French Connection Share Discussion Threads

[bamboo2] 28/9/2013 12:48

El Chup - filtered

[bamboo2] 27/9/2013 23:59

French Connection Group Rating Reiterated by Cantor Fitzgerald (FCCN)

Posted by Zach Kirkland on Sep 27th, 2013 // No Comments


French Connection Group logoFrench Connection Group (LON:FCCN)'s stock had its "hold" rating reaffirmed by equities research analysts at Cantor Fitzgerald in a research note issued to investors on Friday, AnalystRatings.Net reports.

French Connection Group (LON:FCCN) traded down 3.27% on Friday, hitting GBX 31.6799. The stock had a trading volume of 181,324 shares. French Connection Group has a 1-year low of GBX 22.75 and a 1-year high of GBX 34.899. The stock's 50-day moving average is GBX 31.33 and its 200-day moving average is GBX 29.61. The company's market cap is £30.2 million.

Separately, analysts at Numis Securities Ltd upgraded shares of French Connection Group (LON:FCCN) from a "hold" rating to an "add" rating in a research note to investors on Monday, September 16th. They now have a GBX 38 ($0.61) price target on the stock.

hxxp://www.wkrb13.com/markets/212885/french-connection-group-rating-reiterated-by-cantor-fitzgerald-fccn/

[bamboo2] 23/9/2013 14:05

I bought some great fccn clothes earlier this year and looked to buy more of the same styles in the sale, but they've all sold out. I take this as a positive.

[old tyke] 19/9/2013 11:46

I'm broadly with PP on this one, as he knows. There is also an outside chance that some retail heavyweight will see the potential in FC and try talk some sense into that overweight, past his sell by date, idiot, Marks, and persuade him to sell his stake.

[paulypilot] 19/9/2013 01:33

Simon,

I'm fully aware of how the leases work, having been an FD in the sector.
I recall FCCN telling us at an investor meeting that their leases had an average expiry of about 7 years, so that should be down to about 5 years now. So if they can keep trading (which they can, as they have plenty of cash still), then at lease expiry you just hand the unit back, with at worst a schedule of dilapidations to put things back to how they were when you took on the lease. Usually that is minimal expenditure, in my experience of lease expiries.

So this should not actually be an insurmountable issue. I think you lot are getting your knickers in a twist because you lost money on the shares in the past, to be blunt.

At £30m market cap, there's a good opportunity for them to POSSIBLY turn around the business, and give a nice multi-bagger. May not happen of course, we'll just have to wait & see. But risk/reward is still the right way around in my view (JUST!), at £30m market cap. However, I reserve the right to change my mind if trading does not improve in the next 12 months, and will have no qualms about dumping the stock & moving on if no proper trading recovery is in view inside 12 months.

The cash pile basically gives me a free call option on the turnaround, that is the ONLY reason I am currently in this stock.

Cheers, Paul.

[simon42] 18/9/2013 19:34

PP- £100m for not significant (comparatively speaking) license rev of a collapsed brand off its best remains bonkers. I would have thought you'd see that to be the case. You make getting out of leases sound fairly simple or a natural quick process but you know better than that with your retail background. I suspect as you were an accountant and finance dir. dealing with landlords was a fairly big part of your job and not product at all. The landlords are hard nosed and want their money as you know and won't negotiate on rent or exit until FCCN has worked it's way through its cash. The retail disaster may improve as some stores close but it is going to run and run unfortunately. A shame really as it must be a huge distraction away from product and brand development for Marks/FCCN and really demoralise the team.

[paulypilot] 18/9/2013 11:31

Hi CR,

Fair point - I agree that the licensing revenues won't survive forever if the brand becomes increasingly tarnished from tatty shops. I also agree re the stock - FCCN isn't good enough at the price points they charge.

However, it IS still a very aspirational brand, and most of their womenswear stock is very good - they've circled back to classic, very stylish designs for dresses, which is what FCCN is best known for.

But getting c. £5-6m p.a. in licensing revenues, plus the profitable overseas operations, plus growing internet sales, means it's a long way from game over for FCCN. I think you're way too gloomy on the brand overall, but I completely agree with you about the desperate state of their UK/Europe retail operation.

