The Growth Stock You’ve Never Heard Of

by Lawrence Meyers | June 14, 2012 9:40 am

Francesca’s Holdings Corporation (NASDAQ:FRAN[1])? I hadn’t heard of it, either, until it reported earnings last week and I caught the announcement. What I found was a niche retailer that’s growing strongly and deserving of a closer look.

Francesca sells apparel, jewelry, accessories and gifts to the female demographic across 327 boutique stores in 43 states. Somehow, this little business amassed a billion-dollar market cap without me noticing.

What I did notice was the 23% pop in the share price after the earnings report. In Q1, net sales increased 49%, to $61.3 million. Comparable-store sales growth came in at 15.5%, and gross margins improved by 70 basis points, to 53.1%. Net income more than doubled, increasing 123%, to $8.7 million, resulting in earnings per share of 20 cents, versus 10 cents in the first quarter of last year.

With retailers, you always want to see if those strong numbers are just because they increased their store count. Francesca’s certainly did, jumping from 249 stores to 327, an almost 33% increase, which is gigantic.

The company is obviously in the midst of a serious expansion, with 75 more stores set to open this year. But go back and look at those same-store sales, which were up 15.5%. That’s simply incredible at a time when most retailers would give their left pants leg for a high single-digit increase.

Growth has been phenomenal, then, though at the expense of gross margins, which have fallen from 13.4% in 2009 to 11% today.

The company has only $12 million in debt against some $8 million in cash. Without much leverage, the company is able to keep its revenue instead of paying interest. Cash flow has been increasing, from FCF of a mere $8 million in FY09 to $30 million last year. Management is obviously plowing that cash right back into the business.

There are two things to watch for with Francesca’s. First is valuation. The company trades at 30x this year’s earnings, albeit on almost 50% earnings growth. Next year’s expected earnings of $1.10 is a 24x multiple, but YOY growth is expected to be 21%.

Long-term annualized growth of 27% is expected. So I see the company as being fairly valued at the moment. The trick, however, is that this is a retail play, so these stocks can be volatile. If Francesca’s turns out to be faddish in some way — as retail investors are very fickle — that multiple could suddenly contract.

I think, however, in the near term, as the company rapidly expands, you’re safe jumping in. Just be ready to bail at any time.

Lawrence Meyers does not own shares of any company mentioned.

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