Completion of Strategic Review and Final Results

RNS Number : 5488I

French Connection Group PLC

15 March 2010

 

15 March 2010

 

FRENCH CONNECTION GROUP PLC

 

Completion of Strategic Review, Announcement of Sale of a Business and Preliminary Results for the year ended 31 January 2010

 

"Restructuring to return French Connection to Profitability"

 

French Connection Group PLC ("French Connection", "the Group") today announces the completion of its strategic review, which was instigated early last year with the aim of enhancing both profitability and cash generation. In addition to the measures previously announced, the Group today announces the closure of loss making operations internationally and the sale of the Nicole Farhi brand.

 

The new steps being announced today are as follows:

 

·; the sale of Nicole Farhi to OpenGate Capital for a consideration of up to £5 million. In the year ended 31 January 2010 this business generated revenue of £21.7 million and operating losses of £5.6 million. This sale may require shareholder approval. A further announcement will be made as soon as possible on this matter; and

 

·; closure of the majority of the under-performing French Connection retail stores in the US at a one-off cost of £6.5 million but leading to an annual reduction in losses of £3.2 million.

 

Once fully implemented these actions, along with the previously-announced exit from the Japan market, will result in a more focused business which is expected to be profitable and cash generative providing a solid base from which to develop the retained brands.

 

Looking forward strategic focus will be on building on the successes of French Connection, Toast and Great Plains.

 

French Connection also announces its preliminary results for the year ended 31 January 2010.

 

Results Highlights are as follows:

 

·; Operating profit from businesses to be retained of £1.3 million (2009: loss of £(0.7)million), on revenue that increased 1% to £200.3 million (2009: £198.6 million)

·; Like-for-like sales in the UK/Europe retail business to be retained increased by 2.8% driven by a continued resilient performance from French Connection ladies' wear, e-commerce and Toast.  Forward orders in the UK/Europe wholesale business increased for the Winter 2010 season

·; Reported Group loss after tax, (including losses generated in businesses to be discontinued, closure costs and asset revaluations associated with the restructuring) was £(24.9) million (2009: loss £(16.4) million)

 

·; Strong balance sheet with closing net cash of £35.7 million, with tightly controlled working capital

 

·; Dividend proposed of 0.5p for the year (2009: total dividend 1.7p)

 

 

 

Commenting on this announcement, Stephen Marks, Chairman and Chief Executive of French Connection said:

 

"The strategic review is now complete. We have had to make some tough decisions, but our exit from the Japanese market, the reduction of our US retail presence and the sale of Nicole Farhi, together with a reduction in our overhead base, leaves us with a continuing business that we expect will be both profitable and cash generative even in the current difficult economic environment."

 

"It is sad to see the Nicole Farhi brand leaving the Group, but I am delighted that its new owners are totally committed to nurturing the brand and the considerable talents of the team so that its full potential is realised."

 

"In a very difficult economic environment, our ongoing businesses have performed reasonably in the past year. Our UK/Europe retail business has achieved like-for-like sales growth of 2.8%, and Toast achieved revenue growth of 16%. Forward orders in our core UK/Europe wholesale business have increased for the Winter 2010 season. This gives us confidence that the business is returning to sustainable growth for the longer term."

 

"Our balance sheet remains solid with cash of £35.7 million at the end of the year. Our current advertising campaign is being well received by both media and consumers alike and we are now well positioned to benefit from any recovery in the economy."

 

 

Enquiries:

 

Stephen Marks/Neil Williams/Roy Naismith French Connection +44(0)20 7036 7063

Tom Buchanan/Deborah Spencer Brunswick +44(0)20 7404 5959

 

Notes to Editors:

 

French Connection:

Following the changes planned as a result of the strategic review, the French Connection brand will comprise retail or wholesale businesses in the UK, Europe, the US, Canada, Hong Kong and China along with licensed partners operating in a number of other countries most notably Australia, Singapore, Thailand and South Africa. In addition the successful brand licences will continue under which partners produce jewellery, toiletries, shoes and eyewear. Along with the French Connection brand, the Group operates the Great Plains brand, a wholesale-only ladies' wear range, Toast, an e-commerce fashion and homeware brand, and YMC, a small men's and women's wear brand and store.

 

OpenGate Capital:

OpenGate Capital is an opportunistic private equity firm that acquires controlling interests in businesses with solid fundamentals which exhibit opportunities for operational improvements and growth. Established in 2005, OpenGate Capital has a global footprint with headquarters in Los Angeles, USA and a principal office in Paris, France. OpenGate is served by a seasoned team of M&A and operating professionals that bring the skills needed to acquire, operate and build successful companies. The partners of OpenGate have executed over 75 transactions worldwide ranging from corporate divestitures, turnaround acquisitions, industry consolidations and other special situations investments across a wide array of industries and geographical markets.

 

Completion of Strategic Review

 

Introduction

 

French Connection Group PLC ("French Connection") today announces the completion of its strategic review, targeted at enhancing both profitability and cash generation.

 

Following a review of all areas of the Group's business, management are making, or have made, the following changes to improve the Group's profitability:

 

·; the proposed sale of the Nicole Farhi business (announced today)

·; closure of loss making retail stores in US (announced today)

·; closure of the French Connection business in Japan (previously announced)

·; withdrawal from retail operations in Northern Europe (previously announced)

·; reduction of central overhead costs (previously announced)

 

These actions will result in a smaller, more focused and profitable business providing a solid base from which to develop the retained brands.

 

Sale of Nicole Farhi business

 

French Connection Group PLC ("French Connection") today announces that it has exchanged contracts on the sale of the business and assets of the Nicole Farhi business to Fashion Runway Limited, for a consideration of up to £5 million as detailed below.

 

Fashion Runway Limited ("the Purchaser") is the UK acquisition vehicle set up for the purpose of this transaction by OpenGate Capital, a private equity investor based in Los Angeles, USA and Paris, France.

