10-Q 1 v327590_10q.htm QUARTERLY REPORT

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended October 27, 2012

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From              to             

 

Commission File Number: 001-35239

 

 

 

FRANCESCA’S HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

  

   
Delaware 20-8874704

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

   
8760 Clay Road, Houston, Texas 77080
(Address of principal executive offices) (Zip Code)

 

(713) 864-1358

(Registrant’s telephone number, including area code)

 

3480 W. 12th Street,

Houston, Texas 77008

(Former name, former address and former fiscal year, if changed since last report)

 

 

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
       
Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

The registrant had 43,855,030 shares of its common stock outstanding as of November 26, 2012.

 

 
 

 

 

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Unaudited Consolidated Balance Sheets as of October 27, 2012, January 28, 2012 and October 29, 2011 3
     
  Unaudited Consolidated Statements of Operations for the Thirteen and Thirty Nine Weeks Ended October 27, 2012 and October 29, 2011 4
     
  Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Thirty Nine Weeks ended October 27, 2012 5
     
  Unaudited Consolidated Statements of Cash Flows for the Thirty Nine Weeks Ended October 27, 2012 and October 29, 2011 6
     
  Notes to the Unaudited Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
     
Item 4. Controls and Procedures 20
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 21
     
Item 1A Risk Factors 21
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
     
Item 3. Default Upon Senior Securities 21
     
Item 4. Mine Safety Disclosures 21
     
Item 5. Other Information 21
     
Item 6. Exhibits 21

 

 

  

2

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Francesca’s Holdings Corporation

Unaudited Consolidated Balance Sheets

(In thousands)

 

  

October 27,

2012

  

January 28,
2012

  

October 29,

2011

 
             
ASSETS            
             
Current assets:               
Cash and cash equivalents  $12,906   $14,046   $14,982 
Accounts receivable   5,076    2,156    3,571 
Inventories   23,523    14,462    16,546 
Deferred income taxes   2,872    2,352    1,784 
Prepaid expenses and other current assets   4,622    3,025    3,041 
Total current assets   48,999    36,041    39,924 
Property and equipment, net   43,021    33,199    29,973 
Deferred income taxes   1,923    952    — 
Other assets, net   2,372    2,120    2,698 
                
TOTAL ASSETS   $96,315   $72,312   $72,595 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)               
                
Current liabilities:               
Accounts payable  $11,811   $8,627   $8,713 
Accrued liabilities   6,649    9,893    5,931 
Total current liabilities   18,460    18,520    14,644 
Deferred and accrued rents   21,895    14,890    14,839 
Deferred income taxes   —    —    455 
Long-term debt   —    22,000    35,000 
Total liabilities   40,355    55,410    64,938 
                
Commitments and contingencies               
                
Stockholders’ equity (deficit):               
Common stock - $.01 par value, 80.0 million shares authorized; 43.9 million shares issued and outstanding at October 27, 2012; 43.5 million shares issued and outstanding at January 28, 2012; and 43.5 million shares issued and outstanding at October 29, 2011   438    435    435 
Additional paid-in capital   83,935    77,071    76,179 
Accumulated deficit   (28,413)   (60,604)   (68,957)
Total stockholders’ equity   55,960    16,902    7,657 
                
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)   $96,315   $72,312   $72,595 

  

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

3

 

Francesca’s Holdings Corporation

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)

 

  

Thirteen Weeks Ended

  

Thirty Nine Weeks Ended

 
  

October 27,
2012

 
  

October 29,
2011

 
  

October 27,
2012

 
  

October 29,
2011

 
 
Net sales  $71,986   $50,020   $209,673   $142,506 
Cost of goods sold and occupancy costs   34,115    24,187    97,443    68,048 
Gross profit   37,871    25,833    112,230    74,458 
Selling, general and administrative expenses   20,144    17,789    58,960    45,388 
Income from operations   17,727    8,044    53,270    29,070 
Interest expense   (114)   (473)   (546)   (4,529)
Loss on early extinguishment of debt   —    —    —    (1,591)
Other income   105    198    257    248 
Income before income tax expense   17,718    7,769    52,981    23,198 
Income tax expense   6,921    3,025    20,790    9,050 
Net income  $10,797   $4,744    32,191    14,148 
                     
Basic earnings per common share  $0.25   $0.11   $0.74   $0.34 
Diluted earnings per common share  $0.24   $0.11   $0.72   $0.33 
                     
Weighted average shares outstanding:                    
Basic shares   43,825    43,538    43,700    41,601 
Diluted shares   44,911    44,533    44,791    42,421 

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

4

 

Francesca’s Holdings Corporation

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(In thousands)

 

  

Common Stock

   Additional       Total 
  

Shares
Outstanding

 
  

Par Value

 
  

Paid-in
Capital

 
  

Accumulated
Deficit

 
  

Stockholders’
Equity

 
 
Balance, January 28, 2012   43,538   $435   $77,071   $(60,604)  $16,902 
Net income   —    —    —    32,191    32,191 
Stock-based compensation   —    —    2,684    —    2,684 
Restricted stocks vested   3    —    —    —    — 
Stock options exercised and related tax benefit   314    3    4,180    —    4,183 
Balance, October 27, 2012  43,855   $438   $83,935   $(28,413)  $55,960 

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

5

 

Francesca’s Holdings Corporation

Unaudited Consolidated Statements of Cash Flows

(In thousands)

 

  

Thirty Nine Weeks Ended

 
  

October 27,
2012

  

October 29,
2011

 
Cash Flows From Operating Activities:          
Net income  $32,191   $14,148 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation expense   5,458    3,509 
Stock-based compensation expense   2,684    3,907 
Excess tax benefit from stock-based compensation   (2,193)   (449)
Loss on sale of assets   89    20 
Amortization of debt issuance costs   220    462 
Loss on early extinguishment of debt   —    1,591 
Deferred income taxes   (1,491)   2,696 
Changes in assets and liabilities:          
Accounts receivable   (2,920)   931 
Inventories   (9,061)   (4,677)
Prepaid expenses and other assets   (2,068)   (965)
Accounts payable   3,184    2,567 
Accrued liabilities   (1,051)   (479)
Deferred and accrued rents   7,005    6,616 
Net cash provided by operating activities   32,047    29,877 
           
Cash Flows Used by Investing Activities:          
Purchase of property and equipment   (15,370)   (12,236)
Other   —    35 
Net cash used in investing activities   (15,370)   (12,201)
           
