10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended August 2, 2014

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, TX	77080
(Address of principal executive offices)	(Zip Code)

(713) 864-1358

(Registrant’s telephone number, including area code)

None

(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	x	Accelerated filer	¨
Non-accelerated filer	¨  (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 42,297,832 shares (excluding 3,179,581 of treasury stock) of its common stock outstanding as of August 31, 2014.

TABLE OF CONTENTS

PART I.	FINANCIALINFORMATION	3
Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets as of August 2, 2014, February 1, 2014 and August 3, 2013	3
	Unaudited Consolidated Statements of Operations for the Thirteen and Twenty Six Weeks Ended August 2, 2014 and August 3, 2013	4
	Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Twenty Six Weeks Ended August 2, 2014	5
	Unaudited Consolidated Statements of Cash Flows for the Twenty Six Weeks Ended August 2, 2014 and August 3, 2013	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	18
Item 4.	Controls and Procedures	19
PART II.	OTHER INFORMATION	19
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 6.	Exhibits	19

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Francesca’s Holdings Corporation

Unaudited Consolidated Balance Sheets

(In thousands, except share amounts)

	August 2,  2014			February 1,  2014			August 3,  2013
ASSETS
Current assets:
Cash and cash equivalents	$	24,861		$	37,498		$	39,550
Accounts receivable		9,905			8,984			6,549
Inventories		30,191			24,614			25,590
Deferred income taxes		4,726			4,565			3,750
Prepaid expenses and other current assets		6,965			6,764			5,011
Total current assets		76,648			82,425			80,450
Property and equipment, net		71,217			64,131			56,268
Deferred income taxes		4,562			2,335			3,741
Other assets, net		1,538			1,654			2,132
TOTAL ASSETS	$	153,965		$	150,545		$	142,591
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,380		$	10,207		$	5,867
Accrued liabilities		9,088			9,823			8,496
Total current liabilities		20,468			20,030			14,363
Landlord incentives and deferred rent		33,097			27,448			27,475
Long-term debt		5,000			25,000			—
Total liabilities		58,565			72,478			41,838
Commitments and contingencies
Stockholders’ equity:
Common stock - $.01 par value, 80.0 million shares authorized; 45.5 million, 45.2 million and 44.1 million shares issued at August 2, 2014, February 1, 2014 and August 3, 2013, respectively.		455			452			441
Additional paid-in capital		104,925			101,192			88,299
Retained earnings		50,163			31,296			12,013
Treasury stock, at cost – 3.2 million, 2.9 million and 0 shares held at August 2, 2014, February 1, 2014 and August 3, 2013, respectively.		(60,143	)		(54,873	)		—
Total stockholders’ equity		95,400			78,067			100,753
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	153,965		$	150,545		$	142,591

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						Twenty Six Weeks Ended
	August 2, 2014			August 3, 2013			August 2, 2014			August 3, 2013
Net sales	$	97,319		$	89,566		$	182,743		$	168,554
Cost of goods sold and occupancy costs		52,004			41,810			95,596			79,426
Gross profit		45,315			47,756			87,147			89,128
Selling, general and administrative expenses		28,653			23,683			56,465			47,034
Income from operations		16,662			24,073			30,682			42,094
Interest expense		(169	)		(117	)		(390	)		(233	)
Other income		56			121			159			204
Income before income tax expense		16,549			24,077			30,451			42,065
Income tax expense		6,242			9,458			11,584			16,509
Net income	$	10,307		$	14,619		$	18,867		$	25,556
Basic earnings per common share	$	0.24		$	0.33		$	0.45		$	0.58
Diluted earnings per common share	$	0.24		$	0.33		$	0.45		$	0.57
Weighted average shares outstanding:
Basic shares		42,252			44,050			42,220			43,995
Diluted shares		42,367			44,905			42,364			44,894

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
	Shares Outstanding			Par Value		Additional Paid-in Capital		Retained Earnings		Treasury Stock, at cost			Total Stockholders' Equity
Balance, February 1, 2014		42,349		$	452	$	101,192	$	31,296	$	(54,873	)	$	78,067
Net income		—			—		—		18,867		—			18,867
Stock-based compensation		—			—		1,629		—		—			1,629
Stock options exercised and related tax benefit		232			3		2,104		—		—			2,107
Repurchases of common stock		(285	)		—		—		—		(5,270	)		(5,270	)
Balance, August 2, 2014		42,296		$	455	$	104,925	$	50,163	$	(60,143	)	$	95,400

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)

	Twenty Six Weeks Ended
	August 2,  2014			August 3,  2013
Cash Flows From Operating Activities:
Net income	$	18,867		$	25,556
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		6,244			4,774
Stock-based compensation expense		1,629			1,953
Excess tax benefit from stock-based compensation		(775	)		(2,828	)
Inventory write-off		2,731			—
Loss on sale of assets		121			136
Amortization of debt issuance costs		122			147
Deferred income taxes		(2,388	)		(1,628	)
Changes in operating assets and liabilities:
Accounts receivable		(146	)		(4,045	)
Inventories		(8,308	)		(6,541	)
Prepaid expenses and other assets		(208	)		(968	)
Accounts payable		1,480			(2,491	)
Accrued liabilities		(735	)		657
Landlord incentive and deferred rent		5,649			5,383
Net cash provided by operating activities		24,283			20,105
Cash Flows Used in Investing Activities:
Purchase of property and equipment		(13,759	)		(11,622	)
Proceeds from sale of assets		2			3
Net cash used in investing activities		(13,757	)		(11,619	)
Cash Flows Provided by (Used in) Financing Activities:
Repayments of borrowings under the revolving credit facility		(20,000	)		—
Repurchases of common stock		(5,270	)		—
Proceeds from the exercise of stock options		1,332			639
Taxes paid related to net settlement of equity awards		—			(2,280	)
Excess tax benefit from stock-based compensation		775			2,828
Net cash provided by (used in) financing activities		(23,163	)		1,187
Net increase (decrease) in cash and cash equivalents		(12,637	)		9,673
Cash and cash equivalents, beginning of year		37,498			29,877
Cash and cash equivalents, end of period	$	24,861		$	39,550
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes	$	9,413		$	17,647
Interest paid	$	288		$	81

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 is a holding company incorporated in 2007 under the laws of the State of Delaware whose business operations are conducted through its subsidiaries.  Unless the context otherwise requires, the “Company,” refers to Francesca’s Holdings Corporation and its consolidated subsidiaries. The Company operates a national chain of retail boutiques 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 balanced mix of apparel, jewelry, accessories and gifts at attractive prices. At August 2, 2014, the Company operated 526 boutiques, which are located in 47 states throughout the United States and the District of Columbia, and its direct-to-consumer 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, changes in equity, and cash flows at the dates and for the periods presented. The financial information as of February 1, 2014 was derived from the Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 1, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2014.

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 February 1, 2014 included in the Company’s Annual Report on Form 10-K.

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 years 2014 and 2013 each include 52 weeks of operations. The fiscal quarters ended August 2, 2014 and August 3, 2013 refer to the thirteen-week periods ended as of those dates. The year-to-date periods ended August 2, 2014 and August 3, 2013 refer to the twenty-six week periods ended as of those dates.

Management Estimates and Assumptions

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 materially from those estimates.

7

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board ( “FASB” ) issued Accounting Standards Update ( “ASU” ) No. 2014-15, “Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This guidance is effective for annual periods ending after December 15, 2016 and for annual and interim periods thereafter. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

In May 2014 the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This pronouncement was issued to improve the financial reporting of revenue and improves comparability of the top line in financial statements globally and is effective for reporting periods beginning on or after December 15, 2016. The Company is in the process of assessing the provisions of this new guidance and has not determined whether the adoption will have a material impact on our consolidated financial statements.

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 more dilutive of the treasury stock method or the two-class method.

