Francesca's Holdings Conference Call Highlights
Francesca's Holdings Corp (NASDAQ: FRAN) reported its fourth quarter earnings on March 25th, 2014. Shares of the company are up 17.50 percent or $3.65 per share to $17.21. Below are some key takeaways from its conference call:
Neill Davis, Chief Executive Officer:
• As we reported earlier this morning, our sales results for the fourth quarter increased 11% from the prior year 13-week quarter.
• Sales results in regions less affected by the extreme weather, performed within our revised fourth quarter guidance.
• Although, we did not achieve our top line expectation for the quarter, we did achieve adjusted diluted earnings per share of $0.27, in line with our revised outlook and driven by lower selling, general, and administrative expenses.
• For the fiscal year compared to the comparable 52 weeks in the prior year, sales increased 16%, driven by 91 new boutique openings, bringing our location count to 451 as well as continued strong growth in our direct-to-consumer business, specifically an increase of 92% with
favorability across all key performance metrics.
• However, our merchandise gross margins only declined 70 basis points for the year. This is a direct reflection of the underlying strength of our business model.
• Our outlook for the quarter is based on current trends and we expect to see continued top line and margin pressure from apparel and jewelry categories as we clear through carryover merchandise in the first quarter and complete mix shift transitions in the first half.
• Underpinning our full year outlook of double-digit growth rates in sales and diluted earnings per share, is an improving trend in the second half of the fiscal year based on new boutique openings and related sales productivity, improving comparable sales results aided by easier second half comparisons, and further leverage of prior year infrastructure investments.
• We continue to expect our sales mix, represented by apparel to be within historical ranges of approximately 50%. However, penetration within our offerings will be more balanced between dresses and our separates business, which will help mitigate risk of concentrations.
• The back half investments of 2013 included the expansion of our managerial field organization to include area managers, which is one step above the boutique manager level.
• We are expanding our boutique base in 2014 with 85 new locations identified and 75 leases executed. The majority of those are planned to open in the first quarter and the balance in the second quarter.
• We continue to size the market at approximately 900 domestic locations. Our new boutiques continue to meet thresholds of sales productivity, return on invested capital and payback timing. We target new boutique productivity close to maturity levels, which is generally near 10% of chain average and we met those in fiscal 2013.
• Sales through francescas.com increased over 90% this past year and quarter. 40% of that growth was traffic driven with over 12 million visitors and the balance was from conversion and average order value.
• In the fourth quarter, we initiated several customer engagement activities, including an Instagram program and a fashion sponsorship with the cable network Lifetime and their launch of a Project Runway spin-off called Under the Gunn, which runs for 13 weeks through mid-April.
Mark Vendetti, Chief Financial Officer:
• Total company net sales for the fourth quarter increased 6% to $92.1 million or 11% on a restated NRF retail calendar. This increase was driven by 91 new boutiques opened since we ended the fourth quarter of fiscal 2012 with 5 openings during the fourth fiscal quarter of 2013.
• Comparable sales decreased 6%, this compares to a 10% increase in comparable sales in the same period last year. The overall comparable sales decrease was driven by a 4% decrease in comparable transaction counts and a 2% decrease in average transaction size.
• As Neill discussed extreme weather in January caused the direct loss of over 370 boutique selling days, which caused more than 10 times the level of selling days impacted by weather last year.
• Adjusted income from operations was $19.1 million with operating profit margin of 20.7% compared to income from operations of $24.7 million with an operating profit margin of 28.5% in the prior year 14-week period.
• Turning to the full year; net sales increased 16% to $340.3 million compared to the prior 52-week year period. The overall company increase in net sales was driven by new boutique growth with new boutiques contributing approximately $45 million in sales.
• Comparable sales decreased 2% compared to the prior year comparable sales increase of 16%.
• Our merchandise margins decreased 70 basis points to last year due to more frequent promotions and higher levels of markdown during the year. The incremental activities offered in a more competitive retail environment in 2013 lowered average unit retails and were offset by higher units per transaction.
• I would point out and highlight that our merchandise margins to remain consistent within a range of 70 basis points in the last four years.
Adjusted net income was $46.2 million or $1.05 per diluted share based on 44.1 million weighted shares outstanding.
• This compares to adjusted net income of $47.9 million or $1.07 per diluted share based on 44.8 million weighted average shares outstanding in fiscal 2012.
• This includes the impact of a 53-week which was worth an approximate $0.03 per fully diluted share. Turning to the balance sheet; total inventories at the end of the quarter increased by $5.6 million to $24.6 million.
• Ending inventory was up 3% on a per boutique basis at the end of the quarter, driven by an increase in clearance inventory which carried over to the first quarter.
• During the quarter, the company repurchased approximately 1 million shares of company's common stock for $17.9 million at an average price of $18.84 million. To-date, the company repurchased 2.9 million shares for $54.8 million at an average price per share of $18.95.
• Now turning to the first quarter and full year guidance; for the first quarter, the harsh weather that impacted January continued into February. As a result, transactions continued to be weak in February and we experienced a similar number of boutique selling days impacted in February as January.
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