Fashion is our Business

Our business

Fashion can be a tough game. It is a fast-paced business requiring constant creative drive in order to keep ahead of customer expectations. This speed of change causes volatility which in turn creates the excitement which draws people into this most dynamic of businesses.

After over 40 years in that environment, French Connection has succeeded in becoming one of the most recognised fashion brands on the high street. The brand has a global reach, operating in over 30 countries through more than 1,000 stockists and with over £400 million of branded retail sales worldwide, either directly through our own retail chain, through wholesale channels or generated from licensed arrangements.

At the heart of our business is a passion for the clothes. In 1972, when French Connection was conceived, we set out to create well-designed, stylish clothing that appealed to a broad market. We have since worked hard to build on that vision and as a result, French Connection is synonymous with fashion and style.

It remains our prime goal to create distinctiveness in a crowded market place through focus on design. The brand’s strength lies in balancing new, exciting ideas with consistent quality and affordability and in a world of “fast fashion” we are proud of our commitment to the creative process.

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Business aims and operations

With a passionate focus on fashion underpinning the business our aim is to generate increased shareholder value through the sale of fashion products and the extension of our brands into other lucrative markets through licensing. We continually assess markets and relationships for new opportunities to broaden our customer reach.

We design, produce and distribute branded fashion clothing for men and women from our business premises in London, Swansea, New York, Paris, Hong Kong and Toronto. We operate retail stores and concessions in the UK, Ireland, Europe, US and Canada and also operate e-commerce businesses in each of those territories. Further, we wholesale our products to retailers operating in over 30 countries around the world and have licensed partners operating French Connection stores across Asia, Australia and the Middle East. Other branded products, such as toiletries, shoes and eyewear, are produced under licence.

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Principal risks

Our success depends on our ability to produce ranges of garments which are sufficiently attractive to potential customers. We seek to achieve this through retention of experienced and skilled designers and merchandisers and by remaining as operationally flexible as possible. The nature of fashion retail, however, means that it is not always possible to predict customers’ reactions to each season’s new ranges. Our customers’ propensity to spend on clothing is affected by their personal financial situation and other macro-economic factors which impact the total size of the retail markets in which we operate. We have been able to mitigate this somewhat by developing our wholesale and licensing businesses which provide a more stable and predictable income stream. We consider that as a small operator at the upper end of the middle market the impact on our business of macro-economic elements is considerably smaller than the impact of the success of our designers in producing attractive products.

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Brands

Our principal brand is French Connection which accounts for 88% of the Group’s revenues.

Our other brands include:

TOAST: a range of beautifully crafted ladies’ and men’s clothing and unique homeware, available on-line, in selected John Lewis stores and through a growing number of dedicated high-street stores;

Great Plains: a fashion basics range produced in-house and supplied through wholesale to multi-brand retailers mainly in the UK; and

YMC: a fledgling, edgy, contemporary fashion brand for men and women with two stores in London and a growing wholesale base.

Each brand targets a different audience and has achieved high levels of recognition for style and design reflecting the creative passion and skill poured into the design and manufacture of their products.

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French Connection

The French Connection brand operates in the fashion-orientated market place offering a fashion-forward range of quality products at affordable prices. Our customers, typically aged 18-35, appreciate that the brand is at the leading edge of high street fashion and offers quality and style in its products. We design ranges of products for both men and women from underwear to outerwear, casual wear to suits, denim and accessories.

Our design teams are based in London and we arrange for the products to be manufactured in specialist facilities in Europe and Asia. The Group retails garments through a network of retail stores on high streets and in shopping malls across the UK, Ireland and North America and through concessions within leading department stores such as House of Fraser and El Corte Inglés in Spain. We also operate e-commerce internet sites through which our products are available for home delivery in the UK, Ireland, Europe and North America.

The product ranges are also offered for sale at wholesale through our showrooms in London, New York, Paris and Hong Kong to selected customers operating department stores, multi-brand fashion stores or e-commerce sites around the world.

To further extend retail distribution we have granted franchises and licences to quality retailers allowing them to operate French Connection branded retail stores in Europe, the Middle East, Asia and Australia. These customers are supplied through our wholesale channels in the UK and Hong Kong. Our licensees operating stores in Hong Kong and China are 50% joint venture businesses operated by our local partners in those territories.

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Brand extensions

Our globally recognised French Connection and fcuk brands have been extended successfully into complimentary licensed products including men’s and women’s toiletries and fragrances, shoes, watches, jewellery, furniture and eyewear which together generate another major profit stream for the Group: licence royalty income.

Worldwide retail and wholesale operations

Region Location Territories Retail operations Wholesale customers Brands
UK/
Europe
London
Paris
UK, Ireland, Europe Retail stores and concessions,
e-commerce
Department stores, multi-brand stores, franchise operators. French Connection, Great Plains, Toast, YMC.
North America New York USA Retail stores, e-commerce Department stores, multi-brand stores. French Connection, YMC.
Toronto Canada Retail stores, e-commerce Multi-brand stores. French Connection.
Rest of World Hong Kong Hong Kong, China Retail stores and concessions through joint ventures French Connection.
Australia, Asia, India, South Africa etc. Brand licensees, department stores French Connection.

