Wealthy French Connection is on the mend

Business has been improving at French Connection for the past three quarters, yet the high street fashion chain still managed to lose £3.9 million in the six months to July. That went down badly in the City and the shares fell 13%. But there are reasons to be positive here and this kneejerk reaction may offer a decent entry point to this cash-rich retailer.

That loss doesn't look quite so bad when compared with the £6.1 million deficit French Connection flagged a year ago. And the turnaround from a tired brand trading on past glories is firmly on track.

Shutting underperforming stores and a strong pound clipped almost 7% off half-year revenue to £84 million. But scrapping its mid-season sale, delaying the summer sale and cutting prices by less meant underlying like-for-like sales for the UK and Europe rose 6%. And a £7.5 million underlying retail operating loss was £1 million better than last year.

Those better margins in the UK and Europe and lower costs helped drive up underlying operating profit at the wholesale division by 24% to £6.2 million. It's reassuring to hear that the wholesale forward order book for Winter 2014 is higher than last year and that initial Spring 2015 orders are strong.

Admittedly, the US is still sluggish. Profit fell from £1.1 million to £0.9 million during the half following heavy discounting and bad weather. However, its worst stores have been closed and "trends are stabilising," we're told. A new US chief is cracking the whip there, too.

Of course, like-for-like comparisons get tougher in the second-half, and much will depend on how Christmas goes. But management's expectation that full-year numbers will be in line with forecasts appears well-justified.

Numis Securities reckons FC's pre-tax loss will narrow from £4.4 million to £1.6 million in the year to January 2015 on revenue up marginally at £192 million.

"With £2.2 million of the £2.8 million year-on-year improvement already achieved in H1, trends in the US set to stabilise further, an encouraging wholesale order book, and clear benefits from the sensible initiatives being implemented across the group (product, retail ops, estate rationalisation), we see scope for upside to our forecasts and retain our positive stance," the broker says.

Remember, too, that FC is carrying net cash of £19.4 million, which Numis tips to hit £26.2 million by year-end, worth 28p per share. At 63.75p, that represents over 40% of FC's market capitalisation.

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