ITEM 1. FINANCIAL STATEMENTS
Francesca’s Holdings Corporation
Unaudited Consolidated Balance Sheets
(In thousands, except share amounts)
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October 28,
2017
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January 28,
2017
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|
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October 29,
2016
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|
ASSETS
|
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|
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|
|
|
|
|
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|
|
|
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|
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|
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|
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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
|
|
|
|
|
|
|
|
|
|
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|
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TOTAL ASSETS
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|
$
|
191,254
|
|
|
$
|
189,593
|
|
|
$
|
177,958
|
|
|
|
|
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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|
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|
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Accounts payable
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|
$
|
28,239
|
|
|
$
|
9,205
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|
|
$
|
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
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|
|
|
72,000
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Commitments and contingencies
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Stockholders’ equity:
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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
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|
|
|
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
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)
|
Total stockholders’ equity
|
|
|
111,840
|
|
|
|
116,535
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|
|
105,958
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|
|
|
|
|
|
|
|
|
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|
|
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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|
$
|
191,254
|
|
|
$
|
189,593
|
|
|
$
|
177,958
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|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Operations
(In thousands, except per share data)
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|
Thirteen Weeks Ended
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Thirty-Nine Weeks Ended
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October 28,
2017
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October 29,
2016
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October 28,
2017
|
|
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October 29,
2016
|
|
Net sales
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|
$
|
105,791
|
|
|
$
|
119,470
|
|
|
$
|
333,187
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|
|
$
|
340,843
|
|
Cost of goods sold and occupancy costs
|
|
|
63,931
|
|
|
|
61,843
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|
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|
187,249
|
|
|
|
180,149
|
|
Gross profit
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|
41,860
|
|
|
|
57,627
|
|
|
|
145,938
|
|
|
|
160,694
|
|
Selling, general and administrative expenses
|
|
|
41,405
|
|
|
|
41,872
|
|
|
|
126,338
|
|
|
|
116,353
|
|
Income from operations
|
|
|
455
|
|
|
|
15,755
|
|
|
|
19,600
|
|
|
|
44,341
|
|
Interest expense
|
|
|
(109
|
)
|
|
|
(131
|
)
|
|
|
(332
|
)
|
|
|
(353
|
)
|
Other income
|
|
|
88
|
|
|
|
79
|
|
|
|
278
|
|
|
|
118
|
|
Income before income tax expense
|
|
|
434
|
|
|
|
15,703
|
|
|
|
19,546
|
|
|
|
44,106
|
|
Income tax expense
|
|
|
195
|
|
|
|
6,009
|
|
|
|
7,711
|
|
|
|
16,740
|
|
Net income
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|
$
|
239
|
|
|
$
|
9,694
|
|
|
$
|
11,835
|
|
|
$
|
27,366
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Basic earnings per common share
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|
$
|
0.01
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|
|
$
|
0.26
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|
|
$
|
0.33
|
|
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$
|
0.70
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|
Diluted earnings per common share
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|
$
|
0.01
|
|
|
$
|
0.26
|
|
|
$
|
0.32
|
|
|
$
|
0.70
|
|
|
|
|
|
|
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Weighted average shares outstanding:
|
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|
|
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Basic shares
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|
|
35,884
|
|
|
|
37,552
|
|
|
|
36,387
|
|
|
|
38,831
|
|
Diluted shares
|
|
|
35,959
|
|
|
|
37,675
|
|
|
|
36,525
|
|
|
|
38,945
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statement of Changes
in Stockholders’ Equity
(In thousands)
|
|
Common Stock
|
|
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Additional
|
|
|
|
|
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Treasury
|
|
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Total
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|
Shares
Outstanding
|
|
|
Par
Value
|
|
|
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Stock, at
cost
|
|
|
Stockholders'
Equity
|
|
Balance, January 28, 2017
|
|
|
37,541
|
|
|
$
|
461
|
|
|
$
|
109,008
|
|
|
$
|
143,557
|
|
|
$
|
(136,491
|
)
|
|
$
|
116,535
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,835
|
|
|
|
-
|
|
|
|
11,835
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,082
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,082
|
|
Restricted stocks issued, net of forfeitures
|
|
|
264
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares withheld related to net settlement of equity awards
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(142
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(142
|
)
|
Cumulative effect adjustment on adoption of Accounting Standards Update 2016-09
|
|
|
-
|
|
|
|
-
|
|
|
|
120
|
|
|
|
(73
|
)
|
|
|
-
|
|
|
|
47
|
|
Repurchases of common stock
|
|
|
(1,614
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,517
|
)
|
|
|
(18,517
|
)
|
Balance, October 28, 2017
|
|
|
36,179
|
|
|
|
464
|
|
|
|
111,065
|
|
|
|
155,319
|
|
|
|
(155,008
|
)
|
|
|
111,840
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Cash Flows
(In thousands)
|
|
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
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements
.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
1.
|
Summary of Significant Accounting Policies
|
Nature of Business
Francesca’s Holdings Corporation is a holding company
incorporated in 2007 under the laws of the State of Delaware whose business operations are conducted through its subsidiaries. Unless
the context otherwise requires, the “Company,” refers to Francesca’s Holdings Corporation and its consolidated
subsidiaries. The Company operates a nationwide-chain of boutiques providing its customers with a unique, fun and personalized
shopping experience. The Company offers a diverse and balanced mix of apparel, jewelry, accessories and gifts at attractive values.
At October 28, 2017, the Company operated 714 boutiques, which are located in 47 states throughout the United States
and the District of Columbia, and its ecommerce website.
Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
for interim financial statements and are in the form prescribed by the Securities and Exchange Commission (“SEC”).
Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the
opinion of management, these unaudited financial statements include all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company’s financial position, results of operations, changes in equity,
and cash flows at the dates and for the periods presented. The financial information as of January 28, 2017 was derived from the
Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended January 28, 2017
included in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2017.
These unaudited interim consolidated financial statements should
be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the fiscal
year ended January 28, 2017 included in the Company’s Annual Report on Form 10-K.
Due to seasonal variations in the retail industry, interim results
are not necessarily indicative of results that may be expected for any other interim period or for a full year.
Principles of Consolidation
The accompanying unaudited consolidated financial statements
include the accounts of the Company and all its subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.
Fiscal Year
The Company maintains its accounts on a 52- or 53-week year
ending on the Saturday closest to January 31st. Fiscal year 2017 includes 53 weeks of operations while fiscal year 2016 includes
52 weeks of operations. The fiscal quarters ended October 28, 2017 and October 29, 2016 refer to the thirteen-week periods ended
as of those dates. The year-to-date periods ended October 28, 2017 and October 29, 2016 refer to the thirty-nine week periods ended
as of those dates.
Management Estimates and Assumptions
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, net of estimated
sales returns, and expenses during the reporting periods. Actual results could differ materially from those estimates.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Arrangements”,
which amends Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation. The new guidance intends
to simplify several aspects of the accounting for share-based payments, including income tax consequences, classification of awards
as either equity or liabilities, forfeitures and classification on the statement of cash flows. The Company adopted the applicable
provisions of this guidance beginning on January 29, 2017 on a prospective basis or, in the case of recognizing forfeitures as
they occur, using the modified retrospective transition method. Accordingly, prior period financial statements were not adjusted.
The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
In November 2015, the FASB issued ASU 2015-17, “Income
Taxes – Balance Sheet Classification of Deferred Taxes.” The new guidance simplifies the presentation of deferred income
taxes by permitting classification of all deferred tax assets and liabilities as noncurrent on the consolidated balance sheet.
The Company adopted this guidance beginning on January 29, 2017 on a prospective basis, resulting in the classification of all
deferred tax assets and liabilities as non-current. Prior period financial statements were not adjusted. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, “Inventory
(Topic 330): Simplifying the Measurement of Inventory,” which changes the measurement principle for inventory from the lower
of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The
Company adopted this guidance on January 29, 2017 on a prospective basis. The adoption of this guidance did not have a material
impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In March 2016, the FASB issued ASU 2016-04 “Liabilities
- Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products.” The
new guidance allows a company to derecognize amounts related to expected breakage to the extent that it is probable that a significant
reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The amended standard may
be adopted on either a modified retrospective or a retrospective basis. The Company is evaluating the impact of adopting the new
guidance on the consolidated financial statements in conjunction with its evaluation of ASU 2014-09 discussed below.
In February 2016, the FASB issued ASU 2016-02, “Leases
(Topic 842).” The new guidance, among other things, requires lessees to recognize the following for all leases (with the
exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease
payments arising from a lease, measured on a discounted basis and (ii) a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting
model and Topic 606, Revenue from Contracts with Customers. ASU 2016-02 will be effective for public business entities for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted
for all public business entities upon issuance. While the Company is still evaluating the impact of this new guidance on its consolidated
financial statements, it expects that the adoption of this guidance will not have a material impact on its results of operations,
however, will result in a significant increase in total assets and total liabilities on the Company’s balance sheet given
that the Company has a significant number of leases.
In May 2014 the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers.” This pronouncement requires entities to recognize revenue in a way that depicts the transfer of
promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to
in exchange for those goods and services. This standard is effective for reporting periods beginning on or after December 15, 2017,
including interim periods within that fiscal year, with early adoption permitted for interim and annual periods beginning on or
after December 15, 2016. Since the original issuance of ASU 2014-09, the FASB has issued several amendments and updates to this
guidance. This guidance may be adopted on a full retrospective basis to each prior reporting period presented or on a modified
retrospective basis with the cumulative effect of initially applying the guidance recognized at the date of initial application.
The Company is finalizing its evaluation of the impact of adopting the new guidance on the consolidated financial statements. This
evaluation includes reviewing current accounting policies, processes, and arrangements to identify potential differences that could
arise from the application of the guidance. Based on the Company’s assessment to date, the adoption of this guidance will
have the following impact: (a) estimated cost of returns will be recorded as a current asset rather than netted with the allowance
for sales returns; (b) gift card breakage income will be estimated based on a historical redemption rate and recognized over the
historical redemption period rather than when redemption is considered remote; and (c) ecommerce revenue will be recognized upon
shipment rather than upon delivery. The Company will adopt this guidance on a modified retrospective basis on February 4, 2018.
The Company expects that the adoption of this guidance will not have a material impact on its consolidated financial statements.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
Basic earnings per common share amounts are calculated using
the weighted-average number of common shares outstanding for the period. Diluted earnings per common share amounts are calculated
using the weighted-average number of common shares outstanding for the period and include the dilutive impact of stock options
and restricted stock grants using the treasury stock method. The following table summarizes the potential dilution that could occur
if options to acquire common stock were exercised or if the restricted stock grants were fully vested and reconciles the weighted-average
common shares outstanding used in the computation of basic and diluted earnings per share.
