Contract liability

Contract liability consists of gift card liability. The Company accounts 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. The Company’s gift cards do not have an expiration date. Income from gift card breakage is estimated based on historical redemption patterns and recognized over the historical redemption period. Unredeemed gift cards at the end of the prior fiscal year recognized in revenues for the thirteen and twenty-six weeks ended August 4, 2018 totaled $1.1 million and $3.0 million, respectively, and for the thirteen and twenty-six weeks ended July 29, 2017 totaled $1.2 million and $3.3 million, respectively.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Arrangements”, which amends Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation. The new guidance intends to simplify several aspects of the accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities, forfeitures and classification on the statement of cash flows. The Company adopted the applicable provisions of this guidance beginning on January 29, 2017 on a prospective basis or, in the case of recognizing forfeitures as they occur, using the modified retrospective transition method. Accordingly, prior period financial statements were not adjusted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

In November 2015, the FASB issued ASU 2015-17, “Income Taxes – Balance Sheet Classification of Deferred Taxes.” The new guidance simplifies the presentation of deferred income taxes by permitting classification of all deferred tax assets and liabilities as noncurrent on the consolidated balance sheet. The Company adopted this guidance beginning on January 29, 2017 on a prospective basis, resulting in the classification of all deferred tax assets and liabilities as non-current. Prior period financial statements were not adjusted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value.  ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this guidance on January 29, 2017 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In March 2016, the FASB issued ASU 2016-04 “Liabilities - Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products.” The new guidance allows a company to derecognize amounts related to expected breakage to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The amendedThis standard may be adopted on either a modified retrospective or a retrospective basis. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements in conjunction with its evaluation of ASU 2014-09 discussed below.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The new guidance, among other things, requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. ASU 2016-02 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all public business entities upon issuance. While the Company is still evaluating the impact of this new guidance on its consolidated financial statements, it expects that the adoption of this guidance will not have a material impact on its results of operations, however, will result in a significant increase in total assets and total liabilities on the Company’s balance sheet given that the Company has a significant number of leases.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This pronouncement requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods and services. This standard is effective for reporting periods beginning on or after December 15, 2017, including interim periods within that fiscal year, with early adoption permitted for interim and annual periods beginning on or after December 15, 2016. Since the original issuance of ASU 2014-09, the FASB has issued several amendments and updates to this guidance. This guidance may be adopted on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is finalizing its evaluation of the impact of adopting the new guidance on the consolidated financial statements. This evaluation includes reviewing current accounting policies, processes, and arrangements to identify potential differences that could arise from the application of the guidance. Based on the Company’s assessment to date, the adoption of this guidance will have the following impact: (a) estimated cost of returns will be recorded as a current asset rather than netted with the allowance for sales returns; (b) gift card breakage income will be estimated based on a historical redemption rate and recognized over the historical redemption period rather than when redemption is considered remote; and (c) ecommerce revenue will be recognized upon shipment rather than upon delivery. The Company will adopt this guidance on a modified retrospective basis on February 4, 2018. The Company expects that the adoption of this guidance will not have a material impact on its consolidated financial statements.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

The Company adopted ASU 2016-04 and ASU 2014-09 on February 4, 2018 using the modified retrospective approach. Please refer to theRevenue Recognition policy section of this Note 1 to the Unaudited Consolidated Financial Statements for further information.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract." ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The new guidance, among other things, requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, Revenue from Contracts with Customers. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” to provide an additional, optional transition method for adopting ASU 2016-02 which allow entities to apply the new lease standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption while comparative periods presented will continue to be in presented in accordance with current ASC Topic 840. This new guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The guidance is required to be adopted using the modified retrospective approach or the additional, optional transition method set forth in ASU 2018-11. The Company is in the process of compiling all agreements that are considered as a lease under this new guidance as well as implementing its leasing software solution, including identifying changes to its business processes, systems and controls to support its adoption in fiscal year 2019. While the Company is still evaluating the impact of this new guidance on its consolidated financial statements, it expects that the adoption of this guidance will not have a material impact on its results of operations; however, it will result in a significant increase in total assets and total liabilities on the Company’s balance sheet given that the Company has a significant number of leases.

Basic earnings (loss) per common share amounts are calculated using the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per common share amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact of stock options and restricted stock and stock option grants using the treasury stock method. The following table summarizes the potential dilution that could occur if stock options to acquire common stock were exercised or if the restricted stock grants were fully vested and reconciles the weighted-average common shares outstanding used in the computation of basic and diluted earnings (loss) per share.

Potentially issuable shares under the Company’s stock-based compensation plans amounting to approximately 0.50.3 million shares and 0.40.9 million shares in the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 4, 2018, respectively, and 0.30.4 million shares in each of the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 29, 2016,2017 were excluded in the computation of diluted weighted-average common shares outstanding due to their anti-dilutive effect. The Company also excluded contingently issuable performance-based awards totaling 0.7 million shares in each of the thirteen and twenty-six weeks ended August 4, 2018 and 0.4 million shares in each of the thirteen and thirty-ninetwenty-six weeks ended October 28,July 29, 2017 and 0.3 million shares in each of the thirteen and thirty-nine weeks ended October 29, 2016 from the computation of diluted earnings per share because the pre-established goals had not yet been satisfied as of the end of each period.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount reflected in the consolidated balance sheets of financial assets and liabilities, which includes cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their fair values due to the short term nature of these financial assets and liabilities.

During the thirteen weeks ended October 28, 2017, the Company changed the estimated period over which redemption of gift cards is considered to be remote to more closely align with recent Company experience. As a result of this change in estimate, the Company recognized $1.5 million of additional gift card breakage income included in net sales in the unaudited consolidated statements of operations.

The provision for income taxes is based on the Company’s current estimate of the annual effective tax rate. The effective income tax rates for the thirteen and thirty-nine weeks ended October 28,August 4, 2018 and July 29, 2017 were 45.0%44.6% and 39.5%38.7%, respectively, and for the twenty six-weeks ended August 4, 2018 and July 29, 2017 were 6.4% and 39.3%, respectively. The change in the effective income tax rates for the thirteen and thirty-ninetwenty-six weeks ended October 29, 2016 were 38.3% and 38.0%, respectively. The difference between our effective tax rate and federal statutory tax rate is primarily related to state income taxes. The increase in effective tax rate in the thirteen weeks ended October 28, 2017August 4, 2018 versus the comparable prior year period and the statutory federal corporate tax rate under theTax Cuts and Jobs Act enacted in December 2017was primarily due to the additional tax expense recognized related to certain stock-based awards.  

As of August 4, 2018 and July 29, 2017, income tax effectreceivable totaled $11.7 million and $9.6 million, respectively.

The Company has not recorded any adjustment to its estimates at the end of exercised or vested stock-based awards recognizedfiscal year 2017 as a result of the enactment of the Tax Act. As the Company continues to refine and update its analysis of the Tax Act and interprets any additional guidance, it may make adjustments to the amounts that have been previously recorded. Any such adjustment will be reflected in income tax expense.expense or benefit in fiscal year 2018.

Prior Revolving Credit Facility

On August 30, 2013, Francesca’s Collections, Inc., as borrower, and its parent company, Francesca’s LLC, a wholly-owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement (“Second Amended and Restated Credit Agreement”) with Royal Bank of Canada, as Administrative Agent and Collateral Agent, and the lenders party thereto. The credit facility provided capacity of $75.0 million (including up to $10.0 million for letters of credit) and was scheduled to mature on August 30, 2018.  On May 25, 2018, concurrent with entering into the Asset Based Revolving Credit Facility described below, the Second Amended and Restated Credit Agreement was terminated.

Asset Based Revolving Credit Agreement

On May 25, 2018, Francesca’s Holdings Corporation (the “Holdings”), as a guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”), and certain of its subsidiaries as guarantors (together with Holdings and the Borrowers, the “Loan Parties”), entered into an asset based revolving Credit Agreement (“Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and the lenders party thereto. The Credit Agreement provides for revolving commitments of $50.0 million (including up to $10.0 million for letters of credit) and matures on May 25, 2023. Availability under the Credit Agreement is subject to a customary borrowing base comprised of: (a) a specified percentage of the Borrower’s credit card accounts(as defined in the Credit Agreement); and (b) a specified percentage of the Borrower’s eligible inventory (as defined in the Credit Agreement), and reduced by (c) certain customary reserves and adjustments (as defined in the Credit Agreement). The Credit Agreement also contains an increase option permitting the Borrowers, subject to certain requirements, to arrange with lenders for additional revolving commitments for up to an aggregate of $25.0 million. At August 4, 2018, there were no borrowings outstanding and $28.4 million of borrowing base availability under the Credit Agreement.

