Final Results

18th Mar 2009 07:00



18th March 2009

FRENCH CONNECTION GROUP PLC

Preliminary Results

for the year ended 31 January 2009

French Connection Group PLC today announces preliminary results that are in line with market expectations.

	Year to 31 January 2009	Year to 31 January 2008
Turnover	£248.0 million	£236.1 million
(Loss)/Profit before taxation and impairment of goodwill	£(5.5) million	£3.1 million
(Loss)/Profit before taxation	£(17.4) million	£3.1 million
Closing net funds	£37.1 million	£46.7 million
Earnings per share excluding impairment of goodwill	(4.9)p	1.5p
Earnings per share	(17.3)p	1.5p
Total dividend per share for the year	1.7p	5.0p

Stephen Marks, Chairman, commented on the results:

"The results for last year are disappointing and, to a large extent, are a reflection of the impact on fashion markets of the down-turn in the major world economies and in particular the US market. Behind the gloomy headlines however there are some encouraging elements in our performance."

"We have continued to see improvements in our core business with UK retail like-for-like sales ahead by 2% over the year and continued strong growth in sales of French Connection ladies' wear. This reflects the strength of our design and the profile of the brand and we continue to work hard to ensure that we can build on these strengths.  At the same time we are working to address the significant challenges caused by the market conditions through reducing costs and improving efficiency. These changes will help to mitigate the impact on the business of any further decline in the market."

"Our balance sheet remains strong with net funds of £37.1 million at the end of the year. We are therefore able to focus on ensuring that our products and operations are as strong as they can be and appropriately structured to deal with the decline in our markets. We will continue to focus on creating great product but we are preparing for another difficult year."

Enquiries:

Stephen Marks/Neil Williams/Roy Naismith	French Connection	+44(0)20 7404 5959
Tom Buchanan/Deborah Spencer	Brunswick	+44(0)20 7404 5959

CHAIRMAN'S STATEMENT

Dear Shareholders,

Consumer markets around the world have been severely impacted by the on-going economic turmoil and the impact on our business has been significant, as is evident from the disappointing financial results for the year. Despite the market conditions we have continued to see improvements in our core retail businesses over the past year with UK retail like-for-like sales ahead by a creditable 2% over the year. We are working hard to ensure we expand on the successes we have seen while also finding ways to mitigate the significant challenges presented by the market conditions. 

In the year ended 31 January 2009, Group turnover increased by 5% to £248.0 million (2008: £236.1 million) and the result before taxation and before a charge for impairment of goodwill was a loss of £(5.5) million (2008: profit of £3.1 million). Following the significant decline in the US market, the Board has concluded that the goodwill which arose on the acquisition of that business has been impaired, which is included in the charge of £11.9 million in the year. The loss before taxation for the year was therefore £17.4 million. Earnings per share was a loss of (17.3) pence per share (2008: profit of 1.5 pence per share). Cash generated from operations during the year amounted to £1.9 million and after payment of taxation, investment in fixed assets and distribution of dividends the Group retained £37.1 million of net funds at 31 January 2009 (2008: £46.7 million). Having taken account of the deterioration in the business environment the Board is not proposing any further dividend for the year.

These are disappointing results and, to a large extent, are a reflection of the impact on fashion markets of the down-turn in the major world economies and in particular the US market. Behind the gloomy headlines however there are some encouraging elements in our performance, most notably that the core French Connection ladies' wear ranges showed very good growth throughout the year and that our Toast business continued to develop well.

In order to deal with the changing retail environment we have instigated a cost-cutting programme and we are striving to improve efficiencies wherever possible. We have significantly reduced our discretionary budgets for the new financial year and we are working hard with suppliers to find savings wherever possible. However, especially within our retail stores, a significant proportion of the cost base is fixed. Our gross margins are being affected by the increasing costs of supply, including the considerable impact of the weaker Pound, and therefore every effort is being made to maximise efficiency in our supply chain. These changes will help to mitigate the impact on the financial results of the business, but we are preparing ourselves for a difficult new financial year.

Importantly, the Group has no bank debt and we have sufficient funds to support the business for the foreseeable future. We are therefore in a strong position to benefit from any changes in the retail landscape and from the recovery when it finally emerges.

Looking back over the results of the last year, we saw two further consecutive seasons of strong growth in our French Connection ladies' wear retail sales in the UK. This gives us great confidence that the issues we faced previously are well behind us. As we have reported previously, our men's wear ranges have performed less well. The men's wear ranges for 2009 have been entirely revamped and while it will take some time to entice customers back to the stores, particularly in this contracting market, we are confident that the changes will reap rewards in the longer term. The performance of our products in our wholesale customers' stores was similar to that seen in our own stores but it is evident that our wholesale customers are being very cautious in their buying for the new seasons.

Sales at Toast have continued to grow strongly both in their stand-alone stores and in mail-order where the customer base is growing steadily and sales made over the internet have increased significantly.

In North America the contraction in the retail environment was faster and deeper than in the UK and in line with many others we experienced a very poor second half of the year. The market is extremely competitive and highly promotional and we have had to compromise our gross margins in order to protect our volumes and reduce inventory levels. We do not intend to continue in this vein and we intend to re-establish the brand as a full-price player in the market over the next few seasons even at the expense of sales volumes.

In Japan our business has also suffered from the general decline in demand and as planned we have been working to improve the structure of the business now that it is wholly owned.

I am very pleased that our product licensees have performed very well in the year with particularly strong growth in our "fcuk" branded toiletries ranges. We are hopeful that this income will be resilient in the down-turn.

Commentators in the media appear not to agree on when we will see an economic recovery, but they are consistent in their view that it will not be in the short-term. We will therefore focus on ensuring that our business is structured to deal with a prolonged down-turn in our markets while continuing to support our successes. Our short-term aim is to ensure that we return to net cash generation over the annual cycle and then build towards profitability. However, in the current circumstances, it is not possible to predict what can be achieved or the relevant timeframes.

