FRAN Francescas Holdings Corporation

Francesca’s Holdings Corporation (NASDAQ:FRAN) today reported financial results for the third quarter ended October 28, 2017.  

Steve Lawrence, President and CEO, stated, “While our third quarter was a challenging period, we took decisive steps to improve our positioning as we head into the holiday season and beyond. As we previously discussed, our sales results were impacted by merchandise missteps that impacted our business throughout the third quarter. Additionally, comparable sales results were impacted by an estimated 425 basis points from hurricanes Harvey and Irma. We have taken aggressive action to get us back on track by refocusing on our core consumer and delivering on our mission of surprising and delighting every guest, every time with a unique, trend-right assortment at a great value. We have seen business get progressively better as the new receipts have landed and November comparable sales have sequentially improved from our third quarter performance. That being said, we still have a lot of work ahead of us.

“Looking ahead, we remain focused on the initiatives that will be critical for our success in the long term. We have spent the better part of 2017 putting in place building blocks for our future with the infrastructure investments we have made. Growing our ecommerce business remains our number one long term focus and many of the things we have put in place this year will help us drive our online business now and in the future. We are also taking steps to rationalize our store fleet with a focus on openings in A and B malls and closings in C and D malls. We believe this strategy is aligned with our goal to be in the most relevant locations. Overall, we remain focused on taking steps to reinvigorate our merchandise assortments and making investments in our business that will drive sustainable profitable growth for the long term.”  

THIRD QUARTER RESULTS

Net sales decreased 11% to $105.8 million from $119.5 million in the comparable prior year quarter. This decrease was due to an 18% decrease in comparable sales compared to a 7% increase in the comparable prior year period. Comparable sales decreased primarily due to a decline in boutique traffic and conversion rates as the back-to-school assortment did not resonate with guests. Additionally, Hurricanes Harvey and Irma negatively impacted comparable sales by approximately 425 basis points, mostly as a result of the supply chain disruption the Company experienced at its corporate offices located in Houston, Texas. These decreases were partially offset by the addition of 45 net new boutiques since the end of the third quarter last year and $1.5 million of additional gift card breakage income recognized during the quarter as a result of a change in the estimated period over which redemption of gift cards is considered remote.  The Company opened 23 new boutiques and closed one boutique during the quarter, bringing the total count to 714 at the end of the quarter.     

Gross profit, as a percent of net sales, decreased to 39.6% from 48.2% in the prior year quarter.  This was due to a decrease in merchandise margin and deleveraging of occupancy costs. The decrease in merchandise margin was due to increased markdowns in order to sell-through our back-to-school assortment. 

Selling, general and administrative expenses decreased 1% to $41.4 million from $41.9 million in the prior year quarter. This decrease was primarily due to a decrease in short- and long-term performance-based incentive expenses partially offset by increases in boutique and corporate payroll, software, professional fees and marketing expenses.

Income from operations was $0.5 million, or 0.4% of net sales, compared to $15.8 million, or 13.2% of net sales, in the prior year quarter. 

BALANCE SHEET SUMMARY

Total cash and cash equivalents at the end of the third quarter were $19.0 million compared to $24.7 million at the end of the comparable prior year quarter.  During the third quarter, the Company repurchased 0.5 million shares of its common stock at a total cost of $3.5 million.

The Company ended the quarter with $38.8 million of inventory on hand compared to $42.8 million at the end of the comparable prior year period.  Average ending inventory per boutique decreased by 15% compared to the comparable prior year period as the Company continues to diligently control inventory through enhanced inventory management processes that began in the second quarter of 2016. 

FOURTH QUARTER AND REVISED FISCAL YEAR 2017 GUIDANCE

For the fourth quarter ending February 3, 2018, net sales are expected to be in the range of $145 million to $150 million; assuming a decrease of 9% to 12% in comparable sales compared to flat comparable sales in the prior year. The Company plans to open nine new boutiques during the fourth quarter. Diluted earnings per share for the fourth quarter are expected to be in the range of $0.35 to $0.40 compared to $0.39 in the prior year. 

For the fiscal year ending February 3, 2018, net sales are now expected to be in the range of $478 million to $483 million; assuming a decrease of 9% to 10% in comparable sales compared to the prior year increase of 2%. The Company expects to open 60 boutiques and close eight boutiques in fiscal year 2017, compared to 64 new boutiques opened and nine boutiques closed in fiscal year 2016.  Diluted earnings per share are now expected to be in the range of $0.67 to $0.72 compared to the prior year of $1.09. The number of average diluted shares for the full year assumed in guidance is 36.3 million shares. The effective tax rate is estimated to be 38.7%.

Capital expenditures for fiscal year 2017 are expected to be in the range of $30 million to $33 million.