All obligations of each Loan Party under the Credit Agreement are unconditionally guaranteed by Holdings and each of Holdings’ existing and future direct and indirect wholly owned domestic subsidiaries, including the Borrowers. All obligations under the Credit Agreement, and the guarantees of those obligations (as well as banking services obligations and any interest rate hedging or other swap agreements), are secured by substantially all of the assets of Holdings and each of Holdings’ existing and future direct and indirect wholly owned domestic subsidiaries. In addition, the Credit Agreement requires the Loan Parties to maintain a minimum ratio of (i) EBITDAR (as defined in the Credit Agreement) minus unfinanced capital expenditures (as defined in the Credit Agreement), to (ii) fixed charges of 1.00 to 1.00 during periods when availability (as defined in the Credit Agreement) is less than $6.0 million (or has recently been less than $6.0 million as further specified in the Credit Agreement) (such ratio, the “Fixed Charge Coverage Ratio”). As of August 4, 2018, the borrowing availability under the Credit Agreement was more than $6.0 million resulting in the elimination of the fixed charge coverage ratio requirement.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

On August 30, 2013, Francesca’s Collections, Inc. (the “Borrower”), as borrower, and its parent company, Francesca’s LLC,Borrowings under the Credit Agreement bear interest at a wholly owned subsidiaryrate equal to an applicable margin plus, at the option of the Company, entered intoBorrowers, either (a) in the case of base rate borrowings, a Second Amendedrate equal to the highest of (1) the prime rate of JPMorgan Chase Bank, N.A., (2) the federal funds rate plus 1/2 of 1.00%, and Restated(3) LIBOR for an interest period of one month plus 1.00% (subject to a 0.0% LIBOR floor), provided that that the interest rate for base rate borrowings (including the addition of the applicable margin) shall be no less than 1.50% per annum, or (b) in the case of LIBOR borrowings, a rate equal to the LIBOR for the interest period relevant to such borrowing subject to a 0.00% floor. The applicable margin for borrowings under the Credit Agreement ranges from -0.50% to 0.00% per annum with Royal Bankrespect to base rate borrowings and from 1.25% to 1.75% per annum with respect to LIBOR borrowings, in each case based upon the achievement of Canada, as Administrative Agent and Collateral Agent, andspecified levels of the lenders party thereto.Fixed Charge Coverage Ratio. The credit facility provides capacityCredit Agreement also requires the Borrowers to pay a commitment fee for the unused portion of $75.0 million (including up to $10.0 million for letters of credit) and matures on August 30, 2018.  The facility also contains an option permitting the Borrower, subject to certain requirements and conditions, to arrange with the lenders for additional incremental commitments up to an aggregate of $25.0 million, subject to reductions in the event the Borrower has certain indebtedness outstanding. At October 28, 2017, no borrowings were outstanding under the revolving credit facility.facility of 0.20% per annum.

The credit facility contains customary eventsIn connection with the Credit Agreement, the Company incurred $0.5 million of default and requiresdebt issuance costs during the Borrower to comply with certain financial covenants. As of October 28, 2017,twenty-six weeks ended August 4, 2018, which is being amortized over the Borrower was in compliance with all covenants under the credit facility. The credit facility restricts the amount of dividends the Borrower can pay; provided that the Borrower is permitted to pay dividends to the extent it has available capacity in its available investment basket (as defined in the Second Amended and Restated Credit Agreement), no default or event of default is continuing, certain procedural requirements have been satisfied and the Borrower is in pro forma compliance with a maximum secured leverage ratio. At October 28, 2017, the Borrower would have met the conditions for paying dividends outterm of the available investment basket. All obligations under the credit facility are secured by substantially all the assets of the Borrower and any subsidiary guarantor, if any. All obligations under the facility are unconditionally guaranteed, subject to certain exceptions, by Francesca’s LLC and each of the Borrower’s existing and future direct and indirect wholly-owned domestic subsidiaries.facility.