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

	Thirteen Weeks Ended				Twenty Six Weeks Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
	(in thousands, except per share data)
Numerator:
Net income	$	10,307	$	14,619	$	18,867	$	25,556
Denominator:
Weighted-average common shares outstanding - basic		42,252		44,050		42,220		43,995
Options and other dilutive securities		115		855		144		899
Weighted-average common shares outstanding - diluted		42,367		44,905		42,364		44,894
Per common share:
Basic earnings per common share	$	0.24	$	0.33	$	0.45	$	0.58
Diluted earnings per common share	$	0.24	$	0.33	$	0.45	$	0.57

Potentially issuable shares under the Company’s stock-based compensation plans amounting to 0.9 million shares in each of the thirteen and twenty six weeks ended August 2, 2014 and 0.8 million shares in each of the thirteen and twenty six weeks ended August 3, 2013 were excluded in the computation of diluted earnings per share due to their anti-dilutive effect.

3. Inventory

To accelerate the flow of new merchandise into its boutiques, the Company disposed of certain slow-moving inventory during the second quarter of fiscal year 2014 at a net cost of $2.9 million.

4. 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 due to the short term nature of these financial assets and liabilities. The carrying value of the Company’s debt approximates its fair value primarily due to the variable component of interest on debt.

8

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

5. 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 and twenty six weeks ended August 2, 2014 were 37.7% and 38.0%, respectively. The effective tax rates for both the thirteen and twenty six weeks ended August 3, 2013 was 39.3%. The difference between our effective tax rate and federal statutory rate primarily relates to state income taxes.

6. Revolving Credit Facility

On August 30, 2013, Francesca’s Collections, Inc. (“Francesca’s Collections” or the “Borrower”), as borrower, and its parent company, Francesca’s LLC, a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement with Royal Bank of Canada, as Administrative Agent and Collateral Agent, and the lenders party thereto. The credit facility provides capacity of $75.0 million (including up to $10.0 million for letters of credit) and matures on August 30, 2018.  The facility also contains an option permitting the Borrower, subject to certain requirements and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate of $25.0 million, subject to reductions in the event the Borrower has certain indebtedness outstanding.  At August 2, 2014, $5.0 million was outstanding under the credit facility and no letters of credit were outstanding. See Note 10, “Subsequent Event” for additional information.

The credit facility contains customary events of default and requires the Borrower to comply with certain financial covenants. As of August 2, 2014, the Borrower was in compliance with all covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can pay; provided that the Borrower is permitted to pay dividends to the extent it has available capacity in its available investment basket (as defined in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain procedural requirements have been satisfied and the Borrower is in pro forma compliance with a maximum secured leverage ratio. At August 2, 2014, the Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations under the credit facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All obligations under the facility are unconditionally guaranteed by, subject to certain exceptions, by Francesca’s LLC and each of the Borrower’s existing and future direct and indirect wholly-owned domestic subsidiaries.

7. Stock-based Compensation

The Company’s employees participate in various stock-based compensation plans, including stock options and restricted stock awards.

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 grants that are not expected to vest. The stock-based compensation cost recognized in the thirteen and twenty six weeks ended August 2, 2014 totaled $0.8 million and $1.6 million, respectively. The stock-based compensation cost recognized in the thirteen and twenty six weeks ended August 3, 2013 totaled $1.0 million and $2.0 million, respectively,

Stock Options

During the twenty six weeks ended August 2, 2014 and August 3, 2013, the intrinsic value of stock options exercised totaled $2.8 million and $7.7 million, respectively, while stock options were granted at a weighted average grant date fair value of $8.03 and $15.55, respectively.

As of August 2, 2014 there was approximately $6.4 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.

9

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

Restricted Stock Awards

On April 11, 2014, the Company awarded a total of 158,450 service and performance-based restricted stock awards to certain executives and other key employees. These awards entitle the grantee to receive up to a maximum of 1.5 shares of the Company’s common stock per service-based and performance-based restricted stock award if the Company achieves specified annual performance goals set at the beginning of each of the fiscal years 2014, 2015 and 2016. The grantee may earn a portion of the award based on the annual performance during each individual year but must remain continuously employed with the Company for the entire three year vesting period to receive such awards. The specified performance goals include the achievement of certain levels of earnings per share and net sales growth. The fair value of the restricted stock awards is based on the closing price of the Company’s common stock on the award date, which was $17.04 per share for those awards related to the fiscal 2014 performance period. Compensation expense is recognized when it is probable that specified performance goals will be achieved. Such compensation is recognized from the award date over the remaining vesting period. As of August 2, 2014, no compensation expense has been recognized related to these awards.

8. Share Repurchases

On September 3, 2013, the Company’s Board of Directors authorized a $100.0 million share repurchase program commencing on the same date. This authorization has no expiration date. Under the repurchase program, purchases can be made from time to time in the open market, in privately negotiated transactions, under Rule 10b5-1 plans or through other available means. The specific timing and amount of the repurchases is dependent on market conditions, securities law limitations and other factors. There were no share repurchases during the thirteen weeks ended August 2, 2013. During the twenty six weeks ended August 2, 2014, the Company repurchased 285,000 shares of its common stock at a cost of approximately $5.3 million or an average price (including brokers’ commission) of $18.49 per share. The cost of repurchased shares is presented as treasury stock in the unaudited consolidated balance sheets. As of August 2, 2014, the remaining balance available for future share repurchase was approximately $39.9 million.

9. Commitments and Contingencies

Operating Leases

The Company leases boutique space and office space under operating leases expiring in various years through the fiscal year ending 2025. 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 August 2, 2014, are as follows:

Fiscal year	Amount
	(In thousands)
Remainder of 2014	$	16,376
2015		33,948
2016		33,309
2017		32,278
2018		30,054
Thereafter		86,450
	$	232,415

10

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

Legal Proceedings

On September 27, 2013 and November 4, 2013, two purported class action lawsuits entitled Ortuzar v. Francesca’s Holdings Corp., et al. and West Palm Beach Police Pension Fund v. Francesca’s Holdings Corp., et al. were filed in the United States District Court for the Southern District of New York against the Company and certain of its current and former directors and officers for alleged violations of the federal securities laws arising from statements in certain public disclosures regarding the Company’s current and future business and financial condition. On December 19, 2013, the Court consolidated the actions and appointed Arkansas Teacher Retirement System as lead plaintiff. On March 14, 2014, lead plaintiff filed a consolidated class action complaint purportedly on behalf of shareholders that purchased or acquired the Company’s publicly traded common stock between July 22, 2011 and September 3, 2013 against the Company and certain of its current and former directors and officers. The consolidated complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a) (2), and 15 of the Securities Act of 1933 for allegedly false and misleading statements in the Company’s public disclosures concerning, among other things, the Company’s relationship with certain vendors. The lawsuit seeks damages in an unspecified amount. On May 13, 2014 defendants moved to dismiss the consolidated complaint. That motion was fully briefed as of August 13, 2014. The Company believes that the allegations contained in the consolidated complaint are without merit and intends to vigorously defend itself against all claims asserted therein. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time and, as such, the Company has not recorded an accrual for any possible loss.

On December 11, 2013, a purported shareholder derivative action entitled Daniell v. De Merritt, et al. was filed on behalf of the Company in the District Court of Harris County, Texas, naming certain of the Company’s current and former officers and directors as defendants and naming the Company as a nominal defendant. The complaint alleged breaches of fiduciary duty including the dissemination of false and misleading statements, failure to maintain internal controls, and insider selling and misappropriation of information, unjust enrichment, abuse of control, and gross mismanagement. This derivative action sought damages in an unspecified amount, an order directing the Company “to reform and improve” corporate governance and internal controls, restitution and disgorgement from the defendants, and costs and attorneys’ fees. On January 30, 2014, the Company and defendants moved to dismiss the complaint, on May 9, 2014, plaintiff filed an amended petition alleging the same causes of action, and on May 16, 2014, plaintiff filed a notice of nonsuit seeking an order dismissing his claims without prejudice. On May 28, 2014, plaintiff filed a substantially similar complaint alleging the same causes in the Delaware Court of Chancery. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time and, as such, the Company has not recorded an accrual for any possible loss.

