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FOURLIS | More ways to win, fewer ways to lose

Operating leverage: blessing and curse – With Fourlis’s retail concepts being discretionary in nature, profitability tends to be prone to cyclical swings. The high degree of operating leverage embedded in the model has proved both a blessing (130% EBITDA growth over 2012-19) and a curse (>70% decline peak to trough, -56% yoy in 2020). At the onset of 2022, market expectations were pointing to substantial growth (2022e EBITDAaL +20% yoy) thanks to the reopening impulse which would more than offset relatively modest – as envisioned at the time – cost pressures. The war in Ukraine and the resulting spike in energy costs have exacerbated the inflationary forces weighing markedly on the 2022 outlook, with 2022 operating profit now looking likely to settle a bit below last year’s levels.

Brutal spell of underperformance leaving a positive risk-reward skew – With the retail sector likely to continue being buffeted by a flurry of headwinds until H1’23, investors will need to be patient for profit momentum to turn decisively positive. That said, with the share price down c50% vs pre-COVID levels (vs 2022e EBITDA c25% off the 2019 mark), the stock seems to have underperformed by more than fundamental earnings trends would suggest is appropriate. Taking into account the value that is to be crystallized post the listing of the REIC (by H1’23), we advocate looking through near term volatility, reiterating our Buy. Having said that, the short-term risks mean that this value proposition may not be unlocked until more visibility is restored and/or the REIC catalyst materializes.

Quite bullish mgt targets; business primed for growth in the long-run – Mgt has guided for €750m retail sales by 2025e, some 50% above 2022e anticipating material growth for its 2 current concepts and a €50m contribution from the HB franchise. Our recalibrated estimates are c10-15% lower than these levels but the guidance is indicative of the operating leverage in the business: mgt expects an uplift of the retail EBIT margin from 2.5-3% in 2022e to 7.5-8% by 2025e, translating to a retail EBIT in the €56-60m area. This is far greater than our group estimates currently incorporate, with mgt obviously implying there is significant latent value to be crystallized if it executes on its plan. On the other hand, this also means greater risk of cost deleveraging in case of more tepid top line performance.

Valuation – We reprofile our forecasts lowering our 2022-23e EBITDA by c€11m to reflect more pronounced cost pressures. The downgrade is lower in 2024e (€2m) while our 2025e increase slightly as we embed higher top line and a small contribution from HB. Our 2025e group EBIT lands c10% lower than mgt’s target just from the retail business, as we prefer to err on the side of caution at the current juncture. That said, we still calculate significant upside and reiterate that the upcoming REIC demerger will bring to the surface the undervalued sum of the parts, unlocking the value embedded. Following the recalibration of our estimates and an increase to our WACC assumption to reflect tighter monetary policy settings, we lower our PT (based on 10% discount to NAV for the REIC, DCF at 10% WACC for the OpCo) to €5.2 per share.