Newsletter 14 - Is french connection still a good buy? Or a good bye? 3rd november 2014

Since buying French Connection (LSE:FCCN) for 30.47p in July 2013 the shares have had a roller-coaster ride, up to 91p, and then down to 47p.  At the current price of 53p, and market capitalisation of £50m should I buy some more
​

Given that this is a Net Current Asset Value investment, the first place to look is the BS:​

Over the past year NCAV has shrunk from £49.9m to £40.6m while market capitalisation climbed from £30m to £53m.  And this comparison is made before we adjust down the BS values of inventory (say by one-third) and receivables (say by one-fifth) in order to offset any potential overly optimistic BS valuations.

There are encouraging signs on the quality of the operating business, even though the Group remains unprofitable: stores are being closed to reduce the drag of the loss-makers; LFL sales in UK/Europe Retail are up 6.6%, with less need to sell off stock in a seasonal sale; forward orders for Wholesale are up; overhead is down; licensing is still improving, and; there are good prospects for a continued rate of closure of non-contributing stores of around 8 per year in UK/Europe.

In short, they have made a start on the long road to recovery: they seem to have better buyers attracting more customers and are lowering overhead.

But… but…. losses of £3.9m for the latest half-year are worrying.  They are clearly not out of the woods yet.

The share price rise means that French Connection no longer qualifies as a NCAV investment. Furthermore it has not transformed itself into a candidate for my ‘strong economic franchise’ investment portfolio.

If the share price falls to under 35p I will take another look because there would then appear to be sufficient margin of safety in the NCAV position.
​
For now, I’m quite content to sit out the remaining four years until the selling horizon is reached for NCAV portfolios.  If the managerial improvement continues this could be a ten-bagger.  After all, the share was once (2004) over £5.  Unlikely, but it could happen.  If there are enough of these in the portfolio I expect to do well overall.