Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Why Successful Retailers Adopt the Same Winning Strategies

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Francesca's Holdings  (NASDAQ: FRAN  ) is a rarity in the cutthroat world of fashion retail, given its consistent profitability and strong revenue growth. It has consistently delivered an operating margin of more than 20%; while its specialty-retailing peers like ANN and Urban Outfitters sport margins in the low- to mid-single digit range.

The story for revenue growth is similar, with Francesca's increasing its top line by a three-year compound annual growth rate of 55%. There are striking similarities between Francesca's business model and that of other successful retailers like Costco Wholesale  (NASDAQ: COST  ) and Steven Madden (NASDAQ: SHOO  ) , which I will examine below.

Shallow and exclusive
Francesca's has a 'shallow and exclusive' approach when it comes to its assortments. In many ways, this is very similar to the strategy adopted by warehouse-club operator Costco.

Firstly, Francesca's calls its assortments shallow because it chooses to stock up only a limited quantity of each product. Costco's warehouse-club model also thrives on having fewer SKUs (stock keeping units). Both Francesca's and Costco benefit from keeping their merchandise 'new and fresh,' drawing customers back in stores for the latest trending products. This is particularly relevant for Francesca's, as fashion risk, where unpopular merchandise is overstocked relative to customer demand, is minimized.

Secondly, while Francesca's peers focus on third-party national brands, unique merchandise carried under its proprietary labels accounts for a large proportion of Francesca's mix. The exclusivity of Francesca's items suggests that it doesn't have to compete on price with other retailers with respect to 'me-too' products. Similarly, Costco also relies strongly on its private-label products to drive customer loyalty. A recent Consumer Edge Insight survey showed that consumers expressed the greatest amount of satisfaction with Costco's house brands among 25 retailers.

The financial numbers speak for themselves. Both Francesca's and Costco have high inventory turnover ratios. While Costco turns over its inventory every month, or about 12 times a year, Francesca's held its inventory for an average of 45 days in fiscal 2013. This is largely attributed to its 'shallow and exclusive' merchandising strategy.

Fast, but not so fast
In fashion retail, it is very dangerous to be either too far ahead or behind the curve. The former leads to an overestimation of customer demand, while the latter means that all of the profits have been taken off the table. That's why Francesca's positioning as a 'fast follower' is valuable.

Once the latest fashion trend gathers momentum, Francesca's is quick to meet customer needs with its short lead times of between four and 12 weeks. This is made possible by having a diverse supply network of more than 400 U.S.-based vendors. As a result, Francesca's is able to have new merchandise delivered to its stores five days a week, as customers keep coming back for new products.

Speed-to-market is a key competitive advantage, and footwear and accessories retailer Steven Madden understands this as much as Francesca's. Its unique test and react 'supply chain strategy' allows it to achieve shorter lead times of six to eight weeks, compared with the industry norm of three to four months. The key lies in Steven Madden's small sample factory at its headquarters, which enables it to launch a prototype and send the shoes to selected stores within days. If customer response is positive, Steven Madden gives its overseas vendors the go-ahead to start mass production.

While Steven Madden has lead times comparable to that of Francesca's, Francesca's has an edge because its shallow merchandising strategy fits very well with its fast-follower positioning. A faster inventory turnover allows Francesca's to put new products on shelves quickly.

Foolish final thoughts
Pattern recognition is a useful skill to have in identifying profitable companies, as they tend to share common elements accounting for their successes. Francesca's,'shallow and exclusive' merchandise and fast lead times are the same things observed with other peers like Costco and Steven Madden. This is by far the strongest validation of Francesca's business model and its future success. 

Looking for more stocks with proven business models?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2801189, ~/Articles/ArticleHandler.aspx, 9/4/2015 2:58:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Mark Lin

Mark is a private value investor and is the author of website which uses a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders.

Today's Market

updated Moments ago Sponsored by:
DOW 16,045.82 -328.94 -2.01%
S&P 500 1,917.18 -33.95 -1.74%
NASD 4,664.05 -69.44 -1.47%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 2:42 PM
FRAN $12.40 Up +0.30 +2.48%
Francesca's Holdin… CAPS Rating: ***
COST $138.36 Down -2.12 -1.51%
Costco Wholesale CAPS Rating: *****
SHOO $39.41 Down -0.88 -2.18%
Steven Madden, Ltd… CAPS Rating: ****