Despite heavy losses, this retailer could see a strong recovery in its share price.
Fashion retailer French Connection (LSE: FCCN) has certainly had a pretty bad year and a recent trading statement didn't provide much comfort. However, a lot of this is reflected in the share price. Annual sales are running at around £250m and the group has net cash. Yet, with the share price at 31p, it's market value is just £30m.
Let's deal with the negatives first.
The bad news
Its last set of full-year results (to 31 January 2009) showed a pre-tax loss of £17m on revenues of £248m. Not good.
Interim figures then saw pre-tax losses widen to £13m, from £5m the year before. Even worse.
This September, French Connection also revealed that it had cut 50 jobs across head offices in London, New York and Hong Kong, while also shutting its businesses in Denmark and Sweden, with the loss of five stores and concessions. Terrible.
Trading is still bad -- in the most recent statement issued on 25 November, the company didn't pull any punches. Although group turnover in the four months to 30 October was 8% ahead of the same period last year, most of this arose from favourable exchange rate movements. The only bright spots appear to be online trading and womenswear.
French Connection's Japanese business will be closed by February 2010. The cash cost of the closure will be less than £500,000 but there will be a one-off charge to the profit and loss account of £2.5m.
Consensus broker estimates for the full year ending 31 January 2010 are for flat sales (£248m) and a pre-tax loss of £14m. Even its house broker, Numis (LSE: NUM), only issued a 'hold' note following the latest trading update.
The good news
There is some good news, which I think should underpin the share price from these levels.
Firstly, its net current asset value as at 31 July 2009 was £60m, equating to 63p a share. This offers a decent margin of safety for those buying in at current levels.
The Group's balance sheet remains healthy, with £15.4m of net cash at the end of October 2009. It has also reduced its working capital requirements and confirmed to me that it hasn't used its working capital facility this year. French Connection expects to build cash reserves through the Christmas period -- some analysts are predicting a year end cash figure of approximately £20-25m.
French Connection is certainly going to have to take more drastic action to return to positive cash flow generation. An upcoming strategic review should offer a path, albeit a painful one, back to profitability.
Let's not forget that the Chairman and Chief Executive, Stephen Marks -- who founded the company in 1969 and has seen off three recessions -- must know a thing or two about trading in adverse circumstances. I reckon it's premature to write him or his company off.
Another factor underpinning the share price, given the cash situation, could be the possibility of a bid. Any approach would have to satisfy the interest of Stephen Marks of course. He holds 42% of the company.
In conclusion
I wouldn't buy until the next set of full-year results are out. They were released in mid March last year and this time round they should contain the conclusions of the strategic review.
It's been pretty much one-way traffic since these shares peaked at £5 some five years ago. But for those prepared to wait for a recovery, French Connection could provide some decent upside.
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