Business objectives, strategy, and business model
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.
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.
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 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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Our principal brand is French Connection which accounts for 87% of the Group's revenues.
The French Connection brand operates in the fashionorientated 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 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 designed 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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We design, produce and distribute branded fashion clothing for men and women from our business premises in London, Swansea, New York, Paris, Dusseldorf, Hong Kong and Toronto. We operate retail stores and concessions in the UK, Europe, US and Canada and also operate ecommerce businesses in each of those territories. Further, we wholesale our products to retailers operating in over 60 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.
Our design teams are based in London and we arrange for the products to be manufactured in specialist third part factories in Europe and Asia supervised by local buying offices. The main countries where manufacturing takes place are China, India and Turkey.
The Group retails garments through a network of stores on high streets and in shopping malls across the UK, Europe and North America and through concessions within leading department stores such as House of Fraser. We also operate ecommerce internet sites through which our products are available for home delivery in the UK, Europe and North America.
The product ranges are also offered for sale at wholesale through our showrooms in London, New York, Paris, Dusseldorf and Hong Kong to selected customers operating department stores, multi-brand fashion stores or ecommerce 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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Our globally recognised French Connection and fcuk brands have been extended successfully into complementary 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.
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The continued growth of multi-channel retailing is a clear focus for French Connection. We will continue to invest in the people and systems to support this growth opportunity to ensure our customers can shop with us however they wish and get the very best multi-channel experience. The success of our click and collect program is an example of this investment.
Principal risks and uncertainties
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 macroeconomic 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 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.
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. To mitigate cost pressures we have focused on reducing retail operating costs and have achieved considerable savings by optimising our rostering timetables in store.
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 Statement.
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Key Performance Indicators
The Board considers that the key performance indicators for the businesses are:
- total sales achieved in the retail channels; including LFL sales growth;
- total sales achieved in the wholesale channels;
- total sales by geography;
- overall gross margin;
- net operating margin for the retail and wholesale channels in total and across all geographies.
Each of the above is discussed in more detail in the Financial Review.
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