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Francesca’s CEO Departure: Uh Oh

The unexpected news comes with a whole lotta question marks


I’m no fortune-teller, but I know a warning sign when I see one — and the latest news from Francesca’s Holdings (NASDAQ:FRAN) is indeed a red flag waving in the wind.

The boutique chain was founded in 1999 by three siblings — Chong Yi, Kyong Gill and Insuk Koo — and their close friend John De Meritt. It went public just over a decade after the founding four kicked things off, and FRAN has gained around 11% since then, including 76% since January.

I don’t know about you, but I’d sure want my name on that kind of success story.

If you take a look at the company’s upper-level management, though, and even its board of directors, most of the founding names are absent from the list.

Earlier this summer, Gill retired from the company and the board, while Yi and Joo spend their time operating Stony Leather, an apparel and jewelry supplier that’s actually Francesca’s second-largest vendor.

For now, De Meritt is the only founder left standing, having served as CEO since 2006. And earlier in the week, he too announced plans to jump ship … I mean, retire … at the end of the year.

Neill Davis, who used to work at Men’s Wearhouse (NYSE:MW) and has been serving as president of Francesca’s for a whopping one month so far, will take De Merritt’s spot at the helm.

The unexpected departure sure isn’t good news — especially if you ask investors. Shares were off as much as 16% by midday following Wednesday’s announcement, even though the booming boutique chain posted yet another impressive quarter yesterday afternoon.

I don’t blame investors for running.

Sure, CEOs retire all the time. But consider this: Earlier in the year, De Meritt was named to Forbes’ list of America’s Most Powerful CEOs 40 and Under. That may sound nice, but it brings to light a head-scratching reality — he’s only 40 (OK, he’s 41 now, but still).

Why retire at such a young age? Well, De Merritt said he wants “to pursue personal endeavors.”

My guess as to what that means is as good as yours. The only certain thing is that the announcement indeed raises more questions than it answers. On top of that, one would think that founding and running a company is an endeavor in itself — and, in this case, one that’s far from being over.

In the most recent quarter, for example, earnings per share jumped 87%, net sales grew just under 50% and same-store sales rose for the 13th straight quarter. Plus, Francesca’s added 30 new boutiques, bringing the store count nearly 80 stores higher than it was a year earlier.

Oh yeah, and the company has plans to triple its store count in the long term.

Seems like an odd time for a CEO — and founder, mind you — to decide he want a new, more personal project. And it’s plenty of reason to wonder whether De Merritt knows something that we don’t.

Plus, the chain faces other potential roadblocks. Earlier in the summer, for example, I argued that its ambitious growth could actually take away its niche. And, as always, the world of fashion is fickle — what’s in today could be out tomorrow. Plus, other specialty retailers could try to steal a slice of Francesca’s success.

It’s unclear whether these are possible concerns for De Merritt, who could be looking to get out before things go downhill, or whether midlife self-fulfillment has really become suddenly more important that the company he helped build from the ground up.

Either way, the question remains whether Francesca’s can keep up its head-turning success in the long run. And the news of De Merritt’s early departure puts a fine point on the question of what’s around the bend for Francesca’s.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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