We have recently appointed Claire Kent to the Board as a non-executive Director. Claire has a distinguished background in retail market analysis for Morgan Stanley and brings an incisive insight to our business which will be of great benefit.

The French Connection Group businesses are built on the hard work and commitment of our employees and I thank them for their continued dedication and focus particularly during this challenging period. Our over-riding focus is the creation of fashion-forward products to meet our customers' aspirations and we continue to believe that this approach is the appropriate foundation for our business, even in these very difficult times.

Stephen Marks

Chairman and Chief Executive

17 March 2009

  BUSINESS REVIEW

This Business Review should be read in conjunction with the divisional trading analysis in Note 2.

Overview

The financial performance of the Group for the year ended 31 January 2009 deteriorated compared with the previous year, particularly in the second half as demand in our major markets declined sharply. We achieved growth in sales and profits from the French Connection ladies' wear ranges in our retail stores in the UK, further growth in licensing income and continued development in our Toast business. However, the combined impact of our largely fixed cost base, inflationary cost increases and a reduction in achieved gross margins have resulted in an operating loss before financing and impairment of goodwill for the year of £(6.9) million (2008: profit of £1.4 million).

As reported in July, the results shown in the divisional trading analysis reflect a number of structural changes within the Group. There has been a transfer of business from the wholesale channel to the retail channel through the absorption of two franchise stores and the creation of retail concessions within certain department stores which were previously wholesale customers. This has had the effect of increasing turnover and overheads in the retail channel while decreasing the equivalent wholesale results. The new concessions are proving to be beneficial, with the increase in sales more than sufficient to cover the additional overheads. In addition, the Japan retail business became a subsidiary in July and this is now reported in the retail channel under the Rest of the World.

Group turnover was 5% higher than the previous year at £248.0 million (2008: £236.1 million) reflecting the addition of the Japan business and the beneficial impact of weaker Sterling exchange rates on revenues generated in foreign currencies. Other changes in volumes broadly offset each other and are discussed further below.

The Group gross margin declined by 1.4%, as a result of the impact on product costs of significantly weaker Sterling exchange rates in the second half of the year and, to some extent, deeper discounting, particularly in North America. These elements were partially offset by a change in the mix of sales towards higher-margin retail business.

Operating expenses were 11% higher than the previous year at £140.1 million (2008: £126.2 million) as a result of the inclusion of £6.0 million of expenses in Japan and the additional costs of our retail portfolio in the UK, discussed further below. Growth in revenues from our licensees contributed to a good increase in other income to £4.2 million (2008: £3.4 million) on strong sales of branded products.

The operating result also included £2.0 million of gains on disposal of assets (2008: £nil) and an increase in impairment provisions of £1.5 million in relation to certain retail assets (2008: £0.5 million).

As described further below, the performance during the year included some very positive aspects but was severely impacted by the sharp decline in retail markets around the world in the second half of the year. The growth we saw in sales of our French Connection ladies' wear ranges in our UK retail stores and continued growth at Toast are very encouraging for the long term, but making headway in the current economic conditions will be very difficult. We are working to maximise the benefit from the growth in sales while reducing expenditure significantly. We have implemented specific cost-saving programmes in relation to head office staffing levels and discretionary costs. We are also working with our suppliers to ensure maximum efficiency and critically reviewing every part of our business to ensure that it is best suited for weathering the economic challenges. With a strong balance sheet and more than sufficient cash resources the business is well positioned to be able to withstand the downturn and to benefit from any recovery. Our core focus will therefore remain the design and production of fashion-forward products to meet our customers' aspirations. 

Business performance over the past year and our outlook for the new year are discussed in more detail by division in the sections below.

United Kingdom and Europe - Retail

Retail sales in UK/Europe increased by 8% during the year and grew by 2% on a like-for-like basis, despite the downturn in the retail market. Total revenue in the year was £125.3 million (2008: £115.6 million). The growth was generated largely by increased sales of French Connection ladies' wear, which saw a 9% like-for-like increase over last year. The increase also included sales in our new concessions in House of Fraser stores and the concessions in Harvey Nichols, both of which have resulted in a corresponding decrease in sales in the wholesale channel. In addition sales at Toast grew by over 15%. 

Average space traded over the year increased by 2%. The net movement included a store in the new Westfield development in West London, the acquisition of two franchise stores and the new concession space, offset by the closure of three stand-alone stores where opportunities arose to dispose of under-performing locations.

The new concessions in House of Fraser have performed well, with increased levels of sales in the relevant locations generating retail-level margins so that the additional overheads of operating at a retail level are more than covered.

The continued strong growth in sales of the French Connection ladies' wear ranges, even as the fashion market contracts, highlights the strength of our design and the appeal of the brand. We will aim to build on the momentum generated over the last five consecutive seasons of growth in order to gain further market share.

As previously reported, in order to replicate this success in men's wear, the 2009 ranges have been developed by a fresh team. However, our experience from the refinement of the ladies' wear ranges indicates that the process of changing shoppers' buying habits and regeneration of interest in the brand takes time and we are therefore targeting to first stem the decline in men's wear sales and then to build a solid business based on the revamped ranges. We expect that the first phase will be achieved over the coming two seasons.

The French Connection e-commerce business has seen significant development during the year with a new management team and major redesign of the web site. Fashion shoppers in the UK are turning to the internet more readily than ever and our web sales represent a significant and growing income stream, both through our own web site and through our supply of product to third parties.

Toast has had a very strong year with like-for-like sales growth in the seven retail locations and very good growth in mail order sales both in the existing ladies' wear ranges and newer home ware selection. This success validates our continued investment in infrastructure and management in the business.