Conference Call Information

A conference call to discuss the third quarter results is scheduled for December 5, 2017, at 8:30 a.m. ET. A live webcast of the conference call will be available in the investor relations section of the Company’s website, www.francescas.com. A replay of the call will be available after the conclusion of the call and remain available until December 12, 2017. To access the telephone replay, listeners should dial 1-844-512-2921. The access code for the replay is 6325605. A replay of the webcast will also be available shortly after the conclusion of the call and will remain on the website for ninety days.

Forward-Looking Statements

Certain statements in this release are "forward-looking statements" made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements reflect our current expectations or beliefs concerning future events and are subject to various risks and uncertainties that may cause actual results to differ materially from those that we expected. These risks and uncertainties include, but are not limited to, the following: the risk that we cannot anticipate, identify and respond quickly to changing fashion trends and customer preferences or changes in consumer environment, including changing expectations of service and experience in boutiques and online, and evolve our business model; our ability to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise through our ecommerce business; our ability to successfully open and operate new boutiques each year; our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth and our ability to successfully integrate our new Chief Merchant. For additional information regarding these and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to "Risk Factors" in our Annual Report on Form 10-K for the year ended January 28, 2017 filed with the Securities and Exchange Commission on March 22, 2017 and any risk factors contained in subsequent quarterly and annual reports we file with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement.

About Francesca's Holdings Corporation

francesca's® is a growing specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized shopping experience.  The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts. Today francesca's® operates approximately 714 boutiques in 47 states and the District of Columbia and also serves its customers through francescas.com. For additional information on francesca's®, please visit www.francescas.com.

CONTACT:
ICR, Inc.					Company
Jean Fontana					Kelly Dilts 832-494-2236
646-277-1214					Kate Venturina 832-494-2233
					IR@francescas.com

Francesca’s Holdings Corporation
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts, Percentages and Basis Points)
	Thirteen Weeks Ended
	October 28, 2017							October 29, 2016							Variance
	In USD				As a % of Net Sales(1)			In USD				As a % of Net Sales(1)			In USD				%			Basis Points
Net sales	$	105,791			100.0	%		$	119,470			100.0	%		$	(13,679	)		(11	)%		-
Cost of goods sold and occupancy costs		63,931			60.4	%			61,843			51.8	%			2,088			3	%		860
Gross profit		41,860			39.6	%			57,627			48.2	%			(15,767	)		(27	)%		(860	)
Selling, general and administrative expenses		41,405			39.1	%			41,872			35.0	%			(467	)		(1	)%		410
Income from operations		455			0.4	%			15,755			13.2	%			(15,300	)		(97	)%		(1,280	)
Interest expense		(109	)		(0.1	)%			(131	)		(0.1	)%			(22	)		(17	)%		-
Other income		88			0.1	%			79			0.1	%			9			11	%		-
Income before income tax expense		434			0.4	%			15,703			13.1	%			(15,269	)		(97	)%		(1,270	)
Income tax expense		195			0.2	%			6,009			5.0	%			(5,814	)		(97	)%		(480	)
Net income	$	239			0.2	%		$	9,694			8.1	%		$	(9,455	)		(98	)%		(790	)
(1)  Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.
Diluted earnings per share	$	0.01						$	0.26
Weighted average diluted share count		35,959							37,675
Comparable sales	(18)%							7%
	Thirty-Nine Weeks Ended
	October 28, 2017							October 29, 2016							Variance
	In USD				As a % of Net Sales(1)			In USD				As a % of Net Sales(1)			In USD				%			Basis Points
Net sales	$	333,187			100.0	%		$	340,843			100.0	%		$	(7,656	)		(2	)%		-
Cost of goods sold and occupancy costs		187,249			56.2	%			180,149			52.9	%			7,100			4	%		330
Gross profit		145,938			43.8	%			160,694			47.1	%			(14,756	)		(9	)%		(330	)
Selling, general and administrative expenses		126,338			37.9	%			116,353			34.1	%			9,985			9	%		380
Income from operations		19,600			5.9	%			44,341			13.0	%			(24,741	)		(56	)%		(710	)
Interest expense		(332	)		(0.1	)%			(353	)		(0.1	)%			(21	)		(6	)%		-
Other income		278			0.1	%			118			0.0	%			160			136	%		10
Income before income tax expense		19,546			5.9	%			44,106			12.9	%			(24,560	)		(56	)%		(700	)
Income tax expense		7,711			2.3	%			16,740			4.9	%			(9,029	)		(54	)%		(260	)
Net income	$	11,835			3.6	%		$	27,366			8.0	%		$	(15,531	)		(57	)%		(440	)
(1)  Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.
Diluted earnings per share	$	0.32						$	0.70
Weighted average diluted share count		36,525							38,945
Comparable sales	(9)%							3%

