Matalan - Two Seasons
All,
Please find our updated analysis of Matalan here.
Fundamentally, Matalan maintains its steady position in UK apparel retail, neither growing nor shrinking over the past 20 years, and gained market share during the pandemic as competitors exited. The low-price sector remains insulated from online pressure, so aside from cyclical inflation, FX, logistics, and footfall headwinds from the pandemic tail-end, Matalan's £90m average EBITDA has limited structural challenges. Margins should recover through SS24 as new collections roll through. Tactically, performance is at a nadir or perhaps just past nadir, and new management seems reasonable with forecasts. Beyond recovery, further valuation upside depends on articulating a growth story, but we anticipate a refinancing from late 2024 and perhaps a sale one year later at a valuation that should make for extremely attractive returns from today’s perspective.
Investment Rationale:
- Since the additional Super Sr. request, we are holding a 4.4% of NAV position of Matalan across Sr. Sec. Notes Tranche II, Priority Notes, 2nd Lien Notes and equity. The position is marked with a loss from last year. However, we continue to feel very strongly about Matalan. The estate is undiminished and so will be earnings eventually, even if the cost-of-living crisis will have it take a little longer.
- We are holding the new pieces with a medium-term outlook and are confident the equity will turn out to be very valuable once Matalan trade through their currently committed ranges.
Current Trading:
- New management team in place with strong retail backgrounds.
- LFLs were marginally positive for Q2 due to 16% price increases, though volumes were down, almost fully offsetting the increases. SS24 being bought at lower price points to correct high positioning.
- Good full price sales in Q2 due to delayed summer sale. Q3 therefore likely softer.
AW23/24 margins still to be squeezed due to USD/GBP move and cost pressures. Margins improve in SS24.
- Online sales down significantly due to high prices and availability issues from migration to new THG platform.
Outlook:
- Q3 £2m EBITDA headwind from delayed summer sale. Otherwise management upheld FY23/24 guidance.
- Supply chain improvements provided 2000-300bps tailwind. We are unsure how long it will last.
- Cautious buying for AW23 and SS24 lowers risk position this winter.
- Renegotiating freight and supplier contracts. Effects to become visible in SS24.
- Online should improve with lower prices and availability over the coming two seasons.
FX and Inflation:
- £15m FX headwind in Q2 to reduce through AW23/24 and mostly gone by SS24. FX hedging is back to normal following run-down of position into the restructuring.
- Cotton prices have been declining. SS24 collection will be adequately priced again (fingers crossed).
- Wage inflation has so far been masked by lower volumes. We fear the full impact in SS24.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk