Francesca's is on sale, but don't bother

The retail sector is fickle ... and so are momentum investors.

By InvestorPlace Jun 7, 2013 2:42PM

Young woman shopping for clothes in boutique copyright Siri Stafford, Photodisc, Getty ImagesBy Alyssa Oursler


iplogoFrancesca's (FRAN) might offer a chic selection of apparel and jewelry, but its stock's recent movement can only really be described as downright ugly.


The boutique chain posted another high-growth quarter, with net sales improving by 29% and net income jumping 24% year over year. However, revenue growth was less than Wall Street expected, and its full-year forecast didn't win anyone over, either. Francesca's expects sales of $365 million to $370 million and earnings (EPS) of $1.27 to $1.30 per share when all is said and done in 2013 -- below the current consensus of $376.5 million in sales and EPS of $1.32.


The stock fell out of fashion quickly as a result, racking up a loss of 9% by market close.


Great expectations

This is hardly out-of-character for a momentum stock. While your run-of-the-mill retailer would kill for a forecast like Francesca's -- numbers that still translate into revenue and earnings growth north of 20% -- that level of projection has become assumed for the stylish new kid on the block.


And for good reason. In the most recent quarter, Francesca's opened 56 new stores, making for a 16% increase in store count to bring the total above 400. With that in mind, one would hope that the company should grow earnings and sales by … well, at least 16%.


It did, of course. But margins slipped by 70 basis points, same-store sales were unimpressive at 2% and, once again, the forecast was subpar.


Bargain hunting

In the case of most momentum stocks, the bar is set high because investors have already bid the price up significantly in anticipation of eye-popping growth; any slowdown thus erases the justification for such a premium.


In the case of FRAN, though, high expectations really hadn't fluffed up the stock price much.

The lower end of the company's not-good-enough, full-year earnings range would have given FRAN a forward P/E of 25 … before the selloff. Longer-term, that's right in line with its expected five-year annualized growth. Now, the stock is only trading for a price 17 times the low end of its expected earnings, and at a price/earnings-to-growth ratio of 0.89.


Meanwhile, the median analyst target for Francesca's sits at $38. Before the earnings massacre, that gave FRAN implied upside of 20%. Now? An implied upside of 40% (pending any downgrades, of course).


Retail = Risk

Of course, looking at a growth stock like FRAN through the eye of a value investor is folly. With momentum plays, investor sentiment is often more important than the actual numbers. Plus, especially when it comes to Francesca's, the numbers don’t tell the full story.


Besides the usual caution that what's in one day is out the next in the fashion world, my main concern with the chain is that expansion actually could dull FRAN's edge.


See, when I first wandered into one of the boutiques, I had no idea it was a chain, much less a publicly traded company. And that's why I loved it.


As I wrote before (Investor Place), though, that novelty could wear off after the mass expansion Francesca's has planned: a grand total of 900 stores -- almost triple the number it had when the company went public, and in the range of cookie-cutter retail stops like American Eagle (AEO) and Aéropostale (ARO).


Judging by FRAN's same-store sales -- 2% in the most recent quarter and forecast of just 1% to 2% in the current quarter -- it might already be happening ... and we're only halfway there.


The bottom line

If you still are compelled to play a short-term bounce-back, go for it. FRAN indeed looks undervalued at current levels. Plus, with over 42% of the float sold short, the retailer could be ripe for a short squeeze if the trajectory indeed changes.


But beware: Francesca's still faces headwinds in both the near- and long-term. Retail is fickle, FRAN's boutiques might soon lose their boutique feel, and investor expectations clearly remain sky-high.


Francesca's could be a bumpy ride for quite a while.


As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.


More from InvestorPlace

MSN Money on Twitter and Facebook

Like us on Facebook: MSN Money and Top Stocks

Follow us on Twitter: @msn_money and @topstocksmsn

 

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

114
114 rated 1
278
278 rated 2
474
474 rated 3
641
641 rated 4
639
639 rated 5
663
663 rated 6
640
640 rated 7
499
499 rated 8
284
284 rated 9
122
122 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
COPCONOCOPHILLIPS9
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
KOGKODIAK OIL & GAS Corp9
CVXCHEVRON CORPORATION8
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.