Strip that out though, and what's left is good & decently profitable.

Remember that retail leases don't last forever. Most are 15 years at inception, so that means FCCN can gradually wind down their problem retail division over the next 7 years. It's all about survival, stemming the losses, and gradual disposal of problem leases.

Cheers, Paul.

[cockneyrebel] 17/9/2013 22:19

By the way, Licensing revs in H1 2011 were £3m, the £2.6m is down from two years ago.

CR

[cockneyrebel] 17/9/2013 22:15

Not sure a licensing deal keeps up if your presence in the high street is so tarnished imo PP.

Look at Superrdy - stuff is rubbish imo but they have given the youth a shopping experience. Ted Baker, expensive, but every concession I see in a store is full of punters. Take a look at Jacques Vert - they are very expensive but they have found a niche and the clothing looks classy to me, aimed at women of a certain age that have the cash to buy a £180 dress and the bits that go with it.

Unless FCCN become desirable in the high street who's going to buy FCCN sunglasses at a premium? And the longer FCCN take, the more other co' muscle in on their space imo.

Licensing is worth good money if FCCN become a high st star again but if they don't get their act together the licensing starts to fritter away too imo.

CR

[paulypilot] 17/9/2013 20:06

Hi CR,

Mostly good points there, but I do want to come back to you on the Brand. The reason I think FCCN's brand is worth £100m+ is because of the licensing revenues. Remember that is free money that people give to FCCN in return for allowing them to stamp FCCN's name & logo on their products.

You can only generate licensing revenues at all if you have an aspirational brand. FCCN lost the Sears contract, so that is a setback, but other areas of licensing are actually growing. Also they do amazingly well on things like perfumes, spectacles (10,000 pairs of FCCN branded glasses are sold per WEEK!)

So if you look at the recent interims (bearing in mind Feb-Jul is the quiet time of year for fashion retail, apart from Easter, and July anyway) - UK/Europe wholesale made a profit of £1.6m, USA wholesale made £2.5m profit, and "other income", which is the licensing revenues (pure profit) of £2.8m - and remember these are only 6 months figures.

It's all ruined of course by the huge losses in the UK/Europe retail division of £8.2m, and that's just at store contribution level, with another £1.8m in overheads over & above that, plus the Group costs of £2.4m.

The Chinese JV is small, but growing & threw out £0.3m profit too.

So the point is, there are nice bits of the group, which if Retail could be gradually wound down, will leave an aspirational brand, generating nice profits from licensing & wholesale. It's easy to miss that unless you really dig into the constituent parts.

Therefore, I reiterate that the licensing revenues clearly demonstrate that this brand has considerable value. It's ridiculous to compare it to Woolworths!


Other than that, I agree with you that Marks is well past his sell by date, and should just sell the company to a new owner that can revitalise it. I remain of the view though that there is huge potential value in this brand, and to write it off is short-sighted.

Regards, Paul.

[simon42] 17/9/2013 19:06

I think £100m for licensing rights of a collapsed brand is bonkers dream land. The retail side is just so awful and losses may have improved but its still losing a catastrophic sum considering their size. It's dragging them under in a slow drowning. I don't think ithe retail can be fixed. Its too far gone imo. Not to mention the stores being knackered and dated. I thought this time last year FCCN might turn it around but soon dropped that idea after seeing their product and still not impressed by their product today. Price is not an issue if the product is different, commercial and good quality branded product. If fccn get the product right the sales and margin will follow. Price is not an issue for similar but successful retailers like Ted Baker or Super Dry but then both have better instore experiences. Both over priced imo but it works for them. FCCN should steal designers and/or directors from Ted Baker. It is a question of risk reward to invest here but what are the ratios? Is FCCN 80% or 90% likely to fail with the retail eating away like an aggressive cancer. In which case not good odds. And if it succeeds will it only be marginally profitable and much, much smaller? So not this slingshot north for the share price for a very long time. If it is to generate big or growing profits there needs to be a really drastic change and I just can't see it on the horizon right now but who really knows. I'm watching with interest from a safe distance.

