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Impressive third quarter results, positive earnings surprises in the last 4 quarters with an average beat of 12.2% and upward rising estimates helped Francesca's Holdings Corporation (FRAN - Snapshot Report) to attain a Zacks #1 Rank (Strong Buy) on December 7, 2012.

Moreover, shares of this operator of a chain of retail boutiques have generated a solid year-to-date return of 48.3%, offering an attractive investment opportunity.

The Rank Drivers

Better-than-expected third quarter earnings, earnings momentum and an upbeat outlook – are the primary rank drivers for this stock.

Francesca's Holdings reported third-quarter earnings of 24 cents a share surpassing the Zacks Consensus Estimate by a couple of cents or 9.1% and more than doubled from the prior-year quarter earnings of 11 cents. Net sales came in at $72 million, up 44% year over year and exceeded the Zacks Consensus Estimate of $71 million.  Comparable boutique sales improved 16.7%.

Operating income jumped 120.4% to $17.7 million. Operating margin expanded 855 basis points to 24.6%, reflecting selling, general and administrative expense leverage as well as gross margin improvement of 96 basis points to 52.6%.

The company now expects fourth quarter net sales between $82.5 million – $83.5 million, while comparable boutique sales are expected to increase in the mid-single digits. Earnings per share are expected to be in the range of 27 cents – 28 cents.

For fiscal 2012, Francesca's expects net sales between $292.2 million – $293.2 million with earnings per share of $1.00 to $1.01. Earlier, management had guided sales between $290 million – $292 million, and earnings per share of 96 cents – 98 cents. Management now forecasts a low-double-digit increase in comparable boutique sales and plans to open 76 new boutiques and an outlet boutique during the fiscal year.

Rising Estimate Revisions

The Zacks Consensus Estimate for fiscal 2012 increased 3.1% to $1.01 per share in the past 30 days, as 12 out of 14 estimates were revised higher. The current projection implies an estimated year-over-year growth of 83.1%.

Moreover, the estimate revision trends remain approximately the same for fiscal 2013 as 10 out of 14 estimates were revised in the upward direction, thus lifting the Zacks Consensus Estimate by 4.2% to $1.25 per share. The current estimate suggests year-over-year growth of 23.6%.

Premium Valuation

Francesca’s currently trades at a forward P/E of 25.4x, reflecting a 67.1% premium to the peer group average of 15.2x. Also, on a price-to-book basis, the shares trade at 20.1x, a substantial premium to the peer group average of 1.0x. Given the company's strong fundamentals, the premium valuation is justified, and well reflected through long-term earnings growth projection of 27.5%. Moreover, with respect to return on equity (ROE), the stock looks attractive. It has a trailing 12-month ROE of 113.9%, which is significantly above its peer group average of 12.2%. 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 $1.10 billion.

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