Cash Flows Used by Financing Activities:          
Proceeds from issuance of stock in initial public offering, net of costs   —    44,118 
Proceeds from borrowing under the new revolving credit facility   —    41,000 
Repayment of borrowings under the prior senior secured credit facility   —    (93,813)
Repayment of borrowings under the new revolving credit facility   (22,000)   (6,000)
Payment of debt issuance costs   —    (1,468)
Proceeds from the exercise of stock options   1,990    504 
Excess tax benefit from stock-based compensation   2,193    449 
Net cash used in financing activities   (17,817)   (15,210)
           
Net increase (decrease) in cash and cash equivalents   (1,140)   2,466 
Cash and cash equivalents, beginning of year   14,046    12,516 
Cash and cash equivalents, end of period   $12,906   $14,982 
           
Supplemental Disclosures of Cash Flow Information:          
Cash paid for income taxes  $26,182   $6,300 
Interest paid  $405   $5,027 

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

6

 

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

  

1.Summary of Significant Accounting Policies

 

Nature of Business

 

Francesca’s Holdings Corporation (the “Company”) is a holding company incorporated in 2007 under the laws of the State of Delaware. The Company’s business operations are conducted through its wholly-owned indirect subsidiary Francesca’s Collections, Inc. (“Francesca’s Collections”), a corporation formed and existing under the laws of the State of Texas. Francesca’s Collections is wholly-owned by Francesca’s LLC (the “Parent”), a limited liability company formed and existing under the laws of the State of Delaware. Parent is a wholly-owned subsidiary of the Company.

 

The Company operates a national chain of retail locations designed and merchandised to feel like independently owned, upscale boutiques and provide its customers with an inviting, intimate and fun shopping experience. The Company offers a diverse and uniquely balanced mix of apparel, jewelry, accessories and gifts at attractive prices. At October 27, 2012, the Company operated 359 boutiques, which are located in 44 states throughout the United States, and its e-commerce website.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods presented. The financial information as of January 28, 2012 was derived from the Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended January 28, 2012, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 21, 2012.

 

These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the fiscal year ended January 28, 2012 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 21, 2012.

 

Due to seasonal variations in the retail industry, interim results are not necessarily indicative of results that may be expected for any other interim period or for a full year.

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements include the accounts of the Company and all its subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

 

Fiscal Year

The Company maintains its accounts on a 52- or 53-week year ending on the Saturday closest to January 31st. Fiscal year 2012 is a 53-week year and ends on February 2, 2013. The fiscal quarters ended October 27, 2012 and October 29, 2011 refer to the thirteen-week periods ended on those dates. The year-to-date periods ended October 27, 2012 and October 29, 2011 refer to the thirty nine week periods ended on those dates.

 

Reclassifications

 

Certain prior period amounts have been reclassified as prepaid expenses and other current assets in order to provide consistent comparative information. These reclassifications do not materially impact the unaudited consolidated financial statements for the prior periods presented.

 

Management Estimates and Assumption

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, net of estimated sales return, and expenses during the reporting periods. Actual results could differ from those estimates.

 

7

 

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

 

Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards (“IFRS”).” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. The Company adopted this guidance at the beginning of fiscal year 2012. This adoption had no impact on the Company’s financial position, results of operations or cash flows.

 

2.Earnings Per Share

 

Basic earnings per common share amounts are calculated using the weighted-average number of common shares outstanding for the period. Diluted earnings per common share amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact of stock options and restricted stock grants using the treasury stock method.

 

The following table summarizes the potential dilution that could occur if options to acquire common stock were exercised or if the restricted stock grants have fully vested and reconciles the weighted-average common shares outstanding used in the computation of basic and diluted earnings per share:

 

    Thirteen Weeks Ended     Thirty Nine Weeks Ended  
    October 27,
2012		     October 29,
2011		     October 27,
2012		     October 29,
2011		  
    (in thousands, except per share data)  
Numerator:                        
Net income   $ 10,797     $ 4,744     $ 32,191     $ 14,148  
                                 
Denominator:                                
Weighted-average common shares outstanding - basic     43,825       43,538       43,700       41,601  
Options and other dilutive securities     1,086       995       1,091       820  
Weighted-average common shares outstanding - diluted     44,911       44,533       44,791       42,421  
                                 
Per common share:                                
Basic earnings per common share   $ 0.25     $ 0.11     $ 0.74     $ 0.34  
Diluted earnings per common share   $ 0.24     $ 0.11     $ 0.72     $ 0.33  

 

Stock options to purchase common stock of the Company totaling 0.4 million shares in each of the thirteen and thirty nine weeks ended October 27, 2012 and 0.9 million shares in each of the thirteen and thirty nine weeks ended October 29, 2011 were excluded from the calculation of diluted earnings per common share due to their anti-dilutive effect.

 

  3. Fair value of Financial Instruments

  

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount reflected in the consolidated balance sheets of financial assets and liabilities, which includes cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their fair values. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities. The carrying amount of the Company’s debt approximates its fair value at January 28, 2012 and October 29, 2011 due to the variable component of the interest on debt.

 

4.Income Taxes

 

The provision for income taxes is based on the current estimate of the annual effective tax rate. The effective income tax rates for the thirteen weeks ended October 27, 2012 and October 29, 2011 were 39.1% and 38.9%, respectively. The effective income tax rates for the thirty nine weeks ended October 27, 2012 and October 29, 2011 were 39.2% and 39.0%, respectively. The difference between our effective tax rate and statutory rate primarily relates to state taxes.

 

8

 

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

  

5.Credit Facility

 

On July 27, 2011, Francesca’s Collections, Inc. (the “Borrower”) entered into an Amended and Restated Credit Agreement (the “new revolving credit facility”) with Royal Bank of Canada, as Administrative Agent, and KeyBank National Association, as Syndication Agent, which provided $65.0 million of revolving credit facility (including borrowing capacity available for letters of credit). The new revolving credit facility is scheduled to terminate on July 27, 2016. On July 27, 2011, net proceeds from the Company’s initial public offering, together with $41.0 million of indebtedness under the new revolving credit facility and $6.8 million of cash on hand, were used to repay the $92.0 million (including accrued interest of $0.6 million) outstanding under the prior senior secured credit facility. The prior senior secured credit facility was then terminated. In addition, in connection with the new revolving credit facility, the Company recorded $1.5 million of debt issuance costs that will be amortized over the term of the new revolving credit facility. At October 27, 2012, there were no borrowings outstanding under the new revolving credit facility.

