Matalan - Not the usual pattern
All,
Please find our unchanged analysis of Matalan here.
Matalan follows up its disappointing Q4 with a more disappointing Q1, where the cost position was even a little better than forecast, but revenues again fell short of our forecast, wiping out Q1 EBITDA almost entirely. We had rested our case substantially on the lower price point at which the company had ordered this year’s SS collection, but the market is worse now than we had thought and in the company’s defence the weather was undeniably cold this spring.
Investment Rationale:
- We remain “invested" across the capital structure, but would be happy to reduce risk in the name after this double disappointment. We don’t mean to say that Matalan has no hope of recovery, but we feel our thesis is drifting along.
- Matalan’s customer base tends to be more resilient than the fast fashion-buying younger demographic that has deserted the likes of ASOS and Boohoo. But the cost of living crisis engulfs in particular those households with fixed expenses that usually find themselves at the lower end of purchasing power in the first place. So it’s not just the usual pattern and that’s where we went wrong.
- Matalan remains only 4.4x leveraged, but that is only half the truth. At currently depressed volumes and prices, its gross profit and therefore FCF is too low to carry the interest and the cash stash is melting.
- Cash has been managed well with £91m remaining per Q1. However, the business has no RCF and needs a considerable cash balance to run through its WC toughs in Q1 and Q3. We are concerned the company will need fresh cash before the end of summer, even if management denied the suggestion on the call.
- We will do our work and see where the bid settles for this name.
2024:
- Matalan has to stomach significant cost inflation this year and has bought merchandise at a lower price point to generate the required margin to cover for it. However, the cost-of-living crisis remains in full swing and logistics charges are further weighing on margin.
- We were far too bullish in our forecast of €80m EBITDA this year and are forced to revise it down drastically. Not having done the detailed numbers yet, we feel this goal has moved out by a year.
- While perhaps half the Q1 underperformance was weather-induced, the company signalled an additional £15m shipping headwind for the year from lower transit volumes through the Suez canal due to Houthi attacks in the Red Sea. Q1 had seen £2m of that headwind and the remaining £13m are to come in the next quarters.
- As a result, we are concerned that this year’s EBITDA could be even lower than FY23/24’s.
Long Term:
- We have no doubt that the 225-store UK chain can continue to sell an inflation-adjusted £1.2bn of merchandise at close to 50% margin, which after subtracting costs of just under £500m should yield £100m EBITDA. But that will not be this year and even before the disappointing results did we not forecast full recovery for next year.
- Once the company achieves these stats again, it should be worth £700m+ to a new CVC-like bidder, promising handsome rewards for the shareholders.
Short Term:
- As per above, we are concerned that Matalan will need additional cash this autumn or next spring.
- We are sufficiently disappointed to wonder if we could sell now and buy back cheaper next year, if not the illiquid Equity, then at least the bonds.
- As per above, we will do our work and see where the bonds settle before we make any changes.
Here to discuss,
Wolfgang