Attached files

file filename
EX-23.2 - CONSENT OF BDO USA, LLP - Francesca's Holdings CORPdex232.htm
EX-23.1 - CONSENT OF ERNST & YOUNG LLP - Francesca's Holdings CORPdex231.htm
EX-10.26 - COMMITMENT LETTER - Francesca's Holdings CORPdex1026.htm
EX-10.23 - LETTER AGREEMENT - FRANCESCA'S HOLDINGS CORP. AND RICHARD J. EMMETT - Francesca's Holdings CORPdex1023.htm
Table of Contents

As filed with the Securities and Exchange Commission on June 14, 2011

Registration No. 333-173581

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

FRANCESCA’S HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5632   20-8874704
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer
Identification Number)

 

 

c/o Francesca’s Collections, Inc.

3480 W. 12th Street

Houston, Texas 77008

(713) 864-1358

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

John De Meritt

President and Chief Executive Officer

3480 W. 12th Street

Houston, Texas 77008

(713) 864-1358

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of Communications to:

 

Sung Pak, Esq.

O’Melveny & Myers LLP

7 Times Square

New York, New York 10036

(212) 326-2000

 

LizabethAnn R. Eisen, Esq.

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, New York 10019

(212) 474-1000

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.

If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 
Title of Each Class of
Securities to be Registered
  Proposed
Maximum
Aggregate
Offering Price(1)
  Amount of
Registration Fee(2)

Common Stock, par value $0.01 per share

  $150,000,000   $17,415(3)
 
 
(1) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. The proposed maximum offering price includes amounts attributable to shares that may be purchased by the underwriters to cover the underwriters’ option to purchase additional shares of our common stock from the selling stockholders at the initial public offering price less the underwriters’ discount. See “Underwriting”.
(2) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3) Previously paid.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated June 14, 2011

             Shares

LOGO

Francesca’s Holdings Corporation

Common Stock

 

 

This is an initial public offering of shares of common stock of Francesca’s Holdings Corporation.

We are offering              of the shares to be sold in the offering. The selling stockholders, which includes certain of our officers and directors, identified in this prospectus are offering an additional              shares. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders, including any shares sold by the selling stockholders in connection with the exercise of the underwriters’ option to purchase additional shares.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $             and $            . We intend to list our common stock on The NASDAQ Global Select Market under the symbol “FRAN.”

 

 

See “Risk Factors” on page 12 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share    Total

Initial public offering price

   $                    $            

Underwriting discount

   $    $

Proceeds, before expenses, to us

   $    $

Proceeds, before expenses, to the selling stockholders

   $    $

To the extent that the underwriters sell more than              shares of common stock, the underwriters have the option to purchase up to an additional              shares from the selling stockholders identified in this prospectus at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2011

 

Goldman, Sachs & Co.   J.P. Morgan  

Jefferies

 

RBC Capital Markets   Stifel Nicolaus Weisel   KeyBanc Capital Markets

 

 

Prospectus dated                     , 2011.


Table of Contents

LOGO


Table of Contents

LOGO

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     12   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     38   

USE OF PROCEEDS

     40   

DIVIDEND POLICY

     42   

CAPITALIZATION

     43   

DILUTION

     44   

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

     46   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     50   

BUSINESS

     83   

MANAGEMENT

     96   

EXECUTIVE COMPENSATION

     105   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     129   

PRINCIPAL AND SELLING STOCKHOLDERS

     133   

DESCRIPTION OF CAPITAL STOCK

     135   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     140   

SHARES ELIGIBLE FOR FUTURE SALE

     145   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS TO NON–U.S. HOLDERS

     147   

UNDERWRITING (CONFLICTS OF INTEREST)

     151   

LEGAL MATTERS

     156   

EXPERTS

     156   

CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     156   

WHERE YOU CAN FIND MORE INFORMATION

     157   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

Through and including                     , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 

Basis of Presentation

We operate on a fiscal calendar which in a given fiscal year consists of a 52- or 53-week period ending on the Saturday closest to January 31st. The reporting periods contained in our audited consolidated financial statements included in this prospectus contain 52 weeks of operations in fiscal year 2010, which ended January 29, 2011, 52 weeks of operations in fiscal year 2009, which ended January 30, 2010, and 52 weeks of operations in fiscal year 2008, which ended January 31, 2009. For


Table of Contents

fiscal year 2007, which ended on December 31, 2007, and prior periods, the company operated on a fiscal calendar year ending December 31st. The quarterly reporting periods contained in the unaudited consolidated financial statements included in this prospectus consist of 13-week periods ending on April 30, 2011 and May 1, 2010.

 

 

Industry and Market Data

We obtained the industry, market and competitive position data throughout this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. Industry publications, studies and surveys generally state that they have been prepared from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the definitions of our market and industry are appropriate, neither this research nor these definitions have been verified by any independent source. Further, while we believe the market opportunity information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors”. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

 

Trademarks

We operate under our trademark “francesca’s collections®” which is registered under applicable intellectual property laws. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” section of this prospectus and our consolidated financial statements and related notes appearing at the end of this prospectus, before making an investment decision. Some of the statements in this prospectus constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements” for more information.

We are a holding company and all of our business operations are conducted through our wholly owned indirect subsidiary, Francesca’s Collections, Inc. (“Francesca’s Collections”), a corporation formed and existing under the laws of the State of Texas. Francesca’s Collections is wholly owned by Francesca’s LLC (“Parent”), a limited liability company formed and existing under the laws of the State of Delaware. Parent is a wholly owned subsidiary of Francesca’s Holdings Corporation (“Holdings”). Except where the context otherwise requires or where otherwise indicated, the terms “Francesca’s,” “we,” “us,” “our,” “the company,” “our company” and “our business” refer to Holdings and its consolidated subsidiaries as a combined entity. Some differences in the numbers in the tables and text throughout this prospectus may exist due to rounding.

Our Company

francesca’s collections® is one of the fastest growing specialty retailers in the United States. Our retail locations are designed and merchandised to feel like independently owned, upscale boutiques and provide our customers with an inviting, intimate and differentiated shopping experience. We believe we offer compelling value with a diverse and uniquely balanced mix of high-quality, trend-right apparel, jewelry, accessories and gifts at attractive prices. We tailor our assortment to appeal to our core 18-35 year-old, fashion conscious, female customer, although we find that women of all ages are attracted to our eclectic and sophisticated merchandise selection and boutique setting. We carry a broad selection but limited quantities of individual styles and introduce new merchandise to our boutiques five days a week to create a sense of scarcity and newness, which helps drive customer shopping frequency and loyalty.

Our boutiques have been successful across a wide variety of geographic markets and shopping venues. We believe we have an opportunity to continue to grow our boutique base from 249 locations in 38 states as of April 30, 2011 to approximately 900 boutiques in the United States over the next seven to ten years by capitalizing on the flexibility and compelling economics of our boutiques. Our merchandise is also available through our e-commerce website, www.francescascollections.com.

We believe that through the strength of our business model and our disciplined operating philosophy, we have achieved strong financial performance and growth that is among the best in the specialty retail sector:

 

  Ÿ  

For the thirteen weeks ended April 30, 2011, our net sales were $41.3 million, an increase of 62.4%, from $25.4 million for the thirteen weeks ended May 1, 2010. Income from operations increased from $2.6 million for the thirteen weeks ended May 1, 2010 to $8.4 million for the thirteen weeks ended April 30, 2011. Our comparable boutique sales increased by 14.7% for the thirteen weeks ended April 30, 2011. For the same period in the prior year, comparable boutique sales increased by 14.5%.

 

  Ÿ  

Between fiscal year 2008 and 2010, our net sales increased from $52.3 million to $135.2 million, representing a compound annual growth rate of 60.8%.

 

 

1


Table of Contents
  Ÿ  

Our comparable boutique sales increased by 15.2% in fiscal year 2010 after a 9.8% increase in fiscal year 2009.

 

  Ÿ  

Between the end of fiscal year 2008 and 2010 our boutique count increased from 111 to 207, representing a compound annual growth rate of 36.6%.

 

  Ÿ  

Between fiscal year 2008 and 2010 our income from operations increased from $7.0 million to $29.6 million, representing a compound annual growth rate of 106.2%.

Competitive Strengths

We believe the following strengths differentiate us from our competitors and are key drivers of our success:

 

  Ÿ  

Proven Trend-Right Merchandise Delivered at a Compelling Value.    We believe our ability to quickly identify and respond to emerging fashion and lifestyle trends positions us to consistently offer high-quality, trend-right apparel, jewelry, accessories and gifts at prices that ‘surprise and delight’ our customers. We offer a broad selection of merchandise, but intentionally purchase small quantities of individual items for each boutique such that we frequently replenish our boutiques with new merchandise, keeping the shopping experience fresh and exciting for our customers. Our ability to make decisions quickly on trend-right items combined with the short lead times of our vendors, maximizes our speed to market, as it generally takes only four to twelve weeks from the time an order is placed to the time merchandise is available on the boutique floor. With these short lead times, we are able to make more informed buying decisions to meet customers’ merchandise expectations, and to react quickly to changing fashion trends. This approach, combined with our uniquely balanced product mix of approximately 50% apparel and 50% jewelry, accessories and gifts, is designed to encourage more frequent visits by our customers and reduce the seasonal fluctuations and margin erosion experienced by many other specialty retailers.

 

  Ÿ  

Differentiated Shopping Experience.    We believe our warm and inviting boutiques and eclectic merchandise create a unique environment. Our passionate boutique managers and associates are encouraged to infuse each boutique with their personality, which increases their motivation and enhances the feel of an independent, upscale boutique shopping experience. We believe these attributes, along with our strategy of carrying a broad selection but limited quantities of individual styles, create a unique ‘treasure hunt’ atmosphere that strongly appeals to our customers and differentiates us in the marketplace.

 

  Ÿ  

Powerful Boutique Economics and Rigorous Real Estate Selection Process.    We have a proven boutique format that works across a wide variety of shopping venues, market sizes, climates and demographics. Our boutiques average approximately 1,400 square feet, which is meaningfully smaller than most specialty retailers. The performance of our boutiques and our flexible real estate format enhance our ability to secure prominent, highly visible locations in regional malls, lifestyle centers, street locations and strip centers. We deploy a rigorous real estate selection process with all new boutique opportunities measured against specific financial and geographic criteria. Over the previous two fiscal years our new boutiques have generated first year cash on cash returns in excess of 150% and payback periods of less than one year, allowing the company to fund growth from internally generated cash flow.

 

  Ÿ  

Solid and Scalable Infrastructure.    We continually invest in systems, controls and human resources to support our growth. In recent years we have made significant improvements to the infrastructure of our finance, buying and planning, real estate and IT departments. For instance, we believe that we have developed an integrated sourcing, distribution and merchandising

 

 

2


Table of Contents
 

process that is scalable and will facilitate the continued growth in the number of boutiques we operate. As we focus almost exclusively on organic, viral and in-boutique marketing to increase customer loyalty and build our brand image, we do not believe that we will require significant investments in traditional marketing and advertising initiatives as we expand our boutique base.

 

  Ÿ  

Experienced Management Team with a Disciplined Operating Philosophy.    Our senior management has extensive experience across a broad range of disciplines in the retail industry, including merchandising, real estate, supply chain and finance. Our highly skilled executive team includes two of our Founders (as defined below), John De Meritt, our President and Chief Executive Officer, and Kyong Gill, our Executive Vice Chairperson. Together they lead a dynamic team with a strong background at companies such as David’s Bridal, Chico’s, CVS, Banana Republic, Nordstrom and J.C. Penney.

Growth Strategy

We believe we can continue to grow our revenues and earnings by executing on the following strategies:

 

  Ÿ  

Grow Our Boutique Base.    We believe we have the potential to grow our base from 249 boutiques in 38 states as of April 30, 2011 to approximately 900 boutiques in the U.S. over time. We opened 62 new boutiques in fiscal year 2010 and plan to open approximately 75 new boutiques in each of fiscal year 2011 and 2012. Going forward, we expect the economics of our new boutiques to continue to be compelling.

 

  Ÿ  

Drive Comparable Boutique Sales.    We intend to drive comparable boutique sales by maintaining our distinctive approach to merchandising, refining our differentiated boutique experience and increasing the sophistication of our buying and planning infrastructure.

 

  Ÿ  

Expand the Penetration and Presence of our E-Commerce Business.    Our e-commerce sales grew by 85% in fiscal year 2010 but only represented 1.4% of our total net sales. We expect sales from this channel to continue to grow as consumers become more aware of our e-commerce capabilities and we open boutiques in new markets.

 

  Ÿ  

Enhance Operating Margins.    Our strong expected boutique growth should permit us to take advantage of economies of scale in merchandising and sourcing and to also leverage our existing infrastructure, corporate overhead and other fixed costs.

Summary Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider these risks, including all of the risks discussed in the section entitled “Risk Factors,” beginning on page 12 of this prospectus, before investing in our common stock. Risks relating to our business include, among others:

 

  Ÿ  

we may not be able to effectively anticipate, identify and respond quickly to changing fashion trends and customer preferences;

 

  Ÿ  

we may not be able to execute our growth strategy if we are unable to identify suitable locations to open new boutiques, obtain favorable lease terms, attract customers to our boutiques, hire and retain personnel and maintain sufficient levels of cash flow to support our expansion;

 

 

3


Table of Contents
  Ÿ  

in connection with the audit of our consolidated financial statements as of and for the fiscal year ended January 31, 2009, the company identified a material weakness in our internal control over financial reporting for such period which related to accounting for convertible redeemable preferred stock. We have taken steps to remediate our internal control deficiencies, however, there are no assurances that the measures we have taken were completely effective or that similar weaknesses will not recur;

 

  Ÿ  

we may face disruptions in our current or planned new information systems;

 

  Ÿ  

we may not be able to effectively manage our operations, which have grown rapidly, or our future growth;

 

  Ÿ  

we may be adversely impacted by economic conditions and the lack of success of the malls and shopping centers where our boutiques are located;

 

  Ÿ  

we operate in the highly competitive specialty retail apparel and accessories industry and may face increased competition;

 

  Ÿ  

we may not be able to maintain or improve levels of comparable boutique sales; and

 

  Ÿ  

we may not be able to obtain merchandise quickly and at competitive prices if any deterioration or change occurs in our vendor relationships or their businesses.

Our Principal Stockholders

Upon the completion of this offering, affiliates of CCMP Capital Advisors, LLC (collectively referred to as “CCMP”), on the one hand, and Mr. Chong Yi, Ms. Kyong Gill, Ms. Insuk Koo and Mr. John De Meritt (collectively referred to as the “Founders”), on the other hand, are expected to own approximately     %, and     %, respectively, of our outstanding common stock, or     %, and     %, respectively, if the underwriters’ option to purchase additional shares is fully exercised. As a result, CCMP and the Founders will be able to exert significant voting influence over fundamental and significant corporate matters and transactions. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.”

CCMP is a private equity firm specializing in buyouts and growth equity investments in companies ranging from $500 million to more than $3 billion in size. With offices in New York, Houston and London, CCMP focuses on four primary industries: Consumer, Industrial, Energy and Healthcare. Investments under management in its current fund, CCMP Capital Investors II, L.P. include, in addition to the investment in our company, ARAMARK Holdings Corporation, Chaparral Energy Inc., Edwards Group PLC, Generac Holdings Inc., Infogroup Inc. and LHP Hospital Group.

We, CCMP, the Founders and certain other stockholders that are part of our executive management team are parties to a stockholders agreement. Pursuant to the stockholders’ agreement, CCMP has the right at any time, but on not more than five occasions, to require us to use our best efforts to register any or all of the shares held by CCMP on Form S-1 promulgated under the Securities Act at our expense. In addition, the Founders and certain other stockholders (which include members of our management) have the right on a single occasion, upon the request of the holders representing a majority of the shares held by such Founders and other stockholders, to require us to use our best efforts to register any or all of the shares held thereby at any time following the 12-month anniversary of a qualified initial public offering (as defined in the stockholders’ agreement) of our common stock. The stockholders’ agreement also grants CCMP, the Founders and certain other stockholders (which include members of our management) “piggyback” registration rights. If we register any of our

 

 

4


Table of Contents

securities the holders of these shares are entitled to include their shares in the registration. After the completion of this offering, the holders of approximately              shares of our common stock will be entitled to additional short-form registration rights, commencing on the date that we become eligible to register securities on Form S-3.

Corporate and Other Information

We opened our first boutique in Houston, Texas in 1999. John De Meritt, our President and Chief Executive Officer, and Kyong Gill, our Executive Vice Chairperson, are two of the original four Founders of francesca’s collections®. In February 2010, CCMP acquired a controlling interest in the company with the goal of supporting Mr. De Meritt and the management team in accelerating our growth.

Holdings was incorporated in Delaware in 2007. We are a holding company and all of our business operations are conducted through Francesca’s Collections, our wholly owned operating subsidiary. Francesca’s Collections was formed in 2006 and is the successor-in-interest of PFD II, Inc., a corporation incorporated in 1999 under the laws of the State of Texas. In 2002, we incorporated Francesca’s Collections of CA, Inc., under the laws of California to own and operate our boutiques in California. In 2008, Francesca’s Collections of CA, Inc., was merged into Francesca’s Collections and as a result of such merger, Francesca’s Collections of CA, Inc. ceased to exist.

Office Location

Our principal executive office is located at 3480 W. 12th Street, Houston, Texas 77008, our telephone number is (713) 864-1358 and our fax number is (713) 426-2751. We maintain a website at www.francescascollections.com. We do not incorporate the information contained on, or accessible through, our website into this prospectus, and you should not consider it part of this prospectus.

 

 

5


Table of Contents

THE OFFERING

 

Common stock offered by us

             shares.

 

Common stock offered by the selling stockholders

             shares.

 

               shares if the underwriters exercise their option to purchase additional shares in full.

 

Common stock to be outstanding immediately after this offering

            shares.

 

Use of proceeds

The net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $             million, assuming an initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus.

 

  We will not receive any proceeds from the sale of shares by the selling stockholders. For a sensitivity analysis as to the offering price and other information, see “Use of Proceeds.”

 

  We expect to use the net proceeds we receive from this offering, together with borrowings under our new revolving credit facility, to repay our existing senior secured credit facility in full. If we do not enter into a new revolving credit facility, then a portion of the loans under our existing senior secured credit facility will remain outstanding. This refinancing transaction is referred to in this prospectus as the “refinancing”. The completion of this offering is not conditioned upon our obtaining a new revolving credit facility. See “Use of Proceeds” and “Description of Certain Indebtedness”.

 

Principal Stockholders

Upon completion of this offering, CCMP will own a controlling interest in us. We currently intend to avail ourselves of the controlled company exemption under the corporate governance rules of The NASDAQ Stock Market.

 

Dividend Policy

We currently expect to retain all available funds and future earnings, if any, for use in the operation and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our results of operations, financial condition, earnings, capital requirements, legal requirements, restrictions in our debt agreements and other factors our board of directors deems relevant. See “Dividend Policy”.

 

 

6


Table of Contents

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully read the information set forth under “Risk Factors” beginning on page 12 of this prospectus, together with all of the other information set forth in this prospectus, before deciding to invest in shares of our common stock.

 

Proposed symbol for trading on The NASDAQ Global Select Market

“FRAN”

 

Conflicts of Interest

One or more affiliates of J.P. Morgan Securities LLC beneficially own more than 10% of CCMP Capital Investors II, L.P., which is a stockholder in the company. Because J.P. Morgan Securities LLC is an underwriter and its affiliates beneficially, through CCMP Capital Investors II, L.P., own more than 10% of the company, J.P. Morgan Securities LLC is deemed to have a “conflict of interest” under Rule 5121 (“Rule 5121”) of the Financial Industry Regulatory Authority. Furthermore, as described under “Use of Proceeds”, the company expects to use the net proceeds it receives from this offering, together with indebtedness under a new revolving credit facility if available, to repay its existing senior secured credit facility in full. If we do not enter into a new revolving credit facility, then a portion of the loans under our existing senior secured credit facility will remain outstanding. Affiliates of Goldman, Sachs & Co., J.P. Morgan Securities LLC and Jefferies & Company, Inc. and the other underwriters are lenders under the company’s existing senior secured credit facility and will each receive their pro rata share of such repayment. Because it is possible that each of Goldman, Sachs & Co., J.P. Morgan Securities LLC and Jefferies & Company, Inc. or their affiliates could receive more than 5% of the proceeds of this offering in connection with the repayment of the company’s existing senior secured credit facility, each of Goldman, Sachs & Co., J.P. Morgan Securities LLC and Jefferies & Company, Inc. is deemed to have a “conflict of interest” under Rule 5121. Accordingly, this offering will be conducted in accordance with Rule 5121. Rule 5121 requires that a “qualified independent underwriter”, meeting certain standards, to participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence with respect thereto. Stifel, Nicolaus & Company, Incorporated has served as “qualified independent underwriter” within the meaning of Rule 5121 in connection with this offering. For more information, see “Underwriting.”

 

 

7


Table of Contents

Unless otherwise indicated, all information in this prospectus relating to the number of shares of our common stock to be outstanding immediately after this offering:

 

  Ÿ  

excludes 2,416,446 shares of common stock issuable upon the exercise of options outstanding as of                     , 2011, at a weighted average exercise price of $             per share; and

 

  Ÿ  

excludes              shares of our common stock reserved for future issuance under our 2011 Stock Incentive Plan, which plan will be in effect upon completion of this offering.

Unless otherwise indicated, all information in this prospectus assumes:

 

  Ÿ  

the repayment of all amounts outstanding under our existing senior secured credit facility immediately upon completion of this offering, with the net proceeds of this offering and indebtedness under a new revolving credit facility if available;

 

  Ÿ  

no exercise of the underwriters’ option to purchase additional shares; and

 

  Ÿ  

the adoption of our amended and restated certificate of incorporation, or certificate of incorporation, and our amended and restated bylaws, or bylaws, to be effective upon completion of this offering.

 

 

8


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table sets forth our summary consolidated financial information and operating data as of the dates and for the periods indicated. Our summary consolidated financial data for each of the years ended January 29, 2011, January 30, 2010 and January 31, 2009 and the selected consolidated balance sheet data as of January 29, 2011 and January 30, 2010 has been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated balance sheet data as of January 31, 2009 has been derived from our audited consolidated balance sheet, which is not included in this prospectus. The selected consolidated financial data for each of the thirteen weeks ended April 30, 2011 and May 1, 2010 and the selected consolidated balance sheet data as of April 30, 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of May 1, 2010 has been derived from our unaudited consolidated financial statements not included in this prospectus.

We operate on a fiscal calendar which in a given fiscal year consists of a 52- or 53-week period ending on the Saturday closest to January 31st. The reporting periods contained in our audited consolidated financial statements included in this prospectus contain 52 weeks of operations in fiscal year 2010, which ended January 29, 2011, 52 weeks of operations in fiscal year 2009, which ended January 30, 2010, and 52 weeks of operations in fiscal year 2008, which ended January 31, 2009. For fiscal year 2007, which ended on December 31, 2007, and prior periods, the company operated on a fiscal calendar year ending December 31st. Our interim reporting periods in the unaudited consolidated financial statements included in this prospectus consist of 13-week periods ending April 30, 2011 and May 1, 2010.

The historical results presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period may not necessarily be indicative of the results that may be expected for a full year. The following summaries of our consolidated financial and operating data for the periods presented should be read in conjunction with “Risk Factors”, “Selected Consolidated Financial and Operating Data”, “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes, which are included elsewhere in this prospectus.

 

 

9


Table of Contents
Consolidated Statements of Operations   Thirteen Weeks Ended     Fiscal Year Ended  
        April 30,    
2011
        May 1,    
2010
    January 29,
2011
    January 30,
2010
    January 31,
2009
 
   

(in thousands, except share and per share amounts)

 

Net sales(1)

  $ 41,265      $ 25,417      $ 135,176      $ 79,367      $ 52,290   

Cost of goods sold and occupancy costs(2)

    19,641        12,772        65,008        37,244        25,358   
                                       

Gross profit

    21,624        12,645        70,168        42,123        26,932   

Selling, general and administrative expenses

    13,205        10,024        40,525        24,641        19,962   
                                       

Income from operations

    8,419        2,621        29,643        17,482        6,970   

Other income (expense)

    34        16        (2     38        14   

Interest income (expense)

    (2,008            (1,633     2        4   
                                       

Income before income tax expense

    6,445        2,637        28,008        17,522        6,988   

Income tax expense

    2,527        1,046        11,113        6,918        2,382   
                                       

Net income

    3,918        1,591        16,895        10,604        4,606   

Increase in redemption value of convertible redeemable preferred stock

                         (60,271       

Convertible redeemable preferred stock accrued dividends

                         (2,022     (1,641
                                       

Net income (loss) available to shareholders

    3,918        1,591      $ 16,895      $ (51,689   $ 2,965   

Less: income attributable to participating securities

                                (1,038
                                       

Net income (loss) available to common shareholders

  $ 3,918      $ 1,591      $ 16,895      $ (51,689   $ 1,927   
                                       

Basic earnings (loss) per common share(3)

  $ 0.10      $ 0.04      $ 0.43      $ (1.99   $ 0.07   

Diluted earnings (loss) per common share(3)

  $ 0.10      $ 0.04      $ 0.41      $ (1.99   $ 0.07   

Dividends declared per common share

  $      $      $ 2.39                 

Weighted average shares outstanding:(4)

         

Basic shares

    40,466        36,136        39,385        26,000        26,000   

Diluted shares

    40,967        40,628        40,907        26,000        26,000   
Consolidated Balance Sheet Data   As of Thirteen Weeks Ended     As of Fiscal Year Ended  
        April 30,    
2011
        May 1,    
2010
    January 29,
2011
    January 30,
2010
    January 31,
2009
 
   

(in thousands)

 

Total current assets

  $ 36,423      $ 26,421      $ 31,721      $ 22,318      $ 13,036   

Total assets

    67,668        38,664        59,124        31,218        16,830   

Total liabilities

    118,553        12,377        114,592        8,242        4,556   

Convertible redeemable preferred stock—series A

                         85,854        23,561   

Total shareholders’ deficit

    (50,885     26,287        (55,468     (62,878     (11,287

Operating data:

         

Comparable boutique sales growth for period(5)

    14.7     14.5     15.2     9.8     (6.3 )% 

Number of boutiques open at end of period

    249        172        207       147       111  

Net sales per average square foot for period (not in thousands)(6)

  $ 127      $ 111      $ 508     $ 429     $ 384  

Average square feet (in thousands)(7)

    325        229        266       185       136  

Total gross square feet at end of period (in thousands)

    353        249        296       210       158  

 

 

10


Table of Contents

 

(1) Net sales plus shipping and handling fees.
(2) Cost of goods sold and occupancy costs include the direct cost of purchased merchandise, freight costs from our suppliers to our distribution centers and freight costs for merchandise shipped directly from our vendors to our boutiques, allowances for inventory shrinkage and obsolescence, boutique occupancy costs including rent, utilities, common area maintenance, property taxes, depreciation, and boutique repair and maintenance costs, and shipping costs related to e-commerce sales.
(3) Please see note 2 to our consolidated financial statements and note 2 to our unaudited consolidated financial statements included elsewhere in this prospectus, for an explanation of per share calculations.
(4) On April 28, 2010, the company authorized a split of its outstanding and authorized common stock in the ratio of four hundred to one. Accordingly, our consolidated financial data included elsewhere in this prospectus have been adjusted to reflect the effects of the stock split on common shares and per share amounts for all periods presented.
(5) A boutique is included in comparable boutique sales on the first day of the fifteenth full month following the boutique’s opening. When a boutique that is included in comparable boutique sales is relocated, we continue to consider sales from that boutique to be comparable boutique sales. If a boutique is closed for thirty days or longer for a remodel or as a result of weather damage, fire or the like, we no longer consider sales from that boutique to be comparable boutique sales.
(6) Net sales per average square foot is calculated by dividing net sales for the period by the average square feet during the period (see footnote 7 below).
(7) Because of our rapid growth, for purposes of providing a sales per square foot measure we use average square feet during the period as opposed to total gross square feet at the end of the period. For periods consisting of more than one fiscal quarter, average square feet is calculated as (a) the sum of the total gross square feet at the end of each fiscal quarter, divided by (b) the number of quarters. For individual quarterly periods, average square feet is calculated as (a) the sum of total gross square feet at the beginning and end of the period, divided by (b) two. There may be variations in the way in which some of our competitors and other retailers calculate sales per square foot or similarly titled measures. As a result, data in this prospectus regarding our average square feet and net sales per average square foot for period may not be comparable to similar data made available by other retailers.

 

 

11

 

11


Table of Contents

RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making a decision to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operation, cash flow and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

Risks Related to Our Business

Our success depends on our ability to anticipate, identify and respond quickly to new and changing fashion trends, customer preferences and other factors, and our inability to anticipate, identify and respond to these changes and trends could have a material adverse effect on our business, financial condition and results of operations.

Our core market, apparel, jewelry, accessories and gifts for women from 18 to 35-years old, is subject to rapidly shifting fashion trends, customer tastes and demands. Accordingly, our success is dependent on our ability to anticipate, identify and respond to the latest fashion trends and customer demands, and to translate such trends and demands into appropriate, saleable product offerings in a timely manner. A small number of our employees are primarily responsible for performing this analysis and making product purchase decisions. Our failure to anticipate, identify or react swiftly and appropriately to new and changing styles, trends or desired image preferences or to accurately anticipate and forecast demand for certain product offerings is likely to lead to lower demand for our merchandise, which could cause, among other things, sales declines, excess inventories and a greater number of markdowns. Further, if we are not able to anticipate, identify and respond to changing fashion trends and customer preferences, we may lose customers and market share to those of our competitors who are able to better anticipate, identify and respond to such trends and preferences. In addition, because our success depends on our brand image, our business could be materially adversely affected if new product offerings are not accepted by our customers. There can be no assurance that our new product offerings will be met with the same level of acceptance as our past product offerings or that we will be able to adequately respond to fashion trends in a timely manner or the preferences of our customers. If we do not accurately forecast or analyze fashion trends and sales levels, our business, financial condition and results of operations will be adversely affected.

If we are not able to successfully maintain a broad and shallow merchandise assortment, we may be unable to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise through our e-commerce business, which could result in excess inventories and markdowns.

We use the term broad and shallow to refer to a diverse merchandise assortment with relatively small inventory of each product. We believe that our strategy to offer our customers a broad and shallow merchandise assortment has contributed significantly to the success of our business. Among other things, we believe that this strategy creates a constant sense of newness and scarcity value, which drives repeat boutique visits and increased sales. In addition, we believe that this strategy helps us reduce markdowns. There can be no assurance that we will be able to continue to adequately stock our boutiques with a sufficiently broad and shallow assortment of merchandise. As we increase order volumes in connection with opening new boutiques and expanding our e-commerce business, it may become increasingly difficult for us to accurately forecast the optimal amount of merchandise to order from our vendors and continue to offer a broad and shallow merchandise assortment at each boutique. If we are unable to offer a broad and shallow merchandise assortment, customers may choose to visit our boutiques less frequently, our brand could be impaired, our market share may decline and our

 

12


Table of Contents

results of operations could deteriorate. Further, any failure to maintain a broad and shallow merchandise assortment could lead to excess inventories which could lead to markdowns.

Our growth strategy depends in large part upon our ability to successfully open and operate new boutiques each year in a timely and cost-effective manner.

Our strategy to grow our business depends in large part on continuing to successfully open a substantial number of new boutiques each year for the foreseeable future. The success of this strategy will depend largely upon our ability to find a sufficient number of suitable locations, our ability to recruit, hire and train qualified personnel to operate our new boutiques and our ability to scale our infrastructure to successfully integrate our new boutiques.

Our ability to successfully open and operate new boutiques depends on many factors that may be outside of our control including, among others, our ability to:

 

  Ÿ  

identify desirable boutique locations, primarily in malls, lifestyle centers, street locations and strip centers, as well as other types of shopping venues and outlet malls, which may be difficult and costly, particularly in an improving real estate environment;

 

  Ÿ  

negotiate acceptable lease terms, including favorable levels of tenant allowances, which may be difficult, particularly in an improving real estate environment;

 

  Ÿ  

maintain out-of-pocket, build-out costs in line with our boutique economic model, including by receiving expected levels of tenant allowances for a portion of our construction expenses, and managing these construction expenses at reasonable levels, which may be difficult, particularly in an improving real estate environment;

 

  Ÿ  

efficiently source and distribute additional merchandise;

 

  Ÿ  

hire, train and retain a growing workforce of boutique managers, boutique associates and other personnel;

 

  Ÿ  

successfully integrate new boutiques into our existing control structure and operations, including our information technology systems;

 

  Ÿ  

efficiently expand the operations of our distribution facility to meet the needs of a growing boutique network;

 

  Ÿ  

identify and satisfy the merchandise and other preferences of our customers in new geographic areas and markets; and

 

  Ÿ  

address competitive, merchandising, marketing, distribution and other challenges encountered in connection with expansion into new geographic areas and markets.

Our near-term expansion plans have us opening new boutiques in or near the areas where we have existing boutiques. To the extent that we open boutiques in markets where we already have existing boutiques, we may experience reduced net sales at those existing boutiques. Also, if we expand into new geographic areas, we will need to successfully identify and satisfy the fashion preferences of customers in those areas. In addition, we will need to address competitive, merchandising, marketing, distribution and other challenges encountered in connection with any expansion and our limited brand recognition in new markets may limit our expansion strategy and cause our business and growth to suffer.

Finally, we cannot assure you that any newly opened boutiques will be received as well as, or achieve net sales or profitability levels comparable to those of, our existing boutiques in our estimated time periods, or at all. If our boutiques fail to achieve, or are unable to sustain, acceptable net sales

 

13


Table of Contents

and profitability levels, our business may be materially harmed and we may incur significant costs associated with closing or relocating boutiques. In addition, our current expansion plans are only estimates, and the actual number of boutiques we open each year and the actual number of suitable locations for our new boutiques could differ significantly from these estimates. If we fail to successfully open and operate new boutiques and execute our growth plans, the price of our common stock could decline.

We may not be able to efficiently source and distribute the additional merchandise quantities necessary to support our growth.

Our success depends on our ability to source and distribute merchandise efficiently. The sourcing of our merchandise is dependent, in part, on our relationships with our vendors. If we are unable to maintain these relationships we may not be able to continue to source merchandise at competitive prices that appeal to our customers. If we do not succeed in maintaining good relationships with our vendors or if our growth outpaces the ability of our vendors to scale up and the company cannot identify new vendors to meet the demand for additional merchandise production, the company could see its costs go up or the delivery time on its new orders substantially increase.

Increases in the cost of the raw materials or other inputs used in the production of our merchandise could result in the loss of suppliers, increase our cost of goods sold and occupancy costs and adversely affect our financial results.

The success of our business is in part driven by the compelling price-value proposition we offer our customers. If the costs of the raw materials, particularly cotton, leather and synthetics, used in producing our merchandise increase, our vendors would look to pass these cost increases along to us. The price and availability of such raw materials may fluctuate significantly, depending on many factors which are outside of our control, including commodity prices, crop yields and weather patterns. If our vendors attempt to pass any cost increases on to us and we refuse to pay the increases, we could lose certain vendors as suppliers, resulting in the risk that we could not fill our orders in a timely manner or at all. If we pay the increases, we could either attempt to raise retail prices, which could adversely affect our sales and our brand image, or choose not to raise prices, which could adversely affect the profitability of our merchandise sales.

We are planning to replace several core information technology systems, which could disrupt our operations and adversely affect our financial results.

We recently completed the process of upgrading our existing merchandising, warehousing and point-of-sale applications to the latest supported software releases for these applications. The purpose of the upgrade is to allow the company to scale for the boutique growth planned during calendar year 2011 and 2012. Additionally, this upgrade will allow us to continue to operate our business while we are preparing to launch our new enterprise technology platform.

Since the beginning of fiscal year 2011, we have begun the process of replacing our current merchandise management, merchandise planning and allocation and merchandise analytics systems with a new enterprise technology platform. These replacements are expected to be completed in the third quarter of fiscal year 2011. In the near-term, delays and disruptions could arise, either of which might negatively impact our business, prospects, financial condition and results of operations.

During the first quarter of fiscal year 2012, we plan to replace our boutiques’ point-of-sale software system which will complete the implementation of our new enterprise technology platform. Also, our accounting system may need to be upgraded and replaced over time depending on our growth.

 

14


Table of Contents

The risks associated with the above information technology systems changes, as well as any failure of such systems to operate effectively, could disrupt and adversely impact the promptness and accuracy of our merchandise distribution, transaction processing, financial accounting and reporting, including the implementation of our internal controls over financial reporting, the efficiency of our operations and our ability to properly forecast earnings and cash requirements. We could be required to make significant additional expenditures to remediate any such failures or problems.

We believe that other companies have experienced significant delays and cost overruns in implementing similar systems changes, and we may encounter problems as well. We may not be able to successfully implement these new systems or, if implemented, we may still face unexpected disruptions in the future. Any resulting disruptions could harm our business, prospects, financial condition and results of operations.

Our current growth plans will place a strain on our existing resources and could cause us to encounter challenges we have not faced before.

As our number of boutiques and our e-commerce sales grow, our operations will become more complex. While we have grown substantially as a company since inception, much of this growth occurred recently in fiscal year 2010. As we move forward, we expect our growth to bring new challenges that we have not faced before. Among other difficulties that we may encounter, this growth will place a strain on our existing infrastructure, including our distribution facilities, information technology systems, financial controls, real estate and boutique operations staffs, may make it more difficult for us to adequately forecast expenditures, such as real estate and construction expenses, budgeting will become more complex, and we may also place increased burdens on our vendors, as we will likely increase the size of our merchandise orders. The increased demands that our growth plans will place on our infrastructure may cause us to operate our business less efficiently, which could cause a deterioration in the performance of our existing boutiques. New order delivery times could lengthen as a result of the strains that growth will place on our existing resources and our growth may make it otherwise difficult for us to respond quickly to changing trends, consumer preferences and other factors. This could impair our ability to continue to offer trend-right merchandise which could result in excess inventory, greater markdowns, loss of market share and decreased sales.

In addition, our planned expansion is expected to place increased demands on our existing operational, managerial, administrative and other resources. Specifically, our inventory management systems and personnel processes may need to be further upgraded to keep pace with our current growth strategy. We cannot anticipate all of the demands that our expanding operations will impose on our business, and our failure to appropriately address these demands could have an adverse effect on us.

Our business is sensitive to consumer spending and economic conditions.

Consumer purchases of discretionary retail items and specialty retail products, which include our apparel, jewelry, accessories and gifts, may be adversely affected by economic conditions such as employment levels, salary and wage levels, the availability of consumer credit, inflation, high interest rates, high tax rates, high fuel prices and consumer confidence with respect to current and future economic conditions. Consumer purchases may decline during recessionary periods or at other times when unemployment is higher or disposable income is lower. These risks may be exacerbated for retailers like us that focus significantly on selling discretionary fashion merchandise. Consumer willingness to make discretionary purchases may decline, may stall or may be slow to increase due to national and regional economic conditions. Our financial performance is particularly susceptible to economic and other conditions in regions or states where we have a significant number of boutiques. There remains considerable uncertainty and volatility in the national and global economy. Further or

 

15


Table of Contents

future slowdowns or disruptions in the economy could adversely affect mall traffic and new mall and shopping center development and could materially and adversely affect us and our growth plans. We may not be able to maintain our recent rate of growth in net sales if there is a decline in consumer spending.

In addition, a deterioration of economic conditions and future recessionary periods may exacerbate the other risks faced by our business, including those risks we encounter as we attempt to execute our growth plans. Such risks could be exacerbated individually or collectively.

We operate in the highly competitive specialty retail apparel and accessories industry and the size and resources of some of our competitors may allow them to compete more effectively than we can, which could adversely impact our growth and market share.

We face intense competition in the specialty retail apparel and accessories industry. We compete on the basis of a combination of factors, including price, breadth, quality and style of merchandise, as well as our in-boutique experience and level of customer service, our brand image and our ability to anticipate, identify and respond to new and changing fashion trends. While we believe that we compete primarily with specialty retailers and internet businesses that specialize in women’s apparel and accessories, we also face competition from department stores, mass merchandisers and value retailers. We believe our primary competitors include specialty apparel and accessories retailers that offer their own private labels, including, among others, White House | Black Market, Ann Taylor Loft, Charlotte Russe and Anthropologie. In addition, our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have an adverse effect on our business.

We also compete with a wide variety of large and small retailers for customers, vendors, suitable boutique locations and personnel. The competitive landscape we face, particularly among specialty retailers, is subject to rapid change as new competitors emerge and existing competitors change their offerings. We cannot assure you that we will be able to compete successfully and navigate the shifts in our market.

Many of our competitors are, and many of our potential competitors may be, larger and have greater name recognition and access to greater financial, marketing and other resources. Therefore, these competitors may be able to adapt to changes in trends and customer desires more quickly, devote greater resources to the marketing and sale of their products, generate greater brand recognition or adopt more aggressive pricing policies than we can. As a result, we may lose market share, which could reduce our sales and adversely affect our results of operations. Many of our competitors also utilize advertising and marketing media which we do not, including advertising through the use of direct mail, newspapers, magazines, billboards, television and radio, which may provide them with greater brand recognition than we have.

Our competitors may also sell certain products or substantially similar products through the Internet or through outlet centers or discount stores, increasing the competitive pressure for those products. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on us. Competitive forces and pressures may intensify as our presence in the retail marketplace grows.

We do not possess exclusive rights to many of the elements that comprise our in-boutique experience and merchandise offerings. Some specialty retailers offer a personalized shopping experience that in certain ways is similar to the one we strive to provide to our customers. Our competitors may seek to emulate facets of our business strategy and in-boutique experience, which could result in a reduction of any competitive advantage or special appeal that we might possess. In

 

16


Table of Contents

addition, some of our merchandise offerings are sold to us on a non-exclusive basis. As a result, our current and future competitors, especially those with greater financial, marketing or other resources, may be able to duplicate or improve upon some or all of the elements of our in-boutique experience or merchandise offerings that we believe are important in differentiating our boutiques and our customers’ shopping experience. If our competitors were to duplicate or improve upon some or all of the elements of our in-boutique experience or product offerings, our competitive position and our business could suffer.

Our inability to maintain or increase our comparable boutique sales could adversely impact our net sales, profitability, cash flow and stock price.

We may not be able to sustain or increase the levels of comparable boutique sales that we have experienced in the recent past. If our future comparable boutique sales decline or fail to meet market expectations, our profitability could be harmed and the price of our common stock could decline. In addition, the aggregate comparable boutique sales levels of our boutiques have fluctuated in the past and can be expected to fluctuate in the future. A variety of factors affect comparable boutique sales, including fashion trends, competition, current national and regional economic conditions, pricing, changes in our merchandise mix, prior period comparable boutique sales levels, inventory shrinkage, the timing and amount of markdowns, the success of our marketing programs, holiday timing and weather conditions. In addition, it may be more challenging for us to sustain high levels of comparable boutique sales growth during and after our planned expansion. These factors may cause our comparable boutique sales results to be materially lower than in recent periods and lower than market expectations, which could harm our business and our earnings and result in a decline in the price of our common stock.

Our inability to maintain or increase our operating margins could adversely affect the price of our common stock.

We intend to continue to increase our operating margins through scale efficiencies, improved systems, continued cost discipline and enhancements to our merchandise offerings. If we are unable to successfully manage the potential difficulties associated with our growth plans, we may not be able to capture the scale efficiencies that we expect from expansion. If we are not able to continue to capture scale efficiencies, improve our systems, continue our cost discipline and enhance our merchandise offerings, we may not be able to achieve our goals with respect to operating margins. In addition, if we do not adequately refine and improve our various ordering, tracking and allocation systems, we may not be able to increase sales and reduce inventory shrinkage. As a result, our operating margins may stagnate or decline, which could adversely affect the price of our common stock.

Our ability to attract customers to our boutiques depends on locating our boutiques in suitable locations. Conditions or changes affecting boutique locations, including any decrease in customer traffic, could cause our sales to be less than expected.

Boutique locations and related sales and customer traffic may be adversely affected by, among other things, economic conditions in a particular area, competition from nearby retailers selling similar merchandise, changing lifestyle choices of consumers in a particular market and the closing or decline in popularity of other businesses located near our boutique. Although we have opened many boutiques in mall locations, our approach to identifying locations for our boutiques has historically favored street locations and lifestyle centers. As a result, many of our boutiques are located outside of malls near other retailers or public venues that we believe are consistent with our customers’ lifestyle choices. Changes in areas around our boutique locations that result in reductions in customer foot traffic or otherwise render the locations unsuitable could cause our sales to be less than expected. Boutiques located in street locations and lifestyle centers may be more susceptible to such changes than boutiques located in malls.

 

17


Table of Contents

Our business depends on a strong brand image, and if we are not able to maintain and enhance our brand, particularly in new markets where we have limited brand recognition, we may be unable to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise.

We believe that our brand image and brand awareness has contributed significantly to the success of our business. We also believe that maintaining and enhancing our brand image particularly in new markets where we have limited brand recognition is important to maintaining and expanding our customer base. Maintaining and enhancing our brand image may require us to make substantial investments in areas such as merchandising, marketing, boutique operations, community relations, boutique promotions and employee training. These investments may be substantial and may not ultimately be successful.

We do not use traditional advertising channels and if we fail to adequately continue to connect with our customer base, our business could be adversely affected.

We focus on organic, viral and in-boutique marketing to capture the interest of our customers and drive them to our boutiques and website. We do not use traditional advertising channels, such as newspapers, magazines, billboards, television and radio, which are used by some of our competitors. We expect to increase our use of social media, such as Facebook and Twitter, in the future. If our marketing efforts are not successful, there may be no immediately available or cost effective alternative marketing channel for us to use to build or maintain brand awareness. As we execute our growth strategy, our ability to successfully integrate new boutiques into their surrounding communities or to expand into new markets will be adversely impacted if we fail to connect with our target customers. Failure to successfully connect with our target customers in new and existing markets could harm our business, results of operations and financial condition.

We depend on our senior management personnel and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.

Our future success is substantially dependent on the continued service of our senior management, particularly Mr. De Meritt, one of our Founders and our Chief Executive Officer and a member of our board of directors, and Ms. Gill, another of our Founders and the Executive Vice Chairperson of our board of directors. These employees have extensive experience both with our company and in our industry and are familiar with our business, systems and processes. The loss of services of one or more of our key employees could impair our ability to manage our business effectively and could have an adverse effect on our business, as we may not be able to find suitable individuals to replace them on a timely basis or at all. In addition, any departures of key personnel could be viewed in a negative light by investors and analysts, which could cause our common stock price to decline. We do not maintain key person insurance on any employee.

In addition to these key employees, we have other employees in positions, including those employees responsible for our merchandising and operations departments, that, if vacant, could cause a temporary disruption in our business until such positions are filled.

If we are unable to find, train and retain key personnel, including new boutique employees that reflect our brand image and embody our culture, we may not be able to grow or sustain our operations.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of boutique employees, including boutique managers, who understand and appreciate our customers, brand and corporate culture, and are able to adequately and effectively represent our culture and establish credibility with our customers. Like most retailers, we experience significant employee

 

18


Table of Contents

turnover rates, particularly among boutique employees. Our planned growth will require us to hire and train even more personnel to manage such growth. If we are unable to hire and retain boutique personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of the merchandise we offer, our ability to open new boutiques may be impaired, the performance of our existing and new boutiques could be materially adversely affected and our brand image may be negatively impacted. There is a high level of competition for experienced, qualified personnel in the retail industry and we compete for personnel with a variety of companies looking to hire for retail positions. Historically, we have prided ourselves on our commitment to employee growth and development and we focus on promoting from within our team. Our growth plans will strain our ability to staff our new boutiques, particularly at the boutique manager level, which could have an adverse effect on our ability to maintain a cohesive and consistently strong team, which in turn could have an adverse impact on our business. If we are unable to attract, train and retain employees in the future, we may not be able to serve our customers effectively, thus reducing our ability to continue our growth and to operate our existing boutiques as profitably as we have in the past.

Union attempts to organize our employees could negatively affect our business.

None of our employees are currently subject to a collective bargaining agreement. As we continue to grow and enter different regions, unions may attempt to organize all or part of our employee base at certain boutiques or within certain regions. Responding to such organization attempts may distract management and employees and may have a negative financial impact on individual boutiques, or on our business as a whole.

We have one corporate headquarters and distribution facility and have not yet implemented disaster recovery procedures. Disruptions to the operations at that location could have an adverse effect on our business operations.

Our corporate headquarters and our only distribution facility are co-located in Houston, Texas. Our distribution facility supports both our boutiques and our e-commerce business. A majority of our merchandise is shipped from our vendors to the distribution facility and then packaged and shipped from our distribution facility to our boutiques and our e-commerce customers. The success of our boutiques depends on the timely receipt of merchandise because they must receive merchandise in a timely manner in order to stay current with the fashion preferences of our customers. The efficient flow of our merchandise requires that we have adequate capacity and uninterrupted service in our distribution facility to support both our current level of operations, and the anticipated increased levels that may follow from our growth plans. We believe that our current distribution facility is capable of supporting our growth through approximately 450 boutiques without significant additional capital investment. In order to accommodate future growth beyond approximately 450 boutiques we will either need to expand and upgrade our existing distribution facility or move our distribution operations to a new facility with greater capacity. Upgrading our existing facility or transferring our operations to a facility with greater capacity may require us to secure additional favorable real estate or may require us to obtain additional financing. Appropriate locations or financing for the purchase or lease of such additional real estate may not be available at reasonable costs or at all. Our failure to provide adequate order fulfillment and secure additional distribution capacity when necessary could impede our growth plans, and the further increase of this capacity would increase our costs.