On July 8, 2014, a purported shareholder derivative action entitled Murphy v. Davis, et al. was filed on behalf of the Company in the Delaware Court of Chancery, naming certain of the Company’s current and former officers and directors as defendants and naming the Company as a nominal defendant. The Murphy complaint alleges claims of breaches of fiduciary duty, waste, and unjust enrichment. The Murphy complaint seeks damages in an unspecified amount, an order directing the Company “to reform and improve” corporate governance and internal controls, equitable and/or injunctive relief, restitution and disgorgement from the defendants, and costs and attorneys’ fees. The Company, Defendants, the Daniell plaintiff, and the Murphy plaintiff have agreed, subject to Court approval, to the consolidation of the Daniell and Murphy cases and the filing of a consolidated complaint.

The Company, from time to time, 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 is unlikely to have a material adverse effect on the Company’s business, results of operations or financial condition. 

10. Subsequent Event

Subsequent to quarter-end, the Borrower paid the outstanding balance on its revolving credit facility totaling $5.0 million. As of September 10, 2014, there was no outstanding amount under the revolving credit facility.

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. These risks and uncertainties include, but are not limited to, the following: the risk that we cannot anticipate, identify and respond quickly to changing fashion trends and customer preferences; our ability to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise through our direct-to-consumer business; our ability to successfully open and operate new boutiques each year; and our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth. For additional information regarding these and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward looking statements, please refer to “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014 and filed with the Securities and Exchange Commission (“SEC”) on March 28, 2014 and any risk factors contained in subsequent Quarterly Reports on Form 10-Q we file with the SEC.

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 after the date of this report whether as a result of new information, future developments or otherwise.

Overview

Unless the context otherwise requires, the “Company,” “we,” “our,” “ours,” “us” and “francescas ® ” refer to Francesca’s Holdings Corporation and its consolidated subsidiaries.

francesca’s^® is a growing specialty retailer with retail locations designed and merchandised to feel like independently owned, upscale boutiques providing customers a fun and differentiated shopping experience. The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts. As of August 2, 2014, francesca’s ^® operated 526 boutiques in 47 states and the District of Columbia and also served its customers through www.francescas.com, its direct-to-consumer website. The information contained on our website is not incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information contained on our website to be part of this Quarterly Report on Form 10-Q.

12

During the thirteen weeks ended August 2, 2014, our net sales increased 9% to $97.3 million from $89.6 million, income from operations decreased by 31% to $16.7 million from $24.1 million and net income decreased 29% to $10.3 million, or $0.24 per diluted share, from $14.6 million, or $0.33 per diluted share, over the comparable prior year period. During the twenty six weeks ended August 2, 2014, our net sales increased 8% to $182.7 million from $168.6 million, income from operations decreased by 27% to $30.7 million from $42.1 million and net income decreased 26% to $18.9 million, or $0.45 per diluted share, from $25.6 million, or $0.57 per diluted share, over the comparable prior year period.

We have increased our boutique count to 526 boutiques as of August 2, 2014 from 436 boutiques as of August 3, 2013. To complete our planned boutique openings for the fiscal year 2014, we plan to open approximately 13 boutiques during the remainder of the fiscal year.

Results of Operations

The following represents operating data for the thirteen and twenty six weeks ended August 2, 2014 and August 3, 2013.

	Thirteen Weeks Ended						Twenty Six Weeks Ended
	August 2, 2014			August 3, 2013			August 2, 2014			August 3, 2013
Total net sales growth for period		9	%		17	%		8	%		22	%
Comparable sales growth for period(1)		(7	)%		(1	)%		(7	)%		0	%
Number of boutiques open at end of period		526			436			526			436
Net sales per average square foot for period (not in thousands)(2)	$	140		$	154			273		$	304
Average square feet per boutique (not in thousands)(3)		1,345			1,361			1,345			1,361
Total gross square feet at end of period (in thousands)		707			594			708			594

(1) A boutique is included in comparable sales on the first day of the fifteenth full month following the boutique’s opening. When a boutique that is included in comparable sales is relocated, we continue to consider sales from that boutique to be comparable 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 sales. Comparable sales results include our direct-to-consumer sales.

(2) Net sales per average square foot is calculated by dividing net sales for the period by the average square feet during the period. Because of our rapid growth, for purposes of providing net sales per square foot measure, we use average square feet during the period as opposed to total gross square feet at the end of the period. For individual quarterly periods, average 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. 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 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.

 Boutique Count

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

	Thirteen Weeks Ended				Twenty Six Weeks Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Number of boutiques open at beginning of period		513		416		451		360
Boutiques added		13		20		75		76
Number of boutiques open at the end of period		526		436		526		436

13

Thirteen Weeks Ended August 2, 2014 Compared to Thirteen Weeks Ended August 3, 2013

	Thirteen Weeks Ended
	August 2, 2014						August 3, 2013						Variance
	In USD			As a % of Net Sales(1)			In USD			As a % of Net Sales(1)			In USD			%			Basis Points
	(In thousands, except percentages)
Net sales	$	97,319			100.0	%	$	89,566			100.0	%	$	7,753			9	%		—
Cost of goods sold and occupancy costs		52,004			53.4	%		41,810			46.7	%		10,194			24	%		670
Gross profit		45,315			46.6	%		47,756			53.3	%		(2,441	)		(5	)%		(670	)
Selling, general and administrative expenses		28,653			29.4	%		23,683			26.4	%		4,970			21	%		300
Income from operations		16,662			17.1	%		24,073			26.9	%		(7,411	)		(31	)%		(980	)
Interest expense		(169	)		(0.2	)%		(117	)		(0.1	)%		(52	)		44	%		(10	)
Other income		56			0.1	%		121			0.1	%		(65	)		(54	)%		—
Income before income tax expense		16,549			17.0	%		24,077			26.9	%		(7,528	)		(31	)%		(990	)
Income tax expense		6,242			6.4	%		9,458			10.6	%		(3,216	)		(34	)%		(420	)
Net income	$	10,307			10.6	%	$	14,619			16.3	%	$	(4,312	)		(29	)%		(570	)

⁽¹⁾ Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.

Net Sales

Net sales increased 9% to $97.3 million in the thirteen weeks ended August 2, 2014 from $89.6 million in the thirteen weeks ended August 3, 2013. This increase is primarily attributable to the increase in non-comparable sales, which in turn is due to the increase in the number of boutiques in operation in the second quarter of fiscal year 2014 as compared to the same period of the prior year. This change was partially offset by a 7% decrease in comparable sales driven by a 7% decrease in transactions. Our direct-to-consumer sales increased 98% to $3.6 million from $1.8 million during the prior year quarter. There were 416 comparable boutiques and 110 non-comparable boutiques open at August 2, 2014 compared to 313 and 123, respectively, at August 3, 2013.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs increased 24% to $52.0 million in the thirteen weeks ended August 2, 2014 from $41.8 million in the thirteen weeks ended August 3, 2013. Cost of merchandise and freight expenses increased by $7.5 million due to increased sales volume as well as the disposal of certain slow-moving inventory during the second quarter of fiscal year 2014. Occupancy costs increased by $2.7 million due to the increase in the number of boutiques in operation during the thirteen weeks ended August 2, 2014 compared to the same period of the prior year.

As a percentage of net sales, cost of goods sold and occupancy costs increased to 53.4% in the thirteen weeks ended August 2, 2014 from 46.7% in the thirteen weeks ended August 3, 2013, an unfavorable variance of 670 basis points. During the quarter, the disposal of certain slow-moving inventory accounted for 350 basis points while deleveraging of fixed occupancy costs accounted for 170 basis points respectively of the total unfavorable variance. The remaining unfavorable variance arose from increased markdowns and promotional activities and a merchandise mix change to the lower margin categories.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 21% to $28.7 million in the thirteen weeks ended August 2, 2014 from $23.7 million in the thirteen weeks ended August 3, 2013. As a percentage of net sales, selling, general and administrative expense increased to 29.4% in the thirteen weeks ended August 2, 2014 as compared to 26.4% in the thirteen weeks ended August 3, 2013. This increase was primarily due to deleveraging of expenses due to lower sales growth as well as the higher boutique and corporate payroll associated with expansion of the field leadership structure during late 2013 to support the larger boutique base.

