Francesca's Holdings (FRAN)
J. Royden Ward's Contrarian Stock Pick
Without question, Francesca’s Holdings (FRAN) is unloved now, but the stock could become a big winner during the next three to six months. This contrarian pick qualifies in all respects for the ultimate stock rated “sell” by almost all analysts.
Francesca’s Holdings (FRAN: Current Price: 17.27) is a specialty retailer with 571 boutiques in 47 states and the District of Columbia. The company offers a broad selection of women’s apparel, jewelry, accessories and gifts targeted to fashion-conscious 18- to 35-year-old customers. Merchandise is also available through Francesca’s direct-to-consumer website. Francesca’s offers limited quantities of styles and introduces new merchandise to its boutiques five days a week. The company’s methods create a sense of scarcity and freshness for shoppers, spurring customer loyalty and driving shopping frequency.
Analysts dislike Francesca’s because same-store sales declined 5% and earnings per share dropped 25%—despite its sales increase of 11%—during the 12 months ended 1/31/15. However, management added 88 new stores in 2014 and plans to add 85 new boutiques in 2015—which is likely to boost sales and earnings.
FRAN tumbled from a high of 35 in mid-2012 to a low of 12 in October 2014 on the disappointing sales and earnings results and the former CEO’s unexpected departure before recovering to the current 17. The company has a solid balance sheet with minimal debt and plenty of cash. The stock’s current price-to-earnings ratio of 22.7 is high, but I expect earnings will increase 15% per year during the next five years. I recommend buying FRAN at the current price.
From Cabot Wealth Advisory 4/2/12 Sign up for free Cabot Wealth Advisory e-newsletter
Retail remains one of the strongest sectors in the market, and about the only worry in the group is that there are so many names to consider; you have to make sure you don't get overloaded on one sector because, eventually, there will be shakeouts in every group, and if you have lots of exposure, your portfolio could take an outsized hit.
Still, if you stick with the best stories in the sector and try to get them at opportune entry points, I think there's big money to be made. One newer leader is Francesca's Holdings (FRAN), an operator of 283 women's boutiques around the U.S. What makes the company different is that each boutique is purposely made to look unique; there's no chain-store feel here.
Also, the firm ships inventory daily, which keeps each store's products fresh ... but also keeps them in limited supply, creating an urgency factor among shoppers. But what really impresses us is the store's economics; on average, Francesca's new stores pay back all investment made in less than one year. That means the company can open a slew of new stores without running out of cash.
At the end of January, Francesca's had 283 stores, but plans to open another 76 (a huge 27% jump in the store count) in 2012, and 75 per year after that, up to around 900, which management believes is easily doable. Combined with strong same-store sales (up 14.7% in the most recent quarter), this expansion is producing huge sales (up 40% to 50% per quarter) and earnings (a 46% projected rise in 2012) growth.The stock broke out around 25 last month and then surged as high as 34 following a well received earnings report. It's extended to the upside here (the 50-day line is down around 26), but dips toward 30 or even a bit below look buyable to me, as long as you keep a stop in the 26 area. I think the company has great potential, but the trick is buying the stock correctly.
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|Francesca's Holdings (FRAN)
3480 West 12th Street
Houston, Texas 77008
|Index Membership: N/A
Industry: Specialty Retail, Other
Full Time Employees: 605
4/2/12 Francesca's Holdings (FRAN): Expansion is producing huge sales