High street fashion retailer French Connection is in decline, as earnings tumble and sales stumble for the second year running.

A concerted effort to freshen up the brand and its clothes after two difficult years was met with a stony-faced response by the fickle high street fashionistas, who were lured by competition from cheaper and more modish brands and flourishing online rivals. So, despite a net 5% of additional trading space compared to last year, group sales declined by 2% to �241.3m, profit before tax by 67% to �4m and earnings before exceptionals by 69% to 2.2p. Cash flows from operations worryingly plummeted from �24.4m to �5.7m.

Reflecting consumers’ continued cold-shouldering of the brands, wholesale revenues in the UK and Europe fell 16% to �63.4m, with a continued decline in gross margin as well as both forward orders and in-season orders. Wholesale in North America was higher due to a one-off contract and it will be difficult to achieve growth this year. Business at FC’s own North American stores began ‘poorly’ and over the year saw like-for-like sales down 3% with margins dented too.

On the upside, executive chairman Stephen Marks highlighted progress at its UK and European stores in the first few weeks of the new Spring/Summer 2007 season, where sales of full-price merchandise were up over 10% on a like-for-like basis - the first signs that FC is ‘at the start of a new phase in our business cycle’.

Broker Seymour Pierce agrees that ‘recovery is under way’ and attaches an ‘outperform’ rating, although it lowers its optimistic profits forecasts to �8.5m for the current year. Growth Company Investor, which recommended selling the stock at 308p two years ago, is concerned that recent gains are only small and that the tide has not yet turned. Avoid.

Oliver Haill