Income Tax Expense

The decrease in provision for income taxes of $3.2 million in the thirteen weeks ended August 2, 2014 compared to the thirteen weeks ended August 3, 2013 was primarily due to the decrease in pre-tax income. The effective tax rate of 37.7% in the thirteen weeks ended August 2, 2014 was comparable to the effective tax rate of 39.3% in the thirteen weeks ended August 3, 2013.

14

Twenty Six Weeks Ended August 2, 2014 Compared to Twenty Six Weeks Ended August 3, 2013

	Twenty Six Weeks Ended
	August 2, 2014						August 3, 2013						Variance
	In USD			As a % of Net Sales(1)			In USD			As a % of Net Sales(1)			In USD			%			Basis Points
	(In thousands, except percentages)
Net sales	$	182,743			100.0	%	$	168,554			100.0	%	$	14,189			8	%		—
Cost of goods sold and occupancy costs		95,596			52.3	%		79,426			47.1	%		16,170			20	%		520
Gross profit		87,147			47.7	%		89,128			52.9	%		(1,981	)		(2	)%		(520	)
Selling, general and administrative expenses		56,465			30.9	%		47,034			27.9	%		9,431			20	%		300
Income from operations		30,682			16.8	%		42,094			25.0	%		(11,412	)		(27	)%		(820	)
Interest expense		(390	)		(0.2	)%		(233	)		(0.1	)%		(157	)		67	%		(10	)
Other income		159			0.1	%		204			0.1	%		(45	)		(22	)%		—
Income before income tax expense		30,451			16.7	%		42,065			25.0	%		(11,614	)		(28	)%		(830	)
Income tax expense		11,584			6.3	%		16,509			9.8	%		(4,925	)		(30	)%		(350	)
Net income	$	18,867			10.3	%	$	25,556			15.2	%	$	(6,689	)		(26	)%		(490	)

⁽¹⁾ Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.

Net Sales

Net sales increased 8% to $182.7 million in the twenty six weeks ended August 2, 2014 from $168.6 million in the twenty six weeks ended August 3, 2013. This increase is primarily attributable to the increase in non-comparable sales, which in turn is due to the increase in the number of boutiques in operation in the twenty six weeks ended August 2, 2014 as compared to the same period of the prior year. This change was partially offset by a 7% decrease in comparable sales driven by a 7% decrease in transactions. Our direct-to-consumer sales increased 91% to $6.6 million from $3.5 million over the same period. There were 416 comparable boutiques and 110 non-comparable boutiques open at August 2, 2014 compared to 313 and 123, respectively, at August 3, 2013.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs increased 20% to $95.6 million in the twenty six weeks ended August 2, 2014 from $79.4 million in the twenty six weeks ended August 3, 2013. Cost of merchandise and freight expenses increased by $11.1 million due to increased sales volume as well as the disposal of certain slow-moving inventory during the second quarter of fiscal year 2014. Occupancy costs increased by $5.0 million due to the increase in the number of boutiques in operation during the twenty six weeks ended August 2, 2014 compared to the same period of the prior year.

As a percentage of net sales, cost of goods sold and occupancy costs increased to 52.3% in the twenty six weeks ended August 2, 2014 from 47.1% in the twenty six weeks ended August 3, 2013, an unfavorable variance of 520 basis points. During the year-to-date period, the disposal of certain slow-moving inventory accounted for 190 basis points while deleveraging of fixed occupancy costs accounted for 160 basis points respectively of the total unfavorable variance. The remaining unfavorable variance arose from increased markdowns and promotional activities and a merchandise mix change to the lower margin categories.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 20% to $56.5 million in the twenty six weeks ended August 2, 2014 from $47.0 million in the twenty six weeks ended August 3, 2013. As a percentage of net sales, selling, general and administrative expense increased to 30.9% in the twenty six weeks ended August 2, 2014 as compared to 27.9% in the twenty six weeks ended August 3, 2013. This increase was primarily due to deleveraging of expenses due to lower sales growth as well as the higher boutique and corporate payroll expenses associated with expansion of the field leadership structure during late 2013 to support the larger boutique base.

15

Income Tax Expense

The decrease in provision for income taxes of $4.9 million in the twenty six weeks ended August 2, 2014 compared to the twenty six weeks ended August 3, 2013 was primarily due to the decrease in pre-tax income. The effective tax rate of 38.0% in the thirteen weeks ended August 2, 2014 was comparable to the effective tax rate of 39.3% in the thirteen weeks ended August 3, 2013.

 Sales by Merchandise Category

	Thirteen Weeks Ended										Twenty Six Weeks Ended
	August 2, 2014					August 3, 2013					August 2, 2014					August 3, 2013
	In Dollars		As a % of  Net Sales			In Dollars		As a % of  Net Sales			In Dollars		As a % of  Net Sales			In Dollars		As a % of  Net Sales
	(in thousands, except percentages)
Apparel	$	52,128		53.7	%	$	45,613		50.9	%	$	96,892		53.0	%	$	85,461		50.7	%
Jewelry		20,594		21.2	%		23,448		26.1	%		38,914		21.3	%		42,428		25.2	%
Accessories		14,526		15.0	%		12,763		14.2	%		28,670		15.7	%		25,377		15.1	%
Gifts		9,865		10.1	%		7,874		8.8	%		18,287		10.0	%		15,103		9.0	%
Merchandise sales(1)	$	97,113		100.0	%	$	89,698		100.0	%	$	182,763		100.0	%	$	168,369		100.0	%

⁽¹⁾ Excludes gift card breakage income, shipping and change in return reserve.

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 interest and principal, if any, under our revolving credit facility. We may use cash or our revolving 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 August 2, 2014. On August 2, 2014, we had $24.9 million of cash and cash equivalents and approximately $70.0 million in borrowing availability under our revolving credit facility. Subsequent to August 2, 2014, we paid the outstanding balance on the revolving credit facility and, as of September 10, 2014, there were no amounts outstanding under the revolving credit facility. There were no letters of credit outstanding at August 2, 2014.

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:

	Twenty Six Weeks Ended
	August 2, 2014			August 3, 2013
	(In thousands)
Provided by operating activities	$	24,283		$	20,105
Used in investing activities		(13,757	)		(11,619	)
Provided by (used in) financing activities		(23,163	)		1,187
Net increase (decrease) in cash and cash equivalents	$	(12,637	)	$	9,673

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 was $24.3 million and $20.1 million in each of the twenty six weeks ended August 2, 2014 and August 3, 2013, respectively. The increase in cash provided by operating activities in the current quarter was primarily due to timing changes with respect to accounts receivable, accounts payable and accrued liabilities. This change was partially offset by an increase in inventories due to the increase in our boutique count and a decrease in net income.

16

Investing Activities

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

	Twenty Six Weeks Ended
	August 2, 2014		August 3, 2013
	(In thousands)
Capital expenditures for:
New boutiques	$	10,134	$	8,871
Existing boutiques		2,783		829
Technology		696		1,390
Corporate and distribution		146		532
Total capital expenditures	$	13,759	$	11,622

Our total capital expenditures for the twenty six weeks ended August 2, 2014 and August 3, 2013 were $13.8 million and $11.6 million, respectively, with new boutiques accounting for most of our spending at $10.1 million and $8.9 million, respectively. $2.8 million was paid during the twenty-six weeks ended August 2, 2014 in connection with existing boutiques. The majority of this amount was spent on remodeling 34 existing boutiques. Spending for new boutiques included amounts associated with boutiques that will open subsequent to the end of each fiscal quarter. We opened 75 boutiques in the twenty six weeks ended August 2, 2014 compared to 76 boutiques in the twenty six weeks ended August 3, 2013. The average cost of the leasehold improvements, equipment, furniture and fixtures, excluding tenant allowances which are reflected in operating cash flows, for new boutiques opened in the twenty-six weeks ended August 2, 2014 and August 3, 2013 was $199,000 and $179,000, respectively. The average tenant allowance per new boutique in the twenty six weeks ended August 2, 2014 and August 3, 2013 was $90,000 and $74,000, respectively. The increase in average boutique build-out costs and average tenant allowances was principally due to opening more boutiques in mall locations in the current year-to-date period as compared to the prior year period. 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. 