 

All obligations under the new revolving credit facility are unconditionally guaranteed by, subject to certain exceptions, Parent and each of Borrower’s existing and future direct and indirect wholly owned domestic subsidiaries. All obligations under the new revolving credit facility, and the guarantees of those obligations (as well as cash management obligations and any interest rate hedging or other swap agreements), are secured by substantially all of the Borrower’s assets as well as the assets of each subsidiary guarantor.

 

The borrowings under the new revolving credit facility bear interest at a rate equal to an applicable margin plus, at the Company’s option, either (a) in the case of base rate borrowings, a rate equal to the highest of (i) the prime rate of Royal Bank of Canada, (ii) the federal funds rate plus 1/2 of 1% and (iii) the LIBOR for an interest period of one month plus 1.00%; or (b) in the case of LIBOR borrowings, a rate equal to the higher of (i) 1.50% and (ii) the LIBOR for the interest period relevant to such borrowing. The applicable margin for borrowings under the new revolving credit facility will range from 1.25% to 2.25% with respect to base rate borrowings and from 2.25% to 3.25% with respect to LIBOR borrowings, in each case based upon the achievement of specified levels of the ratio of consolidated total debt to consolidated EBITDA. Additionally, the Borrower will be required to pay a fee to the lenders under the new revolving credit facility on the unused amount at a rate ranging from 0.25% to 0.45%, based on the achievement of specified levels of the ratio of consolidated total debt to consolidated EBITDA. The Borrower is also required to pay customary letter of credit fees. During the thirty nine weeks ended October 27, 2012, amounts outstanding under the new revolving credit facility accrued interest at an average rate of 3.8%.

 

The new revolving credit facility requires the Borrower to maintain a maximum consolidated total lease adjusted leverage ratio and a minimum consolidated interest coverage ratio, in each case, on the last day of any fiscal quarter and includes a maximum capital expenditure in any fiscal year. The Borrower’s ability to pay dividends to the Company is subject to restrictions including a maximum secured leverage ratio. If the Borrower’s debt under the new revolving credit facility exceeds that ratio, it is restricted from paying dividends. At October 27, 2012, this ratio was within the required limit, thus, the Borrower would have been allowed to pay dividends.

 

The Borrower was in compliance with the debt covenants of its new revolving credit facility at October 27, 2012.

 

6.Stock-based Compensation

 

Stock-based compensation cost is measured at the grant date fair value and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant). The Company estimates forfeitures for option grants that are not expected to vest. Stock-based compensation cost recognized in the thirteen and thirty nine weeks ended October 27, 2012 totaled $1.0 million and $2.7 million, respectively. Stock-based compensation cost recognized in the thirteen and thirty nine weeks ended October 29, 2011 totaled $2.9 million and $3.9 million, respectively.

 

Stock Options

 

The following table presents stock options granted, exercised, expired and aggregate intrinsic value under the existing Stock Plans for the thirty nine weeks ended October 27, 2012.  

 

9

 

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

  

  

Number of
Shares

  

Weighted
Average
Exercise
Price

  

Weighted
Average
Remaining
Contractual
Life

  

Aggregate
Intrinsic
Value

 
       (Per share data)   (In Years)   (In thousands) 
                 
Outstanding as of January 28, 2012   3,185,112   $8.68           
Options granted   385,000    30.71           
Options exercised   (313,765)   6.34           
Options forfeited or expired   (202,404)   11.44           
Outstanding as of October 27, 2012   3,053,943   $11.51   8   $54,859 
Exercisable at October 27, 2012  1,441,131   $6.08    7   $33,469 

 

During the thirty nine weeks ended October 27, 2012, 385,000 stock options were granted at a weighted average grant date fair value of $15.07. For stock option exercises during the thirty nine weeks ended October 27, 2012, cash received, intrinsic value and excess tax benefit totaled $2.0 million, $7.1 million and $2.2 million, respectively.

 

The following table summarizes the assumptions used to measure the grant date fair value of stock options using the Black Scholes option pricing model.

 

 

Thirty Nine Weeks Ended 

October 27, 2012

Expected volatility (1) 51.8% – 68.2%
Risk-free interest rate (2) 0.8% – 0.9%
Expected term (in years) (3) 6.0 – 6.5
Expected dividend yield —
 

 

(1)The expected volatility incorporates historical volatility of similar entities whose share prices are publicly available. The Company determined that the use of historical volatility for similar entities represents a more accurate calculation of option fair value than actual Company stock experience because of the limited duration the Company’s stock has been publicly traded.
(2)The risk-free interest rate was determined based on the rate of Treasury instruments with maturities similar to those of the expected term of the award being valued.
(3)Represents the period of time options are expected to be outstanding. The weighted-average expected option term was determined using the “simplified method” as allowed by SEC Staff Accounting Bulletin 114, Topic 14. The expected term used to value a share option grant under the simplified method is the midpoint between the vesting date and the contractual term of the share option. This method was used due to the lack of sufficient historical data to provide a basis upon which to estimate the expected term.

 

As of October 27, 2012 there was approximately $13.1 million of unrecognized compensation cost related to non-vested stock options that is expected to be recognized over a weighted-average period of 3 years.

 

7.Commitment and Contingencies

 

Operating Leases

 

The Company leases boutique space and office space under operating leases expiring in various years through the fiscal year ending 2023. Certain of the leases provide that the Company may cancel the lease, with penalties as defined in the lease, if the Company’s boutique sales at that location fall below an established level. Certain leases provide for additional rent payments to be made when sales exceed a base amount. Certain operating leases provide for renewal options for periods from three to five years at their fair rental value at the time of renewal.

 

Minimum future rental payments under non-cancellable operating leases as of October 27, 2012, are approximately as follows:

 

     

Fiscal year

 

Amount

 
   (In thousands) 
Remainder of 2012  $5,482 
2013   23,306 
2014   22,665 
2015   21,916 
2016   21,022 
Thereafter   84,259 
   $178,650 

 

10

 

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

 

Legal Proceedings

 

From time to time, the Company is subject to various claims and legal proceedings arising in the ordinary course of business. While the outcome of any such claim cannot be predicted with certainty, in the opinion of management, the outcome of these matters will not have a material adverse effect on the Company’s business, results of operations or financial conditions.

