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Why Francesca's Holdings Corp Fell 12% in June

By Demitri Kalogeropoulos - Jul 9, 2015 at 8:41AM

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Investors didn't like the specialty retailer's first-quarter results.

What: Specialty retailer Francesca's Holdings' (FRAN) stock slumped 12% lower during the month of June, according to S&P Capital IQ data. With that drop, shares are down 25% from the 52-week high they set in early April. 

FRAN Chart

FRAN data by YCharts

So what: Investors took a step back from the stock after Francesca's posted disappointing first-quarter results on June 10. Sales rose a solid 11% to hit $100 million. However, that gain was entirely due to a higher store count. Francesca's added 76 boutiques to its footprint in the last year, bringing the total to 589 shops. 

Revenue growth at existing locations was nonexistent, though: Comparable-store sales fell 2% as the company booked 5% lower customer traffic.

The good news is that Francesca's didn't need to resort to drastic price cuts in the first quarter. Merchandise margin ticked slightly higher as management held the line on markdowns. Average spending improved by a hefty 3%. Still, rising costs took a big bite out of profits. Operating margin slumped to 12.5% of sales from 16.4% a year ago. 

Now what: Management is focused on getting customer traffic climbing again at its existing locations. "Improving comparable sales is our number one priority," CEO Michael Barnes said in a press release. That will require getting the right mix of inventory in place at the right prices. Francesca's has more flexibility than many small retailers in that regard, given that its non-apparel products of jewelry, accessories, and gifts, make up a significant percentage of sales. The jewelry division in particular can make a strong contribution as it did this past quarter by spiking 20% higher.

Still, management doesn't see a return to comparable-store sales growth in 2015. The company's guidance calls for slightly negative comps this year as 88 new boutiques push overall sales up to $420 million, 11% above 2014's haul. But with customer traffic on track to post its second straight year of declines, it's hard to get excited about Francesca's stock, even after this pullback.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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