Oriflame - Sales-per-member
All,
Please find our slightly updated model on Oriflame here.
We have taken another look at the recent developments of price and member numbers by region and have decided to upgrade our EBITDA forecast for 2023 from €64m to €80m. As previously discussed, member numbers tend to be directly related to sales and our historical analysis backs that up. But as member numbers fall, the sales-per-member have been rising, because it’s usually the one-off members that roll off first. Sales-per-member will fall again with overall sales growth, but in the meantime, we should see a slightly less volatile trough performance from Oriflame, which is an improvement vs. our last estimates.
Investment Considerations:
- We have not again discussed investing in Oriflame on this occasion, as even though Q122 is an easy comp (outbreak of war in the Ukraine), we are not anticipating a great performance. But while the “spoon” is still falling, we do feel we could be nearer to the trough and could decide to take a small long position, depending on market.
- We are unlikely to take a big position soon, because of the continued uncertainties around the Russian and Belarusian businesses and because management has not made us comfortable that they have the solutions to stop the decline of the Asian business. We’ve heard secondary reports that business is greatly increasing following the Chinese lockdown, but those could be intra-quarter comparisons that will not be as visible in the reporting. In the reporting certainly, there is no drop to be seen from the lockdown in the first place.
Sales-per-member:
- As a recap, the majority of Oriflame’s members are little more than ordinary customers, except that Oriflame are looking to strike more of a relationship with them than a normal retailer does. When sales drop, so do member numbers.
- It is therefore also normal that those loyal members still buying from Oriflame tend to buy bigger baskets.
- Historically, members and sales have been fluctuating in sync, because at the margin there is little difference in basket size, but as member numbers have been reducing drastically in the last two years, the effect has become more pronounced.
- Oriflame have also begun to raise prices in H222.
- In light of the improving sales-per-member stats, we are now assuming that incremental sales per member contribute to EBITDA at a rate of 50%, adjusted for cost inflation.
- Adjusted for cost inflation pass-throughs, sales per member will revert to normal levels in time, but in the interim, we should see some P&L support from better margins in 2023 than mere member numbers suggest.
Outlook:
- We are forecasting a Pre-IFRS 16 EBITDA for this year of €80m, down from €91m last year, but up from the €64m we predicted before taking into account the rising sales-per-member effect that has become visible.
- Underlying our model is the basic assumption that in most markets member numbers are stabilising this year. But we caution that there is really no evidence of that yet. So even if Q1 benefits from easy comps, we still find it just a bit early to step in.
- We have Asian members stabilising in the second half of the year, but really only for lack of a more concrete idea.
- We are using a general inflation assumption of 6%. Note that most of the sales force (members) are not consolidated and we are looking across to similar COGS increases at Douglas this year to compare (even though that is an arms-length negotiation with brands as opposed to in-house production).
- We continue to assume a reversal of last year’s FX gains but have now broken those out for the company as a whole in a separate line item.
- The bonds are due in May 26, so at the very latest on 2025 numbers, or in three years. Oriflame EBITDA has almost halved since 2021, but how long it will take to rebuild its Russian success is hard to say. Asia has apparently no solution yet and Turkey and LatAm don’t yet look encouraging either.
- So Oriflame may turn out to be a case of “down with the elevator, up with the stairs”. Stabilisation should encourage bondholders, but unless we see a swift end to the Russian / Ukrainian conflict and see Asia stabilising, much of the re-growth may have to be organic.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk