17 September 2019

FRENCH CONNECTION GROUP PLC

Interim Results for the six-month period ending 31 July 2019

"Building on good progress, on track to meet expectations"

French Connection Group PLC ("French Connection" or "the Group") today announces results for the six month period ending 31 July 2019.

Highlights:

  • Group revenue of £51.0m (2018: £58.1m) down 12.2% (down 14.0% at constant currency) with the ongoing reduction of the store portfolio and a shift in timing of wholesale shipments into the second half of the year.
  • UK/Europe retail and ecommerce LFL sales in UK/Europe of 1.4% (2018: down 7.0%) achieved despite difficult trading environment.
  • Composite gross margin improvement to 42.7% (2018: 41.5%) with higher full price sales in wholesale partially offset by a larger mix of outlet store sales in retail.
  • Seven non-contributing stores and two outlets closed during the half. One new store in Central London.
  • Wholesale revenue down 11.7% (down 14.4% at constant currency) driven by later phasing of UK/Europe shipments.
  • Growth in licensing income to £2.7m (2018: £2.6m) with DFS performing strongly again.
  • Underlying operating loss pre-IFRS 16 adjustments reduced to £5.3m, an improvement of £0.2m (2018: loss of £5.5m).
  • Operating loss of £3.7m including IFRS 16 and onerous lease provision adjustments.
  • Period for Strategic Review and Formal Sale Process extended until the end of the financial year.
  • Closing cash of £10.0m (2018: £12.8m).
  • Group results in line with expectations.

Commenting on the results, Stephen Marks, Chairman and Chief Executive said:

"I am pleased that the changes we have made to the business over the last few years continue to move us forward. There is no doubt that progress has not been helped by the trading conditions in which we operate in the UK, although our retail performance has been resilient, overall the wholesale business is strong and we continue to see good stability in the licence income. The order books we have provide a clear outlook for the second half of the year in wholesale but it appears that retail conditions will continue to be challenging. Underpinned by these results we remain fully on track to achieve our expectations for the financial year."

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Notes:

1. Key performance indicators for the 26 week trading period are outlined below:

H1 19/20

H1 18/19

Var %

Total Group revenue (£m)

51.0

58.1

(12.2%)

Total Retail revenue (£m)

23.8

27.3

(12.8%)

Total Wholesale revenue (£m)

27.2

30.8

(11.7%)

Total Licensing income (£m)

2.7

2.6

+3.8%

Retail LFL (%)

1.4

(7.0)

Average UK/Europe Retail Space (sq.ft. '000s)

151.0

164.5

(8.2%)

Average Group Retail Space (sq.ft. '000s)

161.3

177.1

(8.9%)

Number of stores/concessions:

-

Operated

90

103

(12.6%)

-

Franchised, Licensed & JV

185

204

(9.3%)

Underlying gross margin (%)

41.8

41.5

+30bps

Underlying operating loss before taxation (£m)

(5.3)

(5.5)

+3.6%

Net cash position (£m)

10.0

12.8

(21.9%)

Notes:

  1. Operating Loss excludes adjusting items and discontinued operations.
  2. Underlying Operating Loss excludes adjusting items, discontinued operations, onerous lease releases and IFRS 16 adjustments.
  3. Underlying Gross Margin excludes IFRS 16 adjustments.
  4. Constant Currency is calculated translating the half year ending 31 July 2019 at 31 July 2018 rates to remove the impact of exchange rate fluctuations.
  5. LFL or "Like-for-Like" sales growth is defined as the year-on-year sales growth for owned stores and concessions open more than one year, including ecommerce revenues, removing the impact of closed stores and reported in constant currency.

The Directors believe these measures are best reflective of how the business is managed and are informative to shareholders in understanding the performance of the business.

Enquiries:

Neil Williams

French

+44 (0) 20 7036 7207

Lee Williams

Connection

Tom Buchanan

Paternoster

+44 (0) 20 3012 0241

Catriona Woolner-Winders

Communications

FRENCH CONNECTION GROUP PLC

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CHAIRMAN'S STATEMENT

I am pleased to report that during the first half of the year we have built on the good progress we achieved last year, where we returned the Group to underlying profitability. This has been achieved against a trading background in the UK that has continued to be extremely challenging particularly in the retail sector.

The wholesale business again grew strongly during the period in the USA although we were impacted by a change in the ordering profile of certain larger customers in UK/Europe with a shift of sales into the second half of the year. Given the general trading environment, Retail performed well, achieving a 1.4% increase in like for like sales. Overall the underlying operating loss, excluding the IFRS 16 and Onerous Lease adjustments, improved by £0.2m in the period to £(5.3)m. The operating loss from continuing operations was £(3.7)m (2018: £(5.5)m).

The growth trend we have seen with those wholesale customers in UK/Europe who have significant online businesses as well as with the department stores in the USA, is continuing during the second half of the year and is reflected in our current level of Winter 19 orders and the change in the phasing of deliveries into the second half of the year.

