Solid 1Q Ups Francesca's Price

Retail boutique company Francesca's Holdings Corporation ( FRAN - Snapshot Report ) reported robust fiscal first- quarter 2012 earnings per share of 20 cents, beating the Zacks Consensus Estimate by 11.1%. Quarterly earnings exactly doubled last year’s 10 cents per share. Since the release of the results, the shares of the company have surged nearly 28.7%.

Quarter in Detail

Net sales spiked 48.6% year over year to $61.3 million, while it recorded a modest upside from the Zacks Consensus Estimate of $60 million. Sales improvement was largely driven by a 15.5% increase in comparable boutique sales in the first quarter of 2012, against a 14.7% rise in the year-ago quarter.

During the quarter, the company’s gross margin was up 70 basis points to 53.1% from 52.4% in the year-ago period, mainly due to leveraging occupancy costs. Operating income grew 74.1% to $14.7 million, whereas operating margin expanded 350 basis points to 23.9% on account of selling, general and administrative expense leverage as well as gross margin expansion.

Financials

Francesca's ended the first quarter with cash and cash equivalents of $8.2 million. Inventories rose 32.5% year over year to $17.9 million at quarter end driven by a rise in the boutique base to 327 compared with 249 in the year-ago quarter. The company displayed effective inventory management in the quarter with sales growth of 48.6% exceeding inventory growth of 32.5%.

In the reported quarter, the company used a portion of its cash flows to reduce borrowings under its revolving credit facility by $10.0 million to $12.0 million. Moreover, the company repaid another $3.0 million toward its borrowings at the start of the second quarter bringing borrowings down to $9.0 million. As of April 28, 2012, the company had a total of $53.0 million available under its revolving credit facility.

Looking Ahead

Buoyed by a strong fiscal first-quarter performance, Francesca's guided its second-quarter net sales in the range of $69.0 - $71.0 million. Comparable boutique sales are expected to increase in the low-double-digit range, as it plans to open 29 new boutiques. Earnings per share are expected to be in the range of 22 cents – 23 cents in the second quarter.

For the full year, Francesca’s guided sales between $280 million and $283 million, adjusted earnings per share at 89 cents to 91 cents, and comparable boutique sales in the high single digits. The company plans to open about 75 new boutiques and an outlet boutique through the end of fiscal 2012.

Looking ahead, the company expects to take its current boutique base from 327 locations in 43 states as of April 28, 2012 to about 900 boutiques in the United States over time.

Our View

Houston, Texas-based Francesca's is benefiting from a differentiated boutique set up, assorted and sophisticated merchandise offerings, a positive earnings surprise trend and a strong outlook. Francesca's differentiated business model has helped it to outperform from the beginning of 2012. The success of the company’s boutique format lies in its highly effective broad and shallow merchandising strategy that enables it to cater to the changing customer preferences.

Francesca's competes with the likes of Urban Outfitters Inc. ( URBN - Analyst Report ) and ANN Inc. ( ANN - Snapshot Report ) . Currently, the company has a Zacks #1 Rank that indicates a short term “Strong Buy” rating.