In addition, if we encounter difficulties associated with our distribution facility or if it were to shut down for any reason, including fire, hurricanes or other natural disaster, we could face inventory shortages resulting in “out-of-stock” conditions in our boutiques, and delays in shipments to our direct customers, resulting in significantly higher costs and longer lead times associated with distributing our

 

19


Table of Contents

merchandise. Also, most of our computer equipment and senior management, including critical resources dedicated to merchandising, financial and administrative functions, are located at our corporate headquarters. Our management and our operations and distribution staff would need to find an alternative location, causing further disruption and expense to our business and operations.

We recognize the need for, and are in the early stages of, developing disaster recovery, business continuity and document retention plans that would allow us to be operational despite casualties or unforeseen events impacting our corporate headquarters or distribution center. Without disaster recovery, business continuity and document retention plans, if we encounter difficulties or disasters with our distribution facility or at our corporate headquarters, our critical systems, operations and information may not be restored in a timely manner, or at all, and this could have an adverse effect on our business.

Our business requires that we lease substantial amounts of space and there can be no assurance that we will be able to continue to lease space on terms as favorable as the leases negotiated in the past.

We do not own any real estate. Instead, we lease all of our boutique locations, as well as our corporate headquarters and distribution facility in Houston, Texas. Our boutiques are leased from third parties, with lease terms of five to ten years. Many of our lease agreements also have additional five-year renewal options. We believe that we have been able to negotiate favorable rental rates and tenant allowances over the last few years due in large part to the state of the economy and higher than usual vacancy rates in a number of regional malls and shopping centers. These trends may not continue, and there is no guarantee that we will be able to continue to negotiate such favorable terms. Many of our leases have early cancellation clauses, which permit the lease to be terminated by us or the landlord if certain sales levels are not met in specific periods or if the shopping venue does not meet specified occupancy standards. In addition to fixed minimum lease payments, most of our boutique leases provide for additional rental payments based on a percentage of sales, or “percentage rent,” if sales at the respective boutiques exceed specified levels, as well as the payment of common area maintenance charges, real property insurance and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions. Increases in our already substantial occupancy costs and difficulty in identifying economically suitable new boutique locations could have significant negative consequences, which include:

 

  Ÿ  

requiring that a greater portion of our available cash be applied to pay our rental obligations, thus reducing cash available for other purposes and reducing our profitability;

 

  Ÿ  

increasing our vulnerability to general adverse economic and industry conditions; and

 

  Ÿ  

limiting our flexibility in planning for, or reacting to changes in, our business or in the industry in which we compete.

We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities to fund these expenses and needs and sufficient funds are not otherwise available to us, we may not be able to service our lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which could harm our business. Additional sites that we lease may be subject to long-term non-cancelable leases if we are unable to negotiate our current standard lease terms. If an existing or future boutique is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. In addition, if we are not able to enter into new leases or renew existing leases on terms acceptable to us, this could have an adverse effect on our results of operations.

 

20


Table of Contents

Our ability to obtain merchandise on a timely basis at competitive prices could suffer as a result of any deterioration or change in our vendor relationships or events that adversely affect our vendors or their ability to obtain financing for their operations.

We have many important vendor relationships that we believe provide us with a competitive advantage. We do not own or operate any manufacturing facilities. Instead, we purchase all of our merchandise from third-party vendors. Two of our vendors accounted for approximately 23% of our purchases in fiscal year 2010, with no single vendor accounting for more than 15% of our purchases. One of these vendors is owned and operated by two of our Founders who are the brother and sister of Ms. Kyong Gill, our Executive Vice Chairperson. The other vendor is owned and operated by the brother-in-law of one of our Founders. See “Certain Relationships and Related Party Transactions—Stony Trading Relationship.” Other than the two largest vendors, no vendor accounted for more than 5% of our purchases during fiscal year 2010. Our business and financial performance depend in large part on our ability to evaluate merchandise quickly for style and then modify any undesirable designs or to improve the quality, look, and fit of the item. We do not have long-term contracts with any of these vendors and we generally operate without any contractual assurances of continued supply, pricing or access to new products. Rather, we receive and review samples almost daily for fit and fashion evaluation. Any of our vendors could discontinue supplying us with desired products in sufficient quantities for a variety of reasons.

The benefits we currently experience from our vendor relationships could be adversely affected if our vendors:

 

  Ÿ  

choose to stop providing merchandise samples to us or otherwise discontinue selling merchandise to us;

 

  Ÿ  

raise the prices they charge us;

 

  Ÿ  

change pricing terms to require us to pay on delivery or upfront, including as a result of changes in the credit relationships some of our vendors have with their various lending institutions;

 

  Ÿ  

reduce our access to styles, brands and merchandise by entering into broad exclusivity arrangements with our competitors or otherwise in the marketplace;

 

  Ÿ  

sell similar merchandise to our competitors with similar or better pricing, many of whom already purchase merchandise in significantly greater volume and, in some cases, at lower prices than we do;

 

  Ÿ  

lengthen their lead times; or

 

  Ÿ  

initiate or expand sales of apparel and accessories to retail customers directly through their own stores, catalogs or on the internet and compete with us directly.

We historically have established good working relationships with many small- to mid-size vendors that often have more limited resources, production capacities and operating histories. Market and economic events that adversely impact our vendors could impair our ability to obtain merchandise in sufficient quantities. Such events include difficulties or problems associated with our vendors’ business, finances, labor, ability to import merchandise, costs, production, insurance and reputation. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on acceptable terms or at all in the future, especially if we need significantly greater amounts of inventory in connection with the growth of our business. We may need to develop new relationships with larger vendors, as our current vendors may be unable to supply us with needed quantities and we may not be able to find similar merchandise on the same terms from larger vendors. If we are unable to acquire suitable merchandise in sufficient quantities, at acceptable prices with adequate delivery times due to the loss of or a deterioration or change in our relationship with one or more of our key vendors or events harmful to our vendors occur, it may adversely affect our business and results of operations.

 

21


Table of Contents

A failure in our e-commerce operations could significantly disrupt our business and lead to reduced sales, growth prospects and reputational damage.

While accounting for only 1.4% of our net sales in fiscal year 2010, our e-commerce business is rapidly growing and is an important element of our brand and relationship with our customers. Expanding our e-commerce business is an important part of our growth strategy. In addition to changing consumer preferences, shifting traffic patterns and related customer acquisition costs and buying trends in e-commerce, we are vulnerable to certain additional risks and uncertainties associated with e-commerce sales, including rapid changes in technology, website downtime and other technical failures, security breaches, consumer privacy concerns, changes in state tax regimes and government regulation of internet activities. Our failure to successfully respond to these risks and uncertainties could reduce our e-commerce sales, increase our costs, diminish our growth prospects, and damage our brand, which could negatively impact our results of operations and stock price.

In addition, there is no guarantee that we will be able to expand our e-commerce business. Many of our competitors already have e-commerce businesses that are substantially larger and more developed than ours, which places us at a competitive disadvantage. If we are unable to expand our e-commerce business, our growth plans will suffer and the price of our common stock could decline.

System security risk issues, including our failure to protect our customers’ privacy and disruption of our internal operations or information technology systems, could harm our reputation and adversely affect our financial results and stock price.

Experienced computer programmers and hackers, or even internal users, may be able to penetrate or create systems disruptions or cause shutdowns of our network security or that of third-party companies with which we have contracted to provide services. We generally collect and store customer information for marketing purposes and any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth. Moreover, we could incur significant expenses or disruptions of our operations in connection with system failures or data breaches. An increasing number of websites, including several large internet companies, have recently disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, sophisticated hardware and operating system software and applications that we buy or license from third-parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the security and operation of the systems. The costs to us to eliminate or alleviate security problems, viruses and bugs, or any problems associated with the outsourced services provided to us, could be significant, and efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions.

In addition, almost all states have adopted breach of data security statutes or regulations that require notification to consumers if the security of their personal information is breached, and at least one state has adopted regulations requiring every company that maintains or stores personal information to adopt a comprehensive written information security program. Governmental focus on data security may lead to additional legislative action, and the increased emphasis on information security may lead customers to request that we take additional measures to enhance security or restrict the manner in which we collect and use customer information to gather insights into customer behavior and craft our marketing programs. As a result, we may have to modify our business systems and practices with the goal of further improving data security, which would result in reduced net sales, increased expenditures and operating complexity. Any compromise of our security or accidental loss or

 

22


Table of Contents

theft of customer data in our possession could result in a violation of applicable privacy and other laws, significant legal and financial exposure and damage to our reputation, which could adversely impact our business, results of operations and stock price.

The current geographic concentration of our boutiques creates an exposure to local economies, regional downturns and severe weather or other catastrophic occurrences that may materially adversely affect our financial condition and results of operations.

We operated 28 boutiques in Texas as of April 30, 2011, making Texas our largest market, representing approximately 11% of our total boutiques. We also have boutique concentration in California and Florida, operating 25 boutiques and 18 boutiques in those states, respectively, as of April 30, 2011. As a result, our business is currently more susceptible to regional conditions than the operations of more geographically diversified competitors, and we are vulnerable to economic downturns in those regions. Any unforeseen events or circumstances that negatively affect these areas could materially adversely affect our sales and profitability. These factors include, among other things, changes in demographics and population.

Further, our corporate headquarters and only distribution center are located at a single facility in Houston, Texas. This single distribution center receives, stores and distributes merchandise to all of our boutiques and fulfills all sales for our e-commerce business. Most of our computer equipment and senior management, including critical resources dedicated to merchandising and financial and administrative functions, are located at our corporate headquarters. As described elsewhere in the risk factors in this prospectus, we do not have adequate disaster recovery systems and plans at our corporate headquarters and distribution facility. As a result, our business may be more susceptible to regional natural disasters and catastrophes than the operations of more geographically diversified competitors.

In addition, a substantial number of our boutiques are located in the southeastern United States The southeastern United States, Texas and other states along the Gulf Coast, in particular, are prone to severe weather conditions. For example, hurricanes have passed through Texas, Florida and other states along the Gulf Coast causing extensive damage to the region. Adverse weather conditions impacting Texas and other states along the Gulf Coast, and the southeastern United States generally, could harm our business, results of operations and financial condition. All of our boutique locations expose us to additional diverse risks, given that natural disasters or other unanticipated catastrophes, such as telecommunications failures, cyber-attacks, fires or terrorist attacks, can occur anywhere and could cause disruptions in our operations. Extensive or multiple disruptions in our operations, whether at our boutiques or our corporate headquarters and distribution center, due to natural disasters or other catastrophes could have an adverse effect on our business, results of operations and stock price.

Our results may be adversely affected by fluctuations in energy costs.

Energy costs have fluctuated dramatically in the past and may fluctuate in the future. These fluctuations may result in an increase in our transportation costs for distribution, utility costs for our retail boutiques and costs to purchase product from our vendors. A continual rise in energy costs could adversely affect consumer spending and demand for our merchandise and increase our operating costs and we may be unable to pass along to our customers such increased cost, all of which could have a material adverse effect on our business, results of operations and stock price.

Our net sales and merchandise fluctuate on a seasonal basis, leaving our operating results susceptible to adverse changes in seasonal shopping patterns, weather and related risks.

Due to the seasonal nature of the retail industry, we have historically experienced and expect to continue to experience some fluctuations in our net sales and net income. Our net sales and earnings are typically highest in the fourth fiscal quarter due to the year-end holiday season. Net sales during

 

23


Table of Contents

this period cannot be used as an accurate indicator of annual results. Likewise, as is the case with many retailers of apparel, jewelry, accessories and gifts, we typically experience lower net sales in the first fiscal quarter relative to other quarters. If for any reason, including for example poor weather conditions, soft economic environments and loss of consumer confidence, our net sales were below seasonal norms or expectations during typically higher-volume time periods, our net sales, inventory levels and results of operations could be adversely affected. In addition, in order to prepare for these periods, we must order and keep in stock significantly more merchandise than we carry during other parts of the year. This inventory build-up may require us to expend cash faster than is generated by our operations during these periods. Any unanticipated decrease in demand for our merchandise during peak shopping periods could result in excess inventory levels which could require us to sell excess inventory at a substantial markdown, which could have an adverse effect on our business, profitability and brand image. In addition, we may experience variability in net sales as a result of a variety of other factors, including the timing of new boutique openings, boutique events, other marketing activities, sales tax holidays and other holidays, which may cause our results of operations to fluctuate on a quarterly basis and relative to corresponding periods in prior years.

If our vendors fail to comply with applicable laws, including a failure to use acceptable labor practices, or if our vendors suffer disruptions in their businesses, we could suffer adverse business consequences.

Our vendors source the merchandise sold in our boutiques from manufacturers both inside and outside of the United States. Although each of our purchase orders is subject to our vendor manuals, which require compliance with labor, immigration, manufacturing safety and other laws, we do not supervise, control or audit our vendors or the manufacturers that produce the merchandise we sell. The violation, or perception of any violation, of any labor, immigration, manufacturing safety or other laws by any of our vendors or their U.S. and non-U.S. manufacturers, such as use of child labor, or the divergence of the labor practices followed by any of our vendors or these manufacturers from those generally accepted in the United States, could damage our brand image or subject us to boycotts by our customers or activist groups.

Any event causing a sudden disruption of manufacturing or imports, including the imposition of additional import restrictions, could interrupt, or otherwise disrupt the shipment of finished products to us by our vendors and materially harm our operations. Political and financial instability outside the United States, strikes, adverse weather conditions or natural disasters that may occur or acts of war or terrorism in the United States or worldwide, may affect the production, shipment or receipt of merchandise. These factors, which are beyond our control, could materially hurt our business, financial condition and results of operations or may require us to modify our current business practices or incur increased costs.

Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or otherwise cause us to change the way we do business.

We are subject to numerous regulations, including labor and employment, truth-in-advertising, consumer protection and zoning and occupancy laws and ordinances that regulate retailers generally or govern the promotion and sale of merchandise and the operation of boutiques and warehouse facilities. If these regulations were to change or were violated by our management, employees or vendors, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations.

In addition to increased regulatory compliance requirements, changes in laws could make the ordinary conduct of our business more expensive or require us to change the way we do business.

 

24


Table of Contents

Laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours, immigration laws, child labor laws, supervisory status, leaves of absence, mandated health benefits or overtime pay, could also negatively impact us, such as by increasing compensation and benefits costs for overtime and medical expenses. Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for some merchandise, or additional labor costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to applicable laws, and future actions or payments related to these changes could be material to us.

We will require significant capital to fund our expanding business, which may not be available to us on satisfactory terms or at all. We plan to use cash from operations to fund our operations and execute our growth strategy. If we are unable to maintain sufficient levels of cash flow, we may not meet our growth expectations or we may require additional financing which could adversely affect our financial health and impose covenants that limit our business activities.

We plan to continue our growth and expansion, including opening a number of new boutiques, remodeling existing boutiques and upgrading our information technology systems and other infrastructure as opportunities arise. Our plans to expand our boutique base may not be successful and the implementation of these plans may not result in expected increases in our net sales even though they increase our costs. To support our expanding business and execute on our growth strategy, we will require significant capital.

We currently primarily depend on cash flow from operations and the revolving credit facility under our existing senior secured credit facility to fund our business and growth plans. Upon completion of this offering and our refinancing we expect that we will primarily depend on cash flow from operations and our new revolving credit facility to fund our business and growth plans. If our business does not generate sufficient cash flow from operations to fund these activities, and sufficient funds are not otherwise available to us from our new revolving credit facility, we may need additional equity or debt financing. If such financing is not available to us, or is not available on satisfactory terms, our ability to operate and expand our business or respond to competitive pressures would be curtailed and we may need to delay, limit or eliminate planned boutique openings or operations or other elements of our growth strategy. If we raise additional capital by issuing equity securities or securities convertible into equity securities, your ownership would be diluted.

The prospective lenders’ commitments to lend to us under the new revolving credit facility are subject to a number of conditions. If these conditions are not met, the lenders will not be obligated to provide the new revolving credit facility, and the refinancing of our existing senior secured credit facility may not be completed on the terms that we expect or at all.

The new revolving credit facility, for which we have entered into a commitment letter, will not close unless specified closing conditions are satisfied. Some of these closing conditions are not under our control, and we cannot assure you that all closing conditions will be satisfied. For example, the closing conditions for the revolving credit facility include the absence of various types of material adverse changes relating to us and the concurrent completion of this offering in a manner that yields sufficient proceeds, together with up to $50.0 million of proceeds under the new revolving credit facility, to repay our existing senior secured credit facility in full. See “Description of Certain Indebtedness” for a description of the material closing conditions for the new revolving credit facility. There can be no assurance that we will be able to enter into a new revolving credit facility, or that the refinancing will be completed on the terms that we currently expect. See “Use of Proceeds” and “Description of Certain Indebtedness”. Our inability to enter into a new revolving credit facility could have an adverse effect on our liquidity, working capital and growth plans.

 

25


Table of Contents

We may incur additional indebtedness in the future, which may require us to use a substantial portion of our cash flow to service debt and limit our financial and operating flexibility in important ways.

We may incur additional indebtedness in the future. Any borrowings under any future debt financing (including our new revolving credit facility) will require interest payments and need to be repaid or refinanced, could require us to divert funds identified for other purposes to debt service and would create additional cash demands and could impair our liquidity position and add financial risk for us. Diverting funds identified for other purposes for debt service may adversely affect our business and growth prospects. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we would be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.

Our level of indebtedness has important consequences to you and your investment in our common stock. For example, our level of indebtedness may:

 

  Ÿ  

require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to us for working capital, capital expenditures and other general corporate purposes;

 

  Ÿ  

limit our ability to pay future dividends;

 

  Ÿ  

limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement our business strategy;

 

  Ÿ  

heighten our vulnerability to downturns in our business, the specialty apparel and accessories retail industry or in the general economy and limit our flexibility in planning for, or reacting to, changes in our business and the specialty apparel and accessories retail industry; or

 

  Ÿ  

prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our boutique base and product offerings.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in amounts sufficient to enable us to make payments on our indebtedness or to fund our operations.

The terms of our existing senior secured credit facility do, and the terms of any additional debt financing (including our new revolving credit facility) may, restrict our current and future operations, which could adversely affect our ability to manage our operations and respond to changes in our business.

Our existing senior secured credit facility contains, and any additional debt financing we may incur (including the new revolving credit facility) would likely contain, covenants that restrict our operations, including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. A failure by us to comply with the covenants or financial ratios contained in our existing senior secured credit facility or any additional debt financing we may incur (including the new revolving credit facility) could result in an event of default, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies. If the indebtedness under our existing senior secured credit facility or any additional debt financing we may incur (including the new revolving credit facility) were to be accelerated, our future financial condition could be materially adversely affected.

 

26


Table of Contents

There are claims made against us from time to time that can result in litigation that could distract management from our business activities and result in significant liability or damage to our brand.

As a growing company with expanding operations, we increasingly face the risk of litigation and other claims against us. Litigation and other claims may arise in the ordinary course of our business and include employee claims, commercial disputes, landlord-tenant disputes, intellectual property issues, product-oriented allegations and slip and fall claims. These claims can raise complex factual and legal issues that are subject to risks and uncertainties and could require significant management time. Litigation and other claims against us could result in unexpected expenses and liabilities, which could materially adversely affect our operations and our reputation.

We may be unable to protect our trademarks or other intellectual property rights.

We believe that our trademarks are integral to our boutique design, our e-commerce business and our success in building our brand image and customer loyalty. We rely on trademark registrations and common law trademark rights to protect the distinctiveness of our brand and have registered those trademarks that we believe are important to our business with the United States Patent and Trademark Office. We cannot assure you that these registrations will prevent imitation of our name, merchandising concept, boutique design or private label merchandise, or the infringement of our other intellectual property rights by others. In most cases, the merchandise we sell is purchased on a non-exclusive basis from vendors that also sell to our competitors. While we use our brand name on these items, our competitors may seek to replicate aspects of our business strategy and in-boutique experience, thereby diluting the experience we offer and adversely affecting our brand and competitive position. Imitation of our name, concept, boutique design or merchandise in a manner that projects lesser quality or carries a negative connotation of our brand image could have an adverse effect on our business, financial condition and results of operations.

We are not aware of any claims of infringement upon or challenges to our right to use any of our brand names or trademarks in the United States. Nevertheless, we cannot be certain that the actions we have taken to establish and protect our trademarks will be adequate to prevent imitation of our merchandise by others or to prevent others from seeking to block sales of our merchandise as a violation of the trademarks or proprietary rights of others. Although we cannot currently estimate the likelihood of success of any such lawsuit or ultimate resolution of such a conflict, such a controversy could have an adverse effect on our business, financial condition and results of operations. If disputes arise in the future, we may not be able to successfully resolve these types of conflicts to our satisfaction.

We are currently in the process of registering our trademarks in several foreign countries to seek protection outside the United States. However, international protection of our brand image and the use of these marks may be unavailable or could be limited. Also, other entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for merchandise in foreign countries in which our vendors source our merchandise. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries of which we are not aware. Accordingly, it may be possible for others to prevent the manufacture of our branded goods in certain foreign countries or the sale or exportation of our branded goods from certain foreign countries to the United States. If we were unable to reach a licensing arrangement with these parties, our vendors may be unable to manufacture our merchandise in those countries. Our inability to register our trademarks or purchase or license the right to use our trademarks or logos in these jurisdictions could limit our ability to obtain supplies from less costly markets or penetrate new markets should our business plan change to include selling our merchandise in those foreign jurisdictions.

 

27


Table of Contents

Litigation may be necessary to protect our trademarks and other intellectual property rights or to enforce these rights. Any litigation or claims brought by us could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We may be subject to liability and other risks if we, our vendors or the manufacturers of our merchandise infringe upon the trademarks or other intellectual property rights of third parties, including the risk that we could acquire merchandise from our vendors without the full right to sell it.

We purchase merchandise that may be subject to design copyrights, design patents or otherwise may incorporate protected intellectual property. While we are not involved in the manufacture of any of the merchandise we purchase from our vendors for sale to our customers, we may be subject to liability if our vendors or the manufacturers of our merchandise infringe upon the trademarks or other intellectual property rights of third parties. We do not independently investigate whether our vendors or the manufacturers with whom they do business legally hold intellectual property rights to the merchandise we purchase. Third parties may bring legal claims, or threaten to bring legal claims, against us that their intellectual property rights are being infringed or violated by our use of intellectual property. Litigation or threatened litigation could be costly and distract our senior management from operating our business. If we were to be found liable for any such infringement, we could be required to pay substantial damages and could be subject to injunctions preventing further infringement. In addition, any payments we are required to make and any injunctions with which we are required to comply as a result of infringement claims could be costly and thereby adversely affect our financial results.

If a third party claims to have licensing rights with respect to merchandise we purchased from a vendor, or if we acquire unlicensed merchandise, we may be obligated to remove this merchandise from our boutiques, incur costs associated with this removal if the distributor or vendor is unwilling or unable to reimburse us and be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royalties and other damages and injunctions. Additionally, we will be required to purchase new merchandise to replace any we remove.

We rely upon independent third-party transportation providers for substantially all of our merchandise shipments.

We currently rely upon independent third-party transportation providers for substantially all of our merchandise shipments, including shipments to all of our boutiques and our direct customers. Our use of outside delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather, which may impact a shipper’s ability to provide delivery services that adequately meet our shipping needs. If we change shipping companies, we could face logistical difficulties that could adversely impact deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from the independent third-party transportation providers we currently use, which would increase our costs.

Our ability to source our merchandise efficiently and profitably could be hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.

We currently purchase all our inventory from domestic vendors, who source our merchandise both domestically and internationally. In fiscal year 2010, we believe most of the merchandise sourced by our vendors was produced outside the United States. These vendors, to the extent they obtain merchandise from outside of the United States, are subject to trade restrictions, including tariffs, safeguards or quotas, changes to which could increase the cost or reduce the supply of merchandise available to us. Under the World Trade Organization Agreement, effective January 1, 2005, the United

 

28


Table of Contents

States and other World Trade Organization member countries removed quotas on goods from World Trade Organization members, which in certain instances we believe affords our vendors greater flexibility in importing textile and apparel products from World Trade Organization countries from which they source our merchandise. However, as the removal of quotas resulted in an import surge from China, the United States imposed safeguard quotas on a number of categories of goods and apparel from China, and may impose additional quotas in the future. These and other trade restrictions could have a significant impact on our vendors’ sourcing patterns in the future. The extent of this impact, if any, and the possible effect on our purchasing patterns and costs, cannot be determined at this time. We cannot predict whether any of the countries in which our vendors’ merchandise is currently manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States or foreign governments, nor can we predict the likelihood, type or effect of any restrictions. Trade restrictions, including increased tariffs or quotas, embargoes, safeguards and customs restrictions against items we offer in our boutiques, as well as United States or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of merchandise to our vendors, and we would expect the costs to be passed along in increased prices to us, which could hurt our profitability.