The performance of the Nicole Farhi stores over the early part of the year had been relatively quiet but deteriorated following the banking crisis and it would appear that luxury retailers are being affected by the downturn along with the mainstream. However the new management team in the Nicole Farhi business is working to build on the huge recognition and goodwill associated with the brand and to ensure that resources are appropriate for the size of the business.

There appears to be general agreement among commentators that 2009 will be a difficult year for the UK retail economy and that fashion sales will continue to contract. So far in this recession, our UK/Europe retail business has achieved a robust sales performance and although we cannot avoid the changes in consumer spending, we expect that the attraction of our brands and exciting products will allow us to continue to out-perform the market. Despite this, any expectation of sales growth in the coming year is likely to be considered optimistic.

The on-going assessment of our store portfolio is now being conducted in a more critical light, given the difficult outlook for the retail sector. There are a number of stores which no longer generate a contribution and we are in the process of reviewing our options. This is likely to result in some store closures in the new financial year. We will also search out opportunities to reduce the size of stores or change our financial arrangements with landlords.

The gross margin for the UK/Europe retail division was 1.3% lower than last year at 61.3% (2008: 62.6%). The majority of the decline was caused by the weakness of Sterling in the second half of the year. Most of the purchases from Asia, which are denominated in Hong Kong Dollars, were protected from the worst of the declines in exchange rate through successful forward hedging at beneficial rates of exchange. However product bought in Euros became 14% more expensive in Sterling terms. The Group does not buy Euros forward in the same way as it does Hong Kong Dollars since product sales in the Euro-zone generate sufficient currency to fund the purchases, resulting in a natural hedge. The remaining reduction in the gross margin rate arose from slightly higher discounts during sale periods.

The gross margin rate remains below our target level due to higher than ideal levels of discounting. During the year under review, sale periods and discount depths were similar to the previous year but closing stock levels were significantly reduced. There remains an opportunity to increase margins through tight control of stock levels, although the impact of both the Euro and Hong Kong Dollar exchange rates in the new financial year will cause a further increase in the cost of goods.

Overhead costs within the retail portfolio are subject to inflation increases, in particular rent, rates and staffing costs but each of these areas is being targeted to find savings. Overall, overheads increased by £6.0 million to £78.3 million (2008: £72.3 million) with just over half of the increase arising from the additional concessions in House of Fraser and Harvey Nichols stores and the other new retail locations. In addition there was an impact from the cost incurred in the European stores from the change in the exchange rate. Within the cost base of existing UK stores we saw cost increases of 2.5% driven by rent and rate increases. In addition, investment in promotion and support costs within Toast were increased in support of the increase in turnover.

With the inflation of costs running ahead of the growth in sales, the net operating contribution for the division has fallen by £1.6 million to a loss of £(1.5) million. 

United Kingdom and Europe - Wholesale

As anticipated, sales through our UK/Europe wholesale business reduced in the year to £47.5 million (2008: £55.6 million) as the effects of both the transfers of business to the retail channel and a reduction in forward orders fed through to the trading result. Of the £8.1 million decline in sales, £3.8 million arose from the transfer of business from the wholesale channel to the retail channel due to the concession arrangements described above. In addition two franchise stores were acquired during the year, reducing wholesale sales by a further £0.9 million.

Looking forward, it is clear that our customers are being very cautious in their buying due to the difficult outlook and we therefore are not expecting to see growth in sales in the new year. Further, we will be transferring more wholesale business to the retail channel with the opening of a number of trial men's wear concessions in the first half of the year.

Gross margin in the year was affected in broadly equal measure by the weakening of Sterling and the effects of the move of business out of the wholesale channel into retail. The gross margin of 28.2% (2008: 33.1%) remains lower than our target level due to the high proportion of sales made at a discount as a result of both the declines in full-price current season orders and continued clearance of older season product.

Overheads of £11.9 million (2008: £13.2 million) have benefited from the transfer of £1.7 million of costs associated with some of the concessions now reported in retail. Behind this, there are costs increases reported as a result of the impact of the Euro exchange rate on costs incurred on the Continent and the cost associated with the closure of a small high-end shoe brand in the first half of the year. As reported above, we have implemented a cost reduction programme across the business to search out savings wherever possible.

The net operating contribution from UK/Europe wholesale was a profit of £1.5 million (2008: £5.2 million).

United Kingdom and Europe division

Together, the retail and wholesale businesses in UK/Europe broke even in the year (2008: profit of £5.3 million). Turnover was broadly static overall in the region with retail increases offsetting wholesale declines. The gross margin was slightly lower as a result of downward pressures from exchange rates offset by a benefit from the mix change towards higher-margin retail business. As a result, gross profit was broadly similar to last year however the increase in overheads from inflation, exchange rates and new concession costs resulted in a reduction in operating contribution.

Common overhead costs for the division, including accounting departments and advertising expenditure, increased £1.0 million to £6.7 million compared to last year as a result of there being no repeat of the one-off beneficial settlement on termination of an office lease of £0.5 million reported last year and a slightly increased advertising spend during the year.

Other income in the UK/Europe division of £5.6 million (2008: £4.6 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 increased to £4.2 million (2008: £3.4 million), the growth arising from a combination of our toiletries licence, which showed very strong growth following a re-launch in the Spring of 2008, our new shoe and eyewear licences and continued growth in Australia and Asia.

The UK/Europe division also benefited from £0.6 million of income arising from the disposal of store leases in the UK.

The operating result for the UK/Europe division was a loss of £(0.5) million for the year (2008: profit of £4.2 million).

North America - Retail

The weakening of Sterling during the second half of the year has had a marked impact on the Sterling-reported results of our overseas operations, increasing the trading figures by approximately 10% compared to last year.

