Francesca’s Holdings Locks In #7 In 9 – Francesca’s Holdings Corporation (NASDAQ:FRAN)

My investment thesis on Francesca’s Holdings (FRAN), the troubled and struggling “boutique-like” retailer, remains one of skepticism – which means my money will continue to be invested elsewhere.

After twelve months without a permanent CEO, the retailer, targeting a niche demographic of fashion-conscious, college-educated women between the ages of 18 and 35 with moderate to high disposable income, finally announced its choice of Andrew Clarke on February 13th. But, I question whether there’s enough experience gained, enough meat on the bone, to guide the retailer through survival and recovery.

Yet Another CEO

Source

Mr. Clarke will be the seventh person to fill the position, on a permanent or interim basis, in less than nine years. On January 31, 2019, Steve Lawrence, the boutique-like retailer’s fifth CEO in seven years, immediately “resigned”. The retailer saw moderate geographic growth under Mr. Lawrence, growing from 663 “boutiques” to 738. It also experienced its worst track record for comparable store sales declines on his watch.

Francesca's Holdings CSS Under LawrenceSource: Author-created from company data

As well, despite the store count growth and an improved e-commerce contribution, total revenue actually started to decline year-over-year under his leadership.

Francesca's Holdings Revenue Under LawrenceSource: Author-created from company data

Francesca’s immediately engaged Michael Prendergast, a Senior Director in Alvarez & Marsal’s Private Equity Performance Improvement Retail practice, as interim CEO to take over on February 1, 2019. With Mr. Prendergast engaged, the company also announced it was exploring strategic alternatives. Clearly, decisions were being made well before January 31. The retailer immediately closed its earnings calls to questions.

Six months later, in August 2019, the company declared its review of strategic alternatives completed when it obtained a new term loan.

Following a thorough review process, the board of directors has concluded that the Company will best serve the interests of its stockholders at this time by focusing on the continued execution of its turnaround plan.

In September 2019, Francesca’s finally admitted its Board may be part of the problem, though in a questionable fashion. The Board announced it may need to expand.

As francesca’s® continues to execute its strategy to rebuild value for our stockholders, we believe exploring the possibility of adding to our Board of Directors to enhance the Board’s overall skillset may be beneficial. At the same time, we intend to adhere to our governance processes as we explore bringing the appropriate new talent and skills to the Board.

That may well have been the understatement of the decade considering, in my opinion, the existing Board would have to take credit for the revolving door on the CEO office which partially led to the demise of the retailer. It seems obvious the Board had a need for different or additional talents and/or skills. But, expansion would require additional expense. It seems a better question would be why Board members are not being replaced to obtain different or additional talents and/or skills.

The retailer shared its decision to finally search for a permanent CEO in December 2019.

The Board of Directors has hired an executive search firm to initiate a formal search for a permanent Chief Executive Officer.

Perhaps it was a logical order to to recruit a permanent CEO only after the exploration of strategic alternatives was completed. Still, a lot of valuable experience – identifying and addressing problems and defining solutions – will have been lost for Mr. Clarke in the thirteen months between Mr. Lawrence’s departure and his start date. This loss of knowledge could put the company at risk of slipping back into disarray. After all, it has happened to the retailer more than once as the door to the CEO office revolved.

Date

CEO

President

Year beginning 2012

John De Meritt

Non-existent position

08/01/12

John De Meritt

Neill Davis

01/01/13

Neill Davis

Theresa Backes

01/27/14

Neill Davis

Neill Davis

12/05/14

Michael Barnes

Michael Barnes

05/17/16

Richard Kunes (interim)

Richard Kunes (interim)

09/20/16

Steven Lawrence

Steven Lawrence

02/01/19

Michael Prendergast (interim)

03/09/20

Andrew Clarke

Andrew Clarke

A View of Andrew Clarke

Some may question who would be willing to step into the central leadership role at Francesca’s. Others would hope Mr. Prendergast has righted the ship.

Mr. Clarke comes to Francesca’s from another troubled retailer – but, actually, apparently, not directly. His last executive-level position was at the beaten-down ascena retail group (ASNA)

In August 2018, ascena announced Mr. Clarke as President of its LOFT brand. Prior to this appointment, since August 2017, he had been EVP and CMO (Chief Merchandising Officer) for the group’s Justice brand. In the August announcement, ascena also appointed Julie Rosen as the President of its Ann Taylor and Lou & Grey brands. Yet, according to the company’s website, Ms. Rosen took over the LOFT brand in June 2019.

Source

According to his LinkedIn profile, Mr. Clarke became an investor in and advisory board member to GLOWE in August 2019. Before joining the ascena retail group, Mr. Clarke was the President of Kmart Apparel for Sears Holdings Corporation for almost three years. Frankly, even allowing for a turbulent retail environment, his career path appears to be spinning as quickly as the revolving door on Francesca’s CEO office.

To his credit, there are some tidbits in his career that may be applicable at Francesca’s. While he was CMO of Justice in fiscal 2018 (ending August 4, 2018), the brand posted positive comparable store sales of 7% and was the group’s only brand to post positive CSS. The improvement was driven by a redesign of the merchandising process which allowed product teams to “respond faster to fashion trends” – an ongoing challenge and stated goal of Francesca’s. In January 2019, Mr. Clarke was one of ten finalists for the 2019 Radicals Award sponsored by The Robin Report. The recognition was based on changes instituted while he was CMO of Justice in 2018. The finalists were selected because they were considered “innovators within the legacy world who are driving fundamental transformation”.

