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 trading 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’ expectations 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.
Our principal brand is French Connection which accounts for 93% of the Group’s revenues.
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. French Connection designs, produces and distributes branded fashion clothing, accessories and homeware for men, women, and children to more than 50 countries around the world through its main distribution channels: retail stores, ecommerce, wholesale and licensing.
OUR OTHER BRANDS INCLUDE:
Great Plains: a fashion basics range for women designed in-house. Available on-line and supplied through wholesale to multi-brand retailers; and
You Must Create (YMC): an, edgy, contemporary fashion brand for men and women available on-line, in three London stores 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.
We design, produce and distribute branded fashion clothing and homeware from our business premises in London, New York, Düsseldorf, 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 50 countries around the world and have licensed partners operating French Connection stores across Asia, Australia and the Middle East.
Our design teams are based in London and we arrange for the products to be manufactured in specialist third party 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 department stores such as House of Fraser. We also operate ecommerce channels 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, Düsseldorf and Hong Kong to selected customers operating department stores, multi-brand fashion stores and 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.
Our globally recognised French Connection brand has been extended successfully into complementary licensed products including men’s and women’s toiletries and fragrances, shoes, watches, jewellery, eyewear and furniture. Our Design and Licensing teams work closely with branded partners to develop and enhance product for sale.
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 CRM system is an example of this investment.
|Region||Location||Territories||Retail Operations||Wholesale Customers||Licensing||Brands|
|UK/Europe||London, Düsseldorf||UK, Europe, Middle East||Retail stores and concessions, ecommerce||Department stores, multi-brand stores, franchise operators||Product and country licensing||French Connection, Great Plains, YMC|
|North America||New York||USA||Retail stores, ecommerce||Department stores, multi-brand stores||Product licensing||French Connection, YMC|
|Toronto||Canada||Department stores, multi- brand stores||French Connection|
|Rest Of World||Hong Kong||Australia, Asia||Brand licensees, concessions, department stores||Product licensing||French Connection|
|31 January 2020||31 January 2019|
|Locations||sq ft||Locations||sq ft|
|French Connection/Great Plains||Concessions||45||40,418||47||43,214|
|French Connection US||Stores||2||9,102||2||9,102|
|French Connection Canada||Stores||-||-||1||2,350|
|Total operated locations||81||131,093||96||176,940|
|French Connection licensed & franchised|
|Total licensed & franchised locations||173||103,036||195||132,671|
|Total branded locations||254||234,129||291||309,611|
PRINCIPAL RISKS AND UNCERTAINTIES
The Board recognises there are a number of risks and uncertainties that face the Group. The following highlights some of the principal risks:
|Fashion and design||Our success depends on our ability to produce ranges of garments which are 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 particularly in relation to our supply chain and up front commitments.
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.
|Brand and reputational risk||Our brands and the way they are perceived in their respective markets is very important to us.||We are 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.|
|Macroeconomic factors||The nature of fashion retail 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 also affected by their personal financial situation and other macroeconomic factors which impact the total size of the retail markets in which we operate.||
We consider that as a small operator at the upper end of the middle market the impact on our business of macroeconomic elements is considerably smaller than the impact of the success of our designers in producing attractive products.
|Brexit||The UK left the EU on January 31st 2020 and is now in an implementation period which is due to end on December 31st 2020. Although negotiations for our trading arrangements with the EU and 3rd countries are still in their infancy, it is understood that there will be friction when it comes to crossing borders from Great Britain to Northern Ireland and the EU nations. However, the precise arrangements are still to be agreed. The long-term implications and full economic impact remain unclear. The Group considers the principal risk factors to be macro-economic uncertainty leading to a downturn in the UK economy, trading restrictions with friction at the borders, the imposition of tariffs, further exchange rate volatility, recruitment issues and other recruitment concerns. Tariff increases or trading restrictions are mitigated through the Group’s suppliers predominantly being located outside of the EU. The potential fall in the value of sterling should a trade deal not be agreed is a concern but is partly mitigated within the Group due to the proportion of our business which is transacted in US$ and Euros. This leads to a relatively large natural hedge. For the remainder we hedge in advance. The likely contraction in the labour market is considered a minor risk to the group, with no senior positions currently held by non-UK EU citizens and only around 7% of store staff being EU employees. The Group has communicated across the organisation the steps and procedures required to assist any EU citizens to take advantage of the EU Settlement Scheme to remain in the UK following the transition period. The Board will continue to monitor Brexit developments and assess the potential impact on the business when there is greater certainty and clarity over potential outcomes.|
|Supply chain||The Group is exposed to supply chain operational risk if product is not delivered in a timely fashion, to specification or in appropriate quantities.||The Group’s supply chain is diversified across a number of suppliers in different countries. Our buying offices and production teams work closely with suppliers to mitigate these risks.|
|Infrastructure||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 are constantly focused on store operating cost efficiencies, and have already achieved considerable savings by optimising our rostering timetables in store and actively managing our store estate, and exiting stores where the opportunity is economically available to us.|
|Financial risks||The Group is exposed to financial risks including currency, interest and liquidity.||
The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group monitors its cash position on a regular basis through the use of regularly updated cash flow forecasts, and believes that it has sufficient and appropriate net funds and facilities available.
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 overseas debt risk.
Our experience of bad debts historically has been very low due to this close management. However, recent bad debt write offs have been due to the challenges facing all retailers around the globe and mainly relate to customers of many years standing who we have tried to support through the challenging times. Where there have been poor payment history we try to limit our exposure.
The principal treasury risks to the Group arise from exchange 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. However, the Group is naturally hedged for a significant part of its business and has limited exposure to foreign exchange rate fluctuations.
|IT||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 a number of policies and procedures to protect the software, hardware and data and to prevent unauthorised access to the systems. Work is ongoing to bring the documentation relating to these processes up to date, though the basic procedures are believed to be sound having not suffered any catastrophic failures in the past 12 months.|
The Group's approach to the management of risks is further discussed in the Corporate Governance Statement.
KEY PERFORMANCE INDICATORS
The Board considers that the key performance indicators for the businesses are:
- UK retail LFL sales growth;
- Sales achieved in the wholesale channels;
- Sales by geography;
- Gross margin %;
- Underlying operating profit/loss; and
- Inventory levels.