The One Brick-And-Mortar Retailer To Invest In: Francesca’s Holdings Corp (FRAN)

In today’s cutthroat retail environment, shops have to be extremely flexible in order to survive. Francesca’s Holdings Corp (NASDAQ:FRAN) epitomizes this flexibility in the retail industry, operating a chain of retail boutiques under the Francesca’s collections brand in the United States. A huge part of Francesca’s Holdings’ business model is affordability, which is definitely smart considering the weakness of the U.S. economy and the strong appeal of sales to an increasing number of “deal junkies” across the U.S.

Of course, affordability is a major part of the strategies of practically every major clothing retailers nowadays. Some, such as Macy‘s, Inc. (NYSE:M), are doing just fine in their aggressive efforts to woo price-conscious consumers; Macy’s, Inc. (NYSE:M) recently reported a 4.1% increase in December same-store sales following an unprecedented holiday marketing campaign. Others, such as J.C. Penney Company, Inc. (NYSE:JCP), aren’t doing so well with their emphasis on affordability. Under Ron Johnson, J.C. Penney has revamped its entire pricing strategy (and even its logo) to appeal to consumers with everyday low prices. So far, this has backfired, with J.C. Penney facing so much negative consumer backlash that it’s reverting to utilizing coupons and discounts in the face of analyst downgrades, weak holiday sales, and horrible earnings (its 3-year EPS growth rate is now a whopping negative 24%). Moreover, J.C. Penney is largely expected to close stores in 2013 and, according to insiders, is also going to lay off at least 10% of its employees at its headquarters.

On the other hand, Francesca’s Holdings management has declared that it will expand its boutiques from 327 locations in 43 states as of April 28, 2012 to approximately 900 boutiques over the next seven to ten years in the U.S. alone. So what has allowed Francesca’s Holdings to prosper in such a difficult retail environment?

For one, Francesca’s Holdings’ boutique format affords it a flexibility its big retail counterparts, such as J.C. Penney and Macy’s, don’t have. Its boutiques average approximately 1,400 square feet, which are extremely compact. To put this in context, J.C. Penney and Macy stores can take up more than 100,000 square feet each, and even smaller retailers such as American Eagle Outfitters (NYSE:AEO) usually have stores that span at least 5,000 square feet. The small sizes of its stores not only means that Francesca’s has to pay less in terms of running its stores, but also means that Francesca’s can squeeze into prime real estate areas that its larger counterparts cannot. This flexibility, combined with Francesca’s experience in selecting strategic real estate, has led Francesca’s new boutiques to generate a “first year cash return on net investment in excess of 150%” in the past few years.