Their challenges are enormously more complex in attempting to turn “battleships” into “speedboats”.

The report credited Mr. Clarke with “uncovering a new way of retailing”.

In the year Mr. Clarke was President of the LOFT brand (fiscal 2019 ending August 3, 2019), the brand posted positive comparable store sales of 6% and outperformed the group’s remaining brands. During his tenure in May 2019, the brand launched a rental subscription service dubbed Infinitely LOFT. The service allows members to rent three garments at a time and allows unlimited swaps. It also offers members the option to buy rented pieces at discount rates. The service was an offshoot of the brand’s collaboration with Gwynnie Bee. In the fall of 2017, the two partnered to offer an exclusive LOFT collection to Gwynnie Bee subscribers.

Comparatively and in fairness, there are also some tidbits that could be disconcerting for Francesca’s shareholders and consumers. On his LinkedIn page, Mr. Clarke states an achievement with the Justice brand was driving average selling prices higher. This subject has certainly been a recurring theme for prior CEOs of Francesca’s. The AUR (average unit retail) on apparel certainly climbed on Steve Lawrence’s watch. In the 2015 fourth quarter earnings call, then-CEO Mr. Barnes noted a $44 to $48 ticket price was on the higher end of the retailer’s AUR (average unit retail).

If you look at some of our best-selling merchandise, our dress category is generally $44 and $48 on its own. And, that certainly tends to be higher up in the AUR category. (emphasis added)

Under Lawrence, in 2017 and 2018, that “higher end” range became the norm. Then, under interim CEO Michael Prendergast in 2019, the AUR was purposely lowered. On the 2019 first quarter earnings call, the retailer validated its intent.

The product was offered at more historically appropriate price tickets in the $38 to $44 retail range and the sell-throughs were amazing. (emphasis added)

Hopefully, Francesca’s shoppers won’t be subjected to yet another ticket price test.

Mr. Clarke may desire to change the definition of a Francesca’s shopper as well. During his tenure leading Justice, a brand aimed at tween girls, he promoted inclusivity and won the attention of Ohio’s Prizmnews.

I get letters all the time from moms thanking me for the opportunity for their son to wear our clothes or for their daughter to feel good in a plus-sized outfit. That spirit of inclusivity motivates me every day.

Now He Faces

Mr. Clarke should have his hands full when he assumes the leadership role, even without worrying about selling prices. As of its last reporting, the retailer had purposely built inventory, owed an atypical debt obligation and not yet met its cost savings target identified by Mr. Prendergast.

Prior to the holiday season, Francesca’s decided to build inventory.

With sales trends now performing in line or above inventory levels, we identified key categories that we chose to accelerate inventory receipts to benefit our sales. Based on our data analytics, we reacted to customer demand to supply appropriate inventory levels at the right time for holiday. The teams worked diligently with our vendor base to accelerate inventory shipments and shorten distribution time in preparation for the fourth quarter.

Based strictly on Francesca’s balance sheet, the inventory level increased 19%, by $7.6 million compared to 2018 and by $17 million compared to the second quarter. This was the greatest inventory level at the end of a third quarter the retailer has had this decade.

Francesca’s has routinely operated debt-free for years. But, the retailer’s debt obligation did increase to $18.9 million at the end of the third quarter. This was the first third quarter since 2013 where Francesca’s had a debt obligation on its books. The funds were borrowed under the retailer’s term loan established in August 2019 with an interest rate equal to LIBOR + 8% relevant to the loan period but not less than 10%.

In the 2018 year-end earnings call, interim CEO Mr. Prendergast shared $15 million (before costs) in savings could be gleaned from SG&A expenses.

The first of the initiatives we implemented began in mid-February with the rightsizing of our expense structure and optimizing boutique labor. We have identified and believe we will realize almost $15 million in expense savings before costs associated with those savings during 2019, and we will continue to look for more.

At the end of the third quarter, the retailer had reported some success.

We are on track to achieve corporate expense savings of $8 million and store-level expense savings of $7 million on an annualized basis. (emphasis added)

In the third quarter, SG&A expenses were only $1.89 million less compared to the same quarter in 2018. In the first three quarters, SG&A expenses at $40.4 million total $8.97 million less than the first three quarters of fiscal 2018. Shareholders are likely to expect Mr. Clarke to continue to ride herd on costs to meet the target on an annualized basis.

The Takeaway

The market typically grants a new CEO a grace period – time to learn, adjust and design a plan. Yet, with brick-and-mortar retail strangled, it could prove difficult to give Mr. Clarke much time.

Reported by Forbes and according to a UBS (UBS) analysis, the United States will lose 8,000 to 8,500 retail locations with each 1% increase in e-commerce through 2026. Online retail is predicted to grow from 16% to 25% in that time frame. That equates to approximately 75,000 store closings. It is believed clothing stores, at 21,000, will comprise nearly 30% of the total. That equates to 1 in every 4 clothing stores now open.

Optimistic shareholders will want to believe Mr. Clarke only need follow Mr. Prendergast’s plan. But, leaders tend to want to lead. So, it’s hard to believe Mr. Clarke will simply follow another’s guidance unquestioningly. Furthermore, those Board changes have yet to transpire.

In general, I suspect Francesca’s will be subjected to yet another period of “being fixed”. Therefore, I continue to be skeptical about the retailer’s odds of success.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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