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28,
2017
|
|
|
October 29,
2016
|
|
|
October 28,
2017
|
|
|
October 29,
2016
|
|
|
|
(in thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
239
|
|
|
$
|
9,694
|
|
|
$
|
11,835
|
|
|
$
|
27,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
|
35,884
|
|
|
|
37,552
|
|
|
|
36,387
|
|
|
|
38,831
|
|
Restricted stocks and stock options
|
|
|
75
|
|
|
|
123
|
|
|
|
138
|
|
|
|
114
|
|
Weighted-average common shares outstanding - diluted
|
|
|
35,959
|
|
|
|
37,675
|
|
|
|
36,525
|
|
|
|
38,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.01
|
|
|
$
|
0.26
|
|
|
$
|
0.33
|
|
|
$
|
0.70
|
|
Diluted earnings per common share
|
|
$
|
0.01
|
|
|
$
|
0.26
|
|
|
$
|
0.32
|
|
|
$
|
0.70
|
|
Potentially issuable shares under the Company’s stock-based
compensation plans amounting to approximately 0.5 million shares and 0.4 million shares in the thirteen and thirty-nine weeks ended
October 28, 2017, respectively, and 0.3 million shares in each of the thirteen and thirty-nine weeks ended October 29, 2016, were
excluded in the computation of diluted weighted-average common shares outstanding due to their anti-dilutive effect. The Company
also excluded contingently issuable performance-based awards totaling 0.4 million shares in each of the thirteen and thirty-nine
weeks ended October 28, 2017 and 0.3 million shares in each of the thirteen and thirty-nine weeks ended October 29, 2016 from the
computation of diluted earnings per share because the pre-established goals had not yet been satisfied as of the end of each period.
|
3.
|
Fair Value Measurements
|
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The
carrying amount reflected in the consolidated balance sheets of financial assets and liabilities, which includes cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their fair values due to the short term
nature of these financial assets and liabilities.
|
4.
|
Gift Cards and Gift Card Breakage
|
During the thirteen weeks ended October 28, 2017, the Company
changed the estimated period over which redemption of gift cards is considered to be remote to more closely align with recent Company
experience. As a result of this change in estimate, the Company recognized $1.5 million of additional gift card breakage income
included in net sales in the unaudited consolidated statements of operations.
The provision for income taxes is based on
the Company’s current estimate of the annual effective tax rate. The effective income tax rates for the thirteen
and thirty-nine weeks ended October 28, 2017 were 45.0% and 39.5%, respectively. The effective income tax rates for the
thirteen and thirty-nine weeks ended October 29, 2016 were 38.3% and 38.0%, respectively. The difference between our
effective tax rate and federal statutory tax rate is primarily related to state income taxes. The increase in effective tax
rate in the thirteen weeks ended October 28, 2017 versus the comparable prior year period was due to the income tax effect of
exercised or vested stock-based awards recognized in income tax expense.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
6.
|
Revolving Credit Facility
|
On August 30, 2013, Francesca’s Collections, Inc. (the
“Borrower”), as borrower, and its parent company, Francesca’s LLC, a wholly owned subsidiary of the Company,
entered into a Second Amended and Restated Credit Agreement with Royal Bank of Canada, as Administrative Agent and Collateral Agent,
and the lenders party thereto. The credit facility provides capacity of $75.0 million (including up to $10.0 million
for letters of credit) and matures on August 30, 2018. The facility also contains an option permitting the Borrower,
subject to certain requirements and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate
of $25.0 million, subject to reductions in the event the Borrower has certain indebtedness outstanding. At October 28,
2017, no borrowings were outstanding under the revolving credit facility.
The credit facility contains customary events of default and
requires the Borrower to comply with certain financial covenants. As of October 28, 2017, the Borrower was in compliance with all
covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can pay; provided that
the Borrower is permitted to pay dividends to the extent it has available capacity in its available investment basket (as defined
in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain procedural requirements
have been satisfied and the Borrower is in pro forma compliance with a maximum secured leverage ratio. At October 28, 2017, the
Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations under the credit
facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All obligations under
the facility are unconditionally guaranteed, subject to certain exceptions, by Francesca’s LLC and each of the Borrower’s
existing and future direct and indirect wholly-owned domestic subsidiaries.
|
7.
|
Stock-based Compensation
|
Stock-based compensation cost is measured at the grant date
fair value and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally
the vesting period of the equity grant). The Company recognized a net reversal of stock-based compensation totaling $0.3 million
in the thirteen weeks ended October 28, 2017 and $2.1 million stock-based compensation expense in the thirty-nine weeks ended October
28, 2017. Stock-based compensation in the thirteen and thirty-nine weeks ended October 29, 2016 totaled $0.9 million and less than
$0.1 million, respectively.
Restricted Stock Awards
During the thirty-nine weeks ended October 28, 2017, the Company
granted 0.3 million shares of restricted stock to certain executives and key employees. Of the total shares awarded, 65% was
in the form of performance-based restricted shares (“PSA”) while the remaining 35% was in the form of time-based restricted
shares (“RSA”). During the thirty-nine weeks ended October 29, 2016, the Company granted approximately 0.4 million
target shares of PSAs to certain executives and key employees.
The number of PSAs that may
ultimately vest will equal 0% to 150% of the target shares awarded subject to the achievement of pre-established performance goals
and the employee’s continued employment through the third anniversary of the award date. The RSAs vest in one installment
on the third anniversary of the award date. At October 28, 2017, the Company assessed the probability of achieving the pre-established
performance conditions related to the PSAs and determined that the achievement of the required performance conditions is not probable.
