The One Brick-And-Mortar Retailer To Invest In

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In today's cutthroat retail environment, shops have to be extremely flexible in order to survive. Francesca's Holdings (NASDAQ: FRAN) epitomizes this flexibility in the retail industry, operating a chain of retail boutiques under the Francescas 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 (NYSE: M), are doing just fine in their aggressive efforts to woo price-conscious consumers; Macy's recently reported a 4.1% increase in December same-store sales following an unprecedented holiday marketing campaign. Others, such as J.C. Penney (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 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. 

However, Francesca's Holding's biggest ace up its sleeve isn't the flexibility of its stores: the flexibility of its inventory. As noted by Mignon McLaughlin, a former Managing Editor of Glamour Magazine, "women usually love what they buy, yet hate two-thirds of what is in their closets." Many people, men and women alike, desire freshness and dynamism in their clothing options; they want access to the latest fashions and constantly evolving styles. Francesca's caters perfectly to this desire by introducing new merchandise to its boutique stores five days a week. This constant rotation of clothes means that customers will never be bored by the selection at Francesca's and will also develop a sense of urgency in buying clothing at Francesca, knowing that the product might not be at the store in a couple of days. The rotation also ensures that Francesca's can pounce on developing fashion trends quicker than its competitors. Moreover, Francesca's Holdings carries a varied selection of clothing, but only small quantities of individual items. This allows Francesca's to appeal to a wide variety of customers while at the same time dangling an emphasis on limited quantities over them.

Finally, Francesca's Holdings is extremely flexible in terms of store interiors. No one Francesca's store is the same, and each boutique is uniquely designed to feel like its an independent store. Thus, customers are never bored by same store interiors, leading to what Francesca's calls a "differentiated shopping experience" every time a customer steps into a different Francesca's. 

The flexibility of its store sizes, merchandise, and interior decorations have worked to put Francesca's Holdings on solid financial ground. In its last 3 reported quarters, Francesca's Holdings grew its earnings an average of 93%, something unheard of in the brick-and-mortar retail industry. Moreover, huge growth for Francesca's Holdings has been the norm rather than the exception: it has had 4 consecutive years of annual earnings growth and its earnings have grown in the last 3 years by an average of 58%. Francesca's Holdings also has solid profitability: its annual pre-tax margin is a healthy 20.2%. These numbers blow away those of its competitors, such as Macy's and J.C. Penney, proving that, if there is one brick-and-mortar retailer you should invest in, its Francesca's Holdings


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