(Debtwire) Matalan provides reopening trade but 4Q sales plunge and eroding liquidity weigh on operations

Matalan provides reopening trade but 4Q sales plunge and eroding liquidity weigh on operations

15 June 2021 | 15:36 BST

Matalan’s FY20/21 IAS 17 EBITDA was a negative GBP 21.5m as the UK retailer faced store closures in seven out of the last 12 months of the fiscal year ended on 27 February. The group’s cash balance eroded sharply in 4Q whilst limited disclosure on 1Q current trading was a concern, meaning any potential near-term refinancing remains difficult despite stores reopening, according to four buysiders, with a deep-dive analyst positive.

The company reported FY20/21 results yesterday (14 June) and held an earnings call to discuss them. The FY20/21 LTM IAS 17 EBITDA was negative GBP 21.5m (versus positive GBP 1.7m for LTM 3Q20/21 and positive GBP 80.3m for FY19/20), while FY20/21 adjusted EBITDA post-IFRS 16 lease accounting changes was positive GBP 80.5m.

Matalan faced a gruelling 4Q20/21 period as stores closed from 19 December with January and February trading being exclusively online and stores fully open only for two weeks and partially open for another two weeks in the quarter. Like-for-like sales were down 10.7% Year-on-Year (YoY) for the month of December, down 59.4% YoY for January, and down 64.2% YoY for February.

Positively, the group has benefitted from large online sales growth during the pandemic. Online sales were up 50% YoY for FY20/21 with around 60% of this growth coming in the last quarter. Management expects online sales growth to continue in FY21/22.

Despite the lockdowns impacting sales, the group was still able to win market share. Management told investors on its earnings call that Kantar data for the period-end February showed the group’s performance was 12.2% behind the market, but that Matalan’s 132.4% online growth was 71.4% ahead of the market, while there was a 1.1% win in market share.

When stores were open in December, Children’s and Ladies clothing were the best performing segments in 4Q20/21.

“4Q20/21 is irrelevant [given closures], it is instead about managing liquidity and inventory as well as foot traffic,” one buysider said. “But no disclosure on current trading was at best not positive. “They already know what happened with lockdowns till mid-April and then reopenings, which they could have talked about but didn’t,” he continued. “Why did they not tell us? It wasn’t an alarm bell but it’s not great. No current cash balance was given [either] but they seem to still be alive.”

A second buysider added that May trading could be good, and June had nice weather too. “They are in retail parks, which is helpful for people not too keen to go to Oxford Street with the crowds. The Summer sales shouldn’t be too bad and then it depends on Christmas,” he said. “But any delays in reopenings could create headwinds.”

Catwalk nine lives

Matalan still has a reasonable liquidity position, although it is down on the previous quarter. It had GBP 110m of cash at FY20/21 and had drawn GBP 17.1m into its overdraft leaving a net cash position of GBP 92.9m. This was down sharply sequentially from GBP 185m cash at 3Q20/21 end-November.

The company was able to defer a total GBP 86m of payments at end-February including GBP 46m of rent payments. These deferred rents will reduce to below GBP 30m by 2Q21/22, under GBP 10m by 4Q21/22 and be cleared fully by 2Q22/23 as the company pays them back. Matalan also deferred GBP 15m of HMRC tax payments and GBP 25m of general supplier term payments.

The group had drawn GBP 32.5m of its GBP 33.3m revolving credit facility including GBP 7.4m letters of credit, GBP 8m of guarantees, GBP 17.1m of overdrafts, leaving just GBP 0.8m of the facility available.

The RCF has a minimum liquidity covenant level of GBP 30m at any point in time, which provides large headroom. The RCF also has a net leverage test that has been suspended again for the upcoming 2Q21/22 and 3Q21/22 quarters, after previously being suspended until the upcoming 1Q21/22 quarter.

The company has substantial cash and while they won’t pay down the RCF any time soon given deferred payments to make, they have reserves they can liquidate, independent special situations firm Sarria noted.

The group also has GBP 16.7m available of its CLBILS (Coronavirus Large Business Interruption Loan Scheme) loan. Following the group sale and leaseback of its Knowsley headquarters, it made a GBP 25m payment of which two-thirds went towards its overdraft and a third towards paying down its CLBILS facility. Management noted that it does not foresee needing to access the facility.

Shareholder John Hargreaves was supportive with the sale and leaseback of the Matalan Knowsley Head Office back in December 2020. The property was sold through a share sale of Jonmar Limited (the company in the Matalan group which owned the Head Office) to JMax Knowsley Limited, a company owned by John Hargreaves, with the property being Jonmar Limited’s sole asset. The disposal raised GBP 25m with proceeds, which went towards the overdraft and CLBILS paydown.

