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Published
Mar 14, 2017
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French Connection sees another loss, CEO talks of progress but investor calls for break-up

Published
Mar 14, 2017

French Connection had some surprisingly good news on Tuesday morning. It may not have been enough, but even a little good news is something to cling to when you report yet another consecutive year of annual losses. And whether it will be enough to soothe the concerns of activist investors is unknown.


French Connection has endured almost a decade of losses - DR


For now, one of them, Gatemore Capital Management, which has an 8% holding, said the company needed to be broken up with its various parts adding up to “around two to three times greater than the whole”. As well as French Connection, the retailer also owns Toast, Great Plains and YMC.

So what were the results that upset Gatemore so much and what exactly was the good news? The fashion retailer said it saw an improved trading performance in the year to January 31, and UK and Europe comparable sales were up 4.4% with a third consecutive season of full-price growth for AW16 “despite a challenging trading environment in H2”.

E-tail sales rose 12.7% to represent a strong 27.3% of retail revenue and mobile continues to be a growing proportion of its online activity, generating 39.7% of traffic, up from 32.7% last year.

And it had a closing cash position of £13.5m, down slightly from the prior year’s £14m. That cash position is even more important than for its sector peers given that activist investors have said they are concerned that it could run out of cash.

NOW FOR THE BAD NEWS

So far so good. But the good news quickly came to an end and the company followed all that up with the core story - and that meant bad news.

Group revenues were down 6.7% to £153.2m, overall retail revenue was down 4.9% to £87.9m, and wholesale revenue dropped 9.1% to £65.3m (or 14.7% at constant currency), although wholesale “improved” in H2.

And the big headline figure? The underlying operating loss was £3.7m - not a figure to shout about, but better than the £4.7m seen a year earlier.

Yet even the bad news had some encouraging elements in it. Gross margins reduced during the year to 56.8% from 57.3% reflecting the higher proportion of sales through outlet stores as full-price stores were closed. But the full-price margin achieved in its stores increased. This “reflected the improved full-price trading, reduced discount periods and an increase in the input margin for the winter season.”

On the wholesale front, the company said sales in North America increased in H2 and led to “greatly improved sell-through of the product”, even though timing of deliveries depressed the figures in the UK and Europe.

And it said that although licence income for the year was “adversely impacted by the change in our global perfume licensee and the bankruptcy of our shoe licensee,” it believes “that there is considerable opportunity for growth in both these areas moving forward.”

In fact, the company has recently signed an underwear licence for North America and is in negotiations in a number of other product categories which it said should enhance its current portfolio.

STORE CLOSURES

As is clear from all this, the store closure programme at the chain has been a key feature of the last 12 months. The company closed nine underperforming stores last year (seven in UK/Europe and two in North America). It has already closed another two since the new financial year started with another six due to be shuttered in the months ahead. That adds up to its net retail space in the UK and Europe being cut by almost half.

While that may be denting overall sales, it is clearly helping comparable sales to improve, with that 4.4% comps increase in the latest year being a stark contrast to the 6.4% fall of a year earlier.

So where does all this leave the firm? Well, on Tuesday it said that it has seen a “strong performance in the first six weeks of the new financial year for the spring 17 range and chairman/CEO Stephen Marks talked up “an improvement in performance over the financial year with continued good progress in the UK/Europe retail business.”

He added that “the noticeable improvement we have seen during the second half and into the new financial year leads me to believe that we are moving in the right direction. The reaction to this year's collections has been very strong so far with sales both in our stores and wholesale customers up on last year.”

But however upbeat he was, he could not disguise the extent of the problems at the retailer and also referred to the more sluggish wholesale and licensing divisions that caused problems in H1 last year, as well as admitting that “we have a considerable amount of work to do to take the group back to profitability.”

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