Francesca’s on Friday announced that it’s proposing a reverse split of its common stock "at a ratio not less than 5:1 and not greater than 35:1, with the exact ratio" to be set by the Board of Directors, according to a filing with the Securities and Exchange Commission.
The move, to be presented at the company’s June 28 annual meeting, is designed to help it continue trading on the Nasdaq stock exchange, according to the filing. On Feb. 1, the retailer was warned that its share price for the previous 30 consecutive days had failed to meet the minimum requirement of at least $1 per share. Nasdaq granted a 180-day grace period, or until July 31, to regain compliance.
Also on Friday, Francesca’s detailed a fresh set of risks to its viability as a going concern. A year ago the company said its "long-term strategy to grow our business depends in large part on continuing to successfully open new boutiques each year for the foreseeable future," per its March 28, 2018 end-of-year report to the SEC. The company reiterated that in its more recent filing May 3, but said it is "currently focused on optimizing our existing real estate fleet and do not currently intend to open more than four new boutiques in the foreseeable future." Elsewhere in that filing the company said it will shutter "at least 20 underperforming boutiques."
Francesca's is in dire straits, as detailed last week in the report on its fourth quarter — a pivotal period for any apparel retailer — and its full-year results.
The apparel and accessories retailer swung to a net loss of $21.3 million in the fourth quarter from the prior year’s net income of $3.7 million, as net sales fell 14% to $119.3 million from $138.5 million in the year-ago quarter and comparable sales also fell 14%. Merchandise margins declined by 150 basis points due to increased markdowns, and gross profit, as a percent of net sales, fell to 39.3% from 43.9% in the prior year, the company also said.
Its low share price is a reflection of those woes, and its delisting has exacerbated that particular problem, as institutional investors whose rules prevent owning shares of companies in that situation also abandoned their stock in the company. While reducing the number of shares is an artificial method of boosting the per-share price and inferior to boosting it through good business performance and strong sales, it's not at all a "nefarious" or illegitimate move, according to Alon Kapen, a partner at law firm Farrell Fritz who heads the emerging companies and venture capital practice group.
The company's new take on its risk factors is also something that the SEC "pays close attention to," Kapen also told Retail Dive in an interview. But investors needn't necessarily be alarmed, he also said. "It can indicate a management team that’s thinking critically," he said. "It really depends on the substance of the risk being disclosed."