Stock-based compensation cost is measured at the grant date fair value and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant).period. The Company recognized a net reversal of stock-based compensation totaling $0.3 million in the thirteen weeks ended October 28, 2017 and $2.1$0.7 million of stock-based compensation expense in the thirty-ninethirteen and twenty-six weeks ended October 28, 2017. Stock-basedAugust 4, 2018, respectively, and $1.2 million and $2.4 million of stock-based compensation expense in the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 29, 2016 totaled $0.9 million and less than $0.1 million,2017, respectively.

Restricted StockManagement Awards

During the thirty-ninetwenty-six weeks ended October 28,August 4, 2018 and July 29, 2017, the Company granted 0.9 million and 0.3 million shares of restricted stock, respectively, to certain executives and key employees.  OfFor the fiscal 2018 award, 50% of the total shares awarded 65% waswere in the form of performance-based restricted shares (“PSA”) while the remaining 35% was50% were in the form of time-based restricted shares (“RSA”). DuringFor the thirty-nine weeks ended October 29, 2016,fiscal 2017 award, 65% of the Company granted approximately 0.4 million targettotal shares awarded were in the form of PSAs to certain executives and key employees.while the remaining 35% were in the form of RSAs.The number of PSAs that may ultimately vest will equal 0% to 150% of the target shares awarded subject to the achievement of pre-established performance goals and the employee’s continued employment through the third anniversary of the awardgrant date. The RSAs vest in one installment on the third anniversary of the award date. At October 28, 2017,the end of each reporting period, the Company assessed the probability of achieving the pre-established performance conditions related to the PSAs and determined that the achievement of the required performance conditions is not probable. As a result, the Company reversed $0.9 million of previously recognized stock-based compensation during the thirteen weeks ended October 28, 2017.

Forfeited Awards

In May 2016, Mr. Michael Barnes resigned from his positions as Chairman, President and Chief Executive Officer of the Company.PSAs. As a result of such resignation, 1.3assessment, the Company recorded a reversal of previously accrued expense totaling $0.5 million of then-outstanding and unvested stock-based awards previously granted to him were forfeited. Previously accrued stock-based compensation totaling $2.6$0.9 million was reversed in connection with such forfeiture during the thirty-ninethirteen and twenty-six weeks ended OctoberAugust 4, 2018, respectively, and $0.2 million in each of the thirteen and twenty six weeks ended July 29, 2016.2017.

On September 3, 2013,March 15, 2016, the Company’s Board of Directors authorized a $100.0 million share repurchase program (“Previous Repurchase Plan”) commencing on the same date.  In April 2016, the authorized amount was fully exhausted.

On March 15, 2016, the Company’s Board of Directors authorized an additional $100.0 million share repurchase program (“New Repurchase Plan”) which commenced upon exhaustion of the Previous Repurchase Plan.in April 2016. The New Repurchase Plan has no expiration date. Under the New Repurchase Plan, purchases can be made from time to time in the open market, in privately negotiated transactions, under Rule 10b5-1 plans or through other available means. The specific timing and amount of the repurchases is dependent on market conditions, securities law limitations and other factors.

The following table summarizes the Company’s repurchase activity for the periods presented. The cost of repurchased shares is presented as treasury stock in the unaudited consolidated balance sheets.

At August 4, 2018, there was $40.2 million remaining balance available for future purchases under the Repurchase Plan.

Francesca’s Holdings Corporation

Notes to Unaudited Consolidated Financial Statements

At October 28, 2017, there was $45.2 million remaining balance available for future purchases under the New Repurchase Plan.

Operating Leases

The Company leases boutique space, and office space and its distribution center under operating leases expiring in various years through the fiscal year ending 2028.2029. Certain of the leases provide that the Company may cancel the lease, with penalties as defined in the lease, if the Company’s boutique sales at that location fall below an established level. Certain leases provide for additional rent payments to be made when sales exceed a base amount. Certain operating leases provide for renewal options for periods from three to five years at their fair rental value at the time of renewal.