 

Nicole Farhi is a highly respected designer label founded within the French Connection Group by Stephen Marks and Nicole Farhi in 1982. The brand comprises ladies' wear and men's wear designer garment ranges along with homewares, accessories and other related products. The business operates both its own stand-alone stores and through concessions in leading department stores in the UK and has a significant wholesale business supplying specialist retailers around the world.

 

The transaction comprises a sale of the assets and liabilities of the Nicole Farhi business along with a transfer of the relevant employees and property leases. This transaction may require shareholder approval and is subject to a number of pre-completion conditions including landlord approvals for lease assignments. A further announcement will be made as soon as possible.

 

The consideration of up to £5 million comprises £0.5 million in cash, payable on completion, followed by further payments of up to £4.5 million in cash, payable from 50% of the net cash generation of the Nicole Farhi business over subsequent years with an upper limit of £1 million payable per year (upper limit of £500,000 in the first year). Any outstanding consideration will be settled insofar as possible from any sales proceeds achieved from any subsequent sale of the business by the Purchaser. The proceeds of the proposed sale will be used by French Connection for general corporate purposes.

 

French Connection will support the transition of the Nicole Farhi business into new ownership by providing support office functions and other transitional services for up to two years at no cost to the Purchaser and will also provide financial support for restructuring costs during the first year of £450,000. French Connection will provide further support to the Purchaser if required in the form of guarantees or rent deposits of certain premises to facilitate the transfer or underletting of those premises to the Purchaser.

 

The gross assets which are subject to the transaction are £11.0 million with a net asset value of £6.5 million including cash of £1 million. In the year ended 31 January 2010 the Nicole Farhi business generated revenue of £21.7 million and operating losses of £5.6 million, having been loss making for a number of years. As a result of the sale there is an impairment to the carrying value of certain of the Nicole Farhi assets on the French Connection consolidated balance sheet at 31 January 2010. The remaining effect of the disposal will be reported in the year ending 31 January 2011.

 

Closure of US retail stores

 

French Connection intends to close the majority of its US retail operations as soon as is practical. The portfolio will be reduced from the 23 current locations to approximately six stores. It is expected that the closure process will be achieved at a cash cost in the region of £6.5 million and will take up to twelve months to implement. Provisions for costs expected to arise from the planned closure have been made in the French Connection results for the year ended 31 January 2010.

 

Following the closures, the ongoing US business will comprise the successful and growing wholesale operation supplying French Connection product to major department stores and specialty stores across the country. This will be supported by a small number of retained French Connection branded stores together with an ongoing e-commerce operation.

 

CHAIRMAN'S STATEMENT

 

Preliminary Results for the year ended 31 January 2010

 

Dear Shareholders,

 

The last year has proved to be very challenging for the Group, and we have had to use all our experience and expertise built up from over 40 years of business in order to minimise the effects of the difficult economic climate. This led us to take a series of strategic decisions that, once concluded over the coming months, will leave the remaining business in a significantly stronger position and should enable the Group to grow and prosper in the future.

 

We recognised early in 2009 that it would be necessary to make structural changes to the Group in order to protect the core business for the long term. The resulting strategic review has now been completed and we have taken some tough decisions but the changes will leave us with a continuing business that we expect will be both profitable and cash generative, even in the current difficult economic environment. The Group continues to have substantial cash resources which has been of significant benefit to us enabling us to focus solely on managing business operations.

 

Against the prevailing background of difficult economic conditions during the early part of the financial year, the Board reviewed all aspects of the Group's operations to determine the most appropriate structure for the future. This has resulted in the following actions that have either already been completed or will be implemented over the coming months:

 

·; the sale of the Nicole Farhi business;

·; closure of the majority of the French Connection retail stores in the US;

·; closure of all the French Connection business in Japan;

·; closure of the under-performing retail operations in Northern Europe; and

·; reduction of central overhead costs.

 

We have already completed the closure of the Japanese and Northern Europe businesses, successfully reduced central overheads and have entered into an agreement for the disposal of Nicole Farhi. The other actions will take up to twelve months to implement and our aim is to make the necessary changes with as little impact as possible on the on-going businesses.

 

Our financial results in the last year can be separated between those businesses which will not be part of the Group in the longer term, and those core businesses which will continue. These core businesses achieved revenue of £200.3 million in the year to 31 January 2010 (2009: £198.6 million) and the operating profit of these businesses was £1.3 million (2009: loss of £(0.7) million) before gains or losses on disposal of leases. The loss after tax of the entire Group in the year to 31 January 2010 including the losses generated in businesses which are classified as discontinued together with closure costs and asset revaluations in relation to the restructuring amounted to £(24.9) million (2009: £(16.4) million). Cash generated from operations during the year amounted to £2.0 million including a significant release from improved working capital management during the year. The Group retained £35.7 million of cash at 31 January 2010 (2009: £38.4 million). Based on our confidence in the expected benefit from the restructuring and our cash position the Board has recommended a dividend of 0.5 pence per share for the year.

 

The core businesses have performed reasonably in the past year, despite the difficult environment. Our UK/Europe French Connection retail business has achieved like-for-like growth of 2.8% in the year and Toast achieved a 16% growth in revenue overall. Although this financial year has been difficult in our UK wholesale business, forward orders are showing an increase for the Winter 2010 season for the first time for some years. Based on this and the structural changes we have made we are looking forward to a return to overall growth and to position ourselves to benefit from any recovery in the economy in the longer term. We expect to remain in a net cash position, even after taking account of costs associated with making the changes to the Group referred to above.

 

During the year we have continued to see strong growth from the French Connection ladies' wear business both in the retail and wholesale channels. This performance is in addition to the growth seen for the last three years and provides us with great confidence that the core focus on fashion forward, high quality merchandise is the correct strategy. Menswear has continued to underperform in the past year, however we are determined to achieve improvements in this business, and believe the benefit of our efforts is beginning to be seen, with an improvement in recent performance within our retail stores. This improvement will drive additional profitability so long as it is sustained and we continue to look for further development in this area.

 

The importance of the internet as a distribution and marketing channel has continued to grow over the last year and we have invested considerable effort in this and benefited accordingly. The team that we have in place has done a fantastic job to ensure that we have generated considerable growth and we look forward to continuing this over the coming year both in the UK and also in Europe and North America.

 

We have seen consistent growth in Toast over the year. Greater emphasis has been placed on establishing a retail presence in the cities that are appropriate for Toast, which, coupled with a good growth in sales in the existing shops, has resulted in a good improvement. The mail order business, underpinned by the distribution of the catalogue, has also continued to grow, with a much greater penetration of orders being taken on the internet. We have continued to invest in the infrastructure required to enable this business to develop in the future.

 

Both the product and country licensees have seen good growth over the year. In the UK, toiletries and eyewear have made good advances and we expect to see this continue in the future. Australia, India and Hong Kong have seen good sales growth over the year driven by additional sites and organic growth within the existing store portfolios. The plans currently in place indicate that this will continue over the coming year.

 

We continue to have great confidence in the French Connection brand and to support this we have recently launched a new advertising campaign aimed at developing perceptions of the brand in the minds of the consumer. The response to date has been very strong with a particularly strong response on-line where it has caught the imagination of opinion leaders and style conscious consumers. This will run for the remainder of the season and will help to build brand credibility.

 

I am personally very sad to see the Nicole Farhi brand leaving the Group, however we believe that the added focus that this change will enable us to place on the core businesses and the improvement in cash resources will benefit the Group in the long term. I would like to thank all those involved with Nicole Farhi for all their efforts in the past and wish them all good luck in the future.

 

The French Connection Group business is built on the hard work and commitment of our employees and this past year has been one of the most difficult we have all had to face in many years. The headcount reductions that we felt were imperative to make earlier in the year have made their tasks all the harder. I thank them for their continued dedication, commitment and hard work during this challenging period and look forward to them seeing the benefit of the changes we have made over the next year.

 

This has been a very difficult year, however I am confident that the changes we have made will create a solid base for the development of the business and will enable the Group to return to profitability in the near future.

 

 

 

 

Stephen Marks

Chairman and Chief Executive 15th March 2010

 

BUSINESS REVIEW

 

Introduction

The financial year ended 31 January 2010 has been a very difficult one for the French Connection Group. The world-wide recession had a significant effect on our trading performance and resulted in the stalling of our recovery. The Board implemented a strategic review at the start of 2009 with the aim of making the changes necessary to return the Group to profit and cash generation as soon as possible. This review has resulted in the following actions:

 

·; termination of our retail operation in Japan resulting in the closure of 21 stores;

·; the implementation of a plan to dispose of the Nicole Farhi business, resulting in an agreement for sale which will be concluded in 2010;

·; planned closure of the majority of our retail stores in the US which we expect to complete over the next 12 months;

·; closure of the under-performing stores in northern Europe; and

·; focused reductions in overhead costs including reductions in the number of staff in each of our three main head office locations around the world.

 

These actions and their financial implications are discussed in more detail below along with a review of the business over the financial year. The implementation of the changes will incur a significant cost during the year ended 31 January 2011 but this will be funded from the existing cash resources of the Group and, once completed, the continuing businesses will be cash generative. The net cash cost of the changes described above will be £8.5 million and the net annual impact on the Group's results will be an improvement of £12.5 million.

 

This business review will focus on the core businesses which are expected to be retained for the longer term, while also commenting on the changes planned within each reporting segment. Within the statutory annual accounts, the performance of the Group is analysed between continuing and discontinued activities. The continuing activities include the US retail business that is to be closed during the current year while the discontinued activities include the Japan business and the Nicole Farhi business (which, at 31 January 2010, was "held for sale"). In the detailed analyses below the US retail business has been aggregated with these discontinued business and then separated from the results of the businesses which the Group intends to retain for the longer term.

 

The total loss after tax of the entire Group for the year ended 31 January 2010 was £(24.9) million (2009: £(16.4) million) which can be further analysed as follows:

 

	2010 £m	2009 £m
Divisional operating profit generated by businesses which are to be retained	5.8	3.8
Group management overheads	(4.5)	(4.5)
Result of core businesses to be retained	1.3	(0.7)
Disposal of leases	(0.8)	2.0
Divisional total	0.5	1.3
Divisional operating loss arising from US businesses planned for closure	(3.2)	(3.0)
Provisions and impairments related to the planned closure of US stores	(6.5)	-
Impairment of goodwill	-	(11.9)
Net finance income	0.1	1.2
Operating loss	(9.1)	(12.4)
Share of joint ventures	0.4	0.6
Loss before taxation	(8.7)	(11.8)
Taxation	(0.2)	1.0
Loss after taxation	(8.9)	(10.8)
Loss after taxation of businesses classified as discontinued in the financial year	(9.4)	(5.6)
Provisions and impairments related to the discontinued businesses	(6.6)	-
Loss after tax for the year	(24.9)	(16.4)

 

Restructuring

The restructuring plans described above give rise to exceptional charges in the profit and loss account for the year amounting to £13.1 million. This comprises:

 

	2010 £m
Costs of closure of the retail business in Japan	2.5
Disposal costs and impairments relating to the planned disposal of the Nicole Farhi brand	4.1
Costs and provisions relating to discontinued businesses	6.6
Provisions and impairments related to the planned closure of US stores	6.5
Total	13.1

 

The closure of the stores in Japan was substantially completed prior to the year end and, although the accounting cost has included the cost of exiting leases and meeting obligations for property dilapidations, the net cash impact on the Group will be positive as substantial rent deposits are returned by the landlords and working capital is reduced.

 

The Nicole Farhi business has been classified as "held for sale" at 31 January 2010. Transaction costs incurred prior to the year end and impairments associated with non-current assets have been charged within discontinued activities. In accordance with International Accounting Standards, certain impairments concerning the current assets to be transferred will be recorded on completion of the transaction which is expected in the coming months. The disposal accounting in the year to 31 January 2011 will also reflect the sales proceeds and the remaining costs associated with the disposal.

