Francesca's to focus on expanding, keeping inventories lean

Under new CEO Michael Barnes, Francesca's is shedding excess inventory, trying to bring in more trendy apparel and looking to increase its presence online and in outlet stores.

The Houston-based retailer of women's clothes and accessories expects to expand its number of stores this year to 539, Barnes said during a call with investors Wednesday, even after a drop in net income in its final quarter of 2014, hoping efficiencies will bring up profits.

"We will begin investing in our warehouse and supply chain systems during the year to improve efficiencies and flow of inventory while making improvements in our data analytics capabilities in order to gain greater insight into our sales performance," Barnes said.

Sales grew 17 percent to $107.6 million from the fourth quarter of 2013, but that success was due to the opening of 88 new boutiques in the past year, and helped little by comparable-store sales, typically defined as sales from stores open one year earlier. Comparable-store sales were up 1 percent for the quarter but down 5 percent for the year.

Net income for the fourth quarter that ran through January was $5.97 million, down from $10.61 million in the same period last year. Diluted earnings per share were 14 cents in the fourth quarter, compared with 25 cents last year. Net income was hit by $2.2 million in charges related to the CEO transition.

The company plans to open another 85 stores this year and at least double its outlet locations to 32 from 16. It will also close some stores, Barnes said.

"The new boutiques provide compelling return on investment quickly," Barnes said during the call.

He said outlets are a good opportunity for clearing extra inventory and increasing sales. In the future the company will likely have made-for-outlet lines in addition to clearance items at outlets, he said.

Francesca's will also look to expand direct-to-consumer sales, mostly online sales, after 64 percent growth in the last year. Online sales still make up only about 4 percent of sales, the company said. Similar retailers get an average of about 13 percent of their sales from online, said Betty Chen, an analyst with Mizuho Securities.

Chen said she sees the move to continue adding stores as perplexing when most retailers are looking to cut back their square footage while they increase online sales. She said the company is standing by its long-term goal of 900 stores.

Nomura Securities analyst Simeon Siegel said this is actually slightly slower growth, in the number of new stores, compared with past years. Francesca's has aggressively expanded since opening its first store in Houston in 1999.

"Generally speaking, Francesca's stores are smaller than other stores, so they carry less risk when opening," Siegel said.

He said the results were better than expected and Francesca's is among retailers on a wave of improved sales following the holiday season.

Clearing out what had been a glut of inventory has also been a high priority for Barnes. By the end of the fourth quarter, Francesca's had cut inventory by an average of 19 percent per store.

Investment Technology Group analyst Jeff Toohig said inventory levels could determine whether the strategy of continuing to open new stores works.

"The real question is, with opening new stores, can they maintain a decent job of keeping inventories trim?" he said. "And I think if they're able to do that, then it is a good strategy."

Barnes said Francesca's is working on getting trendier clothes that will sell better. In the fourth quarter, jewelry and gifts made up for weak apparel sales.

Customers spent about the same throughout 2014 when they made purchases, but for most of the year the number of transactions was down 6 to 7 percent, though they grew by 1 percent in the final quarter.

For the year, net income was $32.1 million, down from $44.8 million in 2013, and earnings per share dropped to 76 cents from $1.02.

Mark Vendetti, the chief financial officer, said Francesca's expected a slight decrease in comparable sales in the next quarter.