Gone are the days when sporting a shirt with the letters 'FCUK' - a logo of high street retailer French Connection (FCCN) - was considered the height of cool. The brand has suffered an image problem in recent years along with complaints that its clothes are over-priced. Now, though, things are starting to change. New management and a new design team are attempting a massive turnaround, supported by the company's substantial cash pile. These initiatives have now begun to gather some momentum and the shares look screamingly cheap on a key valuation metric for recovery stocks.
- Net cash
- New management team
- On track to breakeven
- Very low price-to-sales rating
- Image issue
- UK stores still unprofitable
Fifteen months ago French Connection's management team introduced a number of operational initiatives. Stores have been made more efficient thanks to measures such as employee performance incentives, changes to staff scheduling and local merchandising. The perception that clothes were too expensive has also been addressed by increasing the proportion of lower-priced items in stores. Buying has become a lot tighter, too, and crucially, the garments are more appealing thanks to the new design team. Applying these simple and sound retail principles has increased full-price sales, lowered costs and trimmed working capital.
The company's recent full-year results provided some very early-stage signs of a turnaround. The struggling UK/Europe retail division, which accounts for 57 per cent of gross profit, moved into like-for-like sales growth in the second half and also improved its gross margin and shrank its operating loss by £3.8m to £11.6m. That helped the group as a whole move to a £1.7m underlying profit in its seasonally-stronger second half from a £0.9m loss in 2012, and the full-year loss fell by nearly two fifths to £4.4m.
The consensus is for a small retail operating loss this year, helped in part by closing further unprofitable stores. There's likely to be significant investment in e-commerce, too, with a particular focus on pushing international sales.
| FRENCH CONNECTION (FCCN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 59p | MARKET VALUE: | £57m | |
| TOUCH: | 58-59p | 12-MONTH HIGH: | 64p | LOW: 27p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 169 | |
| NET ASSET VALUE: | 58p | NET CASH: | £28.2m | |
| Year to 31 Jan | Turnover (£m) | Pre-tax profit* (£m) | Earnings per share* (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 216 | 4.2 | 3.9 | 1.6 |
| 2013 | 198 | -7.2 | -7.5 | nil |
| 2014 | 189 | -4.4 | -4.6 | nil |
| 2015** | 192 | -1.6 | -1.6 | nil |
| 2016** | 196 | 0.3 | 0.4 | nil |
| % change | +2 | - | - | - |
Normal market size: 10,000 Matched bargain trading Beta: 1.11 *Adjusted PTP and EPS figures **Numis Securities forecasts | ||||
Admittedly, the UK stores need to generate sales growth in the mid-to-high teens to become profitable, so there's a lot of work ahead. But an improving economic outlook in the UK should provide a tailwind and, as a whole, the group should continue to benefit from the success of its profitable wholesale division, and lucrative licensing income stream and profitable joint ventures in China and Hong Kong.
What's more, the shares are cheap as chips based on a price-to-forecast-sales ratio of just 0.3 (at this stage in the turnaround we think it's fitting to use this measure which does not assign value to the substantial cash pile). And while the company has a long way to go before it deserves comparisons to high-functioning rivals, it is worth noting the multiple to forecast sales commanded by Ted Baker, Next and SuperGroup are 2.7 times, 2.5 times and 3.2 times, respectively. French Connection's shares are also valued at only a touch above its tangible asset value of 58p a share.