 

During March 2010, the Company entered into an agreement with OpenGate Capital under which OpenGate will acquire the assets and liabilities of the Nicole Farhi business for a consideration of up to £5.0 million. Subject to completion of the disposal it is expected that the accounts for the year ending 31 January 2011 will reflect an accounting expense in relation to the asset disposal in the region of £4.5 million with a net cash cost of £3.0 million.

 

The asset impairments and provisions in relation to the US retail business reflect the Board's best estimate of the costs that will arise from the closure including associated fees. Management are engaged in the process of identifying the most efficient route to exit the leases. It is expected that the closure will be completed during the current year and in accordance with International Accounting Standards the results of this business for the year under review are presented within continuing activities, notwithstanding the action being taken. Subject to finalisation of this closure during the current year the results for the US retail business shall be presented as discontinued activities in the statutory accounts for the year ending 31 January 2011.

 

There were no significant costs associated with the closure of the Northern European stores.

 

Redundancy costs of £0.3 million were incurred across the Group as a result of the reductions in headcount in the head offices. This cost has been included in the operating costs of the relevant divisions.

 

The net cash cost of all of the restructuring is expected to amount to £8.5 million of which £0.8 million has already been incurred. During the year under review, the businesses will not be retained for the longer term accounted for an operating loss of £12.5 million.

 

Working capital management

During the year there has been a concerted effort to focus on reducing the working capital levels across the Group. The success of this strategy has been highlighted in reduced inventory levels. Part of this benefit has arisen from the closure of the Japan activities, but considerably tighter buying for the newer seasons and success in clearing older inventory has also contributed to the overall reduction. This has led to a cash inflow from working capital management of some £7.3 million compared with the £2.8 million inflow in the prior year. This has helped to mitigate the cash outflow that has arisen from the trading losses in the year and to preserve the cash balance of the Group which remains fundamentally unchanged from the strong position brought forward from the prior year.

 

Closing cash at 31 January 2010 amounted to £35.7 million (2009: £38.4 million) and existing banking facilities amounting to £10.3 million have been retained. The Board considers that this funding will provide sufficient working capital for both the development of the on-going businesses and the restructuring costs.

 

Divisional analysis

The divisional operating profit arising from the businesses which will be retained after the completion of the restructuring can be further analysed as follows:

 

	2010 £m	2009 £m
UK/Europe	2.6	2.7
North America	(0.5)	(0.2)
Rest of the World	2.9	3.3
	5.0	5.8
Group management overheads	(4.5)	(4.5)
	0.5	1.3

 

The results of the trading divisions are discussed in more detail below and the results of the businesses which will be retained in the longer term are identified separately from the total divisional results.

 

United Kingdom and Europe

Retail

Within the UK/Europe operating region the Group will retain its core French Connection retail portfolio in the UK and Ireland having closed eight locations in northern Europe early in the financial year. Nine concessions within El Corte Inglais stores in Spain and Portugal are also still in operation along with the seven Toast retail locations and the French Connection and Toast e-commerce businesses. As part of the disposal plans relating to the Nicole Farhi business, the 23 Nicole Farhi retail locations in the UK will be transferred or closed. A small number of other under-performing stores in the UK have also been closed during the year.

 

	Businesses to be retained			Total
	2010	2009		2010	2009
	£m	£m		£m	£m
Revenue	116.4	107.6		131.0	125.3
Gross profit	70.0	66.5		77.6	76.8
Gross margin	60.1%	61.8%		59.2%	61.3%
Trading overheads	(69.8)	(66.5)		(80.7)	(78.3)
Operating contribution	0.2	-		(3.1)	(1.5)

 

Revenue in the businesses which will be retained increased by 8% to £116.4 million (2009: £107.6 million) and, within that, like-for-like sales increased by 2.8% driven particularly by e-commerce sales in both French Connection and Toast. The retail portfolio grew during the year through the addition of a further ten concessions within House of Fraser department stores to bring the total to 31. These ladies' wear concessions have performed well and make a strong contribution to profit.

 

The sales performance of the French Connection brand has continued to recover and ladies' wear achieved a further increase in like-for-like sales of 4.8% over the year, supported by considerable growth in e-commerce. As previously reported, men's wear has performed less well and in order to address this, the design and merchandising teams are focusing on distinctive positioning for the men's wear ranges which will be supported by our new advertising campaigns. In the early part of the Summer 2010 season we have seen a small improvement in the performance of the men's wear ranges.

 

Toast has achieved remarkable growth during the year, despite the difficult retail environment, achieving a 16% increase in revenue and strong like-for-like growth in both its retail stores and e-commerce. The retail stores are all showing growth, a new store in Cheltenham has been added in the new year and other locations are being considered including potential sites in central London to replace the Selfridges concession which closed towards the end of the financial period.

 

The gross margin in the ongoing businesses was 60.1% during the year, a decrease of 1.7%. The decreases arose from the effect of weaker exchange rates through the period, which has the effect of increasing the cost of product imported, and from the effect of additional outlet stores within the mix. Core margins have remained largely consistent with the previous year and the proportion of sales made during discount periods remained similar. As can be seen from the balance sheet, stock levels have been tightened considerably and it is hoped that this will have a beneficial impact on the depth of discounts required to clear the terminal stock in the new financial year.

 

Underlying overheads in the business have been reduced during the year and are targeted to find further reductions. Despite this, overall store costs have increased by over 4%, attributable to uncontrollable increases in rents and rates along with volume-based increases arising in the e-commerce businesses. Five-yearly rent review settlements during the year have, on average, been concluded at lower rates of increase than previously as a reflection of the softening in the retail sector. However rent reviews concluded in the past year continue to reflect the growth of rents in the previous five years and the average rent increase settled during the year was equivalent to over 2% per annum. The costs of additional stores in the period were off-set by savings made from store closures.

 

The net contribution during the year from the businesses which are to be retained was a profit of £0.2 million (2009: break-even). Trading improvements will be required in order to generate acceptable operating margins and our aim is to generate these improvements through increased sales densities within the existing portfolio and from improved gross margins. These improvements will be generated from a continuation of growth in French Connection ladies' wear, a turn-around in the performance of men's wear and continued tight control of stock levels. We will also continue to manage the portfolio and, wherever possible, aim to dispose of unproductive retail space in a cost-efficient manner. Within Toast and e-commerce we aim to maintain the growth momentum seen in the last year, cautiously investing in these businesses to generate further profitable growth.