We may be subject to sales tax in states where we operate our e-commerce business, which could have an adverse effect on our business, financial condition and results of operations.

Under current state and federal laws, we are not required to collect and remit sales tax in some states where we sell through our e-commerce business . Legislation is pending in some states that may require us to collect and remit sales tax on e-commerce sales or institute use tax reporting. If states pass sales or use tax laws, we may need to collect and remit current and past sales tax and could face greater exposure to income tax and franchise taxes in these states. Any increase in sales tax or use tax reporting on our internet sales could discourage customers from purchasing through our e-commerce business, which could have an adverse effect on growth prospects.

Increases in the minimum wage could have an adverse effect on our financial results.

From time to time, legislative proposals are made to increase the federal minimum wage in the United States, as well as the minimum wage in a number of individual states. Base wage rates for many of our employees are at or slightly above the minimum wage. As federal or state minimum wage rates increase, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly employees as well. Any increase in the cost of our labor could have an adverse effect on our operating costs, financial condition and results of operations.

The additional financial, legal and regulatory requirements imposed on public companies may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

We have historically operated our business as a private company. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act and the rules of The NASDAQ Stock Market. The requirements of these rules and regulations will significantly increase our legal and financial compliance costs, including costs associated with the hiring of additional personnel, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources.

The Exchange Act will require, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. Public disclosure of our business results and other company information could make us less competitive in the market place as our competition gains a better understanding of how we do business.

 

29


Table of Contents

The Sarbanes-Oxley Act will require, among other things, that we maintain additional disclosure controls and procedures and internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort that needs to be re-evaluated frequently. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm auditing the effectiveness of our internal control over financial reporting beginning with fiscal year 2012. Both we and our independent registered public accounting firm will be testing our internal controls in connection with the Section 404 requirements and could, as part of that documentation and testing, identify material weaknesses, significant deficiencies or other areas for further attention or improvement. Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, require the hiring of additional finance, accounting and other personnel, involve substantial costs to modify our existing accounting systems and take a significant period of time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could cause the market value of our common stock to decline.

Various rules and regulations applicable to public companies make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent for purposes of rules of The NASDAQ Stock Market, will be significantly curtailed.

In the past, a material weakness in our internal control over financial reporting had been identified. If material weaknesses or significant deficiencies arise in the future or if we fail to maintain proper and effective internal controls going forward, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect our business, results of operations and financial condition.

In connection with the audit of our consolidated financial statements as of and for the fiscal year ended January 31, 2009, the company identified a control deficiency that constituted a material weakness in our internal control over financial reporting for such period. This material weakness related to accounting for convertible redeemable preferred stock.

A material weakness is a deficiency or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.

We have taken steps to remediate our internal control deficiencies. However, there are no assurances that the measures we have taken to remediate these internal control weaknesses were completely effective or that similar weaknesses will not recur. We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address any other matters we identify.

 

30


Table of Contents

No material weaknesses were identified for the fiscal year ended January 29, 2011, and, accordingly, we believe that our remediation efforts were successful. However, we did not perform an assessment of our internal control over financial reporting nor did our auditors perform an audit over our internal control over financial reporting; we therefore cannot assure you that these or other similar issues will not arise in future periods. We anticipate that we will next evaluate our internal control over financial reporting in connection with management’s preparation of our financial statements for the fiscal year ending January 28, 2012.

In addition, if we are unable to conclude that we have effective internal control over financial reporting, our independent auditors are unable to provide us with an unqualified report as required by Section 404 of this Sarbanes-Oxley Act or we are required by Section 404 of the Sarbanes-Oxley Act to restate our financial statements, we may fail to meet our public reporting obligations and investors could lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.

Certain historical financial information included in this prospectus has been derived from unaudited financial statements and, as such, may contain errors that might have been detected in an audit. Accordingly, our reported financial results may not be reflective of our actual results for these prior periods.

Our consolidated financial statements as of and for the fiscal years ended December 31, 2007 and December 31, 2006, as well as our consolidated financial statements as of and for the months ended January 31, 2007 and January 31, 2008, have not been audited. The financial data for those periods included in this prospectus is based on management accounts only and has not been reviewed or audited by an independent registered public accounting firm. Although management believes that these unaudited consolidated financial statements have been prepared on a basis that is consistent with our audited consolidated financial statements, there is a risk that this unaudited financial information may contain errors that might have been detected in an audit and such financial information may not be reflective of our true historical results for those periods. Any differences between the financial information presented for these unaudited periods in this prospectus and our actual historical results may be material. Accordingly, you are cautioned not to place undue reliance on such information.

Our management has limited experience managing a public company and our current resources may not be sufficient to fulfill our public company obligations.

Following the completion of this offering, we will be subject to various regulatory requirements, including those of the SEC and The NASDAQ Stock Market. These requirements include record keeping, financial reporting and corporate governance rules and regulations. Our management team has limited experience in managing a public company and, historically, has not had the resources typically found in a public company. Our internal infrastructure may not be adequate to support our increased reporting obligations and we may be unable to hire, train or retain necessary staff and may be reliant on engaging outside consultants or professionals to overcome our lack of experience or employees. Our business could be adversely affected if our internal infrastructure is inadequate, we are unable to engage outside consultants or are otherwise unable to fulfill our public company obligations.

 

31


Table of Contents

Risks Related to this Offering and Ownership of Our Common Stock

No market currently exists for our common stock, and there can be no assurance that a viable public market for our common stock will develop.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock after this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market on The NASDAQ Global Select Market or otherwise or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price. Additionally, because we are a specialty retailer whose business is cyclical, the price of our common stock may fluctuate significantly.

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

  Ÿ  

fashion trends and changes in consumer preferences;

 

  Ÿ  

changes in general economic or market conditions or trends in our industry or the economy as a whole and, in particular, in the retail sales environment;

 

  Ÿ  

the timing and level of expenses for new boutique openings, relocations and remodels and the relative proportion of our new boutiques to existing boutiques;

 

  Ÿ  

the performance and successful integration of any new boutiques that we open;

 

  Ÿ  

the success of our e-commerce business and sales levels;

 

  Ÿ  

changes in our merchandise mix and vendor base;

 

  Ÿ  

changes in key personnel;

 

  Ÿ  

entry into new markets;

 

  Ÿ  

our levels of comparable boutique sales;

 

  Ÿ  

announcements by us or our competitors of new product offerings or significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments;

 

  Ÿ  

actions by competitors or other mall, lifestyle center, street locations and strip center tenants;

 

  Ÿ  

weather conditions, particularly during the holiday shopping period;

 

  Ÿ  

the level of pre-opening expenses associated with new boutiques;

 

  Ÿ  

inventory shrinkage beyond our historical average rates;

 

  Ÿ  

changes in operating performance and stock market valuations of other retail companies;

 

  Ÿ  

investors’ perceptions of our prospects and the prospects of the retail industry;

 

  Ÿ  

fluctuations in quarterly operating results, as well as differences between our actual financial and operating results and those expected by investors;

 

32


Table of Contents
  Ÿ  

the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

  Ÿ  

announcements relating to litigation;

 

  Ÿ  

guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

  Ÿ  

changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;

 

  Ÿ  

the development and sustainability of an active trading market for our common stock;

 

  Ÿ  

investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives;

 

  Ÿ  

future sales of our common stock by our officers, directors and significant stockholders;

 

  Ÿ  

other events or factors, including those resulting from system failures and disruptions, hurricanes, war, acts of terrorism, other natural disasters or responses to these events; and

 

  Ÿ  

changes in accounting principles.

These and other factors may lower the market price of our common stock, regardless of our actual operating performance. As a result, our common stock may trade at prices significantly below the public offering price.

In addition, the stock markets, including The NASDAQ Global Select Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many retail companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have approximately              shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

After this offering, CCMP, the Founders and certain other stockholders that are the part of our executive management team will have rights to require us to file registration statements registering additional sales of shares of common stock or to include sales of such shares of common stock in registration statements that we may file for ourselves or other stockholders. In order to exercise these registration rights, these stockholders must satisfy the conditions discussed in “Certain Relationships and Related Party Transactions—Stockholders’ Agreement”. Subject to compliance with applicable lock-up restrictions, shares of common stock sold under these registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large number of

 

33


Table of Contents

shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. Additionally, we will bear all expenses in connection with any such registrations (other than stock transfer taxes and underwriting discounts or commissions). See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement” and “Shares Eligible for Future Sale—Registration Rights”.

We and each of our executive officers, directors, all of the selling stockholders and substantially all of our other existing stockholders will have agreed with the underwriters, that for a period of 180 days after the date of this prospectus, we or they will not offer, sell, assign, transfer, pledge, contract to sell or otherwise dispose of or hedge any shares of our common stock, or any options or warrants to purchase any shares of our common stock or any securities convertible into or exchangeable for shares of common stock, subject to specified exceptions. The representatives of the underwriters may, in their discretion, at any time without prior notice, release all or any portion of the shares from the restrictions in any such agreement. See “Underwriting” for more information. All of our shares of common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders 180 days after the date of this prospectus, subject to applicable volume and other limitations imposed under federal securities laws. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering. Sales by our existing stockholders of a substantial number of shares in the public market, or the perception that these sales might occur, could cause the market price of our common stock to decrease significantly.

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $             per share because the assumed initial public offering price of $            , which is the midpoint of the price range set forth on the cover page of this prospectus, is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. In connection with this offering, we expect to issue stock options to directors, officers and key employees under the 2011 Stock Incentive Plan. We plan to reserve              shares of common stock under the 2011 Stock Incentive Plan for future issuances. You may experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock incentive plans. See “Dilution” for a more detailed description.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover us downgrades our common stock or publishes inaccurate or unfavorable research about our

 

34


Table of Contents

business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.

We do not expect to pay any cash dividends for the foreseeable future.

We currently expect to retain all available funds and future earnings, if any, for use in the operation and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with applicable law and any contractual provisions, including under agreements for indebtedness we may incur, that restrict or limit our ability to pay dividends, and will depend upon, among other factors, our results of operations, financial condition, earnings, capital requirements and other factors that our board of directors deems relevant. Further, because we are a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization, agreements of our subsidiaries or covenants under future indebtedness we may incur. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

Upon completion of this offering, and assuming no exercise of the underwriters’ option to purchase additional shares, our executive officers, directors and principal stockholders will own, in the aggregate, approximately     % of our outstanding common stock, or approximately     % assuming the exercise of outstanding options owned by our executive officers and directors. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors, amendment of our amended and restated certificate of incorporation and approval of significant corporate transactions and will have significant control over our management and policies. This concentration of influence could be disadvantageous to other stockholders with interests different from those of our officers, directors and principal stockholders. We currently expect that, following this offering, three of the seven members of our board of directors will be principals of CCMP, one member will be Mr. De Meritt, President and Chief Executive Officer of the company and one member will be Ms. Kyong Gill, the Executive Vice Chairperson of our board of directors.

Upon completion of this offering, and assuming no exercise of the underwriters’ option to purchase additional shares, CCMP is expected to hold approximately     % of our outstanding common stock and the Founders are expected to collectively hold approximately     % of our outstanding common stock. As a result of these ownership positions, these stockholders could take actions that have the effect of delaying or preventing a change-in-control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. The concentration of voting power held by CCMP may have an adverse effect on the price of our common stock. The interests of these stockholders may not be consistent with your interests as a stockholder.

 

35


Table of Contents

We will be a “controlled company” within the meaning of The NASDAQ Stock Market corporate governance standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

Upon the completion of this offering, affiliates of CCMP will continue to control a majority of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of The NASDAQ Stock Market corporate governance standards. As a controlled company, certain exemptions under The NASDAQ Stock Market corporate governance standards will free us from the obligation to comply with certain corporate governance requirements of The NASDAQ Stock Market corporate governance standards, including the requirements:

 

  Ÿ  

that a majority of the board of directors consist of “independent directors” as defined under The NASDAQ Stock Market corporate governance standards;

 

  Ÿ  

that our director nominees be selected, or recommended for our board of directors’ selection, either (1) by a majority of independent directors in a vote by independent directors, pursuant to a nominations process adopted by a board resolution, or (2) by a nominating and governance committee comprised solely of independent directors with a written charter addressing the nominations process; and

 

  Ÿ  

that the compensation of our executive officers be determined, or recommended to the board for determination, by a majority of independent directors in a vote by independent directors, or a compensation committee comprised solely of independent directors.

Following this offering, we intend to utilize these exemptions. Accordingly, for so long as we are a “controlled company”, you will not have the same protections afforded to stockholders of companies that are subject to all of The NASDAQ Stock Market corporate governance standards.

CCMP controls us and may have conflicts of interest with us in the future.

Upon the completion of this offering CCMP will own a majority of our outstanding common stock and representatives of CCMP and its affiliates will occupy three seats on our board of directors. CCMP is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. In addition, corporate opportunities may arise in the area of potential acquisitions of competitive businesses that may be attractive to us as well as to CCMP or its affiliates.

CCMP and the members of our board of directors who are affiliated with CCMP, by the terms of our amended and restated certificate of incorporation, are not required to offer us any transaction opportunity of which they become aware and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is expressly offered to them solely in their capacity as our directors. The company, by the terms of our amended and restated certificate of incorporation, expressly renounces any interest in any such corporate opportunity to the extent permitted under applicable law, even if the opportunity is one that we would reasonably be deemed to have pursued if given the opportunity to do so. Our amended and restated certificate of incorporation cannot be amended to eliminate the company’s renunciation of any such corporate opportunity arising prior to the date of any such amendment. CCMP or its affiliates may also acquire competing businesses that may not be attractive to us, and have no obligation to refrain from acquiring competing businesses. Any competition could intensify if an affiliate or subsidiary of CCMP were to enter into or acquire a business similar to our specialty retail operations. No assurance can be given that CCMP or its affiliates will not enter into or acquire a competing business in the future.

 

36


Table of Contents

Anti-takeover provisions in our charter documents and provisions of Delaware law might discourage, delay or prevent change in control of our company and may result in an entrenchment of management and diminish the value of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws, each of which will be effective upon completion of this offering, will contain provisions that make it difficult for our stockholders to change the composition of our board of directors, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable. See “Description of Capital Stock”.

These provisions, among other things:

 

  Ÿ  

establish a staggered, or classified, board of directors so that not all members of our board of directors are elected at one time;

 

  Ÿ  

prohibit cumulative voting in the election of directors;

 

  Ÿ  

authorize the issuance by our board of directors of “blank check” preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super-majority voting, special approval, dividend or other rights or preferences superior to the rights of the holders of common stock;

 

  Ÿ  

limit the persons who may call special meetings of stockholders;

 

  Ÿ  

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; and

 

  Ÿ  

establish advance notice requirements for stockholder nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

These anti-takeover provisions and other provisions under Delaware law, together with the concentration of ownership of our common stock discussed above under “Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions,” could substantially impede the ability of our common stockholders to benefit from a change in control and, as a result, could materially adversely affect the market price of our common stock and your ability to realize any potential change-in-control premium.

 

37


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. These statements may include words such as “aim”, “anticipate”, “assume”, “believe”, “can have”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “likely”, “may”, “objective”, “plan”, “potential”, “positioned”, “predict”, “should”, “target”, “will”, “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth rates, market share and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Factors that may cause such differences include, but are not limited to, the risks described under “Risk Factors,” including:

 

  Ÿ  

our ability to identify and respond to new and changing fashion trends, customer preferences and other related factors;

 

  Ÿ  

our ability to maintain a broad and shallow merchandise assortment;

 

  Ÿ  

failure to execute successfully our growth strategy;

 

  Ÿ  

disruptions to our information systems in the ordinary course or as a result of systems upgrades;

 

  Ÿ  

changes in consumer spending and general economic conditions;

 

  Ÿ  

increasing cost of raw materials and other inputs used in the production of our merchandise;

 

  Ÿ  

changes in the competitive environment in our industry and the markets we serve, including increased competition from other retailers;

 

  Ÿ  

failure of our new boutiques or existing boutiques to achieve sales and operating levels consistent with our expectations;

 

  Ÿ  

the success of the malls and shopping centers in which our boutiques are located;

 

  Ÿ  

our dependence on a strong brand image;

 

  Ÿ  

failure of our e-commerce business to grow consistent with our growth strategy;

 

  Ÿ  

our dependence upon key senior management or our inability to hire or retain additional personnel;

 

  Ÿ  

disruptions in our supply chain and distribution facility;

 

  Ÿ  

our indebtedness and lease obligations;

 

  Ÿ  

our reliance upon independent third-party transportation providers for all of our merchandise shipments;

 

  Ÿ  

hurricanes, natural disasters, unusually adverse weather conditions, boycotts and unanticipated events;

 

38


Table of Contents
  Ÿ  

the seasonality of our business;

 

  Ÿ  

increases in costs of fuel, or other energy, transportation or utilities costs and in the costs of labor and employment;

 

  Ÿ  

the impact of governmental laws and regulations and the outcomes of legal proceedings;

 

  Ÿ  

restrictions imposed by our indebtedness on our current and future operations;

 

  Ÿ  

our failure to maintain effective internal controls;

 

  Ÿ  

our inability to protect our trademarks or other intellectual property rights; and

 

  Ÿ  

increased costs as a result of being a public company.

The above is not a complete list of factors or events that could cause actual results to differ from our expectations, and it is not possible for us to predict all of them. We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this prospectus as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly whether as a result of new information, future developments or otherwise.

 

39


Table of Contents

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $            million, assuming an initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders, which includes certain of our officers and directors, including any shares sold by the selling stockholders in connection with the exercise of the underwriters’ option to purchase additional shares.

The terms of our existing senior secured credit facility require us to apply the net proceeds of this offering to prepay the existing loans in an amount equal to such net proceeds. We intend to use the full net proceeds of this offering (based on an assumed initial public offering price of $         per share, the midpoint of the range on the cover page of this prospectus) of $         million, together with $         million of borrowings under a new revolving credit facility, to repay our existing senior secured credit facility in full. If we do not enter into a new revolving credit facility, then we will use the full net proceeds of this offering (based on an assumed initial public offering price of $         per share, the midpoint of the range on the cover page of this prospectus) of $         million to prepay the existing loans as required by the terms of our existing senior secured credit facility, in which case $         million of the existing loans would remain outstanding after this offering. See “Risk Factors—Risks Related to our Business—The prospective lenders’ commitments to lend to us under the new revolving credit facility are subject to a number of conditions. If these conditions are not met, the lenders will not be obligated to provide the new revolving credit facility, and the refinancing of our existing senior secured credit facility may not be completed on the terms that we expect or at all”.

Affiliates of Goldman, Sachs & Co., J.P. Morgan Securities LLC, Jefferies & Company, Inc., RBC Capital Markets, LLC, Stifel, Nicolaus & Company, Incorporated and KeyBanc Capital Markets Inc., underwriters for this offering, are lenders under our existing senior secured credit facility and will receive a portion of the net proceeds used to repay amounts outstanding under our existing senior secured credit facility. In connection with such repayment, affiliates of Goldman, Sachs & Co., J.P. Morgan Securities LLC and Jefferies & Company, Inc. will each receive $         of such net proceeds, an affiliate of RBC Capital Markets, LLC will receive $         of such net proceeds and affiliates of Stifel, Nicolaus & Company, Incorporated and KeyBanc Capital Markets Inc. will each receive $         of such net proceeds. On an aggregate basis, affiliates of the underwriters will receive $             of the net proceeds from this offering as part of such repayment. See “Underwriting”.

Our existing senior secured credit facility consists of a $95.0 million term loan facility and a $5.0 million revolving credit facility, each with a scheduled maturity date of November 17, 2013. As of April 30, 2011, we had $92.6 million outstanding under our term loan facility and $5.0 million available under our revolving credit facility. Immediately prior to the completion of this offering, we anticipate that there will be $            million of term loans and no amounts of revolving loans outstanding under our existing senior secured credit facility. We used all of the term loan borrowings, along with cash on hand, to pay a dividend of $100.0 million on our common stock during November 2010. The borrowings under our existing senior secured credit facility bear interest at a rate equal to an applicable margin plus, at our option, either (a) in the case of base rate borrowings, a rate equal to the highest of (1) the higher of (i) the prime rate of Royal Bank of Canada and (ii) the federal funds rate plus 1/2 of 1%, (2) the LIBOR for an interest period of one month plus 1.00% and (3) 2.75% or (b) in the case of LIBOR borrowings, a rate equal to the higher of (1) 1.75% and (2) the LIBOR for the interest period relevant to such borrowing. The current applicable margin for borrowings under both the revolving credit facility and the term loan facility is 5.00% with respect to base rate borrowings and 6.00% with respect to LIBOR borrowings. The applicable margin for borrowings under both the revolving credit facility and the term loan facility for base rate borrowings increases to 6.50% and 9.00% on June 1,

 

40


Table of Contents

2012 and June 1, 2013, respectively. The applicable margin for borrowings under both the revolving credit facility and the term loan facility for LIBOR borrowings increases to 7.50% and 10.00% on June 1, 2012 and June 1, 2013, respectively. As of January 29, 2011, the loans under our existing senior secured credit facility were LIBOR-based and had an interest rate of 7.75%. See “Description of Certain Indebtedness—Existing Senior Secured Credit Facility” for more information on our existing senior secured credit facility.

A $1.00 increase or decrease in the assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net proceeds we receive from this offering by approximately $            million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriter discounts and commissions and estimated offering expenses payable by us.

 

41


Table of Contents

DIVIDEND POLICY

We did not declare or pay any dividends on our common stock during fiscal year 2009. We declared and paid a dividend of $2.39 per share on our common stock (on a fully diluted basis) during November 2010. We currently expect to retain all available funds and future earnings, if any, for use in the operation and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with applicable law and any contractual provisions, including under agreements for indebtedness we may incur, that restrict or limit our ability to pay dividends, and will depend upon, among other factors, our results of operations, financial condition, earnings, capital requirements and other factors that our board of directors deems relevant. Because we are a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization, agreements of our subsidiaries or covenants under future indebtedness we may incur.

 

42


Table of Contents

CAPITALIZATION

The following table sets forth our cash, cash equivalents and capitalization as of April 30, 2011 on:

 

  Ÿ  

an actual basis; and

 

  Ÿ  

a pro forma as adjusted basis to give effect to the following:

 

  Ÿ  

the sale by us of              shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and

 

  Ÿ  

the use of the net proceeds we receive from this offering, together with $                     of indebtedness under a new revolving credit facility, to repay our existing senior secured credit facility in full.

You should read the following table together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and the sections of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Use of Proceeds” and “Selected Consolidated Financial and Operating Data”.

 

     As of April 30, 2011  
     Actual     Pro Forma
As Adjusted(1)
 
     ($ in thousands)  

Cash and cash equivalents

   $ 12,806      $               
                

Current portion of long-term debt

     7,125     

Long-term debt

     85,500     

Shareholders’ deficit:

    

Common stock, $0.01 par value, 80,000,000 shares authorized; 40,483,985 shares issued and outstanding, actual;              shares issued and outstanding, on a pro forma as adjusted basis

     405     

Additional paid-in capital

     27,897     

Accumulated deficit

     (79,187  
                

Total shareholders’ deficit

   $ (50,885  
                

Total capitalization

   $ 41,740     
                

 

(1) Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, a $1.00 increase or decrease in the assumed initial public offering price of $            per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net proceeds from this offering available to us to prepay our existing senior secured credit facility and would increase or decrease cash and cash equivalents by $            million, additional paid-in capital by $            million, total shareholders’ deficit by $            million and total capitalization by $            million. See “Use of Proceeds.” The pro forma as adjusted information discussed above is illustrative only and following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

43


Table of Contents

DILUTION

Dilution is the amount by which the offering price paid by the purchasers of our common stock in this offering will exceed the pro forma net tangible book value per share of our common stock upon completion of this offering.

If you invest in shares of our common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share you pay in this offering and the pro forma net tangible book value per share of our common stock upon completion of this offering. Our net tangible book value as of                     , 2011 was $            million, or $            per share of common stock. Net tangible book value or deficiency per share of our common stock is determined at any date by subtracting our total liabilities from our total assets, less our intangible assets, and dividing the difference by the number of shares of common stock outstanding at that date.

Our pro forma net tangible book value per share, after giving effect to this offering, set forth below represents our total tangible assets less our total liabilities, divided by the number of shares of our common stock outstanding on                    , 2011, after giving effect to the sale by us of shares of common stock in this offering.

After giving effect to our issuance and sale of            shares of our common stock in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of                     , 2011 would have been approximately $            million, or $            per share of our common stock. This represents an immediate increase in pro forma net tangible book value to our existing stockholders of $            per share, and an immediate dilution of $            per share to new investors who purchase shares of our common stock in this offering.

