TRADE INSTRUCTIONS
Date: August 10, 2017
Name: Francesca’s Holdings Corp.
Symbol: FRAN (NasdaqGS)
Type: Open
Limit: Buy below $8.75

TRADE TARGETS
Holding Period: 5 months
Target Return: 17.1%
Annualized Return: 41.1%
Target Price: $10.25
Stop Loss Level: $7.85

COMPANY DESCRIPTION
Francesca’s Holdings is a specialty retailer based in Houston, Texas which operates a chain of boutiques across the United States. The Company offers a mix of apparel, jewelry, accessories, and gifts through 671 boutiques in 48 states and the District of Columbia, and also serves its customers through www.francescas.com, its e-commerce Website. Link to company website.

TRADE RATIONALE       
Like it has been for most retailers, 2017 has been a particularly brutal year for Francesca’s as its share price has lost nearly half its value. Most of that decline is attributable to the company’s weak first quarter earnings report released in June. There hasn’t been any significant news out of the company since then, but its share price has continued to fall as “the Amazon effect” has hammered away at small retailers.

At this point, our Rapid Profits Matrix thinks FRAN has become oversold and is likely to bounce back later this year. Its P/S (price to sales ratio) of 0.66 is well below the sector average, as is its forward P/E (price to earnings ratio) of 7.2 times next year’s profits. The company has no long-term debt and has a current ratio of more than two times short term liabilities so it isn’t going out of business anytime soon.

FRAN is unusual in that 113% of its float is held by institutions and mutual funds, leaving relatively little stock in the hands of individual investors. None of the eight Wall Street analysts following the company have it rated as either ‘sell’ or ‘underperform’, and their average one-year price target of $12.50 is almost 50% above its current share price.

Due to limited exposure as a result of its small market capitalization ($315 million), it will take something noteworthy to turn the stock around. Could be its next quarterly earnings report due out in early September, or the announcement of a share repurchase program given the company’s strongly positive cash flow. FRAN can also be viewed as a possible takeover given its cash flow and lack of debt.

I am putting a five-month holding period on this trade to get us through the holiday shopping season, in case we need it. But I wouldn’t be surprised if we end up closing out this trade a lot sooner than that since just a return to average sector metrics for P/E or P/S would achieve our target return for this stock.

NOTE: This stock is optionable, but trades on very thin volume so use limits when placing options orders.