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FRAN > SEC Filings for FRAN > Form 10-Q on 11-Jun-2014All Recent SEC Filings

Show all filings for FRANCESCA'S HOLDINGS CORP

Form 10-Q for FRANCESCA'S HOLDINGS CORP


11-Jun-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements concerning our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. These statements may include words such as "aim", "anticipate", "assume", "believe", "can have", "could", "due", "estimate", "expect", "goal", "intend", "likely", "may", "objective", "plan", "potential", "positioned", "predict", "should", "target", "will", "would" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth rates, market share and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management's beliefs and assumptions. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. These risks and uncertainties include, but are not limited to, the following: the risk that we cannot anticipate, identify and respond quickly to changing fashion trends and customer preferences; our ability to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise through our direct-to-consumer business; our ability to successfully open and operate new boutiques each year; and our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth. For additional information regarding these and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward looking statements, please refer to "Item 1A. Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014 and filed with the Securities and Exchange Commission ("SEC") on March 28, 2014 and any risk factors contained in subsequent Quarterly Reports on Form 10-Q we file with the SEC.

We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this report as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly after the date of this report whether as a result of new information, future developments or otherwise.

Overview

Unless the context otherwise requires, the "Company," "we," "our," "ours," "us" and "francescas " refer to Francesca's Holdings Corporation and its consolidated subsidiaries.

francesca'sis a growing specialty retailer with retail locations designed and merchandised to feel like independently owned, upscale boutiques providing customers a fun and differentiated shopping experience. The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts. As of May 3, 2014, francesca's operated 513 boutiques in 46 states and the District of Columbia and also served its customers through www.francescas.com, its direct-to-consumer website. The information contained on our website is not incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information contained on our website to be part of this Quarterly Report on Form 10-Q.

Our net sales increased 8% to $85.4 million in the thirteen weeks ended May 3, 2014 from $79.0 million in the thirteen weeks ended May 4, 2013. Over the same period, income from operations decreased by 22% to $14.0 million from $18.0 million in the prior year. Net income decreased 22% to $8.6 million, or $0.04 per diluted share, in the first quarter of fiscal year 2014 compared to net income of $10.9 million, or $0.24 per diluted share, in the comparable prior year period.

We have increased our boutique count to 513 boutiques as of May 3, 2014 from 416 boutiques as of May 4, 2013. To complete our planned boutique openings for the fiscal year 2014, we plan to open 23 boutiques during the remainder of the fiscal year.

                             Results of Operations



The following represents operating data for the thirteen weeks ended May 3, 2014
and May 4, 2013.



                                                                 Thirteen Weeks Ended
                                                               May 3,             May 4,
                                                                2014               2013
Total net sales growth for period                                      8 %              29 %
Comparable sales growth for period(1)                                 (7 )%              2 %
Number of boutiques open at end of period                            513               416
Net sales per average square foot for period (not in
thousands)(2)                                                $       131        $      148
Average square feet per boutique (not in thousands)(3)             1,341             1,368
Total gross square feet at end of period (in thousands)              688               569

(1) A boutique is included in comparable sales on the first day of the fifteenth full month following the boutique's opening. When a boutique that is included in comparable sales is relocated, we continue to consider sales from that boutique to be comparable sales. If a boutique is closed for thirty days or longer for a remodel or as a result of weather damage, fire or the like, we no longer consider sales from that boutique to be comparable sales. Comparable sales results include our direct-to-consumer sales.

(2) Net sales per average square foot are calculated by dividing net sales for the period by the average square feet during the period. Because of our rapid growth, for purposes of providing net sales per square foot measure, we use average square feet during the period as opposed to total gross square feet at the end of the period. For individual quarterly periods, average square feet is calculated as (a) the sum of total gross square feet at the beginning and end of the period, divided by (b) two. There may be variations in the way in which some of our competitors and other retailers calculate sales per square foot or similarly titled measures. As a result, average square feet and net sales per average square foot for the period may not be comparable to similar data made available by other retailers.

(3) Average square feet per boutique is calculated by dividing total gross square feet at the end of the period by the number of boutiques at the end of the period.

Boutique Count



The following table summarizes the number of boutiques open at the beginning and
end of the periods indicated.



