Francesca’s Besting Lululemon Seen Luring Bids: Real M&A

Francesca’s Holdings Corp., the women’s boutique operator that boasts the retail industry’s fastest growth rate, may also command the most expensive price tag in a U.S. takeover.

Francesca’s is projected by analysts to boost sales by 80 percent during the next three years, faster than any other apparel chain including Lululemon Athletica Inc., according to data compiled by Bloomberg. With the $1 billion company poised to report record free cash flow and more than double its store count to 900 outlets, Francesca’s could appeal to private-equity firms, Avondale Partners LLC said. Rue21 Inc., a similar-sized clothing retailer, agreed in May to a buyout by Apax Partners.

Francesca’s also might be a logical target for other U.S. retailers whose growth has slowed, Macquarie Group Ltd. said. Clothing chains from Aeropostale Inc. to Abercrombie & Fitch Co. had revenue declines in the latest quarter. Investors aren’t giving Francesca’s enough credit for its growth prospects, according to SunTrust Banks Inc., signaling buyers can still get a bargain even as the Houston-based retailer would command the highest multiple for a takeover of a U.S. chain.

“There aren’t that many retailers left who can double the store base and have a proven concept in place,” Pamela Quintiliano, a New York-based analyst at SunTrust, said in a phone interview. “It is definitely an attractive takeover target.”

Randi Sonenshein, Francesca’s vice president of finance and investor relations, didn’t immediately respond to a phone call seeking comment.

Expansion Plan

Francesca’s, which was taken public in 2011 by private-equity firm CCMP Capital Advisors LLC, sells women’s clothes, bags and shoes through 438 U.S. retail locations that are modeled after upscale boutiques.

The company plans to expand to 900 stores within the next seven years. As it grows, analysts project annual sales will rise to $533 million by the fiscal year ended Jan. 31, 2016, 80 percent more than last year’s total of $296 million. That compares with the median estimated growth rate of 20 percent among specialty-apparel retailers valued at more than $1 billion, according to data compiled by Bloomberg.

Francesca’s surging growth stands out in an industry where retailers including Abercrombie and Aeropostale are posting lower sales and shuttering stores, according to Mark Montagna, a Nashville, Tennessee-based analyst at Avondale Partners.

Good Story

That could make the company an attractive target for private-equity firms, which would also be drawn to its free cash flow, he said. Analysts estimate that Francesca’s will generate $50 million in free cash flow this fiscal year, the most on record, and the company has no debt.

“They are the best store growth story in specialty retail,” Montagna said in a phone interview. “Such strong cash flows would enable private equity to take them private and load the company up with debt” in a leveraged buyout.

Francesca’s could fetch as much as a 30 percent premium, or about $30.50 a share, in a takeover, said Susan Anderson, an Arlington, Virginia-based analyst at FBR & Co.

Today, shares of Francesca’s rose 2.7 percent to $24.12.

A larger U.S. retailer makes more sense as a buyer of Francesca’s, lured by the chance to give sales a jolt while also cutting costs by combining operations, said Liz Dunn, a New York-based analyst at Macquarie.

“Most strategic acquirers are looking for brands that have growth potential as well as some differentiated business model,” Dunn said in a phone interview. Francesca’s is “a well-run retailer.”

Fat Margins

Francesca’s operating margin of 26 percent is higher than 95 percent of peers, according to data compiled by Bloomberg.

While the company’s high margins would only add to its appeal for other retailers, private-equity suitors may not see enough room for improvement to justify an investment, Dunn said.

Buyout firms may also be turned off by Francesca’s valuation, according to Howard Tubin, a New York-based analyst at Royal Bank of Canada.

Francesca’s trades at 3.3 times its sales in the last 12 months. Even without a premium, that’s already a higher revenue multiple than in any takeover of a U.S. shoe or apparel retailer, according to data compiled by Bloomberg.

“It doesn’t jump off the pages in an LBO screen as being screamingly cheap,” Tubin said in a phone interview.

Even so, Francesca’s is undervalued given its expansion opportunities and could be attractive to a private-equity buyer looking to get ahead of potentially even higher multiples, said Quintiliano of SunTrust.

Buyout firms could be interested “based on where it is now,” she said. “They have a lot of growth and they’re not being given any credit for it.”

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