Earnings Up, Shares Down
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Retail continues to be a bright spot for the U.S. economy as consumers are cautiously opening their purses and wallets when they find good deals, as the recent retail earning reports suggest.
Retail Boutique Company, Francesca (NASDAQ: FRAN) reported earnings above analysts’ expectations for the second quarter 2012 earnings, which sent shares of the boutique clothing company rallying by nearly 30% since it made its market debut last year.
Net income rose 87% to $12.7 million or 28 cents per share from $5.5 million, or 13 cents per share, in the year-ago period. Revenue reached $76.4 million from $51.2 million. Analysts had expected profit of 24 cents on revenue of $71.3 million. Gross profit widened 205 basis points during the quarter. Same-store sales rose 20.7%., its thirteenth consecutive quarterly comparable boutique sales increase.
Buoyed by a strong performance, Francesca guided its third quarter net sales in the range of $70.5 - $71.5 million. The company has said it can grow its store base to about 900 boutiques in the U.S. over the next seven to 10 years.
The Lust
Strong customer responses across all merchandise categories, most notable in jewelry, contributed to better than planned sales and product margin. The company keeps customers coming back by only ordering merchandise for delivery no more than 90 days beforehand so the styles are fresh and up to date. The strategy is to go broad and shallow. It offers a wide array of items but limited quantities of each, creating a sense of scarcity and newness. Its core audience is women age 18 to 35.
The Shares and Spark
Francesca's high-flying shares plummeted after the unexpected news that Chief Executive John De Merit, has decided to retire. Shares were down 3.5% after hours at $34.80. Meanwhile, investors seemed to ignore the company's report that its fiscal second-quarter income more than doubled as Francesca's same-store sales continued to surge. It diversified into apparel, which has become its largest category, from focusing on selling fashion jewelry, accessories and home decor.
The Competition
Francesca's competitors are the White House/Black Market chain, owned by Chico's FAS (NYSE: CHS), Ann Taylor, owned by Ann (NYSE: ANN), Charlotte Russe, Brighton Collectibles and Urban Outfitter's (NASDAQ: URBN) Anthropologie chain.
Last month, Chico's reported better-than-expected earnings and said it didn't have to resort to margin-eroding discounts to clear shelf space for fall fashions. Urban Outfitter reported an 8.1% increase in quarterly earnings on strong comparable store sales and higher revenue. Both raised their outlooks for the year.
Ann Inc.’s fiscal earnings jumped 24% in recent quarters as its decision to order fabric early and buy off-season factory time helped to mitigate higher raw-material costs.
The End
The success of the company's boutique format lies in its highly effective broad and shallow merchandising strategy that enables it to cater to the changing customer preferences. Despite higher expenses due in part to new store openings, strong holiday sales and improved margins helped its profits surge in recent quarters, for which analyst gave an “outperform” rating on the stock.
Despite the steep fall in the share price during the trading day, Francesca's Holdings is still up around 30% over the last three months. The performance was driven primarily by increased average transaction per boutique as well as higher average dollar sales per transaction. The strong performance quarter after quarter backed by sliding shares has downgraded the stock to “Hold” from “Buy”.
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