Douglas - Survival of the Fittest - Positioning
Dear All,
Please find our updated analysis of Douglas here.
It marks the end of a long run. CVC, having bought and expanded the company on a reptilian roll-out strategy, had to learn to spell words like “Onlline” and “Pricing” the hard way. Having paid dearly for the lessons, Douglas became rather good at it and for a while the pandemic seemed to suggest that this new division was going to be the only thing that would survive - ahem!! - that mattered. Meanwhile back in the future, consumers are returning to the high street and with an elegant switch of CEO, Douglas have hit the groove again. The IPO seems only a matter of time now.
Investment Rationale:
- We have exited our remaining 3% of NAV position in the Unsecureds at 98.25 today, marking the end of a long run. In hindsight, we should have held onto our full position in August.
- We see the company continuing on a strong path with no particular clouds on the horizon. Customers are returning from online to the high streets and the retailer is able to pass on the increased cost base on only slightly lower volumes.
- We are expecting a strong Q124, which could be an ideal launch pad for a IPO or a refinancing after the call protections run off in April.
IPO:
- Rumours abound that the IPO may come as early as Q224 (CVC have missed their chance twice). The market seems strong right now (at least relatively).
- The PIK has call protection through April 15th 2024 at 102 and change.
- We are sticking to Q225.
Q423:
- The company continued to pass through its COGS inflation successfully. Customers came with higher footfall, and basket sizes turned a corner (grew again), at the expense of more volume. When asking management about returning to a lower price / higher conversion strategy, van der Laan denied that this was the plan, preferring to drive margin over volume as long as footfall remains strong. Douglas would drop prices to attract footfall, not to increase conversion.
- As a result of the above, revenue looked disappointing, but the better gross margin made up for half of the shortfall. The other half was made up from higher marketing revenues and lower marketing costs (as the higher footfall did not require more).
- From the EBITDA level the forecast was accurate, except that payables had come down disproportionately due to less supply chain disruption. Management promise that NWC will contract again.
- The PIK (toggle) coupon was paid in cash.
- Southern Europe continues in turnaround as wages have increased and online remains very low. The region has been beafed up with the transfer of Croatia and Slovenia from CEE.
- Douglas will resume store roll-out - in particular in Eastern Europe. As a result, CapEx should be higher going forward, but management have avoided giving an estimate.
- At the time of writing, Notino 2023 revenues had not yet been published, but we expect the Czech retailer to have passed Douglas Online to become Europe's #1 online beauty retailer. Under Van der Laan, Douglas have pivoted back to a multi-channel strategy with stores at its core.
Here to discuss with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk