ITEM 1. FINANCIAL STATEMENTS
Francesca’s Holdings Corporation
Unaudited Consolidated Balance Sheets
(In thousands, except share amounts)
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|
May 5, 2018
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February 3, 2018
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April 29, 2017
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ASSETS
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Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
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$
|
21,833
|
|
|
$
|
31,331
|
|
|
$
|
48,101
|
|
Accounts receivable
|
|
|
20,488
|
|
|
|
16,642
|
|
|
|
8,145
|
|
Inventories
|
|
|
32,728
|
|
|
|
26,816
|
|
|
|
31,365
|
|
Prepaid expenses and other current assets
|
|
|
10,326
|
|
|
|
9,714
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|
|
|
9,479
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|
Total current assets
|
|
|
85,375
|
|
|
|
84,503
|
|
|
|
97,090
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|
Property and equipment, net
|
|
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89,321
|
|
|
|
87,702
|
|
|
|
81,577
|
|
Deferred income taxes
|
|
|
7,726
|
|
|
|
9,413
|
|
|
|
15,859
|
|
Other assets, net
|
|
|
4,222
|
|
|
|
3,622
|
|
|
|
2,896
|
|
|
|
|
|
|
|
|
|
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|
|
|
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TOTAL ASSETS
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|
$
|
186,644
|
|
|
$
|
185,240
|
|
|
$
|
197,422
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|
|
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|
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
|
|
|
|
|
|
|
|
|
|
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|
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Accounts payable
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|
$
|
24,827
|
|
|
$
|
17,801
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|
|
$
|
21,305
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|
Accrued liabilities
|
|
|
14,634
|
|
|
|
14,654
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|
|
|
25,085
|
|
Total current liabilities
|
|
|
39,461
|
|
|
|
32,455
|
|
|
|
46,390
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|
Landlord incentives and deferred rent
|
|
|
37,616
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|
|
|
38,337
|
|
|
|
38,261
|
|
Total liabilities
|
|
|
77,077
|
|
|
|
70,792
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|
|
|
84,651
|
|
|
|
|
|
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|
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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; 47.1 million, 46.3 million and 46.3 million shares issued at May 5, 2018, February 3, 2018 and April 29, 2017, respectively.
|
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|
471
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|
|
|
463
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|
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|
463
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Additional paid-in capital
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111,823
|
|
|
|
111,439
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|
|
|
110,267
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|
Retained earnings
|
|
|
157,294
|
|
|
|
159,045
|
|
|
|
147,817
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|
Treasury stock, at cost – 11.1 million, 10.3 million and 9.2 million shares at May 5, 2018, February 3, 2018 and April 29, 2017, respectively.
|
|
|
(160,021
|
)
|
|
|
(156,499
|
)
|
|
|
(145,776
|
)
|
Total stockholders’ equity
|
|
|
109,567
|
|
|
|
114,448
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|
|
|
112,771
|
|
|
|
|
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|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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|
$
|
186,644
|
|
|
$
|
185,240
|
|
|
$
|
197,422
|
|
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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May 5, 2018
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April 29, 2017
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Net sales
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|
$
|
100,405
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|
|
$
|
107,689
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|
Cost of goods sold and occupancy costs
|
|
|
62,042
|
|
|
|
59,006
|
|
Gross profit
|
|
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38,363
|
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|
48,683
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Selling, general and administrative expenses
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42,883
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41,281
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|
(Loss) income from operations
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(4,520
|
)
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7,402
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Interest expense
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|
(117
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)
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|
|
(113
|
)
|
Other income (expense)
|
|
|
150
|
|
|
|
(25
|
)
|
(Loss) income before income tax (benefit) expense
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|
|
(4,487
|
)
|
|
|
7,264
|
|
Income tax (benefit) expense
|
|
|
(602
|
)
|
|
|
2,931
|
|
Net (loss) income
|
|
$
|
(3,885
|
)
|
|
$
|
4,333
|
|
|
|
|
|
|
|
|
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Basic (loss) earnings per common share
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$
|
(0.11
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)
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$
|
0.12
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Diluted (loss) earnings per common share
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$
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(0.11
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)
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$
|
0.12
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Weighted average shares outstanding:
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Basic shares
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34,836
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|
|
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36,943
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Diluted shares
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34,836
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|
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37,149
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|
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)
