French Connection disappointing sales put off analysts

Wednesday, 08 February 2012
The second profit warning issued by the British retailer in a matter of three months has led down both the market and analysts, as a better performance was expected. French Connection has confirmed that its full-year profits will be under previous estimates due to weak sales in Christmas.

"Trading in our retail stores in UK/Europe was disappointing in the early part of the autumn/winter season and this continued through the Christmas trading period," French Connection said in a statement. "The effect of this has been to negate the growth in like-for-like sales achieved in the first half of the year and to cause the gross margin to be lower than expected."

The company will publish full results for the 12 months ending January 31st 2012 in March. Expected profit before tax for the year would be close to the f £4.7 million that is nearly a 40% down from previous year’s £7.3 million.

The revised profit guidance has been considered as a big step back by many in the market, as French Connection had recently managed to overcome several years of decline which saw the group post heavy losses in 2009 and 2010. Nevertheless, there is room for hope as, thanks to the growth in many areas of the business, the British retailer is expecting to finish the year with net cash reserves of around £33
million and no debt.

“Wholesale deliveries in the second half of the year have shown good growth over the previous year and the forward orders for the Spring/Summer season are ahead of this time last year,” the group’s statement continued, adding that “Our international operations and brand licensing partners continue to perform strongly.”

Soon after French Connection released its profit warning, various analysts downgraded the stock. For example, Freddie George, analyst at Seymore Pierce, has placed fashion retailer French Connection (FCCN.L) under review and downgraded his 2012 profits forecast following a disappointing trading update.

The analyst warned that 'After a second profits warning in six months management will need to improve credibility before any change in view.' The company, which ended its financial year on 31 January, now says it expects pre-tax profit to be in the region of GBP4.7m (US$7.4m) including a one-off exchange gain of GBP0.7m.

Consequently, George has downgraded his 2012 financial year pre-tax profits forecast from £5 million to £4 million, and his earnings-per-share forecast for the year from 4.0p to 3.2p. The analyst warned that 'After a second profits warning in six months management will need to improve credibility before any change in view.

Shares in French Connection closed at 52p on Monday, down 7p. The group is due to report its full-year results on 14 March.

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