As a result, the Company reversed $0.9 million of previously recognized stock-based compensation during the thirteen weeks ended
October 28, 2017.
Forfeited Awards
In May 2016, Mr. Michael Barnes resigned from his positions
as Chairman, President and Chief Executive Officer of the Company. As a result of such resignation, 1.3 million of then-outstanding
and unvested stock-based awards previously granted to him were forfeited. Previously accrued stock-based compensation totaling
$2.6 million was reversed in connection with such forfeiture during the thirty-nine weeks ended October 29, 2016.
On September 3, 2013, the Company’s Board of Directors
authorized a $100.0 million share repurchase program (“Previous Repurchase Plan”) commencing on the same date. In
April 2016, the authorized amount was fully exhausted.
On March 15, 2016, the Company’s Board of Directors authorized
an additional $100.0 million share repurchase program (“New Repurchase Plan”) which commenced upon exhaustion of the
Previous Repurchase Plan. The New Repurchase Plan has no expiration date. Under the New Repurchase Plan, purchases can be
made from time to time in the open market, in privately negotiated transactions, under Rule 10b5-1 plans or through other available
means. The specific timing and amount of the repurchases is dependent on market conditions, securities law limitations
and other factors.
The following table summarizes the Company’s repurchase
activity for the periods presented. The cost of repurchased shares is presented as treasury stock in the unaudited consolidated
balance sheets.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28,
2017
|
|
|
October 29,
2016
|
|
|
October 28,
2017
|
|
|
October 29,
2016
|
|
|
|
(in thousands, except per share data)
|
|
Number of shares repurchased
|
|
|
491
|
|
|
|
263
|
|
|
|
1,614
|
|
|
|
3,506
|
|
Total cost of shares repurchased
|
|
$
|
3,500
|
|
|
$
|
4,194
|
|
|
$
|
18,517
|
|
|
$
|
48,017
|
|
Average price per share (including brokers’ commission)
|
|
$
|
7.13
|
|
|
$
|
15.94
|
|
|
$
|
11.48
|
|
|
$
|
13.70
|
|
At October 28, 2017, there was $45.2 million remaining balance
available for future purchases under the New Repurchase Plan.
|
9.
|
Commitments and Contingencies
|
Operating Leases
The Company leases boutique space and office space under operating
leases expiring in various years through the fiscal year ending 2028. Certain of the leases provide that the Company may cancel
the lease, with penalties as defined in the lease, if the Company’s boutique sales at that location fall below an established
level. Certain leases provide for additional rent payments to be made when sales exceed a base amount. Certain operating leases
provide for renewal options for periods from three to five years at their fair rental value at the time of renewal.
Minimum future rental payments under non-cancellable operating
leases as of October 28, 2017, are as follows:
Fiscal year
|
|
Amount
|
|
|
|
(in thousands)
|
|
Remainder of 2017
|
|
$
|
11,994
|
|
2018
|
|
|
47,809
|
|
2019
|
|
|
45,382
|
|
2020
|
|
|
39,931
|
|
2021
|
|
|
33,108
|
|
Thereafter
|
|
|
93,546
|
|
|
|
$
|
271,770
|
|
Legal Proceedings
The Company, from time to time, is subject to various claims
and legal proceedings, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial
disputes and other matters that arise in the ordinary course of business. While the outcome of any such claim cannot
be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse effect
on the Company’s business, results of operations or financial condition.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains statements that constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements concern our
business, operations and financial performance and condition as well as our plans, objectives and expectations for our business
operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements
of historical fact included in this report are forward-looking statements. These statements may include words such as “aim”,
“anticipate”, “assume”, “believe”, “can have”, “could”, “due”,
“estimate”, “expect”, “goal”, “intend”, “likely”, “may”,
“objective”, “plan”, “potential”, “positioned”, “predict”, “should”,
“target”, “will”, “would” and other words and terms of similar meaning in connection with any
discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements
we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth rates, market share and
financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or
impact of pending or threatened litigation are forward-looking statements.
These forward-looking statements are based on current expectations,
estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs
and assumptions. These statements are not guarantees of future performance or development and involve known and unknown risks,
uncertainties and other factors that are in many cases beyond our control. All of our forward-looking statements are subject to
risks and uncertainties that may cause our actual results to differ materially from our expectations. These risks and uncertainties
include, but are not limited to, the following: the risk that we cannot anticipate, identify and respond quickly to changing fashion
trends and customer preferences 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 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 “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 and
filed with the Securities and Exchange Commission (“SEC”) on March 22, 2017 (“Fiscal Year 2016 10-K”) and
any risk factors contained in subsequent Quarterly Reports on Form 10-Q or other filings we file with the SEC, as well as our disclosures
under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in
this report and in our Fiscal Year 2016 10-K.
We derive many of our forward-looking statements from our own
operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable,
we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors
that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on
our behalf, are expressly qualified in their entirety by the cautionary statements contained in this report as well as other cautionary
statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking
statements made in this report in the context of these risks and uncertainties.
Potential investors and other readers are urged to consider
these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking
statements. These forward-looking statements speak only as of the date of this report. Except as required by law, we undertake
no obligation to update or revise any forward-looking statements publicly after the date of this report whether as a result of
new information, future developments or otherwise.
