Isabel Marant - Holding the cost structure - Initiation

All,

Please find our initiation on Isabel Marant, here.

Isabel Marant | Live Discussion

Tomás Mannion - Senior Analyst

Tuesday 4 Feb, 2 pm UK time | 9 am EST

With Isabel Marant languishing in the 50’s, many of you wonder when to step in and catch this falling knife prompting us to take a deeper look at the Company. We acknowledge the strength of the brand, but It is difficult to look past the key person risk with this credit, and with no meaningful assets, apart from the brand, any recovery without Isabel Marant’s support will be limited.  

Investment Considerations:

- We are not taking a position in Isabel Marant bonds. We see the downside risk as excessive in restructuring, with bondholders unable to negotiate firmly with the shareholders, specifically with IM Creation, the founder's vehicle. We acknowledge the Group owns the rights to the principal brand names, but we can’t find a specific J.Crew blocker that would make us comfortable that a drop-down into an unrestricted subsidiary isn't possible.  Without the brand name or the designer, creditors would have security only over the cost structure.  

- Our primary reason for not taking a position is the legal structure, but even on an operational basis we have significant issues.  We use an adjusted EBITDA (Pre-IFRS 16 i.e. after lease payments, less capitalised design costs) which turned negative in Q3 2024. LTM adj EBITDA, on this basis, is €11m which gives a 0.5x interest coverage ratio. 

- Upside centres on an improvement in the wholesale sales channel, which underwhelmed in the last couple of quarters. To give Isabel Marant credit, its direct channel - either in-store or Internet - demonstrates the brand's strength.

- Any return in the wholesale channel will be gradual and we don’t expect any vast improvement in the next set of numbers. At 55c/€, we don’t see the opportunity to short the bonds.  

Recent Results:

- The publication of the Q3 numbers resulted in the bonds dropping a further 10pts.  Rating agencies also acted, with bonds downgraded to CCC at both Moody’s and S&P.  

- Performance was expected to be weak, as the prior year comps were exceptionally strong, due to a calendar impact. In addition, wholesale of the Spring Summer 2025 (SS25) collection was expected to come in below the guided +/-5% from the last collection. 

- However, actual numbers were even worse. SS25 orders were down 21% on SS24, and down 12% versus the Fall-Winter 2024.  

- The struggles of American department store Barneys and online groups Intermix and MatchesFashion have particularly hurt wholesale orders.  

- Retail sales appear to be stronger. The Company operates its own stores (86) and although average basket sizes and units are marginally down, total sales were up 14%. 

Legal Concerns:

- In a restructuring scenario, the shareholders would likely choose the French jurisdiction. 

- There would be a small creditor class sr. to the SSNs, but not material. The SSNs would theoretically be in a good position to negotiate for the business. 

- We are, however, pessimistic about the SSN’s ability to negotiate hard. We are concerned that the business can be construed as merely the cost centre for the manufacturing and distribution of designs created and invoiced by IM Création. While the group owns the rights to the principal brand names, we have failed to find an explicit J.Crew blocker that would make us comfortable it won’t be dropped down into an unrestricted subsidiary for instance. Without the brand name or the designer, creditors would be holding on to very little.

- We also note that per the limitation of Liens covenant the company can raise p.p. debt secured over the brand names, but with priority upon enforcement, opening the door to layering the bonds.

Design Costs:

- Isabel Marant capitalise its design costs incurred in creating its new designs, amortising the costs once the season is launched, usually within the year.  This has the impact of reducing the actual cost of sales incurred and increasing CAPEX.  We reverse this impact, as we see the design costs as a genuine cost of sales.  Our approach lowers adj EBITDA but does increase the cash conversion rate as there is a corresponding reduction in CAPEX incurred.  

- We don’t view the Company’s approach as attempting to manipulate the numbers and is probably following the accounting rules.  Our approach only works if there is a near near-constant design costs as the design costs incurred in Year 1 usually refer to sales in Year 2. However, adjusting our EBITDA calculations using our approach is more reflective of the actual profitability of Isabel Marant.  

Industry Market Review:

- LVMH, often seen as the industry bellwether, saw their shares fall 5% last year, despite a year-end rally, due to weaker than anticipated Chinese demand, namely in Q3. The shares have rallied since year-end, on positive sentiment of recovery in the luxury segment but the release of LVMH’s full FY24 results today (Wednesday) has resulted in LVMH shares reversing some of the January rally.  

- Kering, owner of Gucci, Balenciaga, YSL and Bottega Veneta, has also suffered, with the share price down 40% last year following several profit warnings in FY24.  Kering's main brand, Gucci which accounts for 50% of revenue and 66% of profits, continues to underperform as a new designer launch has failed to gain traction. 

- The main driving force for the overall weaker sentiment is Chinese demand but internally and in the lucrative travel/duty-free sales segments.  

Happy to discuss further.

Note: we have not gained access to Isabel Marant’s investor relations site, which makes it difficult to analyse in detail. 

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk