Investors don't see new retailers go public too often, making this morning's debut of Francesca's Holdings (Nasdaq: FRAN) a rare sight in its own right.
Finicky shoppers make it difficult for investors to stick with a concept for too long. It also doesn't help that a lot of new chains are started by larger parent companies. Limited Brands (NYSE: LTD) has spawned more mall staples than Octomom.
However, the wild success of high-end athletic wear retailer lululemon athletica (Nasdaq: LULU) has reawakened the investing appetite for young concepts if they can pair up brisk expansion and healthy comps to deliver healthy growth.
The market thought it had a new darling when rue21 (NYSE: RUE) went public two years ago. The teen retailer continues to do well. It opened its 700th store a couple of weeks ago. It saw net sales climb nearly 26% higher on a 5.2% spike in same-store sales in its most recent quarter, and rue21 is targeting earnings per share to climb 24% to 27% this fiscal year. These are all solid performance metrics, but rue21 can't keep up with Lululemon's spectacular growth.
The purveyor of pricey yoga and workout clothing for women may have finally met its match today, though.
Lulu? Meet Francesca.
No "boo" in this boutique
There's something special about francesca's collections, even if it prefers to use all lowercase letters in its signage like Lululemon.
Unlike many of the larger specialty apparel chains that negotiate great deals from suppliers by ordering in gargantuan amounts, Francesca's opts for a broad assortment of trendy apparel and accessories that it then sells in limited amounts. This strategy accomplishes two important things: It keeps lead times short (with purchases popping up at its boutiques as quickly as four weeks after they've been purchased), and it keeps customers coming back often for the ever-changing mix of merchandise. The short lead times help keep it at the cutting edge of the latest fashions, while shoppers approach francesca's collections the way they would a bustling consignment store where every visit is a refreshing surprise.
Half of francesca's collections' product mix is apparel, with the other half consisting of jewelry, accessories, and gifts.
The boutique approach plays well in small leased spaces at upscale malls and shopping centers. The average store takes up just 1,400 square feet of space.
This is obviously a great time to expand. Small-box retailers are buckling, and desperate landlords are willing to strike sweet deals with magnetic tenants that also offer stability. Francesca's has capitalized on the opportunity. It has more than doubled its presence since wrapping up fiscal 2008 with 111 stores. There were 249 boutiques open at the end of April.
All of this would only sound good on paper if the metrics weren't there to back the concept up, but Francesca's is no shrinking violet blouse. Net sales soared 70% last year to $135.2 million, and net income climbed 59%, to $16.9 million. Don't let the fact that its top line outpaces its bottom line scare you. Net margins still clocked in 12.5% for the year. Double-digit net margins isn't something you see every day in retail, as modest markups keep margins in check and at the mercy of frenetic inventory turnover. It's true that Lululemon commands better margins, but American Eagle Outfitters (NYSE: AEO), Abercrombie & Fitch (NYSE: ANF), and even rue21 are all sporting net margins in the mid-single digits.
Expansion will naturally pump up sales growth, but the key here is that francesca's collections stores continue to grow in popularity at the individual store level. Comps rose a whopping 15.2% last year, and it's not as if that performance is stacked up against a sandbagged showing the year before. Same-store sales rose a sharp 9.8% in fiscal 2009.
Same-store sales were up an encouraging 14.7% during this year's first quarter, though comps were only clocking in 3.2% higher during the first two months of the current quarter that ends next week.
Let's not bid Lulu adieu so fast
Investors have no reason to swap out their shares of Lululemon Athletica for Francesca's. There is certainly nothing wrong with Lululemon, though its valuation is certainly not for the cheap of heart.
The fitness apparel specialist for well-to-do women is coming off another blowout quarter where net sales, earnings, and comps climbed 35%, 70%, and 16%, respectively.
Francesca's also isn't perfect. Two-thirds of the 10 million shares being offered in today's IPO came from insiders cashing out at the IPO price of $17. With 43.9 million shares outstanding now, the nearly company's valuation fits only if sales continue to grow and margins hold up their end of the bargain.
The stock opened at $22.93 and traded as high as $24.50 in the morning, pushing its market cap over the $1 billion mark. Is Francesca's worth more than 60 times last year's earnings the way that Lululemon currently is?
Right now, it is worthy. The numbers look great, and even if there may be more premium-worthy appeal in Lululemon as a brand than francesca's collections as a concept, there's no denying that Francesca's is filling a void that growth investors crave and mall landlords desperately need.
Welcome to the show, Francesca's. Let's hope you don't rue21 the day you went public.
Do you know a hotter retailer than Lululemon or Francesca's? Prove it! Top Rick in the comment box below.