Minimum future rental payments under non-cancellable operating leases as of October 28, 2017,August 4, 2018, are as follows:

Legal Proceedings

On January 27, 2017, a purported collective action lawsuit entitled Meghan Magee, et al. v. Francesca’s Holdings Corp., et al. was filed in New Jersey Federal District Court against the Company for alleged violations of federal and state wage and hour laws. The Company believes that the allegations contained in the lawsuit are without merit and intends to vigorously defend itself against all claims asserted therein. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time and, as such, the Company has not recorded an accrual for any possible loss.

The Company, from time to time, is subject to various claims and legal proceedings, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial disputes and other matters that arise in the ordinary course of business.  While the outcome of any such claim cannot be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse effect on the Company’s business, results of operations or financial condition. 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements concern 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 report 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. These risks and uncertainties include, but are not limited to, the following: the risk that we cannot anticipate, identify and respond quickly to changing fashion trends and customer preferences or changes in consumer environment, including changing expectations of service and experience in boutiques and online, and evolve our business model; our ability to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise through our ecommerce business; our ability to successfully open, refresh and operate new boutiques each year; our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth; and our ability to integrate ourimpact of potential tariff increases and new Chief Merchant.tariffs. For additional information regarding these and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward looking statements, please refer to “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017February 3, 2018 and filed with the Securities and Exchange Commission (“SEC”) on March 22, 201728, 2018 (“Fiscal Year 20162017 10-K”) and any risk factors contained in subsequent Quarterly Reports on Form 10-Q or other filings we file with the SEC, as well as our disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our Fiscal Year 20162017 10-K.

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. 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 report 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 report 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 report. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly after the date of this report whether as a result of new information, future developments or otherwise.

Overview

Unless the context otherwise requires, the “Company,” “we,” “our,” “ours,” “us” and “francesca’s®” refer to Francesca’s Holdings Corporation and its consolidated subsidiaries.

francesca’s^® is a growing specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized shopping experience. The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts. As of October 28, 2017,August 4, 2018, francesca’s^® operated 714742 boutiques in 47 states and the District of Columbia and also served its customers through www.francescas.com, our ecommerce website. The information contained on our ecommerce website is not incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information contained on our ecommerce website to be part of this Quarterly Report on Form 10-Q.

During the thirteen weeks ended August 4, 2018, our net sales decreased 6% to $113.0 million from $119.7 million, income from operations decreased by $11.0 million from $11.8 million to $0.8 million, and net income decreased $6.8 million from $7.3 million to $0.5 million, over the comparable prior year quarter. Diluted earnings per share for the thirteen weeks ended August 4, 2018 was $0.01, based on 35.0 million weighted average diluted shares outstanding, compared to diluted earnings per share of $0.20, based on 36.5 million weighted average diluted shares outstanding, in the thirteen weeks ended July 29, 2017.

During the thirteentwenty-six weeks ended October 28, 2017,August 4, 2018, our net sales decreased 11%6% to $105.8$213.4 million from $119.5$227.4 million, income from operations decreased by 97% to $0.5$22.8 million from $15.8income from operations of $19.1 million to a loss from operations of $3.7 million, and net income decreased 98%$15.0 million from net income of $11.6 million to $0.2 million, or $0.01a net loss of $3.4 million. Diluted loss per diluted share for the twenty-six weeks ended August 4, 2018 was $0.10, based on 36.034.8 million weighted average diluted shares outstanding, from $9.7 million, or $0.26compared to diluted earnings per diluted share of $0.32, based on 37.736.8 million weighted average diluted shares outstanding, over the comparable prior year period. During the thirty-nine weeks ended October 28, 2017, our net sales decreased 2% to $333.2 million from $340.8 million, income from operations decreased by 56% to $19.6 million from $44.3 million and net income decreased 57% to $11.8 million, or $0.32 per diluted share based on 36.5 million weighted average diluted shares outstanding, from $27.4 million, or $0.70 per diluted share based on 38.9 million weighted average diluted shares outstanding, over the comparable prior year period.outstanding.

We increased our boutique count to 714742 boutiques as of October 28, 2017August 4, 2018 from 669692 boutiques as of OctoberJuly 29, 2016.2017. Additionally, we remodeled 45 and 14 boutiques in the twenty-six weeks ended August 4, 2018 and July 29, 2017, respectively. We plan to open approximately ninethree boutiques, close 14 boutiques and refresh 35 to 40 boutiques during the remainder of the fiscal year.

