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.
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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