Wednesday, 7 July 2010

the end of the road for the 'cheap' FCUK ?

The Raven had a quick look at French Connection the UK retailer last night;
Well the conclusion is that its a very unappealing stock, even at its low valuation. (nb. low not cheap valuation!) on Revenue of 214mm, CoS 104mm, but other operating expenses of 117mm and the firm's running at an operating loss, which it has really since 2007. Its been restructuring and hence has some restructuring costs which kick the average loss for the last two years at 20mm p.a. Just to put that in context the firm has ~ 130mm in balance sheet assets and ~57mm of liabilities.

The Raven got excited when looking at the balance sheet that this could be a good liquidation story as its assets really are a healthy dollop of cash 36mm , some receivables and inventory which should cover the current liabilities and it appears to have no long term debt at first glance. However there is the relatively ugly uncapitalized leases, of which;
7.3mm <1yr
35.3mm 2-5yrs
222.9mm >5yrs.
Now the Raven isn't familiar with how these get treated in UK bankruptcy, in the US he believes they could be treated as unsercured creditors, with a cap on the liabilities of max of 1yr or 15%, globally capped at 3yrs of the lease. Using that it would be ~ 7.3+35.3+34 = 77mm. Which wipes out any upside for shareholders. The only hope there could be is that these leases are below market rents, in which case the landlords would be keen to terminate the deals if the company weren't able to assign the leases for a fee.
In that rosy best case scenario which the Raven doesn't believe in then he thinks there is approx of 42.4mm of shareholder value in a liquidation scenario, approx 44p as a share price (last nights close of 35.25p), indicating a 20% discount.

The other exit for shareholders would be a sale to a competitor, however the Raven doesn't have a good feeling as to which of their competitors would actually want to take on these stores, as it would appear to be a bit of duplication for major competitors. This is pie in the sky talk however given the large stake held by Stephen Marks the founder and 42% shareholder. The Raven doesn't know the chap, but given his reluctance to see the problems facing the brand as it started making losses in 2007 it would be a surprise to see him liquidate or sell the brand to a competitor.

Pass, there are easier trades and fatter pitches to look at...

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