On September 7th, Neill Davis directly acquired 25,000 shares of Francesca’s Holdings Corp (NASDAQ:FRAN) at an average price of $28.37 per share. The stock dived on the day, finishing down 7% but rising to about $28.25 after hours. Davis, the former CFO of The Men’s Wearhouse, Inc. (NYSE:MW), now owns a total of 65,000 shares in the retailer of women’s apparel and accessories in addition to expectations of a substantial compensation package in the future. Normally it would be rational to avoid purchasing more shares in the company and opt for diversification, implying that Davis is particularly confident in the company’s prospects. This is a theoretical explanation for the fact that insider buying statistically tends to be a bullish sign for a stock (read more about academic studies on insider trading). Francesca’s has a market capitalization of about $1.2 billion; despite today’s decline, the stock is up 66% so far this year. This places it about even with its IPO price from July 2011, over a time period when the broader market indices have been up.
According to our database of 13F filings for the second quarter of 2012, Donald Chiboucis’s Columbus Circle Investors was the largest holder of Francesca’s. The fund reported a position of about 850,000 shares (see more stock picks from Columbus Circle Investors). D.E. Shaw more than doubled its stake in the company, but the 180,000 shares that it owned represented only a small portion of its portfolio (look at some of the larger stock positions that D.E. Shaw owns). Jim Simons’s Renaissance Technologies initiated a position in Francesca’s during the quarter as well (find more of Renaissance Technologies’s favorite stocks).
Francesca’s business has been doing well this year. In the second quarter, revenue was up 49% compared to the second quarter of 2011, and the same growth rate has occurred for the first half of 2012. Net income and earnings per share have more than doubled as the company has been able to grow its margins along with its revenue. Diluted EPS were 28 cents for the second quarter compared to 13 cents a year ago. All major merchandise categories saw increases in revenue. The number of locations increased, but same-store sales experienced double-digit growth rates as well. Since it is a small company, there is still plenty of opportunity to open new locations and expand the concept, and it is also good to see that same-store sales are increasing so rapidly in a period when consumer spending in the U.S. is so sluggish. Francesca’s is priced for further growth in the market. The current market capitalization represents a trailing P/E multiple of 36. The sell-side considers this a fair price given future earnings expectations, with a forward P/E of 23 and a five-year PEG ratio of 1.
The closest peer for Francesca’s is Ann Inc (NYSE:ANN). Ann’s growth is lower, with most of the 24% earnings growth last quarter compared to a year ago coming from margin expansion. Ann carries trailing and forward earnings multiples of 21 and 15, respectively. So it is experiencing lower growth but has a valuation more in line with its existing earnings. We would also consider Fifth & Pacific Companies Inc (NYSE:FNP) and Urban Outfitters, Inc. (NASDAQ:URBN) to be comparable companies in the specialty apparel retail industry. Fifth & Pacific trades at 33 times forward earnings estimates but reported a decline in revenue last quarter compared to the same period in 2011, so we would avoid it. Urban Outfitters, at a market cap of $5.6 billion, is another growth prospect: its revenue and earnings growth were about 10% in its most recent quarter compared to a year ago, and the stock trades at 31 times trailing earnings. The sell-side is bullish, expecting a 20% increase in EPS for 2013 compared to this year, and the forward P/E comes down to 20. Given the insider buying and the superior growth performance so far this year we would in fact prefer Francesca’s to any of these peers.