Retail sales performance in the first half of the financial year was encouraging, however in the second half trade deteriorated sharply, in line with the general retail market. On a like-for-like basis, revenue declined by 3% during the year. Including the effect of two store closures and three openings, which reduced average space traded in the year by 12%, total retail revenue was down 11% in Dollar terms and 2% in Sterling.

Our market position is to operate as a full-price retailer, but the combination of high inventory levels and competitor actions in an extremely promotional market resulted in a decline in achieved gross margin in the year to 57.8% (2008: 60.1%). By better controlling inventory levels we aim to improve the margins in the new financial year, however the retail market continues to be very difficult and in the early part of the season we are working to clear the backlog of excess inventory.

With the reduction in trading space during the year offset by rent increases, overheads reduced by 5% in Dollar terms but increased by 5% in Sterling terms. Operating contribution fell to a loss of £(3.2) million (2008: £(0.9) million), the decline exacerbated by the 10% exchange movement.

North America - Wholesale

Our North America wholesale business has been making good progress, with increased demand from department store customers who have achieved good sell-through of our products. However, with the decline in the retail market in the region the department stores have become more cautious and are cutting back their budgets and have also been more aggressive with their mark-downs. During the year, wholesale revenue in North America increased by 3% in Dollar terms and 13% in Sterling terms with the second half weaker than the first.

Gross margin fell to 31.0% (2008: 37.0%) as a result of both higher mark-down contributions required by the department stores and deeper discounts necessary to clear end-of-season stock. 

Overheads were slightly lower in Dollar terms and slightly higher in Sterling terms. The operating contribution from the North America wholesale division was £1.9 million (2008: £2.4 million). 

North America division

Together, the retail and wholesale operations in North America incurred an operating loss of £(1.3) million, (2008: profit of £1.5 million). Common overhead costs show a marked increase in Sterling terms, but half of this is caused by the movement in exchange rates. The remaining increase relates mainly to some additional infrastructure costs in Canada.

The divisional result benefited from £1.4 million of gains from disposals of leases during the year. The net result was a loss of £(4.0) million (2008: £(1.9) million), a decrease of £2.1 million which was exacerbated in Sterling terms by the 10% movement in exchange rates.

Rest of the World - Retail 

Following the integration of our Joint Venture partner's share of the retail business in Japan, our reporting now includes a Retail channel under the Rest of the World geographic region. The results reported for the financial year represent seven months of trading for the Japan business. Further details of the acquisition are given in the Notes to the Accounts.  

The Group results for the year ended 31 January 2009 include turnover of £7.1 million and a net operating loss of £(1.2) million in relation to the Japan retail business post acquisition as from 10 July 2008. For the full year, the entire Japan business generated turnover of £11.0 million and a net operating loss of £(1.9) million including payment of licence royalties and buying office commission to other divisions of the French Connection Group amounting to £0.6 million.

The performance of the Japan business had been improving but was impacted by the economic slow-down in the second half of the year in line with other regions of the world. Management are in the process of searching out cost savings and opportunities to reorganise the retail portfolio in order to improve the financial performance and we are confident that the business can stem the losses in the medium term.

Rest of the World - Wholesale

Revenue in our wholesale business based in Hong Kong increased by 13% in Sterling terms to £15.0 million (2008: £13.3 million), assisted by the 10% exchange rate difference. Growth was generated in sales to Australia, the Hong Kong retail joint venture and our new department store customer in South Africa.

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 21.3% (2008: 22.6%).

Overheads were affected by a one-off provision against a debt due from a former licensee of £0.3 million. This debt is currently being pursued through the courts and while management consider that it is likely that the debt will be recovered, the provision has been made on the grounds of prudence. Other cost increases reflect administrative costs and a reduction in other income.

Overall the wholesale division based in Hong Kong generated an operating contribution of £1.4 million (2008: £1.8 million).

Rest of the World division

Together, the retail and wholesale businesses in the Rest of the World division generated a contribution of £0.2 million (2008: £1.8 million).

The business in Hong Kong also earns commission income from Group companies on shipments from Hong Kong to the UK, North America and Japan. Total other income from this channel was £1.9 million (£2.0 million). This amount is eliminated from the consolidated Group results.

Net divisional operating profit from the Rest of the World region was £2.1 million, net of the losses in Japan, compared with £3.8 million in the previous year reflecting only the Hong Kong wholesale business.

Group management

The overheads arising from the central Group management function amounted to £4.5 million in the year, a saving of £0.2 million compared to last year as we continue to focus on finding efficiencies in our head office organisation.

Group operating profit 

The operating result before finance costs and impairment of goodwill for the year was a loss of £(6.9) million (2008: profit of £1.4 million). 

The decline is disappointing, especially given the good headway made over the year in sales of French Connection ladies' wear and the continued growth at Toast. The impact of the economic downturn has been to soften the increases achieved so that the effect of the detrimental movement in exchange rates and general cost increases has more than offset the gains made.

Net financing income of £1.2 million (2008: £1.6 million) was generated in the period with both interest rates and average net funds lower than last year.

Group operating result in the year before impairment of goodwill and share of profit of joint ventures amounted to a loss of £(5.7) million (2008: profit of £3.0 million).

Joint Ventures

The Group is party to two retail joint ventures in Hong Kong and China, and was previously party to a third in Japan, each 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 £0.2 million (2008: £0.1 million) with growth being generated from both the Hong Kong and China businesses.

The Hong Kong joint venture operates seven locations, and continued to generate growth during the year. In China the joint venture operates 24 locations and while the sales densities are low, sales are growing and the business is profitable.

During the year we agreed with our partners in Japan to take on their partial ownership of the joint venture so that the Japan business became a wholly owned subsidiary in July 2008. More details are given in the Notes to the Accounts.

Both of the remaining joint ventures provide good opportunities for growth and cash generation for the Group. In addition to the £0.2 million share of profits generated by them in the last year, the two joint ventures generated a combined £0.6m from licence income and gross margin.