Overview
Unless the context otherwise requires, the “Company,”
“we,” “our,” “ours,” “us” and “francesca’s®” refer to Francesca’s
Holdings Corporation and its consolidated subsidiaries.
francesca’s
®
is
a growing specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized
shopping experience. The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts. As of
October 28, 2017, francesca’s
®
operated 714 boutiques in 47 states and the District of Columbia and also
served its customers through www.francescas.com, our ecommerce website. The information contained on our ecommerce website is not
incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information contained on our ecommerce
website to be part of this Quarterly Report on Form 10-Q.
During the thirteen weeks ended October 28, 2017, our net sales
decreased 11% to $105.8 million from $119.5 million, income from operations decreased by 97% to $0.5 million from $15.8 million
and net income decreased 98% to $0.2 million, or $0.01 per diluted share based on 36.0 million weighted average diluted shares
outstanding, from $9.7 million, or $0.26 per diluted share based on 37.7 million weighted average diluted shares outstanding, over
the comparable prior year period. During the thirty-nine weeks ended October 28, 2017, our net sales decreased 2% to $333.2 million
from $340.8 million, income from operations decreased by 56% to $19.6 million from $44.3 million and net income decreased 57% to
$11.8 million, or $0.32 per diluted share based on 36.5 million weighted average diluted shares outstanding, from $27.4 million,
or $0.70 per diluted share based on 38.9 million weighted average diluted shares outstanding, over the comparable prior year period.
We increased our boutique count to 714 boutiques as of October
28, 2017 from 669 boutiques as of October 29, 2016. We plan to open approximately nine boutiques during the remainder of the fiscal
year.
As previously reported, Ms. Laurie Hummel departed from her
positions as Executive Vice President and Chief Merchandising Officer of the Company in August 2017. In November 2017, Ms. Ivy
R. Spargo was appointed as Senior Vice President, Chief Merchandising Officer effective as of November 27, 2017.
In August 2017, Hurricane Harvey hit south Texas and Louisiana
and, in September 2017, Hurricane Irma hit Florida causing widespread damage to property and infrastructure within these regions. These
natural disasters negatively impacted our net sales for our boutiques located in these areas. However, the supply chain disruption
we experienced at our corporate offices located in Houston, Texas was more impactful on net sales for all of our boutiques. Our
corporate offices were shut down for a few days and deliveries were disrupted for several weeks. As a result, we were not able
to receive merchandise at our distribution center, fulfill ecommerce orders or ship fresh merchandise to our boutiques. Because
our operating model relies heavily on fresh merchandise, this disruption impacted net sales for the remainder of the quarter. There
were no other material losses incurred from these hurricanes.
We are in the process of deploying a new technology suite of
systems to enhance our omni-channel and customer engagement capabilities as part of our long-term strategic plan. This includes
replacing our legacy point-of-sale system and introduction of a new order management system and a new customer relationship management
system. As of the end of October 2017, we have completed the roll-out of our new point-of-sale and customer relationship management
systems. We expect that these new systems will enhance our visibility into our customers’ preferences, products and supply
chain resulting in improved customer service, improved operational efficiency, enhanced management analytics and increased synergies
between our ecommerce and our boutique channels.
Results of Operations
The following represents operating data for the thirteen and
thirty-nine weeks ended October 28, 2017 and October 29, 2016.
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28,
2017
|
|
|
October 29,
2016
|
|
|
October 28,
2017
|
|
|
October 29,
2016
|
|
Net sales growth for period
|
|
|
(11
|
)%
|
|
|
15
|
%
|
|
|
(2
|
)%
|
|
|
12
|
%
|
Comparable sales for the period
(1)
|
|
|
(18
|
)%
|
|
|
7
|
%
|
|
|
(9
|
)%
|
|
|
3
|
%
|
Number of boutiques open at end of period
|
|
|
714
|
|
|
|
669
|
|
|
|
714
|
|
|
|
669
|
|
Net sales per average square foot for period
(2)
|
|
$
|
107
|
|
|
$
|
131
|
|
|
$
|
345
|
|
|
$
|
373
|
|
Average square feet per boutique
(3)
|
|
|
1,417
|
|
|
|
1,387
|
|
|
|
1,417
|
|
|
|
1,387
|
|
Total gross square feet at end of period
|
|
|
1,012,000
|
|
|
|
928,000
|
|
|
|
1,012,000
|
|
|
|
928,000
|
|
|
(1)
|
A boutique is included in comparable sales on the first day of the fifteenth full month following the boutique’s opening.
When a boutique that is included in comparable sales is relocated, we continue to consider sales from that boutique to be comparable
sales. If a boutique is closed for thirty days or longer for a remodel or as a result of weather damage, fire or the like, we no
longer consider sales from that boutique to be comparable sales. If a boutique is permanently closed, we exclude sales from that
boutique from comparable sales on the first day of the fiscal month that it did not register full month of sales. Comparable sales
include our ecommerce sales and exclude gift card breakage income.
|
|
(2)
|
Net sales per average square foot is calculated by dividing net sales for the period by the average square feet during the
period. Because of our growth, for purposes of providing net sales per square foot measure, we use average square feet during the
period as opposed to total gross square feet at the end of the period. For individual quarterly periods, average square feet is
calculated as (a) the sum of total gross square feet at the beginning and end of the period divided by (b) two. For periods
consisting of more than one fiscal quarter, 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.
|
|
(3)
|
Average square feet per boutique is calculated by dividing total gross square feet at the end of the period by the number of
boutiques open at the end of the period.
|
Boutique Count
The following table summarizes the number of boutiques open
at the beginning and end of the periods indicated.
