In for the long haul

Stephen Marks, French Connection’s chairman and chief executive, has just experienced the most difficult winter season in all his years in business. That’s saying something considering he founded the fashion company in 1972, and rescued it after the recession of 1989.

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Its a clich'' but French Connection, or at least FCUK was an iconic fashion brand. It’s sold wholesale internationally and through the company’s own stores and department store concessions in the UK, primarily, the US, and recession-bound Ireland, Span and Portugal. The company also has two stores operated as joint ventures, one in Honk Kong, and one in China. There’s less buzz about French Connection these days, and nearly 10% of sales come from newer brands YMC, TOAST and Great Plains. It licenses its name to ranges of spectacles (sold in Specsavers), toiletries (Boots), watches, fragrances and jewellery.

Bargain / Recovery / Cyclical / Stalwart / Growth

While wholesale, licensing, and international operations are growing at varying speeds and overall it’s making a modest profit, French Connection is losing money retailing in the UK Europe and North America, which accounts for 60% of sales. While costs like leases, are fairly fixed or, like cotton prices, volatile, revenues are falling as customers restrict shopping to sales periods, or find bargains on the Internet. Since French Connection targets the high-end of the middle-market, its vulnerable to cheaper brands during slow-downs.

Expectations

To keep prices and sales up, French Connection has launched an exclusive premium range for women, a range of homewares, and aims to minimise discounting. To keep costs down it’s negotiating lower rents as leases expire, six this year and eight next out of 71 stores in total, and will close unviable stores. Press reports suggest the company may go further, and sell off some of its most expensive leases before they expire. Turning the stores around will, says Marks, take "a number of seasons", which could mean years, and if they require refurbishment that could eat into cash flow.

Threats

competitive position ' weak
Though French Connection’s vulnerability to cheaper brands is cyclical, the fading of the FCUK brand and the emergence of the Internet are more intractable dents in its competitive position.

finances ' normal
I’m reluctant to say French Connection’s finances are strong, despite the fact it has no debt or defined benefit pension scheme and ''34m in cash. Its retail stores are losing money partly because of lease obligations agreed when they were profitable. Those obligations (''218m) are a kind of debt not recorded on the balance sheet. Include them at face value, and French Connection’s tangible assets are almost 80% funded by ‘debt’.

management ' strong
Marks has the experience and the incentive to turn the company, his life’s work, around. The value of his shareholding is more than thirty times his salary last year.

valuation ' cheap
The shares trade at a 38% discount to tangible book value.

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Verdict

If Investors expect a rapid turnaround, they’re likely to be disappointed. But now Marks has accepted unprofitable stores should be closed, I think he’s doing everything he can to contain costs and design and source attractive fashions, while demonstrating via licensing the brand still has some value and international appeal.

The shares are very cheap, but the core business is misfiring and the lease commitments are a little daunting. Even though I think Marks can make French Connection prosperous again, I’m going to wait for signs the recovery has resumed before adding more shares to the Thrifty 30.

Notes

• French Connection, TOAST, YMC, Great Plains
• Between 1989 and 1991 Stephen Marks lent French Connection ''3.5m to help turn it around.
• Performance in year to 31 Jan 2012
• Effect of leases on financial strength and valuation
• Stephen Marks: holding ratio
• More about French Connection
• Blogger Expecting Value charts French Connection’s falling popularity (via Google)
• Poppy Dinsey on French Connection
• The Thrifty 30