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Folli Follie Suspected of Financial Fraud, Stock Price Plummeted by Nearly 50%

May 24, 2018.Siqi DaiTokyo, JP
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The US hedge fund, Quintessential Capital Management LLC (QCM) issued a report on May 3rd, reports in-depth review results showed that the actual situation of the Folli Follie Group was clearly inconsistent with the official statement of the double-digit sales growth. Its actual income, the size of its outlets, and its cash balance have all decreased slightly. The core of the problem may be concentrated in Asia, especially Chinese subsidiaries. The cause of the QCM investigation of Folli Follie was commissioned by an investor who had invested in the Folli Follie Group.

After QCM's report came out, Folli Follie's share price tumbled by about 30% within one day. The Greek securities regulatory authorities immediately intervened and asked Folli Follie to submit the consolidated accounts of FY2017 to an independent third party auditor. The share price of the group fell further for several days plunging nearly 50%.

In the report, QCM pointed out that Folli Follie's POS was much smaller than expected. After extensive due diligence and inspection of each individual point of sale in multiple ways, it was found that Folli Follie had only 289 sales for normal operations. Especially not the 630 mentioned by the group in the 2016 annual report. After field investigation, it was confirmed that many important sales points listed by the Group on its website (for example Folli Follie Soho, Folli Follie Madison Avenue store) have been closed. In addition, the scale of some of the points of sale, including key locations, is almost negligible and is being cleared.

QCM stated that after the financial analysis of Folli Follie, official data showed that both its revenue and profit were increasing, but free cash flow (FCF) carry on negatively. This was mainly because the Asian subsidiary of the group continued to increase its working capital, but the peers are significantly disproportionate to their Asian subsidiaries' accounts received and in inventory.

QCM also pointed out that Folli Follie claimed that 1 billion U.S. dollars of revenue are from Asia, of which China has the largest share (70% of Asian sales points are located in China). Surprisingly, QCM found that Fu Li Fu Lei and Binlianyun, two mainland Chinese subsidiaries of Folli Follie, had a total of only 50 sales outlets and generated only about $40 million in revenue. QCM also expressed concern about the auditors hired by Folli Follie and the company that Folli Follie employed to integrate about $1 billion in sales in Asia actually had only two employees. According to the Chinese senior auditor of the Big Four firms, the company may not be able to audit such large amounts and points of sale.

Folli Follie was listed on the Athens Exchange in 1997. At this time, Folli Follie has been reluctant to run the brand. After the listing, the company continues to maintain normal operations in the company. Eleven years later, the Lehman incident in the United States triggered a worldwide financial crisis. It is known that the most affected is Greece and the Folli Follie Group from Greece subsequently had also been seriously affected. This incident of financial fraud also reflected the fact that Folli Follie had difficulties in operating after the financial crisis.

Table: Recent Folli Follie's Stock Price(EUR)