Francesca's Q3 Earnings In Line, Revs Lag; FY View Cut - Analyst Blog

Francesca's Holdings Corp.'s (FRAN) earnings of 17 cents per share in the third quarter of 2014 were in line with the Zacks Consensus Estimate. Earnings however declined 15% year over year due to soft comps and weak margins. Results were at the lower end of management's guided range of 17 to 22 cents.

Revenues & Margins

The specialty retailer reported net sales of $87.1 million, missing the Zacks Consensus Estimate of $88 million by 1%. It was at the lower end of management's expectation of $87.0 to $92.0 million. Declining transactions within comparable boutiques dented sales. However, sales increased 9% year over year backed by 92 boutiques opened since the end of third-quarter fiscal 2013. The company opened 12 boutiques during the quarter.

Comps, including direct-to-consumer sales, decreased 6% as against a decline of 3% in the prior-year quarter due to lower consumer traffic and lower transactions. The gift category reported the highest gain of 47%. Merchandise, jewelry, apparel and accessories categories reported gain of 9%, 8%, 6% and 3%, respectively.

Gross margin shrank 340 basis points (bps) to 47.3% year over year due to 160 bps decline in merchandise margin and 170 bps increased markdowns and promotional activities. Operating margin shrank 520 bps to 13.1% due to a rise of 16% in selling, general and administrative expenses compared with the previous year.

Fiscal Fourth-Quarter 2014 Outlook

Management expects challenging retail environment and aggressive promotional activity to continue throughout the holiday season. Moreover, apparel business is expected to face challenging conditions in the upcoming quarter.

Net sales are expected in the range of $96 to $102 million, up 4% to 11% year over year. Comps are expected to decrease 5% to 10% versus a decrease of 6% a year ago. The company plans to open one boutique in the fourth quarter. Earnings per share are expected in the range of 13 to 19 cents, The guidance takes into consideration 475 to 525 bps decrease in gross profit margin due to higher markdowns in its merchandise given during the quarter.

Fiscal 2014 Outlook

Francesca's lowered the fiscal 2014 outlook in view of the persistent challenges in retail conditions. For fiscal 2014, the company expects net sales in the range of $366 to $372 million versus $373 to $383 million expected previously. Comps are expected to decrease 6% to 8% compared to 2% decline in the previous year. Earnings per share are expected in the range of 75 to 81 cents versus 88 to 98 cents expected earlier. The guidance compares unfavorable with $1.02 per share reported in fiscal 2013.

Francesca's currently carries a Zacks Rank #5 (Strong Sell).

Stocks to Consider

Better-ranked stocks in the apparel industry worth considering are Brown Shoe Company (BWS), Iconix Brand Group Inc. (ICON) and Deckers Outdoor Inc. (DECK). All these stocks have a Zacks Rank #2 (Buy).