 

United Kingdom and Europe

Wholesale

	Businesses to be retained			Total
	2010	2009		2010	2009
	£m	£m		£m	£m
Revenue	32.8	40.1		39.4	47.5
Gross profit	10.2	12.6		10.9	13.4
Gross margin	31.1%	31.4%		27.7%	28.2%
Trading overheads	(8.9)	(10.4)		(10.4)	(11.9)
Operating contribution	1.3	2.2		0.5	1.5

 

The French Connection and Great Plains wholesale businesses will continue unchanged after the disposal of the Nicole Farhi business.

 

Wholesale revenue in UK/Europe declined significantly during the year predominantly due to reductions in orders for men's wear products as our wholesale customers reacted to a slow-down in their volumes over the past 18 months. While the decreases are disappointing, they very much reflect the mood of our customers who have generally found trading to be difficult over the past year and have responded appropriately. However, within their stores, ladies' wear continues to perform well in relation to other brands. We have received positive reactions to the 2010 ranges and we expect an increased order book going into the Winter season for the first time in a number of years. We expect that the development of the men's wear ranges will reap rewards within the wholesale division in coming seasons, however the cycles associated with a wholesale business mean that it is likely that this will take longer than in the retail channel.

 

Gross margins in the wholesale division are a little lower than the previous year with pressures from weaker Sterling.

 

Overhead costs in the division have been managed considerably lower with savings from reduced selling costs and tighter control of general overheads.

 

The net operating contribution from the entire division remained positive, albeit at a lower level due to the decline in volume. The impact on the division of the restructuring will be to improve the operating contribution, but improvement in the core trading performance remains the key focus of our work.

 

United Kingdom and Europe region

	Businesses to be retained			Total
	2010	2009		2010	2009
	£m	£m		£m	£m
Regional operating contribution	1.5	2.2		(2.6)	-
Common overhead costs	(3.9)	(4.8)		(5.4)	(6.7)
Licence income	5.8	4.7		6.7	5.6
	3.4	2.1		(1.3)	(1.1)
Disposal of lease interest	(0.8)	0.6		(0.8)	0.6
Divisional operating result	2.6	2.7		(2.1)	(0.5)

 

The aggregate operating contribution from the retail and wholesale divisions in UK/Europe which will be retained after completion of the restructuring was a profit of £1.5 million (2009: £2.2 million). Common overheads were trimmed back in the year with a £0.8 million reduction in advertising and marketing expenditure.

 

Other income in the UK/Europe region of £5.8 million (2009: £4.7 million) includes both licence receipts from external licensees and also brand royalties charged to Group companies which are purely internal and are eliminated from the Group result. The licence income from external sources, which will continue unchanged following the restructuring, increased to £4.7 million (2009: £4.2 million), the growth generated by our jewellery, toiletries and eyewear licences. In addition, the country licenses especially in Australia, India and Hong Kong have performed well. The indications are that this will continue in the coming year.

 

The operating result for the entire UK/Europe division from the businesses which we intend to retain for the longer term was a profit of £3.4 million (2009: profit of £2.1 million) before losses or gains arising from lease disposals. While the implementation of the restructuring will take some time and incur costs, the benefits from the planned changes are evident within this reporting segment and overall the performance of these businesses has improved over the comparable period. Our expectation is that the restructured business will provide a firm base from which to continue the development of the retained brands and to restore appropriate levels of profitability to the business region and ultimately to the Group in the longer term.

 

North America

Within the North America operating region the Group will retain its core French Connection wholesale business in the US along with approximately six stores which will serve to support the brand presence in the region. The retail portfolio in Canada, comprising 14 stand-alone stores managed by a separate team in Toronto, will also be retained.

 

The weakening of Sterling compared with the previous years has had a marked impact on the Sterling-reported results, increasing the Sterling equivalent of US Dollar-based trading figures by approximately 13% compared to last year. Trading data below is therefore given in the equivalent of US Dollars to allow accurate comparability.

 

North America

Retail

	Businesses to be retained			Total
	2010	2009		2010	2009
	$m	$m		$m	$m
Revenue	32.4	31.5		57.0	62.4
Gross profit	18.1	17.8		30.9	36.1
Gross margin	55.9%	56.5%		54.2%	57.9%
Trading overheads	(18.9)	(17.8)		(37.6)	(41.9)
Operating contribution	(0.8)	-		(6.7)	(5.8)
Operating contribution	(£0.5)	-		(£4.3)	(£3.2)

 

The retail environment in the US has continued to be difficult and increasingly affected by promotional discounting in the full price stores and the clearance of excess inventory carried over from the previous year. Our business in Canada however has proved more resilient but overall the margin decreased by 0.5%.

 

 

 

Core costs have also been tightly controlled and operating costs of the US stores were reduced by 4%. In Canada total costs increased as a result of the three additional stores opened over the past two years. The businesses to be retained recorded a loss of £(0.5) million (2009: break-even).

 

North America

Wholesale

	Businesses to be retained			Total
	2010 $m	2009 $m		2010 $m	2009 $m
Revenue	28.0	33.7		28.4	33.9
Gross profit	9.5	9.8		9.6	10.5
Gross margin	33.9%	29.1%		33.8%	31.0%
Trading overheads	(4.9)	(6.5)		(5.4)	(7.1)
Operating contribution	4.6	3.3		4.2	3.4
Operating contribution	£2.9	£1.8		£2.7	£1.9

 

Sales in our North America wholesale business, which had been making good progress, were affected by the softening of the market during the year and the consequent decline in demand from our customers along with the clearance of older inventory during the previous year. The margin recovered somewhat during the year under review as a result of the lower levels of stock clearance. Our relationships with wholesale customers remain strong and sell-through of our product in their stores has been encouraging. We are working closely with our customers and expect to be able to build volumes on this solid base.