                                                    Thirteen Weeks Ended
                                                   May 3,          May 4,
                                                    2014            2013
Number of boutiques open at beginning of period         451             360
Boutiques added                                          62              56
Number of boutiques open at the end of period           513             416

Thirteen Weeks Ended May 3, 2014 Compared to Thirteen Weeks Ended May 4, 2013



                                            Thirteen Weeks Ended
                                  May 3, 2014                   May 4, 2013                          Variance
                                           As a %                       As a % of
                                           of Net                          Net                                     Basis
                            In USD       Sales(1)          In USD       Sales(1)        In USD          %          Points
                                                         (In thousands, except percentages)
Net sales                  $ 85,424            100.0 %    $ 78,987           100.0 %    $  6,437           8 %           -
Cost of goods sold and
occupancy costs              43,592             51.0 %      37,615            47.6 %       5,977          16 %         340
Gross profit                 41,832             49.0 %      41,372            52.4 %         460           1 %        (340 )
Selling, general and
administrative expenses      27,812             32.6 %      23,351            29.6 %       4,461          19 %         300
Income from operations       14,020             16.4 %      18,021            22.8 %      (4,001 )       (22 %)       (640 )
Interest expense               (221 )           (0.3 )%       (116 )          (0.1 )%       (105 )        91 %         (10 )
Other income                    103              0.1 %          83             0.1 %          20          24 %           -
Income before income tax
expense                      13,902             16.3 %      17,988            22.8 %      (4,086 )       (23 %)       (650 )
Income tax expense            5,342              6.3 %       7,051             8.9 %      (1,709 )       (24 %)       (270 )
Net income                 $  8,560             10.0 %    $ 10,937            13.8 %    $ (2,377 )       (22 %)       (380 )

(1) Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.

Net Sales

Net sales increased 8% to $85.4 million in the thirteen weeks ended May 3, 2014 from $79.0 million in the thirteen weeks ended May 4, 2013. This increase is primarily attributable to the increase in non-comparable sales, which in turn is due to the increase in the number of boutiques in operation in the first quarter of fiscal year 2014 as compared to the same period of the prior year. This change was partially offset by a 7% decrease in comparable sales. The decrease in comparable sales was driven by a 7% decrease in transactions partially offset by an increase in direct-to-consumer sales of 84%. There were 360 comparable boutiques and 153 non-comparable boutiques open at May 3, 2014 compared to 283 and 133, respectively, at May 4, 2013. Our boutique sales were impacted by severe winter weather conditions in the quarter which caused temporary boutique closures throughout a large number of geographic regions.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs increased 16% to $43.6 million in the thirteen weeks ended May 3, 2014 from $37.6 million in the thirteen weeks ended May 4, 2013. Cost of merchandise and freight expenses increased by $3.6 million driven by the increased sales volume. Occupancy costs increased by $2.3 million due to the increase in the number of boutiques in operation during the thirteen weeks ended May 3, 2014 compared to the same period of the prior year.

As a percentage of net sales, cost of goods sold and occupancy costs increased to 51.0% in the thirteen weeks ended May 3, 2014 from 47.6% in the thirteen weeks ended May 4, 2013. This unfavorable variance included a 180 basis point decrease in merchandise margins primarily as a result of increased markdowns and promotional activity related to the sale of carryover clearance inventory from the fourth quarter and the general competitive sales environment. Additionally, occupancy costs increased 160 basis points primarily due to the deleveraging of fixed expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 19% to $27.8 million in the thirteen weeks ended May 3, 2014 from $23.4 million in the thirteen weeks ended May 4, 2013. As a percentage of net sales, selling, general and administrative expense increased to 32.6% in the thirteen weeks ended May 3, 2014 as compared to 29.6% in the thirteen weeks ended May 4, 2013. This increase was primarily due to general deleveraging of expenses due to lower sales growth as well as the higher boutique and corporate payroll associated with expansion of the field leadership structure during late 2013 to support the larger boutique base.

Income Tax Expense

The decrease in provision for income taxes of $1.7 million in the thirteen weeks ended May 3, 2014 compared to the thirteen weeks ended May 4, 2013 was primarily due to the decrease in pre-tax income. The effective tax rate of 38.4% in the thirteen weeks ended May 3, 2014 was comparable to the effective tax rate of 39.2% in the thirteen weeks ended May 4, 2013.

