's Rating Du Jour 12/4: Jefferies Gives 5 Reasons Why to Like Francesca's (FRAN) Again

December 4, 2012 1:17 PM EST
Get Alerts FRAN Hot Sheet
Price: $18.37 --0%

Rating Summary:
    12 Buy, 12 Hold, 1 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 0 | Down: 0 | New: 0
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Join SI Premium – FREE's Rating Du Jour for December 4, 2012 is Jefferies' bullish call on Francesca's Holdings (NASDAQ: FRAN).

After presciently downgrading FRAN a quarter ago, today Jefferies' retail analyst Randal Konik raised his rating back to Buy and boosted his price target from $35 to $38, suggesting over 50 percent upside from Monday's close. Konik has had a perfect track record timing the stock, as shown at Ratings Insider.

Konik said valuation has become "much more attractive," confidence in the long term has not waned and they now feel comfortable with new leadership taking the baton.

The analyst list 5 reasons to buy Francesca again:

1. Concept Is Very Differentiated - The firm says FRAN has a unique boutique concept with small stores, attractive price points and new merchandise flows five days a week. They maintain very lean inventories which allows for less markdowns and faster inventory turns.

2. Lots of Growth Ahead - The comapny has the potential to more than double the store base to 900 stores in the next 7-10 years. Currently the operates ~360 stores.

3. Confidence In New Management - "... we believe the company has transitioned smoothly to the new CEO, Neill Davis. Mr. Davis is currently President and director since 2007, and clearly is very familiar with the company's operations. Additionally, we know him from his previous CFO role at Men's Wearhouse and believe he is a capable and experienced leader."

4. Solid Fundamental - "FRAN continues to have some of the strongest fundamentals in retail. The company’s unique real estate strategy and high 4-wall margins yield strong new store economics, with over 150% ROI within the first year."

5. Sentiment Now Too Negative - ". FRAN's short interest has risen sharply within recent months, from 14% before 2Q results to 28% at present. Additionally, FRAN has the third highest short interest rate within our coverage universe of 25 companies. We believe sentiment is now overly negative at these levels especially given the strong fundamentals and growth story at FRAN."

On valuation, the firm notes shares currently trade in-line with peers at t 21x EPS and 11x EBITDA. However, they belive the stocks should trade at a premium given: given: 1) its early stage of growth vs. peers; 2) superior operating margins; 3) highly visible earnings trajectory of 25-30% annual growth; and 4) strong returns on investment.

Shares of FRAN are up 2.06 percent today to $25.82 amid the upgrade.

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