Francesca’s Holdings Corp (FRAN): This Fashion Boutique May Be Underestimated

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Yahoo! Finance states that the industry average operating margin is 8%. Lululemon has a trailing operating margin of 27.5%, which beats Francesca’s figure, while Urban Outfitters has a 13.7% trailing operating margin.

Valuation

Earnings growth projections also help make the case for Francesca’s. Francesca’s has a forward P/E of 18.9, which slightly surpasses Urban Outfitters’ 18.6 figure, while Lululemon has the highest forward P/E of the group at 30.6.

Yahoo! Finance lists a significantly lower Price Earnings to Growth ratio (PEG) for Francesca’s. Francesca’s has a 0.89 PEG ratio, Urban Outfitters has a 1.42 PEG ratio, and Lululemon has a 1.72 PEG ratio. Francesca’s could be the best deal here, as long as its 1Q 2013 results don’t indicate trouble ahead.

Recent Results

Francesca’s clearly missed this quarter. Without considering direct sales, the retailer expected 4% to 5% comparable store sales growth in 1Q 2013. Francesca’s comparable store sales basically came in where they were last year, and with margins shrinking as well, the retailer definitely faced some challenges.

Yahoo! Finance stated that 42.7% of Francesca’s float was short on May 15, 2013, so many investors did expect a slowdown. Nevertheless, Francesca’s still achieved 29% top line growth because it added more stores, and its expansion strategy shows promise.

Expansion Strategy

Unlike other small, growing retailers, Francesca’s has a nationwide presence. In its 2012 annual report, Francesca’s explains that it has 360 stores in 44 states. This could result in supply chain challenges and weaker margins, but so far the retailer has implemented it successfully. The chain also has $29.9 million cash and no debt. With stores up and running throughout the country already, Francesca’s could have an easier time expanding than a regional retailer.

Takeaway

Francesca’s looks like it has effective inventory and store design strategies, even if its 1Q 2013 results came in weak. This fashion retailer may have had a tougher challenge with comps this quarter because of the spring weather. Francesca’s nationwide footprint suggests decent growth potential.

The fashion retailer’s PEG ratio suggests it is doing well compared with competitors, and a short squeeze may also be a possibility. Overall, Francesca’s looks like a promising, albeit risky, retail pick.

The article This Fashion Boutique May Be Underestimated originally appeared on Fool.com.

Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica (NASDAQ:LULU). Eric is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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