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28,
2017
|
|
|
October 29,
2016
|
|
|
October 28,
2017
|
|
|
October 29,
2016
|
|
Number of boutiques open at beginning of period
|
|
|
692
|
|
|
|
652
|
|
|
|
671
|
|
|
|
616
|
|
Boutiques added
|
|
|
23
|
|
|
|
18
|
|
|
|
51
|
|
|
|
59
|
|
Boutiques closed
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
|
(6
|
)
|
Number of boutiques open at the end of period
|
|
|
714
|
|
|
|
669
|
|
|
|
714
|
|
|
|
669
|
|
Thirteen Weeks Ended October 28, 2017 Compared to Thirteen Weeks Ended October 29, 2016
|
|
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
|
|
|
|
(In thousands, except percentages and 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.
|
Net Sales
Net sales decreased 11% to $105.8 million in the thirteen weeks
ended October 28, 2017 from $119.5 million in the thirteen weeks ended October 29, 2016. This decrease was primarily 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 our back-to-school assortment did not resonate with our guests. Additionally,
Hurricanes Harvey and Irma adversely impacted comparable sales by approximately 425 basis points, mostly as a result of the supply
chain disruption we experienced at our corporate offices located in Houston, Texas. These decreases were partially offset by 45
net new boutiques opened since the comparable prior year period and $1.5 million of additional gift card breakage income recognized
during the current quarter as a result of a change in the estimated period over which redemption of gift cards is considered remote.
There were 640 comparable boutiques and 74 non-comparable boutiques open at October 28, 2017 compared to 596 and 73, respectively,
at October 29, 2016.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs increased 3% to $63.9
million in the thirteen weeks ended October 28, 2017 from $61.8 million in the thirteen weeks ended October 29, 2016. Cost of merchandise
and shipping expenses decreased by $0.4 million compared to the same period of the prior year due to a decrease in sales volume.
Occupancy costs increased by $2.5 million due to the increase in the number of boutiques in operation during the thirteen weeks
ended October 28, 2017 compared to the same period of the prior year.
As a percentage of net sales, cost of goods sold and occupancy
costs increased to 60.4% in the thirteen weeks ended October 28, 2017 from 51.8% in the thirteen weeks ended October 29, 2016,
an unfavorable variance of 860 basis points. This change was due primarily to a decrease in merchandise margin, as a result of
increased markdowns in order to sell-through our back-to-school assortment, as well as deleveraging of occupancy costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 1% to
$41.4 million in the thirteen weeks ended October 28, 2017 from $41.9 million in the thirteen weeks ended October 29, 2016.
This decrease was due to a $4.2 million decrease in short- and long-term performance-based incentive expenses as the achievement
of the required performance metrics is not probable given our current financial results. This decrease was partially offset by
a $2.5 million increase in corporate and boutique payroll to support the larger boutique base and infrastructure investments, $0.4
million increase in marketing, and a $0.4 million increase in software and professional fees associated with our continuing investments
in infrastructure and technology.
As a percentage of net sales, selling, general and administrative
expense increased to 39.1% in the thirteen weeks ended October 28, 2017 as compared to 35.0% in the thirteen weeks ended October
29, 2016 due to deleveraging of expenses as a result of lower sales.
Income Tax Expense
The decrease in provision for income taxes of $5.8 million
in the thirteen weeks ended October 28, 2017 compared to the thirteen weeks ended October 29, 2016 was primarily due to the
decrease in pre-tax income. The effective tax rates were 45.0% and 38.3% in the thirteen weeks ended October 28, 2017 and
October 29, 2016, respectively. The increase in the effective tax rate was due to the income tax effect of exercised or
vested stock-based awards recognized in income tax expense.
Thirty-Nine Weeks Ended October 28, 2017 Compared to
Thirty-Nine Weeks Ended October 29, 2016
|
|
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
|
|
|
|
(In thousands, except percentages and 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.
|
Net Sales
Net sales decreased 2% to $333.2 million in the thirty-nine
weeks ended October 28, 2017 from $340.8 million in the thirty-nine weeks ended October 29, 2016. This decrease was due to
a 9% decrease in comparable sales compared to a 3% increase in the comparable prior year period. Comparable sales decreased primarily
due to a decline in boutique conversion rates, particularly in the thirteen weeks ended October 28, 2017, as our assortment did
not resonate with our guests. Additionally, Hurricanes Harvey and Irma adversely impacted comparable sales by approximately 150
basis points, mostly as a result of the supply chain disruption we experienced at our corporate offices located in Houston, Texas.
This decrease was partially offset by 45 net new boutiques opened since the comparable prior year period. There were 640 comparable
boutiques and 74 non-comparable boutiques open at October 28, 2017 compared to 596 and 73, respectively, at October 29, 2016.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs increased 4% to $187.2
million in the thirty-nine weeks ended October 28, 2017 from $180.1 million in the thirty-nine weeks ended October 29, 2016. Cost
of merchandise and shipping expenses increased by $1.5 million compared to the same period last year primarily due to an increase
in ecommerce shipping costs. Occupancy costs increased by $5.6 million due to the increase in the number of boutiques in operation
during the thirty-nine weeks ended October 28, 2017 compared to the same period of the prior year.