 

Trading overheads have been cut back, in particular in selling overheads and administration in recognition of the difficult trading environment. Overall the net operating contribution from the businesses to be retained was £2.9 million (2009: £1.8 million), a good result given the reduction in demand.

 

North America division

 

	Businesses to be retained			Total
	2010 $m	2009 $m		2010 $m	2009 $m
Regional operating contribution	3.8	3.3		(2.5)	(2.4)
Common overhead costs	(4.6)	(6.2)		(5.4)	(7.4)
Disposal of lease interest	-	2.5		-	2.5
Divisional operating result $	(0.8)	(0.4)		(7.9)	(7.3)
Divisional operating result	(£0.5)	(£0.2)		(£5.0)	(£4.0)

 

The businesses which will be retained after completion of the restructuring made a contribution of $3.8 million (2009: $3.3 million).

 

Common overheads were tightly controlled in the year with particular savings in advertising and promotion although a gain on disposal was not repeated. The operating result from the region was a loss of $(0.8) million or £(0.5) million.

 

Rest of the World

Retail

	Businesses to be retained			Total
	2010 £m	2009 £m		2010 £m	2009 £m
Revenue	-	-		11.8	7.1
Gross profit	-	-		7.2	4.6
Gross margin				61.0%	64.8%
Trading overheads	-	-		(10.7)	(5.8)
Operating contribution	-	-		(3.5)	(1.2)

 

 

In the Rest of the World operating region the Group has closed the retail business in Japan and this has therefore been classified as a "discontinued business" in the financial statements for the year ended 31 January 2010.

 

Rest of the World

Wholesale

The Group will retain its business in Hong Kong which supplies product to our licence partners in Asia, Australia, Africa and South America and also acts as a liaison office between manufacturers in the region and the UK and North America businesses. The costs within this division which arise from the Nicole Farhi business will cease to be part of the Group following the disposal of that brand.

 

	Businesses to be retained			Total
	2010 £m	2009 £m		2010 £m	2009 £m
Revenue	12.7	14.9		12.8	15.0
Gross profit	2.5	3.2		2.5	3.2
Gross margin	19.7%	21.5%		19.5%	21.3%
Trading overheads	(1.1)	(1.4)		(1.5)	(1.8)
Operating contribution	1.4	1.8		1.0	1.4

 

Revenue in our wholesale business based in Hong Kong fell by 15% in Sterling terms, but 26% in local currency. Almost half of the decline in revenue arose as a result of the change in status of the Japan business which, following its absorption into the Group during last year, ceased to be a third party customer of the business. Other declines in sales were seen across many of the licence customers as the world-wide recession had an impact on demand.

 

The gross margin generated by this business is affected by the mix of the different supply arrangements with customers and while core margins were unchanged, the blended gross margin fell to 19.7% (2009: 21.5%).

 

Overheads were affected last year by a one-off provision against a debt due from a former licensee of £0.3 million. The wholesale division based in Hong Kong which will be retained generated a net operating contribution of £1.4 million (2009: £1.8 million).

 

Rest of the World division

	Businesses to be retained			Total
	2010 £m	2009 £m		2010 £m	2009 £m
Regional operating contribution	1.4	1.8		(2.5)	0.2
Other operating income	1.5	1.5		2.1	1.9
Divisional operating result	2.9	3.3		(0.4)	2.1

 

 

The wholesale business in the Rest of the World division generated an operating contribution of a £1.4 million (2009: £1.8 million).

 

The business in Hong Kong also earns commission income from Group companies on shipments from Hong Kong to the UK and North America. Total other income from the retained businesses was £1.5 million (2009: £1.5 million). This amount is eliminated from the consolidated Group results.

 

Excluding the impact of the Japan business and allowing for the overhead changes which will be effected on the disposal of the Nicole Farhi brand, the Rest of the World region generated a profit of £2.9 million in the period (2009: £3.3 million).

 

Group management and net finance income

The overheads arising from the central Group management function amounted to £4.5 million in the year, no change on last year after successive reductions in the last few years. Net finance income in the year of £0.1 million (2009: £1.2 million) reflected the lower interest rates in the market.

 

Group operating result

	Businesses to be retained	US retail for closure	Intra Group	Total "continuing businesses"		Total "continuing businesses"
	2010					2009
	£m	£m	£m	£m		£m
Revenue	200.3	14.0		214.3		213.6
Gross profit	100.2	7.1	3.3	110.6		109.2
Gross margin	50.0%	50.7%		51.6%		51.1%
Trading overheads	(94.9)	(10.5)		(105.4)		(103.7)
Aggregate operating contributions	5.3	(3.4)	3.3	5.2		5.5
Common overhead costs	(6.8)	(0.5)		(7.3)		(8.9)
Licence income	7.3	0.7	(3.3)	4.7		4.2
Disposal of lease interest	(0.8)	-		(0.8)		2.0
Trading contribution	5.0	(3.2)	-	1.8		2.8
Group management overheads	(4.5)			(4.5)		(4.5)
Divisional operating result	0.5	(3.2)		(2.7)		(1.7)
Restructuring costs	-	(6.5)		(6.5)		-
Impairment of goodwill	-	-		-		(11.9)
Net finance income	0.1	-		0.1		1.2
Operating result	0.6	(9.7)	-	(9.1)		(12.4)

 

The total operating result of the core businesses within the regions described above and including net finance income of £0.1 million amounts to an operating profit of £0.6 million. As described above, International Accounting Standards require that the results of the US retail business are included within "continuing operations" until closure, as shown above. Aggregating these two elements the Group operating result for "continuing businesses" is a loss of £(9.1) million (2009: (12.4) million).

 

The total operating result of the regions including both continuing and discontinued operations is set out in the segmental analysis in the statutory accounts and amounts to a loss of £(12.0) million (2009: £(6.9) million) before closure costs, impairments and financing.

 

Joint Ventures

The Group is party to two retail joint ventures in Hong Kong and China on a 50% shareholding basis. The joint ventures are directly managed by locally based management teams and operate retail locations in their respective territories. This business model allows for strategic input from French Connection to marry with local operational experience to create a mutually beneficial business. From the perspective of the French Connection Group we benefit from not only our share of any profits generated but also from margin created on supplying product to the businesses and licence royalty income.