As previously reported, Ms. Laurie Hummel departed from her positions as Executive Vice President and Chief Merchandising Officer of the Company in August 2017. In November 2017, Ms. Ivy R. Spargo was appointed as Senior Vice President, Chief Merchandising Officer effective as of November 27, 2017.

In August 2017, Hurricane Harvey hit south Texas and Louisiana and, in September 2017, Hurricane Irma hit Florida causing widespread damage to property and infrastructure within these regions. These natural disasters negatively impacted our net sales for our boutiques located in these areas. However, the supply chain disruption we experienced at our corporate offices located in Houston, Texas was more impactful on net sales for all of our boutiques. Our corporate offices were shut down for a few days and deliveries were disrupted for several weeks. As a result, we were not able to receive merchandise at our distribution center, fulfill ecommerce orders or ship fresh merchandise to our boutiques. Because our operating model relies heavily on fresh merchandise, this disruption impacted net sales for the remainder of the quarter. There were no other material losses incurred from these hurricanes.year 2018.

We are in the process of deploying a new technology suite of systemstechnologies to enhance our omni-channel and customer engagement capabilities as part of our long-term strategic plan. This includes replacingIn fiscal year 2017, we completed our legacy point-of-sale system replacement and introductionthe implementation of a new order management system and a new customer relationship management system. AsWe started the implementation of the end of October 2017, we have completed the roll-out of oura new point-of-salewarehouse management system for ecommerce and customer relationship management systems. We expect that thesesuch implementation will be completed in fiscal year 2018. This new systemssystem will enhance our visibility into our customers’ preferences, products and supply chain resultingwhich we expect will result in improved customer service, improved operational efficiency, enhanced management analytics and increased inventory synergies between our ecommerce and our boutique channels.

Results of Operations

The following represents operating data for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017August 4, 2018 and OctoberJuly 29, 2016.2017.

Boutique Count

The following table summarizes the number of boutiques open at the beginning and end of the periods and the number of boutiques remodeled for the periods indicated.

Thirteen Weeks Ended October 28, 2017August 4, 2018 Compared to Thirteen Weeks Ended OctoberJuly 29, 20162017

Net Sales

Net sales decreased 11%6% to $105.8$113.0 million in the thirteen weeks ended October 28, 2017August 4, 2018 from $119.5$119.7 million in the thirteen weeks ended OctoberJuly 29, 2016.2017 due to a 13% decrease in comparable sales. This follows a 3% decrease in comparable sales for the same prior year quarter. The decrease in comparable sales was primarily due to an 18% decrease in comparable sales compared to a 7% increase in the comparable prior year period. Comparable sales decreased primarily due to a decline in boutique traffic and conversion rates as our back-to-school assortment did not resonate with our guests. Additionally, Hurricanes Harvey and Irma adversely impacted comparable sales by approximately 425 basis points, mostly as a result ofrate, although conversion has sequentially improved from month-to-month during the supply chain disruption we experienced at our corporate offices located in Houston, Texas.quarter. These decreases were partially offset by 4550 net new boutiques openedadded since the comparable prior year period and $1.5 million of additional gift card breakage income recognized during the current quarter as a result of a change in the estimated period over which redemption of gift cards is considered remote.quarter. There were 640663 comparable boutiques and 7479 non-comparable boutiques open at October 28, 2017August 4, 2018 compared to 596622 and 73,70, respectively, at OctoberJuly 29, 2016.2017.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs increased 3%7% to $63.9$68.9 million in the thirteen weeks ended October 28, 2017August 4, 2018 from $61.8$64.3 million in the thirteen weeks ended OctoberJuly 29, 2016.2017. Cost of merchandise and shippingfreight expenses decreasedincreased by $0.4$1.3 million compared to the same period of the prior year primarily due to increased markdowns and marked-out-of-stock charges as a decreaseresult of our in-season clearance strategy and in sales volume.order to transition the boutiques to the new merchandising direction. Occupancy costs increased by $2.5$3.3 million due to the increase in the number of boutiques in operation, during the thirteen weeks ended October 28, 2017 compared to the same periodhigher rent and related expenses driven by increased penetration of the prior year.boutiques in high traffic centers and higher depreciation as a result of increased costs of opening new boutiques and remodeling existing boutiques.

