March 13, 2018 / 7:50 AM / a year ago

UPDATE 2-UK fashion chain French Connection says close to turning business around

* Annual loss narrows

* Expects to return to profitability

* Shares rise as much as 18.7 percent (Adds detail on takeover approach, shares, background)

By Radhika Rukmangadhan

March 13 (Reuters) - British fashion chain French Connection Group Plc said it was close to returning to profit and disclosed it had been approached by an unnamed U.S. group about a potential takeover although talks did not lead to an offer.

Shares in French Connection, which operates 116 outlets in Europe and North America, rose as much as 18.7 percent to 40 pence in morning trading.

“Our goal has been to return the group to profitability and I believe we are very close to achieving that aim, given the momentum that we are currently seeing within the business,” Chief Executive Stephen Marks said.

French Connection said negotiations about a potential offer for the group had gone on for a number of months last year before they broke off.

Company founder Marks is the largest shareholder in the company, with a stake of around 41 percent. Mike Ashley’s Sports Direct International holds a 27 percent stake.

Activist investor Gatemore Capital last March urged the loss-making company to split itself or spin off its Toast brand, among other options.

Gatemore sold its entire stake in July, saying it was not satisfied with the pace of change at the retailer.

French Connection reported a 0.8 percent increase in like-for-like sales at its stores and said the retail market in Britain remained “particularly challenging”.

French Connection has been struggling to fend off competition from fast-fashion rivals such as ASOS Plc, Forever 21 and Inditex’s Zara. It has closed stores and hired new management and design teams as it tries to turn the corner.

It closed 11 outlets over the year.

“While it is clear that the retail market in which we are operating in the UK is unlikely to improve in the near future, we have clear visibility on the benefits we will obtain from the ongoing portfolio rationalisation,” Marks added.

Underlying operating loss for the year ended Jan. 31 came in at 0.6 million pounds ($833,400), compared with a loss of 3.7 million pounds in the prior year.

Revenue rose 0.5 percent to 154 million pounds. ($1 = 0.7199 pounds) (Reporting by Radhika Rukmangadhan in Bengaluru; Editing by Saumyadeb Chakrabarty and Keith Weir)

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