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Common Stock
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Additional
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Treasury
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Total
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Shares
Outstanding
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Par
Value
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Paid-in
Capital
|
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Retained
Earnings
|
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Stock, at
cost
|
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Stockholders'
Equity
|
|
Balance, February 3, 2018
|
|
|
35,875
|
|
|
$
|
463
|
|
|
$
|
111,439
|
|
|
$
|
159,045
|
|
|
$
|
(156,499
|
)
|
|
$
|
114,448
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|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,885
|
)
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|
|
-
|
|
|
|
(3,885
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
418
|
|
|
|
-
|
|
|
|
-
|
|
|
|
418
|
|
Restricted stocks issued, net of forfeitures
|
|
|
856
|
|
|
|
8
|
|
|
|
(8
|
)
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|
|
-
|
|
|
|
-
|
|
|
|
-
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|
Shares withheld related to net settlement of equity awards
|
|
|
(5
|
)
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|
|
-
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
Cumulative
effect adjustment on adoption of new accounting standards, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,134
|
|
|
|
-
|
|
|
|
2,134
|
|
Repurchases of common stock
|
|
|
(659
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,522
|
)
|
|
|
(3,522
|
)
|
Balance, May 5, 2018
|
|
|
36,067
|
|
|
|
471
|
|
|
|
111,823
|
|
|
|
157,294
|
|
|
|
(160,021
|
)
|
|
|
109,567
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Cash Flows
(In thousands)
|
|
Thirteen Weeks Ended
|
|
|
|
May 5, 2018
|
|
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April 29, 2017
|
|
Cash Flows Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,885
|
)
|
|
$
|
4,333
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
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Depreciation and amortization
|
|
|
5,912
|
|
|
|
5,101
|
|
Stock-based compensation expense
|
|
|
418
|
|
|
|
1,254
|
|
Loss on sale of assets
|
|
|
61
|
|
|
|
110
|
|
Deferred income taxes
|
|
|
980
|
|
|
|
(347
|
)
|
Impairment charges
|
|
|
27
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,846
|
)
|
|
|
(2,540
|
)
|
Inventories
|
|
|
(5,912
|
)
|
|
|
(7,407
|
)
|
Prepaid expenses and other assets
|
|
|
(1,276
|
)
|
|
|
(1,638
|
)
|
Accounts payable
|
|
|
8,721
|
|
|
|
10,341
|
|
Accrued liabilities
|
|
|
2,728
|
|
|
|
(676
|
)
|
Landlord incentives and deferred rent
|
|
|
(721
|
)
|
|
|
169
|
|
Net cash provided by operating activities
|
|
|
3,207
|
|
|
|
8,700
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Used in Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(8,725
|
)
|
|
|
(4,634
|
)
|
Net cash used in investing activities
|
|
|
(8,725
|
)
|
|
|
(4,634
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows Used in Financing Activities:
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(3,980
|
)
|
|
|
(9,054
|
)
|
Taxes paid related to net settlement of equity awards
|
|
|
-
|
|
|
|
(113
|
)
|
Net cash used in financing activities
|
|
|
(3,980
|
)
|
|
|
(9,167
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(9,498
|
)
|
|
|
(5,101
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
31,331
|
|
|
|
53,202
|
|
Cash and cash equivalents, end of period
|
|
$
|
21,833
|
|
|
$
|
48,101
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
24
|
|
|
$
|
73
|
|
Interest paid
|
|
$
|
47
|
|
|
$
|
49
|
|
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 May 5, 2018, the Company operated 744 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 February 3, 2018 was derived from the
Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 3, 2018
included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2018.
These unaudited interim consolidated financial statements should
be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the fiscal
year ended February 3, 2018 included in the Company’s Annual Report on Form 10-K.
Due to seasonal variations in the Company’s business,
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 2018 includes 52 weeks of operations while fiscal year 2017 includes
53 weeks of operations. The fiscal quarters ended May 5, 2018 and April 29, 2017 refer to the thirteen week periods ended as of
those dates.
Management Estimates and Assumptions
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, net of estimated
sales returns, and expenses during the reporting periods. Actual results could differ materially from those estimates.
Revenue Recognition
The Company adopted Accounting Standards Codification (“ASC”)
606, “Revenue from Contracts with Customers” on February 4, 2018 using the modified retrospective approach. Prior period
amounts were not adjusted and continue to be reported in accordance with ASC 605, “Revenue Recognition.” As a result
of adoption of ASC 606, the Company recorded an adjustment of $2.0 million, net of $0.7 million tax effect, to the beginning balance
of retained earnings related to the change in timing of recognizing gift card breakage income. In addition, the cost of estimated
returns is now included in current assets rather than netted with the allowance for sales returns, and ecommerce sales are now
recognized upon shipment rather than delivery to the customer, with the cumulative effect related to this change determined to
be immaterial.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
The Company recognizes revenue when control of the merchandise
is transferred to customers in an amount that reflects the consideration received in exchange for such merchandise. For boutique
sales, control is transferred at the point at which the customer receives and pays for the merchandise at the register. For ecommerce
sales, control is transferred when merchandise is tendered to a third party carrier for delivery to the customer. The consideration
received is the stated price of the merchandise, net of any discount, sales tax collected and estimated sales returns, and, in
the case of ecommerce sales, includes shipping revenue. Cash is typically received on the day of or, in the case of credit or debit
card transactions, within several days of the related sales. Management estimates future returns on previously sold merchandise
based on return history and current sales levels. Estimated returns are periodically compared to actual sales returns and adjusted,
if appropriate. The provision for estimated returns is included in accrued liabilities while the associated cost of merchandise
is included as part of prepaid and other current assets in the consolidated balance sheets.
