French Connection (LON:FCCN) are growing sales and look likely to return to profitability this year despite a tough environment for retailers.
Growth in like-for-like sales with UK/Europe was up 0.8% over the year (in 2017 it was 4.4%). Wholesale revenue was up 8.6% from UK/Europe and North America. The company has reported an improved contribution to LFL sales from retail thanks to portfolio rationalisation. The retailer made a pre-tax loss of -£2.3m for the FY 2018 (-£5.3m in 2017.) FC has closed 11 stores and the opening of a ‘concept’ store in Manchester suggests the firms is looking to keep ahead of the intense competition.
French Connection shares soared double digits on a 300% ramp up in volumes on Monday ahead of its earnings release on Tuesday. FCCN shares have been bottoming out over the past month near £28. Renewed interest in the shares reflect hopes for an earnings turnaround and speculation Sports Direct (LON:SPD) may up its stake. Sports Direct increased its ownership of Debenhams (LON:DEB) to 30% this year and could make similar moves into French Connection.
The retail sector has had such a beating that it is one of the few areas investors can find some value. A PE ratio of 13 for the retail sector compares favourably with 17 for the wider UK stock market. The trick is finding a retailer with the right formula to navigate online competition. A jump in the number of announced store closures and bankruptcies highlights the risks involved. We think French Connection is on the brink of profitability thanks to strength in wholesale and a rationalisation of its retail portfolio. French Connection offers an increasingly rare opportunity for substantial earnings growth in a difficult retail sector. £45 would be a natural resistance to price gains should the current price momentum continue.
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