Wednesday, January 16, 2013


French Connection (FCCN) has issued its sesasonal trading statement, although around 2 weeks earlier than last year, so it's taken me by surprise.
Broker consensus for this year (ending 31 Jan 2013) is for a loss of £4.8m.
Today's statement indicates a loss of £7.5- 8.0m for the year is likely, so that's worse than expected, but not catastrophic. Although on c.£200m turnover, it's not a massive variation.

The key point with FCCN is that they have time to turn it around, because the balance sheet is immensely strong - not only are they net cash throughout the whole year, and have today reported £25m net cash at this time of year, a seasonal high. But also they have the further advantage of a substantial debtor book from their wholesale business, which has no associated debt. If necessary this could be invoice discounted, raising more cash.

There is considerable value in the brand, which has a very high profile amongst affluent female shoppers. Investors tend to be male, hence think only in terms of the old hat "FCUK" slogan T-shirts from the 1990s. But actually French Connection is more about very stylish womens dresses, and gets a lot of coverage in the press, especially from celebrity endorsements like Pippa Middleton & Carol Vauderman, being a couple that I've noticed in 2012.

The litmus test is that their brand licensing division is highly profitable, which is basically free money for other people stamping the French Connection name on products such as glasses, perfume, etc. That indicates the brand, whilst somewhat diminished, still has considerable clout.

The upside potential of course is that FCCN once again becomes a really hot fashion brand, then the upside is shown by British fashion brands such as Burberry or Mulberry. Maybe they should change their name to French Connectioberry?!

This latest mild disappointment might knock a few pence off the share price in the short term, but with the mkt cap only £28m at 29.5p, the share price is only a whisker above net cash, and already factors in continued disappointment. They have time to turn it around, so everything still to play for.

Also worth noting that FCCN had a terrible H1 last year, so they are now up against very soft comparative numbers, which could mean that the next trading statement may surprise on the upside possibly?

I'm happy to continue holding, as this is an each way bet - either they turn it around, or there will be a trade sale, and I think the brand alone is worth multiples of the current share price. However, today is likely to be a down day for these shares- as indeed it is, with them having opened down 16% at 25p, so it's now trading a whisker below its own net cash! I'll be buying more if it goes any lower. (note: FCCN has since bounced a bit to 10% down at 26.88p mid-price at 08:51)

Housebuilder Barratt Developments (BDEV) issues a strong trading update, and appears in rude health - operating profit up 31% vs last year's interim period (6m to 31 Dec), PBT more than doubled to c.£45m.
Net debt has fallen from £542m to £332m, and operating margin has increased from 6.4% to 8.4%.
This surely augurs well for the economy overall in 2013, if housebuilders are seeing strong profit growth & increasingly sound balance sheets? That is bound to increase new building activity.

I've never heard of Ebiquity (EBQ) before. It seems to be some sort of consultancy to the advertising & PR sector. It's previous name was Thomson Intermedia (prior to 2008), but I've never heard of that either!

Whilst their trading seems good, the balance sheet is stuffed with Goodwill, and has too much debt, so that rules it out for me.

Forbidden Technologies (FBT) has put out a positive-sounding trading update, which has put a rocket under the shares, up 25% to 25p, which takes the mkt cap up to a staggering £21.6m.
I say staggering, because this company has delivered de minimis turnover, and has never made a profit. Why people are prepared to pay such a large up-front premium for growth which may or may not happen, is beyond me. Particularly when technology changes so rapidly, this kit might be obsolete before they've even managed to deliver any sensible turnover?

Toumaz (TMZ) was the only blue-sky thing in my portfolio, and whilst their trading statement today has some positive noises in it, the figures and timescales are not attractive enough for me to continue holding, so I've sold out this morning. The mkt cap here of £63m is entirely based on future hopes for its products, and that's just too high a valuation in my opinion.

N Brown (BWNG) reports a superb performance for the 19 weeks ended 12 Jan 2013, with LFL sales up 7.9%! That's really something, given the economic climate. Online sales are an astonishing 54% of total revenue.

They have re-invested profits in measures to drive growth (such as giving discounts to new customers), hence profits are expected to be in line (whereas one would have expected them to be above). The forecast PER of 13 looks about right to me, as growth potential must be fairly limited now one would imagine.

It looks like a good long-term investment to me, the sort of thing to tuck away & forget for 5-10 years, which will churn out gradually rising divis. The divi yield is about 3.7%, so a lot better than a deposit account!

Thorntons (THT) has always seemed to me like another relic from the past, destined to go the way of Comet, Jessops, and HMV. However, their trading statement today gives some hope. Their multi-channel approach, especially targeting commercial sales, seems to be paying off.

