French Connection : Preliminary results for the year ended 31 January 2019 (pdf)

12 March 2019

FRENCH CONNECTION GROUP PLC

Preliminary Results for the year ended 31 January 2019

French Connection Group PLC ("French Connection" or "the Group") today announces results for its financial year ended 31 January 2019.

Highlights:

• • Return to profitability as anticipated with £0.1m underlying operating profit² (2018: loss of £2.1m)

• • Wholesale revenue up 10.3% (13.2% CCY³) from UK/Europe and North America

• • LFL¹ sales down 6.8% due to the impact of the tough retail trading environment in the UK (2018: up 0.8%)

• • Further 10 non-contributing locations closed during the year, with one new store and one concession opened

• • Composite gross margin of 42.3% (2018: 42.7%) due to higher proportion of wholesale sales as growth continues

• • Gain on sale of the Toast brand in April with proceeds from the sale of £11.7m, offset by provisions for onerous retail leases, debt impairment and store closure costs

• • Closing cash of £16.2m (2018: £9.5m)

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

"I am pleased to report that we have achieved our target of returning the Group to underlying profitability this financial year.

This is only part of our overall journey, however it represents a significant achievement given the results over recent years.

This has been achieved despite the ongoing difficult retail trading environment in the UK and is the result of the changes we have made in all areas of the business to adapt to the ever evolving markets in which we operate.

While we still have a way to go to return the business to an appropriate level of profitability, I believe that we have made and continue to make significant progress. "

Notes:

Key performance indicators for the 52 week trading period are outlined below:

FY19	FY184	Var %
Total Group revenue (£m)	135.3	135.0	0.2%
Total Retail revenue (£m)	58.4	65.3	(10.6%)
Total Wholesale revenue (£m)	76.9	69.7	10.3%
Retail LFL¹ (%)	-6.8	+0.8
Stock (£m)	28.4	28.7	(1.0%)
Average UK/Europe Retail Space (sq.ft. '000s)	165.6	175.1	(5.4%)
Average Group Retail Space (sq.ft. '000s)	178.2	188.9	(5.7%)
Number of stores/concessions:
-Operated	96	104	(7.7%)
-Franchised, Licensed & JV	195	212	(8.0%)
Underlying gross margin (%)	42.3	42.7	(40bps)
Net cash position (£m)	16.2	9.5	70.5%

Notes:

• 1. LFL or "Like-for-Like" sales growth is defined as the year-on-year sales growth for owned stores and concessions open more than one year, including ecommerce revenues, removing the impact of closed stores and reported in constant currency.

• 2. Underlying Operating Profit/Loss excludes profit/loss on store disposals and closures, provisions for bad debts and onerous leases and other professional fees.

• 3. Constant Currency (CCY) is calculated by translating the year ending January 2019 at 2018 rates to remove the impact of exchange rate fluctuations.

• 4. The comparative information has been restated to show the discontinued operations separately from the continued operations.

• See discontinued operations Note 3.

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

Enquiries:	Neil Williams Lee Williams	French Connection	[phone]
Tom Buchanan Catriona Woolner Winders	Paternoster Communications	[phone] [phone]

Dear Shareholders

I am pleased to report that we have achieved our target of returning the Group to underlying1 profitability this financial year which represents a significant achievement given the results over recent years. This has been achieved despite the ongoing difficult retail trading environment in the UK and is the result of the changes we have made in all areas of the business to adapt to the ever evolving markets in which we operate. While we still have a way to go to return the business to an appropriate level of profitability, I believe that we have made and continue to make significant progress.

Growth in the wholesale business accelerated during the second half of the year building on the progress made earlier in the year, in both UK/Europe and the USA, however this was offset by the continued difficult retail trading environment in the UK. Overall we achieved an underlying operating profit of £0.1m, an improvement of £2.2m over last year. Including adjusted items we reported an operating loss of £9.3m (2018: £3.8m). We have continued to see good growth in the wholesale business particularly in the USA, with the department stores performing very strongly throughout the year driven by strong consumer demand. Improvements in UK/Europe came in pure-play ecommerce and multi-channel customers.