Disaggregated revenue
The Company disaggregates net sales into the following major
merchandise departments.
|
|
Thirteen Weeks Ended
|
|
|
|
May 5, 2018
|
|
|
April 29, 2017
|
|
|
|
(in thousands)
|
|
Apparel
|
|
$
|
49,534
|
|
|
$
|
60,012
|
|
Jewelry
|
|
|
23,858
|
|
|
|
23,771
|
|
Accessories
|
|
|
15,484
|
|
|
|
13,981
|
|
Gifts
|
|
|
11,105
|
|
|
|
11,115
|
|
|
|
|
99,981
|
|
|
|
108,879
|
|
Others
(1)
|
|
|
424
|
|
|
|
(1,190
|
)
|
|
|
$
|
100,405
|
|
|
$
|
107,689
|
|
|
(1)
|
Includes gift card breakage income, shipping revenue and change in return reserve.
|
Contract liability
Contract liability consists of gift card liability. The Company
accounts for the sale of gift cards as a liability at the time a gift card is sold. The liability is relieved and revenue is recognized
upon redemption of the gift card. The Company’s gift cards do not have an expiration date. Income from gift card breakage
is estimated based on historical redemption patterns and recognized over the historical redemption period. Unredeemed gift cards
at the end of the prior fiscal year recognized in revenues during the thirteen weeks ended May 5, 2018 and April 29, 2017 totaled
$1.7 million and $2.0 million, respectively, while gift card breakage income totaled $0.2 million and $0.1 million, over the same
period, respectively.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“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. This standard may be adopted on either a modified retrospective or a retrospective
basis.
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 adopted ASU 2016-04 and ASU 2014-09 on February
4, 2018 using the modified retrospective approach. Please refer to the
Revenue Recognition
policy section of this Note 1
to the Unaudited Consolidated Financial Statements for further information.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
Recent Accounting Pronouncements Not Yet Adopted
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. The guidance is required to be adopted using the modified retrospective approach.
The Company has selected its leasing software solution and is in the process of identifying changes to its business processes,
systems and controls to support the adoption in fiscal year 2019. 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, it 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.
|
2.
|
(Loss) Earnings per Share
|
Basic (loss) earnings per common share amounts are calculated
using the weighted-average number of common shares outstanding for the period. Diluted (loss) 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
restricted stock and stock option grants using the treasury stock method. The following table summarizes the potential dilution
that could occur if stock 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 (loss) earnings per share.
|
|
Thirteen Weeks Ended
|
|
|
|
May 5, 2018
|
|
|
April 29, 2017
|
|
|
|
(in thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,885
|
)
|
|
$
|
4,333
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
|
34,836
|
|
|
|
36,943
|
|
Restricted stocks and stock options
|
|
|
-
|
(1)
|
|
|
206
|
|
Weighted-average common shares outstanding - diluted
|
|
|
34,836
|
|
|
|
37,149
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share
|
|
$
|
(0.11
|
)
|
|
$
|
0.12
|
|
Diluted (loss) earnings per common share
|
|
$
|
(0.11
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Due to the Company being in a net loss position in
the thirteen weeks ended May 5, 2018, no restricted stocks and stock options were included in the computation of diluted loss
per share as their effect would have been anti-dilutive.
|
Potentially issuable shares under the Company’s stock-based
compensation plans amounting to 0.8 million and 0.3 million shares in the thirteen weeks ended May 5, 2018 and April 29, 2017,
respectively, 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 0.7 million and 0.4 million shares in
the thirteen weeks ended May 5, 2018 and April 29, 2017, respectively, from the computation of diluted earnings per share because
the pre-established goals had not 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.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
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 weeks ended May 5, 2018 and
April 29, 2017 were 13.4% and 40.3%, respectively. The decrease in the effective tax rate in the thirteen weeks ended May 5,
2018 versus the comparable prior year period was due to the lower corporate tax rate under the Tax Cuts and Jobs Act (“Tax
Act”) enacted in December 2017 as well as the additional tax expense recognized related to the expiration of certain stock-based
awards.
As of May 5, 2018 and April 29, 2017, the Company had
$11.4 million of income tax receivable and $9.3 million of income tax payable, respectively.
The Company has not recorded any adjustment to its estimates
at the end of fiscal year 2017 as a result of the enactment of the Tax Act. As the Company continues to refine and update its analysis
of the Tax Act and interprets any additional guidance, it may make adjustments to the amounts that have been previously recorded.
Any such adjustment will be reflected in income tax expense or benefit in fiscal year 2018.
|
5.
|
Revolving Credit Facility
|
On August 30, 2013, Francesca’s Collections, Inc., (“Francesca’s
Collections”), as borrower, and its parent company, Francesca’s LLC (the “Parent”), a wholly-owned subsidiary
of the Company, entered into a Second Amended and Restated Credit Agreement (“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 Francesca’s Collections, 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 Francesca’s Collections has certain indebtedness outstanding. At May 5, 2018, no borrowings
were outstanding under the revolving credit facility.
The credit facility contains customary events of default and
requires Francesca’s Collections to comply with certain financial covenants. As of May 5, 2018, Francesca’s Collections
was in compliance with all covenants under the credit facility. The credit facility restricts the amount of dividends Francesca’s
Collections can pay; provided that Francesca’s Collections 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 Francesca’s Collections is in pro forma compliance
with a maximum secured leverage ratio. At May 5, 2018, Francesca’s Collections 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
Francesca’s Collections 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 Francesca’s Collections’ existing and future direct
and indirect wholly-owned domestic subsidiaries.
The Second Amended and Restated Credit Agreement was terminated
in connection with the Company’s entry into a new asset based revolving credit facility on May 25, 2018. See Note 9, Subsequent
Events, for additional information.
|
6.
|
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. The Company
recognized $0.4 million and $1.3 million of stock-based compensation expense in the thirteen weeks ended May 5, 2018 and April
29, 2017, respectively.