 

The Group's share of net profits generated by the joint ventures during the year was £0.4 million (2009: £0.6 million).

 

Taxation

The tax charge for the year of £0.7 million reflects tax charged on profits generated in Hong Kong. No benefit has been recorded for losses incurred in the US or the UK in the year although those losses remain available to reduce any future taxable profits.

 

 

The effective tax rate in future years will vary depending on the level of profit generated and the different geographic locations where it is taxed since the three principal countries of operation have significantly different tax rates and the Group has substantial tax losses available to offset profits in the major tax territories.

 

Minority interest

The minority interest of £nil (2009: £0.2 million) reported in the income statement represents the net share of results attributable to the 25% ownership held by local management in Canada, Toast and YMC.

 

Discontinued operations

The profit and loss account shows a charge, net of tax, of £16.0 million (2009: £5.6 million) reflecting the net losses of the businesses which are classified as discontinued or held for sale at 31 January 2010 along with the costs and provisions associated with their closure or disposal. These are primarily the Nicole Farhi business ("held for sale" at the year end) and the Japan business. All other businesses, including the US retail business which is planned for closure, are included in "continuing operations".

 

Earnings and dividends

Net earnings for the year attributable to equity shareholders was a loss of £(24.9) million (2009: loss of £(16.6) million). Loss per share was therefore (26.0) pence (2009: (17.3) pence per share).

 

The Board has recommended payment of a dividend of 0.5 pence per share. Subject to approval at the Annual General Meeting the dividend will be paid on 6 July 2010 to shareholders on the register at 26 March 2010 (ex-dividend date 24 March 2010).

 

Balance sheet

The Group balance sheet at 31 January 2010 reports the assets and liabilities of the discontinued businesses as a separate item from the balance sheet relating to the continuing businesses. As described above, the continuing businesses include the US retail stores despite the plans for their closure; they will be classified as discontinued upon their termination.

 

Fixed assets and investments

Total capital expenditure in the year was £2.8 million, £2.3 million of which was spent on the retail portfolio. The remaining expenditure represented investment in our warehouse, head offices and computer systems.

 

The tangible assets at the end of the year represented mostly the remaining un-depreciated capital cost of fitting out our retail stores, head office and warehouse along with IT hardware and systems. As required by International Financial Reporting Standards an impairment test has been conducted on assets where there was an indication of impairment. This has resulted in new impairment provisions amounting to £0.7 million in the year (2009: £1.5 million) in relation to three retail stores.

 

Based on current plans and expectations, capital expenditure in the new financial year will amount to approximately £2.5 million.

 

Investments reported on the balance sheet relate to the amount invested in the two joint ventures described above and has decreased following the absorption of the Japan joint venture into the Group.

 

Cash generation

Taking the loss for the period and excluding the effects of the restructuring provisions, non-cash items (such as depreciation), taxation and finance costs net cash outflow from operations was £(5.3) million (2009: £(0.9) million). The changes in working capital described above created a release of cash of £7.3 million (2009: £2.8 million) resulting in a net cash inflow from operations of £2.0 million (2009: £1.9 million).

 

After cash outflows from investing and finance activities, the closing cash of the Group decreased by only £2.7 million to £35.7 million (2009: £38.4 million). The Group utilises cash during the cycle of the year, but the cash available to the business has been sufficient to cover the entire requirement such that the lowest cash position experienced in the last year was £11.3 million and the average cash position over the year was £21.3 million. In addition to this cash, the Group has working capital overdraft and other facilities of £10.3 million.

 

The restructuring plans laid out above will give rise to cash costs of approximately £7.7 million during the year ending 31 January 2011. Despite this the Board expects that the cash available to the Group will be sufficient to fund both this and the working capital requirements of the business over the year and, while the banking facilities will be retained, it is not expected that they will be utilised on a net basis during the year.

 

The Board's policy is to maintain a strong capital base, including liquid funds, in order to maintain investor, creditor and market confidence and to sustain future development of the business.

 

CONSOLIDATED STATEMENT OF INCOME

Year ended 31 January 2010

				2010		2009 Re-presented*
	Note			£m	£m	£m	£m
Continuing operations
Revenue	4				214.3		213.6
Cost of sales					(103.7)		(104.4)
Gross profit					110.6		109.2
Operating expenses					(117.2)		(117.1)
Other operating income	5				4.7		4.2
Net (loss)/gain on sale of property, plant and equipment					(0.8)		2.0
Operating loss before financing, impairments and closure costs					(2.7)		(1.7)
Closure costs					(6.5)		-
Impairment of goodwill					-		(11.9)
Finance income				0.1		1.3
Finance expenses				-		(0.1)
Net financing income					0.1		1.2
Operating loss					(9.1)		(12.4)
Share of profit of joint ventures, net of tax					0.4		0.6
Loss before taxation					(8.7)		(11.8)
Income tax credit - UK				0.5		2.0
Income tax expense - overseas				(0.7)		(1.0)
Total income tax (expense)/credit					(0.2)		1.0
Loss for the year from continuing operations					(8.9)		(10.8)
Discontinued operations
Loss from discontinued operations, net of tax	3				(16.0)		(5.6)
Loss for the year					(24.9)		(16.4)
Attributable to:
Equity holders of the parent					(24.9)		(16.6)
Minority interests					-		0.2
Loss for the year					(24.9)		(16.4)
Earnings per share
Basic losses per share	7				(26.0)p		(17.3)p
Diluted losses per share	7				(26.0)p		(17.3)p
Continuing operations
Basic losses per share	7				(9.3)p		(11.5)p
Diluted losses per share	7				(9.3)p		(11.5)p

 

*See discontinued operations Note 3.