“The liquidity is not too bad, but the story still feels iffy. I’d still be cautious on the medium-term outlook,” the second buysider commented. “There will be the initial benefit due to pent-up demand and they may face less competition, but March was likely a weak month, and it was only from mid-April that results could get better.”

The company faced further store closures in 1Q21/22, meaning the cash position got worse before it got better, but there was a positive headwind from working capital as a large number of stock was sold in the quarter that had been paid for a while back.

Matalan may need new money and to reset its capital structure, according to the first buysider. “It’s uncomfortable currently in negotiations with suppliers and credit insurers who would want reassurance they have more cash.”

“The cash burn of the business in 4Q20/21 was large and they likely burnt more cash in April and May while they’ve also held Autumn/Winter inventory from last fiscal year going into the new one, which means margins could be soft as they need to sell these,” a third buysider said. “Any auditor statement on a going concern also brings refinancing risk. It is tricky to forecast.”

From lock-up to lockdown easing

Matalan has the potential to deleverage strongly if earnings can pick up. The company at FY20/21 had a negative GBP 21.5m IAS 17 EBITDA but maintenance capex is just GBP 10m (total FY21/22 capex is guided at GBP 20m), bond interest GBP 40m and cash taxes are minimal at this reduced profitability. Therefore, the company could generate free cashflow off a GBP 60m IAS 17 EBITDA. Matalan IAS 17 adjusted EBITDA was up at GBP 80.3m for FY19/20 ahead of the onset of COVID 19.

Management is thinking about refinancing options, but any action is “not sat on their doorstep though they are acutely aware” of the maturities. Matalan has the GBP 33.3m revolving credit facility and GBP 22.2m 16.5% first lien senior secured notes maturing in July 2022 before its first lien secured notes come due in 2023. The group was previously looking to refinance its full debt structure, as reported.

“They will not have the luxury of posting two good quarters to get a refi done. They have 2022 maturities that will become current from August and from January 2023 the first lien bonds too,” the first buysider said. “Given how [German beauty retailer] Douglas priced at 6% I’m surprised they are not pushing for an immediate refi," he said, noting that unlike Douglas's sponsor CVC, Matalan shareholder John Hargreaves may not put money in to the company. 

Additionally, there is the risk of further restriction easing being delayed, the first buysider continued. “We can’t be 100% that certain more variants are coming and they could be stuck with inventory,” he pointed out. “There are a lot of external factors out of their control and whilst this could be pull to par, they are not timing this right.”

“One needs to get past the liquidity bridge and if they can show good reopenings that would be helpful. I’ve been to Primark recently and it was insanely busy,” a fourth buysider said. “Matalan is an interesting story, but a lot of investors are scared to jump in as there is noise from the past and there is no large sponsor behind it.”

Following the onset of the first lockdown in spring last year, Matalan completed a refinancing exercise last summer and implemented a scheme of arrangement last year to raise extra liquidity.

Shareholder and founder John Hargreaves exchanged GBP 50m of his stake in the subordinated bonds for PIK shareholder note with the remaining GBP 80m of cash interest-paying bonds, also converted into PIK in a scheme of arrangement approved on 20 July last year. Matalan’s cash position last summer was further helped by GBP 25m from CLBILS and GBP 25m bondholder support through new money from the 1.5-lien bonds.

The group received government grants of GBP 72.5m in FY20/21 with GBP 28.8m from the Coronavirus Job Retention Scheme, GBP 41.2m rates relief and GBP 2.5m of business grants.

Matalan’s GBP 348m 6.75% first lien secured 2023s are indicated steady at 93.75-mid yielding 11% while its GBP 79m 9.5% second lien secured 2024s are quoted a half point higher at 63.875-mid yielding 30.5%, according to Markit.

The subs will need to roll and there will be a new money need, the first buysider noted. “If they refi they could upsize the bond offering for extra cash,” he said. “Shorting the name could be costly if they refi, which would mean the bonds would move six points higher, so that trade is tough.”

“This is a bet on control of the delta variant and if there is no control then they are in trouble – along with half the economy. Another lockdown would be tough but if the UK finally opens next month, then Matalan have all to play for,” independent special situations firm Sarria commented. “The second liens are not yet yield to maturity paper, but it doesn’t mean it couldn’t be one day. I’d not invest on getting cashed out at refi or maturity. Rolling would be my best scenario for now.”

Matalan declined to comment.

by Adam Samoon