Management Awards
In March 2018 and 2017, the Company granted 0.9 million and
0.2 million shares of restricted stock, respectively, to certain executives and key employees. For the fiscal 2018 award,
50% of the total shares awarded were in the form of performance-based restricted shares (“PSA”) while the remaining
50% were in the form of time-based restricted shares (“RSA”). For the fiscal 2017 award, 65% of the total shares
awarded were in the form of PSAs while the remaining 35% were in the form of RSAs.
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 grant date. The RSAs vest
in one installment on the third anniversary of the award date.
At the end of each reporting period, the Company assessed
the probability of achieving the pre-established performance conditions related to the PSAs and adjusted stock-based compensation
expense based on the results of such assessment.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
On March 15, 2016, the Company’s Board of Directors authorized
a $100.0 million share repurchase program (“Repurchase Plan”) which commenced in April 2016. The Repurchase Plan has
no expiration date. Under the 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.
|
|
Thirteen Weeks Ended
|
|
|
|
May 5, 2018
|
|
|
April 29, 2017
|
|
|
|
(in thousands, except per share data)
|
|
Number of shares repurchased
|
|
|
659
|
|
|
|
609
|
|
Total cost of shares repurchased
|
|
$
|
3,522
|
|
|
$
|
9,285
|
|
Average price per share (including brokers' commission)
|
|
$
|
5.34
|
|
|
$
|
15.24
|
|
At May 5, 2018, there was $40.2 million remaining balance available
for future purchases under the Repurchase Plan.
|
8.
|
Commitments and Contingencies
|
Operating Leases
The Company leases boutique space, office space, and its distribution
center under operating leases expiring in various years through the fiscal year ending 2029. 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 May 5, 2018, are as follows:
Fiscal year
|
|
Amount
|
|
|
|
(in thousands)
|
|
Remainder of 2018
|
|
$
|
37,750
|
|
2019
|
|
|
48,373
|
|
2020
|
|
|
42,901
|
|
2021
|
|
|
36,039
|
|
2022
|
|
|
30,195
|
|
Thereafter
|
|
|
80,342
|
|
|
|
$
|
275,600
|
|
Legal Proceedings
On January 27, 2017, a purported collective action lawsuit entitled
Meghan Magee, et al. v. Francesca’s Holdings Corp., et al. was filed in New Jersey Federal District Court against the Company
for alleged violations of federal and state wage and hour laws. The Company believes that the allegations contained in the lawsuit
are without merit and intends to vigorously defend itself against all claims asserted therein. A reasonable estimate of the amount
of any possible loss or range of loss cannot be made at this time and, as such, the Company has not recorded an accrual for any
possible loss.
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.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
On May 25, 2018, Francesca’s Holdings
Corporation (the “Holdings”), as a guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”),
and certain of its subsidiaries as guarantors (together with Holdings and the Borrowers, the “Loan Parties”), entered
into an asset based revolving Credit Agreement (“Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative
agent and the lenders party thereto. The Credit Agreement provides for revolving commitments of $50.0 million (including up to
$10.0 million for letters of credit) and matures on May 25, 2023. The Credit Agreement also contains an increase option permitting
the Borrowers, subject to certain requirements, to arrange with lenders for additional revolving commitments for up to an aggregate
of $25.0 million.
All obligations of each other Loan Party
under the Credit Agreement are unconditionally guaranteed by Holdings and each of Holdings’ existing and future direct and
indirect wholly owned domestic subsidiaries, including the Borrowers. All obligations under the Credit Agreement, and the guarantees
of those obligations (as well as banking services obligations and any interest rate hedging or other swap agreements), are secured
by substantially all of the assets of Holdings and each of Holdings’ existing and future direct and indirect wholly owned
domestic subsidiaries. In addition, the Credit Agreement requires the Loan Parties to maintain a minimum ratio of (i) EBITDAR (as
defined in the Credit Agreement) minus unfinanced capital expenditures (as defined in the Credit Agreement), to (ii) fixed charges
of 1.00 to 1.00 during periods when availability (as defined in the Credit Agreement) is less than $6,000,000 (or has recently
been less than $6,000,000 as further specified in the Credit Agreement) (such ratio, the “Fixed Charge Coverage Ratio”).
The borrowings under the Credit Agreement
bear interest at a rate equal to an applicable margin plus, at the option of the Borrowers, either (a) in the case of base rate
borrowings, a rate equal to the highest of (1) the prime rate of JPMorgan Chase Bank, N.A., (2) the federal funds rate plus 1/2
of 1.00%, and (3) LIBOR for an interest period of one month plus 1.00% (subject to a 0.0% LIBOR floor), provided that that the
interest rate for base rate borrowings (including the addition of the applicable margin) shall be no less than 1.50% per annum,
or (b) in the case of LIBOR borrowings, a rate equal to the LIBOR for the interest period relevant to such borrowing subject to
a 0.00% floor. The applicable margin for borrowings under the Credit Agreement ranges from -0.50% to 0.00% per annum with respect
to base rate borrowings and from 1.25% to 1.75% per annum with respect to LIBOR borrowings, in each case based upon the achievement
of specified levels of the Fixed Charge Coverage Ratio. The Credit Agreement also requires the Borrowers to pay a commitment fee
for the unused portion of the revolving facility of 0.20% per annum.
