Should You Buy French Connection Group On Today’s News?

Fashion retailer, French Connection Group (LSE: FCCN) is falling today after the company reported its results for the first six month of the financial year. 

The group posted a 36% narrowed pre-tax loss for the first-half, as operating costs fell. What’s more, management revealed that the company is currently trading in line with market expectations and full-year results will be in line with City estimates.

This is undoubtedly good news, as it shows that the struggling retailer is making progress. But should you make use of today’s declines and buy in?

Shrinking losses

French Connection has been struggling to tclothesurn things around for several years now. The group first ran into trouble during 2013, when it reported a pre-tax loss of £10.5m, compared to a profit of £5m for the year before. 

For the most part, these troubles can be attributed to the economic climate, although some analysts also claim that French Connection had lost touch with its customers. Still, the company has put in place a turnaround strategy and today’s results reflect the strategy’s progress.

Total group revenue for the period fell 6.6%, reflecting planned store closures and exchange rate movements. However, underlying like-for-like retail sales across the UK and Europe rose by 6% during the first six months of the year.

Furthermore, the group’s wholesale forward order book for winter 2014 is up on last year, while initial spring 2015 orders are strong. The reported first half pre-tax loss was £3.9m, compared to a loss of £6.1m a year ago.

Commenting on the results, Stephen Marks, chairman and chief executive, said:

“I’m pleased to report a further positive step forward as we rebuild value in our business. The initiatives we put in place to drive a turnaround in our trading continue to deliver an improvement in performance. Whilst costs will continue to be managed tightly, we are cautiously investing in growth opportunities, trialling new store formats and developing our international business.”

It seems as if French Connection is really starting to turn a corner, although the company still has a long road ahead of it. 

Long-term turnaround

French Connection is slowly returning to profitability but City forecasts suggest that the company won’t return to profit until next year. Even then, analysts expect that the company will only report a pre-tax profit of £1.2m, earnings per share of 0.15p. This means that the company is trading at a 2015 P/E of 467. 

Nevertheless, there’s more to French Connection than meets the eye. You see, the company reported a cash balance of £19.4m at the end of July, around 20p per share. This healthy cash balance gives the group plenty of room to manoeuvre and execute its turnaround strategy over the next two years. 

The bottom line

All in all then, French Connection’s turnaround is gaining traction and the company is not at risk of running out of cash any time soon. That being said, the fashion industry is well known for its fickle nature and rapidly changing trends, which makes the company is a high risk bet.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.