Pre 8 a.m. comments

Good morning! French Connection (LON:FCCN) shares are priced at a fraction of its own working capital (and it has no debt or pension deficit either), so the (loss-making) business and brand are effectively thrown in for free. The shares are little more than an option on the company turning itself around before it runs out of cash. The market cap is currently 95.9m shares in issue * 31p = £29.7m.

FCCN has issued an IMS this morning which overall I would say is more positive than negative - given that the shares are priced to oblivion, and that we're in a bull market where investors will latch onto upside potential more than downside risks.

The problem part of the business is UK/Europe retail, which produced horrendous losses last year of £16m on turnover of £103.4m, which has to be one of the worst situations I can ever recall seeing for a retailer (an operating loss margin at store contribution level, i.e. before central costs, of -15.5% is off the scale bad). The problems are tatty stores, over-priced & uninspiring product, poor management, and above all that they are locked into uneconomic leases with uncompetitive rents. Trading in this division is reported today "broadly flat", i.e. slightly down, on last year, on a like-for-like ("LFL") basis - i.e. stripping out the impact of store openings & closures. Interestingly, they say it has improved recently, which surprises me given the autumnal weather, which is usually very damaging for clothing retailers at this time of year. Gross margin levels are slightly lower than last year. So it's not good, but it's not disastrous.

Wholesale business is down, but forward orders for the Winter season are flat, so again not good, but not disastrous.

North America and Asia seem to roughly net off to probably around flat overall.

The most interesting bit though, is that cash has actually risen to £15.7m (compared with £10.4m at the same point last year), and this is near a seasonal low for cash for clothing retailers, due to "continued importance being placed on the tight control of working capital". That's really surprising, and to a large extent destroys, or at least defers, the bear argument that FCCN is in a death spiral & will run out of cash. What the bears forgot is that FCCN…

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here