Concurrent with entering into the Credit
Agreement, the existing Second Amended and Restated Credit Agreement, as described in Note 5 to the Notes to Unaudited Consolidated
Financial Statements, terminated.
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, refresh and operate new boutiques each year;
our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth; and new
tax developments or guidance that may influence our effective tax rate. For additional information regarding these and
other risks and uncertainties that could cause actual results to differ materially from those contained in our forward
looking statements, please refer to “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal
year ended February 3, 2018 and filed with the Securities and Exchange Commission (“SEC”) on March 28, 2018
(“Fiscal Year 2017 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 2017 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
May 5, 2018, francesca’s
®
operated 744 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 May 5, 2018, our net sales decreased
7% to $100.4 million from $107.7 million, income from operations decreased by $11.9 million from $7.4 million to a loss from operations
of $4.5 million, and net income decreased $8.2 million from $4.3 million, or $0.12 earnings per diluted share based on 37.1 million
weighted average diluted shares outstanding, to a net loss of $3.9 million, or $0.11 loss per diluted share based on 34.8 million
weighted average diluted shares outstanding, over the comparable prior year period.
We increased our boutique count to 744 boutiques as of May 5,
2018 from 679 boutiques as of April 29, 2017. We plan to open approximately 8 boutiques and close 16 during the remainder of the
fiscal year.
We are in the process of deploying new technologies to enhance
our omni-channel and customer engagement capabilities as part of our long-term strategic plan. In fiscal year 2017, we completed
our legacy point-of-sale system replacement and the implementation of a new customer relationship management system. We started
the implementation of a new warehouse management system for ecommerce and expect that such implementation will be completed in
fiscal year 2018. This new system will enhance our visibility into our products and supply chain resulting in improved customer
service, improved operational efficiency, enhanced management analytics and increased inventory synergies between our ecommerce
and our boutique channels.
Results of Operations
The following represents operating data for the thirteen weeks
ended May 5, 2018 and April 29, 2017.
|
|
Thirteen Weeks Ended
|
|
|
|
May 5, 2018
|
|
|
April 29, 2017
|
|
Net sales growth for period
|
|
|
(7
|
)%
|
|
|
1
|
%
|
Comparable sales results for the period
(1)
|
|
|
(16
|
)%
|
|
|
(5
|
)%
|
Number of boutiques open at end of period
|
|
|
744
|
|
|
|
679
|
|
Net sales per average square foot for period
(2)
|
|
$
|
96
|
|
|
$
|
114
|
|
Average square feet per boutique
(3)
|
|
|
1,445
|
|
|
|
1,398
|
|
Total gross square feet at end of period
|
|
|
1,075,000
|
|
|
|
949,000
|
|
|
(1)
|
A boutique is included in comparable sales on the
first day of the fifteenth full month following the boutique’s opening. If a boutique is closed for four or more days within
a given fiscal week for any reason, we exclude sales from that boutique from comparable sales for that full fiscal week. 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. 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
|
|
|
|
May 5, 2018
|
|
|
April 29, 2017
|
|
Number of boutiques open at beginning of period
|
|
|
721
|
|
|
|
671
|
|
Boutiques added
|
|
|
27
|
|
|
|
12
|
|
Boutiques closed
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Number of boutiques open at the end of period
|
|
|
744
|
|
|
|
679
|
|
Thirteen Weeks Ended May 5, 2018 Compared to Thirteen
Weeks Ended April 29, 2017
|
|
Thirteen
Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
May
5, 2018
|
|
|
April
29, 2017
|
|
|
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
|
|
$
|
100,405
|
|
|
|
100.0
|
%
|
|
$
|
107,689
|
|
|
|
100.0
|
%
|
|
$
|
(7,284
|
)
|
|
|
(7
|
)%
|
|
|
-
|
|
Cost of goods sold and occupancy costs
|
|
|
62,042
|
|
|
|
61.8
|
%
|
|
|
59,006
|
|
|
|
54.8
|
%
|
|
|
3,036
|
|
|
|
5
|
%
|
|
|
700
|
|
Gross profit
|
|
|
38,363
|
|
|
|
38.2
|
%
|
|
|
48,683
|
|
|
|
45.2
|
%
|
|
|
(10,320
|
)
|
|
|
(21
|
)%
|
|
|
(700
|
)
|
Selling, general and administrative expenses
|
|
|
42,883
|
|
|
|
42.7
|
%
|
|
|
41,281
|
|
|
|
38.3
|
%
|
|
|
1,602
|
|
|
|
4
|
%
|
|
|
440
|
|
(Loss) income from operations
|
|
|
(4,520
|
)
|
|
|
(4.5
|
)%
|
|
|
7,402
|
|
|
|
6.9
|
%
|
|
|
(11,922
|
)
|
|
|
(161
|
)%
|
|
|
(1,140
|
)
|
Interest expense
|
|
|
(117
|
)
|
|
|
(0.1
|
)%
|
|
|
(113
|
)
|
|
|
(0.1
|
)%
|
|
|
(4
|
)
|
|
|
(4
|
)%
|
|
|
-
|
|
Other income (expense)
|
|
|
150
|
|
|
|
0.1
|
%
|
|
|
(25
|
)
|
|
|
(0.0
|
)%
|
|
|
175
