French Connection - not quite a bargain
Posted on January 22, 2008 by Richard Beddard
Filed Under Companies |
French Connection’s price has fallen from 500p to 100p yet this iconic company is still no bargain. Are we FCUKing crazy?
It’s very easy to be carried away by optimistic sounding earnings forecasts. Projections of 123% earnings growth per year for three years originally attracted me to French Connection.
Reality is less enticing. French Connection’s price has fallen from around 500p to 100p and its profits have fallen even faster since 1995, so it ‘aint no growth story. And I’m not confident in the forecasts either because:
- The retail outlook is uncertain. To achieve the same level of profits as last year, says its chairman last November, requires “an improvement in the general retail environment in the UK over the next three months.” And remember, last years results weren’t very good.
- French Connection has lost the impetus it had with the FCUK brand. I think people tired of the shocking but amusing FCUK brand but the company has not found anything as compelling to replace it.
- Analyst’s forecasts are generally unreliable
Anyway, what was a growth story is now a potential recovery story. I’ll save the jokes and detail of French Connection’s rise and fall to a forthcoming iBall [Now live - Ed], provisionally entitled What the FCUK’s going on at French Connection?
Here I’ll dwell on the price, and whether it’s sufficiently low to attract bargain hunters.
French Connection’s recovery depends on shoppers spending more, and favouring French Connection again. Both are possible, even probable, for investors prepared to wait long enough.
But even if the brokers are right, big percentage gains on very low profits aren’t as significant as they sound. In 2007, French Connection reported headline earnings of less than 1p per share. After three years of growth at 123% a year French Connection would only be earning 10p, less than half its 2004 peak of 28p.
When earnings are so variable the PE ratio, which compares the most recent year’s earnings to the share price, is useless (French Connection’s is 108), because one year’s earnings simply aren’t representative of the company’s earning power. Dividing the share price by the long-term earnings average is better. FCCN’s nine year PE is low. About eight.
But there are plenty of retailers on lower long term PEs. SCS Upholstery (sofas), the ‘cheapest‘, is on a long term PE of two. So is Woolworths. Alexon (a fashion retailer) is on three. Marchpole (fashion wholesale and retail) is on five. Debenhams (a department store) is on six. At the other end of the scale Next trades on a long term pe of 17, Marks and Spencer, 19, Moss Bross 22, Ted Baker 23 and ASOS, 688 (based on seven years of earnings)!*1
So despite the collapse of its share price from a high of near enough 500p to its current price of about 100p, French Connection still isn’t screaming, “buy me“.
It’s dividend yields 5%, but last year the company earned less than it paid out. Assuming French Connection announces a final dividend this March, it’s likely to exceed profits again. It can’t pay out more than it earns forever, so the long-term future of the dividend depends on recovery too.
And I don’t take much comfort from the chairman’s statements in successive annual reports. Each one reads like the one before, back to 2005, the first year it identified problems. It’s targeting operating margins above 10% and it’s optimistic that new and better ranges will lift sales. No doubt, they’re very good (women I’ve talked to like the clothes), but they don’t seem to have the pulling power of good old FCUK. On costs, there’s not much talk of cutting them.
French Connection is not doomed, not imminently anyway. The company is profitable (just) has no long-term debt, it knows success, and although it has come off the rails temporarily it has time to turn things around. But, although it’s tempting to gamble on a recovery, I don’t see any reason to hurry.
footnotes:
- Calculated using seven years of earnings data for ASOS. It’s enormously high PE ratio is because earnings have risen very fast from nothing at all, and exuberant investors see potential in its online, celebrity fashion. We featured it in iBall in November.
Comments
4 Responses to “French Connection - not quite a bargain”
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Few analysts are competent at all….
Hi Deborah.
James Montier, in the excellent book I just reviewed writes over a hundred pages on this. One of the things he discovered was that value strategies using forecast PE’s work no better than those using historic PE’s! So why bother?
Richard Beddard should, if he had any common sense, stay away from such obvious ‘jokes’ as the FCUK acronym used as FCUKing… its poor and doesn’t add to the intellectual weight of his argument. Or maybe I was the only one to catch on to the twist of word back in the early days of the century ? FCUK was a fun twist in 2000… by 2008 its a sign of lacking a serious sense of humour.
Tas
Hi Tas, sorry you didn’t like the joke. But that is the argument isn’t it? That the joke’s worn off and they haven’t found anything to replace it.
Anyway if you didn’t like the blog, you’ll hate this: http://iball.iii.co.uk/2008/01/29/french-connection-fccn/