Management anticipates that capital expenditures for the remainder of fiscal year 2014 will be approximately $11.7 million to $13.7 million. The majority of this amount will be spent on investments in new and existing boutiques

Financing Activities

Financing activities consist of borrowings and payments under our revolving credit facility, repurchases of our common stock, and proceeds from the exercise of stock options and the related tax consequence.

Net cash used in financing activities was $23.2 million during the twenty six weeks ended August 2, 2014 compared to net cash provided by financing activities of $1.2 million during the twenty six weeks ended August 3, 2013. The increase in net cash used in financing activities is attributable to repayments of borrowings under our revolving credit facility totaling $20.0 million and repurchases of our common stock amounting to $5.3 million.

Revolving Credit Facility

On August 30, 2013, Francesca’s Collections, Inc. (“Francesca’s Collections” or the “Borrower”), as borrower, and its parent company, Francesca's LLC, a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement with Royal Bank of Canada, as Administrative Agent and Collateral Agent, and the lenders party thereto. The credit facility provides capacity of $75.0 million (including up to $10.0 million for letters of credit) and matures on August 30, 2018. The facility also contains an option permitting the Borrower, subject to certain requirements and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate of $25.0 million, subject to reductions in the event the Borrower has certain indebtedness outstanding. At August 2, 2014, $5.0 million was outstanding under the credit facility and no letters of credit were outstanding.

17

The credit facility contains customary events of default and requires the Borrower to comply with certain financial covenants. As of August 2, 2014, the Borrower was in compliance with all covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can pay; provided that the Borrower is permitted to pay dividends to the extent it has available capacity in its available investment basket (as defined in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain procedural requirements have been satisfied and the Borrower is in pro forma compliance with a maximum secured leverage ratio. At August 2, 2014, the Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations under the credit facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All obligations under the facility are unconditionally guaranteed by, subject to certain exceptions, by Francesca’s LLC and each of the Borrower’s existing and future direct and indirect wholly-owned domestic subsidiaries. 

During the thirteen and twenty six weeks ended August 2, 2014, amounts outstanding under the credit facility accrued interest at an average rate of 2.0%.

Share Repurchase Program

There were no share repurchases in the thirteen weeks ended August 2, 2014. For additional information regarding our share repurchase program, please refer to Note 8 to our unaudited consolidated financial statements included in Part I of this report, which is incorporated herein by reference.

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 included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

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 February 1, 2014. As of August 2, 2014, 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 February 1, 2014.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, please refer to Note 1 to our unaudited consolidated financial statements included in Part I of this Report, which is incorporated herein by reference.

Contractual Obligations

There were no significant changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014, other than those which occur in the normal course of business.

 Off Balance Sheet Arrangements

We are not party to any off balance sheet arrangements.

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 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 to the extent that we do not have effective hedging arrangements in place. We historically have not used derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future. At August 2, 2014, we had $5.0 million of borrowings outstanding under our revolving credit facility and the weighted average interest rate during the period was 2.0%. Based on a sensitivity analysis at August 2, 2014, assuming the loan balance would be outstanding for the remainder of the fiscal year, a 100 basis point increase in interest rates would increase annual interest expense by less than $0.1 million.

18

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 at the reasonable assurance level as of August 2, 2014.

There were no changes in our internal control over financial reporting during the quarter ended August 2, 2014 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information regarding legal proceedings involving us, please refer to Note 9 to our unaudited consolidated financial statements included in Part I of this Report, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the fiscal year ended February 1, 2014 and filed with the SEC on March 28, 2014.

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 August 2, 2014, February 1, 2014 and August 3, 2013, (ii) the Unaudited Consolidated Statements of Operations for the Thirteen and Twenty Six Weeks Ended August 2, 2014 and August 3, 2013, (iii) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Twenty Six Weeks Ended August 2, 2014, (iv) Unaudited Consolidated Statements of Cash Flows for the Twenty Six Weeks ended August 2, 2014 and August 3, 2013 and (v) the Notes to the Unaudited Consolidated Financial Statements.

  * Filed herewith.

** Furnished herewith.

19

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:  September 10, 2014	/s/ Mark Vendetti
	Mark Vendetti
	Chief Financial Officer (duly authorized officer and Principal Financial and Accounting Officer)

20

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Neill P. Davis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Francesca’s Holdings Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined by Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  September 10, 2014
	/s/ Neill Davis
	Neill Davis
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Mark Vendetti, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Francesca’s Holdings Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined by Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  September 10, 2014
	/s/ Mark Vendetti
	Mark Vendetti
	Chief Financial Officer (duly authorized officer and Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

I, Neill P. Davis, the Chief Executive Officer of Francesca’s Holdings Corporation, certify that (i) the quarterly report on Form 10-Q for the fiscal quarter ended August 2, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Francesca’s Holdings Corporation as of the dates and for the periods set forth therein.

/s/ Neill Davis

Neill Davis

Chief Executive Officer

September 10, 2014

Date

I, Mark Vendetti, the Chief Financial Officer of Francesca’s Holdings Corporation, certify that (i) the quarterly report on Form 10-Q for the fiscal quarter ended August 2, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Francesca’s Holdings Corporation as of the dates and for the periods set forth therein.

/s/ Mark Vendetti

Mark Vendetti

Chief Financial Officer (duly authorized officer and Principal Financial and Accounting Officer)

September 10, 2014

Date

The foregoing certifications are being furnished solely to accompany the Quarterly Report on Form 10-Q pursuant to 18 U.S.C. § 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. These certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference.

XML

Revolving Credit Facility (Details Textual) (Revolving Credit Facility [Member], USD $) In Millions, unless otherwise specified	6 Months Ended
	Aug. 02, 2014
Revolving Credit Facility [Member]
Revolving Credit Facility Details
Revolving Credit Facility, Initiation Date	Aug. 30, 2013
Revolving Credit Facility Maximum Borrowing Capacity	$ 75.0
Availability for Letters of Credit Under the Revolving Credit Facility	10.0
Revolving Credit Facility, Expiration Date	Aug. 30, 2018
Available Option to Increase the Borrowing Capacity Under the Revolving Credit Faciltiy	25.0
Amount Outstanding under the Revolving Credit Facility	$ 5.0
Covenant Compliance	As of August 2, 2014, the Borrower was in compliance with all covenants under the credit facility.

XML

Inventory

6 Months Ended

Aug. 02, 2014

Inventory Disclosure [Abstract]

Inventory

3. Inventory

To accelerate the flow of new merchandise into its boutiques, the Company disposed of certain slow-moving inventory during the second quarter of fiscal year 2014 at a net cost of $2.9 million.

XML

Subsequent Event (Details Textual) (USD $)	6 Months Ended			1 Months Ended
	Aug. 02, 2014	Aug. 03, 2013	Aug. 02, 2014 Revolving Credit Facility [Member]	Sep. 10, 2014 Subsequent Event [Member] Revolving Credit Facility [Member]
Subsequent Event [Line Items]
Repayment of borrowing under the revolving credit facility	$ 20,000,000	$ 0		$ 5,000,000
Outstanding Amount Under the Revolving Credit Facility			$ 5,000,000	$ 0

XML

Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	Aug. 02, 2014
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
Remainder of 2014	$ 16,376
2015	33,948
2016	33,309
2017	32,278
2018	30,054
Thereafter	86,450
Total	$ 232,415

XML

Earnings per Share

6 Months Ended

Aug. 02, 2014

Earnings Per Share [Abstract]

Earnings per Share

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 more dilutive of the treasury stock method or the two-class method.

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

	Thirteen Weeks Ended				Twenty Six Weeks Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
	(in thousands, except per share data)
Numerator:
Net income	$	10,307	$	14,619	$	18,867	$	25,556
Denominator:
Weighted-average common shares outstanding - basic		42,252		44,050		42,220		43,995
Options and other dilutive securities		115		855		144		899
Weighted-average common shares outstanding - diluted		42,367		44,905		42,364		44,894
Per common share:
Basic earnings per common share	$	0.24	$	0.33	$	0.45	$	0.58
Diluted earnings per common share	$	0.24	$	0.33	$	0.45	$	0.57

Potentially issuable shares under the Company’s stock-based compensation plans amounting to 0.9 million shares in each of the thirteen and twenty six weeks ended August 2, 2014 and 0.8 million shares in each of the thirteen and twenty six weeks ended August 3, 2013 were excluded in the computation of diluted earnings per share due to their anti-dilutive effect.