|
|
|
|
700
|
%
|
|
|
10
|
|
(Loss) income before income tax expense
|
|
|
(4,487
|
)
|
|
|
(4.5
|
)%
|
|
|
7,264
|
|
|
|
6.7
|
%
|
|
|
(11,751
|
)
|
|
|
(162
|
)%
|
|
|
(1,120
|
)
|
Income tax (benefit) expense
|
|
|
(602
|
)
|
|
|
(0.6
|
)%
|
|
|
2,931
|
|
|
|
2.7
|
%
|
|
|
(3,533
|
)
|
|
|
(121
|
)%
|
|
|
(330
|
)
|
Net (loss) income
|
|
$
|
(3,885
|
)
|
|
|
(3.9
|
)%
|
|
$
|
4,333
|
|
|
|
4.0
|
%
|
|
$
|
(8,218
|
)
|
|
|
(190
|
)%
|
|
|
(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 7% to $100.4 million in the thirteen weeks
ended May 5, 2018 from $107.7 million in the thirteen weeks ended April 29, 2017. This decrease was due to a 16% decrease
in comparable sales compared to a 5% decrease in the same period of the prior year. The decrease in comparable sales was primarily
due to a decline in boutique traffic and conversion rates. This decrease was partially offset by 65 net new boutiques added since
the comparable prior year period. There were 658 comparable boutiques and 86 non-comparable boutiques open at May 5, 2018 compared
to 604 and 75, respectively, at April 29, 2017.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs increased 5% to $62.0
million in the thirteen weeks ended May 5, 2018 from $59.0 million in the thirteen weeks ended April 29, 2017. Cost of merchandise
and shipping expenses decreased by $0.4 million consistent with the decreased sales volume during the quarter. Occupancy costs
increased by $3.4 million due to the increase in the number of boutiques in operation during the thirteen weeks ended May 5, 2018
compared to the same period of the prior year.
As a percentage of net sales, cost of goods sold and occupancy
costs increased to 61.8% in the thirteen weeks ended May 5, 2018 from 54.8% in the thirteen weeks ended April 29, 2017, an unfavorable
variance of 700 basis points. This change was due to a 480 basis points deleveraging of occupancy costs as well as 220 basis points
decrease in merchandise margin. The lower merchandise margin was driven by increased markdowns.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 4% to
$42.9 million in the thirteen weeks ended May 5, 2018 from $41.3 million in the thirteen weeks ended April 29, 2017. This
variance was primarily due to expenses associated with new boutiques opened since the comparable prior year period.
As a percentage of net sales, selling, general and administrative
expense increased to 42.7% in the thirteen weeks ended May 5, 2018 as compared to 38.3% in the thirteen weeks ended April 29, 2017
due to deleveraging of expenses as a result of lower sales.
Income Tax (Benefit) Expense
The decrease in provision for income taxes of $3.5
million in the thirteen weeks ended May 5, 2018 compared to the thirteen weeks ended April 29, 2017 was primarily due to the
decrease in pre-tax income as well as the lower effective tax rate. The effective tax rate decreased to 13.4% from 40.3% as a
result of the lower corporate tax rate under the Tax Cuts and Jobs Act (“Tax Act”) enacted in December 2017 as
well as the additional expense recognized related to the expiration of certain stock-based awards.
We did not record any adjustment to our estimates at the end
of fiscal year 2017 as a result of the enactment of the Tax Act. As we continue to refine and update our analysis of the
Tax Act and interpret any additional guidance, we may make adjustments to the amounts previously recorded. Any such adjustment
will be reflected in income tax expense or benefit in fiscal year 2018.
Sales by Merchandise
Department
|
|
Thirteen Weeks Ended
|
|
|
|
May 5, 2018
|
|
|
April 29, 2017
|
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
In Dollars
|
|
|
As a % of
Net Sales
|
|
|
|
(in thousands, except percentages)
|
|
Apparel
|
|
$
|
49,534
|
|
|
|
49.3
|
%
|
|
$
|
60,012
|
|
|
|
55.7
|
%
|
Jewelry
|
|
|
23,858
|
|
|
|
23.8
|
%
|
|
|
23,771
|
|
|
|
22.1
|
%
|
Accessories
|
|
|
15,484
|
|
|
|
15.4
|
%
|
|
|
13,981
|
|
|
|
13.0
|
%
|
Gifts
|
|
|
11,105
|
|
|
|
11.1
|
%
|
|
|
11,115
|
|
|
|
10.3
|
%
|
Merchandise sales
|
|
|
99,981
|
|
|
|
99.6
|
%
|
|
|
108,879
|
|
|
|
101.1
|
%
|
Other
(1)
|
|
|
424
|
|
|
|
0.4
|
%
|
|
|
(1,190
|
)
|
|
|
(1.1
|
)%
|
|
|
$
|
100,405
|
|
|
|
100.0
|
%
|
|
$
|
107,689
|
|
|
|
100.0
|
%
|
|
(1)
|
Includes gift card breakage income, shipping and change
in return reserve.
|
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations
and borrowings under our revolving credit facility. Our primary cash needs are for capital expenditures in connection with opening
new boutiques and remodeling existing boutiques, investing in improved technology and distribution facility enhancements, funding
normal working capital requirements and payments of interest and principal, if any, under our revolving credit facility. We may
use cash or our revolving credit facility to issue letters of credit to support merchandise imports or for other corporate purposes.
