Francesca’s Q1 Profit Down 21% on Higher Expenses, Lower Margins

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The much anticipated Project Runway: Under the Gunn Capsule Collection by Oscar Garcia-Lopez is now at Francesca's.

The much anticipated Project Runway: Under the Gunn Capsule Collection by Oscar Garcia-Lopez is now at Francesca’s.

Houston—Francesca’s Holdings Corp. reported Tuesday a decline in its first quarter profit, hurt by higher expenses and weakened gross margins.

For the period ended May 3, Francesca’s reported a profit of $8.6 million, or 20 cents a share, down from $10.9 million, or 24 cents a share, a year earlier. That missed analysts’ average estimate for 22 cents a share.

New Boutiques ‘Strong’

Net sales were up 8% to $85.4 million, driven by 62 new boutique openings. However, analysts expected $88 million in sales.

Gross margin narrowed to 49% from 52.4% as elevated levels of markdowns and clearance sales hurt merchandise margins. Overhead costs rose 19%.

“Total sales growth of 8% to $85.4 million was driven by the strength of our new and non-comparable boutique sales and direct-to-consumer initiatives, contributing to incremental year over year growth of 16%,” noted Neill P. Davis, president/ceo. “Our new boutiques continue to open strong and are meeting our expectations of payback periods of less than one year. Declining sales within our comparable boutiques partially offset these gains and were a reflection of decreases in boutique transactions, which has limited the effectiveness of our merchandise clearance strategies through existing channels.”

By category, apparel merchandise sales increased by 12% with increases in fashion tops and separates offsetting weakness in the dress category. Total non-apparel merchandise sales increased 5% with notable weakness in jewelry offset by increases in accessories and gift.

“Our boutique sales were impacted by severe winter weather conditions during February causing over 360 full and partial day boutique closings throughout a large number of Southern, Northeast, and Central geographic regions, particularly in the Gulf Coast, Mid-Atlantic, Northeast, and New England areas,” Davis said.

Comparable store sales, which include direct-to-consumer sales, decreased 7% versus the prior year quarter, driven by a 7% decrease in transactions partially offset by an increase in direct-to-consumer sales of 84% versus the prior year quarter.

Francesca’s lowered its per share earnings estimate for the fiscal year to $1.05 to $1.17 on net sales of $387 million to $399 million, from its previous estimate of $1.16 to $1.31 and net sales of $391 million to $409 million.

For the second quarter, Francesca’s forecast earnings of 24 cents to 29 cents a share and net sales of $98 million to $103 million.

‘Slow Moving Inventory’

Analysts forecast per-share profit of 36 cents and revenue of $104 million.

“Our second quarter guidance reflect May sales trends and our plans to dispose of sufficient amount of slow moving inventory which has been built up due to the negative impact of various macro conditions on our planned sales levels in the apparel and jewelry categories,” David noted. “Our customer loves newness and our plans to dispose of slow moving inventory are targeted to accelerate the flow of new merchandise into our boutiques. We are focused on delivering improved results through the back half of 2014 driven by disciplined inventory management, meeting customer expectations, as well as ongoing customer engagement initiatives.”

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