French Connection has notched up a full-year loss at its UK and European retail division and warned that margins are under pressure from rising input costs.

UK and European retail sales

Retail revenues in the UK and Europe, where French Connection has 72 stores and 43 concessions, dropped by 3% to £110.8m in the year to January 31, a 1.4% like-for-like drop.The division generated a loss of £1.6m during the year versus a profit of £0.3m the year before.

The business said that it would “seek opportunities to streamline” the retail business in to areas where “action would lead to improved profits”. It added that it wanted to improve its store portfolio but was hindered by inflexible lease structures.

Margins were flat in the retail business with the second half of the year impacted by rising input costs.

French Connection added in a statement that “while we have worked hard to mitigate the effects there will be an impact on trading in the new financial year.” The business estimated that the price of its spring 11 ranges rose by 8%.

Although pricing for autumn 11 is yet to be finalised French Connection expects gross margin to be affected by up to 50 basis points.

The business said: “There is a significant opportunity for improvement in this performance and we are therefore focused on increasing the sales density in our stores, developing the [young fashion chain] Toast business further, maximising sales through our e-commerce channels and optimising our gross margins. However, we do not expect to see a significant improvement in performance in the new financial year, given the challenging economic environment in which we find ourselves.”

Menswear outperforms womenswear

French Connection’s menswear ranges saw a return to a growth during the year, however womenswear sales performed less well after a number of seasons of growth before 2010. The company said it wanted to increase womenswear sales by developing more fashion forward ranges. In stores the brand and retailer has also changed its merchandising to reflect a boutique feel and merchandises by outfit. It is also in the process of developing a new shop fit.

UK and European wholesale sales

UK and European wholesale revenues significantly outperformed the retail arm, increasing by 11% during the year, up from £32.6m to £36.1m, with profits in the division increasing by £4.7m to £5.8m.

Forward orders for spring 11 were ahead of equivalent orders from last year by 15%. Early indications suggest a similar increase for autumn 11. Margins were ahead, but again under pressure from rising input costs.

French Connection said: “These improvements reflect a renewed confidence from our wholesale customers in our ranges founded on their experience of their sales to consumers over recent seasons. Sales to e-commerce businesses have increased substantially in the period and continue to show growth into the new financial year. We have also added new customers with particular good progress being made in Europe.”

Together, the retail and wholesale businesses in UK and Europe contributed an operating profit of £4.2m in the year, up from £1.4m the year before.

Group profits soar

Group pre-tax profits at the group’s core continuing operations, excluding Nicole Farhi which was sold for £5m in March last year and the Japanese business which closed last year along with a number of stores around the world, climbed to £7.3m in the year to January 31 from £0.7m the year before helped by the improved wholesale performance and better margins.

Strong sales in Asia aided the performance where profits from French Connection’s retail joint ventures in Hong Kong and China rose to £1.5m in the year compared to £0.4m the year before.

Outlook

Chairman and chief executive Stephen Marks said: “We have achieved a considerably higher profit from the core continuing operations, notwithstanding a period of major change for the group and challenging market conditions. I am looking forward to growing the business further from the solid foundations generated by our recent reorganisation and I believe there are many opportunities for the group to create further value for shareholders in the future.”

Marks added: “The current economic environment is clearly difficult and it appears likely that it will remain so in the coming year. However, I am confident that we have the people, infrastructure, drive and brand strength to build further on the growth we have achieved.”

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