French Connection has good news and bad as performance "improves"

"Improved performance across all divisions”. That was the headline French Connection picked out when it delivered its interim results on Tuesday. But the question is, how much of an improvement did it see?


French Connection


The fashion retailer has suffered years of losses and falling sales and even though its most vocal activist investors have given up on it and sold their stakes, the business is still very firmly under the spotlight.

Let’s look at the details. In the six months to July 31, it saw group revenue of £68.1m. That was down 1.6% from £69.2m a year earlier, but fell 4.2% if exchange rate effects were taken out of the mix.

Is that fall forgivable? Perhaps. It said a 7.2% improvement to £29.6 million in Wholesale (or 2.6% currency-neutral) was offset by the Retail division as a reduced store portfolio kicked-in. The company has been cutting underperforming stores ruthlessly in recent periods. Its store space is down around 10% overall so a total revenue fall of less than 2% (or just over 4% if you take the currency-neutral figure) isn’t bad.

But it isn’t really good either. The Retail division’s contribution “improved” with the operating loss here cut by 18.3% to £6.7 million (although it was a loss nonetheless). Comparable sales in the UK and Europe were “broadly flat” with margins benefitting from fewer markdowns.

But it returned to growth in Licensing with income up 8.3% to £2.6 million in the period.

All of that fed into a reduced pre-tax group operating loss of £5.7 million, better than £7.9 million a year ago, although its closing net cash position of £6.7 million was also lower than last year’s £7.7 million.

Clearly, the firm’s use of the word “improved” is justified but just as clearly, it isn’t out of the woods yet. Another period of losses and falling sales is far from a turnaround.

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What did chairman and CEO Stephen Marks have to say? "We have definitely seen momentum build in the first half of the new financial year.  With full-price sales in Retail up during the early part of the second half, combined with the strong Winter 17 order books in Wholesale and very strong reaction to the Spring 18 collection, I am confident that we will see a good performance during the rest of the year.”

He added: “We have been working with the goal of returning the group to profitability as soon as possible and, while there is still much to do, I believe that we have made significant steps to achieve that in the near future.”

Perhaps most interesting in this statement is Marks’ assertion that the second half has started strongly with “the work we have been doing to refresh and strengthen the French Connection brand definitely having a positive impact.”
 
The company had earlier said it expected to see a return to growth in UK/Europe Wholesale, following the progress seen in North America in H2 last year and this “has come through strongly”. It expects more good news to come for the rest of the year, even though its Australian partner is reorganising its ops and this has hurt sales there.

The growth in Licence income is largely due to the new fragrance licence with Inter Parfums and continued growth with DFS, its furniture licensee.

But that’s the good news. What about those all-important retail stores? Well, while they look bad, there’s a silver lining to the cloud. Overall Retail revenue fell 7.5% to £38.5 million (or down 8.7% currency-neutral). But, as mentioned, with store space down by over 10% on the back of its closure programme, that’s not quite as bad as it looks.


French Connection

 
And gross margins increasing to 56.6% from 56.3% is also encouraging. This improvement came from higher full-price sell-through of Spring 17 product, less promotional activity in the period and higher margins achieved in its outlet stores due to an improved merchandising mix of product. 

The company has also continued to see progress in its e-commerce business which now represents 29.2% of its retail sales, up from 26.5% a year ago. However, sales growth has been held back to some extent as it has reduced the level of sale and clearance product available on the site to promote full-price sales. Further investment has and is being made “to enhance the customer experience through improved functionality and personalised content.” And the increased importance of mobile continues with it now making up 45.4% of traffic from 36.4% a year ago.

Is there any more good news on the horizon? Well, the company is the most productive third-party brand at furniture giant DFS and it has recently signed new homeware and jewellery licences for North America that will contribute from next year. There are a number of other categories, particularly shoes, where it is in active discussions with several interested parties too.
 
And the company has found two new Independent Non-Executive Directors, Sarah Curran and Robin Piggott wit the under-pressure Claire Kent and Dean Murray both stepping down. Curran is the founder of now-defunct My-Wardrobe and until recently the driving force behind VeryExclusive, while Piggott held senior roles at Moss Bros and Alexon.

So, what we have is a company that is clearly on the turnaround trail but its success can’t be guaranteed. And after so many years of losses, it has a lot to do to make up for its weak performance for this entire decade.

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