HOUSTON, July 28, 2020 (GLOBE NEWSWIRE) Francesca’s Holdings Corporation (Nasdaq: FRAN) today provides a business update and reports financial results for the first quarter ended May 2, 2020.

Mr. Andrew Clarke, President and CEO, stated, “Sales of reopened boutiques are trending within our expectations, with higher conversion largely offsetting lower traffic trends. With an increased focus on boutique promotions, as part of our phased reopening plans, we have cleared through the majority of our aged product, which we believe will place us in a better inventory position heading into the fall season. While these promotions are resulting in meaningful gross margin pressure, our priority remains to ensure that we maintain disciplined inventory levels. The re-platforming and relaunching of our ecommerce site is on track for the fall season. Our iOS App is expected to launch in the next few weeks and our Android App is expected to launch this fall. In addition to better enabling our customers to shop wherever, whenever and however she chooses, the launch of our mobile app will enhance our ability to serve our customers where stores remain closed.”

Mr. Clarke continued, “Looking ahead, while the situation remains fluid, with store re-closures taking place in certain states due to increased cases of COVID-19, we are focused on maximizing sales by controlling what is within our control. Our business model enables us to respond quickly to shifts in consumer demand so that we may manage our inventory flow to align with consumer demand. That said, we expect the heightened promotional environment will continue, particularly in light of soft traffic trends. While we expect the retail environment to remain challenging as a result of uncertainty related to COVID-19, we believe we are on the right path forward.”

BUSINESS UPDATE

The following are business update highlights as of July 17, 2020:

• Reopened 674 of 702 boutiques although the majority of them are operating at reduced capacity and hours in accordance with local regulations. This reflects the re-closure of 22 boutiques in California;

• All reopened boutiques have adopted a mandatory mask requirement for associates and customers, irrespective of CDC and local authority guidelines;

• Repaid $2.0 million of outstanding borrowings under the Company’s Amended ABL Credit Agreement bringing the combined outstanding balance to $12.1 million, net of $0.9 million debt issuance costs, and $0.5 million in combined borrowing availability under the Company’s credit facilities;

• Cash and cash equivalents of $18.7 million following repayment of a portion of the outstanding borrowings under the Company’s Amended ABL Credit Agreement as well as payments of certain accounts payable and lease obligations;

• Merchandise and non-merchandise vendor accounts payables substantially current with past due balances paid and lease payments resumed on all locations for July 2020;

• Substantially completed negotiations with the Company’s landlords to abate or defer lease payments for the months of April, May and June 2020. While deferred payments have a minimal impact on GAAP straight-line lease expense, they are expected to have a positive impact on the Company’s cash flow in fiscal year 2020;

• Expects to receive a $10.7 million income tax refund filed with the IRS related to the CARES Act. This tax refund is required to be used to pay down any then outstanding borrowings under the Company’s Amended ABL Credit Agreement.

• As previously disclosed and as a result of the COVID-19 pandemic and its effects on the Company’s business described above, the Company’s revenues, results of operations and cash flows continue to be materially adversely impacted which continues to raise substantial doubt about its ability to continue as a going concern.

SECOND QUARTER OUTLOOK

For the second quarter ending on August 1, 2020, net sales are expected to be in the range of $67.0 million to $71.0 million, assuming a comparable sales decrease of 16% to 11%. Gross margin pressure is expected to accelerate due to more aggressive promotions as the Company continues to move through the remainder of excess inventory as well as the generally challenging retail environment. Loss from operations is expected to be in the range of $23.0 million to $21.0 million. Cash and cash equivalents are expected to be in the range of $10.0 million to $12.0 million while average inventory per boutique is expected to decrease in the mid- to high-single digit range versus the comparable prior year period.

In light of the economic and business uncertainties caused by COVID-19, management may not provide quarterly or annual financial guidance in any future earnings release.