Group profit before tax

The Group result before tax and impairment of goodwill was a loss of £(5.5) million in the year compared to a profit of £3.1 million achieved in the previous year.

Impairment of goodwill

The well-reported decline in the US retail market has had a profound effect on our US business. International Financial Reporting Standards require that an impairment test is conducted annually on any goodwill carried on the balance sheet. Taking into account the poor market conditions and using appropriate forecast growth rates, the test indicates that the £10.8 million of goodwill which arose on the acquisition of the US joint venture in 2001 is impaired. In addition, goodwill of £1.1 million which arose on the acquisition of franchise stores in the UK is considered to be impaired. Together these items give rise to a one-off non-cash charge to the income statement of £11.9 million.

Taxation

The tax credit for the year of £1.0 million represents an effective tax rate of 18% (2008: 48%). The tax credit reflects the combination of a tax credit at 28% on losses taxed in the UK and a tax charge at 16.5% on profits taxed in Hong Kong. No benefit is taken for losses incurred in the US 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.

Minority interest

The minority interest of £0.2 million (2008: £0.2 million) reported in the income statement represents the share of results attributable to the 25% ownership held by local management in our Canada business, Toast and YMC.

Earnings and dividends

Net earnings for the year attributable to equity shareholders adjusted to exclude impairment of goodwill was £(4.7) million (2008: profit of £1.4 million). Loss per share adjusted to exclude impairment of goodwill was therefore (4.9) pence (2008: earnings of 1.5 pence per share).

The Board considered the dividend in the light of the reduction in the Group's trading result, the level of available cash within the Group and the outlook for the coming year and concluded that it would be prudent to pay no further dividend for the year. An interim dividend of 1.7 pence per share was paid in October.

Fixed assets and investments

Total capital expenditure in the year was £5.9 million, £5.1 million of which was spent on the retail portfolio including three new store locations in North America, two new locations and the down-sizing of two locations in the UK, one new store in Japan and the fit-out of a number of in-store concessions. 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 provisions amounting to £1.5 million in the year (2008: £0.5 million) in relation to six 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, more details of which are given in the Notes to the Accounts.

Working capital

Total working capital at the end of the year, being the net of inventory, debtors and creditors, increased by £3.9 million over the year to £41.8 million. The majority of the increase related to the absorption of the Japan business but it was also markedly impacted by the change in exchange rates which, in relation to year end rates, increased Sterling values of Dollar-denominated assets and liabilities by over 25% and Euro-denominated items by over 15%. Excluding the assets and liabilities acquired with the Japan business which are not part of the cash flows of the Group, there was a decrease in working capital giving rise to a release of funds to the cash flow statement as discussed further below.

Inventory levels in the UK have been successfully reduced during the year, although an increase in the average cost price of the garments has meant a small increase in the value carried in the balance sheet. In addition, inventory levels in North America have increased as a result of the combination of poor sales in the second half of the year, a higher average cost price of the garments and the effect of the exchange rate at the end of the year. Finally, the balance sheet includes £2.4 million of inventory in Japan. There remains some older season product in both the UK and North America which is in the process of liquidation. Full provision has been made against any inventories which are likely to be sold at lower than their cost.

In local currencies, debts due from wholesale customers are at a similar level to last year while trade creditors are higher, mainly reflecting timings of deliveries and their respective payments. As commented above, the balance sheet records the effect of the exchange rates on the foreign currency denominated balances and also the absorption of the Japan business and therefore shows a larger movement than is recorded in the cash flow statement.

Cash generation and net funds

Taking the loss for the period and excluding the effects of taxation, finance costs, non-cash items such as depreciation and the changes in working capital described above, net cash inflow from operations was £1.9 million (2008: £4.9 million).

After payment of tax of £2.2 million, dividends of £4.8 million, the fixed asset investments described above and £2.0 million of income from the sale of assets, the closing net funds of the Group decreased by £8.3 million to £38.4 million (2008: £46.7 million). The Group utilises cash over the cycle of the year, but the net funds available to the business have been sufficient to cover the entire requirement such that the lowest net funds position experienced in the last year was £18.0 million and the average net funds position over the year was £28.0 million. In addition to this cash, the Group has working capital overdraft and other facilities of £10.9 million.

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.

GROUP INCOME STATEMENT

Year ended 31 January 2009

	Note	£m	2009 £m	£m	2008 £m
Revenue	2		248.0		236.1
Cost of sales			(121.0)		(111.9)
Gross profit	2		127.0		124.2
Operating expenses			(140.1)		(126.2)
Other operating income	3		5.2		3.4
Other expenses	7		(1.0)		-
Net gain on sale of property, plant and equipment			2.0		-
Operating (loss)/profit before financing costs and impairment of goodwill	2		(6.9)		1.4
Impairment of goodwill	6		(11.9)		-
Finance income		1.3		1.8
Finance expenses		(0.1)		(0.2)
Net financing income			1.2		1.6
Operating (loss)/profit			(17.6)		3.0
Share of profit of joint ventures, net of tax			0.2		0.1
(Loss)/profit before taxation and impairment of goodwill		(5.5)		3.1
Impairment of goodwill		(11.9)		-
(Loss)/profit before taxation			(17.4)		3.1
Income tax credit/(expense) - UK		2.0		(0.6)
Income tax expense - overseas		(1.0)		(0.9)
Total income tax credit/(expense)			1.0		(1.5)
(Loss)/profit for the year			(16.4)		1.6
Attributable to:
Equity holders of the parent			(16.6)		1.4
Minority interests			0.2		0.2
(Loss)/profit for the year			(16.4)		1.6
Basic (losses)/earnings per share	5		(17.3)p		1.5p
Adjusted (losses)/earnings per share	5		(4.9)p		1.5p
Diluted (losses)/earnings per share	5		(17.3)p		1.5p

The Group's results were entirely from continuing operations.

