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Zacks Investment Research downgraded Francesca's Holdings Corp (FRAN - Snapshot Report) to a Zacks Rank #5 (Strong Sell) on Sep 6. Disappointing second quarter fiscal 2013 results and a cut in the fiscal guidance led to the downgrade.

Why the Downgrade?

On Sep 4, Francesca reported dismal second quarter of fiscal 2013 (ending Aug 3, 2013) results. Though earnings of 33 cents per share grew 18% year over year, it missed the Zacks Consensus Estimate by 5.7% and also lagged management’s expectation of 35 cents to 36 cents due to soft sales and weak margins.

Francesca's sales increased 17.0% year over year as growth in the jewelry business was offset by weakness in the gifts category. Sales not only missed the Zacks Consensus Estimate by 4.7% but were also below management’s expectation due to lower-than-expected comparable sales growth (comps).

Comps, including direct-to-consumer (DTC) sales, decreased 1% in the second quarter as against a solid increase of 21% in the prior-year quarter due to lower consumer traffic, lower transactions and a lack of preferred fashions. Excluding direct-to-consumer sales, comps decreased 3% in the current quarter. Comps were also below management’s expectation of an increase of 1% to 2% for the quarter.

Gross margin shrank 150 basis points (bps) to 53.3% due to lower merchandise margins caused by higher promotional spending.

Management believes that the decline in traffic trends will take a toll on the third quarter and will eventually impact fiscal 2013 results. Though the company has taken initiatives to drive the company’s performance, these are expected to reap benefits over the long term. Lower-than- expected sales have also increased the company’s inventory levels. The company thus needs to work on its inventory levels and channelize them properly.

Following sluggish second quarter results, the company reduced its guidance for fiscal 2013. Francesca now expects net sales in the range of $343.0 million to $349.5 million for fiscal 2013 lower than prior expectations of $365.0 million to $370.0 million.

Comps are expected to be flat to down 2% in fiscal 2013, lower than the previous expectation of 4% to 5%. Francesca also slashed its earnings outlook and now expects earnings per share in the range of $1.10 to $1.16 per share compared with the prior range of $1.27 to $1.30 per share.

This specialty retailer witnessed sharp downward estimate revisions after announcing its second quarter fiscal 2013 results. All the estimates declined for the third quarter and fiscal 2013 over the past 7 days. The Zacks Consensus Estimate for the third quarter decreased 33.3% and that for fiscal 2013 went down 13.8% over the last 7 days.

Other Stocks to Consider

Not all stocks are performing as poorly as Francesca’s. Other consumer discretionary sector stocks that are worth considering are Skechers USA Inc (SKX - Analyst Report), Iconix Brand Group Inc. (ICON - Analyst Report) and Brown Shoe Company Inc. (BWS - Snapshot Report). While Skechers holds a Zacks Rank #1 (Strong Buy), Iconix and Brown Shoe hold a Zacks Rank #2 (Buy).

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