 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended 31 January 2010

	2010			2009
	£m		£m	£m	£m
Loss for the period			(24.9)		(16.4)
Other comprehensive income
Currency translation differences for overseas operations		(1.5)		1.1
Currency translation differences on foreign currency loans	(0.6)			4.7
Effective portion of changes in fair value of cash flow hedges	(1.1)			0.8
Currency translation differences transferred to profit and loss, net of tax	0.1			-
Other comprehensive income for the period, net of tax			(3.1)		6.6
Total comprehensive income for the period			(28.0)		(9.8)
Total comprehensive income attributable to:
Equity holders of the parent			(28.0)		(10.0)
Minority interests			-		0.2
Total income and expense recognised for the period			(28.0)		(9.8)

 

 

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 January 2010

			Restated
	Note	2010 £m	2009 £m
Assets
Non-current assets
Intangible assets		2.4	2.3
Property, plant and equipment		11.1	15.8
Investments in joint ventures		2.6	2.4
Deferred tax assets		4.1	3.0
Total non-current assets		20.2	23.5
Current assets
Inventories		40.8	62.6
Trade and other receivables		26.9	34.1
Current tax receivable		-	0.3
Cash and cash equivalents		35.7	38.4
Derivative financial instruments		-	1.0
Assets classified as held for sale	8	6.4	-
Total current assets		109.8	136.4
Total assets		130.0	159.9
Non-current liabilities
Finance leases		-	0.7
Deferred tax liabilities		0.8	0.8
Total non-current liabilities		0.8	1.5
Current liabilities
Trade and other payables		42.9	57.4
Current tax payable		0.5	0.1
Derivative financial instruments		0.1	-
Provisions		8.7	-
Liabilities classified as held for sale	8	4.7	-
Total current liabilities		56.9	57.5
Total liabilities		57.7	59.0
Net assets		72.3	100.9
Equity
Called-up share capital		1.0	1.0
Share premium account		9.4	9.4
Other reserves		2.8	5.9
Retained earnings		57.9	83.4
Total equity attributable to equity holders of the parent		71.1	99.7
Minority interests		1.2	1.2
Total equity		72.3	100.9

 

The comparative balance sheet for the year ended 31 January 2009 has been restated to reflect changes in accounting policy following the amendment to IAS 38 as explained in Note 1.

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

	Share capital £m				Share premium £m	Hedging reserve £m	Translation reserve £m	Retained earnings £m	Total £m	Minority interests £m	Total equity £m
Balance at 1 February 2008	1.0				9.4	0.2	(0.9)	107.3	117.0	1.0	118.0
Change in accounting policy (Note 1)								(2.5)	(2.5)		(2.5)
Restated balance
at 1 February 2008	1.0				9.4	0.2	(0.9)	104.8	114.5	1.0	115.5
Total comprehensive income for
the period
Loss								(16.6)	(16.6)	0.2	(16.4)
Other comprehensive income
Currency translation for overseas
operations, net of tax							1.1		1.1		1.1
Currency translation differences
on foreign currency loans, net of tax							4.7		4.7		4.7
Effective portion of changes in fair
value of cash flow hedges						0.8			0.8		0.8
Transactions with owners, recorded directly in equity
Dividends to equity holders								(4.8)	(4.8)		(4.8)
Balance at 31 January 2009	1.0				9.4	1.0	4.9	83.4	99.7	1.2	100.9
Total comprehensive income for the period
Loss								(24.9)	(24.9)	-	(24.9)
Other comprehensive income
Currency translation for overseas
operations, net of tax							(1.5)		(1.5)		(1.5)
Currency translation differences
on foreign currency loans, net of tax							(0.6)		(0.6)		(0.6)
Currency translation differences
transferred to profit and loss, net of tax							0.1		0.1		0.1
Effective portion of changes in fair
value of cash flow hedges						(1.1)			(1.1)		(1.1)
Transactions with minority interests, recorded directly in equity
Dividends to minority interests								(0.6)	(0.6)		(0.6)
Balance at 31 January 2010	1.0				9.4	(0.1)	2.9	57.9	71.1	1.2	72.3

 

Translation reserve

The translation reserve comprises foreign currency differences arising from the translation of the financial statements of foreign operations as well as from the translation of foreign currency loans.

 

Hedging reserve

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

CONSOLIDATED STATEMENT OF CASH FLOWS

Year ended 31 January 2010

 

 

	Note	2010 £m	2009 £m
Operating activities
Loss for the period		(24.9)	(16.4)
Adjustments for:
Depreciation		5.5	8.0
Impairment of goodwill		-	11.9
Restructuring costs		8.7	-
Impairment of assets held for sale		3.8	-
Finance income		(0.1)	(1.3)
Finance expense		-	0.1
Share of profit of joint ventures		(0.4)	(0.2)
Non-operating loss/(gain) on property, plant and equipment		1.4	(2.0)
Income tax expense/(credit)		0.7	(1.0)
Operating loss before changes in working
capital and provisions		(5.3)	(0.9)
Decrease/(increase) in inventories		14.5	(3.3)
Decrease/(increase) in trade and other receivables		2.7	(0.8)
(Decrease)/increase in trade and other payables		(9.9)	6.9
Cash flows from operations		2.0	1.9
Interest paid		-	(0.1)
Income tax paid		(0.7)	(2.2)
Cash flows from operating activities		1.3	(0.4)
Investing activities
Interest received		0.2	1.2
Acquisition of subsidiary		-	0.3
Acquisition of franchise		(0.1)	(0.2)
Acquisition of property, plant and equipment		(2.8)	(5.9)
Net (costs)/proceeds from sale of property, plant and equipment		(0.6)	2.0
Capital contributions received from acquisition of property, plant
and equipment		0.8	-
Cash flows from investing activities		(2.5)	(2.6)
Financing activities
Payment of finance lease liabilities		(1.2)	(0.4)
Dividends paid	6	(0.6)	(4.8)
Cash flows from financing activities		(1.8)	(5.2)
Net decrease in cash and cash equivalents		(3.0)	(8.2)
Cash and cash equivalents at 1 February		38.4	46.7
Exchange rate fluctuations on cash held		0.3	(0.1)
Cash and cash equivalents at 31 January		35.7	38.4