Francesca's Holdings: A Strong Buy

A solid year-to-date return of 82.8%, strong second-quarter fiscal 2012 results and rising estimates aided Francesca's Holdings Corporation ( FRAN - Snapshot Report ) to attain a Zacks #1 Rank (Strong Buy) on September 6, 2012. This operator of a chain of retail boutiques has outperformed the Zacks Consensus Estimate for the third consecutive quarter. Looking at the earnings surprise history of the last three quarters, the company has topped the Zacks Consensus Estimates by an average of 13.2%.

The Rank Drivers

A combination of an effective merchandising strategy, strong results and an upbeat outlook are the rank drivers for this stock.

Francesca's Holdings reported second-quarter fiscal 2012 earnings of 28 cents per share on September 4 that surpassed the Zacks Consensus Estimate of 24 cents by 16.7%, and year-ago earnings of 15 cents by 86.7%.

Net sales of $76.4 million recorded a modest upside from the Zacks Consensus Estimate of $71 million and spiked 49.1% from $51.2 million a year ago on the back of a 20.7% increase in comparable boutique sales. Operating income grew 65.7% to $20.9 million, whereas operating margin expanded 274 basis points to 27.4%, reflecting selling, general and administrative expense leverage as well as gross margin improvement of 205 basis points to 54.8%.

Buoyed by a robust performance, Francesca's projected its third quarter net sales in the range of $70.5 million to $71.5 million. Comparable boutique sales are expected to increase in the low-double-digit range and the company plans to open 2 new boutiques. Earnings per share are expected between 21 cents and 22 cents in the third quarter.

For fiscal 2012, Francesca’s now envisions net sales between $290 million and $292 million and earnings per share in the band of 96 cents to 98 cents. Management forecasts low-double-digit comparable boutique sales to increase and plans to open 76 new boutiques and an outlet boutique during the fiscal year. Earlier, management had guided sales between $280 million and $283 million, and earnings per share in the range of 89 cents to 91 cents. Looking ahead, the company believes that there still exists room to increase its boutique count to 900 from 357 locations in 44 states as of July 28, 2012.

Soaring Earnings Momentum

The Zacks Consensus Estimate for fiscal 2012 rose 8.9% to 98 cents per share in the past 60 days, implying a year-over-year growth of 77.6%, and in sync with the upper-end of the guidance range.

For fiscal 2013, the Zacks Consensus Estimate jumped 7.2% to $1.19 per share, suggesting a year-over-year growth of 21.8%.

Premium Valuation

Francesca’s currently trades at a forward P/E of 31.53x, reflecting an 87.9% premium to the peer group average of 16.78x. Also, on a price-to-book basis, the shares trade at 31.56x, a substantial premium to the peer group average of 0.91x. Given the company's strong fundamentals, the premium valuation is justified, and is well reflected through long-term earnings growth projection of 27.5%. With respect to return on equity (ROE), the stock looks very attractive. It has a trailing 12-month ROE of 145.4%, which is substantially above its peer group average of 15.6%. This implies that the company reinvests its earnings more efficiently than its peer group.

Company Description

Founded in 1999 and headquartered in Houston, Texas, Francesca’s Holdings Corporation operates a chain of retail boutiques under the Francesca’s collections brand in the United States. It is a holding company and operates through its subsidiary, Francesca’s Collections Inc. The company targets female customers and offers a diverse and uniquely balanced mix of high-quality, trend-right apparel, jewelry, accessories and gifts at attractive prices. Francesca’s Holdings, which competes with Urban Outfitters Inc. ( URBN - Analyst Report ) and ANN Inc. ( ANN - Snapshot Report ) , has a market cap of $1.35 billion.