Reviewed our short position in Takko

All,

We have reviewed our short position in Takko, because:

1) Germany’s February has produced +8% sales for apparel retailers.

2) Moreover, we have been hearing that discounts and marketing intensity at Takko have been in line with peers over Christmas. No sign of panic then.

3) We had been contemplating if the company would struggle to organise its purchases in a coordinate fashion for lack of liquidity in the purchasing month before Easter (now). Easter is Takko’s biggest season. But that does not seem to materialise, or we would by now have heard about it. 

We are staying short.

Our reasons:

1) February is the single least important month for Takko. It has fewer days than other months, but it is also quite simply not a big apparel shopping month for the German housewife. February should account for only 5% of annual sales.

2) Germany has seen some extreme weather in February with one half shuffling snow from their nearly collapsing roofs, while the other had the warmest February ever (similar to England). While one half was snowed in, the other half was not buying winter clothes. Quite how that resulted in +8% growth is very peculiar, but it shouldn’t be a trend for the year.

3) The short was never about the weather. 2018 has been an extremely poor year (see graph below). And while Takko have been outperforming the market that flight seems to have landed (see our note here). If sales growth were to neutralise around zero this year, that would only be a stabilisation at low levels.

4) We continue to believe that Takko have had to make significant use of their RCF through Crhistmas and January and that the company won’t be able to pay it all down again after Easter (April 30th is Q1 end), even with inventory normalisation, which we think should be unlikely, given the headlines we are receiving from the German apparel market. Thus we are awaiting a display of the limited liquidity headroom the company now has.

Wolfgang