Licence income improved reflecting a strong performance again from DFS, some new licences but this was partially offset by reduced income from fragrance.

Wholesale

Revenue decreased by 11.7% to £27.2m (14.4% at constant currency). We achieved continued good growth in the USA but this was offset by the shift in sales for the UK/Europe division from the first to the second half of the year. Our major customers in the UK continued to grow their orders overall, despite the general trading conditions, particularly those with online operations, both pure play and multi-channel. In the USA good progress was made with the department stores, especially Bloomingdales and Nordstrom, where the sell through was strong again.

Underlying gross margin increased strongly to 32.7% (2018: 30.8%) reflecting an increased proportion of full price sales, an improvement in the underlying margins and reduced customer support. Tight control of operating costs meant that although they increased by 2.0%, this was mainly due to the translation of US costs into sterling, with costs declining by 2.4% at constant currencies resulting in the overall underlying contribution from the wholesale division only reducing by £0.7m to £3.9m excluding IFRS 16 and onerous lease adjustments.

We expect to increase sales, compared to last year, over the remainder of the year, given the existing Winter 19 order books and the positive reaction that we have received so far to the Summer 20 collections.

Retail

Overall revenue decreased by 12.8% to £23.8m (13.5% at constant currency). This was the combination of the planned reduction in our store portfolio with an 8.9% reduction in Group average space traded offset by a 1.4% increase in like for like sales in UK/Europe. The period started and finished well for us with some softness around Easter, however we were pleased with the overall performance given the general market conditions. Our Oxford Street store closed as planned during the period. In response to this and the desire to maintain a central London presence in July we opened a new concept store close by in Duke Street, called the Studio, showcasing exclusive merchandise and a curated selection of product. The result so far has been encouraging, but it is still early days.

Underlying gross margin was 52.1% (2018: 53.5%), reduced by the impact of the higher proportion of sales through our outlet stores as the full price store portfolio reduced as planned and a higher level of promotional activity to clear stock during the sale period. Overheads were 16.1% lower due to the reduced store portfolio, in particular Oxford Street closed during the period. Underlying overheads were 3.1% lower overall after some business rates and payroll cost increases were offset by lower rentals achieved on lease extensions. As a result overall the underlying loss from the retail division reduced to £6.7m (2018: £7.2m) excluding IFRS 16 and onerous leases adjustments.

Within this, ecommerce revenue reduced slightly. A new team is in place and progress has been made with the site particularly around personalisation of communication, with further customer experience enhancements to be rolled out during the second half of the year to drive engagement and conversion, together with an increased investment in digital marketing spend to drive traffic. We expect the impact of this to grow towards the later part of the second half of the year. As we further develop the site, the key focus is very much on the experience for mobile users and the activity generated through mobile continues to grow with visits at 63.6% up from 56.4% last year.

Licensing

Licence income was slightly up on last year at £2.7m (2018: £2.6m). DFS has continued to perform strongly and we expanded the selection with some good results. We saw an initial contribution from our new luggage licence and further development of homeware ranges in the US although sales within the fragrance category were more challenging than in the previous year.

Operating expenses

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Group underlying operating expenses dropped by 8.5% (10.0% at constant currency). The majority of the saving was in relation to the net store closures but there was also a small reduction in overall costs reflecting the continued focus in this area.

Other items

Adjusting items incurred during the period amount to £1.0m. This is made up of store closure costs, the reorganisation of some of our overseas franchise relationships and the cost of a head office restructuring.

Cash at the period end was £10.0m (2018: £12.8m), reflecting the losses made during the first half of the year. We continue to believe that the business is best served by retaining our current cash reserves to support the turnaround of the business especially with the increased working capital requirements given the growth in the wholesale business and therefore do not recommend the payment of an interim dividend.

In October last year, following press speculation regarding the potential sale of the Group, we announced that we were in the process of reviewing all strategic options in order to deliver maximum value for shareholders. Alongside several potential strategic options, the review includes the consideration of all types of corporate and brand transactions, including seeking offers for the Group. As disclosed at the time, we had commenced preliminary discussions with several interested parties and we have had conversations with several other interested parties regarding the Group's plans. Discussions are still ongoing with a number of parties. We initially expected this strategic review (including the formal sale process) to conclude during the first half of 2019, but as announced on 28 June, given the active ongoing discussions, we extended this process to now. We believe that further time is required to bring the process to a successful conclusion and expect the process to be concluded by the end of our current financial year.

Outlook

I am pleased that the changes we have made to the business over the last few years continue to move us forward. There is no doubt that progress has not been helped by the trading conditions in which we operate in the UK, nevertheless our retail performance has been resilient, the wholesale business is strong and we continue to see good stability in our licence income. The order books we have provide a clear outlook for the second half of the year in wholesale but it appears that retail conditions will continue to be challenging. Underpinned by these results we remain fully on track to achieve our expectations for the financial year.