GROUP BALANCE SHEET

At 31 January 2009

	Note	2009 £m	2008 £m
Assets
Non-current assets
Intangible assets	6	2.3	14.1
Property, plant and equipment		15.8	15.5
Investments in joint ventures		2.4	3.6
Deferred tax assets		3.0	2.4
Total non-current assets		23.5	35.6
Current assets
Inventories		62.6	53.0
Trade and other receivables		36.6	29.8
Current tax receivable		0.3	-
Cash and cash equivalents	9	38.4	49.3
Derivative financial instruments		1.0	0.2
Total current assets		138.9	132.3
Total assets		162.4	167.9
Non-current liabilities
Finance leases		0.7	-
Deferred tax liabilities		0.8	1.0
Total non-current liabilities		1.5	1.0
Current liabilities
Bank loans and overdraft	9	-	2.6
Trade and other payables		57.4	44.9
Current tax payable		0.1	1.4
Total current liabilities		57.5	48.9
Total liabilities		59.0	49.9
Net assets		103.4	118.0
Equity
Called-up share capital		1.0	1.0
Share premium account		9.4	9.4
Other reserves		5.9	(0.7)
Retained earnings		85.9	107.3
Total equity attributable to equity holders of the parent		102.2	117.0
Minority interests		1.2	1.0
Total equity		103.4	118.0

GROUP STATEMENT OF RECOGNISED

INCOME AND EXPENSE

Year ended 31 January 2009

	£m	2009 £m	£m	2008 £m
(Loss)/profit attributable to equity shareholders		(16.6)		1.4
Minority interests		0.2		0.2
Total income and expense recognised in the income statement		(16.4)		1.6
Currency translation differences on foreign currency net investments	6.6		1.1
Effective portion of changes in fair value of cash flow hedges	0.8		0.2
Income tax on income and expense recognised in equity	(0.8)		(0.6)
Total income and expense recognised in equity		6.6		0.7
Total income and expense recognised for the year		(9.8)		2.3
Attributable to:
Equity holders of the parent		(10.0)		2.1
Minority interests		0.2		0.2
Total income and expense recognised for the year		(9.8)		2.3

 

GROUP STATEMENT OF CASH FLOWS

Year ended 31 January 2009

	Note	2009 £m	2008 £m
Operating activities
(Loss)/profit for the period		(16.4)	1.6
Adjustments for:
Depreciation		8.0	8.0
Impairment of goodwill		11.9	-
Finance income		(1.3)	(1.8)
Finance expense		0.1	0.2
Share of profit of joint ventures		(0.2)	(0.1)
Non-operating gain on property, plant and equipment		(2.0)	(0.1)
Income tax (credit)/expense		(1.0)	1.5
Operating profit before changes in working
capital and provisions		(0.9)	9.3
Increase in inventories		(3.3)	(1.3)
(Increase)/decrease in trade and other receivables		(0.8)	0.7
Increase/(decrease) in trade and other payables		6.9	(3.8)
Cash flows from operations		1.9	4.9
Interest paid		(0.1)	(0.2)
Income tax paid		(2.2)	(1.3)
Cash flows from operating activities		(0.4)	3.4
Investing activities
Interest received		1.2	1.7
Investment in joint ventures		-	(0.2)
Acquisition of subsidiary	7	0.3	-
Acquisition of franchises		(0.2)	-
Acquisition of property, plant and equipment		(5.9)	(2.5)
Net proceeds from sale of property, plant and equipment		2.0	0.1
Cash flows from investing activities		(2.6)	(0.9)
Financing activities
Payment of finance lease liabilities	8	(0.4)	-
Dividends paid		(4.8)	(4.8)
Cash flows from financing activities		(5.2)	(4.8)
Net decrease in cash and cash equivalents	9	(8.2)	(2.3)
Cash and cash equivalents at 1 February	9	46.7	48.9
Exchange rate fluctuations on cash held	9	(0.1)	0.1
Cash and cash equivalents at 31 January	9	38.4	46.7

NOTES

1 Basis of preparation

Consolidated financial statements and accounting policies

The preliminary announcement for the year ended 31 January 2009 has been prepared in accordance with International Accounting Standards and International Financial Reporting Standards (collectively "IFRSs") as adopted by the European Union (EU) at 31 January 2009. Details of the accounting policies applied are those set out in French Connection Group PLC's Annual Report 2008. The annual financial information presented in this preliminary announcement for the year ended 31 January 2009 is based on, and is consistent with, that in the Group's audited financial statements for the year ended 31 January 2009, and those financial statements will be delivered to the Register of Companies following the Company's Annual General Meeting. The auditor's report on those financial statements is unqualified and does not contain any statement under Section 237(2) or (3) of the Companies Act 1985.

These consolidated financial statements have been prepared using the historical cost convention, modified for certain items carried at fair value, as stated in the accounting policies.

Statutory accounts

Information in this preliminary announcement does not constitute statutory accounts of French Connection Group PLC and its subsidiaries ("the Group") within the meaning of Section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 January 2008 have been filed with the Registrar of Companies. The auditor's report on those accounts was unqualified and did not contain statements under Section 237(2) or (3) of the Companies Act 1985.

