FCCN – French Connection in hindsight

FCCN (French Collection) – a clothes manufacturer and retailer – released a trading statement today, reporting a 12% decline in like-for-like sales. Shares were already trading at below PBV, but the news has send them spiralling down 24% at the time of writing.

FCCN has been a widely discussed value share, and is/was owned by investors with far superior investing talent to me. There was a lot of discussion about it yesterday, before it dropped its bombshell, so it is interesting to compare what was said then, with what we know now.

So, what did we know as of yesterday? Richard Beddard has been doing some excellent analysis on the company. He showed that it was not a true net-net, after factoring in store leases. It also had an F-score of 5/6. He described the competitive position as weak. He was pondering an add or hold on the company.

A couple of my own observations: net cash flow was very weak for the company – putting it on a price to cashflow of 54 – very high, actually. After capex, the company had negative free cashflow. Plus, we know that fashion retailers are notoriously fickle. So, what we have is a company that looks quite weak. If it had been a net-net with an F-score of 8 or 9, then we would have something to work with. I felt that, if anything, that FCCN was a sell, given the numbers we saw.

The problem with a company like FCCN is that it’s what I call a "50/50" stock. It trades on a cheap valuation, and all market participants are aware as to what’s at stake. The qualitative and quantitative aspects of the company are well-understood. What nobody knows, though, is the probabilities associated with the upside and the downside. So an investor faces a big upside, a big downside, and it’s a complete guess as to which is the correct way to bet. Unfortunately, the cost of being wrong puts a big dent in your portfolio, and seems to happen far too frequently (at least when I try to do it).

Thankfully, Richard decided not to top up. I quipped that it’s what Peter Lynch would have done. Unfortunately I am not able to channel Lynch’s investment acumen directly, but I can parrot a few of his investment rules that might help:

  • Long shots almost always miss the mark.
  • don’t bottom-fish
  • If you are thinking of investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back

OK, fair enough, clothing is a little different from buggy whips. Whips are an obsolete technology, whereas clothing is not. I’m thinking of it more as a turnaround situation.

Now, for all my self-satisfied preening as to having made the right call (for now, anyway), I didn’t actually know that FCCN would release a bad trading statement today (in fact, I didn’t know it was going to release any trading statement at all). It could have easily issued a good one – in which case I would have looked a bit of a numpty. It does, though, illustrate the kind of risk that one takes with these companies. Even former retailing directors turned investors can call it wrong.

I would like to thank Richard Beddard and the other wise investors who spread their knowledge and experience to people like myself who can benefit from their insights. Thanks guys.

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About mcturra2000

Computer programmer living in Scotland.
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1 Response to FCCN – French Connection in hindsight

  1. Pingback: Friday Reading | Expecting Value - UK Value Investing Blog

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