Here’s the deal…
Whenever a Retailer, durable or non-durable Brand in any pocket of the broader space (about 180 companies as we see it) puts out numbers, we always analyze it as a team in detail as if we were sitting in a seat on the Buy-Side. Most of this ‘back and forth’ amongst the four of us never sees the light of day as it relates to research notes, simply because there is not necessarily a call to be made, in our opinion. There are, however, a number of names/events that spark our interest due to some change on the margin in TRADE, TREND or TAIL duration, but may not necessarily carry major investment significance – yet, at least. Here’s us sharing the very raw interaction.
Let us know what you think.
TRADE: Beat by 52%, and yet EPS ‘only’ grew 24%. Forecast accuracy has never been FRAN’s strong point. But in fairness, it raised its own bar in 3Q by taking UP guidance by 17% at the mid-point. Golf clap there as this is a rarity in retail.
TREND: The earnings algorithm in the latest quarter was exceptional (see chart below) with 9% revenue growth translating to 24% EPS growth and FCF more than doubling. Importantly, the compares in the algorithm are extremely easy in 3Q, and the company’s earnings guidance in 3Q implies a 35% decline vs last year, which is simply too conservative given the TREND. Furthermore, the SIGMA setup is bullet-proof, meaning that inventories are correcting while margins are stabilizing – which invariably leads to a positive Gross Margin inflection.
TAIL: The company definitely knows its customer and has a fairly stable and predictable revenue stream. That’s a plus. But it already has nearly 650 stores, which is dangerously close to the 700 mark that is a benchmark for most specialty retailer. We’re not saying it can’t go higher – and in fact – it will whether it should or not. But valuation should naturally be under pressure as it hits the top end of historical retail standards. The same goes for productivity, which stands at an enviable rate of $590 per foot. The downside is that said productivity has been locked between $580 and $600 for the better part of three years. E-commerce is an obvious plus, as the Francesca’s brand stands a chance at making it in a successful e-comm model, but that has yet to be proven at only 4% of sales. All in, this is a company with a slowing long-term top line trajectory, is down to 15% margins from an (overearning) peak of 26% – but there’s no reason margins can’t go lower.
This does not strike us as an overt short. But one to keep an eye through a sandbagged 3Q and momentum/recovery from May’s blow-up, +60% already since that event. We’re going to mark the calendar to revisit this one in another 13 weeks.
Sent: Wednesday, September 07, 2016 8:54 AM
To: Retail Team
Subject: FRAN #'s
FRAN 2Q16 – Beat, up 14% pre-market
Reported flat comp, 420 bps above street -4.2%. Up from -4% in 2Q15
Rev came in above street by 5.6%. Was up 9% YY
GM% 30 bps above expectations. Down -64 bps YY
EBIT margin up 52 bps YY, 436 bps above street
SG&A as a % of sales down -116 bps to 31.9%, -408 bps below street
Very positive SIGMA move. Sales/inventories spread +11.6%, up from 0.8% in 1Q16
Avg ending inventory per boutique down 9% YY
EPS $0.16-$0.19 vs street $0.15
Revenue $114M-$118M vs street $110.2M
Assuming a +MSD in comp vs street (1.2%)
Raised FY Guidance:
EPS $0.96-$1.03 vs street $0.87. Raised from prior $0.86-$0.96
Rev $473-455mm vs street $468mm. Raised from prior $460-480
Comp down LSD to +LSD vs street (1.3%). Up from prior guidance (-3%)-flat