 

 

2 Segmental analysis
2009		UK/Europe			North America			Rest of the World			Intra Group	Total
		Retail	Whole- sale	Total	Retail	Whole- sale	Total	Retail	Whole- sale	Total
		£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Revenue		125.3	47.5	172.8	34.4	18.7	53.1	7.1	15.0	22.1		248.0
Gross profit		76.8	13.4	90.2	19.9	5.8	25.7	4.6	3.2	7.8	3.3	127.0
Gross margin		61.3%	28.2%	52.2%	57.8%	31.0%	48.4%	64.8%	21.3%	35.3%		51.2%
Trading overheads		(78.3)	(11.9)	(90.2)	(23.1)	(3.9)	(27.0)	(5.8)	(1.8)	(7.6)		(124.8)
Operating contribution		(1.5)	1.5	-	(3.2)	1.9	(1.3)	(1.2)	1.4	0.2	3.3	2.2
Common overhead costs				(6.7)			(4.1)					(10.8)
Licensing income				5.6						1.9	(3.3)	4.2
Disposal of lease interests				0.6			1.4					2.0
Divisional operating loss				(0.5)			(4.0)			2.1	-	(2.4)
Group management overheads												(4.5)
Operating loss before financing costs												(6.9)

The share of the results of the joint venture operations of £0.2 million (2008: £0.1 million) relate to Rest of the World retail operations and are not disclosed in the information above.

The impairment of goodwill of £11.9 million (2008: £nil) is allocated to the US retail business (£2.2 million), the US wholesale business (£8.6 million) and the UK retail division (£1.1 million).

2008		UK/Europe			North America			Rest of the World			Intra Group	Total
		Retail	Whole- sale	Total	Retail	Whole- sale	Total	Retail	Whole- sale	Total
		£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Revenue		115.6	55.6	171.2	35.1	16.5	51.6	-	13.3	13.3		236.1
Gross profit		72.4	18.4	90.8	21.1	6.1	27.2	-	3.0	3.0	3.2	124.2
Gross margin		62.6%	33.1%	53.0%	60.1%	37.0%	52.7%	-	22.6%	22.6%		52.6%
Trading overheads		(72.3)	(13.2)	(85.5)	(22.0)	(3.7)	(25.7)	-	(1.2)	(1.2)		(112.4)
Operating contribution		0.1	5.2	5.3	(0.9)	2.4	1.5	-	1.8	1.8	3.2	11.8
Common overhead costs				(5.7)			(3.4)					(9.1)
Licensing income				4.6						2.0	(3.2)	3.4
Divisional operating profit				4.2			(1.9)			3.8	-	6.1
Group management overheads												(4.7)
Operating profit before financing costs												1.4

  

3 Other operating income

	2009 £m	2008 £m
Licensing income	4.2	3.4
Negative goodwill on acquisition of subsidiary	1.0	-
	5.2	3.4

Negative goodwill arising on acquisition of subsidiary is disclosed in Note 7.

4 Dividends - equity 

	2009 £m	Pence per share	2008  £m	Pence per share
Final paid for prior financial year	3.2	3.3p	3.2	3.3p
Interim paid for current financial year	1.6	1.7p	1.6	1.7p
Total dividends paid during the year	4.8	5.0p	4.8	5.0p

The Board is not proposing a final dividend (2008: £3.2 million or 3.3 pence) giving a total dividend for the current financial year of 1.7 pence per share (2008: 5.0 pence).

 

	2009 £m	Pence per share	2008  £m	Pence per share
(Loss)/profit attributable to equity shareholders	(16.6)	(17.3)p	1.4	1.5p
Impairment of goodwill	11.9	12.4p	-	-
Adjusted (losses)/earnings	(4.7)	(4.9)p	1.4	1.5p

In the opinion of the Directors, the adjusted (losses)/earnings per share gives a better measure of the Group's underlying performance than the basic (losses)/earnings per share.

  

6 Intangible assets

		Goodwill £m
Cost and net book value at 1 February 2007 and 31 January 2008		14.1
Cost and net book value at 1 February 2008		14.1
Acquisition during the year		0.2
Impairment during the year		(11.9)
Disposal during the year		(0.1)
Net book value at 31 January 2009		2.3

On 9 June 2008, the Group acquired the net assets of two franchise stores. The book and fair value of the assets acquired, all inventories related, was £0.1 million and the consideration was £0.3 million. Goodwill arising on the acquisition of £0.2 million has been capitalised and relates to the right to trade in the acquired store locations. No separately identifiable intangibles were recognised in accordance with the recognition criteria of IAS38.

During the year the Group disposed of £0.1 million of goodwill. The Directors consider this disposal to be immaterial to the Group and therefore no further disclosures have been presented.

Goodwill includes £10.8 million relating to the acquisition of the remaining 50% of the share capital of the US business, French Connection Holdings Inc., acquired in March 2001. This relates to two cash generating units; a retail business (£2.2 million) and a wholesale business (£8.6 million). The recent down turn in the US economy has had a profound effect on both US businesses and therefore also on the recoverable amounts in relation to the goodwill. Taking into account the current poor market conditions and using appropriate forecast growth rates, the Directors consider that the carrying value of the US goodwill has become impaired and therefore a provision has been made against the whole of the carrying value which has been recognised in the profit and loss during the period.

Goodwill of £1.1 million relates to the acquisition of three UK franchise stores in 2007. Based on the current UK retail economic climate and appropriate growth rates, the Directors consider that the goodwill associated with these three retail stores has been impaired and therefore a provision has been made against the carrying value. The impact on each reportable segment is disclosed in Note 2.

No goodwill impairment losses were recognised in the prior year. Of the remaining goodwill, £1.9 million relates to the acquisition of retail franchise operations in the UK.

Given the similar nature of the activities of each cash generating unit, a consistent methodology is applied across the Group in assessing cash generating unit recoverable amounts. The recoverable amount is the higher of the value in use and the fair value less the costs to sell. The value in use is the present value of the cash flows expected to be generated by the cash generating unit over a projection period together with a terminal value. Cash flows are projected based on actual operating results and the Directors' five year forward forecasts which are based on Directors' knowledge and historical experience and economic growth forecasts for the fashion industry. A discount rate of 11% (2008: 12%) has been applied to the value in use calculations representing a pre-tax rate reflecting market assessments of the time value of money at the balance sheet date. A terminal growth rate of 2% (2008: 3%) has been used based on industry growth rates.

