently purchase all of our inventory
from domestic vendors, who source our merchandise both domestically and internationally. In fiscal years 2015 and 2014, we believe
most of the merchandise sourced by our vendors was produced outside the United States. These vendors, to the extent they obtain
merchandise from outside of the United States, are subject to trade restrictions, including tariffs, safeguards or quotas, changes
to which could increase the cost or reduce the supply of merchandise available to us. Under the World Trade Organization Agreement,
effective January 1, 2005, the United States and other World Trade Organization member countries removed quotas on goods from
World Trade Organization members, which in certain instances we believe afford our vendors greater flexibility in importing textile
and apparel products from World Trade Organization countries from which they source our merchandise. However, as the removal of
quotas resulted in an import surge from China, the United States imposed safeguard quotas on a number of categories of goods and
apparel from China, and may impose additional quotas in the future. These and other trade restrictions could have a significant
impact on our vendors’ sourcing patterns in the future. The extent of this impact, if any, and the possible effect on our
purchasing patterns and costs, cannot be determined at this time. We cannot predict whether any of the countries in which our vendors’
merchandise are currently manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed
by the United States or foreign governments, nor can we predict the likelihood, type or effect of any restrictions. Trade restrictions,
including increased tariffs or quotas, embargoes, safeguards and customs restrictions against items we offer in our boutiques,
as well as United States or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of
merchandise to our vendors, and we would expect the costs to be passed along in increased prices to us, which could hurt our profitability.
Additionally, political instability or
acts of terrorism, significant fluctuations in the value of the U.S. dollar against foreign currencies and restrictions on the
transfer of funds between the U.S. and foreign jurisdictions, any of which if they effect the countries where our merchandise are
sourced, could adversely affect our merchandise flow and, consequently, cause our sales to decline.
We may be subject to sales tax in states where we operate
our direct-to-consumer business, which could have an adverse effect on our business, financial condition and results of operations.
Under current state and federal laws, we
are not required to collect and remit sales tax in some states where we sell through our direct-to-consumer business. Legislation
is pending in some states that may require us to collect and remit sales tax on direct-to-consumer sales or institute use tax reporting.
If states pass sales or use tax laws, we may need to collect and remit current and past sales tax and could face greater exposure
to income tax and franchise taxes in these states. Any increase in sales tax or use tax reporting on our internet sales could discourage
customers from purchasing through our direct-to-consumer business, which could have an adverse effect on growth prospects.
Increases in the minimum wage could have an adverse effect
on our financial results.
From time to time, legislative proposals
are made to increase the federal minimum wage in the United States, as well as the minimum wage in a number of individual states
and municipalities. Legislation to increase the minimum wage is currently pending or being contemplated in some states in
which we operate. Base wage rates for many of our employees are at or slightly above the minimum wage. As federal or state minimum
wage rates increase, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to
our other hourly employees as well. Any increase in the cost of our labor could have an adverse effect on our operating costs,
financial condition and results of operations.
Anti-takeover provisions of Delaware law and our certificate
of incorporation and bylaws could delay and discourage takeover attempts that stockholders may consider to be favorable.
Our amended and restated certificate of
incorporation and amended and restated bylaws contain provisions that make it difficult for our stockholders to change the composition
of our board of directors, preventing them from changing the composition of management. In addition, the same provisions may discourage,
delay or prevent a merger or acquisition that our stockholders may consider favorable. These provisions, among other things:
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establish a staggered, or classified, board of directors so that not all members of our board of directors are elected at one
time;
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prohibit cumulative voting in the election of directors;
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authorize the issuance by our board of directors of “blank check” preferred stock, the terms of which may be established
and the shares of which may be issued without stockholder approval, and which may include super-majority voting, special approval,
dividend or other rights or preferences superior to the rights of the holders of common stock;
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limit the persons who may call special meetings of stockholders;
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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
and
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establish advance notice requirements for stockholder nominations for elections to our board of directors or for proposing
matters that can be acted upon by stockholders at stockholder meetings.
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These anti-takeover provisions and other
provisions under Delaware law could substantially impede the ability of our common stockholders to benefit from a change in control
and, as a result, could materially adversely affect the market price of our common stock and your ability to realize any potential
change-in-control premium.
Our costs to comply with changing regulations applicable
to public companies have increased significantly and our management is required to devote substantial time in complying with these
public company regulations.
As a public company, we are required to
incur additional legal, accounting, compliance and other expenses that we did not incur as a private company. We are obligated
to file with the SEC annual and quarterly information and other reports that are specified in Section 13 and other sections
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, we are also subject to other
reporting and corporate governance requirements, including certain requirements of The NASDAQ Stock Market, certain provisions
of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), certain provisions of the Dodd-Frank Act of 2010 (“Dodd-Frank”)
and the regulations promulgated thereunder, which impose significant compliance obligations upon us. We must be certain that we
have the ability to institute and maintain a comprehensive compliance function; established internal policies; ensure that we have
the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis; design,
establish, evaluate and maintain a system of internal controls over financial reporting in compliance with Sarbanes-Oxley; involve
and retain outside counsel and accountants in the above activities and maintain an investor relations function.
Sarbanes-Oxley and Dodd-Frank, as well
as rules subsequently implemented by the SEC and The NASDAQ Stock Market, have imposed increased regulation and disclosure and
have required enhanced corporate governance practices of public companies. Our efforts to comply with evolving laws, regulations
and standards in this regard have resulted and will likely continue to result in increased administrative expenses and a diversion
of management’s time and attention from revenue-generating activities to compliance activities. These require a significant
commitment of additional resources. We may not be successful in implementing or maintaining these requirements, any failure of
which could materially adversely affect our business, results of operations and financial condition. In addition, if we fail to
implement or maintain the requirements with respect to our internal accounting and audit functions, our ability to continue to
report our operating results on a timely and accurate basis could be impaired. If we do not implement or maintain such requirements
in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such
as the SEC or The NASDAQ Stock Market. Any such action could harm our reputation and the confidence of investors and customers
in our company and could materially adversely affect our business and cause our share price to fall.