Stephen Marks

Chairman and Chief Executive

17 September 2019

Notes:

  1. Operating Loss excludes adjusting items and discontinued operations.
  2. Underlying Operating Loss excludes adjusting items, discontinued operations, onerous lease releases and IFRS 16 adjustments.
  3. Underlying Gross Margin excludes IFRS 16 adjustments.
  4. Underlying overheads consist of LFL store overheads.
  5. LFL or "Like-for-Like" sales growth is defined as the year-on-year sales growth for owned stores and concessions open more than one year, including ecommerce revenues, removing the impact of closed stores and reported in constant currency.
  6. Constant Currency is calculated translating the half year ending 31 July 2019 at 31 July 2018 rates to remove the impact of exchange rate fluctuations.
    .
    The Directors believe these measures are best reflective of how the business is managed and are informative to shareholders in understanding the performance of the business.

FINANCIAL REVIEW

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Financial results overview

The start to the financial year has seen a continued improvement in underlying profitability. The first half, which is a traditionally low point in the year, generated an operating loss from continuing operations of £(3.7)m, an improvement of £1.8m (32.7%) on the previous year (2018: £(5.5m)). Including adjusting items, the Group reported total loss for the period of £(4.7)m (2018: £(5.8)m).

Overall we have seen a good performance in our Retail division compared with the market as a whole, with like-for- like growth of 1.4% in the half. Licensing has also moved forward slightly on the year. However, the timing of winter orders, a reduction in expected reorders and a lower level of clearance deals in the half has impacted the performance of our Wholesale division.

The current reporting period is inclusive of the implementation of IFRS 16 which has resulted in presentational changes to the Income Statement, Balance Sheet and Cash Flow. In addition, the underlying result on a like-for-like basis has benefitted from the adoption of IFRS 16 'modified retrospective' approach (see Note 8 'Change in Accounting Policy').

Adjusted underlying operating result, excluding the impact of IFRS 16 and onerous leases recognised in previous years, is a loss of £(5.3)m, an improvement of £0.2m compared to loss of £(5.5)m in the previous year.

Revenue overview

Total H1 2019 revenue of £51.0m was 12.2% (14.0% at constant currency) lower than the previous year (2018: £58.1m) due in part to a reduced store portfolio. Wholesale revenue grew in North America, but fell in UK/Europe due to shipment timing, with an overall decline of 11.7% (14.4% at constant currency) in the period. Overall retail sales reduced by 12.8% (13.5% at constant currency) following continued reduction in stores, with a UK/Europe LFL performance of +1.4% (2018: -7.0%).

Gross margin

Composite gross margin of 42.7% was up by 120bps (2018: 41.5%). The Wholesale margin at 34.2% was up on the

year by 340bps (2018: 30.8%) reflecting the impact of reduced clearance sales. Retail margin was 52.5% which was

down on the year by 100bps (2018: 53.5%), driven by a larger proportion of outlet sales.

Wholesale

Wholesale revenue decreased with sales of £27.2m, down £3.6m (11.7%) on last year (14.4% at constant currency). We saw continued growth in North America of 12.4% driven by the Department Store business but a decline in UK/Europe of 23.4% due to the reduction in clearance sales and timing over the half year of winter despatches. In our Rest of World segment, there was a continued reduction in sales (at a lower margin) to our partners in Australia and Hong Kong.

Group wholesale gross margin improved to 34.2% (2018: 30.8%) reflecting an increased proportion of full price sales in the half as well as the reduced customer support. However, US stock levels were higher following earlier intake of stock than the previous year.

Sell through rates across the board have been good, but particularly in the US department stores where we continue to do well. This has been reflected in the strong order books that we have for Winter 19 and the positive feedback we have received to the Spring 20 collection.

Underlying wholesale profitability, excluding the impact of IFRS 16 and onerous leases, was £3.9m (2018: £4.6m),

with costs increasing by 2.0%. Statutory reported wholesale operating profit was £4.8m (2018: £4.6m).

Retail

Group retail revenues of £23.8m were 12.8% lower than the prior year (2018: £27.3m) (13.5% lower at constant currency) mainly due to the reduced store portfolio but offset slightly by LFL improvement of 1.4% in UK/Europe. Nine non-contributing stores including two outlets in the last six months and three concessions closed, with another two concessions being opened. Our Oxford Street store closed during the period but to maintain a Central London presence, we opened a new concept store close by in Duke Street, called The Studio.

Retail gross margins of 52.5% (2018: 53.5%) were lower on the year, mainly as we continue to see the impact on the sales mix of closing full price stores faster than outlets.

The underlying retail loss, excluding the impact of IFRS 16 and onerous leases, of £(6.7)m was a welcome step forward in performance of the division following the previous decline in 2018 to a loss of £(7.2)m. The improvement was driven by the return to LFL growth and store closures. We continue to review each store depending upon circumstances and opportunities available to us. We however continue to see upward cost pressures from a combination of rates and wages but have successfully renegotiated several leases to reduce overall rent for continuing stores. Statutory reported retail operating loss was £(5.2)m (2018: £(7.2)m).

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French Connection Group plc published this content on 17 September 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 17 September 2019 06:21:00 UTC