Shares in French Connection (LSE: FCCN) are down by around 20% today after the fashion company released a profit warning. It now expects to miss its full year guidance, with a weak retail first quarter being the reason despite the company’s wholesale division performing in-line with expectations.
The share price fall means that the company’s shares have slumped by 43% in the last year, with its return to profitability in the current year (following three consecutive years of losses) looking increasingly unlikely. However, does this mean that now is a great time to buy, with its shares trading at a relatively low price? Or, are the likes of ASOS (LSE: ASC), Boohoo.Com (LSE: BOO) and Marks & Spencer (LSE: MKS) still more favourable choices?
Valuation
With French Connection being a loss-making business, a sensible way to value the company is through the price to book (P/B) ratio. And, with the company having net assets of £56m as at the end of January, it currently trades on a P/B ratio of just 0.73, which indicates that its shares offer very good value for money as well as a wide margin of safety. Furthermore, French Connection has no debt, just under £10m in cash, and is aiming to become more efficient and more focused, with seven stores set to close during the course of the current year.
Compared to ASOS, Boohoo.Com and Marks & Spencer, French Connection appears to offer good value for money, with them having significantly higher P/B ratios. However, they are all hugely profitable companies, and so deserve to trade at a premium to French Connection, with Boohoo.Com and Marks & Spencer seeming to offer superior value for money than ASOS.
In fact, while Boohoo.Com has a price to earnings growth (PEG) ratio of just 0.8 and Marks & Spencer’s is a respectable 1.8, ASOS has a much higher (and less appealing) PEG ratio of 2.8. This indicates that its strong growth prospects over the next couple of years are already priced in, which may lead to its share price failing to move upwards at a rapid rate.
Looking Ahead
Clearly, the risk from investing in French Connection is far greater than for any of the other three companies discussed here. It is the only one of the four that is currently loss-making, and its financial performance is not improving as rapidly as its investors or management team expected, with its business shrinking and scaling back rather than growing as ASOS, Boohoo.Com and Marks & Spencer are.
As a result, shares in French Connection are likely to come under increased pressure in the short run, with market sentiment unlikely to stabilise until the company begins to deliver more consistent and improving financial performance. As such, and while its shares are dirt cheap, French Connection does not appear to be a better buy than ASOS, Boohoo.Com or Marks & Spencer, although for long term investors who are able to take a considerable amount of risk and volatility, they could still prove to be a sound buy once they have stabilised following today’s profit warning.