The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable
and other current liabilities. Our working capital position benefits from the fact that we generally collect cash from sales to
customers the day of or, in the case of credit or debit card transactions, within several days of the related sales and we typically
have up to 30 days to pay our vendors.
We were in compliance with all covenants under our revolving
credit facility as of May 5, 2018. On May 5, 2018, we had $21.8 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 May
5, 2018. On May 25, 2018, we terminated our existing revolving credit facility and entered into a new asset based credit facility
which provides us with a maximum borrowing availability of $50 million. See “Revolving Credit Facility” below for more
information.
We expect that our cash flow from operations along with borrowings
under our revolving credit facility and tenant allowances for new boutiques will be sufficient to fund capital expenditures and
our working capital requirements for at least the next twelve months.
Cash Flow
A summary of our operating, investing and financing activities
are shown in the following table:
|
|
Thirteen Weeks Ended
|
|
|
|
May 5, 2018
|
|
|
April 29, 2017
|
|
|
|
(in thousands)
|
|
Provided by operating activities
|
|
$
|
3,207
|
|
|
$
|
8,700
|
|
Used in investing activities
|
|
|
(8,725
|
)
|
|
|
(4,634
|
)
|
Used in financing activities
|
|
|
(3,980
|
)
|
|
|
(9,167
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(9,498
|
)
|
|
$
|
(5,101
|
)
|
Operating Activities
Operating activities consist of net (loss) 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 $3.2 million and $8.7 million in each of the thirteen
weeks ended May 5, 2018 and April 29, 2017, 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 as well as timing of payments
for inventory purchases, accrued payroll and income taxes.
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.
|
|
Thirteen Weeks Ended
|
|
|
|
May 5, 2018
|
|
|
April 29, 2017
|
|
|
|
(in thousands)
|
|
Capital expenditures for:
|
|
|
|
|
|
|
|
|
New boutiques
|
|
$
|
5,777
|
|
|
$
|
3,031
|
|
Remodels
|
|
|
1,929
|
|
|
|
784
|
|
Existing boutiques
|
|
|
417
|
|
|
|
332
|
|
Technology
|
|
|
435
|
|
|
|
339
|
|
Corporate and distribution
|
|
|
167
|
|
|
|
148
|
|
|
|
$
|
8,725
|
|
|
$
|
4,634
|
|
Our total capital expenditures for the thirteen weeks ended
May 5, 2018 and April 29, 2017 were $8.7 million and $4.6 million, respectively, which were mostly spent on new boutiques and remodels.
Spending for boutiques include amounts associated with boutiques that will open subsequent to the end of each fiscal quarter.
|
|
Thirteen Weeks Ended
|
|
|
|
May 5, 2018
|
|
|
April 29, 2017
|
|
New boutiques:
|
|
|
|
|
|
|
|
|
Number of new boutiques opened
|
|
|
27
|
|
|
|
12
|
|
Average cost per new boutique
|
|
$
|
307,000
|
|
|
$
|
256,000
|
|
Average tenant allowance per new boutique
|
|
$
|
45,000
|
|
|
$
|
74,000
|
|
|
|
|
|
|
|
|
|
|
Remodels:
|
|
|
|
|
|
|
|
|
Number of boutiques remodeled
|
|
|
15
|
|
|
|
4
|
|
Average cost per remodeled boutique
|
|
$
|
140,000
|
|
|
$
|
178,000
|
|
The increase in the average cost of new boutiques during the
thirteen weeks ended May 5, 2018 compared to the same prior year period was due to higher costs of leasehold improvements as well
as furniture and fixtures as a result of implementing our new boutique design which was piloted in our existing boutiques last
year. Average tenant allowance per boutique decreased principally due to 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
and build-out allowances from our landlords. Borrowings under our revolving credit facility can also be used, if needed, to buildout
boutiques. As previously disclosed, we are embarking on a remodel program in fiscal year 2018. For the thirteen weeks ended May
5, 2018, the average cost of a remodel decreased compared to the same period last year primarily due to the refinement of our new
boutique design.
Management anticipates that capital expenditures for the remainder
of fiscal year 2018 will be approximately $21.3 million. The majority of this amount will be spent on new and existing boutiques
as well as investments in our technology systems.
Financing Activities
Financing activities consist of borrowings and payments under
our revolving credit facility, repurchases of our common stock, and proceeds from the exercise of stock options and the related
tax consequence.
Net cash used in financing activities totaled $4.0 million and
$9.2 million during the thirteen weeks ended May 5, 2018 and April 29, 2017, respectively. Cash used in financing activities in
each period primarily consists of repurchases of common stock.
Revolving Credit Facility
Second Amended and Restated Credit Agreement
On August 30, 2013, Francesca’s Collections, Inc. (the
“Francesca’s Collections”), 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 Francesca’s
Collections, 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 that Francesca’s Collections has certain indebtedness
outstanding. At May 5, 2018, no borrowings were outstanding under the credit facility.
