French Connection sees wholesale strength but sales still fall

French Connection company results are always closely watched given the problems the company has had in recent periods. And when its interim results, the six months to July 31 are headlined “continue to make progress”, you know that means they're not going to be spectacularly good.

And that was certainly the case with declines on some key measures such as falling group revenue, like-for-like sales, and the composite margin.

But at least the firm’s underlying pre-tax operating loss narrowed slightly and the company seems to think that it's heading in the right direction.

So let's look at those numbers in detail. Group revenues dropped 2.4% to £58.1 million, although the constant currency fall was only 0.8%. Its wholesale revenues rose 6.2%, or 8.9% constant currency, helping to offset weakness elsewhere.

Its reduced store portfolio and tough retail trading in the UK were the overriding feature of the results statement as the company saw a 7% decline in like-for-like sales in the UK/Europe. Overall retail revenue decreased by 10.5% to £27.3 million and even e-commerce revenue “reduced slightly”. Licensing income was flat on last year at £2.6 million.

And while wholesale was strong, that fact also helped to dent the composite gross margin, which dropped to 41.5% from the 42.9% of a year ago as wholesale margins are smaller.

So what did that all mean for the bottom line? The underlying operating loss before tax was reduced to £5.5 million, which was a little better than the £5.9 million loss of a year earlier.

OPTIMISM FOR THE FUTURE

Some of those figures somewhat undermined FC’s view that it's continuing to make progress, given that the loss remains close to the year-ago level and the like-for-like sales decline in the prior H1 was only 4.1%.

But one thing in favour of its upbeat stance is the really big news - that the company said it remains on track to return to profitability by the financial year-end.

Chairman and CEO Stephen Marks said he was pleased with the work done over the last couple of years but admitted that “progress has not been helped by the trading conditions in which we operate in the UK, although we can take great confidence from the performance of the wholesale business and the stability of the licence income.”

What evidence did he put forward to support an imminent return to profitability? He said the company's current order books “provide a clear outlook for the second half of the year in wholesale although retail continues to be challenging.”

So it seems that wholesale is the big hope and that view is perhaps valid given wholesale’s H1 strength in both the UK/Europe and the US.

The company said the increased revenue in wholesale “has been driven particularly by those customers in UK/Europe who have significant online businesses as well as with department stores in the USA, especially Bloomingdales and Nordstrom. We expect this trend to grow in the second half of the year based on our current level of Winter 18 orders.”

On the own-retail front, while the business has been challenged, the company also said that it has benefitted from the reduction in stores seen over the last year. It continues to actively review its retail portfolio and expects eight stores to close this year, with two having already closed in the first half.

And it added: “Given the continued deterioration of trading conditions on the UK high street, we have reviewed the underlying lease contracts of a number of loss-making stores that we are actively looking to exit but are currently unable to, and have made a one-off provision for the onerous nature of those contracts.”

French Connection sees wholesale strength but sales still fall

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