Douglas - Cosmetic Complexity
All,
Please find our all-new analysis here.
Douglas has been a fantastic trade for us into the refinancing. So it is hard to try to chase the same story now (refinancing behind us, but online stemming the business still lies ahead). We do feel confident that the company will prevail, not least because of the evident EBITDA contribution Douglas already derives from online business as well as some of the upsides from concentrating inventory in five warehouses instead of 20 and to have less parked in 2500 stores. But the path ahead is long and stony and a little trip-up here and there is almost bound to happen.
Complexity:
- Douglas represents one of those companies where a small, but growing business replaces a large, but ailing one. The Online business is anything but small, but its EBITDA contribution is still significantly smaller than that of the store chain. These names have risk attached to them for which we would like to earn more than what is on offer here right now.
- Over the next two years, Douglas is to move into five new warehouses from its carpet of 20 now. What are the chances a complete change of warehousing strategy goes smoothly? At the very least we are expecting some investment in double inventory.
- The pandemic remains with us for now and another botched Q1 will be the end of this capital structure.
- The online growth is coming and further self-cannibalisation is inevitable. More stores will require closure in the future and the ongoing reinvention of what a future successful store format will look like will take some trial and error. The same goes for the online marketplace.
Opportunistic:
- Idiosyncratic drop: As regards the SSNs, the gigantic bond is B- rated. Any deterioration in that could send a large contingent of CLOs running for the exit. Clearly, the PIKs would also drop.
- Market sell-off: As regards the PIK, the duration is clearly long and the path is stony. If the past is any guidance, there will be a time when those will be available much cheaper.
No Positioning:
We are therefore not taking a mother position at this time and are instead waiting for an opportunity - potentially later this year - to pick the bonds up at a lower level once some of the cash has been used up and the big Q1 performance still lies ahead.
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003