Francesca’s Holdings Corporation Target Price $35

FRAN : NASDAQ : US$18.08
BUY 
Target: US$35.00

COMPANY DESCRIPTION:
Francesca’s Holdings Corporation is the holding company for specialty retailer Francesca’s Collections. Through a national chain of around 440 retail boutiques and an e-commerce web site, Francesca’s sells apparel, jewelry, accessories, and gift items with an assortment tailored to its core 18-35 year-old, fashion-conscious female customer.
All amounts in US$

 

GROWTH THESIS REMAINS INTACT
Investment recommendation
On September 4, FRAN reported Q2 results that fell below expectations as traffic weakened and greater promotional levels persisted. Since that time, the stock has declined 25%, compared with the S&P 500 index +2%, the RLX index +4%, and the specialty apparel peer group +2%. We consider this an overreaction for a company we forecast will grow sales and EPS at compounded annual rates of 15% and 17%, respectively, over the next five years. Traffic has remained soft, which does cloud the H2 picture, but we think this is priced in following the stock’s recent move. Over the long haul, we believe FRAN will continue to generate one of the highest EBIT margins (in the mid-20% range) and returns (TTM ROIC of 29%) in the specialty retail group. We do not think this is fully reflected with shares trading at 12x our C2014 EPS estimate and 7x C2014E EV/EBITDA.
Investment highlights
 We expect square footage to increase at a five-year CAGR of 18%. This is the highest rate of growth among all the retailers we cover and is three times the group’s average.
 Shares trade at a discount to specialty apparel peers despite top growth prospects. FRAN trades at a sizable discount to the group’s average C2014E P/E of 17x and C2014E EV/EBITDA of 8x, while our sales and EPS growth projections are more than double the mean.

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