Shares in fashion retailer, French Connection (LSE: FCCN), have slumped by over 8% today after a very disappointing set of first half results. Loss before tax increased from £3.9m in the first half of 2014 to £7.9m in the first half of the current year due to the disappointing performance of the company’s Spring 2015 collection.
Although French Connection had flagged the difficulties it was experiencing back in its April trading update, today’s results are nevertheless disappointing for its investors. Revenue in the period fell by 9.8% and, while underlying operating expenses were cut by an impressive 1.4%, such a drop was not enough to offset the challenging top-line performance of the business.
Looking ahead, French Connection is attempting to turn its fortunes around. For example, it closed six stores during the first half of the year and expects to close more in the remainder of the year. In addition, its Licensing division continues to offer solid performance, with year-on-year sales growth of 3.4%, while its lack of debt and healthy cash balance of £15m means that it has a relatively large amount of breathing space from which to conduct a successful turnaround.
Meanwhile, the company has stated that its trading since the half year results period has been improved, with like-for-like sales across UK and Europe being flat, with gross margins being up on last year. However, for the full year it is expected to remain a loss-making entity and, looking ahead to next year, is due to see its pretax loss widen. As such, investor sentiment could decline and put the company’s share price under further pressure over the short to medium term.
Of course, French Connection, as with most retailers, is highly dependent upon the Christmas period and strong trading during this time could be a positive catalyst to push its share price higher. And, while its Spring collection proved to be a major disappointment, its Winter collection appears to be performing much better and could realistically surprise on the upside. Furthermore, with French Connection having a price to book value (P/B) ratio of just 0.5, there is considerable potential for an upward rerating if its financial performance is better than expected by the market.
However, with many of its retail peers delivering improved performance in recent months and years, there appear to be better options elsewhere for investors seeking retail exposure. That’s not to say that French Connection will fail turn its business around, but rather that there are more appealing risk/reward opportunities available within the retail industry.
Certainly, French Connection could, in the long run, become a smaller, more efficient and profitable business but, as today’s results show, there is a considerable amount of work to successfully complete before then and, in the meantime, further share price falls cannot be ruled out. As such, it seems to be a stock worth watching, rather than buying, at the present time.
