Interactive Investor

Can French Connection be worth 55% more?

14th March 2017 15:48

Graeme Evans from interactive investor

Will French Connection ever return to profit? Having just recorded a fifth consecutive annual loss, and with another one forecast this year, investors have grown weary waiting for the fashion retailer's turnaround.

So, it was no surprise that on the day annual reported pre-tax losses rose 51% to £5.3 million, activist investor Gatemore Capital renewed calls for the group to be split up, arguing that assets such as the brand name are worth more on their own.

However, founder and chief executive Stephen Marks believes there's still a future for French Connection, particularly as a "noticeable improvement" in recent trading has raised hopes that the business is moving in the right direction.

While there have been many false dawns in the French Connection recovery story, the optimism is shared by Numis Securities analyst Andrew Wade.

Reported results included £1.6 million of net store closure costs in the year ended 31 January 2017 versus a £1.2 million profit a year ago. And Wade continues to expect the business to return to profit in the 2019 financial year, following a narrowing of today's underlying loss of £3.7 million to £1.5 million in 2018.

Wade, who has a buy rating and target price of 55p - implying potential upside of around 55% - is encouraged by further solid progress in the retail division, which has partly offset a mixed performance in wholesale and licensing.

Like-for-like sales growth of 4.4% in retail for the year to January 31 compared with a decline of 6.4% the year before. Store closures under plans to shrink the estate to 30 full-price shops by January 2019 meant the retail division's total revenues fell 4.9% to £87.9 million.

But Marks, who founded the business in 1969, said: "The reaction to this year's collections has been very strong so far with sales both in our stores and wholesale customers up on last year.

"It is early in the year and we have a considerable amount of work to do to take the group back to profitability although I believe that the actions we have taken and continue to take, will go a long way to achieving that goal this year."

The scale of the turnaround challenge is shown in the company's share price performance. At 35p - after a 2% rise today - the stock is still some way short of the 50p reached in September last year. And any uptick in inflation will be no help to the mid-range fashion firm.

Marks owns more than 41% of the company, with Mike Ashley's Sports Direct International and Gatemore among the other major shareholders with stakes of 11% and 8% respectively.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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