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

Fashion boutique chain Francesca’s Holdings Corp (NASDAQ:FRAN) reported 1Q 2013 results that included unimpressive comparable store sales and weaker margins, but this miss could be an opportunity.

This clothing and accessories retailer employs business strategies that have been very effective for other stores. Like other fashion retailers that share these strengths, Francesca’s Holdings Corp (NASDAQ:FRAN) carries a premium valuation.

Scarcity

Francesca’s Holdings Corp (NASDAQ:FRAN) uses a compelling strategy to sell clothing, jewelry, and accessories. The retailer doesn’t stock large quantities of any individual product, and it frequently switches out its inventory. This strategy provides a strong incentive to buy an appealing product immediately, because if the shopper comes back later, the product might not be there. Games on social networking sites frequently use this marketing strategy as well, which suggests that it’s effective. A brick and mortar store needs effective supply chain management to use this strategy, another strength for Francesca’s Holdings Corp (NASDAQ:FRAN).

Lululemon Athletica inc. (NASDAQ:LULU) demonstrates that stocking products in limited quantities can also provide another financial advantage. Jokes about Lululemon Athletica inc. (NASDAQ:LULU)’s see through yoga pants have showed up in lots of headlines over the past few months, but this retailer understands how marketing works.

In 2012, The Wall Street Journal’s Dana Mattioli reported (pay site) that 95% of Lululemon’s products sold without discounts because of this strategy. Francesca’s Holdings Corp (NASDAQ:FRAN) does hold sales, but this strategy could help the retailer limit its inventory without offering drastic discounts.

Uniqueness

Francesca’s Holdings Corp (NASDAQ:FRAN) also uses another effective upscale retail strategy, differentiation. The fashion retailer wants its stores to feel unique, so individual stores’ designs vary to some extent. Urban Outfitters, Inc. (NASDAQ:URBN) also uses variable store designs to differentiate its stores. Eric Feigenbaum, at Vmsd., describes Urban Outfitters, Inc. (NASDAQ:URBN) as retail’s chameleon because of this design strategy. Urban Outfitters’ strategies look like they’re working well at the moment, as the company’s retail segment reported 9% higher comps last quarter including direct sales.

Margins

Francesca’s high margins indicate effective inventory management and marketing. The company reported revenue of $296 million and operating income of $77.9 million in 2012, which resulted in a 26.3% operating margin for the year. The company did note that its gross margin declined from 53.1% in the first quarter (Q1) of 2012 to 52.4% in Q1 2013 because of sales promotions, though, and its operating margin dropped as well. Francesca’s operating margin shrank from 23.9% in 1Q 2012 to 22.8% in 1Q 2013, but this result still surpasses many of its peers.