French Connection hit by fresh profits alert as slump deepens

French Connection will launch its end-of-year sale 10 days before Christmas after a fresh deterioration in its fortunes forced its third profits warning in 15 months.

The troubled fashion group yesterday became the retail sector's first pre-Christmas casualty, although its troubles extend deeper than the slump on the high street. Department stores are shunning the retailer's stock for next summer, setting back the group's chances of recovery by at least 12 months.

French Connection said the further slump in wholesale orders meant it could make as little as £11m in pre-tax profits and only £14m at best. This is half the amount it guided the market to expect in July's profits warning and represents the third time in five months it has disappointed the City.

Stephen Marks, the chairman who owns 42 per cent of the group, said: "We are experiencing very difficult conditions on the UK high street right now and shoppers continue to be cautious."

The retailer will bring its January sale forward to 15 December, the third successive year it has been forced to slash its prices during its peak selling season to shift unsold stock. Early sales are a last resort for desperate retailers keen to boost the top line at the expense of margins. Although last Christmas saw most of the high street succumb to this tactic, retailers are not as heavily stocked as this time last year, which means bargains could be scarcer.

Despite the severity of yesterday's profits downgrades, the presence of Iceland's Baugur as a 14 per cent shareholder helped to support the stock. French Connection shares fell 13.5p to 261.5p. Baugur's interest in the retailer has mystified many analysts given that Mr Marks has always made it clear that he does not intend to sell his stake.

Each new profits warning provides fresh ammunition for the cynics who marvel at Mr Marks' timing in offloading £36.5m worth of stock close to the peak of the company's valuation in summer 2004, just before sales started to dive. The proceeds were used to fund his divorce from his ex-wife, Alisa.

After a series of fashion blunders, including not stocking enough embroidered skirts this summer, fashion pundits have credited the group with being back "on trend" with its autumn collections. Its drainpipe jeans and sweater dresses have proved popular, helping underlying sales in its shops recover from a 9 per cent decline in September to stand about 2 per cent lower.

But this modest improvement is not enough to offset the group's escalating cost case. Rhys Williams, at Seymour Pierce, said to counter soaring rent, staff costs and rates, French Connection's like-for-like sales needed to increase by 5 per cent next year "just to stand still".

In addition, analysts noted the long time-lag between improving collections and wholesale buyers willing to give the brand the benefit of the doubt. Matthew McEachran, at Investec Securities, said: "It could get worse before it gets better." For the year to January 2007, he barely expects profits to improve, pencilling in £12.5m. Two years ago the group made profits of £40m.

He said the group needed another "big step change" in the quality of its product if it is to win the battle to woo shoppers to its stores. French Connection has stood firm against critics who deem its clothing over-priced, insisting it competes in the same niche as upmarket retailers such as Whistles and Karen Millen. "There are lots of competitors with good products at much better prices. French Connection needs to be much better than the others on the high street," Mr McEachran added.

Mr Marks, who founded the company in 1969, maintained his optimism that the group could claw its way back. "We have seen a positive impact from range improvements this season, although we have further to go, we will continue to work to maximise our opportunities going forward," he said.