The following table illustrates this per share dilution to new investors purchasing shares of our common stock in this offering:

 

Assumed initial public offering price per share

      $                

Net tangible book value per share as of                     , 2011

   $                   

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering

     
           

Pro forma net tangible book value per share after this offering (without giving effect to the refinancing)

     
           

Dilution per share to new investors

      $                

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, a $1.00 increase or decrease in the assumed initial public offering price of $            per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net tangible book value attributable to new investors purchasing shares in this offering by $             per share and the dilution to new investors by $            per share and increase or decrease the pro forma net tangible book value per share after this offering by $            per share.

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to            shares or,    %, in the aggregate, of the total number of shares of our common stock outstanding upon completion of this offering, and will increase the total number of shares held by new investors to            shares or,    %, in the aggregate, of the total number of shares of our common stock outstanding upon completion of this offering.

 

44


Table of Contents

If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own            shares or,    %, in the aggregate, and our new investors would own            shares or,    %, in the aggregate, of the total number of shares of our common stock outstanding upon completion of this offering.

The following table summarizes, as of                     , 2011, as adjusted to give effect to this offering, the difference between the number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors, at an assumed initial public offering price of $            per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering:

 

     Shares Purchased     Total Consideration     Average
Price

Per Share
 
      Number    Percent     Amount      Percent    

Existing stockholders

                       $                                     $                

New investors in the offering

            
                                      

Total

        100   $           100   $     
                                      

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, a $1.00 increase or decrease in the assumed initial public offering price of $            per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease total consideration paid by new investors and total consideration paid by all stockholders by approximately $            million.

The foregoing discussion and tables assume no exercise of stock options to purchase              shares of our common stock issuable upon the exercise of stock options outstanding as of                     , 2011, at a weighted average exercise price of $            per share. To the extent that any options are exercised, new investors will experience further dilution.

 

45


Table of Contents

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated financial data for each of the years ended January 29, 2011, January 30, 2010 and January 31, 2009 and the selected consolidated balance sheet data as of January 29, 2011 and January 30, 2010 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated balance sheet data as of January 31, 2009 has been derived from our audited consolidated balance sheet, which is not included in this prospectus. The selected consolidated financial data for each of the years ended December 31, 2006 and December 31, 2007 and the selected consolidated balance sheet data as of December 31, 2006 and December 31, 2007 have been derived from our unaudited consolidated financial statements, which are not included in this prospectus. The selected consolidated financial data for each of the thirteen weeks ended April 30, 2011 and May 1, 2010 and the selected consolidated balance sheet data as of April 30, 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of May 1, 2010 has been derived from our unaudited consolidated financial statements not included in this prospectus.

In February 2010, CCMP acquired a controlling interest in the company from the Founders and Bear Growth Capital Partners, LP (“BGCP”). In connection with the acquisition, the company considered the application of push-down accounting to the company’s financial statements. The company determined that given the percentage of the equity interest acquired in the acquisition, the push-down accounting treatment was optional but not required. The company elected not to apply the push-down accounting treatment as a result of the acquisition.

We operate on a fiscal calendar which in a given fiscal year consists of a 52- or 53-week period ending on the Saturday closest to January 31st. The reporting periods contained in our audited consolidated financial statements included in this prospectus contain 52 weeks of operations in fiscal year 2010, which ended January 29, 2011, 52 weeks of operations in fiscal year 2009, which ended January 30, 2010, and 52 weeks of operations in fiscal year 2008, which ended January 31, 2009. For fiscal year 2007, which ended on December 31, 2007, and prior periods, the company operated on a fiscal calendar year ending December 31st. Our interim reporting periods in the unaudited consolidated financial statements included in this prospectus consist of 13-week periods ending April 30, 2011 and May 1, 2010.

The historical results presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period may not necessarily be indicative of the results that may be expected for a full year. You should read the selected consolidated financial and operating data for the periods presented in conjunction with “Risk Factors”, “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes, which are included elsewhere in this prospectus.

 

46


Table of Contents
Consolidated
Statements of
Operations
(1)
  Thirteen
Weeks Ended
    Fiscal Year Ended     Year Ended  
    April 30,
2011
    May 1,
2010
    January 29,
2011
    January 30,
2010
    January 31,
2009
    December 31,
2007
    December 31,
2006(2)
 
   

(in thousands, except share and per share amounts)

 

Net sales(3)

  $ 41,265      $ 25,417      $ 135,176      $ 79,367      $ 52,290      $ 40,210      $ 29,708   

Cost of goods sold and occupancy costs(4)

    19,641        12,772        65,008        37,244        25,358        19,312        14,225   
                                                       

Gross profit

    21,624        12,645        70,168        42,123        26,932        20,898        15,483   

Selling, general, and administrative expenses

    13,205        10,024        40,525        24,641        19,962        14,671        9,833   
                                                       

Income from operations

    8,419        2,621        29,643        17,482        6,970        6,227        5,650   

Other income (expense)

    34        16        (2     38        14        (159       

Interest income (expense)

    (2,008            (1,633     2        4        2        4   
                                                       

Income before income tax expense

    6,445        2,637        28,008        17,522        6,988        6,070        5,654   

Income tax expense

    2,527        1,046        11,113        6,918        2,382        2,379        47   
                                                       

Net income

    3,918        1,591        16,895        10,604        4,606        3,691        5,607   

Increase in redemption value of convertible redeemable preferred stock

                         (60,271                     

Convertible redeemable preferred stock accrued dividends

                         (2,022     (1,641     (1,703       
                                                       

Net income (loss) available to shareholders

    3,918        1,591      $ 16,895      $ (51,689   $ 2,965      $ 1,988      $ 5,607   

Less: Income attributable to participating securities

                  —          —          (1,038     (552     —     
                                                       

Net income (loss) available to common shareholders

  $ 3,918      $ 1,591      $ 16,895      $ (51,689   $ 1,927      $ 1,436      $ 5,607   
                                                       

Basic earnings (loss) per common share(5)

  $ 0.10      $ 0.04      $ 0.43      $ (1.99   $ 0.07      $ 0.06      $ 0.22   

Diluted earnings (loss) per common share(5)

  $ 0.10      $ 0.04      $ 0.41      $ (1.99   $ 0.07      $ 0.06      $ 0.22   

Dividends declared per common share

  $      $      $ 2.39                               

Weighted average shares outstanding:(6)

             

Basic shares

    40,466        36,136        39,385        26,000        26,000        26,000        26,000   

Diluted shares

    40,967        40,628        40,907        26,000        26,000        26,000        26,000   

 

47


Table of Contents
Consolidated Balance
Sheet Data
(1)
  As of
Thirteen Weeks Ended
    As of Fiscal Year Ended     As of Year Ended  
    April 30,
2011
    May 1,
2010
    January 29,
2011
    January 30,
2010
    January 31,
2009
    December 31,
2007
    December 31,
2006(2)
 
   

(in thousands, except share and per share amounts)

 

Total current assets

  $ 36,423      $ 26,421      $ 31,721      $ 22,318      $ 13,036      $ 12,860      $ 7,396   

Total assets

    67,668        38,664        59,124        31,218        16,830        14,797        8,912   

Total liabilities

    118,553        12,372        114,592        8,242        4,556        5,107        2,335   

Convertible redeemable preferred stock—series A

                         85,854        23,561        21,703          

Total shareholders’ (deficit) equity

    (50,885     26,287        (55,468     (62,878     (11,287     (12,013     6,577   

Operating data:

             

Comparable boutique sales growth for period(7)

    14.7     14.5     15.2     9.8     (6.3 )%      5.0     1.5

Number of boutiques open at end of period

    249        172        207       147       111       78       64  

Net sales per average square foot for period (not in thousands)(8)

  $ 127      $ 111      $ 508     $ 429     $ 384     $ 401     $ 399  

Average square feet (in thousands)(9)

    325        229        266       185       136       100       74  

Total gross square feet at end of period (in thousands)

    353        249        296       210       158       110       89  

 

(1) In January 2008, we changed our fiscal year end from December 31st to the Saturday closest to January 31st. The following table presents selected unaudited consolidated financial and other selected data as of and for the months ended February 2, 2008 and January 31, 2007:

 

     Month Ended  
     February 2,
2008
    January 31,
2007
 
     (in thousands)  

Consolidated Statements of Operations Data:

    

Net revenues

   $ 2,794      $ 1,593   

Net loss

     (506     (262

Consolidated Balance Sheet Data:

    

Total assets

   $ 14,913      $ 8,478   

Convertible Redeemable Preferred Stock

   $ 21,920      $   

 

(2) For the year ended December 31, 2006, we operated as a Subchapter “S” Corporation and therefore were not subject to Federal Income Tax. If we had been a “C” Corporation as of January 1, 2006, assuming a combined federal, state and local effective tax rate of 39%, we would have incurred total income tax of $2,205.
(3) Net sales plus shipping and handling fees.
(4) Cost of goods sold and occupancy costs includes the direct cost of purchased merchandise, freight costs from our suppliers to our distribution centers and freight costs for merchandise shipped directly from our vendors to our boutiques, allowances for inventory shrinkage and obsolescence, boutique occupancy costs including rent, utilities, common area maintenance, property taxes, depreciation, and boutique repair and maintenance costs and shipping costs related to e-commerce sales.
(5) Please see note 2 to our consolidated financial statements and note 2 to our unaudited consolidated financial statements included elsewhere in this prospectus, for an explanation of per share calculations.

 

48


Table of Contents
(6) On April 28, 2010, the company authorized a split of its outstanding and authorized common stock in the ratio of four hundred to one. Accordingly, our consolidated financial data included elsewhere in this prospectus have been adjusted to retroactively reflect the effects of the stock split on common shares and per share amounts for all periods presented.
(7) A boutique is included in comparable boutique sales on the first day of the fifteenth full month following the boutique’s opening. When a boutique that is included in comparable boutique sales is relocated, we continue to consider sales from that boutique to be comparable boutique sales. If a boutique is closed for thirty days or longer for a remodel or as a result of weather damage, fire or the like, we no longer consider sales from that boutique to be comparable boutique sales.
(8) Net sales per average square foot is calculated by dividing net sales for the period by the average square feet during the period (see footnote 9 below).
(9) Because of our rapid growth, for purposes of providing a sales per square foot measure we use average square feet during the period as opposed to total gross square feet at the end of the period. For periods consisting of more than one fiscal quarter, average square feet is calculated as (a) the sum of the total gross square feet at the end of each fiscal quarter, divided by (b) the number of quarters. For individual quarterly periods, average square feet is calculated as (a) the sum of total gross square feet at the beginning and end of the period, divided by (b) two. There may be variations in the way in which some of our competitors and other retailers calculate sales per square foot or similarly titled measures. As a result, data in this prospectus regarding our average square feet and net sales per average square foot for period may not be comparable to similar data made available by other retailers.

 

49


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial and Operating Data” and our consolidated financial statements and the related notes and other financial information and operating data, which are included elsewhere in this prospectus. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” and “Special Note Regarding Forward-Looking Statements” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We operate on a fiscal calendar which in a given fiscal year consists of a 52- or 53-week period ending on the Saturday closest to January 31st. The reporting periods contained in our audited consolidated financial statements included in this prospectus contain 52 weeks of operations in fiscal year 2010, which ended January 29, 2011, 52 weeks of operations in fiscal year 2009, which ended January 30, 2010, and 52 weeks of operations in fiscal year 2008, which ended January 31, 2009. For fiscal year 2007, which ended on December 31, 2007, and prior periods, the company operated on a fiscal calendar year ending December 31st. The quarterly reporting periods contained in the unaudited consolidated financial statements included in this prospectus consist of 13-week periods ending on April 30, 2011 and May 1, 2010. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.

Overview

francesca’s collections® is one of the fastest growing specialty retailers in the United States. Our retail locations are designed and merchandised to feel like independently owned, upscale boutiques and provide our customers with an inviting, intimate and fun shopping experience. We believe we offer compelling value with a diverse and uniquely balanced mix of high-quality, trend-right apparel, jewelry, accessories and gifts at attractive prices. We tailor our assortment to appeal to our core 18-35 year-old, fashion conscious, female customer, although we find that women of all ages are attracted to our eclectic and sophisticated merchandise selection and boutique setting. We carry a broad selection but limited quantities of individual styles and introduce new merchandise to our boutiques five days a week in order to create a sense of scarcity and newness, which helps drive customer shopping frequency and loyalty.

By offering a differentiated shopping experience and high-quality merchandise at a compelling value, our boutiques have been successful across a wide variety of geographic markets and shopping venues. We believe we have an opportunity to continue to grow our boutique base from 249 locations in 38 states as of April 30, 2011 to approximately 900 boutiques in the United States over time. Our merchandise is also available through our e-commerce website, www.francescascollections.com.

Our company was founded in 1999 by the Founders. We opened our first boutique that same year in Houston, Texas selling fashion jewelry and accessories. In April 2007, the Founders sold a minority ownership interest in the company to BGCP. Early that same year, Mr. De Meritt was appointed the President and Chief Executive Officer of our company. Since 2007, Mr. De Meritt has augmented our strong founding management team with additional highly skilled and deeply experienced executives across key areas of our business. In February 2010, CCMP acquired an approximately 84% controlling interest in the company from the Founders and BGCP (the “CCMP Acquisition”) with the goals of providing liquidity to the Founders and BGCP and supporting Mr. De Meritt and his management team in accelerating our company’s growth.

 

50


Table of Contents

Our strong growth and operating results reflect the initiatives taken by our management team which include accelerating the rate of new boutique openings, and further investing in our distribution capability and in our internet site and e-commerce capability, as well as the acceptance of our brand and merchandise as we have expanded into additional regions of the United States. Our net sales increased from $29.7 million in fiscal year 2006 to $135.2 million in fiscal year 2010, a compound annual growth rate of 46.1%. Over the same period, we grew income from operations from $5.7 million to $29.6 million, a compound annual growth rate of 51.3%. While revenue increased at a compound annual growth rate of 46.1%, our total retail square footage growth increased at a compound annual growth rate of 35.0% over that same period, as our boutique sales productivity improved.

Since the beginning of fiscal year 2011, we have increased our boutique base from 207 boutiques to 249 boutiques as of April 30, 2011. We expect to continue our strong growth in the future. We believe there is a significant opportunity to grow our boutique base to approximately 900 boutiques over time. We plan to open approximately 75 boutiques in fiscal year 2011 (42 of which were opened as of April 30, 2011). We expect to continue to drive our comparable boutique sales by featuring high-quality, trend-right merchandise at attractive prices and by maintaining our broad and shallow merchandising approach that we believe will result in increased units and dollars per transaction while also protecting margins. We also expect to increase our e-commerce sales by more fully utilizing the functionality of our core e-commerce software that we licensed in 2010, improving our cross-selling and up-selling capability, emphasizing the purchase of coordinated outfits to increase average dollars per sales transaction, and by increasing site traffic by utilizing better search engine optimization tools, email campaigns and social media marketing.

We believe that our broad and shallow merchandising strategy and the differentiated shopping experience we offer to our customers contributes to the success of our boutiques, which generate attractive returns. Over the previous two fiscal years, we opened 98 boutiques which averaged approximately 1,400 square feet and, of the locations open 12 or more months, boutique sales averaged approximately $750,000 in the first year. On average, these boutiques delivered a first-year, pre-tax cash return on net investment in excess of 150% and paid back our net investment on a pre-tax basis in less than one year. Consistent with recent openings, our new boutique operating model assumes a net investment of $156,000 consisting of approximately $45,000 of opening inventory and $181,000 of build-out costs less approximately $70,000 of landlord tenant allowances. We projected the cost of build-out with related fixtures and equipment to open a new boutique of $181,000 in fiscal year 2011, which represents an increase of approximately $11,000 from fiscal year 2010. While we do not foresee further significant cost increases, there can be no assurance that those costs will not continue to increase. We expect new boutique economics to be consistent with our recent history and, based on first-year boutique sales of $650,000 to $750,000 should yield similar pay back and return on net investment.

We pursue various initiatives to build brand awareness and create relationships with customers. These initiatives include in-boutique visual merchandising and presentation, periodic promotions including email marketing campaigns, the use of social networks and the building of a customer database. Our website was redesigned in October of 2010 to deliver improved functionality as well as a stronger brand and fashion sensibility to our customers.

We continue to invest capital to build the corporate and distribution infrastructure necessary to support our growth. We also continue to invest in our systems infrastructure, including implementation of technology for retail merchandise management, point-of-sale software and software applications to support our e-commerce initiatives. We are currently implementing an integrated merchandise management, warehouse management and point-of-sale system. Our plan calls for the merchandise and warehouse components to be implemented during 2011 and the new point-of-sale system to be deployed chain-wide by mid-2012.

 

51


Table of Contents

We are subject to a number of risks and uncertainties many of which are outside of our control and may adversely affect our business, financial condition, results of operations, cash flows and prospects. These uncertainties and risks include, among others, increases in the cost of raw materials and other inputs used in the production of our merchandise, general economic conditions, the potential lack of success of the malls and other shopping venues in which our boutiques are located, and increased competition as we continue to grow our boutique base. To date, recent increases in the price of cotton, which is used in the production of a portion of our apparel merchandise, have not materially affected our ability to obtain apparel merchandise from our vendors, the prices we pay for such merchandise or the prices we charge our customers for such merchandise. If the price of cotton continues to increase in the future, we cannot assure you that we will be able to obtain consistent levels and quality of cotton apparel merchandise or that our sales prices and margins will not be adversely impacted. Any future increases in the price of cotton, or other raw materials used in the production of our merchandise, could materially and adversely impact our results of operations.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are net sales, comparable boutique sales, gross profit, selling, general and administrative expenses and operating income.

Net Sales

Net sales constitute gross sales net of merchandise returns. Net sales consist of sales from comparable boutiques and non-comparable boutiques and sales and shipping revenue from our e-commerce business.

Comparable Boutique Sales

A boutique is included in comparable boutique sales on the first day of the fifteenth full month following the boutique’s opening, which is when we believe comparability is achieved. When a boutique that is included in comparable boutique sales is relocated, we continue to consider sales from that boutique to be comparable boutique sales. If a boutique is closed for thirty days or longer for a remodel or as a result of weather damage, fire or the like, we no longer consider sales from that boutique to be comparable boutique sales. There may be variations in the way in which some of our competitors and other retailers calculate comparable, “same store” or “same boutique” sales. As a result, data in this prospectus regarding our comparable boutique sales may not be comparable to similar data made available by other retailers. Non-comparable boutique sales is comprised of new boutique sales, e-commerce sales, sales from closed boutiques and other sales not included in comparable boutique sales.

Measuring the change in year-over-year comparable boutique sales allows us to evaluate how our boutique base is performing. Various factors affect comparable boutique sales, including:

 

  Ÿ  

consumer preferences, buying trends and overall economic trends;

 

  Ÿ  

our ability to identify and respond effectively to fashion trends and customer preferences;

 

  Ÿ  

our ability to provide an assortment of distinctive, high-quality product offerings to generate new and repeat visits to our boutiques;

 

  Ÿ  

competition;

 

52


Table of Contents
  Ÿ  

changes in our merchandise mix;

 

  Ÿ  

changes in pricing and average unit prices;

 

  Ÿ  

the number of items purchased per transaction or boutique visit;

 

  Ÿ  

the timing of promotional events and holidays;

 

  Ÿ  

the timing of introduction of new merchandise and customer acceptance of new merchandise;

 

  Ÿ  

the level of customer service that we provide in our boutiques;

 

  Ÿ  

our opening of new boutiques in the vicinity of our existing boutiques;

 

  Ÿ  

our ability to source and distribute merchandise efficiently; and

 

  Ÿ  

the number of boutiques we open, close, remodel or relocate in any period.

Opening new boutiques is an important part of our growth strategy. As we continue to pursue our growth strategy we expect that a significant percentage of our net sales will continue to come from new boutiques not included in comparable boutique sales. Accordingly, comparable boutique sales is only one measure we use to assess the success of our growth strategy. Our rapid pace of new boutique openings may affect the comparability of our results of operations, particularly our comparable boutique sales growth, to similar data made available by other retailers. We also anticipate that sales from our e-commerce business will become a more significant contributor to net sales.

The specialty retail apparel and accessories industry is cyclical, and consequently our net sales are affected by general economic conditions. Purchases of apparel, jewelry, accessories and gift items are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence.

Our business is mildly seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season and lowest in the first fiscal quarter. While December generally experiences the highest level of net sales, January is typically the month with the least net sales. Both months are included in our fourth fiscal quarter.

Gross Profit

Gross profit is equal to our net sales less our cost of goods sold and occupancy costs. Gross margin measures gross profit as a percentage of our net sales. Cost of goods sold and occupancy costs includes the direct cost of purchased merchandise, freight costs from our suppliers to our distribution centers and freight costs for merchandise shipped directly from our vendors to our boutiques, allowances for inventory shrinkage and obsolescence, boutique occupancy costs, including rent, utilities, common area maintenance, property taxes, depreciation and boutique repair and maintenance costs, and shipping costs related to e-commerce sales. The components of our cost of goods sold and occupancy costs may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this prospectus regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

The variable component of our cost of goods sold and occupancy costs is higher in higher volume quarters because the variable component of our cost of goods sold and occupancy costs generally increases as net sales increase. Changes in the mix of our merchandise sold, such as changes in the percentage of apparel sold, may also impact our overall cost of goods sold and occupancy costs. We review our inventory levels on an ongoing basis to identify slow-moving merchandise, and generally

 

53


Table of Contents

use markdowns to clear that merchandise. The timing and level of markdowns are not principally seasonal in nature but are driven by customer acceptance of our merchandise. If we misjudge the market for our merchandise, we may be faced with significant excess inventories for some merchandise and be required to mark down such merchandise in order to sell them. These markdowns may result in selling merchandise below cost. Markdowns have reduced our gross profit in some prior periods and may have a material adverse impact on our earnings for future periods depending on the extent of the markdown discount and the amount of merchandise affected.

Selling, General and Administrative Expenses

Selling expense includes boutique payroll, employee benefits, freight from distribution centers to boutiques, boutique pre-opening expense, credit card merchant fees, costs of maintaining our internet presence and operating our e-commerce business while general and administrative expenses includes payroll and benefits for our headquarters and distribution operations, management incentives, professional fees, travel and administration costs and other expenses related to operations at our corporate headquarters, as well as share-based compensation. While selling expense generally varies proportionally with net sales, general and administrative expenses does not generally vary proportionally with net sales. As a result, general and administrative expenses as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters. The components of our selling, general and administrative expenses may not be comparable to those of our competitors and other retailers. We expect that our selling, general and administrative expenses will increase in future periods due to our continuing growth and in part to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company. Among other things, we expect that compliance with the Sarbanes-Oxley Act and related rules and regulations will result in significant legal and accounting costs.

Share-based compensation expense related to stock options was $2,400,000, $99,000 and $8,000 for fiscal years 2010, 2009 and 2008, respectively. We granted options to purchase an aggregate of 1,994,430, 406,000 and 100,000 shares of common stock in fiscal years 2010, 2009 and 2008, respectively. These and any future stock option grants will increase our share-based compensation expense in fiscal year 2011 and in future fiscal years compared to fiscal year 2010. See “—Critical Accounting Policies”.

Income from Operations

Income from operations is gross profit less selling, general and administrative expenses. We use operating income as an indicator of the productivity of our business and our ability to manage selling, general and administrative expenses. We believe that our operating income, expressed as a percentage of net sales, compares favorably to other specialty retailers.

EBITDA and Adjusted EBITDA

In evaluating our business, we consider and use EBITDA as a supplemental measure of our operating performance because it has been a measurement criterion in our management compensation plan. We use Adjusted EBITDA only as a measure in the calculation of the financial ratios that we are required to maintain under the terms of our existing senior secured credit facility. We define EBITDA as net income before net interest expense, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus share-based compensation expense as adjusted for expenses (minus gains) that we do not consider reflective of our ongoing operations, consistent with the definition of EBITDA in our existing senior secured credit facility (referred to herein as “Credit Agreement EBITDA”). See “—Non-GAAP Measures.”

