French Connection: Mistaking Marks

Monday, Apr 27 2015 by



Shares are down 17% this morning. Last month I wrote about French Connection:

"This is a strange one, I like low-risk situations and nothing seems lower risk than 50% of the market cap in cash. The problem is that the absolute figures here are just as large. There is an attractive business somewhere but it is mixed up with stuff that clearly isn't attractive. I can see why someone would buy the stock at the current price, I wouldn't be surprised if it does well. Today though, there just isn't enough sign that management really want to grapple with the issues facing the company. Until they do, the risk is just going to be too high here."

The only new piece of information, apart from the miss on sales, is that the store closing plan is now being accelerated.

Marks' Madness

My view here is that investors should continue to keep clear. The question you have to ask every time is: Are these problems secular or cyclical? Does this company have structural issues? Are the recent trends positive or negative? The key issue here is that the retail business is just totally uncompetitive but Marks just won't shrink it at the pace that is clearly required.

The catalyst for this warning is the weak trading performance after the year end and through Easter. Trading has been consistently poor for a while though. L4Ls were down 300bps last year, much weaker in the second half, but I don't get the impression there is any sense of crisis here.

The decision to accelerate the store closures from the few expected this year is clearly the right move but this just highlights how reluctant management has been. Not only should this have been started ages ago, it should have been completed by now. Mr Marks has been reluctant to move though and this shows just how reluctant management has been to make these decisions. The problem is that we have to defer to the judgement of Mr. Marks, and he has been consistently wrong.

What we can learn?

French Connection nicely demonstrates two issues: over-reliance on quantitative analysis and the problems of minority ownership. First, on a quantitative basis, French Connection does look cheap but on any other basis, it clearly isn't. There are attractive parts of the business but, as I say above, they are jammed onto parts that aren't attractive at all. Quantitative investing does work but there are these strange cases every now and again where the fundamentals are just very different (i.e. an insider who just wants to do his own thing). 

Second, if you are a minority owner you do have to just kind of trust that the guy running the show knows what they are doing. Marks isn't going anywhere but he is clearly very attached to the retail arm. Another similar situation that springs to mind is Town Centre Securities, whatever happens you know that the Ziffs aren't selling Merrion. Insider ownership can work very well, the interests of both principal and agent are aligned, but it can work just as badly when there is a lot of history.


French Connection will always interest me. The brand is tremendously valuable and the company could do a lot of business with a far smaller retail estate (it could easily be worth twice this price). However, Marks is clearly very reluctant to reduce the estate. I am sure that he said he would reduce it a few years ago but the pace is just far too leisurely. Until then, the company will continue to just swing about wildly in this range.

Extract from Mercurius Research Daily Note


No position is held by the author in any stock mentioned.

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French Connection Group PLC designs and supplies branded fashion clothing and accessories for men and women. The Company operates retail stores and concessions in the United Kingdom, Europe, the United States and Canada and also operates e-commerce businesses in each of those territories. Its principal brand is French Connection, which designs, produces and distributes branded fashion clothing, accessories, such as toiletries and fragrances, shoes, watches, jewelry, eyewear, furniture and homeware through its distribution channels: retail stores, e-commerce, wholesale and licensing. Its other brands include, Great Plains and YMC. The Company operates in approximately 50 countries around the world. The Company's subsidiaries include French Connection Limited, French Connection UK Limited, French Connection (London) Limited, Contracts Limited, French Connection Group Inc., French Connection (Hong Kong) Limited, French Connection (Canada) Limited and YMC Limited. more »

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