French Connection: losses persist but there's good news too
today Mar 13, 2018
The stakes are high at French Connection as the under-pressure fashion retail group battles not only against tough times on the high street and its own specific sales problems, but increasing shareholder unhappiness.
So its preliminary results announcement on Tuesday was closely watched for any signs of recovery. Did it deliver? Yes and no. It’s still lossmaking, but is tantalisingly close to break-even level. And its overall sales are still down, but that’s due to store closures designed to boost profitability.
The company is certainly progressing, but it’s not in the clear yet. In the 12 months to January 31, group revenues did manage to rise, but only by 0.5% to £154 million. Yet given that the company has closed stores and that the year-ago sales result was a 6.7% fall, that could be seen as a good outcome.
Wholesale revenue rose 8.6% (or 7.1% currency-neutral) to £70.9 million for the UK, Europe and North America. In North America, the core department store business grew well across the majority of accounts, which is good news.
And there was an “improved contribution from retail driven by portfolio rationalisation.” That “rationalisation” means those aforementioned store closures, with 11 of them shuttered during the year against one new concept store opened in Manchester. Fewer stores meant retail revenue dropped, by 5.5%, to £83.1 million, although a 5.5% drop compared to an 11.3% reduction in retail space could be seen as justification for the current strategy.
Comparable sales rose only 0.4% however in the UK and Europe, compared to a 4.4% rise a year ago, and e-commerce revenue grew by only 3.1%, compared to much faster growth for some rivals.
However, e-tail now represents 29.7% of French Connection’s retail revenue and mobile continues to be a growing proportion of its online activity, generating 46.8% of traffic, up from 39.7% last year.
THE BOTTOM LINE
But what did all this mean to the bottom line? That, after all, is what those worried shareholders, and staff who are keen to protect their jobs in a weak environment, care about.
Profits are still proving elusive, as is margin growth. The faster growth in wholesale where margins are lower meant the composite gross margin fell to 45.2% from 45.8%. And the retail gross margin dropped to 56.3% from 56.8%, reflecting the higher proportion of sales through its outlet stores as the full-price store portfolio reduced. The margin achieved in the full-price stores had initially increased, reflecting improved trading, but was reduced overall by slightly higher levels of markdown during the winter sale period.
It’s clear that French Connection suffered many of the same problems as its retail peers and it’s no surprise that it reported an underlying operating loss, although that loss fell to £0.6 million from £3.1 million in the prior year. And the overall operating loss once various costs were added in came to £2.3 million after £5.3 million last year.
Chairman and CEO Stephen Marks maintained an upbeat stance overall. "We have made considerable progress across the group over the last year and I enter the new financial year with renewed confidence,” he said. “Our goal has been to return the group to profitability and I believe we are very close to achieving that aim.”
He added that while it’s “clear that the retail market in the UK is unlikely to improve in the near future, we have visibility on the benefits we will obtain from the ongoing portfolio rationalisation. The reaction to our collections and strength of our wholesale orders both for the spring and winter seasons further underpins the performance. Although we are only early into the year, I believe we are in a very strong position to make significant progress again.”
MORE REASONS TO BE CHEERFUL
As well as the main retail and wholesale ops, the company said that licence income for the year continued to be strong, with additional income from its DFS furniture deal and its beauty license with Interparfums.
It also said that its brand awareness efforts have been paying off with its recent advertising campaigns having “resonated particularly well with consumers.”
But clearly, the current performance isn’t exactly a stellar one so there’s plenty more work to do.
The company said it continues to work on its product quality and it will carry on with its store closure programme to get to a portfolio of 30 full-price French Connection stores by the end of the current financial year, with one store already closed and another five already planned later in the year.
That new Manchester concept store will, presumably, be the model for future openings as it “serves as a great representation of the brand, in a smaller location but in a key market." It said performance to date has been “encouraging”.
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