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Management of the business

Founded by Chairman and Chief Executive Stephen Marks, French Connection’s long history of success has been based on design quality and innovative fashion, supported by a strong market presence resulting in one of the most highly recognised and respected clothing brands in the UK and across the world. We seek to ensure that products are presented for sale in contemporary surroundings by knowledgeable and friendly staff who are in-tune with our customers. We recognise that our products are the core element of our business and that our ability to produce fashionable clothing to match our customers’ expectation has been, and continues to be, the key to our continued success.

We seek to ensure that our resources are deployed effectively and efficiently to support our unitary business. Design and production of the ranges and maintenance of our operating standards are paramount for all our business managers who have broad responsibility for their area of operations.

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Management of risks

Each year the brands produce two main seasonal fashion ranges and the success of each of these is largely dependent on the ability of our designers to reflect attractively the emerging trends in fashion. We utilise a mix of experience and fresh thinking in our design studios under the consistent guidance of the senior management to ensure continuity of the brand attitudes.

Like all retailers we are susceptible to volatility in the propensity of consumers to spend, which is affected by macro-economic issues. The design process and our retail businesses in particular have a significant proportion of fixed costs giving rise to operational gearing and this is exacerbated by upward-only rent reviews which have recently seen cost increases well ahead of general inflation.

Our brands and the way they are perceived in their respective markets is very important to us. We are therefore very protective of the brands and work to ensure that they are presented in appropriate ways and that they are not misused. A main driver for brand perception is the products themselves and therefore our reputational risk is closely linked to our sales success.

As a wholesaler we also face the risk of default from our customers and manage this through active relationship management by our dedicated customer accounts team. Our experience of bad debts has been very low over many years due to this close management. We also insure certain debt risks, mainly overseas.

The Group maintains a positive net cash balance throughout the year and we are conscious to manage the Group’s working capital effectively.

The principal treasury risks to the Group arise from exchange rate and interest rate fluctuations. The Board has approved policies for managing these risks, which are reviewed on a regular basis, including the use of financial instruments, principally forward foreign exchange contracts. No transactions of a speculative nature are undertaken.

The most significant exposure to foreign exchange fluctuations relates to purchases made in foreign currencies, principally the Hong Kong Dollar and Euro. The Group’s policy is to reduce substantially the risk associated with purchases denominated in currencies other than Sterling by using forward fixed rate currency purchase contracts. There has been no change since the year end to the major treasury risks faced by the Group or the Group’s approach to the management of these risks.

The Group is dependent on reliable IT systems for managing and controlling its business and for providing efficiency and speed in the supply chain. Our IT function oversees all the systems and has policies and procedures to protect the software, hardware and data and to prevent unauthorised access to the systems.

The Group’s approach to the management of risks is further discussed in the Corporate Governance Report.

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Key Performance Indicators

The Board considers that the key performance indicators for the businesses are:

  • year-on-year comparison of retail sales on a same-store basis known as like-for-like sales growth;
  • total sales achieved in the wholesale channels;
  • gross margin by division;
  • net operating contribution by division, being gross profit of the division, less the direct costs of the divisional operation; and
  • net operating margin by division, being the operating profit before financing as a percentage of revenue.

Each of the above is discussed in more detail in the Business Review.

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Growth and development plans

Following a restructuring of the business implemented in 2010 the Group traded profitably up to July 2011 at which point the UK/Europe retail business started to experience a decline in sales volumes. This had a significant effect on Group profitability despite continued growth in wholesale, licensing and our international businesses. As a result the Board implemented an extensive review of the UK retail business. This review resulted in a broad range of significant initiatives which were announced in September 2012.

The initiatives focus on the following main areas:

Store operations

  • develop better selling skills and improve customer service to increase basket size and average transaction values;
  • improve efficiency in-store by re-engineering processes; and
  • optimise effectiveness of labour hours through more flexible labour management.

Customer focused product

  • develop our ranges to better meet the aspirations of our core customers;
  • ensure product pricing matches customers’ value perceptions; and
  • improve accessories and ancillary product ranges.

Merchandise management

  • implement a more carefully structured approach to buying;
  • improve reaction speed to best selling lines and changing trends; and
  • continue to carefully manage gross margin during sale periods.

Portfolio management

  • target the disposal of loss making stores where economically viable; and
  • engage external property agents working with landlords and potential tenants.

Strengthened management team

  • made a number of new senior management appointments in design, retail and multi-channel functions.

Details of progress in implementing these initiatives is provided in the Chairman’s Statement. We are confident that the initiatives will result in a steady and significant improvement in the revenue and gross margins in the UK/Europe retail business and therefore have a positive impact on Group profitability over the next two financial years and beyond.

The overall aim is to improve sales densities and achieved gross margin in our retail stores which will be evidenced by our key performance indicators of growth in like-for-like sales and gross margin percentage. Underperforming stores will, where possible, be closed. We will also continue to expand our e-commerce operation which is now a significant sales channel.

In our wholesale business we aim to improve volumes with both existing wholesale customers and through recruiting new outlets, reported through the growth in total wholesale turnover. Our key performance indicators in this area are the sales, gross margins and net operating margins reported for each business segment.

We will continue to work to nurture and develop our other brands. Further, we aim to extend the reach of the French Connection brand through additional licensing in new product segments and territories and to support and nurture our existing licensees for further growth, the result of which will be seen in increases in licence royalty income.

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