Francesca's Holdings Corporation (NASDAQ:FRAN) Q2 2019 Earnings Conference Call - Final Transcript

Sep 10, 2019 • 08:30 am ET

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Francesca's Holdings Corporation (NASDAQ:FRAN) Q2 2019 Earnings Conference Call - Final Transcript

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Presentation
Executive
Cindy Thomassee

with deeper markdowns taken to work through poor performing legacy products. This was partially offset by a high single-digit increase in boutique conversion rate and low single-digit increase in average units per transaction. Both of these metrics showed improvement from the first quarter, with conversion rate improving dramatically from the mid-single digit decline. As we previously mentioned, we believe that an improvement in boutique conversion rate would be the first indication that our turnaround plan is working. E-commerce sales were not as strong as expected due to the lack of new products and breadth in the online assortment.

As Michael mentioned during his remarks, initiatives are underway to enhance our e-commerce shopping experience. Gross margin for the period was 38.2% versus 39% in the prior year. The 80 basis point decline was due to lower merchandise margins as a result of deeper markdowns on legacy products and deleveraging of occupancy costs as a result of lower sales.

Despite the aggressive markdowns, the merchandise margin only slightly decreased as we did not have to take marked out of stock charges during the quarter as we did in the prior year. We were very pleased with the sell through on products that reflects our go forward strategy. Adjusted SG&A decreased 11% to $38.7 million in the second quarter of fiscal year 2019 from $43.3 million in the same period last year. This decrease was mostly due to a $2.5 million decrease in boutique payroll and supplies associated with the Company's cost reduction initiative under the turnaround plan. The specific of the additional decreases are as follows: $0.9 million decrease in corporate payroll and related expenses due to lower headcount; $0.4 million decrease in marketing expenses; and a $0.3 million decrease in asset write-off charges related to remodel boutiques. Excluding the adjustments for SG&A, adjusted income from operations in the second quarter of fiscal year 2019 was $1.8 million, compared to $0.8 million in the same period last year.

During the quarter, our income tax benefit was $0.3 million, compared to an income tax expense of $0.4 million in the prior year quarter. The income tax benefits recognized in the second quarter is based on a revised estimate of our annualized taxable income for fiscal year 2019. Our adjusted net income for the quarter was $2.1 million or $0.72 adjusted diluted earnings per share, which compares to a net income of $0.5 million or $0.16 diluted earnings per share in the prior year.

Now turning to the balance sheet, we ended the second quarter of 2019 with $22 million in cash, compared to $23.4 million at the end of second quarter last year. The Company had $10 million in debt outstanding at the end of the quarter under our ABL with JPMorgan Chase. As at August 3, 2019, we had $10 million of borrowing availability under the ABL of which $4 million were available for borrowings before consideration of the fixed charge coverage ratio requirements.

As previously disclosed on August 13, 2019, we