As a percentage of net sales, cost of goods sold and occupancy
costs increased to 56.2% in the thirty-nine weeks ended October 28, 2017 from 52.9% in the thirty-nine weeks ended October 29,
2016, an unfavorable variance of 330 basis points. This change was due to a decrease in merchandise margin, as a result of increased
markdowns, as well as deleveraging of occupancy costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 9% to
$126.3 million in the thirty-nine weeks ended October 28, 2017 from $116.4 million in the thirty-nine weeks ended October
29, 2016. This variance was due to a $6.3 million increase in corporate and boutique payroll to support our larger boutique base
and infrastructure investments, $2.1 million increase in software and professional fees associated with our continuing investments
in technology and infrastructure, $1.5 million increase in marketing expense and a $2.0 million prior year net benefit associated
with the resignation of our prior Chief Executive Officer (“CEO”) and the related search process. These increases were
partially offset by a $4.4 million decrease in short- and long-term performance-based incentive expenses as the achievement of
the required performance metrics is not probable given our current financial results.
As a percentage of net sales, selling, general and administrative
expense increased to 37.9% in the thirty-nine weeks ended October 28, 2017 as compared to 34.1% in the thirty-nine weeks ended
October 29, 2016 due to the prior year net benefit associated with the resignation of our CEO as well as deleveraging of expenses
as a result of lower sales.
Income Tax Expense
The decrease in provision for income taxes of $9.0 million in
the thirty-nine weeks ended October 28, 2017 compared to the thirty-nine weeks ended October 29, 2016 was primarily due to the
decrease in pre-tax income. The effective tax rates were 39.5% and 38.0% in the thirty-nine weeks ended October 28, 2017 and October
29, 2016, respectively.
Sales by Merchandise
Department
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28, 2017
|
|
|
October 29, 2016
|
|
|
October 28, 2017
|
|
|
October 29, 2016
|
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
|
(in thousands, except percentages)
|
|
Apparel
(1)
|
|
$
|
54,663
|
|
|
|
51.7
|
%
|
|
$
|
64,013
|
|
|
|
53.6
|
%
|
|
$
|
180,071
|
|
|
|
54.0
|
%
|
|
$
|
182,731
|
|
|
|
53.6
|
%
|
Jewelry
|
|
|
22,826
|
|
|
|
21.6
|
%
|
|
|
26,143
|
|
|
|
21.9
|
%
|
|
|
72,157
|
|
|
|
21.7
|
%
|
|
|
75,573
|
|
|
|
22.2
|
%
|
Accessories
(1)
|
|
|
15,360
|
|
|
|
14.5
|
%
|
|
|
17,346
|
|
|
|
14.5
|
%
|
|
|
44,076
|
|
|
|
13.2
|
%
|
|
|
45,783
|
|
|
|
13.4
|
%
|
Gifts
|
|
|
10,922
|
|
|
|
10.3
|
%
|
|
|
11,638
|
|
|
|
9.7
|
%
|
|
|
34,873
|
|
|
|
10.5
|
%
|
|
|
36,174
|
|
|
|
10.6
|
%
|
Merchandise sales
|
|
|
103,771
|
|
|
|
98.1
|
%
|
|
|
119,140
|
|
|
|
99.7
|
%
|
|
|
331,177
|
|
|
|
99.4
|
%
|
|
|
340,261
|
|
|
|
99.8
|
%
|
Other
(2)
|
|
|
2,020
|
|
|
|
1.9
|
%
|
|
|
330
|
|
|
|
0.3
|
%
|
|
|
2,010
|
|
|
|
0.6
|
%
|
|
|
582
|
|
|
|
0.2
|
%
|
|
|
$
|
105,791
|
|
|
|
100.0
|
%
|
|
$
|
119,470
|
|
|
|
100.0
|
|
|
$
|
333,187
|
|
|
|
100.0
|
%
|
|
$
|
340,843
|
|
|
|
100.0
|
%
|
|
(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 revenue and change in return reserve.
|
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations
and borrowings under our revolving credit facility. Our primary cash needs are for capital expenditures in connection with opening
new boutiques and remodeling existing boutiques, investing in improved technology and distribution facility enhancements, funding
normal working capital requirements and payments of interest and principal, if any, under our revolving credit facility. We may
use cash or our revolving credit facility to issue letters of credit to support merchandise imports or for other corporate purposes.
The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable
and other current liabilities. Our working capital position benefits from the fact that we generally collect cash from sales to
customers the day of or, in the case of credit or debit card transactions, within several days of the related sales and we typically
have up to 30 days to pay our vendors.
We were in compliance with all covenants under our revolving
credit facility as of October 28, 2017. On October 28, 2017, we had $19.0 million of cash and cash equivalents and $75.0 million
in borrowing availability under our revolving credit facility. There were no borrowings outstanding under our revolving credit
facility at October 28, 2017.
We expect that our cash flow from operations along with borrowings
under our revolving credit facility and tenant allowances for new boutiques will be sufficient to fund capital expenditures and
our working capital requirements for at least the next twelve months.
Cash Flow
A summary of our operating, investing and financing activities
are shown in the following table:
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28, 2017
|
|
|
October 29, 2016
|
|
|
|
(in thousands)
|
|
Provided by operating activities
|
|
$
|
3,908
|
|
|
$
|
35,469
|
|
Used in investing activities
|
|
|
(19,121
|
)
|
|
|
(18,658
|
)
|
Used in financing activities
|
|
|
(18,969
|
)
|
|
|
(48,310
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(34,182
|
)
|
|
$
|
(31,499
|
)
|
Operating Activities
Operating activities consist of net income adjusted for non-cash
items, including depreciation and amortization, deferred taxes, the effect of working capital changes and tenant allowances received
from landlords. Net cash provided by operating activities was $3.9 million and $35.5 million in each of the thirty-nine weeks ended
October 28, 2017 and October 29, 2016, respectively. The decrease in cash provided by operating activities in the current period
as compared to the same period of the prior year was primarily due to the decrease in net income and higher income tax payments
partially offset by timing of payments for inventory purchases.
