Francesca's Slips to Strong Sell on Poor Q3 & FY Outlook Cut - Analyst Blog

Zacks Investment Research downgraded Francesca's Holdings Corp. (FRAN) to a Zacks Rank #5 (Strong Sell) on Dec 16 after the company reported poor third-quarter fiscal 2014 results and lowered its fiscal 2014 guidance on Dec 10.

Why the Downgrade?

Francesca's witnessed sharp downward estimate revisions since it reported disappointing third quarter results.

Although earnings of 17 cents came in line with the Zacks Consensus Estimate, it declined from the year-ago figure by 15%. The primary reason behind the weakness was lower sales in the company's boutiques. Earnings were at the lower end of management's expectation of 17 to 22 cents.

The specialty retailer's net sales of $87.1 million missed the Zacks Consensus Estimate by 1% and were at the lower end of management's expectation of $87.0 to $92.0 million. The lower-than-expected sales resulted from fewer transactions at its comparable stores.

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 fewer transactions.

Gross margin also 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 16% increase in selling, general and administrative expenses compared with the previous year.

Weak Fourth-Quarter Outlook

Following soft results in the first three quarters, Francesca's lowered the fiscal 2014 outlook in view of the persistent challenges in the 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%, worse than the 2% decline in the previous year. Earnings per share are expected in the range of 75 to 81 cents versus 88 to 98 cents.

Most of the analysts also revised their estimates downward in the last 7 days following the weak third-quarter fiscal 2014 results. As a result, the Zacks Consensus Estimate for fourth-quarter fiscal 2014 slipped 36% to 18 cents. Estimates for fiscal 2014 declined 11.2% to 79 cents during the same time period.

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).