Investor sentiment toward FRAN and other retailers is understandably negative. After all, The Conference Board’s Consumer Confidence Index slid to just 71.2 in October, possibly due in large part to the shenanigans in Washington, D.C. As the budget issues finally start to recede, consumer confidence and retail spending should rebound, just as it did after the budget scares of July 2011. An investment in FRAN is based on the notion that current sales trends and the weak share price are a reflection of the current somber mood and not indicative of this company’s health.
Indeed, in its short tenure as a public company, FRAN has already proven itself to be a savvy financial operator. In fiscal 2013, the retailer had 54% gross margins, 26% operating margins and 16% net margins. For some context, L Brands (NYSE: LTD), a well-regarded retail operator that owns brands such as Victoria’s Secret and Bath & Body Works, had 42% gross margins, 15% operating margins and 7% net margins last year.
Equally important, a larger store count should enable FRAN to glean operating leverage, enabling margins to hold at their currently high levels or rise even higher. Simeon Siegel, an analyst at Nomura Securities, said in a report, “We see a several-hundred-basis-point opportunity to bring SG&A in line with that of peers as the business scales.”
In a bid to support the stock, FRAN is now in the midst of a $100 million share buyback that at current prices would eliminate more than 10% of the share count.
As noted earlier, FRAN’s store base is likely to approach 450 units by the end of this fiscal year. Yet on the conference call, management said it believes that the business model can ultimately support 900 stores. “We are well positioned and focused on creating the appropriate infrastructure to undergird our long-term growth, even in a period of lower sales expectations,” noted CFO Mark Vendetti.
As the tough finish to fiscal 2014 comes into focus, investors will start to focus on better trends in the next fiscal year, beginning in February. And investors are likely to refocus on what is now a very cheap stock.
Shares recently traded just under $17.50, or around 12.8 times projected fiscal 2015 EPS of $1.37. As investors focus on FRAN’s capacity for 20% annual EPS growth, look for that multiple to expand to 20, yielding 50%-plus upside for this beaten-down high-quality retailer.
Recommended Trade Setup:
— Buy FRAN up to $22
— Set stop-loss at $16
— Set initial price target at $27 for a potential 23% gain in six months
This article was originally written by David Sterman and posted on ProfitableTrading.
$1,000 Per Month Trading System
You could collect $1,000 or more per month without buying a single stock. Click here to learn how…
