French Connection: Wow — £2.4m Compensation For Closing A Loss-Making Store!

30 November 2015
By Maynard Paton

Quick update on French Connection (FCCN).

Event: Trading statement published 30 November

Summary: Phew! A pleasantly surprising update that revealed stable trading and a signal that losses could be narrowing. However, the most welcome news was the redevelopment of the group’s loss-making Regent Street store, for which compensation of £2.4m will be received from the landlord. I just wish FCCN could be paid off for all of its under-performing shops! I continue to hold.

Price: 32p
Shares in issue: 96,178,134
Market capitalisation: £32m
Click here for my previous FCCN posts

Statement:

FCCN Nov15 trading update

My thoughts:

* The statement was better than I had expected

I was pleasantly surprised by this update.

FCCN claimed the top-line performance of its Winter 2015 collection had been “strong” and while I would not go that far, certainly the positive progress was a far cry from the awful first-half figures revealed in September.

True, like-for-like Retail sales since August advanced by only 0.2% after a 6% drop last year. But advance they did and they helped gross margins increase by 1.5 percentage points, too.

Note that today’s statement did not cover the firm’s recent Black Friday sale, in which certain lines were priced at 50% off. Meanwhile, today’s Cyber Monday deals are offering a 25% discount.

* Cash pile suggests losses are narrowing

I thought it was promising that boss Stephen Marks was able to predict:

While we still have the all-important Christmas period to come, we expect the results for the full year to be in line with market expectations.”

Prior to today, house broker Numis was expecting a £4.5m loss for the year to January 2016, and a £3m loss for the year after.

However, today’s statement revealed the group’s cash pile had dropped by only £1.5m during the last twelve months. That figure compares to an outflow of £4.4m for the year to July 2015 and an outflow of £5m for the year to January 2015.

As such, it seems to me the cash-flow trend is improving and is much closer to break-even than those market forecasts from Numis.

* Further store closures are on the way

I am pleased FCCN has once again accelerated its plan to rid itself of loss-making stores.

Back in March, the group had expected to shut three or four shops during the current year, and then increased that figure to seven after April’s profit warning.

September’s interims then said six outlets had shut and three or four were to go during the second half.

Now, today’s statement says seven shops will close in the second half, to give 13 closures for the year as a whole.

I remain convinced that closing stores is the most reliable way for FCCN to stem its Retail losses and return the wider group to profitability.

* A lucky £2.4m bonus — Regent Street store to close

Here’s some very good news — FCCN’s store on London’s Regent Street is to be redeveloped next year and the group will receive a £2.4m payoff (2.4p per share) as compensation. And there’s more good news — FCCN will no longer have to absorb the site’s losses!

I have no idea how large the losses are at the Regent Street store, but I guess with central-London rents they could be much greater than the average FCCN outlet.

Now… if only all of FCCN’s landlords could redevelop their buildings, pay the chain compensation and immediately stem those high-street losses!

* The non-Retail part of business has held up reasonably well

Counter-balancing FCCN’s loss-making Retail estate are the firm’s Licensing and Wholesaling divisions, which continue to trade in line with expectations.

The extended 5-year deal selling FCCN-branded sofas through DFS looks positive, too.

* More bargain basement than basket case?

As before, my investment theory remains simple — if the near-£15m losses at the Retail division could one day disappear by closing a load of shops, the present valuation should become the bargains of all bargains.

At the last count, non-Retail profit was £10.2m and compares to a current market cap of £32m.

Nonetheless, FCCN shareholders have experienced no end of false dawns during the last ten years and there’s no evidence to suggest Mr Marks has permanently revitalised the business just yet.

* Next update — possibly a trading update in January 2016. Annual results due mid-March 2016.

Maynard Paton

Disclosure: Maynard owns shares in French Connection.

8 thoughts on “French Connection: Wow — £2.4m Compensation For Closing A Loss-Making Store!

  1. Maynard Paton Post author

    French Connection (FCCN)

    Notification of Major Interest in Shares
    http://www.investegate.co.uk/french-connection–fccn-/rns/tr-1–notification-of-major-interest-in-shares/201601070943591399L/

    A very interesting development. WA CAPITAL LIMITED has revealed it owns 4,963,424 or 5.16% of FCCN.

    A quick check at Companies House:
    https://beta.companieshouse.gov.uk/company/07306402/officers

    …reveals the only director at WA CAPITAL LIMITED is William Lester ADDERLEY.

    That surname seemed familiar to me, and I see from his other current appointments:
    https://beta.companieshouse.gov.uk/officers/0Xkk32HFwcfEcrHdjU_VynUxKUQ/appointments

    …he is the same William Lester ADDERLEY from Dunelm Group PLC.

    The link between WA CAPITAL and Mr Adderley is also confirmed from this old RNS:
    http://www.investegate.co.uk/dunelm-group-plc–dnlm-/rns/director-pdmr-shareholding/201205090700188563C/

    Anyway, from Dunelm’s website:
    http://dunelm.production.investis.com/about-us/directors-and-officers.aspx

    Will Adderley — Deputy Chairman

    Key strengths: Has worked in, and is familiar with, all parts of the Group. Specific product strengths in buying and trading with strong and long-standing supplier relationships. Has been instrumental in growing the Group to its current size having, as the former CEO, developed out-of town format in the late 1990s.

    Dunelm role: Executive Director and major shareholder, who spends his time on strategic activities which protect and enhance shareholder value and preserve the Group’s culture and values. Member of the Nominations Committee.

    Joined Dunelm Board: 1992, and has worked for Dunelm for his whole career. He took over the day-to-day running of the Group from his father in 1996. Remained as Chief Executive through the Group’s IPO in 2006. Became Deputy Chairman in February 2011 and was reappointed Chief Executive in September 2014. Resumed his role as Deputy Chairman when John Browett became Chief Executive on 1 January 2016.

    Previous experience: All parts of Dunelm’s business.

    So he clearly knows a thing or two about retailing. Indeed, the Adderley family has transformed Dunelm from a single Leicester market stall into a national retailer selling various homewares with annual profits of £121m.

    Dunelm’s 2015 annual report shows William Adderley owning 61,961,779 shares — equivalent to 30% of the group’s share capital and worth about £560m with annual ordinary dividends of about £13m. So this FCCN investment is small beer for him at £2m (at 40p a share).

    Nonetheless, Mr Adderley’s appearance on the share register is a positive for beleaguered FCCN investors. For a start, Mr Adderley is very rich and a hands-on retailer — he could buy FCCN outright with ‘loose change’ and no doubt use some trusted industry contacts to run the firm for him.

    It is one thing for us investors to push for change at FCCN, because the incumbent directors know we couldn’t run the business ourselves, but it is quite another for a fellow (and richer) industry executive to come along and start agitating the board (well, at least I hope he does).

    I’d like to think Mr Adderley would have a much more dynamic impact on FCCN, even though his speciality is not high fashion. I mean, all that is required for FCCN to become profitable is for the firm to close its loss-making shops — something that current boss Stephen Marks has been rather tardy to do (until recently).

    Anyway, let’s see how this plays out. Along with the windfall mentioned in the Blog post above, the news emerging from FCCN of late has been positive. Hopefully recent Xmas trading has not been a total disaster and 2016 sees the chain recover from last year’s woes.

    Maynard

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