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Will Francesca’s Fall Into Bankruptcy Court’s Clutches?

Francesca’s is the latest fashion retailer whose financials are faltering.

The Houston-based women’s specialty chain skipped out on rent obligations in April but will resume payments, including deferred amounts, next month, compounding liquidity concerns that could spell a bankruptcy filing in the not-so-distant future.

In a regulatory filing Tuesday with the Securities and Exchange Commission, Francesca’s noted that audited financial statements for the year ended Feb. 1, did not include any adjustments for any impact of the coronavirus pandemic on operations. Independent auditors flagged a “going concern” qualifier the chain’s annual report filed in May, the company said, which indicates concern that Francesca’s could be on very shaky ground.

Francesca’s first raised the bankruptcy possibility after posting fourth-quarter earnings results last month. At the time, the retailer said it was working to implement a comprehensive plan to mitigate the damage of the coronavirus pandemic. The seller of eclectic garb and bohemian baubles borrowed $5 million under an amended asset based revolving credit facility, and filed for an income tax refund for $10.7 million under the Corona Aid, Relief and Economic Security Act (CARES Act) that allows companies to carryback net operating losses to prior years.

In Tuesday’s filing, the company said it experienced “significant” declines in comparable sales, net sales and gross profit since fiscal year 2017, which it attributed to a downward trends in store traffic and conversion rates. “The shutdown of all of our boutiques from March 15, 2020 to April 30, 2020 in connection with the COVID-19 pandemic exasperated these issues,” the company said. Francesca’s also raised the possibility that it might need additional financing to fund current operations, but there’s little assurance it would be able gather the necessary reserves.

The company said it could end up in default if it fails to get back into compliance with its real estate rental bills, for which it received a waiver when it violated terms for nonpayment.

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“If we are unable to generate or obtain the requisite amount of financing needed to fund our business operations or execute our growth strategy, our liquidity and ability to continue operations could be materially adversely affected. As a result, we may be required to delay, reduce and/or cease our operations and/or seek bankruptcy protection,” the company said in the SEC filing.

Launched in 1999, Francesca’s expects to delay filing its first-quarter earnings report. The specialty chain operates about 700 mall-based stores, selling a colorful variety of moderately priced apparel, accessories, footwear, beauty and home goods.

Many consultants and credit analysts expected COVID-19 will usher in a period of distress for retail resulting from temporary store closures that began in mid-March. While some chains began reopening at the end of April, some will not finish the reopening process until mid-July.