Polish Retail - Just a temporary weakening - IPOPEMA
Just a temporary weakening
Given the supportive macro environment (i.e. a record-low unemployment rate and growing average salaries), PMR forecasts Polish retail sales to post a 2018-22E CAGR of roughly 4%. We believe the enhancement of the Polish government’s program 500+ and the development of e-commerce sales should result in positive LFLs and an uptrend in top lines, while on risks side we point at potential implementation of retail tax since 2020. However, due to pressure on gross margins (from heavy competition and less favourable FX rates) and SG&A costs, we recommend a selective approach to Polish apparel retail companies. We prefer VRG (BUY, FV PLN 5.0), as we believe that synergies after the merger with Bytom should boost the EBITDA margin from 11.1% in 2018 to around 12% in 2020-2021E. In CCC (BUY, FV PLN 174.5) the 2019E results could be negatively affected by integration costs, but we expect to see a recovery in margins over the long term. For LPP (HOLD, FV PLN 7,777) we highlight stable growth in the top line, while the development of e-commerce in EU countries might put downward pressure on profitability. For Monnari (HOLD, FV PLN 6.0) we note the limited organic growth potential and the negative impact of the Femestage acquisition over the short term and the upside potential of investment properties disposals.
LPP (HOLD, FV PLN 7,777): We believe, the major positive triggers have already been priced in. The company has limited growth potential in terms of floorspace in CEE, while less favourable FX rates and the development of e-commerce lead us to assume a slight decline in gross margin (to 54.1% within the LPP’s target of 54-55%) in 2019E. We find LPP’s current valuation demanding: the P/E of 19.4x in 2019E and 17.1x in 2020E imply 39% and 32% premiums to peers respectively.
CCC (BUY, FV PLN 174.5): After pretty weak results in 1Q19 due to the integration of acquired businesses, we also expect meagre results in 2Q19 given the sales in April and May. However, we assume positive synergies to emerge from 2020 onwards. Assuming savings on SG&A costs and a deterioration in the gross margin, we expect CCC’s EBITDA margin to recover to 8.8% in 2020E and 9.2% in 2021E after fall to 8.0% in 2019E (which we believe is already priced-in).
VRG (BUY, FV PLN 5.0): We expect VRG to remain on a growth track due to the development of floorspace and further solid growth in e-commerce. Based on the merger with Bytom, we believe VRG will benefit from synergies (which will improve the gross margin) as well as savings at the SG&A level. We forecast the EBITDA margin to improve from 11.1% in 2018 to 12.0% in 2021E with EBITDA posting 2018-21E CAGR of over 20%.
Monnari (HOLD, FV PLN 6.0): We view Monnari’s results forecasts as uninspiring. We highlight the limited space for organic growth and the fact that current FX rates are less supportive for gross margin than they were in 2018 (we expect the margin to fall by 2pp y/y in 2019). In our opinion the stock is fairly valued given the forecast deterioration in results in the years ahead and the upside potential of investment properties disposals (PLN 62m as of end of 4Q18).
CCC is engaged in the wholesale and retail trade of clothing and footwear. Co. offers its products to wide range of consumers, from demanding clientele of trendy boutiques to value-oriented medium segment customers, to less wealthy customers seeking reasonably priced quality footwear. Co. pursues a strategy of brand diversification, which is reflected in its three autonomous distribution channels: a chain of official CCC stores, BOTI footwear shops and QUAZI boutiques. Co. offers more than 2,500 designs of footwear. Co. also owns more than 67 proprietary brand names e.g. Lasocki.
LPP SA Gdansk is clothing manufacturing group based in Poland. Co. is engaged in the design and distribution of clothing. Co.'s headquarters is located in Gdan'sk, including designing resources for all its brands. Co.'s stores offer its customer products that include jackets, shirts, sweaters, dresses, skirts, trousers, jeans, underwear and garment products. Co. also sells promotion clothing under a special selected brand. Co.'s product offering is addressed to a variety of customers for whom separate brands and chain stores are set up. Co. launches clothing under such brand names as: RESERVED, CROPP, MOHITO, HOUSE, and PROMOSTARS.
Monnari Trade SA is a Poland-based company engaged in the design and sale of women's apparel. The Company's product offer focuses on classical style and is addressed principally to women in age between 30 and 50. The clothing portfolio, including skirts, dresses, trousers, jackets, blouses, coats and others, is supplemented by accessories, such as belts, bags, shoes and jewelry. The manufacture is conducted on a contract basis by enterprises in Poland, Europe and the Far East. Monnari also offers seasonal collections, promotions and customer loyalty programs. The Company operates through numerous subsidiaries, including Madam Posh Sp z o o, Madam Collection Sp z o o, Madam Elegant Sp z o o, Madam Costume Sp z o o, Model Sp z o o, Modern Craft Sp z o o, Madam Prime Sp z o o, Madam Fashion Sp z o o, Madam Elite Sp z o o, Madam Perfect Sp z o o, Madam Chic Sp z o o, Madam Fancy Sp z o o, Madam Absolute Sp z o o, Madam Spring Sp z o o and Madam Joy Sp z o o, among others.
VRG SA, formerly VISTULA GROUP SA, is a Poland-based holding that specializes in the design, manufacturing and distribution of men's clothing and accessories. The Company operates in two business segments: Apparel and Jewelry. The Company's brand portfolio consists of Vistula, a men's fashion brand, which also includes Lantier and Vistula Red tailoring collections, Bytom, a men's fashion and tailoring brand, Wolczanka, a fashion and tailoring brand specializing in dress shirts, which also includes the Lambert collection, Deni Cler Milano, a women's fashion brand, and W.Kruk, which specializes in jewelry, as well as retailing of watches from Swiss manufacturers, such as Rolex, Omega and Tag Heuer, among others. The Company's own retail chain comprises more than 400 stores across Poland, as well as online stores for each brand.
Rapidly growing CEE brokerage with over 50 stocks under coverage across CEE4 countries: Poland, Czechia, Hungary, Romania.
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