(Debtwire) Matalan's April tap boosts capex for store-shopping spree ahead of expected earnings recovery
28 May 2025
14:28 BST
Summary
Investment in store refurbs
December 2024 sales resilient
Significant LTM earnings growth expected by FY25/26
Matalan’s GBP 25m add-on debt raise in April has boosted room to execute on the company's guided earnings rebound.
The UK-based retailer still has hefty leverage, a history of repeatedly missing earnings guidance and a knack for being prone to bouts of quarterly earnings volatility. But December 2024 sales were encouragingly resilient as LTM earnings are expected to climb significantly by FY25/26 (fiscal-year end February 2026). This leaves optimism, even if operational volatility creates execution risks, an independent special situations desk and one buysider noted, with a second buysider cautious.
The company on 10 April announced the issuance of GBP 25m in additional 10% super senior secured 2027 notes and made amendments to bond indentures. A purchase agreement was made with anchor investors including Invesco, Tresidor, Man Group and Napier Park with the funds purchasing the notes. The notes were fungible with the existing super senior notes.
The GBP 25m funding will mainly be used to accelerate investment to support the multi-year business strategy announced in January 2025 that includes investing in store refreshes, new store openings, a new App to boost e-commerce and loyalty programs and an investment in the Matalan supply chain, according to the company's April press release. Buybacks of outstanding bonds may also be considered, subject to market conditions.
Indenture amendments were also made, including extending the super senior note maturity to December 2027 from January 2027, and extending the maturity of the priority notes to December 2027 from July 2026.
The company at 3Q24/25 (quarter-end 23 November 2024) had a cash balance of GBP 91.1m, according to investor presentation material.
“Matalan had a mountain to climb on costs over the past 18 months. This is now behind the company and freight surcharges are less of a pressure. There is a built-in tailwind for 2025 now,” independent special situations desk Sarria told Debtwire. “The liquidity, even with the GBP 25m extra, is tight and there is no RCF while working capital swings are significant. Liquidity is there, but it is not something to jump up and down about.”
One buysider noted there is expansion and a plan to open new stores, while some have been refurbished and the performance indicators for these have been good. The first buysider noted results for FY24/25 should be robust and the Red Sea supply headwind impact on operations has gone away, which will improve the bottom line. The first buysider added that online has not performed so well, but there are efficiencies to come on growth and working capital.
Matalan and refurbishment land ahoy
The company's LTM earnings are set to improve in the coming quarters based on management guidance. Matalan in the April statement noted that FY24/25 (fiscal-year end 22 February) IAS 17 (pre-IFRS 16) EBITDA rose to GBP 54m-GBP 57m versus prior guidance of GBP 50m-GBP 55m. The company has also guided for FY25/26 IAS 17 EBITDA to be in the range of GBP 65m-GBP 70m.
Matalan previously reported 3Q24/25 results for quarter-end 23 November 2024 in January. The company's 3Q24/25 IAS 17 EBITDA was GBP 19.9m versus GBP 18.9m in 3Q23/24. Quarterly sales were down 7.8% YoY, with September sales performing well before a weakening in October and November (see chart below for like-for-like numbers).
The Winter of Discount
Source: Matalan 3Q24/25 investor presentation
Management guided towards an upbeat tone for FY24/25 results in the 3Q24/25 investor presentation. The December 2024 monthly EBITDA of GBP 20.2m was up GBP 3.5m YoY, though the FY24/25 outlook for EBITDA was revised down to GBP 50m-GBP 55m from prior GBP 57m-GBP 62m guidance given at 2Q24/25 results.
This was not the first time that guidance for FY24/25 IAS 17 EBITDA was revised downwards. Matalan management had previously remained upbeat on the upcoming FY24/25 fiscal year ahead of its 3Q23/24 earnings call and had guided for FY24/25 IAS 17 EBITDA in the GBP 80m-GBP 85m range, though this already remained below the GBP 97.4m initially targeted in the company's January 2023 business plan.
The company reported 5.8x net leverage at 3Q24/25 with a LTM 3Q24/25 IAS 17 EBITDA of GBP 46.2m according to the investor presentation.
