Matalan - That was it - Positioning

All,

Please find our updated analysis of Matalan here.

As flagged following last week’s call we have been disappointed by the results and are concerned about the business over the coming year. There have been warning signs in the weather this year, but we had not expected the company to give up all Q1 EBITDA and to have to make as much as a €35m investment in margin. While we continue to believe that Matalan will return to strength, We are not looking forward to waiting for it and prefer to take some chips off the table while we can.

Investment Rationale:

- We are selling our positions across the SSNs, the Priority Notes and the Super Sr. Notes at a low price of 80p/£ - well wide of the quotes we are observing - in the hope that takes account of the generally low liquidity in the name. We are holding on to our equity position on the assumption that we won't receive a bid for it. 

- Our view has turned decidedly negative following the Q1 guidance we received on the FY23/24 call last week. We are not aware of the wider market having interpreted the news as decidedly negative as we have and are taking advantage of that head start. There is a chance that Q2 will be significantly better than Q1, but we consider it remote and prefer missing few points on a pull-to-par trade over falling off a cliff in October.

- Our base case has moved to expecting the SSNs to return to PIK in October and to Matalan quite possibly requiring extra cash early next year.

Model Update Q124/25:

- The model reflects management budget, adjusted for what we've learned on the Q1 call, namely: £-35m in lower prices and £-15m in shipping headwinds from the Suez blockade. So EBITDA for this financial year does not show £80m, but only £30m. 

- Expenses continue to grow by approx. £-55m YoY as per budget.

. We had originally found the budget overall acrobatic, requiring a significant down-shift in product quality and mix that implied a big bet on volumes. While we were initially inclined to go with the budget, we are abandoning those goals for far lower estimates. 

- Even at the current run rates, our projections could be ambitious, as history suggests that the market does not tolerate Gross Margins above 50% for more than a single quarter every other year or so. 

- To preserve liquidity, we think Matalan will be looking to toggle the coupons back to PIK.

Q124/25:

- Q1 was a major disappointment. Bought at a 7% lower price point than last year's SS collection, this year's range was intended to bring Matalan's market offering back to equilibrium and allow it to earn a better margin. 

- The company, however, had to give up the margin to customers, making a £35m price investment (p.a., we understand) for the year. By the looks of it, this has not resulted in any volume improvement, but only arrested the decline. All else equal, this price drop alone should drop the £80m EBITDA budget down to £45m for FY24/25.

- The Suez crisis is adding a further £15m headwind to the year, of which £2m have been incurred in Q1. Matalan are facing surcharges of £800 per container as the canal is closed and shipping takes longer around Africa. Added to the price drop above, these surcharges would drop the budgeted EBITDA further down to £30m for FY24/25.

- The weather was unseasonally cold in spring, but management profess that stock is adequate and at the time of the call (late June) did not see the need for an earlier-than-usual discount campaign. We do expect to see this soon, however.

- Management conceded that it needed to devise a new financial plan. So while we have not officially received a "profit warning", it is as good as upon us.

Looking forward to discussing this name further,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk