Good morning!

 

 

French Connection (LON:FCCN)

I think it was Antony Bolton who said that his best calls were often stocks that at the time felt uncomfortable to buy. That's how it felt for me with French Connection, where hardly anyone could see my logic that it was a good each way bet at about 30p (they are now 60p!). The bulletproof Balance Sheet, loaded up with cash, and no debt, plus a large wholesale debtor book on top, was sufficiently strong that the company could absorb continued losses for years to come, providing they didn't get completely out of hand. Cash gives you time to turn a business around, and founder/CEO (who still holds 42% of the shares) has been making a lot of changes on various fronts to turn the group around.

Moreover, the group results mask what is in reality two successful businesses, the wholesale and brand licensing divisions, which together made a profit of £17.8m in 2013/14 (the year end was 31 Jan 2014). This was more than enough to cover the £11.3m group overheads, and would have left a profit of £6.5m. However, the problem part of the business is the Retail division, which has a long tail of heavily loss-making shops, on leases that cannot be disposed of in the short term. This made a thumping great loss of £11.6m in 2013/14, although that is usefully improved from the appalling £15.4m loss in 2012/13.

Over time though, the retail losses will melt away, as problem leases are handed back to the landlord at the time of expiry. Typically retail shop leases are fifteen years in duration, at the time of inception. So in FCCN's case, most of the problem leases will surely be in their second half now, so perhaps 5 years left to expiry? Taking a long term view then, from now on FCCN should be experiencing a tailwind of lease expiries of loss-making shops, which will boost profitability a certain amount each year. Nine loss-making shops were closed in 2013/14, and a further 3-5 more are due for closure this year.

My initial review of the results for year ended 31 Jan 2014 published this morning has not identified anything unexpected or untoward.  On 5 Feb 2014 the company said that the loss for 2013/14 would be reduced to…

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