As summer wrapped up, consumers’ moods grew sour. Fears of a looming government shutdown led many to simply stop spending on discretionary items, leading to a cycle of lower profit forecasts for a number of retailers.
Few appear to have been as hard hit as women’s apparel and accessory retailer Francesca’s Holdings Corp (NASDAQ:FRAN). In early September, Francesca’s announced that same-store sales, which had been growing at a fast pace ever since its July 2011 IPO, had suddenly turned negative.
Investors were in an unforgiving mood, and shares fell sharply to a 52-week low.
News of the sudden sales slowdown led many to question if this once-hot retailer was still capable of robust growth. Sales had risen 45% in fiscal 2013 to nearly $300 million, leading to a 100% spike in 2013 earnings per share (EPS). Though analysts had been expecting another banner year in fiscal 2014, they now expect FRAN to boost sales only 17% (based entirely on new store openings) and grow EPS less than 10%.
Yet investors shouldn’t conclude that FRAN’s business model is broken. Instead, the recent slowdown can be chalked up to growing pains. And with sales growth expected to re-accelerate in fiscal 2015 to around 20%, investors will again start focusing on this retailer’s very impressive operating metrics.
To be sure, FRAN’s management concedes the in-store merchandise wasn’t especially compelling in recent months — quite a turnabout for a company known for a deft merchandising touch. On the quarterly conference call, management explained, “There has not been a dominant fashion trend to drive and chase in apparel category this season.” Management also noted that FRAN’s long lead times led the retailer to miss out on any fashion themes that did emerge this summer.
Also, the company said that gift items, which account for roughly 10% of sales, were poorly selected by the company’s merchandisers. “We recognize the assortment needs to be refined,” said CEO Neill Davis on the conference call.
To be sure, investors don’t expect stellar results for the current quarter, ended in October, nor should they expect solid upside from the holiday season.
But as the next fiscal year gets under way in February, FRAN looks set to exceed a low set of expectations. For example, the company is on track to open roughly 80 stores in the current fiscal year, expanding the store base by around 20% to over 450 stores. That’s roughly in line with the projected sales growth rate for next year, implying that same-store sales will be flat.
Yet that view is likely too pessimistic. After all, the company posted a slight 1% drop in sales in the most recent quarter, as a 4% drop in traffic was mostly offset by a 3% increase in average transaction prices. Assuming traffic stabilizes in the coming fiscal year and those 3% price increases stick, you already have a recipe for modest same-store sales growth.
Management expects same-store sales growth to be better than modest. “As we step into the spring of 2014, I feel very good about what the merch[andise] is going to be able to bring to the table and the responsiveness of our customers,” noted Davis.