[el chupacabra] 17/9/2013 18:37

so their cash position went up cus they made 1m on currency hedges then?

lol at least they got the fx market right :)

[el chupacabra] 17/9/2013 18:11

so how did they manage to have 22m in cash, still no debt and yet make a loss of -6m? im confused! :(

[cockneyrebel] 17/9/2013 17:58

PP. Some good points.

One issue I would take is that they are likely to make a profit in H2. I know seasonally in the past that has been the case and would be the case in normal circumstances. But last year when they lost £6m in H1 they made a hefty loss in H2. I see no reason why they won't make a loss in H2 again - last years reasons etc are all well and good but FCCN have a good way of shifting long term ongoing losses into 'one offs' imo. They are going to continue to have costs fro closing stores, redundancy costs, fees etc so they constantly fritter cash.

£100m for the brand/licensing/wholesale? The brand is worth jack today - what was HMV or Woolworth's ? Who would want it other than out of admin when they could dump all those expensive rents? How many brands like French Con gone bust and never been bought up and become anything? Who wants a high street presence today? Even the malls are closing and losing footfall.


Re THT comparison - the directors have delivered what they said they would and it's totally new management - just what FCCN needs. Also the new board have bought a stack of shares, the New Chairman has 1.3m now and has been buying at this level last week. Most other directors have loaded up and as for the pension deficit I think that's falling and will do moreso as bond yields rise, as it will for many co's imo.

They do have high debt but it's falling under this board and the high debt facility aids with the massive amount of Easter Eggs they have to make and stock ahead of Easter as well as Christmas stock and that's on top of the investment they have been making on new and more efficient production. THT do have a strategy too and it is working - FCCN just don't have a strategy other than wait till the store closers are done and then hope punters like the stock and are prepared to pay a big premium for it.

The classic line of 'we know it's early days in out turnaround' in the trading update says it all, since 2010 and before Marks has been saying they are turning the business around but geeze - if they have profitable stores why haven't they refurbished those with some of the cash they have? The stores are starting to look like something out of a Hammer Horror movie they are that old.

FCCN, not going bust fast but dying a slow painful death like Woolies and HMV imo. I understand your plan and admire you for it but I think if FCCN are ever to recover we'll all get a big advance warning with Marks leaving the day to day business imo.

CR

[stud-muffin] 17/9/2013 17:17

Totally disagree with you Pauly on THT.

They have a huge investment structure within their plant and operation. Carrying debt is not unreasonable. The pension debt can be managed away once they start to get into their stride.

I see THT with eps forecasts ranging towards 12p plus for FY 2015 going to over £1.50 -1.80 before Easter next year. They are in a very solid position and moving toward a premium FMCG company with a high multiple.

FCCN are a gamble, I have reduced yesterday and today. I see these testing 25p again before the real direction of travel is clear. Disappointing but hardly surprising.

[paulypilot] 17/9/2013 12:51

Hi,

Shanklin - fair point. But remember it is fashion, so their performance will only ever be as good as their current season's stock.

CR - thanks for link to article. I agree still LOTS of work to be done on product, need to be more competitive on price, and tired stores. These are not insurmountable issues though, especially when you have cash in the bank.

One thing I can't quite get my head round, is how FCCN UK/Europe retail managed to lose so much money last year, I think it was £16m on about £100m turnover. That is really, really bad. Off the scale bad.

My point is that, based on my experience of serious under-performance in this sector when the retailer I used to be FD of went through a very bad patch, to show figures like FCCN's, then I would say pretty much ALL of their shops must be losing money. Or probably only a handful making a profit. Yet they talk about only 14 shops being ear-marked for closure. It just doesn't seem to stack up in my mind.

I'm keeping a close eye on this one, as I don't want to be holding the shares if trading really collapses. And it hasn't - the latest figures showed things are not getting any worse, indeed a slight improvement in profitability (i.e. smaller losses). But the clock is ticking - I don't think Marks has got much more time to turn it around, maybe 2 years? Then he's going to run out of options & cash, and it will then just be a trade sale.

However, I reckon you could probably sell the brand/licensing/wholesale bit for north of £100m, so these shares could be a very interesting each way bet.
Anyway, we'll see. I think it has to be seen as a special situation, you can't really rationalise this stock in the normal way you would for a struggling retailer.

CR - I know you like THT. Look at how their shares have shot up on a pretty modest trading recovery. And they still have a massive debt pile & pension deficit. So that one illustrates the upside potential if a turnaround takes place, although I think investors have been extremely cavalier with the Bal Sheet risks on THT - in any previous Recession the Banks would have foreclosed on it.

Cheers, Paul.

[cockneyrebel] 17/9/2013 07:52

Worth a read - especially at the end from Neil Saunders - I follow him on Twitter, very balanced and well-versed imo.

CR

[shanklin] 17/9/2013 07:43

Interesting discussion here. Just one thing to add...

...With FCCN, unless commentary is backed up by numbers I think it is safest to assume that its on the optimistic side. At least then you protect yourself against the sort of statements FCCN have made in the past where one minute trading is described in very positive terms and then five minutes later the numbers show its all gone downhill rapidly.

All IMHO of course but, for example, an encouraging reaction from wholesalers is completely meaningless unless it translates into sales.

[paulypilot] 17/9/2013 00:56

Hi CR,

As mentioned on Twitter, I just looked at the usual seasonality of FCCN over several years, and the fact is that H1 is less profitable than H2. That is the seasonality of womenswear - when I was FD at Pilot, we had the same y/end as FCCN (31 Jan), and saw the same seasonality, so it's not something I imagined!

If you look at last year, FCCN made a £6.6m operating loss in H1, and a £2.5m operating loss in H2, which was a particularly bad H2 result. I think the figures you mention incorporate a lot of additional provisions, but I'm only interested in the true underlying operating results.

So, given that H1 this year is a tiny bit improved from last year, and that the A/W order book is better, then a result not far from breakeven for H2 is perfectly likely.


We all know that FCCN is a bit of a crock, and has lots of problems, but it also has a bulletproof Balance Sheet, and still has plenty of time to fix the issues. Who knows whether that will happen or not? The jury is out. But at £30m market cap, which is well under its own net working capital, I think it's a reasonable punt on a risk/reward basis.

This brand is still VERY valuable. That is why they can make wholesale & overseas work, plus they rake in millions every year from just licensing the brand to other people to stick onto other products. You can only do that if the brand is coveted by consumers. My 16 y-old niece had a FCCN purse, and I asked her about it - very aspirational brand to her & her mates, as it turns out.

It ain't over yet, so still worth a punt at £30m in my view. I'll give it another 12 months, and then move on if no discernible improvement in trading. This is definitely NOT one to hang onto forever - it's just a risk/reward punt on a turnaround, that could multi-bag.

Cheers, Paul.

[cockneyrebel] 16/9/2013 20:04

I'm not sure where PP gets "H2 usually around breakeven ". FCCN lost nearly as much in H2 as they lost in H1 last year.

It's all very well having a bit of cash but that disappears as Christmas approaches as cashflow pours out - it's not cash they can use without incurring debt or a large overdraft as xmas approaches meaning greater costs.

What they need is a plan and that plan needs to bet to sell online a lot more but they can't get out of the long leases they have. When they had loads of cash several years ago, like the (£47m they had in 2008) they should have just paid a ransom to get out of the badly loss-making stores and taken the hit. The losses these stores have made since would have covered getting out of those leases imo.

Marks just doesn't have a plan other than to lose as little as he can for the next 3 years until they get out of the leases. If you've got 3 years to have your money dead then that might be ok, personally I'd be out and wait to buy back when they warn or the results miss and take the price down and put that money to use elsewhere while the mkt is decent, imo. Who knows, in 3 years time when they can get out of these leases we might be in another recession.

All imo.

CR

[amorruso] 16/9/2013 19:07

The point here is that the valuation is already reflecting the poor trading record.

But the most crucial thing is that the there is no debt and the cash pile has actually risen so the valuation is only a fraction of the working capital..

With trading even just slightly improving it could well result in a fairly large uplift in the shares.