Do Today’s Results Make French Connection Group A Better Buy Than Ted Baker plc Or Boohoo.Com PLC?

Struggling fashion firm French Connection Group (LSE: FCCN) fell by around 10% this morning, after the group posted a full-year loss of £3.5m. That’s more than double last year’s loss of £1.6m.

A combination of store closures and poor sales during the first half of last year means that sales fell by 8% to £164.2m.

On the bright side, French Connection said that first-half losses were reversed in the second half, which was profitable. Licensing revenue rose by 12% to £7.3m and gross margin remained flat at just over 46%. French Connection ended the year with net cash of £14m, down from £23.2m the previous year.

This stock’s appeal as a turnaround play has been based on two factors. Firstly, French Connection has always had a strong balance sheet with net cash. This has given the firm time to turn itself around.

Secondly, the firm’s results have consistently suggested that its brand and products remain popular. The problem has been that its network of retail stores is costly and loses money.

The argument in favour of investing in French Connection is that as the retail network is scaled back, the firm will become profitable again thanks to strong wholesale and licensing revenue. Last year’s fall in wholesale revenue was disappointing, but the second-half recovery is encouraging and suggests the story remains strong.

On balance I think this investment story remains valid, but is weakening. French Connection’s turnaround has already taken several years. Cash is beginning to run low, so definite progress will be required this year.

Better alternatives?

Value investors prefer to buy cheap, beaten-up stocks, but there’s a case for paying more to buy shares in companies that are proven performers.

In the fashion sector, two good examples are Ted Baker (LSE: TED) and Boohoo.Com (LSE: BOO). Both companies have clear growth plans and are highly profitable.

Ted Baker’s sales and profits have risen by around 20% per year since 2010. Boohoo has managed to increase its sales by an average of 55% per year since its foundation in 2011. Boohoo’s profits have also risen strongly. Earnings per share are expected to have risen by 34% to 1.1p in the 2015/16 financial year, which ended on 28 February.

Naturally this kind of performance comes at a fairly high price. Boohoo trades on a 2015/16 forecast P/E of 36, falling to 28 for 2016/17. There’s no dividend, but Boohoo does generate a lot of cash and had a net cash balance of £60m at the end of August.

Ted Baker also looks quite pricey. The shares currently trade on a 2016 forecast P/E of 28, dropping to a P/E of 24 for 2016/17. There’s also a 1.7% forecast dividend yield.

If Ted Baker and Boohoo continue to grow at current rates, then in a few years’ time, both stocks could look very cheap at today’s prices. Both companies are in good financial health and appear to have strong management.

Whether they’re cheap enough to buy today is up to you.

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Roland Head 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.