 

11

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements concerning our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. These statements may include words such as “aim”, “anticipate”, “assume”, “believe”, “can have”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “likely”, “may”, “objective”, “plan”, “potential”, “positioned”, “predict”, “should”, “target”, “will”, “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth rates, market share and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements.

 

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Factors that may cause such differences include, but are not limited to, the risks described under “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012 and filed with the Securities and Exchange Commission (“SEC”) on March 21, 2012.

 

We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this report as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

 

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly whether as a result of new information, future developments or otherwise.

 

Overview

 

francesca’s® is one of the fastest growing specialty retailers in the United States. Our retail locations are designed and merchandised to feel like independently owned, upscale boutiques and provide our customers with an inviting, intimate and fun shopping experience. We believe we offer compelling value with a diverse and uniquely balanced mix of high-quality, trend-right apparel, jewelry, accessories and gifts at attractive prices. We tailor our assortment to appeal to our core 18-35 year-old, fashion conscious, female customer, although we find that women of all ages are attracted to our eclectic and sophisticated merchandise selection and boutique setting. We carry a broad selection but limited quantities of individual styles and introduce new merchandise to our boutiques five days a week in order to create a sense of scarcity and newness, which helps drive customer shopping frequency and loyalty.

 

During the thirteen weeks ended October 27, 2012, our net sales increased 43.9% to $72.0 million, income from operations increased 120.4% to $17.7 million and net income increased 127.6% to $10.8 million compared to the same period of the prior year. During the thirty nine weeks ended October 27, 2012, our net sales increased 47.1% to $209.7 million, income from operations increased 83.2% to $53.3 million and net income increased 127.5% to $32.2 million compared to the same period in the prior year.

 

As of October 27, 2012, we have increased our boutique count to 359 boutiques (including our first outlet boutique) in 44 states from 283 boutiques in 41 states as of October 29, 2011.

 

12

 

Results of Operations

 

The following data represents the amounts shown in our unaudited consolidated statements of operations, both in dollars and as a percentage of net sales, and operating data for the thirteen and thirty nine weeks ended October 27, 2012 and October 29, 2011.

 

  

Thirteen Weeks Ended

  

Thirty Nine Weeks Ended

 
  

October 27,

2012

  

October 29,

2011

  

October 27,

2012

  

October 29,

2011

 
   (in thousands, except percentages) 
                 
Net sales  $71,986   $50,020   $209,673   $142,506 
Cost of goods sold and occupancy costs   34,115    24,187    97,443    68,048 
Gross profit   37,871    25,833    112,230    74,458 
Selling, general and administrative expenses   20,144    17,789    58,960    45,388 
Income from operations   17,727    8,044    53,270    29,070 
Interest expense   (114)   (473)   (546)   (4,529)
Loss on early extinguishment of debt   —    —    —    (1,591)
Other income   105    198    257    248 
Income before income tax expense   17,718    7,769    52,981    23,198 
Income tax expense   6,921    3,025    20,790    9,050 
Net income  $10,797   $4,744   $32,191   $14,148 
                     
Percentage of Sales (5):                    
Net sales   100.0%   100.0%   100.0%   100.0%
Cost of goods sold and occupancy costs   47.4%   48.4%   46.5%   47.8%
Gross profit   52.6%   51.6%   53.5%   52.2%
Selling, general and administrative expenses   28.0%   35.6%   28.1%   31.8%
Income from operations   24.6%   16.1%   25.4%   20.4%
Interest expense   (0.2)%   (0.9)%   (0.3%)   (3.2%)
Loss on early extinguishment of debt   —    —    —    (1.1%)
Other income   0.1%   0.4%   0.1%   0.2%
Income before income tax expense   24.6%   15.5%   25.3%   16.3%
Income tax expense   9.6%   6.0%   9.9%   6.4%
Net income   15.0%   9.5%   15.4%   9.9%
                     
Operating data:                    
Comparable boutique sales growth for period (1)    16.7%   6.5%   17.7%   8.4%
Number of boutiques open at end of period   359    283    359    283 
Net sales per average square foot for period (not in thousands)(2)(4)   $145   $126   $454   $395 
Average square feet per boutique at the end of the period (not in thousands)(3)    1,387    1,410    1,387    1,410 
Total gross square feet at end of period (in thousands)   498    399    498    399 

 

(1)A boutique is included in comparable boutique sales on the first day of the fifteenth full month following the boutique’s opening. When a boutique that is included in comparable boutique sales is relocated, we continue to consider sales from that boutique to be comparable boutique sales. If a boutique is closed for thirty days or longer for a remodel or as a result of weather damage, fire or the like, we no longer consider sales from that boutique to be comparable boutique sales. E-commerce sales are excluded from comparable boutique sales.
(2)Net sales per average square foot are calculated by dividing net sales for the period by the average total square feet during the period. Because of our rapid growth, for purposes of providing a net sales per square foot measure, we use average total square feet during the period as opposed to total gross square feet at the end of the period. For individual quarterly periods, average total square feet is calculated as (a) the sum of total gross square feet at the beginning and end of the period, divided by (b) two. For periods consisting of more than one fiscal quarter, average total square feet is calculated as (a) the sum of total gross square feet at the beginning of the period and total gross square feet at the end of each fiscal quarter within the period, divided by (b) the number of fiscal quarters within the period plus one (which, for a fiscal year, is five). There may be variations in the way in which some of our competitors and other retailers calculate sales per square foot or similarly titled measures. As a result, average total square feet and net sales per average square foot for the period may not be comparable to similar data made available by other retailers.
(3)Average square feet per boutique is calculated by dividing total gross square feet at the end of the period by the number of boutiques open at the end of the period. We have provided average square feet per boutique in our Annual Report on Form 10-K but not in our quarterly reports on Form 10-Q. We believe that adding this data on a quarterly basis provides relevant information to investors as of a more current date.

 

13

 

(4)We revised the calculation of prior year average total square feet for periods consisting of more than one fiscal quarter to conform to the current year calculation described in footnote 2. Consequently, net sales per average square foot for the year-to-date period also changed. The following table presents average total square feet and net sales per average square foot for the thirty nine weeks ended October 27, 2012 and October 29, 2011 calculated using the method described in our Form 10-Q for the period ended October 29, 2011 filed with the SEC on December 7, 2011.

 

         
  

Thirty Nine Weeks Ended

 
  

October 27,

2012

  

October 29,

2011

 
Net sales per average square foot (not in thousands)  $450   $391 
Average total square feet (in thousands)   466    365 

 

(5)Percentage totals in the above table may not equal the sum of the components due to rounding.

