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Francesca’s Confirms 50% Sales Drop, But Stock Pops On Q2 Comp Sales Projections

Francesca’s first-quarter earnings report remained in line with dismal expectations set in June, with sales dropping 50 percent sales in the quarter to $43.8 million. But the company now expects comparable sales for the second quarter, which ends Aug. 1, 2020, to take a much lesser hit, dipping between 11 percent and 16 percent.

Francesca’s stock shot up as much as 94 percent when it reported its earnings Wednesday before the market opened. The stock remained up 47 percent when markets closed.

The women’s specialty apparel retailer has reopened 674 of 702 boutiques, although most are operating at reduced capacity and hours in accordance with local regulations. This number reflects the re-closure of 22 boutiques in California, where confirmed COVID-19 infections have been rising. The company also permanently closed eight boutiques in the quarter.

In a Nutshell: Andrew Clarke, president and CEO of Francesca’s Holdings Corp., said sales at reopened boutiques were trending within expectations, with “higher conversion largely offsetting lower traffic trends.”

Year-over-year total inventories increased 7.95 percent from $32.2 million to $34.8 million in the quarter.

Clarke said markdowns and promotions drove the decrease in its current inventory levels. Francesca’s noted that in the second quarter, average inventory per boutique is expected to decrease in the mid- to high-single digit range versus the comparable prior-year period.

“With an increased focus on boutique promotions, as part of our phased reopening plans, we have cleared through the majority of our aged product, which we believe will place us in a better inventory position heading into the fall season,” Clarke said. “While these promotions are resulting in meaningful gross margin pressure, our priority remains to ensure that we maintain disciplined inventory levels.”

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While Clarke said the company’s business model enables it to respond quickly to shifts in consumer demand so that it can manage inventory flow to align with consumer demand, he still expects the heightened promotional environment will continue, particularly in light of soft traffic trends.

The retailer anticipates gross margin pressure to accelerate in the second quarter due to the more aggressive promotions as it moves through the remainder of excess inventory as well as the “generally challenging retail environment.”

Like many apparel companies during the pandemic, Francesca’s deferred rent payments throughout the pandemic into June. The company was able to complete negotiations with its landlords to abate or defer lease payments for the months of April, May and June. Lease payments have resumed for the company as of July 2020, while past due balances for merchandise and non-merchandise vendor accounts payables have been paid.

Francesca’s now has cash and cash equivalents of $18.7 million after it repaid $2 million of the outstanding borrowings under its Amended ABL credit agreement.

Although Francesca’s has provided a second-quarter preview of sales and earnings, it says it may not provide quarterly or annual financial guidance in future earnings releases.

Operations and cash flows continue to be materially adversely impacted by the coronavirus pandemic, with the company reiterating that it continues to raise “substantial doubt about its ability to continue as a going concern.”

Net Sales: Net sales decreased 50 percent to $43.8 million from $87.1 million in the prior-year quarter primarily due to the mandated boutique closures beginning on March 25, and continuing through the end of the first quarter related to the health emergency.

This decrease was partially offset by strong performance in e-commerce, although Francesca’s did not reveal specific e-commerce results.

With Francesca’s second quarter nearly reaching its conclusion as well, the company revealed its net sales are expected to be in the range of $67 million to $71 million, assuming a comparable sales decrease of 11 percent to 16 percent.

Net Earnings: Net loss for the first quarter ended May 2 was $15.3 million, or $5.25 per share, compared to prior-year quarter net loss of $10.1 million, or $3.50 per share.

Gross loss as a percent of sales was 6.6 percent as compared to last year’s gross profit of 34.8 percent in the prior year quarter. The massive change was primarily due to deleverage in occupancy costs as a result of lower sales. Occupancy costs include the full lease expense for all boutiques for the first quarter, regardless of any rent deferral.

Excluding $7.5 million in non-cash impairment charges and a $10.7 million income tax benefit related to the net operating loss carryback provision under the CARES Act, adjusted net loss for the first quarter was $28.4 million, or $9.73 per share. This compares to adjusted net loss of $8.2 million, or $2.84 per share, in the comparable prior-year quarter. 

Operating losses for the quarter totaled $35.3 million, compared to $9.7 million in the prior-year quarter. Excluding the non-cash impairment charges, adjusted loss from operations for the first quarter was $27.8 million.

For the second quarter, operating losses are expected to be in the range of $21 million to $23 million in the second quarter. Cash and cash equivalents are expected to be in the range of $10 million to $12 million.

CEO’s Take: “The re-platforming and relaunching of our e-commerce site is on track for the fall season,” Clarke said. “Our iOS app is expected to launch in the next few weeks and our Android app is expected to launch this fall. In addition to better enabling our customers to shop wherever, whenever and however she chooses, the launch of our mobile app will enhance our ability to serve our customers where stores remain closed. Looking ahead, while the situation remains fluid, with store re-closures taking place in certain states due to increased cases of COVID-19, we are focused on maximizing sales by controlling what is within our control.”