French Connection Share Discussion Threads

[stud-muffin] 16/9/2013 18:37

Pauly Pilots opinion as published today on his blog:

Next I've had a quick read of the interim results from French Connection (LON:FCCN). My strategy here is to hold the shares for as long as their Balance Sheet remains strong, and a turnaround looks possible. I had already decided to dump the shares today if trading was reported to have got significantly worse. It hasn't - they look to have stabilised trading, with a slight improvement in losses from last year's H1. The Feb-Jul period is expected to be loss-making, with H2 usually around breakeven or a small profit, so the full year result this year is likely to be c.£5m loss perhaps.

There was a loss of £6.1m in H1, slightly reduced against the same period in 2012 of £6.3m loss. Their big problem is the UK/Europe retail division, which is delivering absolutely terrible results - so bad that it shouldn't really exist - last year (ending 31 Jan 2013) it made an operating loss of £16.0m on turnover of £103.4m. The true figure was nearer to £20m loss, once overheads are included.

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So it is slightly encouraging to see that this division has this time reported slighly reduced losses, of £8.2m in H1 of 2013, against £9.2m in the prior period. That was on like-for-like sales down again, by 4.5%, however half of that fall was due to moving the sale period. Gross margins are a bit better at 55.5% (compared with 54.7% last year H1), suggesting that more stock is being sold at full price, which is good news. Gross margins really should be much higher than that though, more like the mid 60%'s, which suggests to me that FCCN are still getting their product pricing badly wrong - you can clearly see that just by visiting any shop - and see prices that are sky high compared with competitors. So customers hold back on buying, and just wait for the half price sale. Not a very good strategy from the company.

4 under-performing stores have closed, and another 3 are due to close in H2, so that's encouraging. If they can just survive long enough to hand back the leases on expiry to landlords, then eventually FCCN could gradually change into a wholesale & licensing business, which it's actually quite good at. They're hopeless at retail though - a lot of the turnaround actions taken are just retail basics, that should have been done all along. The whole thing reeks of bad management, but that's why the shares are cheap.



So looking at valuation, with 95.9m shares in issue, FCCN is only valued at £30.2m at the current share price of 30.5p. Since it is currently loss-making and not paying a dividend, you cannot value it on a PER or divi yield basis. So the only meaningful way to value it is to estimate what profit it might make if the turnaround succeeds, and then put that on a PER, and/or to think about Balance Sheet NAV, and the value of the brand. Also one should consider what value it might achieve on a disposal via a trade sale. Luxury brands can command huge values, although in this case the founder has a blocking stake of about 42%, so it hinges on what his intentions are.

Net cash has actually risen against last year, due to squeezing stock levels down. There is £22.3m of net cash, and the Balance Sheet remains very strong, with £87.7m in current assets being 209% of the £41.9m current liabilities. Long term liabilities are negligible, at £0.9m. Therefore by my estimates, there is enough fuel in the tank to continue for several more years at the current level of losses, so solvency is not an issue yet.

So with net working capital less all creditors of £44.9m, FCCN is one of the very few companies on the market that is actually valued at less than its own working capital - i.e. there is effectively a negative valuation being put on the business. That seems very extreme to me, especially considering the wholesale & brand licensing parts of the business are profitable, and clearly have value.

So I remain of the view that this could be turned around, and it has bought more time to continue with the turnaround plan. I'm happy to hold, and believe the upside could be considerable if/when a turnaround really gains traction. However, I'm also keeping a close eye on the door, indeed am standing right next to it, in case a rapid exit is needed on any further lurch down in trading performance. The outlook sounds moderately encouraging, with a positive reaction to Winter collections from wholesale customers having increased the wholesale order books. That should be an early indicator of improved retail sales later this year, for their crucial autumn/winter season.

Forget menswear & slogan T-shirts, they are irrelevant. FCCN is all about womenswear, and in particular dresses, which are their main speciality. The current season stock looks very nice to me, but still considerably over-priced. Womenswear is an incredibly competitive market place, and with much cheaper alternatives out there, it's difficult to see where FCCN goes unless they either embrace much lower selling prices, or get out of retail altogether and just become a wholesaler & licensing operation - which in my opinion is the obvious solution to their current woes.