 

54


Table of Contents

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of net sales:

 

    Thirteen Weeks Ended        Fiscal Year Ended   
   
 
April 30,
      2011      
  
  
   
 
May 1,
      2010      
  
  
   
 
January 29,
      2011      
  
  
   
 
January 30,
        2010      
  
  
   
 
January 31,
        2009
  
  
    (in thousands, except percentages and number of boutiques)   

Net sales

  $ 41,265      $ 25,417      $ 135,176      $ 79,367      $ 52,290   

Cost of goods sold and occupancy costs

    19,641        12,772        65,008        37,244        25,358   
                                       

Gross profit

    21,624        12,645        70,168        42,123        26,932   

Selling, general and administrative expenses

    13,205        10,024        40,525        24,641        19,962   
                                       

Income from operations

    8,419        2,621        29,643        17,482        6,970   

Other income (expense)

    34        16        (2     38        14   

Interest income (expense)

    (2,008            (1,633     2        4   
                                       

Income before income tax expense

    6,445        2,637        28,008        17,522        6,988   

Income tax expense

    2,527        1,046        11,113        6,918        2,382   
                                       

Net income

  $ 3,918      $ 1,591      $ 16,895      $ 10,604        4,606   
                                       

Percentage of sales:

         

Net sales

    100.0     100.0     100.0     100.0     100.0

Cost of goods sold and occupancy costs

    47.6     50.2     48.1     46.9     48.5
                                       

Gross profit

    52.4     49.8     51.9     53.1     51.5

Selling, general and administrative expenses

    32.0     39.4     30.0     31.0     38.2
                                       

Income from operations

    20.4     10.4     21.9     22.1     13.3

Other income (expense)

    0.0     0.0     0.0     0.0     0.0

Interest income (expense)

    (4.8 )%      0.0     (1.2 )%      0.0     0.0
                                       

Income before income tax expense

    15.6     10.4     20.7     22.1     13.3

Income tax expense

    6.1     4.1     8.2     8.7     4.6
                                       

Net income

    9.5     6.3     12.5     13.4     8.7
                                       

Operating data:

         

Comparable boutique sales growth for period(1)

    14.7     14.5     15.2     9.8     (6.3 )% 

Number of boutiques open at end of period

    249        172        207        147        111   

Net sales per average square foot for period (not in thousands)(2)

  $ 127      $ 111      $ 508      $ 429      $ 384   

Average square feet (in thousands)(2)(3)

    325        229        266        185        136   

Total gross square feet at end of period (in thousands)

    353        249        296        210        158   

 

(1) A boutique is included in comparable boutique sales on the first day of the fifteenth full month following the boutique’s opening. When a boutique that is included in comparable boutique sales is relocated, we continue to consider sales from that boutique to be comparable boutique sales. If a boutique is closed for thirty days or longer for a remodel or as a result of weather damage, fire or the like, we no longer consider sales from that boutique to be comparable boutique sales.
(2) Net sales per average square foot are calculated by dividing net sales for the period by the average square feet during the period (see footnote 3 below).
(3) Because of our rapid growth, for purposes of providing a sales per square foot measure we use average square feet during the period as opposed to total gross square feet at the end of the period. For periods consisting of more than one fiscal quarter, average square feet is calculated as (a) the sum of the total gross square feet at the end of each fiscal quarter, divided by (b) the number of quarters. For individual quarterly periods, average square feet is calculated as (a) the sum of total gross square feet at the beginning and end of the period, divided by (b) two. There may be variations in the way in which some of our competitors and other retailers calculate sales per square foot or similarly titled measures. As a result, data in this prospectus regarding our average square feet and net sales per average square foot for period may not be comparable to similar data made available by other retailers.

 

55


Table of Contents

The following table summarizes the number of boutiques open at the beginning and the end of the periods indicated:

 

     Thirteen Weeks Ended   Fiscal Year Ended
     April 30,
2011
   May 1,
2010
  January 29,
2011
  January 30,
2010
   January 31,
2009

Number of boutiques open at beginning of period

       207          147         147         111          80  

Boutiques added

       42          26         62         36          31  

Boutiques closed

                (1 )       (2 )                 
                                                    

Number of boutiques open at the end of period

       249          172         207         147          111  
                                                    

We have determined our operating segments on the same basis that we use internally to evaluate performance. Our reporting segments are our boutiques and e-commerce business, which have been aggregated into one reportable financial segment. We aggregate our operating segments because (i) the merchandise offered at our retail locations and through our e-commerce business is largely the same, (ii) we believe that the majority of our e-commerce customers are also customers of our retail locations and (iii) the merchandise margin of both segments is similar.

Thirteen Weeks Ended April 30, 2011 Compared to Thirteen Weeks Ended May 1, 2010

Net sales

Net sales increased 62.4%, or $15.8 million, to $41.3 million, for the thirteen weeks ended April 30, 2011 from $25.4 million for the thirteen weeks ended May 1, 2010. Comparable boutique sales increased 14.7%, or $3.2 million, and non-comparable boutique sales increased $12.6 million for the thirteen weeks ended April 30, 2011 compared to the thirteen weeks ended May 1, 2010. Of the total increase in non-comparable boutique sales, $4.4 million was generated by boutiques that opened in the thirteen weeks ended April 30, 2011 and $0.3 million was generated from higher e-commerce sales. There were 145 comparable boutiques and 104 non-comparable boutiques at April 30, 2011 compared to 112 and 60, respectively, at May 1, 2010.

 

     Thirteen Weeks Ended         
     April 30,
      2011      
    May 1,
2010
     Change  
     (in thousands)         

Apparel

   $ 22,780      $ 14,313       $ 8,467   

Jewelry

     8,116        5,267         2,849   

Accessories

     6,104        3,239         2,865   

Gift

     4,494        2,564         1,930   

Shipping

     46        34         12   
                         
     41,540        25,417         16,123   

Allowance for returns

     (275             (275
                         

Net sales

   $ 41,265      $ 25,417       $ 15,848   
                         

The preceding table was prepared from our internal merchandise system and presents sales by merchandise category. As shown in the table above, sales increased in all merchandise categories.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs increased 53.8%, or $6.9 million, to $19.6 million in the thirteen weeks ended April 30, 2011 from $12.8 million in the thirteen weeks ended May 1, 2010. Cost

 

56


Table of Contents

of merchandise and freight expenses increased by $4.6 million primarily driven by the increased sales volume. Occupancy costs increased by $1.9 million principally due to the increase in the number of boutiques in operation since May 1, 2010. This led to higher fixed boutique-level expenses including depreciation and common area maintenance. Allowance for shrinkage increased by $0.4 million primarily due to increased sales and inventory levels. As a percentage of net sales, cost of goods sold and occupancy costs decreased to 47.6% in the thirteen weeks ended April 30, 2011 from 50.2% in the thirteen weeks ended May 1, 2010. This decrease was primarily attributable to higher rent expense due to a correction of $0.7 million recorded in the thirteen weeks ended May 1, 2010 for rent incurred from time of possession to boutique opening related to boutique openings in fiscal years prior to fiscal year 2010.

Gross Profit

Gross profit increased 71.0%, or $9.0 million, in the thirteen weeks ended April 30, 2011 to $21.6 million from $12.6 million in the thirteen weeks ended May 1, 2010. Gross margin increased 260 basis points to 52.4% for the thirteen weeks ended April 30, 2011 from 49.8% for the thirteen weeks ended May 1, 2010. This increase was primarily attributable to a $0.7 million correction to rent expense, or 268 basis points of gross margin in the thirteen weeks ended May 1, 2010, for rent incurred from time of possession to boutique opening related to boutiques opened in fiscal years prior to fiscal year 2010.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 31.7%, or $3.2 million, to $13.2 million in the thirteen weeks ended April 30, 2011 from $10.0 million in the thirteen weeks ended May 1, 2010. Of the total increase, $2.8 million was attributable to the increase in selling expense, principally caused by the increase in the number of boutiques in operation during the thirteen weeks ended April 30, 2011 as compared to the same period of the prior year, which led to higher overall boutique-level labor expenses and other costs to operate our boutiques. Specifically, payroll and related expenses increased by $2.2 million and credit card merchant fee expense increased by $0.4 million. General and administrative expenses increased by $0.4 million primarily due to an increase of $1.1 million in expenses incurred to support the growth of our boutique base partially offset by a non-recurring employee cash incentive of $1.0 million made in connection with CCMP’s acquisition of a majority of the equity in the company in the thirteen weeks ended May 1, 2010. As a percentage of net sales, selling, general and administrative expenses decreased to 32.0% in the thirteen weeks ended April 30, 2011 from 39.4% in the thirteen weeks ended May 1, 2010, principally due to the effect of the previously discussed non-recurring expense in the prior year period as well as an improvement in our operating leverage as we effectively managed the increase in fixed expenses in relation to our growth. The selling expense portion declined as a percentage of net sales to 18.5% from 19.2% while the general and administrative portion declined to 13.4% from 20.2% in the thirteen weeks ended April 30, 2011 from the thirteen weeks ended May 1, 2010.

Income from Operations

As a result of the foregoing, income from operations increased $5.8 million, or 221.2%, to $8.4 million in the thirteen weeks ended April 30, 2011 from $2.6 million in the thirteen weeks ended May 1, 2010. Income from operations was 20.4% of net sales in the thirteen weeks ended April 30, 2011 compared to 10.4% in the thirteen weeks ended May 1, 2010.

Interest Expense, Net

Interest expense, net increased by $2.0 million in the thirteen weeks ended April 30, 2011 compared to the thirteen weeks ended May 1, 2010 because the company had no borrowings in the thirteen weeks ended May 1, 2010.

 

57


Table of Contents

Provision for Income Taxes

The increase in provision for income taxes of $1.5 million in the thirteen weeks ended April 30, 2011 from the thirteen weeks ended May 1, 2010 was principally due to an increase in pre-tax income.

The effective tax rate for the thirteen weeks ended April 30, 2011 was 39.2%, which was comparable to the 39.7% effective tax rate for the corresponding prior year period.

Net Income

Net income increased 146.3%, or $2.3 million, to $3.9 million in the thirteen weeks ended April 30, 2010 from $1.6 million in the thirteen weeks ended May 1, 2010. This increase was due primarily to a $9.0 million increase in gross profit, partially offset by increases in selling, general and administrative expenses of $3.2 million, higher interest expense of $2.0 million and an increase in provision for income taxes of $1.5 million.

Fiscal Year 2010 Compared to Fiscal Year 2009

Net Sales

Net sales increased 70.3%, or $55.8 million, to $135.2 million in fiscal year 2010 from $79.4 million in fiscal year 2009. Comparable boutique sales increased 15.2% for fiscal year 2010 compared to fiscal year 2009. Comparable boutique sales increased $10.5 million and non-comparable boutique sales increased $45.3 million, with $33.4 million from boutiques that opened in fiscal year 2010. There were 137 comparable boutiques and 70 non-comparable boutiques open at January 29, 2011 compared to 106 and 41, respectively, at January 30, 2010.

Our net e-commerce sales increased to $1.9 million in fiscal year 2010 from $1.0 million in fiscal year 2009. E-commerce sales increased due to our use of a more robust e-commerce technology platform, expanded marketing efforts to a larger customer base and a growing awareness of francesca’s collections® resulting from growth in our boutique base.

 

     Fiscal Year Ended         
     January 29,
2011
     January 30,
2010
     Change  
     (in thousands)  

Apparel

   $ 70,326       $ 45,540       $ 24,786   

Jewelry

     27,911         16,764         11,147   

Accessories

     19,567         8,007         11,560   

Gifts

     17,367         8,949         8,418   

Shipping

     195         107         88   
                          
     135,366         79,367         55,999   

Allowance for returns

     (190              (190
                          

Merchandise sales

   $ 135,176       $ 79,367       $ 55,809   
                          

The preceding table was prepared from our internal merchandise system and presents sales by merchandise category. As shown in that table, sales increased in all of our merchandise categories, but growth was particularly high in the accessories and gift categories. We determined that an allowance for returns was not necessary in fiscal year 2009 because our calculation of the return amount for 2009 based on historical returns was not material for that year.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs increased 74.5%, or $27.8 million, to $65.0 million in fiscal year 2010 from $37.2 million in fiscal year 2009. Cost of merchandise and freight expenses

 

58


Table of Contents

increased by $18.2 million primarily driven by the increased sales volume. Occupancy costs increased by $8.6 million principally due to the increase in the number of boutiques in operation during fiscal year 2010 as compared to fiscal year 2009. This led to higher fixed boutique-level expenses including rent, utilities, depreciation and common area maintenance. Allowance for shrinkage increased by $1.0 million primarily due to increased sales and inventory levels. As a percentage of net sales, cost of goods sold and occupancy costs increased to 48.1% in fiscal year 2010 from 46.9% in fiscal year 2009 which was primarily caused by a decline in merchandise margin resulting from increased sales of markdown merchandise as a percentage of total sales as well as a correction to rent expense of $0.7 million reflecting rent incurred prior to boutique openings in past fiscal years.

Gross Profit

Gross profit increased 66.6%, or $28.0 million, in fiscal year 2010 to $70.2 million from $42.1 million in fiscal year 2009. Gross margin decreased 116 basis points to 51.9% for fiscal year 2010 from 53.1% for fiscal year 2009. This decrease was primarily attributable to a decline in merchandise margin, which decline was primarily due to sales of markdown merchandise accounting for a larger proportion of net sales in fiscal year 2010 as well as a correction to rent expense of $0.7 million, or 50 basis points of gross margin, for rent incurred from time of possession to boutique opening, for boutiques opened in prior fiscal years.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 64.5%, or $15.9 million, to $40.5 million in fiscal year 2010 from $24.6 million in fiscal year 2009. Of the total increase, $8.9 million was attributable to the increase in selling expense, primarily due to an increase in the number of boutiques in operation during fiscal year 2010, compared to fiscal year 2009, which led to higher overall boutique-level labor expenses and other costs to operate our boutiques. Specifically, payroll and related expenses increased by $6.9 million, credit card merchant fee expense increased by $1.1 million and boutique and office supplies expense increased by $0.5 million. Several smaller changes accounted for the $0.4 million remaining increase. General and administrative expenses increased by $7.0 million due to the cost of adding headquarters and distribution employees to manage the larger boutique base and increased net sales as well as increased management incentives. Payroll and related expenses accounted for $5.9 million of the increase, including an increase of $2.3 million in stock compensation expense, and corporate travel expense increased $0.5 million. The remaining increase consisted of smaller year-to-year changes. As a percentage of net sales, selling, general and administrative expenses decreased to 30.0% in fiscal year 2010 from 31.0% in fiscal year 2009, primarily due to lower boutique-level labor expenses as a percentage of sales. The selling expense portion declined as a percentage of net sales to 17.8% in fiscal year 2010 from 19.0% in fiscal year 2009, while the general and administrative portion increased to 12.2% from 12.0% in fiscal year 2010.

Income from Operations

As a result of the foregoing, income from operations increased $12.2 million, or 69.6%, to $29.6 million in fiscal year 2010 from $17.5 million in fiscal year 2009. Income from operations was 21.9% of net sales in fiscal year 2010 compared to 22.1% in fiscal year 2009.

Interest Expense, Net

Interest expense, net increased by $1.6 million in fiscal year 2010 compared to fiscal year 2009 because the company made initial borrowings under its senior secured credit facility during fiscal year 2010.

 

59


Table of Contents

Provision for Income Taxes

The increase in provision for income taxes of $4.2 million in fiscal year 2010 from fiscal year 2009 was due primarily to a $10.5 million increase in pre-tax income. The effective tax rate of 39.7% in fiscal year 2010 was comparable to the effective tax rate of 39.5% in fiscal year 2009.

Net Income

Net income increased 59.3%, or $6.3 million, to $16.9 million in fiscal year 2010 from $10.6 million in fiscal year 2009. This increase was due primarily to a $28.0 million increase in gross profit, partially offset by increases in selling, general and administrative expenses of $15.9 million, and a higher provision for income taxes of $4.2 million.

Fiscal Year 2009 Compared to Fiscal Year 2008

Net Sales

Net sales increased 51.8%, or $27.1 million, to $79.4 million in fiscal year 2009 from $52.3 million in fiscal year 2008. Comparable boutique sales increased 9.8% for fiscal year 2009 compared to fiscal year 2008, as a result of particularly strong growth in clothing and accessories categories, as presented in the following table. Comparable boutique sales increased by $4.5 million and non-comparable boutiques sales increased $21.7 million with $15.0 million from boutiques that opened in fiscal year 2009. There were 106 comparable boutiques and 41 non-comparable boutiques open at January 30, 2010 compared to 70 and 41, respectively, at January 31, 2009.

Our net e-commerce sales increased to $1.0 million from $0.7 million in the prior fiscal year. E-commerce sales increased as we expanded our assortment of merchandise available for online purchase and as our customer database that we market to increased.

 

     Fiscal Year Ended         
     January 30,      January 31.         
     2010      2009      Change  
     (in thousands)  

Apparel

   $ 45,540       $ 26,829       $ 18,711   

Jewelry

     16,764         12,281         4,483   

Accessories

     8,007         5,391         2,616   

Gifts

     8,949         7,789         1,160   

Shipping

     107         —           107   
                          

Merchandise sales

   $ 79,367       $ 52,290       $ 27,077   
                          

The preceding table was prepared from our internal merchandise system and presents sales by merchandise category. While percentage growth rates were highest for apparel and accessories, our jewelry category was also a key contributor to the total net sales increase. Returns for both fiscal years 2009 and 2008 were not material, thus, we do not believe that an allowance for returns was necessary for those years.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs increased 46.9%, or $11.9 million, to $37.2 million in fiscal year 2009 from $25.4 million in fiscal year 2008. Cost of merchandise and freight expenses increased $8.4 million which was primarily driven by the increased sales volume. Occupancy costs increased $3.5 million principally due to the increase in the number of boutiques in operation during fiscal year 2009 as compared to fiscal year 2008. This led to higher fixed boutique-level expenses

 

60


Table of Contents

including rent, utilities, depreciation and common area maintenance. As a percentage of net sales, cost of goods sold and occupancy costs decreased to 46.9% in fiscal year 2009 from 48.5% in fiscal year 2008 as fixed costs were absorbed by increased sales.

Gross Profit

Gross profit increased 56.4%, or $15.2 million, in fiscal year 2009 to $42.1 million from $26.9 million in fiscal year 2008. Gross margin increased 156 basis points to 53.1% for fiscal year 2009 from 51.5% for fiscal year 2008. This increase was primarily attributable to the absorption of fixed boutique occupancy costs over increased net sales as well as lower inventory shrinkage costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 23.4% or $4.7 million to $24.6 million in fiscal year 2009 from $20.0 million in fiscal year 2008. Of the total increase, $3.0 million was attributable to the increase in selling expense, primarily due to an increase in the number of boutiques in operation during fiscal year 2009, compared to fiscal year 2008, which led to higher overall boutique-level labor expenses and other costs to operate our boutiques. Specifically, payroll and related expenses increased by $2.0 million and credit card merchant fee expense increased by $0.6 million. Several smaller changes accounted for the $0.4 million remaining increase. General and administrative expenses increased by $1.7 million due to the cost of adding headquarters and distribution employees to manage the larger boutique base and increased net sales as well as professional fees relating to the CCMP Acquisition. Specifically, professional fees were increased by $1.0 million, payroll and related expenses increased by $0.4 million, which included an additional $90 thousand of compensation expense. The remaining $0.3 million increase was comprised of smaller year-to-year changes. As a percentage of net sales, selling, general and administrative expenses declined to 31.0% in fiscal year 2009 from 38.2% in fiscal year 2008. The selling expense portion declined to 19.0% from 23.1% as a percentage of net sales, principally as a result of improved boutique labor scheduling. The general and administrative portion declined to 12.0% in fiscal year 2009 from 15.1% in fiscal 2008 as headquarters payroll was absorbed over higher net sales, partially offset by increased professional fees.

Income from Operations

As a result of the foregoing, income from operations increased $10.5 million, or 150.8%, to $17.5 million in fiscal year 2009 from $7.0 million in fiscal year 2008. Income from operations was 22.0% of net sales in fiscal year 2009 compared to 13.3% in fiscal year 2008.

Provision for Income Taxes

The increase in provision for income taxes of $4.5 million in fiscal year 2009 from fiscal year 2008 was due primarily to a $10.5 million increase in pre-tax income and an increase in the effective tax rate. For fiscal year 2008, the provision for income taxes was reduced by $0.2 million due to adjustments made to deferred income taxes for differences between estimates used in recording the income tax provision in the prior year and the actual federal and state tax returns.

Net Income

Net income increased 130.2%, or $6.0 million, to $10.6 million in fiscal year 2009 from $4.6 million in fiscal year 2008. This increase was due primarily to a $15.2 million increase in gross profit, partially offset by increases in selling, general and administrative expenses of $4.7 million, and a higher provision for income taxes of $4.5 million.

 

61


Table of Contents

Quarterly Results and Seasonality

The following table sets forth our historical quarterly results of operation as well as certain operating data for each of our most recent eight fiscal quarters expressed as a percentage of our net sales. This unaudited quarterly information has been prepared on the same basis as our annual audited financial statements appearing elsewhere in this prospectus, and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented.

The quarterly data should be read in conjunction with our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus.

Quarterly Results of Operations

 

    Fiscal Year 2011     Fiscal Year 2010     Fiscal Year 2009  
    First
Quarter
    Fourth
Quarter
    Third
Quarter
    Second
Quarter
    First
Quarter
    Fourth
Quarter
    Third
Quarter
    Second
Quarter
    First
Quarter
 
   

(unaudited)

(in thousands, except percentages and number of boutiques)

 

Net sales

  $ 41,265      $ 39,882      $ 35,073      $ 34,804      $ 25,417      $ 24,607      $ 19,501      $ 20,008      $ 15,251   

Gross profit

    21,624        20,592        18,149        18,782        12,645        12,932        10,204        10,919        8,068   

Income from operations

    8,419        8,912        8,401        9,709        2,621        4,580        4,053        5,591        3,258   

Net income

    3,918        4,328        5,115        5,861        1,591        2,788        2,450        3,390        1,976   

Year-Over-Year Increase

                 

Net sales

    62.4     62.1     79.9     74.0     66.7     69.0     49.9     50.9     33.0

Gross profit

    71.0     59.2     77.9     72.0     56.7     99.7     52.3     43.6     31.9

Percent of Annual Results

                 

Net sales

    n/a        29.5     25.9     25.7     18.8     31.0     24.6     25.2     19.2

Gross profit

    n/a        29.3     25.9     26.8     18.0     30.7     24.2     25.9     19.2

Income from operations

    n/a        30.1     28.3     32.8     8.8     26.2     23.2     32.0     18.6

Net income

    n/a        25.6     30.3     34.7     9.4     26.3     23.1     32.0     18.6

Operating Data

                 

Comparable boutique sales change

    14.7     14.5     21.1     11.2     14.5     20.6     8.5     11.2     (3.6 )% 

Number of boutiques open at end of period

    249        207        206        197        172        147        145        129        118   

 

Percentage totals in the above table may not equal the sum of the components due to rounding.

Seasonality

Our business is mildly seasonal in nature and demand is generally the highest in the fourth fiscal quarter due to the year-end holiday season and lowest in the first fiscal quarter. In addition, to prepare for these periods, we must order and keep in stock more merchandise than we carry during other parts of the year. We expect inventory levels, along with an increase in accounts payable and accrued expenses, generally to reach their highest levels in anticipation of the increased net sales during these periods. As a result of this seasonality and generally because of variation in consumer spending habits, we experience fluctuations in net sales and working capital requirements during the year.

 

62


Table of Contents

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and borrowings under our senior secured credit facility. Following completion of this offering, we expect that our primary sources of liquidity will be cash flows from operations and borrowings under a new revolving credit facility. Our primary cash needs are for capital expenditures in connection with opening new boutiques and remodeling existing boutiques, investing in improved technology and working capital required for the increases in merchandise inventories associated with our growth and payments of interest and principal under our existing senior secured credit facility. We also occasionally use cash or our senior secured credit facility to issue letters of credit to support merchandise imports or for other corporate purposes. Cash is also required for investment in information technology and distribution facility enhancements and funding normal working capital requirements. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable and other current liabilities. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within several days of the related sale and we typically have up to 30 days to pay our vendors.

While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may elect to pursue additional expansion opportunities within the next year which could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional expansion opportunities, our ability to pursue such opportunities could be materially adversely affected. Additionally, during the recent recession, we experienced negative comparable boutique sales from the third quarter of fiscal year 2008 through the first quarter of fiscal year 2009, which reduced our cash flow from operations. We could experience a similar effect in a future recessionary period.

We were in compliance with all covenants under our existing senior secured credit facility as of April 30, 2011. At April 30, 2011, we had $12.8 million of cash and cash equivalents and $5.0 million in borrowing availability under our revolving credit facility. There were no letters of credit outstanding at the end of fiscal year 2010.

Cash Flow

A summary of our operating, investing and financing activities are shown in the following table:

 

     Thirteen Weeks Ended     Fiscal Year Ended  
     April 30,
2011
    May 1,
2010
    January 29,
2011
    January 30,
2010
    January 31,
2009
 
     (in thousands)  

Provided by operating activities

   $ 7,950      $ 2,562      $ 21,020      $ 13,277      $ 3,708   

Used for investing activities

     (6,662     (3,543     (16,208     (5,538     (2,013

Used for financing activities

     (998     623        (6,063            (1,525
                                        

Increase (decrease) in cash and cash equivalents

   $ 290      $ (358   $ (1,251   $ 7,739      $ 170   
                                        

 

63


Table of Contents

Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization, deferred taxes, the effect of working capital changes and tenant allowances received from landlords.