FIRST QUARTER RESULTS

Net sales decreased 50% to $43.8 million from $87.1 million in the comparable prior year quarter primarily due to the mandated boutique closures beginning on March 25, 2020 and continuing through the end of the first quarter related to the COVID-19 pandemic. This decrease was partially offset by strong performance in ecommerce as all of the Company’s efforts subsequent to March 25, 2020 were focused on driving ecommerce sales during the temporary boutique closure period. The Company permanently closed eight boutiques during the first quarter, bringing the total boutique count to 703 at the end of the quarter.

Gross loss, as a percent of sales, was (6.6)% as compared to gross profit, as a percentage of sales, of 34.8% in the prior year quarter. This unfavorable variance was primarily due to deleverage in occupancy costs as a result of lower sales. Occupancy costs include the full lease expense for all boutiques for the first quarter ended May 2, 2020, regardless of any rent deferral. Additionally, merchandise margin decreased due to aggressive markdowns and promotions as well as increased inventory reserves as a result of the COVID-19 pandemic.

Selling, general and administrative (SG&A) expenses decreased $15.0 million or 38% to $25.0 million from $40.0 million in the prior year quarter. Adjusted SG&A in the first quarter ended May 4, 2019 was $38.0 million and excludes $1.2 million of consulting expenses associated with the Company’s review of strategic and financial alternatives and turnaround strategy, $1.1 million in severance benefits and other payroll costs also associated with the turnaround plan, and $0.3 million of stock-based compensation reversal associated with the departure of certain employees. There were no non-GAAP adjustments to SG&A in the first quarter ended May 2, 2020.

The $13.0 million decrease in SG&A versus adjusted SG&A in the comparable prior year period was primarily due to a $10.7 million decrease in boutique and corporate payroll costs as a result of the temporary furlough of substantially all of the Company’s employees, a $0.9 million decrease in boutique and corporate bonus expenses and $0.6 million decrease in professional fees.

The Company recorded non-cash asset impairment charges of $7.5 million as a result of lower than expected sales and profitability for the Company’s boutiques due to the COVID-19 pandemic. Of the total amount, $6.8 million was related to the write-down of operating lease right-of-use assets for 107 underperforming boutiques and $0.7 million was related to the write-down of property and equipment for 41 underperforming boutiques. The Company did not record non-cash asset impairment charges in the comparable prior year period.

Loss from operations was $35.3 million compared to $9.7 million in the prior year quarter. Excluding the non-cash impairment charges of $7.5 million, adjusted loss from operations for the first quarter ended May 2, 2020 was $27.8 million. This compares to adjusted loss from operations of $7.7 million in the comparable prior year period, which excludes the adjustments to SG&A noted above.

Income tax benefit was $20.3 million compared to an income tax expense of $0.4 million in the prior year quarter. The effective income tax rate in the current year quarter was 57.0% compared to 4.3% in the comparable prior year period. The income tax benefit in the current year quarter was primarily due the $9.6 million federal and state net operating loss that the Company may carryback to prior years under the CARES Act. In addition, the Company filed an income tax refund for $10.7 million with the IRS in April 2020 related to its net operating loss for fiscal year 2018 that the Company may also carryback to prior years under the CARES Act. The income tax expense for the prior year quarter included a non-cash charge of $2.1 million associated with the additional valuation allowance provided on the Company’s net deferred tax assets. The Company continues to provide a full valuation allowance on its net deferred tax asset as of May 2, 2020.

Net loss for the first quarter ended May 2, 2020 was $15.3 million, or $5.25 per share, compared to prior year quarter net loss of $10.1 million, or $3.50 per share. Excluding the non-cash impairment charges and income tax benefit related to the net operating loss carryback provision under the CARES Act, adjusted net loss for the first quarter ended May 2, 2020 was $28.4 million, or $9.73 per share. This compares to adjusted net loss of $8.2 million, or $2.84 per share, in the comparable prior year quarter. 

Please see the reconciliation of adjusted SG&A, adjusted loss from operations, adjusted net loss and adjusted loss per share, each a non-GAAP financial measure, to the most directly comparable GAAP financial measure provided in the tables at the end of this press release.

About Francesca's Holdings Corporation

francesca's® is a 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. Today, francesca's® operates approximately 702 boutiques in 47 states and the District of Columbia and also serves its customers through francescas.com.