XML

Unaudited Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Aug. 02, 2014	Feb. 01, 2014	Aug. 03, 2013
Current assets:
Cash and cash equivalents	$ 24,861	$ 37,498	$ 39,550
Accounts receivable	9,905	8,984	6,549
Inventories	30,191	24,614	25,590
Deferred income taxes	4,726	4,565	3,750
Prepaid expenses and other current assets	6,965	6,764	5,011
Total current assets	76,648	82,425	80,450
Property and equipment, net	71,217	64,131	56,268
Deferred income taxes	4,562	2,335	3,741
Other assets, net	1,538	1,654	2,132
TOTAL ASSETS	153,965	150,545	142,591
Current liabilities:
Accounts payable	11,380	10,207	5,867
Accrued liabilities	9,088	9,823	8,496
Total current liabilities	20,468	20,030	14,363
Landlord incentives and deferred rent	33,097	27,448	27,475
Long-term debt	5,000	25,000	0
Total liabilities	58,565	72,478	41,838
Commitments and contingencies
Stockholders’ equity:
Common stock - $.01 par value, 80.0 million shares authorized; 45.5 million, 45.2 million and 44.1 million shares issued at August 2, 2014, February 1, 2014 and August 3, 2013, respectively.	455	452	441
Additional paid-in capital	104,925	101,192	88,299
Retained earnings	50,163	31,296	12,013
Treasury stock, at cost - 3.2 million, 2.9 million and 0 shares held at August 2, 2014, February 1, 2014 and August 3, 2013, respectively.	(60,143)	(54,873)	0
Total stockholders’ equity	95,400	78,067	100,753
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$ 153,965	$ 150,545	$ 142,591

XML

Unaudited Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Aug. 02, 2014	Aug. 03, 2013
Cash Flows From Operating Activities:
Net income	$ 18,867	$ 25,556
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	6,244	4,774
Stock-based compensation expense	1,629	1,953
Excess tax benefit from stock-based compensation	(775)	(2,828)
Inventory write-off	2,731	0
Loss on sale of assets	121	136
Amortization of debt issuance costs	122	147
Deferred income taxes	(2,388)	(1,628)
Changes in operating assets and liabilities:
Accounts receivable	(146)	(4,045)
Inventories	(8,308)	(6,541)
Prepaid expenses and other assets	(208)	(968)
Accounts payable	1,480	(2,491)
Accrued liabilities	(735)	657
Landlord incentive and deferred rent	5,649	5,383
Net cash provided by operating activities	24,283	20,105
Cash Flows Used in Investing Activities:
Purchase of property and equipment	(13,759)	(11,622)
Proceeds from sale of assets	2	3
Net cash used in investing activities	(13,757)	(11,619)
Cash Flows Provided by (Used in) Financing Activities:
Repayments of borrowings under the revolving credit facility	(20,000)	0
Repurchases of common stock	(5,270)	0
Proceeds from the exercise of stock options	1,332	639
Taxes paid related to net settlement of equity awards	0	(2,280)
Excess tax benefit from stock-based compensation	775	2,828
Net cash provided by (used in) financing activities	(23,163)	1,187
Net increase (decrease) in cash and cash equivalents	(12,637)	9,673
Cash and cash equivalents, beginning of year	37,498	29,877
Cash and cash equivalents, end of period	24,861	39,550
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes	9,413	17,647
Interest paid	$ 288	$ 81

XML

Earnings per Share (Details Textual) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 02, 2014	Aug. 03, 2013	Aug. 02, 2014	Aug. 03, 2013
Antidilutive Securities Excluded from Computation of Earnings Per Share
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	0.9	0.8	0.9	0.8

XML

Income Taxes (Details Textual)	3 Months Ended		6 Months Ended
	Aug. 02, 2014	Aug. 03, 2013	Aug. 02, 2014	Aug. 03, 2013
Income Tax Disclosure [Line Items]
Effective Income Tax Rate	37.70%	39.30%	38.00%	39.30%

XML

Summary of Significant Accounting Policies

6 Months Ended

Aug. 02, 2014

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Nature of Business

Francesca’s Holdings Corporation is a holding company incorporated in  2007 under the laws of the State of Delaware whose business operations are conducted through its subsidiaries.  Unless the context otherwise requires, the “Company,” refers to Francesca’s Holdings Corporation and its consolidated subsidiaries. The Company operates a national chain of retail boutiques 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 balanced mix of apparel, jewelry, accessories and gifts at attractive prices. At August 2, 2014, the Company operated  526 boutiques, which are located in 47 states throughout the United States and the District of Columbia, and its direct-to-consumer 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, changes in equity, and cash flows at the dates and for the periods presented. The financial information as of February 1, 2014 was derived from the Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 1, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2014.

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 February 1, 2014 included in the Company’s Annual Report on Form 10-K.

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 years 2014 and 2013 each include 52 weeks of operations. The fiscal quarters ended August 2, 2014 and August 3, 2013 refer to the thirteen-week periods ended as of those dates. The year-to-date periods ended August 2, 2014 and August 3, 2013 refer to the twenty-six week periods ended as of those dates.

Management Estimates and Assumptions

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 materially from those estimates.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board ( “FASB” ) issued Accounting Standards Update ( “ASU” ) No. 2014-15, “Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This guidance is effective for annual periods ending after December 15, 2016 and for annual and interim periods thereafter. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

In May 2014 the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This pronouncement was issued to improve the financial reporting of revenue and improves comparability of the top line in financial statements globally and is effective for reporting periods beginning on or after December 15, 2016. The Company is in the process of assessing the provisions of this new guidance and has not determined whether the adoption will have a material impact on our consolidated financial statements.

XML

Unaudited Consolidated Balance Sheets (Parenthetical) (USD $) In Millions, except Per Share data, unless otherwise specified	Aug. 02, 2014	Feb. 01, 2014	Aug. 03, 2013
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01	$ 0.01
Common stock, shares authorized	80.0	80.0	80.0
Common stock, shares issued	45.5	45.2	44.1
Treasury stock, shares	3.2	2.9	0

XML

Summary of Significant Accounting Policies (Policies)

6 Months Ended

Aug. 02, 2014

Accounting Policies [Abstract]

Basis of Presentation

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, changes in equity, and cash flows at the dates and for the periods presented. The financial information as of February 1, 2014 was derived from the Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 1, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2014.

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 February 1, 2014 included in the Company’s Annual Report on Form 10-K.

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

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

Fiscal Year

The Company maintains its accounts on a 52- or 53-week year ending on the Saturday closest to January 31st. Fiscal years 2014 and 2013 each include 52 weeks of operations. The fiscal quarters ended August 2, 2014 and August 3, 2013 refer to the thirteen-week periods ended as of those dates. The year-to-date periods ended August 2, 2014 and August 3, 2013 refer to the twenty-six week periods ended as of those dates.

Management Estimates and Assumptions

Management Estimates and Assumptions

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 materially from those estimates.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board ( “FASB” ) issued Accounting Standards Update ( “ASU” ) No. 2014-15, “Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This guidance is effective for annual periods ending after December 15, 2016 and for annual and interim periods thereafter. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

In May 2014 the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This pronouncement was issued to improve the financial reporting of revenue and improves comparability of the top line in financial statements globally and is effective for reporting periods beginning on or after December 15, 2016. The Company is in the process of assessing the provisions of this new guidance and has not determined whether the adoption will have a material impact on our consolidated financial statements.

Earnings Per Share

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 more dilutive of treasury stock method or the two-class method.

Fair Value of Financial Instruments

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 due to the short term nature of these financial assets and liabilities. The carrying value of the Company’s debt approximates its fair value primarily due to the variable component of interest on debt.

