The Next Hot Growth Story
A few months ago, I was racing through the mall -- Short Pump Town Center in Richmond, Va., for those of you following along at home -- in search of a casual dress. With little time to spare, I ducked into a funky-looking boutique with a great window display. Lo and behold, I found just the sort of thing I'm always searching for. Not a dress, but a promising small-cap company: Francesca's Holdings (NAS: FRAN) .
This same class-A mall features The Buckle (NYS: BKE) and lululemon athletica (NAS: LULU) stores, other small-cap retailing success stories that have earned impressive returns for investors. Buckle stock, for instance, has returned over 3,500% since its May 1992 IPO, and Lululemon stock has returned nearly 400% since its July 2007 IPO. For Peter Lynch-style investors like you and me, the question is obvious: Could Francesca's Holdings be next?
Growth plans and an awesome Q2
The chain boasts incredible unit-level economics. It costs less than $200,000 to open and stock a new Francesca's Collections store, and the stores earn, on average, pre-tax returns of 150% in the first year. The company's store-level returns are even better than those of Chipotle, Lumber Liquidators and Ulta Salon (NAS: ULTA) -- that is, some of the most impressive operators in the retail/restaurant sector.
Right now, Francesca's operates just under 400 stores in 43 states, with the greatest number in California and in Francesca's home state of Texas. Management has said it plans to open about 75 new stores each year, with the goal of an eventual 900. It's a plan that has deep appeal for consumers -- hungry for Francesca's mix of reasonably priced and mildly bohemian accessories, clothes, and shoes -- as well as for investors. Last quarter, Francesca's overall sales rose 49% and same-store sales were up 20%. That's 13 consecutive quarters of same-store sales growth. Plus, earnings per share grew 87% over the previous year, and gross margins were up 205 basis points.
Management changing hands
Still, the stock dipped almost 20% on the news. That's likely because CEO John De Meritt announced his plans to step down. On the conference call, De Merritt said, "I have enjoyed building a great company and it was important for me to lead the organization to a point where I felt comfortable transitioning the leadership to others. I had a number of goals that I felt needed to be accomplished for that to happen and I feel confident that those goals have been achieved."
There's no reason for panic, however. The management team stepping in to replace De Meritt has been working alongside him for five years, and both the new CEO, Neill Davis, and the new president, Theresa Backes, have deep retail experience. Davis, for his part, appears bullish on the company's prospects; on Sept. 7, he purchased 25,000 shares at $28.37.
"I believe that exploiting our core competitive competencies that are inherent in our merchandising and real estate strategies, as well as selectively further leveraging the Francesca's brand, will drive our strategy in the near term," said Davis during the call. "I also believe there is tremendous market share to be gained in the digital sales channel. Our volume of business in the digital channel, while approximately less than 2% penetrated today, is growing at a three-year compounded annual growth rate of 60%. Achieving penetration rates in excess of 10% are in my forward view."
Even more good news: Management also announced plans to make the company debt free by paying off the remaining $2 million balance on its revolving credit facility during the third quarter.
At 30 times forward earnings, Francesca's shares don't look cheap. Yet the company's future prospects appear very bright indeed. With Mr. Market punishing growth stocks left and right on the basis of real or perceived misses, it's not difficult to imagine a brief moment when the music stops and savvy investors have the chance to get in on this promising retail stock at a better price. Be sure to put Francesca's Holdings on your watchlist. And if you're currently seeking a more time-tested retail model, look no further than The Motley Fool's Top Stock for 2012. The report outlines the reasons this stock is set to outperform in fast-growing markets. Download your copy today.
The article The Next Hot Growth Story originally appeared on Fool.com.Catherine Baab-Muguira has no interest in any of the companies mentioned here. The Motley Fool owns shares of Chipotle Mexican Grill, lululemon athletica, and Lumber Liquidators Holdings.Motley Fool newsletter serviceshave recommended buying shares of The Buckle, Lumber Liquidators Holdings, lululemon athletica, Chipotle Mexican Grill, and Ulta Salon. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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