Douglas - Estimated Restructuring Costs

All,

Please find our updated analysis/model on Douglas here. 

We have modelled the impact of coronavirus in line with what we’ve learned on the last call and some first-hand digging in Germany. The company has sufficient liquidity and - if needed - wiggling room to trade through this fall and Christmas season and into next year. Thereafter the company will have to improve and that should cost. It’s of course early to try and quantify the impact, but investors need to take a stab now:

For 2021, what will have to happen is a cost reduction of 5% of Opex to stem the likely drop in business volume in the store network. In the simplest terms, the P&L of the store network functions like the model below. If we assume that perhaps only 1/5th of EBITDA = E500k would be made up by growth in online consumption, then the remaining OpEx reduction required would be 5%.

Reducing OpEx by 5%:

5% is a typical cost reduction requirement for any CRO entering a company. But following various cost programs in the past, at Douglas there is no way to achieve this without taking the axe to leases and staff and even that is not straight forward. If we assume that all stores will see a uniform drop in demand throughout Europe, then going by the natural log curve (probably aggressive) then we could see the need for a 20% reduction in number of stores. In reality 1/x is probably too extreme a curve and half of that = 10% of stores is more likely. Some of those should roll off in the next year and some leases can be re-struck, but that still leaves some 200 stores EBITDA dilutive and in urgent need of closure or similar - in countries with no CVA mechanism.

Estimate Employees: 

Douglas have employee expenses of approx. E650m, only a small amount of which seems related to HQ. So 10% of employees at approx. 1 year of compensation would cost E60m to lay off, except that Douglas should have a fair number on flexible contracts. Nevertheless, let’s assume the full E60m as a ceiling. 

Estimate Stores:

IFRS-16 coming in handy for once estimates operating lease liabilities of E1.1bn. Again, subtracting HQ, and leases running off, liabilities under negotiation would be no more than E100m and so the damage would perhaps be limited to E20m. 

Clearly we could drive trucks through these estimates, but if including other costs and consulting / legal costs the total bill amounts to E100m, payback would be a sensible sounding 2 years and more importantly, the company should be just about able to afford it - beginning next year.

Timing remains crucial as 2022 maturities are coming closer.

Wolfgang