Stock-based Compensation

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 grants that are not expected to vest. The stock-based compensation cost recognized in the thirteen and twenty six weeks ended August 2, 2014 totaled $0.8 million and $1.6 million, respectively. The stock-based compensation cost recognized in the thirteen and twenty six weeks ended August 3, 2013 totaled $1.0 million and $2.0 million, respectively,

XML

Document And Entity Information	6 Months Ended
	Aug. 02, 2014	Aug. 31, 2014
Document Information [Line Items]
Entity Registrant Name	Francesca's Holdings CORP
Entity Central Index Key	0001399935
Current Fiscal Year End Date	--01-31
Entity Filer Category	Large Accelerated Filer
Trading Symbol	FRAN
Entity Common Stock, Shares Outstanding		42,297,832
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Aug. 02, 2014
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2014

XML

Earnings per Share (Tables)

6 Months Ended

Aug. 02, 2014

Earnings Per Share [Abstract]

Earnings per share

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

	Thirteen Weeks Ended				Twenty Six Weeks Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
	(in thousands, except per share data)
Numerator:
Net income	$	10,307	$	14,619	$	18,867	$	25,556
Denominator:
Weighted-average common shares outstanding - basic		42,252		44,050		42,220		43,995
Options and other dilutive securities		115		855		144		899
Weighted-average common shares outstanding - diluted		42,367		44,905		42,364		44,894
Per common share:
Basic earnings per common share	$	0.24	$	0.33	$	0.45	$	0.58
Diluted earnings per common share	$	0.24	$	0.33	$	0.45	$	0.57

XML

Unaudited Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 02, 2014	Aug. 03, 2013	Aug. 02, 2014	Aug. 03, 2013
Net sales	$ 97,319	$ 89,566	$ 182,743	$ 168,554
Cost of goods sold and occupancy costs	52,004	41,810	95,596	79,426
Gross profit	45,315	47,756	87,147	89,128
Selling, general and administrative expenses	28,653	23,683	56,465	47,034
Income from operations	16,662	24,073	30,682	42,094
Interest expense	(169)	(117)	(390)	(233)
Other income	56	121	159	204
Income before income tax expense	16,549	24,077	30,451	42,065
Income tax expense	6,242	9,458	11,584	16,509
Net income	$ 10,307	$ 14,619	$ 18,867	$ 25,556
Basic earnings per common share (in dollars per share)	$ 0.24	$ 0.33	$ 0.45	$ 0.58
Diluted earnings per common share (in dollars per share)	$ 0.24	$ 0.33	$ 0.45	$ 0.57
Weighted average shares outstanding:
Basic shares (in shares)	42,252	44,050	42,220	43,995
Diluted shares (in shares)	42,367	44,905	42,364	44,894

XML

Revolving Credit Facility

6 Months Ended

Aug. 02, 2014

Debt Disclosure [Abstract]

Revolving Credit Facility

6. Revolving Credit Facility

On August 30, 2013, Francesca’s Collections, Inc. (“Francesca’s Collections” or the “Borrower”), as borrower, and its parent company, Francesca’s LLC, a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement with Royal Bank of Canada, as Administrative Agent and Collateral Agent, and the lenders party thereto. The credit facility provides capacity of $75.0 million (including up to $10.0 million for letters of credit) and matures on August 30, 2018.  The facility also contains an option permitting the Borrower, subject to certain requirements and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate of $25.0 million, subject to reductions in the event the Borrower has certain indebtedness outstanding.  At August 2, 2014, $5.0 million was outstanding under the credit facility and no letters of credit were outstanding. See Note 10, “Subsequent Event” for additional information.

The credit facility contains customary events of default and requires the Borrower to comply with certain financial covenants. As of August 2, 2014, the Borrower was in compliance with all covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can pay; provided that the Borrower is permitted to pay dividends to the extent it has available capacity in its available investment basket (as defined in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain procedural requirements have been satisfied and the Borrower is in pro forma compliance with a maximum secured leverage ratio. At August 2, 2014, the Borrower would have met the conditions for paying dividends out of the available investment basket. All obligations under the credit facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All obligations under the facility are unconditionally guaranteed by, subject to certain exceptions, by Francesca’s LLC and each of the Borrower’s existing and future direct and indirect wholly-owned domestic subsidiaries.

XML

Income Taxes

6 Months Ended

Aug. 02, 2014

Income Tax Disclosure [Abstract]

Income Taxes

5. 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 and twenty six weeks ended August 2, 2014 were 37.7% and 38.0%, respectively. The effective tax rates for both the thirteen and twenty six weeks ended August 3, 2013 was 39.3%. The difference between our effective tax rate and federal statutory rate primarily relates to state income taxes.

XML

Inventory (Details Textual) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Aug. 02, 2014
Inventory [Line Items]
Cost of Disposed Inventory	$ 2.9

XML

Commitments and Contingencies (Tables)

6 Months Ended

Aug. 02, 2014

Commitments and Contingencies Disclosure [Abstract]

Schedule of Future Minimum Rental Payments for Operating Leases

Minimum future rental payments under non-cancellable operating leases as of August 2, 2014, are as follows:

Fiscal year	Amount
	(In thousands)
Remainder of 2014	$	16,376
2015		33,948
2016		33,309
2017		32,278
2018		30,054
Thereafter		86,450
	$	232,415

XML

Commitments and Contingencies

6 Months Ended

Aug. 02, 2014

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

9. Commitments and Contingencies

Operating Leases

The Company leases boutique space and office space under operating leases expiring in various years through the fiscal year ending 2025. 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 August 2, 2014, are as follows:

Fiscal year	Amount
	(In thousands)
Remainder of 2014	$	16,376
2015		33,948
2016		33,309
2017		32,278
2018		30,054
Thereafter		86,450
	$	232,415

Legal Proceedings

On September 27, 2013 and November 4, 2013, two purported class action lawsuits entitled Ortuzar v. Francesca’s Holdings Corp., et al. and West Palm Beach Police Pension Fund v. Francesca’s Holdings Corp., et al. were filed in the United States District Court for the Southern District of New York against the Company and certain of its current and former directors and officers for alleged violations of the federal securities laws arising from statements in certain public disclosures regarding the Company’s current and future business and financial condition. On December 19, 2013, the Court consolidated the actions and appointed Arkansas Teacher Retirement System as lead plaintiff. On March 14, 2014, lead plaintiff filed a consolidated class action complaint purportedly on behalf of shareholders that purchased or acquired the Company’s publicly traded common stock between July 22, 2011 and September 3, 2013 against the Company and certain of its current and former directors and officers. The consolidated complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a) (2), and 15 of the Securities Act of 1933 for allegedly false and misleading statements in the Company’s public disclosures concerning, among other things, the Company’s relationship with certain vendors. The lawsuit seeks damages in an unspecified amount. On May 13, 2014 defendants moved to dismiss the consolidated complaint. That motion was fully briefed as of August 13, 2014. The Company believes that the allegations contained in the consolidated complaint are without merit and intends to vigorously defend itself against all claims asserted therein.

 

On December 11, 2013, a purported shareholder derivative action entitled Daniell v. De Merritt, et al. was filed on behalf of the Company in the District Court of Harris County, Texas, naming certain of the Company’s current and former officers and directors as defendants and naming the Company as a nominal defendant. The complaint alleged breaches of fiduciary duty including the dissemination of false and misleading statements, failure to maintain internal controls, and insider selling and misappropriation of information, unjust enrichment, abuse of control, and gross mismanagement. This derivative action sought damages in an unspecified amount, an order directing the Company “to reform and improve” corporate governance and internal controls, restitution and disgorgement from the defendants, and costs and attorneys’ fees. On January 30, 2014, the Company and defendants moved to dismiss the complaint, on May 9, 2014, plaintiff filed an amended petition alleging the same causes of action, and on May 16, 2014, plaintiff filed a notice of nonsuit seeking an order dismissing his claims without prejudice. On May 28, 2014, plaintiff filed a substantially similar complaint alleging the same causes in the Delaware Court of Chancery. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time and, as such, the Company has not recorded an accrual for any possible loss.

