Matalan and UK retail
All,
Please find our updated analysis here.
Matalan bonds dropped yesterday after it gave a gloomy account of British retail, both in the apparel as well as in the groceries segment.
Moreover, Q2 will be heavily impacted by a number of at least partially offsetting factors including being one week longer than last year.
Q1
- A strong set of results, if with an elevated inventory position at quarter end - some £12.5m unplanned.
- LfL sales were up 2.4%. However, by our math that would likely equate to -1% on the unrefurbished half of the stores. Better than virtually anyone else in physical retail, but not by itself immune to the environment.
- While Q1 started well (in March - Easter), May LfL sales fell by 4.5% and June appears to have been at best the same. Matalan claim - and most other retailers appear to back that up - that this is a sector wide trend for the year driven primarily by a compounding mix of bad weather and Brexit induced consumer uncertainty.
- Matalan’s own position is worsened by the fact that this year the company bought some £12m of additional stock from having been light on items last summer. By management’s own admission that plan has not worked out. Thus at the end of May the company had some £12.5m of excess stock to clear between now and end of August, which is quite an amount.
Q2:
- Having waited until the end of June for summer to arrive, Matalan finally joined the sales season last weekend - at the same time as last year but with 45% more volume on discount.
- FX: Compared to Q218, Q219 will not suffer from the £4m GM “headwind” that Q1 was exposed to. So in relative terms that should be supportive of Q2 margins.
- Timing: Q2 will be a week longer than last year, adding most likely some £20m in sales and a couple million in EBITDA.
- WC: Due to the timing of the quarter end and the progressed payment cycle at that cut-off date, Accounts payable should be significantly lower (as in Q4), leading to a significant WC outflow - although that is only temporary.
Q3:
- Given the weak market, the company has (as will everyone else) begun to cut and adjust the AW collection in underperforming areas.
- FX: Should see a “Tailwind” of £1m in GM.
- Timing: Loses a BIG week in Summer, but runs for an additional BIG week in November, thus likely a stronger quarter.
WC: Q3 starts with a lower accounts payable balance, thus promising a relatively positive WC development compared to Q318.
- Cost Savings: benefits from redeploying back-office and logistics staff into customer-facing roles of £2-3m p.a. should become effective in Q319/20.
Q4:
- FX: Should see a “Tailwind” of £2m in GM.
- Timing: Loses a BIG week in November and adds a small week in February. So should be lower in turnover YoY.
- WC: due to the later cut-off, again the payment cycle is further evolved and accounts payable are expected to be down (cash outflow) by £18m YoY (this was flagged in Q4 already).
=> It is important to recognise that Matalan is by far the best positioned player in the market to face off the weakness in British retail and the company continue to make idiosyncratic improvements over its own past performance. Leverage and liquidity are under control and aside from an elevated stock position to clear, we are not seeing too much wrong with Matalan overall.
=> Leverage may be rising by up to 1/2 turns in Q2. This would be due to a mix of lower EBITDA and a later balance sheet date, showing further outflows from accounts payable, while the stock position may still be elevated. So the breakdown: £-15m accounts payable, £-12.5m Stock, £-10m LTM EBITDA on a 2.7x multiple to date = 1/2 a turn of EBITDA.
We will be maintaining our position in the name.
Wolfgang