As a percentage of net sales, cost of goods sold and occupancy costs increased to 60.4%61.0% in the thirteen weeks ended October 28, 2017August 4, 2018 from 51.8%53.7% in the thirteen weeks ended OctoberJuly 29, 2016,2017, an unfavorable variance of 860730 basis points. This change was due primarily to a decrease indriven by lower merchandise margin and higher occupancy costs. Merchandise margins decreased due to higher markdowns and marked-out-of-stock charges while the higher occupancy costs was due to higher rent and related expenses as well as depreciation. Additionally, occupancy costs deleveraged significantly versus last year as a result of increased markdowns in order to sell-through our back-to-school assortment, as well as deleveraging of occupancy costs.

lower sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 1% to $41.4$43.3 million in the thirteen weeks ended October 28, 2017August 4, 2018 from $41.9$43.6 million in the thirteen weeks ended OctoberJuly 29, 2016.2017. This decrease was primarily due to a $4.2$1.6 million decrease inof lower short- and long-term performance-based incentive expenses as the achievementa result of the required performance metrics is not probable given our current financial results. This decrease waslower expected payouts partially offset by a $2.5increases of $0.9 million increase in corporate payroll and boutique payroll$0.3 million in marketing expenses to support the larger boutique base and infrastructure investments, $0.4 million increase in marketing, and a $0.4 million increase in software and professional fees associated with our continuing investments inecommerce operations as well as infrastructure and technology.strategic investments.

As a percentage of net sales, selling, general and administrative expense increased to 39.1%38.3% in the thirteen weeks ended October 28, 2017August 4, 2018 as compared to 35.0%36.4% in the thirteen weeks ended OctoberJuly 29, 20162017 primarily due to deleveraging of expenses as a result of lower sales.

Income Tax Expense

The decrease in provision for income taxes of $5.8$4.2 million in the thirteen weeks ended October 28, 2017August 4, 2018 compared to the thirteen weeks ended OctoberJuly 29, 20162017 was primarily due to the decrease in pre-tax income. The effective tax rates were 45.0% and 38.3%rate in the thirteen weeks ended October 28, 2017 and OctoberAugust 4, 2018 increased to 44.6% from 38.7% in the thirteen weeks ended July 29, 2016, respectively.2017. The increasechange in the effective tax rate versus the comparable prior year period and the statutory federal corporate tax rate under the Tax Cuts and Jobs Act (“Tax Act”) enacted in December 2017 was primarily due to additional tax expense recognized related to the income tax effectvesting of exercised or vestedcertain stock-based awards recognizedawards.

We did not record any adjustment to our estimates at the end of fiscal year 2017 as a result of the enactment of the Tax Act. As we continue to refine and update our analysis of the Tax Act and interpret any additional guidance, we may make adjustments to the amounts previously recorded. Any such adjustment will be reflected in income tax expense.expense or benefit in fiscal year 2018.

Thirty-NineTwenty-Six Weeks Ended October 28, 2017August 4, 2018 Compared to Thirty-NineTwenty-Six Weeks Ended OctoberJuly 29, 20162017

Net Sales

Net sales decreased 2%6% to $333.2$213.4 million in the thirty-ninetwenty-six weeks ended October 28, 2017August 4, 2018 from $340.8$227.4 million in the thirty-ninetwenty-six weeks ended OctoberJuly 29, 2016. This decrease was2017 due to a 9%15% decrease in comparable sales. This follows a 4% decrease in comparable sales compared to a 3% increase infor the comparablesame prior year period. ComparableThe decrease in comparable sales decreasedwas primarily due to a decline in boutique traffic and conversion rates, particularly in the thirteen weeks ended October 28, 2017, as our assortment did not resonate with our guests. Additionally, Hurricanes Harvey and Irma adversely impacted comparable sales by approximately 150 basis points, mostly as a result of the supply chain disruption we experienced at our corporate offices located in Houston, Texas. This decrease wasrate. These decreases were partially offset by 4550 net new boutiques openedadded since the comparable prior year period. There were 640663 comparable boutiques and 7479 non-comparable boutiques open at October 28, 2017August 4, 2018 compared to 596622 and 73,70, respectively, at OctoberJuly 29, 2016.2017.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs increased 4%6% to $187.2$131.0 million in the thirty-ninetwenty-six weeks ended October 28, 2017August 4, 2018 from $180.1$123.3 million in the thirty-ninetwenty-six weeks ended OctoberJuly 29, 2016.2017. Cost of merchandise and shippingfreight expenses increased by $1.5$0.9 million compared to the same period lastof the prior year primarily due to an increaseincreased markdowns and marked-out-of-stock charges as a result of our in-season clearance strategy and in ecommerce shipping costs.order to transition the boutiques in to the new merchandising direction. Occupancy costs increased by $5.6$6.7 million due to the increase in the number of boutiques in operation, during the thirty-nine weeks ended October 28, 2017 compared to the same periodhigher rent and related expenses driven by increased penetration of the prior year.boutiques in high traffic centers and higher depreciation as a result of increased costs of opening new boutiques and remodeling existing boutiques.