                         Sales by Merchandise Category



                                           Thirteen Weeks Ended
                               May 3, 2014                      May 4, 2013
                                         As a % of                        As a % of
                        In Dollars       Net Sales       In Dollars       Net Sales
                                    (in thousands, except percentages)
Apparel                $     44,764            52.3 %   $     39,849            50.7 %
Jewelry                      18,321            21.4 %         18,981            24.1 %
Accessories                  14,144            16.5 %         12,614            16.0 %
Gifts                         8,399             9.8 %          7,230             9.2 %
Merchandise sales(1)   $     85,628           100.0 %   $     78,674           100.0 %

(1) Excludes gift card breakage income, shipping and change in return reserve.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility. Our primary cash needs are for capital expenditures in connection with opening new boutiques and remodeling existing boutiques, investing in improved technology and distribution facility enhancements, funding normal working capital requirements and payments of interest and principal, if any, under our revolving credit facility. We may use cash or our revolving credit facility to issue letters of credit to support merchandise imports or for other corporate purposes. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable and other current liabilities. Our working capital position benefits from the fact that we generally collect cash from sales to customers the day of or, in the case of credit or debit card transactions, within several days of the related sales and we typically have up to 30 days to pay our vendors.

We were in compliance with all covenants under our revolving credit facility as of May 3, 2014. On May 3, 2014, we had $25.4 million of cash and cash equivalents and approximately $60 million in borrowing availability under our revolving credit facility. There were no letters of credit outstanding at May 3, 2014.

We expect that our cash flow from operations along with borrowings under our revolving credit facility and tenant allowances for new boutiques will be sufficient to fund capital expenditures and our working capital requirements for at least the next twelve months.

Cash Flow



A summary of our operating, investing and financing activities are shown in the
following table:



                                                            Thirteen Weeks Ended
                                                       May 3, 2014       May 4, 2013
                                                               (In thousands)
Provided by operating activities                       $      9,710     $      12,089
Used in investing activities                                 (8,078 )          (8,517 )
Provided by (used in) financing activities                  (13,717 )             314

Net increase (decrease) in cash and cash equivalents   $    (12,085 )   $       3,886

Operating Activities

Operating activities consist of net income adjusted for non-cash items, including depreciation and amortization, deferred taxes, the effect of working capital changes and tenant allowances received from landlords. Net cash provided by operating activities was $9.7 million and $12.1 million in each of the thirteen weeks ended May 3, 2014 and May 4, 2013, respectively. The decrease in cash provided by operating activities in the current quarter was primarily due to lower net income as well as timing changes with respect to accounts payable, accrued liabilities and accounts receivable.

Investing Activities



Investing activities consist primarily of capital expenditures for new
boutiques, improvements to existing boutiques, as well as investment in
information technology and our distribution facility.



                                                     Thirteen Weeks Ended
                                               May 3, 2014         May 4, 2013
                                                        (In thousands)
       Capital expenditures for:
       New boutiques                           $      6,663       $       7,350
       Existing boutiques                             1,309                 337
       Technology                                        61                 627
       Corporate and distribution                        45                 203
       Net cash used in investing activities   $      8,078       $       8,517

Our total capital expenditures for the thirteen weeks ended May 3, 2014 and May 4, 2013 were $8.1 million and $8.5 million, respectively, with new boutiques accounting for most of our spending at $6.7 million and $7.4 million, respectively. $1.3 million was paid during the period in connection with the remodeling of 19 existing boutiques. Spending for new boutiques included amounts associated with boutiques that will open subsequent to the end of each fiscal quarter. We opened 62 boutiques in the thirteen weeks ended May 3, 2014 compared to 56 boutiques in the thirteen weeks ended May 4, 2013. The average cost of the leasehold improvements, equipment, furniture and fixtures, excluding tenant allowances which are reflected in operating cash flows, for new boutiques opened in the thirteen weeks ended May 3, 2014 and May 4, 2013 was $182,000 and $172,000, respectively. The average tenant allowance per new boutique in the thirteen weeks ended May 3, 2014 and May 4, 2013 was $89,000 and $72,000, respectively. Tenant allowances are amortized as a reduction in rent expense over the term of the lease. The average collection period for these allowances is approximately six months after boutique opening. As a result, we fund the cost of new boutiques with cash flow from operations, build-out allowances from our landlords, or borrowings under our revolving credit facility.

