Will Francesca’s Thrive in the Current Economic Environment

While Francesca's Holdings (NASDAQ: FRAN  ) has seen stock-price depreciation of 35.6% in the past year, Ann (NYSE: ANN  ) and Chico's FAS  (NYSE: CHS  ) have seen stock-price increases of 6.5% and 4.7%, respectively. These are positive returns, but they're still well short of what many apparel-focused retailers have seen in regards to stock-price appreciation over the same time frame.

However, all of these performances appear to be justifiable based on underlying business performances. In regards to Francesca's, one simple yet key number is cause for concern.

Ambitious growth
In the third quarter, Francesca's net sales jumped 11% year over year. At first glance, this would appear to be a significant positive. However, this strong performance was primarily due to the opening of 10 new boutiques. If there are more stores, there will be more sales.

Comps actually declined 3%, indicating a lack of returning customers at retail locations open at least 13 months. This is compared to a comps increase of 17% in the year-ago quarter. For the third quarter, Francesca's did see strength in accessories, but apparel tops and jewelry were weak.

Boutique transactions in November were below company expectations, especially during the Thanksgiving holiday week. Francesca's cited slower traffic. When traffic is slow, a retailer often must rely on increased promotions to regenerate consistent traffic. This negatively impacts margins and earnings.

Despite current headwinds, Francesca's plans on opening five new boutiques in the fourth quarter. This is actually a good, methodical number, but risks still exist. This is a tricky situation.

On one hand, Francesca's isn't a well-known brand, and it must expand in order to increase the brand's exposure and recognition. On the other hand, weak comps performance has indicated a lack of demand for the company's merchandise. This likely stems from a hesitant consumer as opposed to the merchandise Francesca's is offering, but it's a stiff headwind, nonetheless.

Francesca's also failed to improve on the bottom line, with earnings per share plummeting 17% to $0.20 year over year. Selling, general, and administrative expenses increased 28% to $25.8 million due to higher payroll expenses, which relates to boutique expansion.

Looking ahead, Francesca's expects fourth-quarter net sales to improve 10%, and for EPS to come in at $0.25-$0.29. For FY 2014, Francesca's expects comps to come in at negative 3% to negative 1%. This is compared to a comps increase of 16% in FY 2013. Either excitement for the brand has faded or consumers aren't as willing to spend on discretionary items as they were one year ago.

Online performance
Francesca's performed well online in the third quarter, seeing an 87% increase in direct-to-consumer sales. Francesca's attributed this strong performance to improved site traffic, conversion rates, and transaction values.

According to Alexa.com (global leader in website analytics), Francescas.com sports a global traffic ranking of 65,962. This is poor. However, the ranking increased 2,676 spots over the past three months. Francescas.com's domestic traffic ranking: 13,879. Also poor.

On the positive side, the site's 27.1% bounce rate (visitor views one page and leaves) is strong. This indicates that 72.9% of people who visit the site are interested enough to explore, which has the potential to lead to sales. Page views per user of 6.3, and time-on-site of 4:39 are also above average. The problem seems to be not enough people knowing of the site's existence.

Comps comparisons versus Chico's FAS and Ann
In the retail environment, nothing is more important than comps. Perhaps Chico's or Ann has performed better in this regard recently.

Chico's saw comps decline 1.4% in its third quarter, primarily due to lower traffic. Ann saw its third-quarter comps improve 4%, which the company attributes to fashionable assortment and value. Ann has also seen continued success in its work attire as well as new shoe and jewelry collections.

The bottom line
It will be difficult for Francesca's to show sustainable growth while opening new boutiques given the current economic environment and tepid consumer. This has already been demonstrated with recent comps numbers.

If Francesca's can continue to grow online, it will give the company much greater potential, especially considering so many consumers are now opting to shop online. However, this would take a considerable amount of time, and Francesca's would still have to compete against a multitude of more established retailers with stronger online presences. In short, Francesca's looks to be a high-risk investment at this point in time.

Chico's also suffered a recent comps decline, which might indicate weakening demand. At least Chico's yields 1.2%, whereas Francesca's and Ann don't offer any yield.

Ann has performed best of the three in a difficult retail environment, which is demonstrated by its recent comps improvement. That said, none of these companies are resilient to a weak consumer environment. 

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