As a percentage of net sales, cost of goods sold and occupancy costs increased to 56.2%61.4% in the thirty-ninetwenty-six weeks ended October 28, 2017August 4, 2018 from 52.9%54.2% in the thirty-ninetwenty-six weeks ended OctoberJuly 29, 2016,2017, an unfavorable variance of 330710 basis points. This change was driven by lower merchandise margin and higher occupancy costs. Merchandise margins decreased due to a decrease in merchandise margin,higher markdowns and marked-out-of-stock charges while the higher occupancy costs was due to higher rent and related expenses as well as depreciation. Additionally, occupancy costs deleveraged significantly versus last year as a result of increased markdowns, as well as deleveraging of occupancy costs.lower sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 9%1% to $126.3$86.2 million in the thirty-ninetwenty-six weeks ended October 28, 2017August 4, 2018 from $116.4$84.9 million in the thirty-ninetwenty-six weeks ended OctoberJuly 29, 2016.2017. This variance was due to a $6.3increases of $2.1 million increasein boutique and corporate payroll and related expenses, $0.5 million in boutique supplies, $0.3 million in marketing, and $0.3 million in corporate and boutique payrolldepreciation, all of which were to support ourthe larger boutique base and ecommerce operations as well as infrastructure investments, $2.1 million increase in software and professional fees associated with our continuing investments in technology and infrastructure, $1.5 million increase in marketing expense and a $2.0 million prior year net benefit associated with the resignation of our prior Chief Executive Officer (“CEO”) and the related search process.strategic investments. These increases were partially offset by a $4.4$2.5 million decrease in short- and long-term performance-based incentive expenses as the achievementa result of the required performance metrics is not probable given our current financial results.lower expected payouts.

As a percentage of net sales, selling, general and administrative expense increased to 37.9%40.4% in the thirty-ninetwenty-six weeks ended October 28, 2017August 4, 2018 as compared to 34.1%37.4% in the thirty-ninetwenty-six weeks ended OctoberJuly 29, 20162017 primarily due to the prior year net benefit associated with the resignation of our CEO as well as deleveraging of expenses as a result of lower sales.

Income Tax (Benefit) Expense

The decrease in provision for income taxes of $9.0$7.8 million in the thirty-ninetwenty-six weeks ended October 28, 2017August 4, 2018 compared to the thirty-ninetwenty-six weeks ended OctoberJuly 29, 20162017 was primarily due to the decrease in pre-tax income. The effective tax rates were 39.5% and 38.0%rate in the thirty-ninetwenty-six weeks ended October 28,August 4, 2018 decreased to 6.4% from 39.3% in the twenty-six weeks ended July 29, 2017. The change in the effective tax rate versus the comparable prior year period and the statutory federal corporate tax rate under the Tax Cuts and Jobs Act (“Tax Act”) enacted in December 2017 was primarily due to additional tax expense recognized related to the vesting of certain stock-based awards.

We did not record any adjustment to our estimates at the end of fiscal year 2017 as a result of the enactment of the Tax Act. As we continue to refine and October 29, 2016, respectively.update our analysis of the Tax Act and interpret any additional guidance, we may make adjustments to the amounts previously recorded. Any such adjustment will be reflected in income tax expense or benefit in fiscal year 2018.

Sales by Merchandise Department