Francesca’s Holdings Corporation
Consolidated Balance Sheets
(In thousands, except share and per share amount)
		October 28, 2017				January 28, 2017				October 29, 2016
ASSETS
Current assets:
Cash and cash equivalents		$	19,020			$	53,202			$	24,725
Accounts receivable			18,150				5,605				8,218
Inventories			38,824				23,958				42,774
Deferred income taxes			-				8,487				5,709
Prepaid expenses and other current assets			10,179				8,823				7,745
Total current assets			86,173				100,075				89,171
Property and equipment, net			85,710				80,484				82,992
Deferred income taxes			15,577				6,978				4,425
Other assets, net			3,794				2,056				1,370
TOTAL ASSETS		$	191,254			$	189,593			$	177,958
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	28,239			$	9,205			$	16,550
Accrued liabilities			12,848				25,761				16,629
Total current liabilities			41,087				34,966				33,179
Landlord incentives and deferred rent			38,327				38,092				38,821
Total liabilities			79,414				73,058				72,000
Commitments and contingencies
Stockholders’ equity:
Common stock - $0.01 par value, 80.0 million shares authorized; 46.4 million, 46.1 million and 46.1 million shares issued at October 28, 2017, January 28, 2017 and October 29, 2016, respectively.			464				461				461
Additional paid-in capital			111,065				109,008				107,908
Retained earnings			155,319				143,557				128,922
Treasury stock, at cost – 10.2 million, 8.5 million and 8.3 million shares at October 28, 2017, January 28, 2017 and October 29, 2016, respectively.			(155,008	)			(136,491	)			(131,333	)
Total stockholders’ equity			111,840				116,535				105,958
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	191,254			$	189,593			$	177,958

Francesca’s Holdings Corporation
Consolidated Statements of Cash Flows
(In thousands)
		Thirty-Nine Weeks Ended
		October 28, 2017				October 29, 2016
Cash Flows Provided by Operating Activities:
Net income		$	11,835			$	27,366
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			15,749				14,415
Stock-based compensation expense			2,082				18
Excess tax benefit from stock-based compensation			-				(2	)
Loss on disposal of assets			565				265
Deferred income taxes			(65	)			(81	)
Impairment charges			100				66
Changes in operating assets and liabilities:
Accounts receivable			(12,272	)			1,364
Inventories			(14,866	)			(11,233	)
Prepaid expenses and other assets			(3,529	)			(1,294	)
Accounts payable			16,987				2,015
Accrued liabilities			(12,913	)			301
Landlord incentives and deferred rent			235				2,269
Net cash provided by operating activities			3,908				35,469
Cash Flows Used in Investing Activities:
Purchases of property and equipment			(19,121	)			(18,666	)
Other			-				8
Net cash used in investing activities			(19,121	)			(18,658	)
Cash Flows Used in Financing Activities:
Repurchases of common stock			(18,827	)			(48,715	)
Taxes paid related to net share settlement of equity awards			(142	)			-
Proceeds from the exercise of stock options			-				403
Excess tax benefit from stock-based compensation			-				2
Net cash used in financing activities			(18,969	)			(48,310	)
Net decrease in cash and cash equivalents			(34,182	)			(31,499	)
Cash and cash equivalents, beginning of year			53,202				56,224
Cash and cash equivalents, end of period		$	19,020			$	24,725
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes		$	23,806			$	13,014
Interest paid		$	144			$	143

Francesca’s Holdings Corporation
Supplemental Information
Quarterly Sales by Merchandise Category
		Thirteen Weeks Ended
		October 28, 2017								October 29, 2016								Variance
		In Dollars				As a % ofNet Sales				In Dollars				As a % ofNet Sales				In Dollars				%
		(in thousands, except percentages)
Apparel(1)		$	54,663				51.7	%		$	64,013				53.6	%		$	(9,350	)			(15	)%
Jewelry			22,826				21.6	%			26,143				21.9	%			(3,317	)			(13	)%
Accessories(1)			15,360				14.5	%			17,346				14.5	%			(1,986	)			(11	)%
Gifts			10,922				10.3	%			11,638				9.7	%			(716	)			(6	)%
Merchandise sales			103,771				98.1	%			119,140				99.7	%			(15,369	)			(13	)%
Other (2)			2,020				1.9	%			330				0.3	%			1,690				512	%
		$	105,791				100.0	%		$	119,470				100.0	%		$	(13,679	)			(11	)%
(1) In the first quarter of fiscal 2017, swimwear was reclassified out of accessories to apparel.  To facilitate comparability, prior year amounts were reclassified.
(2) Includes gift card breakage income, shipping and change in return reserve.

Quarterly Comparable Sales
	FY 2017			FY 2016			FY 2015
Q1	(5)%			2%			(2)%
Q2	(3)%			0%			(4)%
Q3	(18)%			7%			4%
Q4				0%			11%
Fiscal year				2%			3%

Boutique Count
	Thirty-Nine Weeks EndedOctober 28, 2017		Fiscal Year EndedJanuary 28, 2017		Thirty-Nine Weeks EndedOctober 29, 2016
Number of boutiques open at the beginning of period	671		616		616
Boutiques opened	51		64		59
Boutiques closed	(8	)	(9	)	(6	)
Number of boutiques open at the end of period	714		671		669