Douglas - sufficient cash

All,

As expected, Douglas have had an encouraging call today. Reporting on Covid-19 related underperformance was exceptionally clear and management appears to have convinced callers (and us) that the current cash position may just be sufficient to trade through the coming Christmas season, be it on changed terms with suppliers, which have yet to be negotiated. 

Conclusions: 

- We remain long the SSNs for 5.6% of NAV.

- The company would benefit from more liquidity and trading through Christmas without additional injections will require some negotiations with suppliers. However we are quite confident that - given the size of the company, the historic precedent for these longer terms and the current need for them - suppliers will be forthcoming.

- Not all the shift to online will return to stores and thus the company will have to attack its store base again. However, Douglas appear to be gaining market share and chances are that humanity will continue to buy skin care, cosmetics and perfumes in largely the same quantities as before (maybe more perfume if we have to stay at a social distance??). 

Key information from the call:

- 90% of stores are open again, trading at 90% of YoY comparable Sales = ca. 80% overall sales run-rate currently with some further increase assumed in the next weeks as remaining stores come out of lock-down. After an initial few days of catch-up wave, the current sales levels seem sustainable and (hopefully) can be built upon.

- March: was EBITDA flat and consumed E9m in FCF (after some deferral of payments etc.) Overall Payables are now E50m higher than usual.

- April: should be worse as Sales were down 90% and thus GP down E-80m (E-95 in Stores and E+15m online). Extra Covid-19 costs were E-5m, offset by savings from St. Labour of E+38m, leaving EBITDA at -47m. As regards CF: the company did not pay its April rents of E30m and is negotiating those payables as well as future commitments. WC should be a heavy outflow of some E-40m (timing effect) and CapEx some E-7m, to arrive at End-of-April Cash of E244m, some E-64, lower than March.

- May: P&L should look similar to March with WC normalised. CapEx is not so easy to switch off as pre-commitments remain. 

- June and beyond: sales return at approx. 90%+ with a gradual return of expenses as well as employees come out of short-term labour and other arrangements.

- Q121: Last year, the company switched to a more straight forward payables regime, involving Q120 outright inventory purchases of E-130m, vs only E-61m the year before. Management is however confident that it can stretch payables terms again and smoothen the build-up again, thus being able to manage within the confines of its current liquidity position.

- The company estimates its permitted secured debt basket to be E300m, although is eager to stress that it has no current plans to raise any such additional financing.

- The RCF is effectively exhausted at current levels, given non-cash commitments for rent and purchases. Cash-drawings are E74m via RCF and E90m via ancillary facilities, which circumvents the leverage covenant. Further drawings are neither planned, not easily possible and even then limited to only an incremental E10m. The facilities have no clean-down provision.

We will be updating our model in due course.

Wolfgang