 

The following table summarizes the number of boutiques open at the beginning and end of the periods indicated.

 

                 
   Thirteen Weeks Ended   Thirty Nine Weeks Ended 
  

October 27,

2012

   October 29,
2011		   October 27,
2012		   October 29,
2011		 
Number of boutiques open at beginning of period   357    279    283    207 
Boutiques added   2    4    76    76 
Boutiques closed   —    —    —    — 
Number of boutiques open at the end of period   359   283   359   283 

 

Thirteen Weeks Ended October 27, 2012 Compared to Thirteen Weeks Ended October 29, 2011

 

Net Sales

 

Net sales increased 43.9% to $72.0 million in the thirteen weeks ended October 27, 2012 from $50.0 million in the thirteen weeks ended October 29, 2011. Non-comparable boutique sales contributed $14.0 million while comparable boutique sales contributed $7.6 million of the sales increase for the thirteen weeks ended October 27, 2012 as compared to the thirteen weeks ended October 29, 2011. The 16.7% increase in comparable boutique sales for the quarter was driven by higher average transactions per boutique. The average dollar sales per transaction was consistent with the prior year period. Our e-commerce sales grew by 63.3% in the thirteen weeks ended October 27, 2012 compared to the same period of the prior year. There were 268 comparable boutiques and 91 non-comparable boutiques open at October 27, 2012 compared to 185 and 98, respectively, at October 29, 2011.

 

The following table presents sales by merchandise category. As shown in the table, sales increased in all of our merchandise categories.

 

   Thirteen Weeks Ended     
   October 27, 2012   October 27, 2012    Change 
   In Dollars
(in thousands)		   As a % of
Net Sales		   In Dollars
(in thousands)		   As a % of Net Sales     
Apparel  $38,013    52.8%  $27,698    55.4%  $10,315 
Jewelry   15,844    22.0%   9,802    19.6%   6,042 
Accessories   10,854    15.1%   7,653    15.3%   3,201 
Gift   7,139    9.9%   5,032    10.0%   2,107 
Merchandise sales   71,850    99.8%   50,185    100.3%   21,665 
Shipping   106    0.2%   73    0.2%   33 
Changes in return reserve   30    0.0%   (238)    (0.5)%   268 
Net sales  $71,986    100.0%  $50,020    100.0%  $21,966 

 

Cost of Goods Sold and Occupancy Costs

 

Cost of goods sold and occupancy costs increased 41.0% to $34.1 million in the thirteen weeks ended October 27, 2012 from $24.2 million in the thirteen weeks ended October 29, 2011. Cost of merchandise and freight expenses increased by $7.0 million driven by the increased sales volume. Occupancy costs increased by $2.6 million due to the increase in the number of boutiques in operation during the thirteen weeks ended October 27, 2012 compared to the same period of the prior year. Allowance for shrinkage increased by $0.3 million due to increased sales. As a percentage of net sales, cost of goods sold and occupancy costs decreased to 47.4% in the thirteen weeks ended October 27, 2012 from 48.4% in the thirteen weeks ended October 29, 2011 due to leveraging of occupancy costs.

 

14

 

Gross Profit

 

Gross profit increased 46.6% to $37.9 million in the thirteen weeks ended October 27, 2012 from $25.8 million in the thirteen weeks ended October 29, 2011. As a percentage of net sales, gross profit increased to 52.6% for the thirteen weeks ended October 27, 2012 from 51.6% for the thirteen weeks ended October 29, 2011 due to leveraging of occupancy costs.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased 13.2% to $20.1 million in the thirteen weeks ended October 27, 2012 from $17.8 million in the thirteen weeks ended October 29, 2011. As a percentage of net sales, selling, general and administrative expense was 28.0% in the thirteen weeks ended October 27, 2012 as compared to 35.6% in the thirteen weeks ended October 29, 2011.

 

Selling expenses increased $3.0 million due to the increase in the number of boutiques in operation in the thirteen weeks ended October 27, 2012 compared to the same prior year period. As a percentage of net sales, selling expenses decreased 1.3% due to improved leverage from increased sales.

 

General and administrative expenses decreased by $0.6 million primarily driven by a decrease in stock-based compensation expense due to the accelerated vesting of certain options in the prior year period. As a percentage of net sales, general and administrative expenses decreased due to a 4.4% decrease in stock-based compensation expense in the thirteen weeks ended October 27, 2012 as compared to the same prior year period.

 

Income from Operations

 

Income from operations increased by 120.4% to $17.7 million, or 24.6% of net sales, in the thirteen weeks ended October 27, 2012 from $8.0 million, or 16.1% of net sales, in the thirteen weeks ended October 29, 2011. This increase was principally due to an increase of $12.0 million in gross profit partially offset by a $2.4 million increase in selling, general and administrative expenses.

 

Interest Expense

 

Interest expense decreased by 75.9% to $0.1 million in the thirteen weeks ended October 27, 2012 from $0.5 million in the thirteen weeks ended October 29, 2011 due to the lower average outstanding balance on our credit facilities in the third quarter of fiscal year 2012 compared to the same period of the prior year.

 

Income Tax Expense

 

Income tax expense increased to $6.9 million in the thirteen weeks ended October 27, 2012 from $3.0 million the thirteen weeks ended October 29, 2011 due to the increase in taxable income. Our effective tax rate increased to 39.1% in the thirteen weeks ended October 27, 2012 as compared to our effective tax rate of 38.9% in the thirteen weeks ended October 29, 2011.

 

Net Income

 

Net income increased 127.6% to $10.8 million in the thirteen weeks ended October 27, 2012 from $4.7 million in the thirteen weeks ended October 29, 2011. This improvement was due to an increase of $12.0 million in gross profit and a reduction of $0.4 million in interest expense. These improvements were partially offset by increases of $2.4 million in selling, general and administrative expenses and $3.9 million in income tax expense.

 

Thirty Nine Weeks Ended October 27, 2012 Compared to Thirty Nine Weeks Ended October 29, 2011

 

Net Sales

 

Net sales increased 47.1% to $209.7 million in the thirty nine weeks ended October 27, 2012 from $142.5 million in the thirty nine weeks ended October 29, 2011. Non-comparable boutique sales contributed $45.0 million while comparable boutique sales contributed $21.9 million of the sales increase for the thirty nine weeks ended October 27, 2012 as compared to the thirty nine weeks ended October 29, 2011. The 17.7% increase in comparable boutique sales was driven by higher average transaction per boutique. The average dollar sales per transaction was consistent with the prior year period. Our e-commerce sales grew by 58.9% in the thirty nine weeks ended October 27, 2012 compared to the same period of the prior year. There were 268 comparable boutiques and 91 non-comparable boutiques open at October 27, 2012 compared to 185 and 98, respectively, at October 29, 2011.

