Wednesday, September 19, 2012

Wed 19 Sept 2012 - FCCN, ASC, CLL

Good morning! I'm delighted to see page hits here shooting up from an average of around 600 per day during August, to over 1,000 per day now. The more the merrier, so please feel free to pass on this site's details to friends & colleagues if you think they would find it useful.

Another busy morning for results, so I might split the report into 2 again this morning, rather than delay the first part. As usual, I'll start with my particular area of expertise, retailers (where I was the Head of Finance for a ladieswear chain for 8 years ending in 2002, hence the "Pilot" in my nickname).

Fashion brand French Connection (FCCN) reports gloomy interims, as expected since they have warned on profits a number of times in the last year. The trading statement dated 9 Aug 2012 said that H1 operating profit would be £7m worse than last year (which was a profit of £0.7m), hence the H1 loss of £6.3m loss announced today is bang on where they said it would be.

Closing net cash is reported at £21.2m, well down from the £30.9m reported this time last year, although it should be emphasised that about half of the reduction is down to working capital movements which should reverse, so the underlying fall in net cash is only about £5m.

They also do a substantial amount of wholesale business, so unlike most retailers they also own a substantial (£27.7m) debtor book.  Their inventories is £2m more than ALL creditors, so you can see that this is a very strong balance sheet - the chance of this company going bust is nil right now. Therefore that gives them a chance to turnaround their trading performance.

Whilst it's disappointing that no current trading information is given, the narrative to the results today does go into detail about what they are doing to turn the business around - encrouaging, as it scotches the suggestion that management have given up.

I hold some FCCN shares in my personal portfolio. Why, you may ask? Because they are so cheap! Yes, the business is struggling, but it has more than enough financial strength to give it time to engineer a turnaround (which they have done before - last year the shares shot up to peak at 140p on the back of one good trading season). So it's the type of situation I love - where all the bad news is in the price, in spades, but the turnaround potential is in for free.

Did I mention that the share price of 25p gives a mkt cap of only £24m?! Only 10% above its own net cash position. That's crazy, especially when you recognise that trading is H2 weighted, so the £6.6m H1 loss should be partially recoupled in H2, so I reckon you're looking at a full year loss of around £4m - hardly catastrophic.

Also, bear in mind that FCCN has several highly successful parts, which together make a profit of around £15m p.a. - namely wholesale, international, and brand licensing. The latter in particular is a gold-mine, and demonstrates the strength of the brand, that makers of glasses, jewellery, perfume, accessories, etc, pay FCCN a licence fee simply to stamp the FCCN brand name on their products. Forget slogan T-shirts, that was years ago & isn't relevant any more.

The main things FCCN need to do are: lower their prices (everyone I ask says FCCN prices are too high, and I agree), improve the quality & design of the product, improve the tatty stores (tricky if they are pending disposal, but a tatty store damaged the brand), and improve retail standards (poor visual merchandising, lousy in-store graphics, etc).

They talk of a turnaround taking around 2 years, so I'm in this one for the long-haul, but at £24m mkt cap there is serious upside potential here if & when the turnaround happens. No guarantee it will of course, but the results today (especially the narrative) at least show that management are trying.

There is no reason for the price to move today, as the results are in line with expectations, but I shall probably buy some more if there is any significant weakness. I think we've seen the low at 20p some time ago, so risk/reward looks pretty good to me around 25p if you're prepared to wait for the turnaround. Bear in mind also that the next trading statement could be positive, since Sept 2011 was when their trading hit a brick wall - hence last year's poor sales figures are this year's soft comparatives, which are therefore easy to beat.

Oh, one negative is that FCCN passed the Interim divi, which is a bit disappointing, but not unreasonable until they have sorted the business out.

Moving on, internet clothing retailer ASOS (ASC), reports positive Q4 trading to 31 August, which it needs to given its stratospheric rating of 52 times historic earnings. Although that falls to 33 times next year's earnings. Bear in mind that the mkt cap is £1.6bn at 2041p/share, whilst reported sales are £553m, so the share price effectively already factors in a tripling of the size of the business (since ex-growth one might expect it to be valued at a PSR of 1).

On the other hand, ASOS has always looked expensive during its spectacular growth. Indeed, I was an early shareholder, with 500,000 shares in this a few years ago, which would today be worth £10m. However, instead of holding for 2041p/share, I sold for a handsome profit at ... wait for it ... 9p a share (as they looked fully priced at that level a few years ago, and I'd bought at around 3p). Argghhh!

Such a toppy rating is an accident waiting to happen in my view, although the international growth is very impressive at 42% Y-on-Y in Q4, and 64% for the full year.

Marketing company Cello (CLL) has delivered OK-ish interim results, with adj EPS down from 3.06p to 2.69p. However they confirm the full year outlook, which is for 6.44p, putting them on a low PER of just 6.
However, there is rather too much debt for my liking (£13.7m), and a balance sheet overweight with goodwill, so will probably keep this on my watch list. The forecast divi yield is approaching 5% though, which does look quite interesting.

I see FCCN has fallen off a cliff in the last few minutes. Why, given that results were exactly as expected??? Gotta go, I have some more FCCN shares to buy!!!


  1. Sorry Paul, don't share your bullishness about FCCN. In the past, the saving grace for the poor retail performance has been the ability to shift their stock to the wholesale division and turn it there. Even that channel is struggling now. I've had a quick look at the UK business (and I accept I'm ignoring value in N America here), but in order to eliminate the loss of the retail side of the UK business, sales would have to rise either 34% in the retail business or 300% in the wholesale business or some combination between the two. That's a tall order, no matter how much restructuring and re-engineering of the stores they do. Any turnaround of that magnitude will take years and money. They have £21m, they are losing £6-7m of cash through losses per half year, so there's not a huge amount to burn through.

    Their working capital management is poor -

    Debtors of 27m - Assuming that's all wholesale, then as wholesale turnover was 31m in 6m, we're looking at 5 months sales still outstanding....

    Inventory - £48m - as 6m turnover was £96m, that means they are holding three months stock, a large chunk of which appears to have been paid for given how low Trade Creditors are....

    So, not surprised at the low value, but pessimistic as to how the management can turn it around into a profitable business from here in the short/medium term


  2. Hi Jockblue - some fair points in there, but also some errors. The underlying cash position only fell by about 5m, the other 5m is due to temporary working capital movements (mainly that they paid their creditors quicker). So the cash is likely to bounce back somewhat in H2. By my calcs the cash pile should, over time decline only by about 3-4m p.a., and that's while they are trading badly.

    The problem retail side will indeed take a few years to turn around, as you just have to wait for the leases to expire on the biggest problem units. But the most important thing is that the rest of the business (licensing, overseas, and wholesale) is making so much profit, it can cover ongoing losses from retail as it is gradually managed down in size.

    Above all though, they need to get their product right. At the moment, the designs are not good enough, and too pricey. Fix that (which can happen instantly on a new season's product) and we have a serious multi-bagger on our hands.

    The core business is worth around 200m in my view, but the retail side has a negative value of maybe 50-100m. So we should still be at a multiple of the current price, even allowing for current problems.

    It's a terrific opportunity, if you can see beyond the current difficulties, and crucially see that there is a highly successful brand licensing & overseas operation lurking in there.

    I wouldn't say I'm massively bullish as things stand. I can just see the opportunity, if they get the product right, and sort out the loss-making stores. Meanwhile there is plenty of cash to manage that process.

  3. PaulyPilot, a big thanks for your round ups and write ups, as a fairly new and small time investor people such as yourself have taught me a lot. I've even followed after you re ZZZ and HOME.

    FCCN has been on my watchlist for a long time - i am keeping an eye out for signs of a turn around. I used to shop in French Connection, but haven't in over 3 years as the menswear is not only expensive but is boring. Really behind the trend, really uninspiring. It is still boring today. My female friends tell me womenswear has always been desireable but as we know is too expensive. I walk past the store on my high street often and it is always quiet, as it has been for several years. It still is.

    When the time comes that i notice the stores being busier and their collections being worn by people in the street (i notice peoples clothes) then i will buy in before the following trading statement knowing sales will have risen. For what its worth i will comment when and if this happens on the MF boards.