 

     Thirteen
Weeks Ended
    Fiscal Year Ended  
       April 30,  
2011
      May 1,  
2010
    January 29,
2011
    January 30,
2010
    January 31,
2009
 
     (in thousands)  

Net income

   $ 3,918      $ 1,591      $ 16,895      $ 10,604      $ 4,606   

Adjustments to reconcile net income to net cash provided by operating activities:

          

Depreciation and amortization

     980        464        2,377        1,215        700   

Stock-based compensation expense

     476        1,097        2,400        99        8   

Excess tax benefit from stock-based compensation

     (28     (487     (1,757              

Loss on sale of assets

     9               25                 

Amortization of debt issuance costs

     195               158                 

Deferred income taxes

     1,675        (253     (2,685     (833     (54

Changes in assets and liabilities:

          

Accounts receivable

     (2,143     (2,311     (3,557     (126     (49

Income tax receivable

     616                               

Inventories

     (1,512     (2,071     (5,581     (794     310   

Prepaid expenses and other current assets

     (1,386     (90     (1,549     (573     (407

Accounts payable

     2,168        1,298        3,443        1,434        (298

Accrued liabilities

     (761     67        3,874        1,007        39   

Deferred and accrued rents

     3,743        2,692        5,999        1,440        315   

Income taxes payable

            565        978        (196     (1,462
                                        

Net cash provided by operating activities

   $ 7,950      $ 2,562      $ 21,020      $ 13,277      $ 3,708   
                                        

Thirteen Weeks Ended April 30, 2011 Compared to Thirteen Weeks Ended May 1, 2010

Net cash provided by operating activities increased $5.4 million, to $8.0 million, in the thirteen weeks ended April 30, 2011 from $2.6 million in the thirteen weeks ended May 1, 2010 primarily due to improved operating results given our strong net sales growth.

Net working capital decreased $3.6 million in the thirteen weeks ended April 30, 2011 as compared to thirteen weeks ended May 1, 2010 due to increases in accounts payable and accrued liabilities in connection with the increase in the number of boutiques in operation. These decreases were partially offset by increases in: merchandise inventory in connection with both new as well as existing boutiques; accounts receivable from credit card providers and tenant allowances from landlords; and prepaid assets as a result of the deferral of expenses related to this offering.

Fiscal Year 2010 Compared to Fiscal Year 2009

Net cash provided by operating activities was $21.0 million and $13.3 million for fiscal years 2010 and 2009, respectively. The $7.7 million increase in fiscal year 2010 compared to fiscal year 2009 was primarily due to improved operating results given our significant net sales growth.

 

64


Table of Contents

Net working capital decreased $3.1 million in fiscal year 2010 as merchandise inventory increased in connection with both new as well as existing boutiques; accounts receivable, principally from credit card providers increased in connection with the increase in net sales as well as from higher tenant allowances and federal income tax refund receivable; and prepaid assets increased as a result of higher prepaid rent and prepaid insurance. Those working capital decreases were partially offset by increases in accounts payable, accrued liabilities and deferred rent.

Merchandise inventory increased $5.6 million in fiscal year 2010 compared to an increase of $0.8 million in fiscal year 2009. Merchandise inventory increased during the year due to and in preparation for new boutique openings, and in anticipation of sales increases in comparable boutiques. We estimate inventory levels and capital requirements based on historical boutique sales performance and new boutique opening plans as well as planned merchandise assortment. To the extent that inventory levels substantially increase, we may rely upon various promotional events or pricing strategies to sell through the inventory levels. Management believes that at January 29, 2011, merchandise inventory is at an appropriate level, from both a business and capital structure perspective, and properly planned for the prospective selling season. While management remains watchful in the current economic environment, we do not believe it will have a negative effect on our present business strategy.

Investing Activities

Investing activities consist primarily of capital expenditures for new boutiques, improvements to existing boutiques, as well as investment in information technology and our distribution facility.

 

     Thirteen Weeks Ended      For the Fiscal Year Ended  
     April 30,
2011
    May 1,
2010
     January 29,
2011
     January 30,
2010
     January 31,
2009
 
     (In thousands)  

Capital expenditures for:

             

New boutiques

   $ 6,168      $ 3,385       $ 13,176       $ 4,872       $ 1,676   

Existing boutiques

     237        48         850         153         138   

Technology

     48        60         1,708         94         —     

Corporate and distribution

     234        50         474         419         199   

Proceeds from sale of property and equipment

     (25     —           —           —           —     
                                           

Net cash used in investing activities

   $ 6,662      $ 3,543       $ 16,208       $ 5,538       $ 52,011   
                                           

Thirteen Weeks Ended April 30, 2011 Compared to Thirteen Weeks Ended May 1, 2010

Our capital expenditures for the thirteen weeks ended April 30, 2011 were $6.7 million with new boutiques accounting for the majority of spending at $6.2 million. Spending for new boutiques included amounts associated with boutiques that opened within the second quarter of 2011. The company opened 42 boutiques in the thirteen weeks ended April 30, 2011 compared to 26 new boutiques in the thirteen weeks ended May 1, 2010.

Fiscal Year 2010 Compared to Fiscal Year 2009

Our total capital expenditures for fiscal year 2010 were $16.2 million with new boutiques accounting for the majority of spending at $13.2 million. Spending for new boutiques included amounts associated with boutiques that opened within the first quarter of the subsequent fiscal year. The average cost of the leasehold improvements, furniture and fixtures for new boutiques opened in fiscal

 

65


Table of Contents

year 2010 was $170,000 exclusive of tenant allowances. Tenant allowances in fiscal year 2010 averaged approximately $72,000 per boutique. Of the $13.2 million of capital spending on new boutiques, $3.4 million was for new boutiques that opened in fiscal year 2011. In fiscal year 2009, $0.9 million was spent on boutique openings in fiscal year 2010. While capital expenditures for new boutiques were $13.2 million, we received tenant allowances of $5.0 million. The average collection period for these allowances is six months after boutique opening. As a result, we fund the cost of new boutiques with cash flow from operations, build-out allowances from our landlords, or borrowings under our existing senior secured credit facility. See discussion under “—Existing Senior Secured Credit Facility”. Tenant allowances were $1.4 million and $0.3 million for fiscal years 2009 and 2008, respectively. Tenant allowances are amortized as a reduction in rent expense over the term of the lease. The remaining capital expenditures of $3.0 million in fiscal year 2010, $0.7 million in fiscal year 2009 and $0.3 million in fiscal year 2008 were primarily for investments in information technology, our corporate offices and for distribution facility enhancements.

Management anticipates that capital expenditures in fiscal year 2011 will be approximately $18.3 million to $20.8 million, including approximately $13.5 million to $14.3 million in connection with the opening of approximately 75 new boutiques in 2011 and approximately $3.0 million to $4.5 million in connection with boutiques we plan to open in early fiscal year 2012. Consistent with our boutique operating model, we anticipate that the average cost of leasehold improvements, furniture and fixtures for new boutiques planned to open in fiscal year 2011 will be approximately $181,000 per boutique, before tenant allowances of approximately $70,000. The average collection period for these allowances is six months after boutique opening. However, the timing of collection of tenant allowances does not effect our availability of capital to open new boutiques. Based on our experience to date in fiscal year 2011, we expect that new boutiques opening in fiscal year 2011 will cost approximately $11,000 per boutique more than in fiscal year 2010. This increase is primarily due to an increase in the cost of leasehold improvements, an increase in the cost of signage and technological enhancements. We expect that cost of opening new boutiques to continue to increase in future years. However, we expect that any such increases will not be material and should not adversely impact our expansion plans or pay back and return on our net investment. Capital spending in fiscal year 2011 for boutiques opening in fiscal year 2011 is subject to a number of variables including the successful negotiation of leases and the timing of the availability of space to begin boutique construction. Our technology initiatives are expected to require capital investment in the range of $1.8 to $2.0 million during fiscal year 2011. The remaining capital expenditures are expected to be used for miscellaneous investments in our corporate offices and for distribution center enhancements.

For the longer term, we expect that our cash flow from operations along with borrowings under either our existing secured credit facility or our new revolving credit facility and tenant allowances for new boutiques will be sufficient to fund capital expenditures for new boutiques, our technology initiatives including our planned merchandise planning, allocation and analytic system implementation and point-of-sale upgrade, improvements to our corporate offices and distribution facility, and to timely meet the principal and interest requirements under either our existing senior secured credit facility or our proposed new revolving credit facility. While our accounting system may require upgrading or replacement at a future date, we believe it is sufficient for at least the next two-to-three years, at which point we will assess the cost and benefit of its replacement.

 

66


Table of Contents

Financing Activities

Financing activities consist primarily of borrowings and payments under our existing senior secured credit facility and distributions to our stockholders.

 

    Thirteen
Weeks Ended
    Fiscal Year Ended  
    April 30,
2011
    May 1,
2010
    January 29,
2011
    January 30,
2010
     January 31,
2009
 
   

(in thousands)

 

Dividends

  $      $      $ (100,000   $         —       $   

Excess tax benefit from stock-based compensation

    28        487        1,757                  

Proceeds from debt

                  95,000                  

Repayments on debt

    (1,188            (1,187               

Payment of debt issuance costs

                  (2,137               

Proceeds from the exercise of stock options

    162        136        504                  

S-Corporation distributions

                                 (1,525
                                        

Net cash used for financing activities

  $ (998   $ 623      $ (6,063   $       $ (1,525
                                        

Thirteen Weeks Ended April 30, 2011 Compared to Thirteen Weeks Ended May 1, 2010

Net cash used for financing activities was $1.0 million in the thirteen weeks ended April 30, 2010. This included the repayment of $1.2 million of indebtedness outstanding under our existing senior secured credit facility. This repayment was partially offset by $0.2 million of proceeds received from exercises of employee stock options.

Fiscal Year 2010 Compared to Fiscal Year 2009

Net cash used for financing activities was $6.1 million in fiscal year 2010. This included net proceeds of $95.0 million from borrowings under our existing senior secured credit facility, offset by the payment of a $100.0 million cash dividend and the repayment of $1.2 million of indebtedness outstanding under our existing senior secured credit facility. We currently expect to retain all available funds and future earnings, if any, for use in the operation and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. See “Dividend Policy”.

During fiscal year 2010, we made $1.2 million of scheduled principal payments on the term loans outstanding under our existing senior secured credit facility, reducing outstanding term loan to $93.8 million at fiscal year-end.

There were no revolving credit borrowings outstanding under our existing senior secured credit facility at January 29, 2011.

Preferred Stock

On February 26, 2010, CCMP acquired approximately 84% of our outstanding equity from various stockholders. As a part of the CCMP Acquisition, the Series A Preferred Stock of the company was converted into common shares on a one-for-one basis and all related rights and preferences were terminated. Accordingly, no preferred stock was outstanding at year-end. See note 10 to our consolidated financial statements included elsewhere in this prospectus.

Existing Senior Secured Credit Facility

On November 17, 2010, Francesca’s Collections, our wholly owned indirect subsidiary, entered into a $100.0 million senior secured credit facility with a syndicate of financial institutions. The existing

 

67


Table of Contents

senior secured credit facility consists of a $95.0 million term loan facility and a $5.0 million revolving credit facility, each with a scheduled maturity date of November 17, 2013. The revolving credit facility includes borrowing capacity available for letters of credit. We had $92.6 million and $93.8 million outstanding under our term loan facility as of April 30, 2011 and January 29, 2011, respectively, and $5.0 million available under our revolving credit facility as of those dates. There were no outstanding letters of credit at April 30, 2011 and January 29, 2011.

All obligations under the existing senior secured credit facility are unconditionally guaranteed by, subject to certain exceptions, Parent and each of Francesca’s Collections’ existing and future direct and indirect wholly owned domestic subsidiaries. All obligations under our existing senior secured credit facility, and the guarantees of those obligations (as well as cash management obligations and any interest rate hedging or other swap agreements), are secured by substantially all of Francesca’s Collections’ assets as well as those of each subsidiary guarantor.

The borrowings under our existing senior secured credit facility bear interest at a rate equal to an applicable margin plus, at our option, either (a) in the case of base rate borrowings, a rate equal to the highest of (1) the higher of (i) the prime rate of Royal Bank of Canada and (ii) the federal funds rate plus 1/2 of 1%, (2) the LIBOR for an interest period of one month plus 1.00% and (3) 2.75% or (b) in the case of LIBOR borrowings, a rate equal to the higher of (1) 1.75% and (2) the LIBOR for the interest period relevant to such borrowing. The current applicable margin for borrowings under both the revolving credit facility and the term loan facility is 5.00% with respect to base rate borrowings and 6.00% with respect to LIBOR borrowings. The applicable margin for borrowings under both the revolving credit facility and the term loan facility for base rate borrowings increases to 6.50% and 9.00% on June 1, 2012 and June 1, 2013, respectively. The applicable margin for borrowings under both the revolving credit facility and the term loan facility for LIBOR borrowings increases to 7.50% and 10.00% on June 1, 2012 and June 1, 2013, respectively. At April 30, 2011 and January 29, 2011, the loans under our existing senior secured credit facility were LIBOR-based and had an interest rate of 7.75%.

Additionally, we are required to pay a fee to the lenders under the revolving credit facility on the un-borrowed amount at a rate equal to 1/2 of 1%. We are also required to pay customary letter of credit fees.

The term loan facility amortizes each year in an amount equal to 1.25% per annum from closing until September 30, 2011 (payable in four equal installments beginning on December 30, 2010) and 2.50% per annum from October 1, 2011 to September 30, 2012 (payable in four equal installments beginning on December 31, 2011), with the remaining amount payable on November 17, 2013.

Principal amounts outstanding under the revolving credit facility are due and payable in full at maturity.

Our existing senior secured credit facility contains customary affirmative and negative covenants, including limitations on the ability of Francesca’s Collections and its subsidiaries, to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii) engage in mergers or consolidations; (viii) change the business conducted by Francesca’s Collections and its subsidiaries; (ix) engage in certain transactions with affiliates; (x) enter into agreements that restrict dividends from subsidiaries; and (xi) amend certain charter documents and material agreements governing subordinated and junior indebtedness.

In addition, the existing senior secured credit facility requires Francesca’s Collections to maintain the following financial ratios:

 

  Ÿ  

Beginning with the fiscal quarter ending January 29, 2011, a consolidated leverage ratio which shall not be more than the maximum consolidated leverage ratio, which is based upon the ratio

 

68


Table of Contents
 

of (i) consolidated total debt (as defined in the credit agreement) to (ii) consolidated EBITDA (as defined in the credit agreement). The maximum consolidated leverage ratio decreases over the term of the facility and is set at the following levels during the following periods: (a) 4.50 to 1.00 for the fiscal quarters ending January 29, 2011 and April 30, 2011, (b) 4.25 to 1.00 for the fiscal quarters ending July 31, 2011 and October 31, 2011, (c) 4.00 to 1.00 for the fiscal quarter ending January 28, 2012, (d) 3.75 to 1.00 for the fiscal quarters ending April 30, 2012 and July 31, 2012, (d) 3.50 to 1.00 for the fiscal quarter ending October 31, 2012, (e) 3.25 to 1.00 for the fiscal quarter ending February 2, 2013, and (f) 3.00 to 1.00 for the fiscal quarters ending April 30, 2013 and thereafter.

 

  Ÿ  

Beginning with the fiscal quarter ending January 29, 2011, a senior leverage ratio which shall not be greater than the maximum senior leverage ratio, which is based upon the ratio of (i) senior debt (as defined in the credit agreement) to (ii) consolidated EBITDA (as defined in the credit agreement). The maximum senior leverage ratio decreases over the term of the facility and is set at the following levels during the following periods: (a) 3.50 to 1.00 for the fiscal quarters ending January 29, 2011 and April 30, 2011, (b) 3.25 to 1.00 for the fiscal quarters ending July 31, 2011 and October 31, 2011, (c) 3.00 to 1.00 for the fiscal quarter ending January 28, 2012, (d) 2.75 to 1.00 for the fiscal quarters ending April 30, 2012 and July 31, 2012, (d) 2.50 to 1.00 for the fiscal quarter ending October 31, 2012, (e) 2.25 to 1.00 for the fiscal quarter ending February 2, 2013, and (f) 2.00 to 1.00 for the fiscal quarters ending April 30, 2013 and thereafter.

 

  Ÿ  

Beginning with the fiscal quarter ending October 31, 2011, a consolidated fixed charge coverage ratio which shall not be less than the minimum consolidated fixed charge coverage ratio, which is based upon the ratio of (i) consolidated EBITDA (as defined in the credit agreement) for the prior four fiscal quarters minus certain capital expenditures (as defined in the credit agreement) minus taxes payable with respect to such period minus permitted tax distributions (as defined in the credit agreement) to (ii) consolidated fixed charges (as defined in the credit agreement). The minimum consolidated fixed charge coverage ratio increases over the term of the facility and is set at the following levels during the following periods: (a) 1.0 to 1.0 for the fiscal quarter ending October 31, 2011, (b) 1.1 to 1.0 for the fiscal quarters ending January 28, 2012, April 30, 2012, July 31, 2012 and October 31, 2012, (c) 1.3 to 1.0 for the fiscal quarter ending February 2, 2013, and (d) 2.0 to 1.0 for the fiscal quarters ending April 30, 2013 and thereafter.

We were in compliance with our existing senior secured credit facility as of April 30, 2011 and our consolidated leverage ratio and senior leverage ratio both were 2.30 to 1.00 as of such date. Our ability to declare dividends from Francesca’s Collections to Holdings at April 30, 2011 was subject to restrictions under our existing senior secured credit facility. See “Description of Certain Indebtedness—Existing Senior Secured Credit Facility” for additional details on our existing senior secured credit facility.

We may voluntarily prepay loans or reduce commitments under our existing senior secured credit facility, in whole or in part, without any prepayment penalties or charges other than customary redeployment costs with respect to LIBOR borrowings.

The existing senior secured credit facility provides that mandatory prepayments out of the following amounts will be applied first to the term loan facility then second to the revolving credit facility (without reducing commitments under the revolving credit facility):

 

  Ÿ  

an amount equal to 50% of excess cash flow (as defined in the credit agreement) for each fiscal year, which percentage is reduced to 25% upon the achievement of a consolidated leverage ratio less than or equal to 2.25 to 1.00 and further reduced to 0% upon the achievement of a consolidated leverage ratio less than or equal to 1.50 to 1.00;

 

69


Table of Contents
  Ÿ  

an amount equal to 100% of the net cash proceeds of any indebtedness that is not permitted to be incurred under the terms of the credit agreement;

 

  Ÿ  

an amount equal to 100% of the net cash proceeds from certain non-ordinary course asset sales and casualty events, subject to reinvestment rights; and

 

  Ÿ  

an amount equal to 100% of the net cash proceeds from equity issuances (including net cash proceeds from this offering) other than to CCMP and other existing stockholders.

Our existing senior secured credit facility also contains customary events of default, including: (i) failure to pay principal, interest, fees or other amounts under the existing senior secured credit facility when due taking into account any applicable grace period; (ii) any representation or warranty proving to have been incorrect in any material respect when made; (iii) failure to perform or observe covenants or other terms of the existing senior secured credit facility subject to certain grace periods; (iv) a cross default with respect to other indebtedness having an aggregate principal amount of at least $3.0 million; (v) bankruptcy and insolvency events; (vi) unsatisfied final judgments in excess of $3.0 million; (vii) a “change of control” (as defined in the credit agreement governing our existing senior secured credit facility); (viii) certain defaults under the Employee Retirement Income Security Act of 1974; (ix) the invalidity or impairment of any loan document or any security interest; and (x) the subordination provisions of any subordinated debt or junior debt (each as defined in the credit agreement governing our existing senior secured credit facility) having a principal amount of at least $3.0 million shall cease to be in full force. A “change of control” does not include an initial public offering of our common stock as long certain CCMP managed funds continue to own and control, directly or indirectly, at least 50% of the capital ownership of Parent on a fully diluted basis following such offering.

For the longer term, we expect that our cash flow from operations along with borrowings under either our existing senior secured credit facility or our new revolving credit facility and tenant allowances for new boutiques will be sufficient to fund capital expenditures for new boutiques, our technology initiatives including our planned merchandise planning, allocation and analytic system implementation and point-of-sale upgrade, improvements to our corporate offices and distribution facility and to timely meet the principal and interest requirements under either our existing senior secured credit facility or our proposed new revolving credit facility. While our accounting system may require upgrading or replacement at a future date, we believe it is sufficient for at least the next two-to-three years, at which point we will assess the cost and benefit of its replacement.

We expect to use the net proceeds from this offering, together with borrowings under our new revolving credit facility, to repay our existing senior secured credit facility in full. If we do not enter into a new revolving credit facility, then a portion of the loans under our existing senior secured credit facility will remain outstanding. The proposed terms of the new facility include an interest rate that will vary with other reference rates including LIBOR and Prime Rate as quoted by the Administrative Agent bank, but with a lower interest rate margin than our existing facility. Therefore, our longer-term requirements for principal and interest payments will be lower than is required under our current borrowing.

New Revolving Credit Facility

On May 23, 2011, we and a group of lenders entered into a commitment letter for a new revolving credit facility, based on a detailed term sheet, in the aggregate amount of $65.0 million. The commitments under the commitment letter expire on August 15, 2011, unless extended. The material closing conditions under the new revolving credit facility are as follows:

 

  Ÿ  

the absence of various types of material adverse changes relating to us;

 

  Ÿ  

the concurrent completion of this offering in a manner that yields sufficient proceeds, together with up to $50.0 million of proceeds under the new revolving credit facility, to repay our existing senior secured credit facility in full;

 

70


Table of Contents
  Ÿ  

the absence of any competing issues of debt by us;

 

  Ÿ  

the delivery of monthly financial statements until the closing date; and

 

  Ÿ  

the execution of customary loan and security documentation.

Some of these closing conditions are outside our control. There can be no assurance that the closing conditions will be met. If these conditions are not met, the lenders will not be obligated to provide the new revolving credit facility, and the refinancing of our existing senior secured credit facility may not be completed on the terms that we expect or at all.

Our new revolving credit facility will consist of a $65.0 million revolving credit facility, with a five year maturity. The new revolving credit facility will include borrowing capacity available for letters of credit.

All obligations under the new revolving credit facility will be unconditionally guaranteed by, subject to certain exceptions, Parent and each of Francesca’s Collections’ existing and future direct and indirect wholly owned domestic subsidiaries. We do not anticipate that there will be any subsidiary guarantors as of the closing date for the new revolving credit facility because Francesca’s Collections does not currently have any subsidiaries and does not intend to create any new subsidiaries prior to the closing for the new revolving credit facility. All obligations under the new revolving credit facility, and the guarantees of those obligations (as well as cash management obligations and any interest rate hedging or other swap agreements), will be secured by substantially all of Francesca’s Collections’ assets as well as the assets of each subsidiary guarantor.

The borrowings under the new revolving credit facility will bear interest at a rate equal to an applicable margin plus, at our option, either (a) in the case of base rate borrowings, a rate equal to the highest of (1) the higher of (i) the prime rate of Royal Bank of Canada and (ii) the federal funds rate plus 1/2 of 1%, (2) the LIBOR for an interest period of one month plus 1.00% and (3) 2.75% or (b) in the case of LIBOR borrowings, a rate equal to the higher of (1) 1.75% and (2) the LIBOR for the interest period relevant to such borrowing. The applicable margin for borrowings under the new revolving credit facility will range from 1.25% to 2.25% with respect to base rate borrowings and from 2.25% to 3.25% with respect to LIBOR borrowings, in each case based upon the achievement of specified levels of a ratio of consolidated total debt to consolidated EBITDA. Additionally, we will be required to pay a fee to the lenders under the new revolving credit facility on the un-borrowed amount at a rate ranging from 0.25% to 0.45%, based on the achievement of specified levels of a ratio of consolidated total debt to consolidated EBITDA. We will also be required to pay customary letter of credit fees.

The new revolving credit facility will contain customary affirmative and negative covenants, including limitations on the ability of Francesca’s Collections and its subsidiaries, to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii) engage in mergers or consolidations; (viii) change the business conducted by Francesca’s Collections and its subsidiaries; (ix) engage in certain transactions with affiliates; (x) enter into agreements that restrict dividends from subsidiaries; and (xi) amend certain charter documents and material agreements governing subordinated and junior indebtedness.

In addition, the new revolving credit facility will require Francesca’s Collections to comply with the following financial covenants:

 

  Ÿ  

A maximum ratio of (i) lease-adjusted consolidated total debt (as defined in the credit agreement) to (ii) consolidated EBITDA of 4.25 to 1.00.

 

71


Table of Contents
  Ÿ  

A minimum ratio of (i) consolidated EBITDA to (ii) interest expense of 4.00 to 1.00.

 

  Ÿ  

Maximum capital expenditures of $25.0 million per fiscal year, with any unused portion allowed to be carried over to the next fiscal year subject to a 50.0% cap.