Whilst the retail business continues to benefit from the ongoing store rationalisation programme, which has resulted in over half the portfolio being exited over the last five years as planned, it has again been impacted by the difficult trading conditions on the UK high street. We saw a 6.8% reduction in like-for-like sales in the remaining portfolio for the year. We have continued with store closures during the second half of the year. Given the current environment the renegotiation of leases is now becoming more favourable to tenants and better deals are available certainly in the short term. This has resulted in a number of stores that were expected to be closed continuing to trade for the time being. As disclosed in our half year results, given the worsening market conditions, we reviewed the underlying lease contracts of a number of loss-making stores that we are actively looking to exit but are currently unable to and have made a one-off provision for the onerous nature of those contracts.

Licensee income reduced slightly on last year reflecting a strong performance once again from DFS, however impacted by reduced income from our Australian licensee, the cessation of ladies Christmas toiletries gifting with Boots and a one off benefit from our previous shoe licensee last year.

As previously announced in April last year, we sold our 75% holding in Toast to the Bestseller Group for £11.7m net of costs.

Wholesale

Revenue increased by 10.3% in the year (13.2% CCY3). The strong growth that we saw last year in both UK/Europe and North America has continued throughout the year and actually accelerated in the second half. The major customers in the UK continued to grow - particularly in the online space - both pure play and multi-channel. In North America, good progress was made with all the department stores, particularly Bloomingdales and Nordstrom, who saw a significantly improved sell through and increased volumes. We are currently rationalising our structure in North America by consolidating everything through our New York operation and removing our office in Toronto, thereby reducing the cost base going forward but maintaining the majority of the revenue.

Gross margins at 32.5% were 0.4% up on last year driven by the increased proportion of full price sales. Despite the increase in revenue, costs were again tightly controlled particularly in UK/Europe and were reduced by 4.9% (0.3% CCY). Overall this has resulted in a 25.6% increase in contribution to £15.2m.

Reaction to both the Summer and Winter 19 collections has been good and orders in North America have continued to be very strong again this year, however the UK in the short term is being impacted to some extent by the current economic climate with customers being conservative in their buying.

Retail

Overall revenue decreased by 10.6% (10.2% CCY) due to a combination of the continued store closure programme with a further 10 locations closed during the year (5 stores and 5 concessions), together with the reduction in like-for-like sales of 6.8% for the year. We had initially anticipated additional stores being closed in the second half of the year, however it is becoming apparent that at the end of leases certain landlords are now becoming more flexible on terms and this has meant that 4 stores expected to close are continuing to trade in the short term but are likely to close during the current financial year. Our target of 30 full-price stores will be passed in the current year with another 8 stores expected to close but again this will depend on the individual negotiations on each site. The uncertainty that existed in relation to House of Fraser in the middle of the year given the change in ownership has now gone away, with the majority of stores remaining open. This has led to an increased opportunity for us particularly with Menswear and Great Plains, although the House of Fraser online channel has been particularly difficult after an extended closure of the site early in the second half of the year. The average lease length of the remaining UK/Europe stores is 2.3 years (2018: 2.4 years).

Gross margins increased by 1.0% to 55.1%. This was achieved by improved base margins and slightly lower markdowns despite the increase in the proportion of sales through the outlet stores. Underlying overheads, excluding the impact of the reduced store portfolio, rose by 0.9% reflecting the new stores/concessions, inflationary pressures particularly on staff costs and continued business rates increase in the South East, offset by ongoing tight cost management. Overall contribution for the year reduced by £0.6m.