Investing Activities
Investing activities consist primarily of capital expenditures
for new boutiques, improvements to existing boutiques, as well as investments in information technology and our distribution facility.
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28, 2017
|
|
|
October 29, 2016
|
|
|
|
(in thousands)
|
|
Capital expenditures for:
|
|
|
|
|
|
|
|
|
New boutiques
|
|
$
|
13,331
|
|
|
$
|
11,538
|
|
Existing boutiques
|
|
|
4,400
|
|
|
|
3,316
|
|
Technology
|
|
|
1,072
|
|
|
|
3,160
|
|
Corporate and distribution
|
|
|
318
|
|
|
|
652
|
|
|
|
$
|
19,121
|
|
|
$
|
18,666
|
|
Our total capital expenditures for the thirty-nine weeks ended
October 28, 2017 and October 29, 2016 were $19.1 million and $18.7 million, respectively, with new boutiques accounting for most
of our spending at $13.3 million and $11.5 million, respectively. Spending for new boutiques includes amounts associated with boutiques
that are scheduled to open subsequent to the end of each fiscal quarter. We opened 51 boutiques in the thirty-nine weeks ended
October 28, 2017 compared to 59 boutiques in the thirty-nine weeks ended October 29, 2016. The average cost of the leasehold improvements,
equipment, furniture and fixtures, excluding tenant allowances which are reflected in operating cash flows, for new boutiques opened
in the thirty-nine weeks ended October 28, 2017 and October 29, 2016 was $291,000 and $234,000, respectively, while the average
tenant allowance per new boutique was $55,000 and $77,000 over the same periods, respectively. The increase in average buildout
costs was principally due to higher cost of leasehold improvements while the lower average tenant allowance was the result of our
continued focus in lowering rental rates. Tenant allowances are amortized as a reduction in rent expense over the term of the lease.
The average collection period for these allowances is approximately six months after boutique opening. As a result, we fund the
cost of new boutiques with cash flow from operations, build-out allowances from our landlords, or borrowings under our revolving
credit facility. Our spending for existing boutiques totaled $4.4 million and $3.3 million during the thirty-nine weeks ended October
28, 2017 and October 29, 2016, respectively. The amount spent for existing boutiques in each period was used for remodeling and
relocating 20 and 31 boutiques, respectively, and in the thirty-nine weeks ended October 28, 2017, for new boutique equipment in
connection with the point-of-sale system rollout.
Management anticipates that capital expenditures for the remainder
of fiscal year 2017 will be approximately $10.9 million to $13.9 million. The majority of this amount will be spent on new and
existing boutiques.
Financing Activities
Financing activities consist of borrowings and payments under
our revolving credit facility, if any, repurchases of our common stock, and proceeds from the exercise of stock options and the
related tax consequence.
Net cash used in financing activities totaled $19.0 million
and $48.3 million during the thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively. Cash used in financing
activities in each period primarily consists of repurchases of common stock.
Revolving Credit Facility
On August 30, 2013, Francesca’s Collections, Inc. (the
“Borrower”), as borrower, and its parent company, Francesca's LLC, a wholly owned subsidiary of the Company, entered
into a Second Amended and Restated Credit Agreement with Royal Bank of Canada, as Administrative Agent and Collateral Agent, and
the lenders party thereto. The credit facility provides capacity of $75.0 million (including up to $10.0 million for letters of
credit) and matures on August 30, 2018. The facility also contains an option permitting the Borrower, subject to certain requirements
and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate of $25.0 million, subject
to reductions in the event the Borrower has certain indebtedness outstanding. At October 28, 2017, no borrowings were outstanding
under the credit facility.
The credit facility contains customary events of default and
requires the Borrower to comply with certain financial covenants. As of October 28, 2017, the Borrower was in compliance with all
covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can pay; provided that
the Borrower is permitted to pay dividends to the extent it has available capacity in its available investment basket (as defined
in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain procedural requirements
have been satisfied and the Borrower is in pro forma compliance with a maximum secured leverage ratio. At October 28, 2017, the
Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations under the credit
facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All obligations under
the facility are unconditionally guaranteed by, subject to certain exceptions, by Francesca’s LLC and each of the Borrower’s
existing and future direct and indirect wholly-owned domestic subsidiaries.
Share Repurchase Program
For information regarding our share repurchase program, please
refer to Note 8 to our unaudited consolidated financial statements included in Part I of this report, which is incorporated herein
by reference.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities
at the date of the financial statements. A summary of the Company’s significant accounting policies is included in Note 1
to the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for
the fiscal year ended January 28, 2017.
Certain of the Company’s accounting policies and estimates
are considered critical, as these policies and estimates are the most important to the depiction of the Company’s consolidated
financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently
uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section of our Annual Report on Form 10-K for the fiscal year ended January 28, 2017. As of October 28, 2017,
there were no significant changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on
Form 10-K for the fiscal year ended January 28, 2017.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements,
please refer to Note 1 to our unaudited consolidated financial statements included in Part I of this Report, which is incorporated
herein by reference.
Contractual Obligations
There were no significant changes to our contractual obligations
and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017, other than
those which occur in the normal course of business.
Off Balance Sheet Arrangements
We are not party to any off balance sheet arrangements.