The new revolving credit facility will also contain customary events of default, including: (i) failure to pay principal, interest, fees or other amounts under the new revolving credit facility when due taking into account any applicable grace period; (ii) any representation or warranty proving to have been incorrect in any material respect when made; (iii) failure to perform or observe covenants or other terms of the existing senior secured credit facility subject to certain grace periods; (iv) a cross default with respect to other material indebtedness; (v) bankruptcy and insolvency events; (vi) unsatisfied material final judgments; (vii) a “change of control”; (viii) certain defaults under the Employee Retirement Income Security Act of 1974; (ix) the invalidity or impairment of any loan document or any security interest; and (x) the subordination provisions of any material subordinated debt or junior debt shall cease to be in full force.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires estimates and judgments that affect the reported amounts of our assets, liabilities, net sales and expenses, and disclosure of contingent assets and liabilities. Management bases estimates on historical experience and other assumptions it believes to be reasonable given the circumstances and evaluates these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies involve a higher degree of judgment and complexity. See note 1 to our consolidated financial statements, which are included elsewhere in this prospectus for a complete discussion of our significant accounting policies. The following reflect the significant estimates and judgments used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue upon purchase of merchandise by customers, net of estimated merchandise returns and discounts. Revenue is recognized for boutique sales at the point at which the customer receives and pays for the merchandise at the register. For on-line sales, revenue is recognized upon delivery and includes shipping charges. Management estimates future returns on previously sold merchandise based on return history and current sales levels. The estimated sales returns are periodically compared to actual sales returns and adjusted, if appropriate.

Gift Cards and Gift Card Breakage

We account for the sale of gift cards as a liability at the time a gift card is sold. The liability is relieved and revenue is recognized upon redemption of the gift card. Our gift cards do not have an expiration date. We will recognize income from the breakage of gift cards when the likelihood of redemption of the gift card is remote based on historical redemption patterns. We do not have accumulated adequate historical data to reasonably estimate the amount of gift cards that will never be redeemed. Consequently, we have not recognized gift card breakage income in fiscal years 2010, 2009 or 2008. We do not anticipate recognizing gift card breakage until it accumulates additional data beyond fiscal year 2011.

 

72


Table of Contents

Inventory Valuation

We value merchandise inventory at the lower of cost or market on a weighted average cost basis. Inventory costs include freight-in. We record merchandise receipts at the time they are delivered to our distribution center or to our boutiques from vendors.

We review our inventory levels to identify slow-moving merchandise and generally use promotional markdowns to clear slow-moving merchandise. Each period we evaluate recent selling trends and the related promotional events or pricing strategies in place to sell through the current inventory levels. Promotional markdowns or additions to the lower of cost or market reserve may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have an adverse impact on earnings, depending on the extent and amount of inventory affected. The anticipated deployment of new merchandise is reflected within the estimated future promotional markdown plan, as such new inventory in certain circumstances will displace merchandise currently on-hand. Additions to the lower of cost or market reserve are recorded as an increase to cost of goods sold and occupancy costs in the accompanying consolidated statements of operations.

We also estimate a shrinkage reserve for the period of time between the last physical inventory count and the balance sheet date. The estimate for shrinkage reserve can be affected by changes in merchandise mix and changes in actual shrinkage trends.

Impairment of Long-lived Assets

We periodically evaluate long-lived assets held for use and held for sale whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level of which there are identifiable cash flows, which is generally at a boutique level. Boutique assets are reviewed for impairment using factors including, but not limited to, our future operating plans and projected cash flows. The determination of whether impairment has occurred is based on an estimate of undiscounted future cash flows directly related to that boutique, compared to the carrying value of the assets. We recognize impairment if the sum of the undiscounted future cash flows of a boutique does not exceed the carrying value of the assets. For impaired assets, we recognize a loss equal to the difference between the net book value of the asset and its estimated fair value. Fair value is based on discounted future cash flows of the asset using a discount rate commensurate with the risk. In addition, at the time a decision is made to close a boutique, we record an impairment charge, if appropriate, or accelerates depreciation over the revised useful life of the asset. Based on the analysis performed, there was no impairment for each of the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009.

Income Taxes

We account for income taxes using the liability method. Under this method, the amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of the company’s assets and liabilities. Valuation allowances are established against deferred tax assets when it is more-likely-than-not that the realization of those deferred tax assets will not occur.

Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a

 

73


Table of Contents

change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.

A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.

We recognize tax liabilities for uncertain tax positions and adjusts these liabilities when the company’s judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which the new information becomes available. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense.

Stock-based Compensation

In connection with our stock based compensation plans, our board of directors considers the estimated fair value of the company’s stock when setting the stock option exercise price as of the date of each grant. Because the company is privately held and there is no public market for its common stock, the fair market value of its common stock is determined by our board of directors at the time the option grants are awarded. In determining the fair value of our common stock, the board of directors considers such factors as the company’s actual and projected financial results, the consideration paid by third party investors in the company, including, investments by BGCP and CCMP in arm’s length transactions for their respective investment and controlling investment in the company, the principal amount of the company’s indebtedness, valuations of the company performed by third parties and other factors it believed were material to the valuation process. To the extent financial projections and anticipated boutique openings did not materially change from the date of the BGCP Acquisition or the CCMP Acquisition through date of a stock option grant, our board of directors concluded that the per share price of our common stock related to each of the acquisition transactions represented the most accurate estimate of the fair value of our common stock for purpose of setting the respective option exercise price as of the date of such grant. Additionally, for these grants, in making its determination of fair value our board of directors did not apply control premium or marketability considerations. To timely secure the necessary talent we require to support our growth, our board of directors takes into account a number of factors, including utilizing the most recent third-party valuation study available to help establish the exercise price for the applicable grant. Our board of directors does not believe it is necessary to obtain third-party valuation studies as of the date of each option grant; however, for purposes of stock-based compensation expense recognition, we use then-current third-party valuation studies.

Stock-based compensation expense related to stock options was $2,400,000, $99,000 and $8,000 for fiscal years 2010, 2009 and 2008, respectively. We granted options to purchase an aggregate of 1,994,430, 406,000 and 100,000 shares of common stock in fiscal years 2010, 2009 and 2008, respectively. These grants and any future stock option grants will likely increase our stock-based compensation expense in fiscal year 2011 and in future fiscal years compared to fiscal year 2010.

We account for stock-based compensation in accordance with FASB ASC 718, “Compensation-Stock Compensation”, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of this statement, stock-based compensation cost is measured at the grant date fair value and is recognized as an expense over the employee’s requisite service period

 

74


Table of Contents

(based on the vesting period of the equity grant). As required under this guidance, we estimate forfeitures for options granted which are not expected to vest. Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value of our stock-based compensation expense. We estimate the grant date fair value of stock option awards using the Black-Scholes option pricing model. For fiscal years 2010, 2009 and 2008, the fair value of stock options was estimated at the grant date using the following assumptions:

 

     Fiscal Year Ended  
     January 29,
2011
     January 30,
2010
     January 31,
2009
 

Expected volatility

     54.21% – 60.59%         85.43%         53.45%   

Risk-free interest rate

     1.63% – 3.24%         0.90%         3.21%   

Weighted average term

     6.27 – 6.50         2.00         6.42   

Expected dividend yield

                      

The risk-free interest rate was determined based on the rate of Treasury instruments whose maturities are similar to those of the expected term of the award being valued. The expected dividend yield was based on our expectations of not paying dividends on our common stock for the foreseeable future. The expected volatility incorporates historical volatility of similar entities whose shares prices are publicly available.

As of April 30, 2011, we had outstanding vested options to purchase approximately 732,209 shares of common stock, at a weighted average exercise price of $2.94 per share, and outstanding unvested options to purchase 1,684,237 shares of common stock, at a weighted average exercise price of $6.21 per share. The per share value of each share of common stock underlying the vested and unvested options at the dates of the grant of the options range from $0.48 to $5.97 per share.

2007 Stock Incentive Plan

We granted options to acquire 1,006,000 shares of our common stock under the 2007 plan. The exercise price for options to acquire our common stock granted under the 2007 plan were determined based on, among other factors, the per share enterprise value paid by BGCP for its acquisition of a 35% interest in the company in April 2007 (“BGCP Acquisition”) and third-party valuation reports. The per share price paid in the BGCP Acquisition was negotiated in an arm’s length transaction. Below is a description of the specific grants of options to acquire our common stock in 2008 and 2009 and the factors that were specifically considered at each grant date.

 

  Ÿ  

During April of 2008, we granted options to acquire 100,000 shares of our common stock at an exercise price of $1.43 per share. The exercise price for this grant equaled the per share price paid in the BGCP Acquisition in April 2007. Our board used a market based methodology to determine the exercise price per share based on the sale price paid in the BGCP Acquisition. No adjustment was made for lack of marketability discount. A third-party valuation study as of January 31, 2009 obtained for financial accounting purposes concluded that the fair value of the common stock was $0.34 per share which was substantially lower than the exercise price of $1.43 per share we used for this grant. We did not make any adjustment to the original exercise price as a result of the conclusions reached in the third-party valuation study. Nevertheless, the compensation expense recognized in connection with this option grant was computed using the common stock fair value of $0.34 per share and the exercise price of $1.43 per share as of the grant date.

 

  Ÿ  

On October 5, 2009, we granted options to acquire 406,000 shares of our common stock at an exercise price of $0.34 per share. The exercise price for this grant was determined based on a third-party valuation study as of January 31, 2009, which for financial accounting purposes

 

75


Table of Contents
 

concluded that the fair value of our common stock as of January 31, 2009 was $0.34 per share. The third-party valuation study dated January 31, 2009 was the most recent third-party valuation study available as of the October 5, 2009 grant date. To timely secure the services of the applicable grantee we used this third-party valuation study to set the applicable option exercise price as that was the only third-party valuation study available at such time. After making the October 5, 2009 grant, we received a third-party valuation study as of October 31, 2009, which for financial accounting purposes concluded that the fair value of our common stock as of October 31, 2009 was $3.01 per share. We believe that the increase in per share value was primarily due to boutique openings, increased sales and overall improvement in our performance resulting in increased EBITDA. Additionally, comparable public company business enterprise values to EBITDA multiples used in the valuation increased. We did not make any adjustment to the original option exercise price for the October 5, 2009 option grant after receiving the third-party valuation study as of October 31, 2009. Nevertheless, the compensation expense recognized in connection with the October 5, 2009 option grant was computed using the common stock fair value of $3.01 per share and the exercise price of $0.34 per share as of the grant date. For the two third-party valuation reports as of January 31, 2009 and October 31, 2009, we used a discount of 41% and 44% respectively, for lack of marketability of our common stock in determining the fair value of $.034 per share and $3.01 per share.

The following table sets forth all stock option grants to acquire our common stock granted during 2008 and 2009 under the 2007 Stock Incentive Plan.

Grant Date

   Number
of
Options
Granted
     Exercise
Price
Per
Share
     Common Stock
Fair Value per
Share at

Grant Date
    

Third-Party
Valuation Date

   Vesting
Period
(Years)
     Weighted
Average
Stock Option
Fair Value (1)
 

April 1, 2008

     100,000       $ 1.43       $ 0.34       January 31, 2009      5       $ 0.07   

October 5, 2009

     406,000       $ 0.34       $ 3.01       October 31, 2009      4       $ 2.69   

 

 

  (1) 

The stock option fair value was determined using a third party valuation study.

The valuation studies as of January 31, 2009 and October 31, 2009 used the following methodologies to determine the value of our equity: (i) the January 31, 2009 valuation study used a combination of the income approach and the market approach (with each method being assigned a weighting of 50%); and (ii) the October 31, 2009 valuation study used the market approach.

Generally, the income approach focused on the income-producing capability of the company, by calculating the present value of future net cash flows to be generated by us. We developed indications of value by discounting our expected cash flows to the present value at a rate of return that considered the risk related to an investment in the company. The discount rate selected was based on our weighted average cost of capital. Our weighted average cost of capital was calculated by analyzing the cost of our equity and the cost of our debt (with our equity being weighted 98.05% and our debt being weighted 1.95%).

The market approach is a general way of determining the value of a business ownership interest, security or asset by using one or more methods that compare the subject business’ ownership interest, security or asset to similar businesses, ownership interests, securities or assets that have been sold. In the valuation of our equity interests, we applied the market approach by utilizing the guideline public company method.

The guideline public company method compares the subject entity to guideline publicly traded entities (that is, publicly traded entities operating in a generally similar industry to the subject entity). In

 

76


Table of Contents

applying this method, we determined our value based on a multiple of our EBITDA. In determining the appropriate multiple to apply to our EBITDA, we reviewed the business enterprise value to EBITDA multiples of the guideline companies.

In consultation with our valuation consultant we considered factors, such as control vs. minority interest as well as the lack of marketability with respect to our equity in determining the appropriate discount to be applied to the value of our stock. Ultimately, we elected to apply a marketability discount to the value of our stock. The valuation studies as of January 31, 2009 and October 31, 2009 used an option-based methodology in determining the marketability discounts (41% and 44%, respectively). Using the option-based methodology, we determined the appropriate discount based on the value of a put option with respect to the company’s stock (such value being determined based on the Black-Scholes option-pricing model).

During the period between the BGCP Acquisition in April of 2007, and the January 31, 2009 valuation of our stock, our comparable boutique sales were negative. Additionally, during fiscal year 2008 general business conditions affecting the specialty retail industry were negative along with overall economic conditions. Accordingly, the valuation study as of January 31, 2009 reflected a substantial contraction in EBITDA multiples for the retail industry peer group against which we compared our equity valuation during such period.

During the period between the January 31, 2009 valuation of our stock and the October 31, 2009 valuation of our stock, general economic conditions improved and our comparable boutique sales increased. We believe that the increase in per share value during fiscal year 2009 (as reflected in the October 31, 2009 valuation study) was primarily due to new boutique openings, increased sales and overall improvement in our performance, resulting in increased EBITDA. The valuation study as of October 31, 2009 reflected a substantial growth in EBITDA multiples for the retail industry peer group against which we compared our equity valuation during such period. Hence, comparable public company business enterprise values to EBITDA multiples used in the valuation increased.

2010 Stock Incentive Plan

We granted options to acquire 1,994,430 shares of our common stock under the 2010 plan. The exercise price for options granted under the 2010 plan were determined based on, among other factors, the per share enterprise value paid by CCMP for its acquisition of approximately 84% interest in the company in February 2010 (“CCMP Acquisition”) and third-party valuation reports. The per share price paid in the CCMP Acquisition was negotiated in an arm’s length transaction. In establishing the exercise price for options granted during March, May and July 2010, our board of directors concluded that no material change in the financial condition of the company had occurred since the closing of the CCMP Acquisition to warrant an adjustment in the exercise price for these grants. Below is a description of the specific grants of options to acquire our common stock during 2010 and the factors that were specifically considered at each grant date.

 

  Ÿ  

During March of 2010, we granted options to acquire 1,062,400 shares of our common stock at an exercise price of $6.13 per share. The exercise price for this grant was equal to the per share price paid in the CCMP Acquisition in February 2010. Our board used a market based methodology to determine the exercise price per share based on the sale price paid in the CCMP Acquisition. Projected sales and anticipated new boutique openings were consistent at March 2010 with sales and growth projections as of February 2010; which validated the use of the CCMP Acquisition price. No adjustment to the exercise price was made for lack of control or lack of marketability discount.

 

  Ÿ  

During May of 2010, we granted options to acquire 400,000 shares of our common stock at an exercise price of $6.13 per share. The exercise price for this grant was equal to the per share price paid in the CCMP Acquisition. Our board used a market based methodology to determine

 

77


Table of Contents
 

the exercise price per share based on the sale price paid in the CCMP Acquisition. Projected sales and anticipated new boutique openings were consistent at May 2010 with sales and growth projections as of February 2010; which validated the use of the CCMP Acquisition price. No adjustment to exercise price was made for lack of control or lack of marketability discount.

 

  Ÿ  

During July of 2010, we granted options to acquire 80,000 shares of our common stock at an exercise price of $6.13 per share. The exercise price for this grant was equal to the per share price paid in the CCMP Acquisition. Our board used a market based methodology to determine the exercise price per share based on the sale price paid in the CCMP Acquisition. Projected sales and anticipated new boutique openings were consistent at July 2010 with sales and growth projections as of February 2010; which validated the use of the CCMP Acquisition price. No adjustment to exercise price was made for lack of control or lack of marketability discount.

 

  Ÿ  

During December of 2010, we granted options to acquire 452,030 shares of our common stock at an exercise price of $10.19 per share. The exercise price for this grant was determined based on, among other factors, a third-party valuation study of our common stock as described in more detail below. An analysis was performed by the third-party valuation consultant to estimate the fair values of our common stock as of the grant date. The objective of the analysis was to determine the fair market value of the company, its common stock and the fair value of related stock options, as of the valuation date, on a controlling interests basis. The probability-weighted expected return method was used to estimate the fair value of our common stock which, in turn, represented the stock option exercise price on the date of grant. This method was selected based on management’s current expectation of either an initial public offering or a sale or merger of the company in the near future. Three scenarios were incorporated into the valuation: (i) the company being sold to another company (the “M&A Scenario”), (ii) the company engaging in an initial public offering (the “IPO Scenario”), and (iii) the company remaining an independent, privately-held company (the “Private Scenario”). The estimated fair value of our common stock in each scenario was affected by the use of certain assumptions and valuation methodologies. The fair value of the stock was assessed based on the probability weighted potential for each scenario on the date of grant. The estimated fair value under the M&A Scenario considered the projected value of the company upon sale or merger. To arrive at the fair value of our common stock under the M&A Scenario, the discounted value of the cash flow leading up to the date of an assumed merger or sale was added to values from comparable merger and acquisition transactions applying the observed paid-multiples to our financial performance to determine enterprise value. In calculating the fair value of our common stock and the exercise price for the options granted by us in December of 2010, we ascribed a probability weighting of 20% to the M&A Scenario.

To determine the estimated fair value of our common stock under the IPO Scenario, the public market valuations of other high-growth specialty retailers were reviewed using a variety of methods. For such firms, a number of multiples and ratios such as revenue, earnings before interest, taxes, depreciation and amortization, or EBITDA, and net income to enterprise value were calculated. Then those multiples were applied to both our historical and projected financial performance to determine our estimated enterprise value. In calculating the fair value of our common stock and the exercise price for the options granted by us in December of 2010, we ascribed a probability weighting of 70% to the IPO Scenario.

The estimated fair value under the Private Scenario was determined considering valuations based on three different fair value models: (i) an income valuation model that incorporates the calculation of the present value of future cash flows discounted at an appropriate rate applicable given the risks associated with the company and related forecast, (ii) a market valuation model that considers recent sales or offerings of comparable assets between third parties and (iii) the guideline public company method that focuses on comparing the company’s economic performance to guideline publicly traded entities. In calculating the fair value of our

 

78


Table of Contents

common stock and the exercise price for the options granted by us in December of 2010, we ascribed a probability weighting of 10% to the Private Scenario.

We included additional factors in the above scenarios including a significant increase in comparable boutique sales during fiscal year 2010 including a 21.1% comparable boutique sales increase in the third quarter. Additionally, our new boutique openings during fiscal year 2010 exceeded our forecast by a significant percentage. Those accretive factors were partially offset by the impact of the recapitalization of the company in November 2010, whereby we incurred $95.0 million of indebtedness under our existing senior secured credit facility and used the proceeds to declare a $100 million cash dividend.

The following table sets forth all stock option grants to acquire our common stock granted during 2010 under the 2010 Stock Incentive Plan.

 

Grant Date

  Number of
Options
Granted
    Exercise
Price
Per Share
    Common Stock
Fair Value per
Share at
Grant Date
   

Third-Party
Valuation Date

  Vesting
Period
(Years)
    Weighted
Average
Stock Option
Fair Value
 

March 26, 2010

    1,062,400      $ 6.13      $ 6.13      Not obtained(1)     4      $ 3.93   

May 1, 2010

    400,000      $ 6.13      $ 6.13      Not  obtained(1)     5      $ 3.45   

July 1, 2010

    80,000      $ 6.13      $ 6.13      Not obtained(1)     5      $ 3.64   

December 1, 2010

    452,030      $ 10.19      $ 10.19      December 1, 2010     5      $ 5.83 (2) 

 

(1) 

Fair value equaled CCMP Acquisition per share price based on our determination that the fair value did not change between the CCMP Acquisition date and option grant date.

(2) 

The stock option fair value was determined using a third party valuation study.

During the period between the October 31, 2009 valuation study and the CCMP Acquisition in February of 2010, we experienced growth in sales performance and new boutique openings. We believe that our strong historical financial growth coupled with strong future prospects were the key factors on which CCMP based the price per share it paid in the acquisition.

Off Balance Sheet Arrangements

We are not party to any off balance sheet arrangements.

Contractual Obligations

The following table summarizes our contractual obligations as of January 29, 2011 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 

            Payments Due by Period  
     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Long-term debt obligations

   $ 93,813       $ 5,938       $ 87,875       $ —         $      —     

Estimated interest on long-term debt obligations (2)

     22,830         7,845         14,985         —           —     

Operating lease obligations (1)

     118,717         15,285         29,292         23,611         50,529   

Merchandise purchase commitments

     8,066         8,066         —           —           —     

Contracts for software application implementation

     2,101         549         888         664         —     

 

(1) Excludes common area maintenance charges, real estate taxes and certain other expenses which amounted to approximately 35.1% of minimum lease obligations in fiscal year 2010. We expect this percentage to be relatively consistent for the next three years.

 

79


Table of Contents
(2) For purposes of this table, we estimated interest expense to be paid during the remaining term of the Senior Secured Credit Facility using average LIBOR during the period the loan was outstanding in fiscal 2010 plus the applicable margin as defined in the Credit Agreement.
(3) We executed additional lease contracts for new boutiques in the thirteen weeks ended April 30, 2011 that increased our operating lease obligations to the following:

 

      Amount  
     (in thousands)  

Remainder of 2011

   $ 12,393   

1-3 Years

     31,253   

3-5 Years

     26,099   

More than 5 Years

     57,414   
        

Total

   $ 127,159   
        

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.

Non-GAAP Measures

In evaluating our business, we consider and use EBITDA as a supplemental measure of our operating performance because it has been a measurement criterion in our management compensation plan. We use Adjusted EBITDA only as a measure in the calculation of the financial ratios that we are required to maintain under the terms of our existing senior secured credit facility. We define EBITDA as net income before net interest expense, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus share-based compensation expense as adjusted for expenses (minus gains) that we do not consider reflective of our ongoing operations, consistent with the definition of Credit Agreement EBITDA. If we fail to maintain required levels of Adjusted EBITDA, we could have a default under our existing senior secured credit facility, potentially resulting in an acceleration of all of our outstanding indebtedness. We expect that Credit Agreement EBITDA under the new revolving credit facility will be defined in a manner substantially similar to the Credit Agreement EBITDA under our existing senior secured credit facility. All of the adjustments made in our calculation of Adjusted EBITDA, as described below, are adjustments that were made in calculating our performance for purposes of the required financial ratios under our existing senior secured credit facility, and are presented in a manner consistent with the reporting of the Credit Agreement EBITDA to our lenders. In prior periods, we used an EBITDA calculation only for internal purposes. We believe that the use of EBITDA facilitates investors in making operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting relative interest expense), and the age and book value of facilities and equipment (affecting relative depreciation expense).

The subsequent table presents EBITDA for fiscal years 2010, 2009 and 2008, and Adjusted EBITDA for fiscal year 2010. The company did not have any debt prior to fiscal year 2010 that required compliance with financial ratio requirements and therefore had no requirement to prepare Adjusted EBITDA in prior periods.

The terms EBITDA and Adjusted EBITDA are not defined under U.S. generally accepted accounting principles, or U.S. GAAP, and are not measures of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our EBITDA and Adjusted EBITDA

 

80


Table of Contents

have limitations as analytical tools, and when assessing our operating performance, you should not consider EBITDA and Adjusted EBITDA in isolation, or as a substitute for net income (loss) or other consolidated income statement data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to:

 

  Ÿ  

EBITDA and Adjusted EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

  Ÿ  

they do not reflect changes in, or cash requirements for, our working capital needs;

 

  Ÿ  

they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

  Ÿ  

they do not reflect income taxes or the cash requirements for any tax payments;

 

  Ÿ  

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

 

  Ÿ  

other companies may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally. EBITDA and Adjusted EBITDA are calculated as follows for the periods presented:

 

     Thirteen Weeks Ended      Fiscal Year Ended  
     April 30,
2011
     May 1,
2010
     January 29,
2011
    January 30,
2010
    January 31,
2009
 
                   (in thousands)  

Net income

   $ 3,918       $ 1,529       $ 16,895      $ 10,604      $ 4,606   

Plus: interest expense

     2,008         —           1,635        —          1   

Less: interest income

     —           —           (2     (2     (5

Plus: depreciation and amortization

     980         464         2,377        1,215        700   

Plus: provision for income taxes

     2,527         1,046         11,113        6,918        2,382   
                                          

EBITDA

   $ 9,433       $ 3,039       $ 32,018      $ 18,735      $ 7,684   
                                          

Plus: stock-based compensation(1)

     476         1,097       $ 2,400       

Plus: costs related to CCMP acquisition(2)

     —           1,315         1,315       

Plus: correction of prior-year construction period rent(3)

     —           680         680       

Plus: IPO preparation expenses

     —           —           30       

Plus: Other(4)

     —           —           71