The credit facility contains customary events of default and
requires Francesca’s Collections to comply with certain financial covenants. As of May 5, 2018, Francesca’s Collections
was in compliance with all covenants under the credit facility. The credit facility restricts the amount of dividends Francesca’s
Collections can pay; provided that Francesca’s Collections 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 Francesca’s Collections is in pro forma compliance
with a maximum secured leverage ratio. At May 5, 2018, Francesca’s Collections 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 Francesca’s Collections 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 Francesca’s Collections existing and future
direct and indirect wholly-owned domestic subsidiaries.
On May 25, 2018, concurrent with entering into the Asset Based
Revolving Credit Facility described below, the Second Amended and Restated Credit Agreement was terminated.
Asset Based Revolving Credit Facility
On May 25, 2018, Francesca’s Holdings
Corporation (the “Holdings”), as a guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”),
and certain of its subsidiaries as guarantors (together with the Company and the Borrowers, the “Loan Parties”), entered
into an asset based revolving Credit Agreement (“Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative
agent and the lenders party thereto. The Credit Agreement provides for revolving commitments of $50.0 million (including up to
$10.0 million for letters of credit) and matures on May 25, 2023. The Credit Agreement also contains an increase option permitting
the Borrowers, subject to certain requirements, to arrange with lenders for additional revolving commitments for up to an aggregate
of $25.0 million.
All obligations of each other Loan Party
under the Credit Agreement are unconditionally guaranteed by the Company and each of the Company’s existing and future direct
and indirect wholly owned domestic subsidiaries, including the Borrowers. All obligations under the Credit Agreement, and the guarantees
of those obligations (as well as banking services obligations and any interest rate hedging or other swap agreements), are secured
by substantially all of the assets of the Company and each of the Company’s existing and future direct and indirect wholly
owned domestic subsidiaries. In addition, the Credit Agreement requires the Loan Parties to maintain a minimum ratio of (i) EBITDAR
(as defined in the Credit Agreement) minus unfinanced capital expenditures (as defined in the Credit Agreement), to (ii) fixed
charges of 1.00 to 1.00 during periods when availability (as defined in the Credit Agreement) is less than $6,000,000 (or has recently
been less than $6,000,000 as further specified in the Credit Agreement) (such ratio, the “Fixed Charge Coverage Ratio”).
The borrowings under the Credit Agreement
bear interest at a rate equal to an applicable margin plus, at the option of the Borrowers, either (a) in the case of base rate
borrowings, a rate equal to the highest of (1) the prime rate of JPMorgan Chase Bank, N.A., (2) the federal funds rate plus 1/2
of 1.00%, and (3) LIBOR for an interest period of one month plus 1.00% (subject to a 0.0% LIBOR floor), provided that that the
interest rate for base rate borrowings (including the addition of the applicable margin) shall be no less than 1.50% per annum,
or (b) in the case of LIBOR borrowings, a rate equal to the LIBOR for the interest period relevant to such borrowing subject to
a 0.00% floor. The applicable margin for borrowings under the Credit Agreement ranges from -0.50% to 0.00% per annum with respect
to base rate borrowings and from 1.25% to 1.75% per annum with respect to LIBOR borrowings, in each case based upon the achievement
of specified levels of the Fixed Charge Coverage Ratio. The Credit Agreement also requires the Borrowers to pay a commitment fee
for the unused portion of the revolving credit facility of 0.20% per annum.
The Credit Agreement contains customary
affirmative and negative covenants, including limitations, subject to customary exceptions, on the ability of the Company and its
subsidiaries to (i) incur additional debt; (ii) create liens; (iii) make certain investments, acquisitions, loans and advances;
(iv) sell assets; (v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii)
engage in mergers or consolidations; (viii) change the business conducted by the Company and its subsidiaries; (ix) engage in certain
transactions with affiliates; (x) enter into agreements that restrict dividends from subsidiaries or the ability of subsidiaries
to grant lines upon their assets; and (xi) amend certain charter documents and material agreements governing subordinated and junior
indebtedness.
The Credit Agreement also contains customary
events of default, including: (i) failure to pay principal, interest, fees or other amounts under the Credit Agreement when due
taking into account any applicable grace period; (ii) any representation or warranty proving to have been materially incorrect
when made or deemed made; (iii) a cross default with respect to other material indebtedness; (iv) bankruptcy and insolvency events;
(v) unsatisfied material final judgments; (vi) a “change of control”; (vii) certain defaults under the Employee Retirement
Income Security Act of 1974; (viii) the invalidity or impairment of any loan document or any security interest; and (ix) breach
of covenants in the Credit Agreement and other loan documents.
Share Repurchase Program
For information regarding our share repurchase program, please
refer to Note 7 to our unaudited consolidated financial statements included in Part I of this report, which is incorporated herein
by reference.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities
at the date of the financial statements. A summary of the Company’s significant accounting policies is included in Note 1
to the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for
the fiscal year ended February 3, 2018.
Certain of the Company’s accounting policies and estimates
are considered critical, as these policies and estimates are the most important to the depiction of the Company’s consolidated
financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently
uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section of our Annual Report on Form 10-K for the fiscal year ended February 3, 2018. As of May 5, 2018, there
were no significant changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form
10-K for the fiscal year ended February 3, 2018.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements,
please refer to Note 1 to our unaudited consolidated financial statements included in Part I of this Report, which is incorporated
herein by reference.
Contractual Obligations
There were no significant changes to our contractual obligations
and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018, 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.