Management anticipates that capital expenditures for the remainder of fiscal year 2014 will be approximately $17 million to $19 million. The majority of this amount will be spent on new boutique leasehold improvements at approximately $11 million to $13 million. Additionally, we plan to complete remodels for approximately 30-35 boutiques during the fiscal year. The remaining capital expenditures are expected to be used for our technology initiatives as well as corporate office and distribution center enhancements.

Financing Activities

Financing activities consist of borrowings and payments under our revolving credit facility, repurchases of our common stock, and proceeds from the exercise of stock options and the related tax consequence.

Net cash used in financing activities was $13.7 million during the thirteen weeks ended May 3, 2014 compared to net cash provided by financing activities of $0.3 million during the thirteen weeks ended May 4, 2013. During the quarter, we repaid $10.0 million of borrowings under our revolving credit facility and additionally repurchased $5.3 million of common stock.

Revolving Credit Facility

On August 30, 2013, Francesca's Collections, Inc. ("Francesca's Collections" or the "Borrower"), as borrower, and its parent company, Francesca's LLC, a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement with Royal Bank of Canada, as Administrative Agent and Collateral Agent, and the lenders party thereto. The credit facility provides capacity of $75.0 million (including up to $10.0 million for letters of credit) and matures on August 30, 2018. The facility also contains an option permitting the Borrower, subject to certain requirements and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate of $25.0 million, subject to reductions in the event the Borrower has certain indebtedness outstanding. At May 3, 2014, $15.0 million was outstanding under the credit facility and no letters of credit were outstanding.

The credit facility contains customary events of default and requires the Borrower to comply with certain financial covenants. As of May 3, 2014, the Borrower was in compliance with all covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can pay; provided that the Borrower is permitted to pay dividends to the extent it has available capacity in its available investment basket (as defined in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain procedural requirements have been satisfied and the Borrower is in pro forma compliance with a maximum secured leverage ratio. At May 3, 2014, the Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations under the credit facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All obligations under the facility are unconditionally guaranteed by, subject to certain exceptions, by Francesca's LLC and each of the Borrower's existing and future direct and indirect wholly-owned domestic subsidiaries.

During the thirteen weeks ended May 3, 2014, amounts outstanding under the credit facility accrued interest at an average rate of 2.0%.

Share Repurchase Program

For information regarding our share repurchase program, please refer to Note 7 to our unaudited consolidated financial statements included in Part I of this report, which is incorporated herein by reference.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. A summary of the Company's significant accounting policies is included in Note 1 to the Company's annual consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

Certain of the Company's accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of the company's consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the fiscal year ended February 1, 2014. As of May 3, 2014, there were no significant changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, please refer to Note 1 to our unaudited consolidated financial statements included in Part I of this Report, which is incorporated herein by reference.

Subsequent Event

We regularly review our inventory balances to identify slow moving merchandise. We generally use markdowns to clear this type of merchandise. However, due to the negative impact of various macro conditions on our planned sales levels within primarily the apparel and jewelry categories, inventory balances have outpaced sales. We believe that regular markdowns are insufficient to clear slow moving inventory at a pace that is suitable for our merchandising strategy. A primary reason our customer shops our boutiques, we believe, is her love for new fashion. Accordingly, in June 2014 we determined that we should dispose of sufficient amount of slow moving inventory during the second fiscal quarter to accelerate the flow of new merchandise into our boutiques. We believe that this strategy will adequately address our customers' desire for new fashion and will likely allow us to attain improved results through the back half of 2014.We estimate that during the second quarter we will dispose of approximately $2.5 to $3.5 million of inventory at cost before taxes or $0.04 to $0.05 diluted earnings per share.

Contractual Obligations

There were no significant changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014, other than those which occur in the normal course of business.

Off Balance Sheet Arrangements

We are not party to any off balance sheet arrangements.

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