Free-cashflow generation was minimal in FY23/24. With FY23/24 post-IFRS 16 EBITDA of GBP 146.2m, Matalan benefitted from a GBP 33.4m working capital release, but then faced a GBP 103.6m outflow for lease liabilities, GBP 35.5m in capex, GBP 27.5m of interest payments and a GBP 0.6m of outflows for taxes and other items, leaving just GBP 12.4m of positive free cashflow after the working capital inflow.
A second buysider noted this is very much a marginal investment case and their fund sold out a couple of years back, adding it seemed operations have gone so badly and this name could go the way of Swedish cosmetics retailer Oriflame which announced a recapitalisation in March 2025, or Spain-based pizza restaurant Food Delivery Brands (Telepizza) which received court approval for a restructuring plan in 2023, but noted there is some way for Matalan to go for operations to improve.
“The company is positioned to have a better year in FY25/26, may perform in line with peers and can improve margins. The business is producing positive EBITDA and there are no covenant or liquidity issues. Future scenarios include an amend-and-extend transaction if the business stutters or negotiating new covenants with anti-layering protection” the first buysider said. “Otherwise, there could still be a restructuring, but management wants to IPO the business – to do so, it needs to command a greater EBITDA to boost EV/EBITDA multiple expectations.”
Karl-Heinz ho silver lining
Matalan is aiming to appoint a new CEO since former CEO Jo Whitfield departed Matalan last year, joining UK supermarket Asda’s board of directors in February 2025. Whitfield was appointed as Matalan's CEO in March 2023, along with Karl-Heinz Holland as Chair. Holland spent 23 years at discounter Lidl and was also CEO of Spanish discount food retailer DIA (Distribuidora Internacional de Alimentacion), and since May 2018 had been Chairman of German discount retailer Takko.
Matalan in January 2023 finalised its recapitalisation backed by a bondholder group representing over 70% of the outstanding First Lien Secured Notes – led by Invesco, Man Group, Napier Park and Tresidor – who took control of the business. The agreement followed the conclusion of the strategic sales process launched in September 2022.
The recapitalisation involved a reduction in gross debt to GBP 336m from GBP 593m and up to GBP 100m of new capital to provide funding for operations and executing on its growth strategy. The earliest debt maturities are in January 2027, and the debt package allowed additional committed, undrawn funding, additional baskets and downside protection options.
Those bondholders who took control of the business in the 2023 recap could consider a potential exit down the line if operational momentum builds. Matalan’s restated senior secured notes were callable at 105 for the first six months before stepping down to 102.5 for the next six months and then to par thereafter.
Matalan’s GBP 196m 10% senior secured 2028s are indicated at 74-mid with a 23.8% yield to worst on IHS Markit.
The bond prices offer a yield pick-up versus German discount retailer Takko. Takko has B3/B-/BB- rated 10.25% senior secured 2030s indicated at 105.75-mid with a 8.9% yield on IHS Markit.
“Look at Takko, they recovered much faster, but Matalan still has its store portfolio too. If Matalan EBITDA goes towards a run-rate number then it is sufficient, but the question is how long it takes to get there,” Sarria said. “The company needs to rebuild sales and the potential is there. But the GBP 25m extra tranche raised was the last possible one under the documentation, so this is it, the strategy has to work now, otherwise cards will need to be reshuffled.”
The first buysider noted the “proof is still in the pudding,” and they’ve not yet appointed a CEO, but over the past year the company has been de-facto run by the likes of Karl-Heinz Holland. The first buysider added that the company had many issues previously, but has been pivoting towards achieving quality like M&S has, while still having a lower-priced product.
Matalan was 5.8x net levered on a pre-IFRS 16 basis at 3Q24/25 (see Debtwire analyst capital structure below).
Matalan did not comment further beyond a management statement in an April press release seen by Debtwire.
“We are delighted to have secured this additional funding from our anchor investors. The funds will enable us to build on the progress we have already made in delivering our strategy, and accelerate investment across the business – from our stores through to our supply chain. We look forward to driving Matalan’s transformation forward as we continue on our journey to deliver sustainable, profitable growth,” Executive Chair Karl-Heinz Holland had noted in April.
by Adam Samoon, Jou Yu and Priyanka Kotadia