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Form 10-Q Francesca's Holdings For: Jul 30

September 7, 2016 4:54 PM EDT

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the Quarterly Period Ended July 30, 2016

 

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 37,919,724 shares (excluding 7,998,572 of treasury stock) of its common stock outstanding as of August 15, 2016.

 

 

 

   

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 3
     
Item 1. Financial Statements 3
     
  Unaudited Consolidated Balance Sheets as of July 30, 2016, January 30, 2016 and August 1, 2015 3
     
  Unaudited Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks Ended July 30, 2016 and August 1, 2015 4
     
  Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Twenty-Six Weeks Ended July 30, 2016 5
     
  Unaudited Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 30, 2016 and August 1, 2015 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 18
     
PART II. OTHER INFORMATION 19
     
Item 1. Legal Proceedings 19
     
Item 1A. Risk Factors 19
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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)

 

   July 30, 2016   January 30, 2016   August 1, 2015 
ASSETS               
Current assets:               
Cash and cash equivalents  $26,021   $56,224   $48,840 
Accounts receivable   10,791    9,580    9,061 
Inventories   32,667    31,541    33,642 
Deferred income taxes   6,728    6,411    5,537 
Prepaid expenses and other current assets   6,715    7,013    5,915 
Total current assets   82,922    110,769    102,995 
Property and equipment, net   80,225    77,894    80,176 
Deferred income taxes   4,640    3,847    5,426 
Other assets, net   1,296    1,067    1,677 
                
TOTAL ASSETS  $169,083   $193,577   $190,274 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY               
Current liabilities:               
Accounts payable  $16,620   $14,305   $13,301 
Accrued liabilities   14,327    16,328    13,465 
Total current liabilities   30,947    30,633    26,766 
Landlord incentives and deferred rent   38,673    36,552    37,404 
Total liabilities   69,620    67,185    64,170 
                
Commitments and contingencies               
                
Stockholders’ equity:               
Common stock - $0.01 par value, 80.0 million shares authorized; 45.9 million, 45.9 million and 45.5 million shares issued at July 30, 2016, January 30, 2016 and August 1, 2015, respectively.   459    459    455 
Additional paid-in capital   106,916    107,693    105,843 
Retained earnings   119,228    101,556    79,949 
Treasury stock, at cost – 8.0 million, 4.8 million and 3.2 million shares at July 30, 2016, January 30, 2016 and August 1, 2015, respectively.   (127,140)   (83,316)   (60,143)
Total stockholders’ equity   99,463    126,392    126,104 
                
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $169,083   $193,577   $190,274 

 

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 
   July 30, 2016   August 1, 2015   July 30, 2016   August 1, 2015 
Net sales  $115,260   $106,033   $221,373   $201,044 
Cost of goods sold and occupancy costs   61,323    55,725    118,306    105,843 
Gross profit   53,937    50,308    103,067    95,201 
Selling, general and administrative expenses   36,815    35,133    74,481    68,136 
Income from operations   17,122    15,175    28,586    27,065 
Interest expense   (113)   (112)   (222)   (222)
Other income (expense)   39    (54)   39    (120)
Income before income tax expense   17,048    15,009    28,403    26,723 
Income tax expense   6,457    5,705    10,731    10,178 
Net income  $10,591   $9,304   $17,672   $16,545 
                     
Basic earnings per common share  $0.27   $0.22   $0.45   $0.39 
Diluted earnings per common share  $0.27   $0.22   $0.45   $0.39 
                     
Weighted average shares outstanding:                    
Basic shares   38,664    42,332    39,474    42,318 
Diluted shares   38,755    42,433    39,580    42,425 

 

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

 

 4 

 

 

Francesca’s Holdings Corporation

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(In thousands)

 

   Common Stock   Additional       Treasury   Total 
  

Shares

Outstanding

  

Par

Value

  

Paid-in

Capital

  

Retained

Earnings

  

Stock, at

cost

  

Stockholders'

Equity

 
Balance, January 30, 2016   41,095   $459   $107,693   $101,556   $(83,316)  $126,392 
Net income   -    -    -    17,672    -    17,672 
Stock-based compensation   -    -    (857)   -    -    (857)
Restricted stocks issued, net of forfeitures   40    -    -    -    -    - 
Stock options exercised   28    -    280    -    -    280 
Tax effect of stock-based compensation   -    -    (200)   -    -    (200)
Repurchases of common stock   (3,243)   -    -    -    (43,824)   (43,824)
Balance, July 30, 2016   37,920   $459   $106,916   $119,228   $(127,140)  $99,463 

 