Thorntons say that, "We enter the second half of our financial year with profits in line with our expectations and ahead of last year...", pretty reassuring.

They are expected to make a £3.1m profit for this year.

The elephant in the room is their debt, roughly the same as the £30m mkt cap. That makes it far too high risk for me to even consider buying the shares. A significant increase in profits is needed to make that level of debt sustainable.

Marketing materials printer, Communisis (CMS) shares had a good year in 2012, and they confirm that results for 2012 are in line with expectations. Net debt has fallen to £21m, just under a third of the £67m mkt cap, so still a material amount.

The PER is about 9, so given the debt too, I think that seems about fair value. The shares are up almost 50% in the last month, which makes it look fully priced to me, for the time being. It's low margin work, and in a mature/declining sector, so I can't get excited about this one.

Bloomsbury Publishing (BMY) issues an IMS today, which gives lots of detail, but not a terribly clear overview. However, they do say that;
"In the four months ended 31 December 2012, Group operating profits from title sales were up year on year because of lower relative costs of production in the new digital environment and a lower returns rate as the proportion of online sales increased, in spite of a 2% decrease in title sales".
So that sounds reasonably positive.

I'm quite tempted to have a nibble here, as the fwd PER is only 8.9, the divi yield almost 5%, and it has net cash of £7.7m at 31 Dec 2012. So good value characteristics there.

It's very clear that companies which are succeeding at the moment are those which have embraced the internet age, and have an effective multi-channel strategy. Bloomsbury seems to tick that box, so it looks interesting at the current price of 116p.

I've read the Braemar Shipping (BMS)  IMS, but since it doesn't give an overall trading comment (just division by division), I can't draw anything meaningful from it as to the company's overall performance.

So a big thumbs down there for a worse than useless trading statement, which has just created uncertainty. The whole point of an IMS is that it should give investors a clearer picture of a company's overall trading performance. This one from BMS today just muddies the water. So not surprising to see the shares have dropped 5%, as investors will usually read ambiguity as negative.

OK, that was a lot of information to plough through today!

Just a quick heads up, I'm considering an offer of payment to publish my morning reports on another website. They will still be free to view, and the content will be exactly the same, with me having full control over the content & free to write what I like, but they might appear on a different website.

I might trial this idea, and if so, there will be an introductory paragraph here, together with a link to the day's article. So just one extra click for readers, but it should generate a bit of income for me, which would be helpful as writing these reports is quite a big chunk of my time & energy each day, so it would be nice to earn a bit of income from doing it.

It might not happen, as we're still discussing terms, but just wanted to flag it up to you. Of course if any other website or publishers would like to talk to me about my morning reports being published exclusively by you on your website, paper, or magazine, and if the price is right, then get in touch sooner rather than later!

Regards, Paul.


  1. Hi Paul,

    Thank you for your write ups and insight. I am a holder of both FCCN and CMS.

    For FCCN, I agree the cash position is what makes the business very attractive at this price, but how do the operating leases impact on this cash balance?

    I bough tin to CMS last year and believe the business is still undervalued as they move in to higher margin work aided by some acquisitions. Also with the BT and Nationwide contracts announced feeding in to next years figures, I believe CMS has turned the corner of it's recovery.

    Thanks again for the time you take in putting together this site. It's an invaluable resource to many PI's.


    1. The shop leases at FCCN are definitely part of the problem, although it's not actually that many shops - only about 70 in the UK for example.

      Apart from a few horrible leases which they can't get out of, I see the loss-making shops as more of a symptom than a cause. The underlying problem is that FCCN's stock is just not good enough for the very high prices they are charging.

      They need to improve the designs, AND lower their prices. If they do that, then I suspect many of the loss-making shops will turn around.

      On £200m turnover, a turnaround could quickly eradicate £8m losses, and swing them back into profit, because when sales rise, margins also tend to rise too (because less stock is sold at reduced prices in end of season sale).

      I'm not denying that FCCN is seriously under-performing. But they have time to turn it around, due to their balance sheet strength. I don't know whether they will succeed or not, but I think the upside is much greater than the downside at 27p/share.

      Regards, Paul.

  2. Hi Paul
    Have they online sales and are they growing like topsy like other fashion retailers? Would be good to have some data if you have some.
    Thanks, Ram

  3. Hi Paul,

    I just came across the site. I was a holder of Game when it died. The main thing I took away from that was that a struggling retailer with what seems like a decent balance sheet can unravel very fast.

    The cool thing about retailers is that when they are growing they can generate loads of cash from working capital (buy stock on credit, sell for cash). But when they start to shrink the process works in reverse. You've also got a whole load of off balance sheet leases to consider.

    I wondered if this was something you had considered with FCCN?