 

15

 

The following table presents sales by merchandise category. As shown in the table, sales increased in all of our merchandise categories.

 

  

Thirty Nine Weeks Ended

     
  

October 29, 2011

  

October 27, 2012

  

 

Change

 
  

In Dollars 

(in thousands) 

   As a % of Net Sales  

In Dollars
(in thousands) 

  

As a % of

 Net Sales 

     
                     
Apparel  $111,171    53.0%  $78,507    55.1%  $32,664 
Jewelry   45,926    21.9%   28,039    19.7%   17,887 
Accessories   31,540    15.1%   21,444    15.0%   10,096 
Gift   21,142    10.1%   14,891    10.5%   6,251 
     Merchandise sales   209,779    100.1%   142,881    100.3%   66,898 
Shipping   277    0.1%   155    0.1%   122 
Changes in return reserve   (383)   (0.2)%   (530)   (0.4)%   147 
        Net sales  $209,673    100.0%  $142,506    100.0%  $67,167 

 

Cost of Goods Sold and Occupancy Costs

 

Cost of goods sold and occupancy costs increased 43.2% to $97.4 million in the thirty nine weeks ended October 27, 2012 from $68.0 million in the thirty nine weeks ended October 29, 2011. Cost of merchandise and freight expenses increased by $20.7 million, driven by the increased sales volume. Occupancy costs increased by $7.6 million due to the increase in the number of boutiques in operation during the thirty nine weeks ended October 27, 2012 compared to the same period of the prior year. Allowance for shrinkage increased by $1.1 million due to increased sales. As a percentage of net sales, cost of goods sold and occupancy costs decreased to 46.5% in the thirty nine weeks ended October 27, 2012 from 47.8% in the thirty nine weeks ended October 29, 2011 due to leveraging of occupancy costs.

 

Gross Profit

 

Gross profit increased 50.7% to $112.2 million in the thirty nine weeks ended October 27, 2012 from $74.5 million in the thirty nine weeks ended October 29, 2011. As percentage of net sales, gross profit was 53.5% for the thirty nine weeks ended October 27, 2012 from 52.2% for the thirty nine weeks ended October 29, 2011 due to leveraging of occupancy costs.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased 29.9% to $59.0 million in the thirty nine weeks ended October 27, 2012 from $45.4 million in the thirty nine weeks ended October 29, 2011. As a percentage of net sales, selling, general and administrative expense decreased to 28.1% in the thirty nine weeks ended October 27, 2012 as compared to 31.8% in the thirty nine weeks ended October 29, 2011.

 

Selling expenses increased $8.8 million due to the increase in the number of boutiques in operation in the thirty nine weeks ended October 27, 2012 compared to the same period of the prior year. As a percentage of net sales, selling expenses decreased 1.5% due to improved leverage from increased sales.

 

General and administrative expenses increased by $4.8 million primarily due to the costs of adding corporate office and distribution employees to support the larger boutique base and increased net sales. As a percentage of net sales, general and administrative expenses decreased due to a 1.5% decrease in stock-based compensation expense as a result of the accelerated vesting of certain options in the prior year period.

 

Income from Operations

 

Income from operations increased by 83.2% to $53.3 million, or 25.4% of net sales, in the thirty nine weeks ended October 27, 2012 from $29.1 million, or 20.4% of net sales, in the thirty nine weeks ended October 29, 2011. This increase was principally due to an increase of $37.8 million in gross profit partially offset by a $13.6 million increase in selling, general and administrative expenses.

 

16

 

Interest Expense

 

Interest expense decreased by 87.9% to $0.5 million in the thirty nine weeks ended October 27, 2012 from $4.5 million in the thirty nine weeks ended October 29, 2011 due to the lower average outstanding balance on our credit facilities in the thirty nine weeks ended October 27, 2012 compared to the same period of the prior year.

 

Income Tax Expense

 

Income tax expense increased to $20.8 million in the thirty nine weeks ended October 27, 2012 from $9.1 million in the thirty nine weeks ended October 29, 2011 due to the increase in taxable income. Our effective tax rate increased to 39.2% in the thirty nine weeks ended October 27, 2012 as compared to our effective tax rate of 39.0% in the thirty nine weeks ended October 29, 2011.

 

Net Income

 

Net income increased 127.5% to $32.2 million in the thirty nine weeks ended October 27, 2012 from $14.1 million in the thirty nine weeks ended October 29, 2011. This improvement was due to an increase of $37.8 million in gross profit, a reduction of $4.0 million in interest expense and the absence of $1.6 million in loss on early extinguishment of debt. These improvements were partially offset by increases of $13.6 million in selling, general and administrative expenses and $11.7 million in income tax expense.

 

Liquidity and Capital Resources

 

Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility. Our primary cash needs are for capital expenditures in connection with opening new boutiques and remodeling existing boutiques, investing in improved technology and distribution facility enhancements, funding normal working capital requirements and payments of borrowings and interest, if any, under our revolving credit facility. We also occasionally use cash or our credit facility to issue letters of credit to support merchandise imports or for other corporate purposes. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable and other current liabilities. Our working capital position benefits from the fact that we generally collect cash from sales to customers the day of or, in the case of credit or debit card transactions, within several days of the related sales and we typically have up to 30 days to pay our vendors.  

 

We were in compliance with all covenants under our revolving credit facility as of October 27, 2012. At October 27, 2012, we had $12.9 million of cash and cash equivalents and $65.0 million in borrowing availability under our new revolving credit facility. There were no letters of credit outstanding at October 27, 2012.

 

We expect that our cash flow from operations along with borrowings under our revolving credit facility and tenant allowances for new boutiques will be sufficient to fund capital expenditures and our working capital requirements for, at least, the next twelve months.

