Doubling down on Francesca

On January 5 FRAN dropped more than 20%, finishing the day at $5.95. It had closed at $7.50 the day before (exactly the price when I first invested about three months ago).

The above was caused by a new update on 2017 Q4 guidance based on holiday results, where the company stated that it now expects sales for the fourth quarter ending February 3, 2018 to be between $137m and $139m, assuming a decrease of 15% to 17% in comparable sales. Their previous Q4 guidance was for sales between $145m and $150m, assuming a 9% to 12% decrease in comparable sales. Fourth quarter earnings per share are expected to be between $0.18 to $0.23 compared to previous guidance of $0.35 to $0.40 (safe to say, holiday performance was not what was expected).

2017 full year EPS are now expected to be between $0.50 and $0.55, meaning net income of $18m to $20m, half of the average net income for the previous five years. This is a bit lower than what I imagined when I valued FRAN, and I thought the share price would recover in the fourth quarter instead of crashing 20%. What to do?

I was already expecting 2017 to be a year of abnormally low earnings for FRAN. Q4 performance was impacted by the lack of momentum coming out of Q3, and they are taking initiatives to reinvigorate their merchandise and drive traffic to their boutiques and online store. FRAN was already selling for a 50% discount to my fair value estimate of $14.50 per share (which hasn’t changed); the price went further down, giving me an ever bigger discount of almost 60% ($6/$14.5=41.37%); and on my post valuing FRAN I said that I would like to buy more if the price went down to $5. What to do? Buy some more!

TD Order 2

I didn’t think the price would go down to $5 at this time, and I enjoy taking advantage of the irrational behaviour of short-term speculators. A company’s value doesn’t change from quarter to quarter, and when the price goes down due to bad news and speculators are fearful, it is a great opportunity to buy.

Therefore, on January 5 I bought another 130 shares at $5.99 (for a total investment of £592.71), bringing my average price per share down to $6.65 on 230 shares (($7.50*100+$5.99*130)/230=$6.6465). Since then the price went further down to $5.40 and then recovered to $6.25 as of Friday, January 19, giving me a 6% loss over my average purchase price.

“Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

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