Summary

  • Francesca’s Holdings Corp (NASDAQ:FRAN) revenue and price have a negative correlation over the last 5-year period.
  • Despite sustained top line growth, FRAN management has failed to improve their net income in the recent years.
  • FRAN’s Q4 2016 guidance update has already priced in and there is not much upside potential for the stock price.
  • FRAN has a mean price target of $17.75 and currently the stock is trading at $18.75, which indicates it is trading in overbought territory.

Introduction

It seems the 2016 holiday season was kind to the apparel retailers, including Francesca’s.

During the latest Q4 2016 guidance update, the current President and Chief Executive Officer of the company, Steve Lawrence sounded delighted to announce that the holiday performance was “solid.” He also again confirmed the revenue for the quarter would reflect “a strong response” to their “merchandise offering as well as a disciplined and effective promotional strategy.”

Given the strong bullishness in the last two-quarters, the continuing revenue growth has certainly attracted additional bullish momentum in the market.

However, we believe despite long-term optimism about the top line growth, the stock price has already priced in the latest guidance update and moved to an overbought territory. We recommend that secondary investors take caution in increasing their exposure to Francesca’s in the short term.

Takeaway from Latest Q4 2016 Guidance Update

Since Francesca’s updated their Q4 2016 sales guidance on January 9, 2017, their stock price has jumped from around $15.5 per share, and currently trading at $18.75 per share, which represents a 20.97% increase over the last weekend.

The guidance update mentioned that the sales estimate is now around $143 to $148 million. It effectively means that compared to prior guidance of $144 to $146 million; the sales would likely to either decrease by around 1% or increase by 1% in comparable sales.

If the actual sales figure matches the lower guidance estimate of $143 million, compared to Q3 2016’s $119.47 million sales, it will represent a 19.7% increase. However, compared to the $134.6 million sales in Q4 2015, it would only represent a 6.24% increase.

Revenue and Stock Price Correlation

01_rev_price

Figure 1: Francesca’s Stock Price Had a Strong Correlation to Its Quarterly Revenue Last Year

If we take a closer look at figure 1, we can see that Francesca’s stock price has a strong correlation to its quarterly revenue. As the quarterly revenue continued to go down in the first two-quarters of 2016, so did the stock price, which at one point traded below $11 per share at the end of Q2 2016. However, as soon as the revenue started to move up, the stock also rebounded and ended up increasing over 100% by the end of 2016.

02_rev_price_long-term

Figure 2: Over the Last 5-Year Period, Francesca’s Revenue and Stock Price Had a Negative Correlation

However, over the last 5- year period, Francesca’s stock price and quarterly revenue have a negative correlation, as seen in figure 2. Since Q1 2013, Francesca’s stock price gradually went down despite continuous revenue growth.

03_ebitda

Figure 3: Over the Last 5-Year Period, Francesca’s Stock Price is Highly Correlated to Its Quarterly EBITDA

The primary reason behind this long-term negative correlation between price and revenue is the fluctuating bottom line of the company. If fact, the EBITDA chart of Francesca’s closely matches its stock price fluctuation over the last 5-year period.

04_revenue_vs_net_income

Figure 4: Despite Increasing Top Line, Francesca’s Net Income Remained Flat

Furthermore, the management of Francesca’s had focused on growth instead of trying to increase the net income of the company. As we can see in figure 4, despite the continued quarterly revenue growth over the last 5-year period, their net profit remained flat around $10 million per quarter.

Conclusion

Even if Francesca’s Q4 2016 revenue beats the current guidance of $143 to $148 million, we do not see any reason to believe their net income would start to improve in the short-term. So far, the management has failed to communicate to the shareholders about any strategy to increase the bottom line of the company.

According to 4-traders, Francesca’s has a mean price target of $17.75 per share, which means the stock is currently trading much higher than its estimated price target.

Hence, we strongly recommend that secondary investors consider scaling out of their long positions and reconsider any plans to increase their exposure at the current price level as there is not much upside potential in the short term.