Douglas assessment of position

All,

please find our updated analysis on Douglas here. 

Q2 was disappointing, if not quite as much as we had estimated. So our short was well timed, but made only little money.

Situation:

- The company is now NCF negative and A&M have been hired to find savings and significantly reduce the German store count. This should typically result in more restructuring costs before the savings become visible. 

- Management appear to be relying on an ebbing of competitive pressure from one of their pureplay rivals, we believe to be Flaconi. If it is Flaconi, we are not sure that is going to happen soon. The company is owned by Pro7 and under an equity-for-media deal pays its parent E20m p.a. as is. So as long as they break even (unlevered), they’ll continue to reinvest everything in growth - i.e. margin. So the GM pressure is unlikely to abate and Douglas will have to find even more savings.

- The online business is stuck. When subtracting Parfumdreams from Douglas Online we are seeing no growth at all LTM. The company is flagging further investments into its e-commerce IT, but we are not convinced that will address the fundamental problem of no-growth-at-all. If Douglas want to command a margin on the German business in the future they have to above all control the volume and at present they are losing that to Flaconi.

Short Term:

Still, Q3 (June quarter) should be relatively positive (EBITDA flat YoY), given the easter timing. Moreover, we will have to wait / pay coupon+fees  for another three months before we learn about it before the more decisive Q4 is reported only in December.

Long Term:

- There are many risks on the horizon, including mergers of pureplay competitors and competitive scenarios unfolding in other countries as well. Douglas urgently have to get the German operation under control before battle begins on another front.

- Reducing the German estate and finding an additional E70m of savings appears realistic and achievable. We are therefore mildly optimistic that Douglas can present a recovery in 2020/2021 - in time for refinancing (before quite likely dipping again as the trade continues to rotate into online). 

So in light of a flat outlook on Q3, the time to December that we will need to hod the short for until perhaps more significant news are shared with us and given our mildly constructive outlook in the long term we are reviewing our short at present and may think of a more pronounced trade around December. Thoughts are not final yet.

Wolfgang