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 
   July 30, 2016   August 1, 2015 
Cash Flows Provided by Operating Activities:          
Net income  $17,672   $16,545 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   9,482    8,000 
Stock-based compensation expense   (857)   1,591 
Excess tax benefit from stock-based compensation   (6)   (61)
Loss on sale of assets   155    282 
Deferred income taxes   (1,315)   (3,940)
Changes in operating assets and liabilities:          
Accounts receivable   (1,205)   3,279 
Inventories   (1,126)   (9,841)
Prepaid expenses and other assets   (55)   86 
Accounts payable   2,599    2,466 
Accrued liabilities   (2,001)   1,561 
Landlord incentives and deferred rent   2,121    4,527 
Net cash provided by operating activities   25,464    24,495 
           
Cash Flows Used in Investing Activities:          
Purchases of property and equipment   (11,149)   (14,959)
Other   8    3 
Net cash used in investing activities   (11,141)   (14,956)
           
Cash Flows (Used in) Provided by Financing Activities:          
Proceeds from the exercise of stock options   280    169 
Excess tax benefit from stock-based compensation   6    61 
Repurchases of common stock   (44,812)   - 
Net cash (used in) provided by financing activities   (44,526)   230 
           
Net (decrease) increase in cash and cash equivalents   (30,203)   9,769 
Cash and cash equivalents, beginning of year   56,224    39,071 
Cash and cash equivalents, end of period  $26,021   $48,840 
           
Supplemental Disclosures of Cash Flow Information:          
Cash paid for income taxes  $9,175   $8,335 
Interest paid  $95   $94 

 

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 nationwide-chain of boutiques providing its customers with a unique, fun and personalized shopping experience. The Company offers a diverse and balanced mix of apparel, jewelry, accessories and gifts at attractive values. At July 30, 2016, the Company operated 652 boutiques, which are located in 48 states throughout the United States and the District of Columbia, and its ecommerce 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 January 30, 2016 was derived from the Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended January 30, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 25, 2016.

 

These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the fiscal year ended January 30, 2016 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 intercompany 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 2016 and 2015 each include 52 weeks of operations. The fiscal quarters ended July 30, 2016 and August 1, 2015 refer to the thirteen week periods ended as of those dates. The year-to-date periods ended July 30, 2016 and August 1, 2015 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 returns, and expenses during the reporting periods. Actual results could differ materially from those estimates.

 

Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-9, “Improvements to Employee Share-Based Payment Arrangements”, which amends Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation. The new guidance intends to simplify several aspects of the accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities, forfeitures and classification on the statement of cash flows. ASU 2016-9 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The new guidance includes the following adoption methods depending on the provision being adopted: (1) amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method, (2) amendments related to the presentation of employee taxes paid on the statement of cash flows should be applied retrospectively, (3) amendments requiring recognition of excess tax benefits and deficiencies in the income statement should be applied prospectively, and (4) amendments related to the presentation of excess tax benefits on the statement of cash flows should be applied either prospectively or retrospectively. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

 7 

 

 

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

 

In March 2016, the FASB issued ASU 2016-4 “Liabilities - Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products.” The new guidance allows a company to derecognize amounts related to expected breakage to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-4 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The amended standard may be adopted on either a modified retrospective or a retrospective basis. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-2, “Leases (Topic 842).” The new guidance, among other things, requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. ASU 2016-2 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, “Income Taxes – Balance Sheet Classification of Deferred Taxes.” The new guidance simplifies the presentation of deferred income taxes by permitting classification of all deferred tax assets and liabilities as noncurrent on the consolidated balance sheet. The new guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that fiscal year, with early adoption permitted. The amended standard may be adopted on either a prospective or a retrospective basis. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value.  ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2016, with early adoption permitted.  The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. 

   

In May 2014 the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This pronouncement requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods and services. In August 2015, the FASB deferred the effective date of ASU 2014-09. Accordingly, this standard is effective for reporting periods beginning on or after December 15, 2017, including interim periods within that fiscal year, with early adoption permitted for interim and annual periods beginning on or after December 15, 2016. Since the original issuance of ASU 2014-09, the FASB has issued several amendments and updates to this guidance, and additional amendments and updates are currently being considered by the FASB. The Company is currently evaluating the impact of adopting the new guidance, along with the related amendments and updates, on the 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 treasury stock method. The following table summarizes the potential dilution that could occur if options to acquire common stock were exercised or if the restricted stock grants were fully vested and reconciles the weighted-average common shares outstanding used in the computation of basic and diluted earnings per share.

 

 8 

 

 

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

 

   Thirteen Weeks Ended   Twenty-Six Weeks Ended 
   July 30, 2016   August 1, 2015   July 30, 2016   August 1, 2015 
   (in thousands, except per share data) 
Numerator:                    
Net income  $10,591   $9,304   $17,672   $16,545 
                     
Denominator:                    
Weighted-average common shares outstanding - basic   38,664    42,332    39,474    42,318 
Options and other dilutive securities   91    101    106    107 
Weighted-average common shares outstanding - diluted   38,755    42,433    39,580    42,425 
                     
Per common share:                    
Basic earnings per common share  $0.27   $0.22   $0.45   $0.39 
Diluted earnings per common share  $0.27   $0.22   $0.45   $0.39 

 

Potentially issuable shares under the Company’s stock-based compensation plans amounting to approximately 0.4 million and 0.3 million shares in the thirteen and twenty-six weeks ended July 30, 2016, respectively, and 0.4 million and 0.5 million shares in the thirteen and twenty-six weeks ended August 1, 2015, respectively, were excluded in the computation of diluted weighted-average common shares outstanding due to their anti-dilutive effect. The Company also excluded contingently issuable performance-based awards totaling 0.2 million shares in each of the thirteen and twenty-six weeks ended July 30, 2016 and 1.1 million shares in each of the thirteen and twenty-six weeks ended August 1, 2015 from the computation of diluted earnings per share because the pre-established goals had not been satisfied as of the end of each period.

 

3.Fair Value Measurements

 

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.

 

4.Income Taxes

 

The provision for income taxes is based on the Company’s current estimate of the annual effective tax rate. The effective income tax rates for the thirteen and twenty-six weeks ended July 30, 2016 were 37.9% and 37.8%, respectively. The effective income tax rates for the thirteen and twenty-six weeks ended August 1, 2015 were 38.0% and 38.1%, respectively. The difference between our effective tax rate and federal statutory tax rate is primarily related to state income taxes.

 

5.Revolving Credit Facility

 

On August 30, 2013, Francesca’s Collections, Inc. (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 July 30, 2016, no borrowings or letters of credit were outstanding under the credit facility.

 

The credit facility contains customary events of default and requires the Borrower to comply with certain financial covenants. As of July 30, 2016, 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 July 30, 2016, 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.

 

 9 

 

 

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

 

6.Stock-based Compensation

 

Stock-based compensation cost is measured at the grant date fair value and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant). The Company estimates forfeitures for grants that are not expected to vest. The Company recognized $1.9 million and $0.9 million net reversal of stock-based compensation expense in the thirteen and twenty-six weeks ended July 30, 2016, respectively, and $0.8 million and $1.6 million of stock-based compensation expense in the thirteen and twenty-six weeks ended August 1, 2015, respectively. The net reversal of stock-based compensation expense during the thirteen and twenty-six weeks ended July 30, 2016 was associated with the resignation of the Company’s Chairman, President and Chief Executive Officer (“CEO”) discussed below.

 

Resignation of the Chairman, President and Chief Executive Officer

 

On May 15, 2016, Michael W. Barnes resigned from his positions as Chairman, President and CEO of the Company. As a result of such resignation, the following outstanding and unvested stock-based awards previously granted to him were forfeited.

 

·Market- and service-based employee stock options providing Mr. Barnes with the right to purchase 1.0 million shares of the Company’s common stock granted in connection with his appointment as Chairman, President and CEO of the Company in December 2014; and
·Performance-and service-based restricted stock awards providing Mr. Barnes with the contingent right to receive 0.3 million shares of the Company’s common stock (based on the target number of shares for performance periods that have not yet been completed and the number of earned shares for awards that relate to completed performance periods and are subject only to time-based vesting).

 

The resignation of Mr. Barnes resulted in the reversal of $2.6 million of previously accrued stock-based compensation expense related to these unvested awards. This reversal was recorded during the thirteen weeks ended July 30, 2016.

 

Performance-based restricted stock awards

 

The Company granted approximately 358,000 and 115,000 target shares of performance-based restricted stock to certain executives and key employees in March 2016 and March 2015, respectively. Awards are considered “granted” when the performance goals related to those awards have been established.  The number of shares that may ultimately vest will equal 0% to 150% of the target shares subject to the achievement of pre-established performance goals during the applicable performance period and the employees’ continued employment through the third year anniversary of the date on which the award was originally approved by the Compensation Committee.

 

In connection with the performance-based restricted stock awards, the Company recognized $0.2 million net reversal of stock-based compensation expense in the thirteen weeks ended July 30, 2016 and $0.2 million of stock-based compensation expense in the twenty-six weeks ended July 30, 2016. The net reversal of stock-based compensation expense was associated with the resignation of the Company’s Chairman, President and CEO discussed above. The stock-based compensation expense in each of the thirteen and twenty-six weeks ended August 1, 2015 totaled $0.2 million.

 

7.Share Repurchases

 

On September 3, 2013, the Company’s Board of Directors authorized a $100.0 million share repurchase program (“Previous Repurchase Plan”) commencing on the same date.  In April 2016, the authorized amount was fully exhausted. 

 

On March 15, 2016, the Company’s Board of Directors authorized an additional $100.0 million share repurchase program (“New Repurchase Plan”), which commenced immediately upon the exhaustion of the Previous Repurchase Plan. This authorization has no expiration date.  Under the New Repurchase Plan, 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.  

 

During the thirteen weeks ended July 30, 2016, the Company repurchased 2.3 million shares of its common stock at a cost of $27.0 million or an average price (including brokers’ commission) of $11.66 per share. During the twenty-six weeks ended July 30, 2016, the Company repurchased 3.2 million shares of its common stock at a cost of $43.8 million or an average price (including brokers’ commission) of $13.51 per share. No common stock repurchases were made in the thirteen and twenty-six weeks ended August 1, 2015. The cost of repurchased shares is presented as treasury stock in the unaudited consolidated balance sheets.  

 

 10 

 

 

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

 

8.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 2027. 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 July 30, 2016, are as follows:

 

Fiscal year  Amount 
   (In thousands) 
Remainder of 2016  $21,046 
2017   42,329 
2018   41,025 
2019   38,328 
2020   32,502 
Thereafter   82,430 
   $257,660 

 

Legal Proceedings

 

The Company, from time to time, is subject to various claims and legal proceedings, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial disputes and other matters that arise in the ordinary course of business.  While the outcome of any such claim cannot be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse effect on the Company’s business, results of operations or financial condition. 

 

 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 ecommerce business; our ability to successfully open and operate new boutiques each year; our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth, and our ability to attract and integrate a new President and Chief Executive Officer. 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 January 30, 2016 and filed with the Securities and Exchange Commission (“SEC”) on March 25, 2016, Part II, Item 1A. “Risk Factors” contained in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2016 and any risk factors contained in subsequent Quarterly Reports on Form 10-Q or other filings 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 “francesca’s®” refer to Francesca’s Holdings Corporation and its consolidated subsidiaries.

 

francesca’s® is a growing specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized shopping experience. The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts. As of July 30, 2016, francesca’s ® operated 652 boutiques in 48 states and the District of Columbia and also served its customers through www.francescas.com, its ecommerce website. The information contained on our ecommerce website is not incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information contained on our ecommerce website to be part of this Quarterly Report on Form 10-Q.

  

During the thirteen weeks ended July 30, 2016, our net sales increased 9% to $115.3 million from $106.0 million, income from operations increased by 13% to $17.1 million from $15.2 million and net income increased 14% to $10.6 million, or $0.27 per diluted share based on 38.8 million weighted average diluted shares outstanding, from $9.3 million, or $0.22 per diluted share based on 42.4 million weighted average diluted shares outstanding, over the comparable prior year period. During the twenty-six weeks ended July 30, 2016, our net sales increased 10% to $221.4 million from $201.0 million, income from operations increased by 6% to $28.6 million from $27.1 million and net income increased 7% to $17.7 million, or $0.45 per diluted share based on 39.6 million weighted average diluted shares outstanding, from $16.5 million, or $0.39 per diluted share based on 42.4 million weighted average diluted shares outstanding, over the comparable prior year period.

 

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We increased our boutique count to 652 boutiques as of July 30, 2016 from 608 boutiques as of August 1, 2015. We plan to open approximately 14 to 24 boutiques and close one to five during the remainder of the fiscal year.

 

On May 15, 2016, Michael W. Barnes resigned from his positions as Chairman, President and Chief Executive Officer (“CEO”) of the Company. As a result of such resignation, each of Mr. Barnes’ then-outstanding and unvested equity awards were forfeited. This forfeiture resulted in the reversal of $2.6 million of previously recognized stock-based compensation expense related to those unvested awards recorded during the second quarter of fiscal year 2016. Additionally, we incurred $0.6 million of professional expenses in connection with the related search process during the same period. On May 16, 2016, the Board of Directors appointed Richard Kunes, a member of the Board of Directors, to serve as the Company’s Interim Chairman, President and Chief Executive Officer effective immediately.

 

We are in the early stages of deploying a new technology suite of systems to enhance our omni-channel and customer engagement capabilities as part of our long-term strategic plan. This includes replacing our legacy point-of-sale system and introduction of a new order management system and a new customer relationship management system. The point-of-sale system is expected to be implemented during fiscal year 2017. Throughout the installation and stabilization of these new systems, we will continue to run our existing platform to ensure continuity during the conversion process. We expect that these new systems will enhance our visibility into our customers’ preferences, products and supply chain resulting in improved customer service, improved operational efficiency, enhanced management analytics and increased synergies between our ecommerce and our boutique channels.

 

Results of Operations

 

The following represents operating data for the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015.

 

   Thirteen Weeks Ended   Twenty-Six Weeks Ended 
   July 30, 
2016
  

August 1,

2015

  

July 30,

2016

  

August 1,

2015

 
Net sales growth for period   9%   9%   10%   10%
Comparable sales results for the period (1)   0%   (4)%   1%   (3)%
Number of boutiques open at end of period   652    608    652    608 
Net sales per average square foot for period (2)  $130   $130    250   $256 
Average square feet per boutique (3)   1,378    1,363    1,378    1,363 
Total gross square feet at end of period   899,000    829,000    899,000    829,000 
(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. If a boutique is permanently closed, we exclude sales from that boutique from comparable sales on the first day of the fiscal month that it did not register full month of sales. Comparable sales include our ecommerce sales.
(2)Net sales per average square foot are calculated by dividing net sales for the period by the average square feet during the period. Because of our 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 the sum of total gross square feet at the beginning and end of the period divided by two. For periods consisting of more than one fiscal quarter, average square feet is calculated as (a) the sum of total gross square feet at the beginning of the period and total gross square feet at the end of each fiscal quarter within the period, divided by (b) the number of fiscal quarters within the period plus one (which, for a fiscal year, is five). There may be variations in the way in which some of our competitors and other retailers calculate sales per square foot or similarly titled measures. As a result, average 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 
   July 30, 2016   August 1, 2015   July 30, 2016   August 1, 2015 
Number of boutiques open at beginning of period   637    589    616    539 
Boutiques added   19    19    41    69 
Boutiques closed   (4)   -    (5)   - 
Number of boutiques open at the end of period   652    608    652    608 

 

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Thirteen Weeks Ended July 30, 2016 Compared to Thirteen Weeks Ended August 1, 2015

 

   Thirteen Weeks Ended             
   July 30, 2016   August 1, 2015   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 and basis points) 
Net sales  $115,260    100.0%  $106,033    100.0%  $9,227    9%   - 
Cost of goods sold and occupancy costs   61,323    53.2%   55,725    52.6%   5,598    10%   60 
Gross profit   53,937    46.8%   50,308    47.4%   3,629    7%   (60)
Selling, general and administrative expenses   36,815    31.9%   35,133    33.1%   1,682    5%   (120)
Income from operations   17,122    14.9%   15,175    14.3%   1,947    13%   60 
Interest expense   (113)   (0.1)%   (112)   (0.1)%   (1)   (1)%   - 
Other income (expense)   39    0.0%   (54)   (0.1)%   93    172%   10 
Income before income tax expense   17,048    14.8%   15,009    14.2%   2,039    14%   60 
Income tax expense   6,457    5.6%   5,705    5.4%   752    13%   20 
Net income  $10,591    9.2%  $9,304    8.8%  $1,287    14%   40 
(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 $115.3 million in the thirteen weeks ended July 30, 2016 from $106.0 million in the thirteen weeks ended August 1, 2015. This increase was due to the addition of 44 net new boutiques since the comparable prior year period. Our comparable sales were flat compared to the same period of the prior year as the increase in transaction count offset the decrease in average transaction value. Ecommerce comparable sales increased 37% to $4.8 million compared to the same prior year period driven by higher website traffic and conversion rates. There were 578 comparable boutiques and 74 non-comparable boutiques open at July 30, 2016 compared to 513 and 95, respectively, at August 1, 2015.

 

Cost of Goods Sold and Occupancy Costs

 

Cost of goods sold and occupancy costs increased 10% to $61.3 million in the thirteen weeks ended July 30, 2016 from $55.7 million in the thirteen weeks ended August 1, 2015. Cost of merchandise and freight expenses increased by $3.6 million compared to the same period of the prior year primarily due to increased sales volume. Occupancy costs increased by $2.0 million due to the increase in the number of boutiques in operation during the thirteen weeks ended July 30, 2016 compared to the same period of the prior year.

 

As a percentage of net sales, cost of goods sold and occupancy costs increased to 53.2% in the thirteen weeks ended July 30, 2016 from 52.6% in the thirteen weeks ended August 1, 2015, an unfavorable variance of 60 basis points. This change was driven by 30 basis points of lower merchandise margin and 30 basis points deleveraging of occupancy costs. The decrease in merchandise margin was primarily attributable to sales mix change to the lower margin categories.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased 5% to $36.8 million in the thirteen weeks ended July 30, 2016 from $35.1 million in the thirteen weeks ended August 1, 2015. This increase was due to higher corporate and boutique payroll to support the larger boutique base and strategic initiatives, as well as an increase in marketing and depreciation expenses. The increase in marketing expense was due to the implementation of new marketing initiatives while the higher depreciation was due to continuing investments in technology and infrastructure. These increases were partially offset by a $2.0 million net benefit associated with the resignation of our CEO and the related search process. As a percentage of net sales, selling, general and administrative expense decreased to 31.9% in the thirteen weeks ended July 30, 2016 as compared to 33.1% in the thirteen weeks ended August 1, 2015 primarily due to the net benefit associated with the resignation of our CEO.

 

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Income Tax Expense

 

The increase in provision for income taxes of $0.8 million in the thirteen weeks ended July 30, 2016 compared to the thirteen weeks ended August 1, 2015 was primarily due to the increase in pre-tax income. The effective tax rates were 37.9% and 38.0% in the thirteen weeks ended July 30, 2016 and August 1, 2015 respectively.

 

Twenty-Six Weeks Ended July 30, 2016 Compared to Twenty-Six Weeks Ended August 1, 2015

 

   Twenty-Six Weeks Ended             
   July 30, 2016   August 1, 2015   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 and basis points) 
Net sales  $221,373    100.0%  $201,044    100.0%  $20,329    10%   - 
Cost of goods sold and occupancy costs   118,306    53.4%   105,843    52.6%   12,463    12%   80 
Gross profit   103,067    46.6%   95,201    47.4%   7,866    8%   (80)
Selling, general and administrative expenses   74,481    33.6%   68,136    33.9%   6,345    9%   (30)
Income from operations   28,586    12.9%   27,065    13.5%   1,521    6%   (60)
Interest expense   (222)   (0.1)%   (222)   (0.1)%   -    -    - 
Other income (expense)   39    0.0%   (120)   (0.1)%   159    132%   10 
Income before income tax expense   28,403    12.8%   26,723    13.3%   1,680    6%   (50)
Income tax expense   10,731    4.8%   10,178    5.1%   553    5%   (30)
Net income  $17,672    8.0%  $16,545    8.2%  $1,127    7%   (20)
(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 10% to $221.4 million in the twenty-six weeks ended July 30, 2016 from $201.0 million in the twenty-six weeks ended August 1, 2015. This increase is due to a 1% increase in comparable sales driven by the increase in transaction count at the boutiques and on-line as well as the addition of 44 net new boutiques since the comparable prior year period. Ecommerce comparable sales increased 38% to $10.1 million driven by higher website traffic and conversion rate. There were 578 comparable boutiques and 74 non-comparable boutiques open at July 30, 2016 compared to 513 and 95, respectively, at August 1, 2015.

 

Cost of Goods Sold and Occupancy Costs

 

Cost of goods sold and occupancy costs increased 12% to $118.3 million in the twenty-six weeks ended July 30, 2016 from $105.8 million in the twenty-six weeks ended August 1, 2015. Cost of merchandise and freight expenses increased by $8.1 million compared to the same period of the prior year due to increased sales volume. Occupancy costs increased by $4.4 million due to the increase in the number of boutiques in operation during the twenty-six weeks ended July 30, 2016 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 twenty-six weeks ended July 30, 2016 from 52.6% in the twenty-six weeks ended August 1, 2015, an unfavorable variance of 80 basis points. This change was driven by 50 basis points of lower merchandise margin and 30 basis points deleveraging of occupancy costs. The decrease in merchandise margin was primarily attributable to a sales mix change to the lower margin categories.

  

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased 9% to $74.5 million in the twenty-six weeks ended July 30, 2016 from $68.1 million in the twenty-six weeks ended August 1, 2015. This increase was due to higher corporate and boutique payroll to support the larger boutique base and strategic initiatives, as well as an increase in marketing and depreciation expenses. The increase in marketing expense was due to the implementation of new marketing initiatives while the higher depreciation was due to continuing investments in technology and infrastructure. These increases were partially offset by a $2.0 million net benefit associated with the resignation of our CEO and the related search process. As a percentage of net sales, selling, general and administrative expense decreased to 33.6% in the twenty-six weeks ended July 30, 2016 as compared to 33.9% in the twenty-six weeks ended August 1, 2015 primarily due to the net benefit associated with the resignation of our CEO.

 

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Income Tax Expense

 

The increase in provision for income taxes of $0.6 million in the twenty-six weeks ended July 30, 2016 compared to the twenty-six weeks ended August 1, 2015 was primarily due to the increase in pre-tax income. The effective tax rates were 37.8% and 38.1% in the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively.

 

Sales by Merchandise Department

 

   Thirteen Weeks Ended   Twenty-Six Weeks Ended 
   July 30, 2016   August 1, 2015   July 30, 2016   August 1, 2015 
   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  $61,081    53.2%  $56,441    53.5%  $115,973    52.4%  $104,611    52.1%
Jewelry   25,368    22.1%   23,442    22.2%   49,430    22.4%   45,415    22.6%
Accessories   15,136    13.2%   14,537    13.8%   31,182    14.1%   29,891    14.9%
Gifts   13,209    11.5%   11,069    10.5%   24,536    11.1%   20,924    10.4%
Merchandise sales (1)  $114,794    100.0%  $105,489    100.0%  $221,121    100.1%  $200,841    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 July 30, 2016. On July 30, 2016, we had $26.0 million of cash and cash equivalents and $75.0 million in borrowing availability under our revolving credit facility. There were no borrowings or letters of credit outstanding under our revolving credit facility at July 30, 2016.

 

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 
   July 30, 2016   August 1, 2015 
   (In thousands) 
Provided by operating activities  $25,464   $24,495 
Used in investing activities   (11,141)   (14,956)
(Used in) provided by financing activities   (44,526)   230 
Net (decrease) increase in cash and cash equivalents  $(30,203)  $9,769 

 

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 $25.5 million and $24.5 million in each of the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively. The increase in cash provided by operating activities in the current period as compared to the same period of the prior year was primarily due to higher net income partially offset by the timing of payments for inventory purchases, payroll and income taxes as well as changes in landlord incentives and deferred rent in connection with new boutiques.

 

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Investing Activities

 

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

 

   Twenty-Six Weeks Ended 
   July 30, 2016   August 1, 2015 
   (In thousands) 
Capital expenditures for:          
New boutiques  $6,202   $9,424 
Existing boutiques   2,354    3,776 
Technology   2,002    1,157 
Corporate and distribution   591    602 
   $11,149   $14,959 

 

Our total capital expenditures for the twenty-six weeks ended July 30, 2016 and August 1, 2015 were $11.1 million and $15.0 million, respectively, with new boutiques accounting for most of our spending at $6.2 million and $9.4 million, respectively. Spending for new boutiques included amounts associated with boutiques that will open subsequent to the end of each fiscal quarter. We opened 41 boutiques in the twenty-six weeks ended July 30, 2016 compared to 69 boutiques in the twenty-six weeks ended August 1, 2015. 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 July 30, 2016 and August 1, 2015 was $226,000 and $218,000, respectively, while the average tenant allowance per new boutique was $76,000 and $79,000 over the same periods, respectively. Tenant allowances are amortized as a reduction in rent expense over the term of the lease. The average collection period for these allowances is approximately six months after boutique opening. As a result, we fund the cost of new boutiques with cash flow from operations, build-out allowances from our landlords, or borrowings under our revolving credit facility. Our spending for existing boutiques totaled $2.4 million and $3.8 million during the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively. The majority of the amount spent for existing boutiques in the current period was used in remodeling and relocating 20 boutiques while the prior year amount was spent on upgrading display fixtures and equipment across many of our boutiques as well as remodeling 13 boutiques. 

 

Management anticipates that capital expenditures for the remainder of fiscal year 2016 will be approximately $16.9 million to $19.9 million. The majority of this amount will be spent on new and existing boutiques as well as investments in our technology systems.

 

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 totaled $44.5 million during the twenty-six weeks ended July 30, 2016 which consists of $44.8 million repurchases of common stock and $0.3 million proceeds from stock option exercises and the related tax benefit. Net cash provided by financing activities totaled $0.2 million during the twenty-six weeks ended August 1, 2015 which consists of proceeds from stock option exercises and the related tax benefit.

 

Revolving Credit Facility

 

On August 30, 2013, Francesca’s Collections, Inc. (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 July 30, 2016, no borrowings or letters of credit were outstanding under the credit facility.

 

The credit facility contains customary events of default and requires the Borrower to comply with certain financial covenants. As of July 30, 2016, 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 July 30, 2016, 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. 

 

 17 

 

 

Share Repurchase Program

 

For information regarding our share repurchase program, please refer to Note 7 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 January 30, 2016.

 

Certain of the Company’s accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of the Company’s consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended January 30, 2016. As of July 30, 2016, there were no significant changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2016.

  

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 January 30, 2016, 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 July 30, 2016, no borrowings or letters of credit were outstanding under the Second Amended and Restated Credit Agreement.

 

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.

 

 18 

 

 

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 July 30, 2016.

 

There were no changes in our internal control over financial reporting during the quarter ended July 30, 2016 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

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 January 30, 2016 and filed with the SEC on March 27, 2015 and in Item IA contained in Part II of our Form 10-Q for the fiscal quarter ended April 30, 2016 and filed with the SEC on June 9, 2016.

 

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

 

The following table provides information about the Company’s share repurchase activity during the thirteen weeks ended July 30, 2016.

 

Period (1)  Total number
of shares
purchased
   Average
price paid
per share (2)
   Total number of
shares purchased
as part of a
publicly
announced plans
or programs (3)
   Approximate
dollar value of
shares that may
yet be purchased
under the plans or
programs
 
May 1, 2016 – May 28, 2016   688,360   $13.20    688,360   $90,923,840 
May 29, 2016 – July 2, 2016   1,223,943   $10.73    1,223,943   $77,811,188 
July 3, 2016 – July 30, 2016   405,687   $11.84    405,687   $73,012,475 
                     
Total   2,317,990   $11.66    2,317,990      

 

(1)Periodic information is presented by reference to our fiscal monthly periods during the second quarter of fiscal year 2016.
(2)Average price paid per share includes brokers’ commission.
(3)On March 15, 2016, the Company’s Board of Directors authorized an additional $100 million share repurchase program commencing upon the exhaustion of a previous $100 million share repurchase program approved in September 2013. This authorization has no expiration date. Under the repurchase program, purchases can be made from time to time through open market purchases, in privately negotiated transactions, under a Rule 10b5-1 plans or through other available means. The specific timing and amount of repurchases is dependent on market conditions, securities law limitations and other factors.

 

ITEM 6. EXHIBITS

 

Exhibit No.   Description
     
10.1+   Compensation Arrangements with Richard Kunes, Interim Chairman, President and Chief Executive Officer (as incorporated by reference to the Current Report on Form 8-K filed by Francesca’s Holdings Corporation on June 10, 2016).
     
31.1*   Certification of Interim 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)
     

 

 19 

 

 

Exhibit No.   Description
     
32.1**   Certification of Interim 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 July 30, 2016, January 30, 2016 and August 1, 2015, (ii) the Unaudited Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks Ended July 30, 2016 and August 1, 2015, (iii) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Twenty-Six Weeks Ended July 30, 2016, (iv) Unaudited Consolidated Statements of Cash Flows for the Twenty-Six Weeks ended July 30, 2016 and August 1, 2015 and (v) the Notes to the Unaudited Consolidated Financial Statements.

 

  * Filed herewith.

** Furnished herewith.

+ Indicates a management contract or compensatory plan or arrangement.

 

 20 

 

 

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 7, 2016 /s/ Kelly Dilts
  Kelly Dilts
  Chief Financial Officer (duly authorized officer and Principal Financial and Accounting Officer)

  

 21 

 

Exhibit 31.1

 

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

I, Richard Kunes, 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 7, 2016 /s/ Richard Kunes
  Richard Kunes
 

Interim Chief Executive Officer

(duly authorized officer and Principal Executive Officer)

 

   

 

 

Exhibit 31.2

 

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

I, Kelly Dilts, 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 7, 2016 /s/ Kelly Dilts
  Kelly Dilts
 

Chief Financial Officer

(duly authorized officer and Principal Financial and Accounting Officer)

 

   

 

 

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, Richard Kunes, the Interim Chief Executive Officer of Francesca’s Holdings Corporation, certify that (i) the quarterly report on Form 10-Q for the fiscal quarter ended July 30, 2016 (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/ Richard Kunes
  Richard Kunes
 

Interim Chief Executive Officer

(duly authorized officer and Principal Executive Officer)

   
  September 7, 2016
  Date

 

I, Kelly Dilts, the Chief Financial Officer of Francesca’s Holdings Corporation, certify that (i) the quarterly report on Form 10-Q for the fiscal quarter ended July 30, 2016 (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/ Kelly Dilts
  Kelly Dilts
  Chief Financial Officer (duly authorized officer and Principal Financial and Accounting Officer)
   
  September 7, 2016
  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.

 

   

 



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