  

7 Acquisition of subsidiary

On 10 July 2008, the Group completed the acquisition of the 50% of French Connection Japan Inc. owned by Renown Inc. The 50% joint venture had previously been accounted for using the equity method of accounting. This resulted in French Connection Japan Inc. becoming a wholly-owned subsidiary of the French Connection Group. French Connection Group acquired the interest in return for a payment by Renown Inc. to French Connection Group of £0.2 million. 

Details of the subsidiary's trading post-acquisition are presented in Note 2 'Segmental analysis' within the Retail Rest of World segment. If the acquisition had occurred on 1 February 2008, management estimates that consolidated revenue for the year to 31 January 2009 would have been £252.0 million and consolidated loss before tax and impairment of goodwill for that period would have been £5.9 million. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 February 2008.

The acquisition had the following effect on the Group's assets and liabilities on acquisition date.

		Pre-acquisition carrying amounts £m	Fair value adjustments £m	Recognised values on acquisition £m
Property, plant and equipment		-	0.4	0.4
Inventories		0.6	-	0.6
Trade and other receivables		1.5	-	1.5
Cash and cash equivalents		0.1	-	0.1
Trade and other payables		(1.0)	(0.3)	(1.3)
Finance lease liabilities		-	(0.5)	(0.5)
Net identifiable assets and liabilities		1.2	(0.4)	0.8
Negative goodwill on acquisition				(1.0)
Consideration received, satisfied in cash				(0.2)
Cash acquired				(0.1)
Net cash inflow				(0.3)

The negative goodwill of £1.0 million has been credited within "Other operating income" in the Group Income Statement. The excess of the net fair value of the identifiable assets, liabilities and contingent liabilities acquired over the cost of the acquisition is mainly attributable to provisions against the carrying value of fixed assets, dilapidations provisions and the recognition of finance leases on the balance sheet.

As a result of the acquisition, the following fair value adjustments were made to the initial 50% investment in French Connection Japan Inc.

	Fair value adjustments £m
Property, plant and equipment	(0.5)
Trade and other payables	(0.5)
Total fair value adjustments	(1.0)

The above fair value adjustments are mainly attributable to fixed asset impairments and dilapidations provisions. These fair value adjustments have been expensed within "Other expenses" in the Group Income Statement. The total income statement effect of the negative goodwill and fair value adjustments is £nil.

Pre-acquisition carrying amounts were determined based on applicable IFRSs immediately before the acquisition. The values of assets, liabilities and contingent liabilities recognised on acquisition are their estimated fair values. 

The trade and other payables fair value estimates are provisional and may be adjusted within the twelve months following acquisition date. 

8 Reconciliation of decrease in cash to movement in net funds

		2009 £m	2008 £m
Decrease in cash		(8.2)	(2.3)
Cash outflow from finance leases		0.4	-
Change in net funds from cash flows		(7.8)	(2.3)
Translation differences		(0.8)	0.1
New finance leases		(1.0)	-
Movement in net funds		(9.6)	(2.2)
Net funds at beginning of year		46.7	48.9
Net funds at end of year		37.1	46.7

9 Analysis of net funds

	1 February 2008 £m	Cash flow £m	Non cash changes £m	31 January 2009 £m
Cash and cash equivalents in the balance sheet	49.3	(10.9)	-	38.4
Bank overdrafts	(2.6)	2.7	(0.1)	-
Cash and cash equivalents in the cash flow	46.7	(8.2)	(0.1)	38.4
Finance lease obligations	-	0.4	(1.7)	(1.3)
Net funds	46.7	(7.8)	(1.8)	37.1

FIVE YEAR RECORD

	2009 £m	2008 £m	2007 £m	2006 £m	2005 £m
Revenue	248.0	236.1	241.3	246.3	265.7
(Loss)/profit before taxation	(17.4)	3.1	4.0	15.7	33.7
(Loss)/profit attributable to shareholders	(16.6)	1.4	0.1	9.7	23.0
(Losses)/earnings per share
Basic	(17.3)p	1.5p	0.1p	10.2p	24.1p
Adjusted	(4.9)p	1.5p	2.2p	7.1p	24.1p
Diluted	(17.3)p	1.5p	0.1p	10.1p	23.9p
Dividends per share	1.7p	5.0p	5.0p	5.0p	5.0p

All of the above numbers have been prepared under IFRS.

RETAIL LOCATIONS

		31 January 2009		31 January 2008
		Locations	sq ft	Locations	sq ft
Operated locations
UK/Europe
French Connection	Stores	77	234,550	75	236,507
French Connection	Concessions	40	24,908	19	13,918
Nicole Farhi	Stores	8	20,212	9	22,627
Nicole Farhi	Concessions	12	12,551	14	11,528
Toast	Stores	6	7,072	6	7,072
Toast	Concessions	1	854	3	1,679
Great Plains	Stores	1	850	1	850
		145	300,997	127	294,181
North America
French Connection	Stores	37	140,740	36	143,841
Nicole Farhi	Stores	1	5,000	1	5,000
		38	145,740	37	148,841
Japan
French Connection	Stores	18	38,405
French Connection	Concessions	3	4,950
		21	43,355
		204	490,092	164	443,022
French Connection licensed and franchised
UK/Europe		13	20,610	20	29,710
North America		1	2,000	1	2,000
Middle East		14	25,214	11	20,047
Australia		43	62,801	38	55,610
Japan				22	44,300
Hong Kong		7	12,416	6	11,921
China		24	34,386	22	29,016
Other		52	52,195	50	51,961
		154	209,622	170	244,565
Total		358	699,714	334	687,587

ENDFR JRMMTMMJBTIL

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