Within retail, revenue for ecommerce was slightly down on last year, reflecting the general trading environment but also impacted by a high turnover of staff within this area, particularly at the senior level. We have recently recruited a new senior team including management, trading, digital and technical, in order to place greater emphasis and focus on this key area of growth. We have started to see the benefits of this feed through in the early part of the new financial year. Based on this we will increase the level of investment as we go forward both on the customer experience elements and into higher levels of digital marketing, to drive improved levels of engagement and conversion. The move towards higher levels of mobile traffic continues at 56.8% compared to 50.9% last year.

Licensing

Licensing income for the year was £5.8m compared to £6.3m last year. There are a number of different elements contributing to this movement. We saw continued excellent performance from our partnership with DFS and the launch of our homewear licence in North America which performed very well during the second half of the year. These were offset by a shortfall in income from our Australian licensee, the cessation of a ladies toiletries Christmas gifting programme in the UK and the benefit from the final income from our previous shoe licensee last year. Looking forward we have a North America luggage licensee starting this year and expect to see continued growth from homeware in the USA.

Operating expenses, adjusted for store closures and currency movements, were flat on the year with inflationary pressures especially from staff costs and the impact of increased business rates, offset by rent renegotiations and group-wide cost saving initiatives.

We have recognised a provision for onerous lease costs in the period of £5.2m. In addition to this we have taken an IFRS9 impairment provision of £2.0m in relation to a debt from our Indian licensee, a £0.8m bad debt provision against amounts due from House of Fraser, £0.9m in respect of store closure costs and £0.5m restructuring costs in relation to our Canadian business. The profit to the Group on the sale of our stake in the Toast brand amounted to £9.7m and generated sale proceeds of £11.7m.

The Group ended the year with a strong cash position of £16.2m (2018: £9.5m), reflecting the proceeds on the sale of our stake in Toast, payments to exit stores during the year and capital expenditure mainly on stores and IT infrastructure. Overall working capital increased by £4.6m with the continued growth in the wholesale business. The Board have decided that there will be no dividend payable for the year.

In October last year, following press speculation regarding the potential sale of the Group, we announced that we were in the process of reviewing all strategic options in order to deliver maximum value for shareholders. Alongside several potential strategic options, the review includes the consideration of all types of corporate and brand transactions, including seeking offers for the Group. As disclosed at the time, we had commenced preliminary discussions with several interested parties and have had conversations with several other interested parties regarding the Group's plans. The discussions are ongoing with a number of parties. We continue to expect this strategic review (including the formal sale process) to conclude during the first half of 2019 and will make further announcements when appropriate.

Our initial goal has been to return the Group to profitability which we have now achieved, however we now must intensify our efforts to ensure that we build on the momentum that we have within the business and move to an appropriate level of profitability. It is clear though that the retail market in which we are operating in the UK is unlikely to improve in the near future especially given the uncertainty surrounding our exit from the European Union and the knock on effect that is having on consumer confidence. Our performance in wholesale remains strong especially in the USA with reaction to the new collections being very positive. In addition we have new and growing license partners working with us. Although we are only early into the new financial year, I believe we are in a very good place and will make further significant progress. One of the continued strengths of the Group is the hard work and dedication of all the people who work here. I would like to thank you all for your continued contribution, especially for the determination and commitment you have shown during another particularly tough year on the high street but you should take pride in the progress we have made.

Stephen Marks

Chairman and Chief Executive

Notes:

• 1. Underlying Operating Profit excludes adjusting items and discontinued operations.

• 2. LFL or "Like-for-Like" sales growth is defined as the year-on-year sales growth for owned stores and concessions open more than one year, including ecommerce revenues, removing the impact of closed stores and reported in constant currency.

• 3. Constant Currency (CCY) is calculated by translating the year ending January 2019 at 2018 rates to remove the impact of exchange rate fluctuations.

• 4. Underlying overheads consist of LFL store overheads.

• 5. Adjusting items include provisions for bad debts, onerous leases and store closures and other professional fees.

• 6. Continuing operations exclude the discontinued results from the disposed Toast subsidiary.

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