Takko - after the call - remaining short

All,

We remain short for the time being. Cash may be E20m better than we thought, but the trajectory is largely as per thesis. 

As expected, the company is applying the breaks. Liquidity is tight at best. Q1 may still have needed bank discussions. Earnings are falling and store numbers are rising. This is not a good combination for a retailer.

Thoughts:

RCF:

- Management did not comment on my question to what level the RCF was drawn in Q1. We got the feeling that something has changed in the make-up of the RCF / LC lines during Q1, but it's really just a feeling and we may be absolutely wrong about that.

- Expense items including Marketing and CapEx were both guided lower, with the flexibility of being materially lower at short notice. Coupled with a tight liquidity position and potentially some material drawing under the RCF that may have triggered a conversation with its banks, we wonder if this begins to add up to the kind of picture that we have had in mind after all - even if E20m better than expected.

Expansion:

- The company is clearly looking to curb its level of expansion and seems concerned with conserving cash again. 

- The company has been cutting TV campaigns in Q4 in favour of hard selling discounts and is not guiding towards an increase in marketing expense in 2019/20. i.e. it sounds like there won’t be any this year either. 

- Net store expansion has been guided to 40 across a 2 year period with CapEx also guided “slightly” down - mostly on lower expansion. However the move from 120 net openings in one year to 40 across two years is not a slight change. Either this means that Takko are planning a significantly higher number of store closures (did not guide towards that) or management plan  to open significantly fewer stores, in which case CapEx should be materially lower.

Inventory revaluation: 

- This is an item that can be thought of as transferring EBITDA from one period to the next. By taking the write-down charge in 2018/19, the company can sell the items at cost or thereabout in 2019/20, without having to realise the loss then. It is an audited figure however. So there is nothing wrong with it (except its bigger this year). 

- What irks people is that it can be added back to EBITDA for the purpose of covenant calculations. This has been the case for a very long time at Takko. And yes, it does systematically inflate Takko’s covenant calculation.

Participants have been focusing quite a bit on the increase of loss making stores and on the relatively large inventory value adjustment. Both are clearly a direct consequence of last year’s relatively weak trading conditions and we have thus not given them as much consideration this morning as they received in the call. The model aims to project adjusted EBITDA, so there is no impact from these inventory write-downs.

We will send an update of the model in due course.

Wolfgang