Matalan - Strong. Challenged, but strong.
All,
Please refer to our unchanged analysis here.
Sales came in significantly ahead of our expectations, as the company liquidated its SS stock successfully through August. As a result we do not foresee significant write-offs in Q3. However, the strong sales push clearly impacted margins and so Cost of sales were similarly high.
Still, EBITDA was marginally positive and therefore some £9m stronger than we had feared.
The real success of the quarter lies in the cash realisation due to the timely sale of that inventory, which means Matalan had cash on BS of £160m, a figure, which was however also helped by slower than expected intake of merchandise due to delays at the port and with hindsight too prudent ordering. The vast cash position is therefore set to reverse by approx £50m WC in Q3, which includes (IFRS16) an outflow of £8m for unpaid rent, which will recur quarterly for the next 12-18 months to bring down the current balance of £32m which is effectively also part of the cash balance.
Away from seasonal swings and WC volatility, the company has made a good start to the year - all things considered. Matalan has taken good market share over the summer. Q3 will be impacted by stock shortages, but management seem upbeat on Q4 and customer anticipation of Christmas for which the seasonal stock is already in the warehouse (not impacted by port congestion).
The company continues to struggle with its undersized online capacity. Online revenues account for approx. 15% of sales, but the company could generate significantly more sales via this channel. Management have dialled back digital marketing and is focussing exclusively on demand from existing customers, which is a shame at a time when many customers are exploring new offerings online. The restrictive capacity is unlikely to improve in the next 12 months before a pocket sorter can be afforded - provisionally in the latter half of 2021.
Respecting management guidance, we expect Q3 to be weaker than our model on the sales line, but possibly more profitable as the low stock position should call for lower discounting.
Overall, the company has sufficient liquidity and due to its positioning in retail parks where customers perceive better Coronavirus hygiene than on the high street, Matalan is benefiting from the situation in relative terms over the market as a whole.
Aside from scenarios including a second lock-down, Matalan seem on the right track and with sufficient liquidity to emerge from this crisis intact. Liabilities have been managed extremely well this summer and once again the company is proving its relative resilience in a downward cycle.
We remain long the SSNs for 5% our NAV.
Wolfgang
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2 Stephen Street
London W1T 1AN
E: wfelix@sarria.co.uk
T: +44 203 744 7003