Already having expressed “substantial doubt” about its ability to operate as a going concern since the start of the Covid-19 pandemic, Francesca’s is officially pursuing strategic alternatives, including bankruptcy protection.
The women’s specialty apparel retailer made the decision after posting a second-quarter sales decline of 29 percent to $75.7 million and net losses in the period of $17.2 million.
In a Nutshell: The pursuit of strategic alternatives was likely going to be a “when,” not “if” scenario for Francesca’s, with the company expressing for months that it wouldn’t be able to operate as is for much longer. Francesca’s is exploring numerous options, including lease concessions, further cuts to operating and capital expenditures, raising additional capital and restructuring its debt and liabilities through a private restructuring or a bankruptcy.
The retailer brought on FTI Capital Advisors to help find ways improve its liquidity and financial positioning. However, the company said there is no guarantee that it will be able to improve its financial position and liquidity, complete a refinancing, raise additional capital or successfully restructure its indebtedness and liabilities.
The company’s strategic plans are not yet finalized and are subject to numerous uncertainties including negotiations with creditors and investors and conditions in the credit and capital markets.
Francesca’s is taking a number of steps to cater to shoppers’ changing tastes. On a company earnings call Tuesday morning, CEO Andrew Clarke said Francesca’s is leveraging its demand-driven sourcing model to pivot to “styles and categories that align with customers’ current mindset and activities.”
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Noting that “buy now, wear now is more important than ever,” Clarke said the retailer is adding more loungewear –which Francesca’s has successfully tested with strong initial results—and graphic tees that speak to the “shift in mindset toward casualization.” Comfortable bottoms like leggings and joggers are also driving recent apparel sales, he added, noting that the chain is ramping up its casual pants business.
The chain will “continue to lean into high-demand categories,” which includes footwear like slippers as well as face masks, for autumn, Clarke said. And in the coming season, Francesca’s has plans to test a small assortment of tween products on its website and through its forthcoming smartphone app, the CEO added, noting that e-commerce will also feature an extended size offering. The chain has seen digital trends similar to its retail peers; 74 percent of online customers in the second quarter were new to Francesca’s, while people who previously only shopped in the company’s stores accounted for 67 percent of e-commerce purchases.
In the first quarter, sales dropped 50 percent, and the company only recently announced a mobile app launch, illustrating just how far behind it was from a digital standpoint when its stores were forced to close.
In the second quarter, Francesca’s continued to take “aggressive and prudent actions” to reduce expense and manage cash flows, reducing its clearance inventory by 45 percent compared with the same period last year.
Total inventories decreased 25.9 percent to $22.9 million from $30.9 million in the year-ago quarter. Average inventory per boutique decreased 24 percent due to more clearance merchandise sold than merchandise received as a result of vendor supply disruptions.
As of Sept. 4, nine of the company’s boutiques remained closed, most of which are located in California, a state struggling with not just the virus but raging fires, too. The company opened one new boutique and permanently closed four, bringing the total count to 700 at the end of the quarter.
Francesca’s is not currently offering an outlook for the remainder of the year.
The company’s cash and cash equivalents totaled $18.2 million, with the retailer having $12.2 million of borrowings outstanding, net of $800,000 in debt issuance costs and $3 million in combined borrowing base availability under its credit agreements.
Selling, general and administrative (SG&A) expenses decreased 33 percent to $26 million from $38.9 million compared with the same period a year ago. This decline was primarily due to a $9.6 million drop in boutique and corporate payroll costs primarily because of minimum employee coverage at the boutiques and a temporary furlough of substantially all of the company’s employees during a portion of the quarter. The company also saw a $1.7 million decrease in boutique and corporate bonus expenses.
Additionally, merchant processing fees decreased $500,000 due to lower sales, and corporate travel expenses decreased $400,000 as only essential travel occurred because of the pandemic. Software and computer services and corporate depreciation expenses each decreased by $300,000.
Net Sales: Net sales dropped 29 percent to $75.7 million from $106 million in the comparable prior year quarter primarily due to a decrease in traffic and the temporary closure of most of the company’s stores as a result of the pandemic.
This decrease was partially offset by an increase in e-commerce sales due to an increase in conversion rate partially offset by lower average unit retail due to aggressive markdowns and promotions.
Comparable store sales dipped only 5 percent, but the total excludes individual boutique sales during the weeks in which a location was temporarily closed for four or more days of a week.
Net Earnings: Net loss for the second quarter was $17.2 million, or $5.80 per share, compared net income of $1.8 million, or 61 cents per share, in the prior year quarter.
Operating losses were $12.7 million compared with income from operations of $1.4 million in the prior year quarter.
Gross profit, as a percent of sales, was 17.5 percent, a massive dip from the 38.2 percent margin calculated in the prior-year quarter. This unfavorable variance was driven by a decrease in merchandise margin because of aggressive markdowns and promotions to clear aged merchandise and to drive traffic to boutiques and the e-commerce website.
Francesca’s lease expense declined $1.2 million primarily due to early termination of certain leases triggered by kick-out provisions and Covid-19-related rent abatements received from certain landlords.
CEO’s Take: “During the second quarter, we continued to take measures to optimize sales and monetize inventory through our e-commerce channel as well as our reopened boutiques,” Clarke said in a statement. “As we substantially reduced aged inventory in our boutiques as they reopened, we saw a strong response to new merchandise that reflects her current mind-set of casual comfort as well as our assortment of fashion outfitting.
“We remain encouraged by the growth we are seeing in new customers and have initiated tests in new categories, including loungewear and face masks, as we see the opportunity to benefit from the market disruption,” Clarke continued. “As we continue to navigate through the pandemic, we remain focused on managing costs and liquidity, including the further reduction of non-critical spending and continued negotiations with vendors and landlords on payment terms. We will build on our progress as we continue to leverage our demand driven sourcing model, enhance our omnichannel capabilities and evolve our marketing strategies to optimize engagement with existing customers while broadening our reach to new customers.”
Additional reporting by Jessica Binns.