 

Cash Flow

 

A summary of our operating, investing and financing activities are shown in the following table:

 

  

Thirty Nine Weeks Ended

 
  

October 27,

2012

  

October 29,

2011

 
   (In thousands) 
Provided by operating activities  $32,047   $29,877 
Used in investing activities   (15,370)   (12,201)
Used in financing activities   (17,817)   (15,210)
Net increase (decrease) in cash and cash equivalents  $(1,140)  $2,466 

 

Operating Activities

 

Operating activities consist of net income adjusted for non-cash items, including depreciation and amortization, deferred taxes, the effect of working capital changes and tenant allowances received from landlords. Net cash provided by operating activities of $32.0 million in the thirty nine weeks ended October 27, 2012 consisted of net earnings, adjusted for non-cash charges, increases in accounts payable and deferred and accrued rents offset by increases in accounts receivable, inventories, prepaid expenses and other assets and a decrease in accrued liabilities. Net cash provided by operating activities of $29.9 million in the thirty nine weeks ended October 29, 2011 consisted of net earnings, adjusted for non-cash charges, increases in accounts payable, deferred and accrued rents and a decrease in accounts receivable offset by increases in inventories, prepaid expenses and other assets and a decrease in accrued liabilities. The increases in our working capital components were due to the increase in the number of boutiques in operation in the thirty nine weeks ended October 27, 2012 compared to the same period of the prior year. Accrued liabilities was lower at October 27, 2012 as a result of lower income tax payable due to overpayment while the decrease in accrued liabilities at October 29, 2011 was primarily due to lower accrued interest.

 

17

 

Investing Activities

 

Investing activities consist of capital expenditures for new boutiques, improvements to existing boutiques, as well as investment in information technology and our distribution facility.

 

  

Thirty Nine Weeks Ended

 
  

October 27,
2012

  

October 29,
2011

 
   (In thousands) 
Capital expenditures for:          
New boutiques  $9,159   $10,488 
Existing boutiques   916    582 
Technology   850    875 
Corporate and distribution   4,445    291 
Proceeds from sale of property and equipment   —    (35)
Net cash used in investing activities  $15,370   $12,201 

 

Our total capital expenditures for the thirty nine weeks ended October 27, 2012 and October 29, 2011 were $15.4 million and $12.2 million, respectively, with new boutiques accounting for most of our spending at $9.2 million and $10.5 million, respectively, over the same period. Spending for new boutiques included amounts associated with boutiques that will open subsequent to the end of the fiscal quarter. The Company opened 76 boutiques in each of the thirty nine weeks ended October 27, 2012 and October 29, 2011. The average cost of the leasehold improvements, equipment, furniture and fixtures, excluding tenant allowances, for new boutiques opened in the thirty nine weeks ended October 27, 2012 and October 29, 2011 was $185,000 and $180,000, respectively. The increase in the average capital expenditures for new boutiques was due to an increase in the cost of leasehold improvements, signage and technological enhancements. We expect that costs of opening new boutiques will continue to increase in future years. However, we expect that any such increases will not be material and should not adversely impact our expansion plans or payback period and return on our net investment. The average tenant allowance per new boutique was $92,000 and $81,000 in the thirty nine weeks ended October 27, 2012 and October 29, 2011, respectively. Tenant allowances are amortized as a reduction in rent expense over the term of the lease. The average collection period for these allowances is approximately six months after boutique opening. As a result, we fund the cost of new boutiques with cash flow from operations, build-out allowances from our landlords, or borrowings under our revolving credit facility. Capital expenditures for corporate and distribution amounting to $4.4 million for the thirty nine weeks ended October 27, 2012 consisted mainly of the new corporate office build-out while the prior period amount of $0.3 million was spent on miscellaneous corporate and distribution facility enhancements.

 

Management anticipates that capital expenditures for the remainder of fiscal year 2012 will be approximately $6.0 million to $7.0 million. Of this amount, approximately $5.6 million to $6.6 million will be spent on new boutiques that will open in fiscal year 2013. We expect that our cash flow from operations along with tenant allowances for new boutiques will be sufficient to fund our capital expenditures for the rest of fiscal year 2012.

 

Financing Activities

 

Financing activities consist principally of borrowings and payments under our revolving credit facility as well as proceeds from the exercise of stock options and the related tax consequence.

 

Net cash used in financing activities in the thirty nine weeks ended October 27, 2012 of $17.8 million consisted of $22.0 million repayment of borrowings under our revolving credit facility offset by $4.2 million proceeds from stock option exercises and the related tax benefit. Net cash used in financing activities in the thirty nine weeks ended October 29, 2011 of $15.2 million consisted of $99.8 million repayment of borrowings under our credit facilities and $1.5 million payment of debt issuance costs offset by $44.1 million proceeds from our initial public offering, $41.0 million proceeds from our new revolving credit facility and $1.0 million proceeds from stock option exercises and the related tax benefit.

 

18

 

Revolving Credit Facility

 

On July 27, 2011, Francesca’s Collections, Inc., our indirect wholly-owned subsidiary, entered into a revolving credit facility in the aggregate amount of $65.0 million that matures on July 27, 2016. The revolving credit facility includes borrowing capacity available for letters of credit. At October 27, 2012, there were no amounts outstanding under the revolving credit facility.

 

All obligations under the revolving credit facility are unconditionally guaranteed by, subject to certain exceptions, Francesca’s LLC, our direct wholly-owned subsidiary and the parent of Francesca’s Collections, Inc., and each of Francesca’s Collections’ existing and future direct and indirect wholly owned domestic subsidiaries. There are currently no subsidiary guarantors for the revolving credit facility because Francesca’s Collections does not currently have any subsidiaries. All obligations under the revolving credit facility, and the guarantees of those obligations (as well as cash management obligations and any interest rate hedging or other swap agreements), are secured by substantially all of Francesca’s Collections’ assets as well as the assets of any subsidiary guarantor.

 

The borrowings under the revolving credit facility bear interest at a rate equal to an applicable margin plus, at our option, either (a) in the case of base rate borrowings, a rate equal to the highest of (1) the prime rate of Royal Bank of Canada, (2) the federal funds rate plus 1/2 of 1%, and (3) the LIBOR for an interest period of one month plus 1.00%, or (b) in the case of LIBOR borrowings, a rate equal to the higher of (1) 1.50% and (2) the LIBOR for the interest period relevant to such borrowing. The applicable margin for borrowings under the revolving credit facility ranges from 1.25% to 2.25% with respect to base rate borrowings and from 2.25% to 3.25% with respect to LIBOR borrowings, in each case based upon the achievement of specified levels of a ratio of consolidated total debt to consolidated EBITDA. Additionally, we are required to pay a fee to the lenders under the revolving credit facility on the un-borrowed amount at a rate ranging from 0.25% to 0.45%, based on the achievement of specified levels of a ratio of consolidated total debt to consolidated EBITDA. We are also required to pay customary letter of credit fees. During the thirty nine weeks ended October 27, 2012, amounts outstanding under the revolving credit facility accrued interest at an average rate of 3.8%.

