Even in The Pandemic Era, The Fundamentals Still Matter

‘Change’ is not an unfamiliar word in the fashion industry.

But in recent years, it’s been a loaded one—as stores began to shift from brick and mortar to eCommerce. Inherent in this major trend was (and is) a complete reshaping of legacy companies’ operating models, operating efficiencies, inventory management, human capital, and much more. In the pandemic era, the new model (and all its conveniences to boards and customers alike) has taken on an outsized weight.

However, some were more dedicated to the pre-pandemic shift than others. For Francesca’s, a women’s clothing boutique, staying with their brick-and-mortar model was ultimately detrimental to their business. But the signs of deterioration were there—well before COVID-19.

Below, we track the migration (and degradation) of Francesca’s by showing their Financial Health Rating (probability of default) and Core Health Score (the outlook of efficiencies inside the business) over time.


From November 2015 to May 2018, Francesca’s stood in the upper right-hand corner of Quadrant A (green zone)–historically indicative of a very strong company. Meaning, at that time, they demonstrated a sustainable operational efficiency over the medium term combined with a very low level of default risk over a 12-month time horizon. By May of 2018, Francesca’s exhibited a CHS of 71 and an FHR of 85.

Back then, the company was undoubtedly in a solid position, especially when compared to 13 of its US industry peers, who had an average CHS of 62 and average FHR of 77 at May 2018. They also outperformed peers when it came to leverage (0.70 Total Liabilities to Equity compared to 1.3) and better operating efficiency (2.5 Sales to Assets compared to 2.0).

However, by August 2019, significant declines in Francesca’s CHS and FHR—to 24 and 40, respectively—moved it into Quadrant B (yellow zone). While the peer group also experienced declines during this time, the average CHS (53) and FHR (63) kept the peer group in Quadrant A (green zone). Francesca’s leverage had increased seven-fold to 4.9, which put it higher than the peer group average leverage (4.1). From May 2018 to August 2019, Francesca’s Current Ratio, a measure of liquidity, dropped from 2.2 to 0.9, while this peer group dropped from 2.1 to 1.4.

These underlying mechanics only continued to metastasize throughout 2019 and into 2020. Prior to filing for Chapter 11 bankruptcy protection in December 2020, Francesca moved into Quadrant C (red zone) in November 2019, with a CHS and FHR of 24 and 27, respectively. However, by November 2019, the peer group was still in Quadrant A (green zone), with average CHS of 53 and FHR of 61.

These significant downward changes served as early warning signs of a business unable to operate efficiently in the current (and preexisting) retail environment, while not bringing in enough cash to meet liabilities. Case in point: Francesca’s Sales to Asset ratio had dropped to 1.1, versus 1.3 for the peer group, and its EBITDA Margin was 0.8% versus 6.3% for the peer group.

Even in the pandemic era, the fundamentals of risk still matter. And they are trackable. For us, that begins with four simple (but often heavy) questions:  

  • What is the risk?
  • How has the risk been changing over time?
  • How does the risk compare to industry peers?
  • Why is the risk what it is?

These act as the basis of all our data, analytics, and dialogues used by our enterprise clients—objectively, beyond the moment, and with context.

Contextually—for Francesca’s—the rise of fast fashion had hit a new watermark in 2018.

People cared more about buying what was on trend in each season (and at a good price) than they did about longer lasting threads at a steeper price point. Francesca’s catered to the latter, making expensive pieces that were still trendy, but not budget-friendly. They also maintained their brick-and-mortar business model, while other companies had a significant online presence. As result, the boutique lost market share as convenience dominated.

In other words: the stage was set—but you’d only know what the actors were doing if you had clear indicators of the decisions that were being made and the underlying mechanics at play (via predictive and objective financial health assessments).

For our clients, significant drops, or degradation among portfolio companies like Francesca’s, trigger alert notifications months and years in advance—giving them time to see changes before their competitors, understand the underlying mechanics of the risk, and mitigate the increasing levels of that risk.

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