Wednesday, January 17, 2018

Francesca's HODL'INGS

I can't help myself when it comes to train-wreck stocks. Francesca's has gotten smoked over pretty much any time period you can think of. It's down 78% from its IPO price many years ago, 79% from its price five years ago, 68% over the last year, and 41% over the last six months. It's safe to say that there are no momentum investors excited about this one.

The company is normally very profitable, but has had a terrible year, expecting to make only $18M in profit this year; its market cap is $215M, with no debt and cash of $19M.

FRAN's 4th quarter same-store sales were down 16%, so clearly there are problems. But the market may be overreacting, as the company is still profitable and has a balance sheet that can allow it to last a few years. They've got the time to fix their merchandising issues, though there is no guarantee they can actually do it.

Operating leases are only about 5 years long, so they have additional leeway by closing underperforming stores and right-sizing the business.

In 2018, their tax rate has gone down substantially. However, it remains to be seen whether this reduction in dues will just be competed away and end up benefiting the consumer rather than the retailer.

FRAN also has room to cut capex and stop opening new stores if present market conditions persist. This will help with free cash flow, and management has not been shy about buying back shares in the past. Management has been buying shares for themselves in the open market as of late; for example, last week the company's CEO dropped more than $50K to pick up a few shares.

Overall, FRAN looks to me to be very undervalued with a strong operating history and good management, that operates in a risky industry.

I know I should be staying away from retail. My list of failed investments is littered with retailers. But I also have a few winners. Seeing as how I can't stay away, nor should I if the odds are in my favour, for the most part I keep "basket" positions only. I don't want to lose too much in a single company, but I do want to benefit from exposure to some of the most hated names in the market. FRAN falls into that category.

Disclosure: Author has a long position in FRAN


Franck des daubasses said...

A basket approach is always a good way to buy a lot of discount with less risk!

Olivier Bernard said...

Seems to me all of the growth came from new store openings. Declining comps clearly shows competition is taking its toll and I don't see much of a competitive edge that could improve overall margins. You'll probably make money on the trade but clearly a value trap. What is your process for avoiding value traps in deep value situations?