 

 The revolving credit facility contains customary affirmative and negative covenants, including limitations on the ability of Francesca’s Collections and its subsidiaries, to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii) engage in mergers or consolidations; (viii) change the business conducted by Francesca’s Collections and its subsidiaries; (ix) engage in certain transactions with affiliates; (x) enter into agreements that restrict dividends from subsidiaries; and (xi) amend certain charter documents and material agreements governing subordinated and junior indebtedness.

 

In addition, the revolving credit facility requires Francesca’s Collections to comply with the following financial covenants:

 

·A maximum ratio of (i) lease-adjusted consolidated total debt (as defined in the credit agreement) to (ii) consolidated EBITDA of 4.25 to 1.00.
   
·A minimum ratio of (i) consolidated EBITDA to (ii) interest expense of 4.00 to 1.00.
   
·Maximum capital expenditures of $25.0 million per fiscal year, with any unused portion allowed to be carried over to the next two fiscal years subject to a 50.0% cap.

 

We were in compliance with the financial covenants under our revolving credit facility as of October 27, 2012. Further, Francesca’s Collections’ ability to pay dividends is subject to restrictions including a maximum secured leverage ratio. If Francesca’s Collections’ debt under the revolving credit facility exceeds that ratio, it is restricted from paying dividends. At October 27, 2012, this ratio was within the required limit, thus, Francesca’s Collections would have been allowed to pay dividends.

 

The revolving credit facility also contains customary events of default, including: (i) failure to pay principal, interest, fees or other amounts under the revolving credit facility when due taking into account any applicable grace period; (ii) any representation or warranty proving to have been incorrect in any material respect when made; (iii) a cross default with respect to other material indebtedness; (iv) bankruptcy and insolvency events; (v) unsatisfied material final judgments; (vi) a “change of control”; (vii) certain defaults under the Employee Retirement Income Security Act of 1974; (viii) the invalidity or impairment of any loan document or any security interest; and (ix) the subordination provisions of any material subordinated debt or junior debt shall cease to be in full force.

 

19

 

Critical Accounting Policies

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. A summary of the Company’s significant accounting policies is included in Note 1 to the Company’s annual consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012 and filed with the SEC on March 21, 2012.

 

Certain of the Company’s accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of the company’s consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended January 28, 2012 filed with the SEC on March 21, 2012. As of October 27, 2012, there were no significant changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012 filed with the SEC on March 21, 2012.

 

Contractual Obligations

 

At October 27, 2012, there were no borrowings outstanding under our revolving credit facility. There have been no other significant changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012 and filed with the SEC on March 21, 2012 other than those which occur in the normal course of business.

 

Off Balance Sheet Arrangements

 

We are not a party to any off balance sheet arrangements.

 

Subsequent Events

 

Subsequent to October 27, 2012, the northeast region of the United States was heavily impacted by hurricane Sandy. There were approximately 60 boutiques located in the affected region that were forced to temporarily close for at least one full business day. In addition, some boutiques suffered damages due to flooding. We do not believe that hurricane Sandy, or the resulting damage, will have a significant impact on the Company’s fourth quarter or the fiscal year 2012 results.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our principal exposure to market risk relates to changes in interest rates. Our revolving credit facility, if drawn upon, carries floating interest rates that are tied to LIBOR, the federal funds rate and the prime rate, and therefore, our statements of operations and our cash flows could be exposed to changes in interest rates. At October 27, 2012, there were no borrowings outstanding under our revolving credit facility.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures were effective as of October 27, 2012.

 

20

 

There were no changes in our internal control over financial reporting during the quarter ended October 27, 2012 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.  

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are subject to various legal proceedings and claims, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial disputes and other matters that arise in the ordinary course of business. While the outcome of these and other claims cannot be predicted with certainty, we do not believe that the outcome of these matters will have a material adverse effect on our business, results of operations or financial condition.

 

ITEM 1A. RISK FACTORS

 

The following is an additional risk factor to the Risk Factors previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the fiscal year ended January 28, 2012 and filed with the SEC on March 21, 2012.

 

We depend on our senior management personnel and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business. 

 

Our future success is substantially dependent on the continued service of our senior management, particularly Mr. Neill Davis, one of our directors since 2007 and our current President. Mr. Davis will become our Chief Executive Officer beginning January 1, 2013. Mr. Davis has extensive experience both with our company and in our industry and is familiar with our business, systems and processes. The loss of services of one or more of our named executive officers could impair our ability to manage our business effectively and could have an adverse effect on our business, as we may not be able to find suitable individuals to replace them on a timely basis or at all. In addition, any departures of key personnel could be viewed in a negative light by investors and analysts, which could cause our common stock price to decline. We do not maintain key person insurance on any employee. In addition to these key employees, we have other employees in positions, including those employees responsible for our merchandising and operations departments that, if vacant, could cause a temporary disruption in our business until such positions are filled.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULT UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

During the third quarter of fiscal year 2012, we began deployment of a new point-of-sale system to our boutiques. We expect to complete the roll-out of the new software to all boutiques in the first quarter of fiscal year 2013.

 

ITEM 6. EXHIBITS

 

Exhibit No.

  

Description

     
  31.1   Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)
     
  31.2   Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)
     
  32.1   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
  101   Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Unaudited Consolidated Balance Sheets as of October 27, 2012, January 28, 2012 and October 29, 2011, (22) the Unaudited Consolidated Statements of Operations for the thirteen and thirty nine weeks ended October 27, 2012 and October 29, 2011, (iii) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the thirty nine weeks ended October 27, 2012, (iv) Unaudited Consolidated Statements of Cash Flows for the thirty nine weeks ended October 27, 2012 and October 29, 2011 and (v) the Notes to the Unaudited Consolidated Financial Statements.

 

21

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   
  Francesca’s Holdings Corporation
  (Registrant)
   
Date:  December 7, 2012

/s/ Cynthia Thomassee

  Cynthia Thomassee
 

Interim Chief Financial Officer, Vice President of Accounting and Controller

(duly authorized officer and Principal Financial and Accounting Officer)

 

22