On July 8, 2014, a purported shareholder derivative action entitled Murphy v. Davis, et al. was filed on behalf of the Company in the Delaware Court of Chancery, naming certain of the Company’s current and former officers and directors as defendants and naming the Company as a nominal defendant. The Murphy complaint alleges claims of breaches of fiduciary duty, waste, and unjust enrichment. The Murphy complaint seeks damages in an unspecified amount, an order directing the Company “to reform and improve” corporate governance and internal controls, equitable and/or injunctive relief, restitution and disgorgement from the defendants, and costs and attorneys’ fees. The Company, Defendants, the Daniell plaintiff, and the Murphy plaintiff have agreed, subject to Court approval, to the consolidation of the Daniell and Murphy cases and the filing of a consolidated complaint.

The Company, from time to time, 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 is unlikely to have a material adverse effect on the Company’s business, results of operations or financial condition.

XML

Stock-based Compensation

6 Months Ended

Aug. 02, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

7. Stock-based Compensation

The Company’s employees participate in various stock-based compensation plans, including stock options and restricted stock awards.

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 grants that are not expected to vest. The stock-based compensation cost recognized in the thirteen and twenty six weeks ended August 2, 2014 totaled $0.8 million and $1.6 million, respectively. The stock-based compensation cost recognized in the thirteen and twenty six weeks ended August 3, 2013 totaled $1.0 million and $2.0 million, respectively,

Stock Options

During the twenty six weeks ended August 2, 2014 and August 3, 2013, the intrinsic value of stock options exercised totaled $2.8 million and $7.7 million, respectively, while stock options were granted at a weighted average grant date fair value of $8.03 and $15.55, respectively.

As of August 2, 2014 there was approximately $6.4 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.

Restricted Stock Awards

On April 11, 2014, the Company awarded a total of 158,450 service and performance-based restricted stock awards to certain executives and other key employees. These awards entitle the grantee to receive up to a maximum of 1.5 shares of the Company’s common stock per service-based and performance-based restricted stock award if the Company achieves specified annual performance goals set at the beginning of each of the fiscal years 2014, 2015 and 2016. The grantee may earn a portion of the award based on the annual performance during each individual year but must remain continuously employed with the Company for the entire three year vesting period to receive such awards. The specified performance goals include the achievement of certain levels of earnings per share and net sales growth. The fair value of the restricted stock awards is based on the closing price of the Company’s common stock on the award date, which was $17.04 per share for those awards related to the fiscal 2014 performance period. Compensation expense is recognized when it is probable that specified performance goals will be achieved. Such compensation is recognized from the award date over the remaining vesting period. As of August 2, 2014, no compensation expense has been recognized related to these awards.

XML

Share Repurchases

6 Months Ended

Aug. 02, 2014

Share Repurchases [Abstract]

Share Repurchases

8. Share Repurchases

On September 3, 2013, the Company’s Board of Directors authorized a $100.0 million share repurchase program commencing on the same date.  This authorization has no expiration date.  Under the repurchase program, purchases can be made from time to time in the open market, in privately negotiated transactions, under Rule 10b5-1 plans or through other available means.  The specific timing and amount of the repurchases is dependent on market conditions, securities law limitations and other factors.  There were no share repurchases during the thirteen weeks ended August 2, 2013. During the twenty six weeks ended August 2, 2014, the Company repurchased  285,000 shares of its common stock at a cost of approximately $5.3 million or an average price (including brokers’ commission) of $18.49 per share.  The cost of repurchased shares is presented as treasury stock in the unaudited consolidated balance sheets.  As of August 2, 2014, the remaining balance available for future share repurchase was approximately $39.9 million.  

XML

Subsequent Event

6 Months Ended

Aug. 02, 2014

Subsequent Events [Abstract]

Subsequent Event

10. Subsequent Event

Subsequent to quarter-end, the Borrower paid the outstanding balance on its revolving credit facility totaling $5.0 million. As of September 10, 2014, there was no outstanding amount under the revolving credit facility.

XML

Earnings per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 02, 2014	Aug. 03, 2013	Aug. 02, 2014	Aug. 03, 2013
Numerator:
Net income	$ 10,307	$ 14,619	$ 18,867	$ 25,556
Denominator:
Weighted-average common shares outstanding - basic (in shares)	42,252	44,050	42,220	43,995
Options and other dilutive securities (in shares)	115	855	144	899
Weighted-average common shares outstanding - diluted (in shares)	42,367	44,905	42,364	44,894
Per common share:
Basic earnings per common share (in dollars per share)	$ 0.24	$ 0.33	$ 0.45	$ 0.58
Diluted earnings per common share (in dollars per share)	$ 0.24	$ 0.33	$ 0.45	$ 0.57

XML

Stock-based Compensation (Details Textual) (USD $) In Millions, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 02, 2014	Aug. 03, 2013	Aug. 02, 2014	Aug. 03, 2013
Stock-based Compensation Disclosures
Stock-based Compensation	$ 0.8	$ 1.0	$ 1.6	$ 2.0
Employee Stock Option [Member]
Stock-based Compensation Disclosures
Weighted Average Grant Date Fair Value of Options Granted During the Period (in dollars per share)			$ 8.03	$ 15.55
Aggregate Intrinsic Value of Options Exercised			2.8	7.7
Unrecognized Compensation Cost Related to Stock Options	6.4		6.4
Weighted Average Period Over Which Unrecognized Compensation Costs Related to Non-vested Awards will be Recognized (in years)			3 years
Restricted Stock [Member]
Stock-based Compensation Disclosures
Restricted Stocks Granted During the Period (in shares)			158,450
Maximum Shares to be Received if the Performance Goals are Achieved			1.5
Weighted Average Fair Value of Restricted Stocks Granted During the Period (in dollars per share)			$ 17.04
Stock-based Compensation			$ 0

XML

Unaudited Consolidated Statement of Changes in Stockholders' Equity (USD $) In Thousands	Total USD ($)	Shares Outstanding (in shares)	Common Stock USD ($)	Additional Paid-in Capital USD ($)	Retained Earnings USD ($)	Treasury Stock, at cost USD ($)
Balance at Feb. 01, 2014	$ 78,067		$ 452	$ 101,192	$ 31,296	$ (54,873)
Balance (in shares) at Feb. 01, 2014		42,349
Net income	18,867		0	0	18,867	0
Stock-based compensation	1,629		0	1,629	0	0
Stock options exercised and related tax benefit	2,107		3	2,104	0	0
Stock options exercised and related tax benefit (in shares)		232
Repurchases of common stock	(5,270)		0	0	0	(5,270)
Repurchases of common stock (in shares)	(285)	(285)
Balance at Aug. 02, 2014	$ 95,400		$ 455	$ 104,925	$ 50,163	$ (60,143)
Balance (in shares) at Aug. 02, 2014		42,296

XML

Fair value of Financial Instruments

6 Months Ended

Aug. 02, 2014

Fair Value Disclosures [Abstract]

Fair value of Financial Instruments

4. 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 due to the short term nature of these financial assets and liabilities. The carrying value of the Company’s debt approximates its fair value primarily due to the variable component of interest on debt.

XML

Share Repurchases (Details Textual) (USD $) Share data in Thousands, except Per Share data, unless otherwise specified	3 Months Ended	6 Months Ended
	Aug. 02, 2014	Aug. 02, 2014	Sep. 03, 2013
Treasury Stock Disclosure [Line Items]
Amount Authorized Under the Stock Repurchase Program			$ 100,000,000
Number of Treasury Stock Acquired	0	285
Cost of Treasury Stocks Acquired		5,270,000
Average Cost Per Share of Treasury Stock Acquired		$ 18.49
Remaining Authorized Amount Under the Stock Repurchase Program	$ 39,900,000	$ 39,900,000

XML

Summary of Significant Accounting Policies (Details Textual)	6 Months Ended
	Aug. 02, 2014 States Boutiques
Company Information and Summary of Significant Accounting Policies [Line Items]
Year of Incorporation	2007
Entity Incorporation, State Country Name	Delaware
Number of Boutiques in Operation	526
Number of States in which Entity Operates	47