NASDAQ:FRAN FRANCESCA’S HOLDINGS
Sector financial performance:
This company, who primarily sells women’s apparel, jewelries, and accessories from third party brands in their own stores, has been grouped into women’s apparel retailer sector in clothing industry.
We are seeing a downward trend in the organic sales for young (below 35) women’s apparels in the past several years and the trend accelerates in 2018, before which the situation in this apparel sector for women below 35 seemed not as bad as the whole women apparel industry because demand were still solid and strong as indicated by data from some of the retailers that demand still was considerably sensitive to price so that some of companies had been able to improve their comparable sales by lowering price/promotion. Data indicates that while promotion did not bring more traffic they have helped improve average transaction size and as well brought more transactions with limited traffic. However, since the second half of 2017, while price kept going down, transactions went down significantly in the past one year (more than annualized 10% decline in comps).
As we had discussed, there are no apparent evidences to prove that the decline in sales of women’s apparels has derived from decrease in demand for those products since we did not see any fundamental changes in factors such as macroeconomy or consumers’ lifestyle. We think the decrease in sales is from the general decrease in traffic, which has been a result of less in-store shopping activities as many shopping activities are being replaced by online shopping. Therefore, the direct result is that for those products that consumers can buy online the sales move from in-store to e-commerce and for a small portion of those products that consumers do not like to buy online the sales may just go away. However, since consumers still need those products, while they are not buying as many as before due to reduced visits of stores, they still need them to maintain the basic demand. Therefore, we think the decrease in comparable sales for those apparels will not be permanent and it will slow down in 1-2 years when it hits another decrease of 10%.
However, the unfavourable retail industry (the slowing traffic mainly) has been putting huge pressure on the profits of companies as shown either through shrinking merchandise margin resulted from promotion activities or the deleveraging of expenses as a result of declining sales and new stores’ opening. As we can see that a typical gross margin down significantly to about 42% and the operating margin is down to 4% currently in 2018.
According our analysis, companies’ enterprise price/EBI is around 19 with interest/EBI ratio of 4%.
Data indicated that this company’s sales increase has mainly come from its new opened stores, the number of which has grown at aggressive rate in the past three years. Comparable store sales decreased in first half of fiscal 2017 after two years’ increase for previous years and the decline accelerate in 2018 because store traffic has continued to decrease while reducing price. While it seems that this company had been successful in improving its stores’ transaction size or even transaction numbers facing decreasing traffic before 2017, the shrinking traffic caused comparable sales go down eventually. E-commerce sales have increased at about 30% annual rate in the past three years.
The second13 weeks of fiscal 2018 compared with the same period of 2017
Net sales decreased 5% due to decrease of 13% in comparable sales.
The first 13 weeks of fiscal 2018 compared with the same period of 2017
Net sales decreased 7% due to decrease of 16% in comparable sales offset by increase in new stores.
Fiscal 2017 compared with 2016
Net sales decreased 3% due to decrease of 11% in comparable sales offset by increase in new stores.
The net sales of this company increased about 3% in the first 6 months of fiscal 2017 compared with the same period of 2016, primarily attributable to increase from new opened stores but offset by decrease in average comparable stores sales of 4%, which was resulted from decrease in traffic.
The net sales of this company increased about 11% in fiscal 2016 compared with the 2015, primarily attributable to increase from new opened stores and increase of 2% in comparable stores sales, which was resulted from increase in both transactions and transaction size while traffic decreased.
The net sales of this company increased about 16% in fiscal 2015 compared with the 2014, primarily attributable to increase from new opened stores and increase of 3% in comparable stores sales, which was resulted from increase in transaction size.
This company’ gross margin is currently 42% (occupancy costs included) down due to decreased merchandize margin (lower price/promotion) and deleveraging of occupancy costs from declining sales and opening of new stores. Due to deleveraging of new store-related costs and other expenses, its SG&A as percentage of sales has increased to 38% so as to cause this company’s operating margin go down to about 4% in 2018 from about 14% of 2014.
This stock currently has an enterprise price/EBI ratio of 19. We think that its stock is being relatively overvalued considering that there is no signal that decrease in comparable sales will be slowing down (for example, less promotion/markdown).