However, from an investor point of view, it remains an interesting situation, with good multi-bagger potential from this very low valuation, if they get things right. Downside risk is contained by a Balance Sheet that remains very strong. However, the clock is ticking, and if the turnaround doesn't happen within the next year, then I'll probably move on.



Edit: Just to clarify, I am NOT saying that FCCN is a great business. It's got serious problems, and if they don't turn things around in the next year or two, then who knows what happens next? They have shop leases that they can't get out of, prices are too high, lots of problems. HOWEVER, at a £30m market cap, I see it as an interesting risk/reward situation as an investor. So I'm not waving a flag for the company, saying how great it is, or in denial about it! It could go either way, and I don't have a strong view on the likely outcome. However to me as an investor, if the odds of them turning it around are say 50:50, then the upside reward is a multi-bagger, to say 120p+ (as indeed happened in 2010-11), whereas the downside risk is down to maybe 20p at which point I throw in the towel & sell. So it's assymetrical risk/reward, skewed in my favour, at the moment. That could change, and if it does, I'll sell up & move on.
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[major clanger] 16/9/2013 15:16

Broker upgrade: Numis - Add from Hold - TP 38p
More here:

[davdreamer] 16/9/2013 12:43

had a sale at tht this week, continentals half price at the stores. Hmmmm they just taste yummy. Pity it had to finish.

[shanklin] 16/9/2013 09:44

bigboyo

AIUI, having spoken with the FD a couple of years ago, the profile of FCCN's lease expirations is such that they cannot exit loss-making stores at all quickly, which is a major drag on the business.

This is in complete contrast to THT where, largely as a matter of complete good fortune, the new'ish CE came into a situation where the leases on many stores were close to expiry which has massively facilitated their turn-around plans, albeit their plans seem much more far-reaching and fundamentals than what is happening here.

[bigboyo] 16/9/2013 09:34

The results are not as good as many anticipated. The better parts are the online sales which now account for 20% af all global retail sales (up from 17%)

In my opinion this is a fantastic figure that bodes very well for the future. The current problem in my opinion are the leases that FC is stuck with and the loss making retail stores. The process of unwinding these onerous leases will be protracted and Mr Marks repeatedly sets 2015 as the inflexion point for the turn from loss to profit.

I wonder what the average length of the retail leases is and when (or if) break clauses can be activated.

Does anyone on this forum know ?

[cockneyrebel] 16/9/2013 09:30

The cash position difference is £1m, that's neither here nor their cyberbubs - a few less stores open, a little less rent/rates to pay and that could account for that.

They have lost pretty much the same in H1 as last year and my bet is, if we do see a continued improvement in the market over Christmas they might do well to lose a couple of million less than last year in H2 - if they lose less than £10m this year they'll have surprised me.

Meanwhile, if you take a walk down the high street, Next, Superdry, Ted Baker and many of the other fashion led stores are increasing space and have fresh looking stores while FCCN are still stuck with their shabby looking stores that should have been updated a decade ago. Once you get this far behind the competition it takes a lot of time, effort, money and creativity to catch up - Marks is just a tired old man that doesn't have it imo.

CR

[mustau] 16/9/2013 08:25

If their outlet in the the designer village is anything to go buy, they have a long way to go. Every other store buzzing, FC, no more than 5 customers.

[cyberbub] 16/9/2013 07:48

Improved cash position, better stock control, loss reduced from last year... those are some positives??I agree not quite as good as I had hoped. These things take time though.Will be interested to see paulypilot's view.

[cockneyrebel] 16/9/2013 07:31

sounds encouraging cyberbub?

They have already lost in H1 a £1m more than they were expected to do for the whole year!

If anyone thinks these are going to make a profit in H2 they are off their rocker - the improvement over last year is predestrian which id why they skipped the trading update.

They lost £10m+ last year, they are heading for much the same and no way gonna do a $5m loss as forecast imo.

Wait for the warning imo.

CR

[shanklin] 16/9/2013 07:26

Well if that's an improvement, I would hate to see what they what a deterioration in trading looks like. I'm struggling to see anything positive in today's RNS.

[amorruso] 15/9/2013 15:46

Would say 80p to 100p

[cyberbub] 15/9/2013 15:32

Sounds encouraging. As I say, if losses are reducing and it looks like a corner has been turned, we could break out from the current range even before profitability returns IMO. Target the 60p resistance maybe?GLA NAI

[amorruso] 15/9/2013 13:28

On the road to recovery expects Numis:

hxxp://money.uk.msn.com/news/debenhams-set-for-sales-rebound

An overhauled summer range is likely to have provided a boost to first half trading at fashion retailer French Connection as the group's revival plans begin to pay off.

The chain, which reports half-year figures on Wednesday, recently revealed "broadly flat" UK and European retail like-for-like sales in the first quarter - a marked recovery from the 7% plunge in the previous financial year.

Analysts are expecting a further pick up in the second quarter thanks to a well received spring/summer selection and in-store changes.

Andrew Wade, retail expert at Numis Securities, said: "French Connection bought more tightly into Spring/Summer 2013 and it ended the period with a cleaner stock position.

"Combined with the improved weather over the summer months, we look for a solid performance through the second quarter."

French Connection slumped to an overall bottom-line loss of £10.5 million in the year to January 31, against profits of £5 million the previous year.

The company, whose brands include Toast and Great Plains, posted losses of £7.2 million when excluding the cost of store closures and other one-off items.

A £16 million loss at its UK and European arm dragged the group into the red and founder and chief executive Stephen Marks called conditions the worst he has known in 40 years of trading.

But he said on posting the figures that there would be a "steady and significant'' improvement in the company's trading performance and a return to profitability by 2015.

He has vowed to manage the business cautiously in order to limit discounting and increase full-price sales.

Other changes have included a revised approach to rostering in order to ensure better staff coverage at peak times and changes to merchandising to enable the quicker re-stocking of best-selling lines.

Mr Wade believes there will be some improvements in the first half, but that the group will remain in the red.

As the turnaround plans gain traction over the remainder of the year, he predicts annual losses will narrow to £5.5 million.

"French Connection remains a strong global brand with a new focus on change and sensible initiatives being implemented," he added.

The company has 74 stores in the UK and Europe, as well as licensed and wholesale operations around the world, including Hong Kong and China.

[dewtrader] 10/9/2013 12:35

bowling up

[cyberbub] 10/9/2013 09:24

Hopefully to put a bit of backbone into the share price here??Looking good so far...

[bamboo2] 10/9/2013 09:21

Chalk and cheese, both good sources of calcium.

[dewtrader] 10/9/2013 08:40

Bowling up

[cyberbub] 10/9/2013 08:16

Yeah probably right :-)

[stud-muffin] 10/9/2013 07:22

Chalk and cheese.

Nothing to discuss.

[cyberbub] 09/9/2013 20:07

Meanwhile, an encouraging reference to the rag trade picking up, from today's BBC...



Yes I know they are at the opposite end of the market to us! But I think you can generally draw some broader conclusions about 'clothes' and 'retail'?

Discuss.

:-)

[stud-muffin] 08/9/2013 10:11

Paul

I hope you are correct, I have reduced here and taken advantage (I hope?) of the recent weakness in Thorntons - but still hold a 100k shares.

I Will wait till I see some direction before buying more - the missing trading statement has not helped here as I for one was expecting it to reflect the recent better sales enviroment.

Hey ho one week Wednesday to wait.

[paulypilot] 08/9/2013 09:45

Hi cyberbub,

Absolutely right, I agree.

The jury is out on whether FCCN can turn things around, but they are clearly trying - there was a lot of stuff in the last report detailing all the personnel changes they have made, new products introduced (e.g. the homewares), etc.

The brand still has considerable strength & value, which is evidenced by the big profits from Licensing, which is all offset by shockingly bad losses on the retail side. But if they can survive long enough to gradually close down the loss-making shops as their leases expire, then that problem should slowly disappear. They've got the Balance Sheet strength to tread water for quite a few years, even if performance doesn't improve.

Looking at their website, the current season womenswear is lovely I think - classically elegant, exactly what it should be. The menswear is, as usual, deathly dull. Both ranges are over-priced, as usual (e.g. £60 fo a cagoule!! £40 for a quilted Gilet [I got one from Primark for a tenner])

Also, they've sensibly gone back to using attractive models, instead of weird-looking ones, which is a positive step.

No idea what will happen, but I think if the odds are in our favour - just one good season, and the shares could be back over a quid, whilst the Bal Sheet protects the downside.

Cheers, PAul.