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French Connection Bleeding Cash

Struggling French Connection, losing cash fast, is barely surviving as retail losses from temporarily closed stores overshadow gains in wholesale operations.

In a Nutshell: In what may be the last public disclosure of French Connection’s financial performance on the eve of the company’s sale, the first-half statement shows an ailing retailer in deep distress.

The British retailer, best known for its provocative “FCUK” logo, managed to narrow its losses from a year ago, as well as from the same 2019 period. Cost-cutting initiatives, however, didn’t do much to improve cash flow.

French Connection completed the six-month period ended July 31 with net funds of just 1 million pounds ($1.4 million). That’s a significant 80.8 percent drop from 5.2 million pounds ($7.1 million) in 2020, and represents a 90.0 percent slump from net funds of 10.0 million pounds ($13.6 million) in 2019. Cash flow from operations for the period before capital expenditures, store disposal cost and lease liabilities, interest and taxes were 6.4 million pounds ($8.7 million), an improvement from 3.7 million pounds ($5.0 million)  in 2020 and 1.2 million pounds ($1.6 million) in 2019.

Group operating expenses dropped by 44.3 percent, mostly due to store closures and restructuring initiatives.

French Connection earlier this month said it accepted a 29 million pound ($39.5 million) takeover from a consortium that includes chairman and CEO Stephen Marks, who founded the chain in 1972, and Apinder Singh Ghura, the second largest shareholder in the British retailer. The transaction is pending formal shareholder approval.

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Suffering losses and in need of cash flow, the British fashion retailer has officially been on the market since March. The company had considered selling itself in 2018, when it opened a strategic review. But in January 2020, the money-hemorrhaging retailer abandoned that route.

Marks said he plans to retire following the acquisition by the MIP Holdings Ltd. consortium.

““I am pleased that the improvement in business we saw in the early part of the period has continued throughout the first half of the financial year. Wholesale in both the UK and the US has performed well, with a good outcome to the Summer season,” Marks said. “Over the last 5 years, French Connection has made significant progress in its plans to rationalise the size of its store portfolio and to return the Group to profitability.”

On Oct. 6, two days after the British retailer said it had accepted the takeover offer, Britain’s accounting watchdog—the Financial Reporting Council (FRC)—said it was probing Mazars in connection with its audit of French Connection. The investigation, which began in July, is centered on the audit for the year ended Jan. 31, 2020. While the accounting firm said it was cooperating with the probe, there was no other information detailing what the FRC might be focused on.

Net Sales: Group revenue for the period was 40.2 million pounds ($54.7 million), reflecting a 68.2 percent gain from 23.9 million pounds ($32.5 million) in the same 2020 period, but a 21.2 percent decline from 2019’s 51.0 million pounds ($69.4 million).

Drilling down further, the company’s wholesale operations are faring better than its retail business. Wholesale sales were 28.8 million pounds ($39.2 million), representing a 108.7 percent increase from 13.8 million pounds ($18.8 million) from 2020, and a 5.9 percent gain from 27.2 million pounds ($37.0 million) in 2019.

In contrast, retail sales were 11.4 million pounds ($15.5 million), reflecting a 12.9 percent increase from 10.1 million pounds ($13.8 million) in 2020, but a 52.1 percent drop from 23.8 million pounds ($32.4 million) in 2019. Retail losses reflect store closures for 11 weeks due to Covid-19 restrictions, as well as the reduction in the store portfolio since 2019.

E-commerce sales grew 9.4 percent for the period and is 50.9 percent of overall retail revenue. Like-for-like sales were down 11.9 percent from 2019 levels.

Earnings: The group operating loss narrowed to 900,000 pounds ($1.2 million), reflecting a 92.6 percent improvement from a loss of 12.2 million pounds ($16.6 million) in 2020 and a 75.0 percent improvement from the loss of 3.6 million pounds ($4.9 million) in 2019.

CEO’s Take: “There still, however, remains a risk of disruption to trading due to any future Covid-19 restrictions, particularly through the winter months, together with other macro-economic factors including the current constraints in the global supply chain and the impact on the availability of merchandise at the correct time,” Marks said.