CCC – Turning the Corner Toward Profits
CCC delivered disappointing earnings for 2019 due to a combination of various factors, of which some were rooted in the fundamentals (oversized stores, unattractive product mix), some were temporary setbacks (inventory sell-off, IT investment, post-merger restructuring, one-time events), and some could be blamed on the weather. Looking ahead, after revisions to incorporate more conservative assumptions as to future growth, our current EBIT margin forecast for 2022 is lower than the target set by CCC in its 'GO.22' strategy plan (at 7.2% vs. 8-9%), but it is higher than the current consensus of 5.9%. Similarly, in 2020 we expect 13% higher EBIT than the average estimate of market analysts, and we see an annual EBIT margin of 5.0% vs. 4.3% forecast by the market – a discrepancy which indicates potential for upward revisions to CCC's earnings expectations in the coming quarters. Our upbeat view on 2020 profits factors in the expected positive effects of the various growth initiatives that CCC successfully completed last year. These included the implementation of innovative sales solutions, inventory optimization, a revamp of the product mix, and cost reductions. As a result, we believe CCC can stem earnings declines in Q1 2020 and start delivering growth from the second quarter. At the same time, the Company will most likely reduce CAPEX to PLN 222m this year from PLN 727m in 2019, when it was investing in technology and growth, with positive effects on free cash flow. CCC's net debt/EBITDA ratio reached 2.9x at the end of 2019, and it will most likely rise further to an estimated 3.3x by the end of March 2020, only to decrease in subsequent quarters. We see CCC as undervalued at the current level relative to its short-term prospects, and so we maintain our buy recommendation with a target price of PLN 135 per share.
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.
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