Dive Brief:

• Francesca’s on Friday warned that the operational and financial consequences of the COVID-19 pandemic  raise “substantial doubt about our ability to continue as a going concern.” That warning itself violates certain covenants in agreements with its lenders, according to the company’s year-end filing with the Securities and Exchange Commission.

• The “going concern” issue arises from temporary closure of all its boutiques from March 25 to April 30 and the disruptions to its supply chain and operations, according to the filing. Where allowed, some locations have since opened, the company said.

• If the company can’t drum up enough financing to keep operations going or execute on its growth strategy, “we may be required to delay, reduce and/or cease our operations and/or seek bankruptcy protection,” the company also warned.

Dive Insight:

Francesca’s ended the year expressing confidence in its turnaround, but now says that the pandemic has interrupted its momentum.

On Friday, the retailer reported “relatively flat” fourth quarter net sales ($118.9 million versus $119.3 million in 2019) and a 1% rise in store comps. The increase in comparable sales was due to more average units sold per transaction and higher​ conversion rates, but that was offset by traffic declines and markdowns and promotions, the company said in a press release. Three stores closed in the quarter, bringing the total count as of Feb. 1 to 711.     

Also in the quarter, gross profit as a percent of net sales contracted to 34.6% from 39.3% last year, due to “lower merchandise margins as a result of deeper markdowns and promotions during the holiday selling period as well as increased inventory reserves.”

The pandemic, at least temporarily, has forced the closure of many more stores and introduced a high level of uncertainty, both about how and when operations can resume, and what shape the consumer will be in as they do.

Like many retailers, Francesca’s has scrambled to mitigate the impact. The company suspended all capital expenditures; limited investment in e-commerce; reduced the base salaries of senior leadership; and, beginning in April, deferred rent payments at all stores, corporate headquarters and its distribution facility, “subject to discussion with our landlords and other vendors.” Its failure to pay rent — and plans to forgo rent payments in May and June — also violate certain loan covenants, the company said.

As of Feb. 1, Francesca’s had 5,236 employees, 1,159 of them working full time and 4,077 part time, but as of April 15 the company has furloughed “substantially all of our corporate and boutique employees.”

Last month the company also borrowed $5 million under its revolving credit facility with JPMorgan, according to its 10-K filing. The struggling retailer also said it has filed for a $10.7 million income tax refund and employee retention tax credits and has deferred certain payroll taxes as provided by the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act.  The company may be required to use that entire $10.7 million refund to repay certain outstanding debt, per the filing.

The apparel chain faces another problem, as identified by Green Street Advisors last week. The commercial real estate firm warned that the demise of many malls is being accelerated by the pandemic, and that no types of shopping center are spared. More than half of mall-based department stores are likely to shut down permanently, and that will affect in-line tenants like Francesca’s, according to that report.

“[M]any of our boutiques are located in shopping malls and other retail centers that benefit from the ability of ‘anchor’ retail tenants, generally large department centers, and other attractions, to generate sufficient levels of consumer traffic in the vicinity of our boutiques,” Francesca’s said in its filing. “We, along with numerous other retailers, including anchor retail tenants, have announced the closure of a significant number of stores, mainly in mall and anchor store locations.”