Steinhoff - Thoughts on Pepco

All,

Please refer to our unchanged analysis of Steinhoff here.

Perhaps we are misreading the results, but we are surprised. As we noted only last week, Andy Bond’s departure seemed to be explained to us by the achievements in the last years, the IPO and possibly bigger opportunities elsewhere. However, we are now concerned that the concrete timing may have been influenced by another factor: falling “Underlying" C.C. LfL Sales in Eastern Europe, which seem not entirely explained by Covid restrictions.

As per above, we may be misinterpreting the results and it’s only one quarter, but Pepco is Steinhoff’s biggest asset and so we will follow those developments more closely from here.

Poundland Q1 (Sept-Dec):

- Poundland results are strong, but not straight forward.

- LfL sales (at constant currency) are up 1.5% and new stores account for 1.4%. That would have us calculate YoY Constant Currency revenues of 2.9%, but Poundland calculate 4.3%. Where the incremental 1.4% are coming from we do not know.

- In contrast to Eastern Europe, the UK had not been in lockdown over Q121 (Sept-Dec. 20). So in contrast to Pepco, there is no adjustment to be made for temporarily closed stores.

- We’ve had trouble reconciling Poundland’s c.c. LfL figures last year already, when they were also posted stronger than the two other figures suggest. If anyone knows the answer, please let us know.

- Poundland write that they’ve been able to renegotiate rent on 30 locations by an average of 22%. Considering their 1055 stores, this is a promising number if can be continued going forward, but of itself should have only marginal impact.

So Pepco “Underlying” C.C. LfLs were in fact -8%?

- At +20% YoY, the roll out of new stores continues to accelerate - even in percentage terms.

- As a result C.C. Sales are up 20%.

- The situation in Eastern Europe during this Q1 was (and is) vastly different than last year. Whereas last year, figures were greatly disrupted by store closures during various lockdowns phased differently across the countries within which it operates, this year shops have remained open for the most part, but testing and vaccination restrictions for shop entry have limited footfall instead.

- Whereas last year we saw a strong Constant Currency LfL figure of -6% (which included the open stores), this year it's advertised as Zero, which must include two offsetting elements:

- A reversal of those revenues lost in compulsorily closed stores last year (9% of trading weeks as measured on today’s estate compared to 1% this year) and

- Uhhhm, a loss of the difference of -8% elsewhere - captured in C.C. LfL Sales - i.e. lower “Underlying” C.C. LfL Sales.

- If the above is true, that underperformance would be hard to explain with Covid restrictions alone.

Low vaccination levels in E-Europe:

- Pepco remind us that Eastern Europe still suffers from vaccination levels in the midd 50% range.

- With health care comparatively less developed than in Western Europe, governments could remain be under pressure to maintain strict Covid 19 on shoppers for longer than elsewhere.

- If shopping restrictions have had an impact on 14% of trading weeks, perhaps Pepco stores are disproportionately affected as sales would have had to be running at only 40% in those stores to explain a -8% for the division.

- Whichever proportion of such underperformance is due to Covid induced shopping restrictions, the low vaccination levels in the region suggest they will be a drag on growth for some time longer.

Second thoughts on CEO Andy Bond’s departure:

- We’ve previously written that his departure - for health reasons - may well be correctly billed as such (we don’t know), but may be aided by the achievement of the IPO of the firm last year and him possibly eyeing a new opportunity elsewhere - bigger.

- Considering our above calculation of “Underlying” C.C. LfLs in Eastern Europe - majority perhaps, but most likely not entirely Covid induced - he may have factored this dampener into his calculations when deciding to leave.

- The share price also appears to reflect this reality and he may want to be out before it trades at a discount to IPO.

- Andy Bond has been great in rolling out a vast estate fast. But summer is followed by winter and it may be time to prune the overgrown bush to prepare it for a colder period. Andy Bond has a great track record and shouldn’t stick around for that. But the next CEO should start a program to that effect.

Investment Rationale:

- We remain significantly long Steinhoff in both SFHG tranches as the company realises its grand settlement and IPOs Mattress Firm. However, as of today we feel a little bit warned about the prospects of the company’s poster child and biggest asset Pepco. Pepco have stuck to their 2022 targets, but it is no longer revising those upwards as it used to. Perhaps we are not reading the figures correctly or it was a blip and the company improves in the next quarters again. So we are not reducing our Steinhoff positions yet, but we will keep a closer eye on that.

Please reach out to discuss,

Wolfgang

Wolfgang FelixSTEINHOFF