Shares: Fashion is off the peg: Leading quoted houses are looking power-dressed for profits growth

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The Independent Online
THE HOT, dry summer and a cool, wet autumn could be the icing on the cake for some of the stock market's fashion companies, which are enjoying buoyant trading and rising profits.

The autumn fashions are already in the shops and selling well. But although share prices in the sector have risen from the bombed-out levels touched in 1992, ratings are modest and do not appear to take account of the excellent outlook for further profits growth.

The most spectacular bust to boom story is French Connection, 235p. In 1991-92 losses reached a staggering pounds 10.7m or 54.4p a share, and there was a serious question mark over the group's future. Fortunately, its founder and 75 per cent shareholder, Stephen Marks, has other sources of wealth. He lent the company pounds 3.55m - initially with no interest on the first pounds 2m. A new chairman and finance director were appointed, and Mr Marks himself became chief executive.

Loss-making subsidiaries were disposed of, including the Bukta leisurewear business, leaving the group to focus on its French Connection and Nicole Farhi brands and its 50 per cent-owned US operations.

The rebound has been phenomenal. There was a small loss in the year to 31 January 1993, followed by a profit for last year of pounds 5.1m on sales of pounds 63.9m. There has been no dividend since 1991, but that should change this year.

Prospects generally look encouraging: the summer collections had a good reception, and in May winter order-books were reported to be ahead of the previous year for both labels. The group has also recently opened a flagship London outlet on the corner of Oxford Street and Regent Street.

Particularly exciting are prospects for the US subsidiary, which is run and 50 per cent owned by Michael Axelrod, who is also a shareholder and director of French Connection. In the past year, US sales almost doubled from pounds 10.9m to pounds 20.3m, with operating profits rising from pounds 0.9m to pounds 2.8m. Further progress this year could see 1994-95 profits topping pounds 6m to drop the price-earnings ratio at 230p into single figures.

Another rag trade business on a strong recovery path is the womenswear specialist Jacques Vert. As with French Connection, the share price plumbed the depths in 1992, when the group reported a pounds 4.65m loss. Since then the price has roughly quintupled to 200p, but the shares still looks cheap on a prospective p/e for the year to 30 April 1995 of 9.2. This is projected to fall below 8 on expected 1995-96 earnings.

Fashion group shares must expect to be on modest ratings, given the history of wild swings between losses and profits. However, there are signs that lessons have been learned that will protect profitability in the future. It is also likely that our profit projections for 1994-95 and 1995-96 are too low, leaving room for pleasant surprises.

The recovery at Jacques Vert has parallels with that seen at French Connection. In particular, the group closed one of three UK manufacturing facilities, scrapped a loss-making leisurewear label, and withdrew from the US. These changes eliminated 174 jobs, leaving 750 employees, and produced an immediate rebound to pounds 1m of profits in 1992-93, even though trading remained tough. Sales, for example, were well down on the levels in the previous four years.

But the more recent pattern has been one of strong sales growth helped by a spectacular expansion in the number of concessions. These have multiplied from negligible levels in 1990 to 66 at present, which has helped sales on the retail side to grow from pounds 9m to pounds 13.8m.

Some idea of the impact this is having on the group is shown by the fact that in the last four half-years, retail successively produced losses of pounds 527,000 and pounds 666,000, followed by successive profits of pounds 99,000 and pounds 372,000.

Bearing in mind the good response reported for the winter 1994 season, it would not take much for analysts' forecasts - overall group pre-tax profits rising from pounds 2.7m before exceptionals to pounds 3.1m - to be usefully beaten.

The shares look excellent value, with longer-term potential underpinned by new brand development, including next year's planned launch of a brand dedicated to smaller women, who make up more than half the female population.

Last of my trio of rag trade shares is Frank Usher, a long- established specialist in cocktail and evening wear for women. Profits have been less volatile on the downside and are likely to be less explosive upwards than for the other two companies. Against that, the shares, at 110p, are on a historic dividend yield of 6.8 per cent with every prospect that will climb over the next two years as profits move steadily higher.

One reason for the greater stability of Usher's profits is that the group does not hold stocks but makes to order.

Twice a year, for the spring/ summer and autumn / winter periods, it designs and makes up collections that are shown on catwalks worldwide. Almost half its output is exported.

Sourcing is also done on a worldwide basis. Profits were nearly halved in 1991, partly because of the recession but also because the group was adapting to changes in the retail marketplace. Since then there has been a healthy recovery, from pounds 780,000 profit to pounds 1.22m last year. This year we expected profits to top the pounds 1.39m achieved in 1990, even though there was a first-half decline. This suggests a momentum in recent trading that also bodes well for the year to 31 May 1996.

A final wild-card attraction of Frank Usher shares is that the group is making a determined effort to replicate its success in evening wear, with a line of suits for women. Costs associated with this effort head back the first-half performance but, on a longer-term view, have the potential to double the size of the business.

(Photograph omitted)

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