LPP – Resilience Through Global Headwinds
Global consumer spending is going to be hit by the closure of most retail establishments as a containment measure amid the coronavirus pandemic. LPP as well closed most of its brick stores in mid-March, and with the pace of recovery in post-virus visits from risk-conscious shoppers likely to be slow the retailer is looking at a year of weak sales. The Polish government is preparing measures to aid local businesses, such as wage subsidies and rent assistance up to 90%, and LPP itself has taken action to curb expenses – efforts which can mitigate, but not prevent, an inevitable drop in sales profits. Having said that, on the upside we want to highlight LPP's robust financial standing, with PLN 729m held in cash and another PLN 170m invested in money market funds as of end-2019 – money which will help navigate the weeks of zero brick store sales in March and April without squeezing liquidity. Our current base-case forecasts for LPP assume that brick stores will stay closed until mid-May, and that compared to 2019 foot traffic in Q2 through Q4 will be 30% to 15% lower, against online sales growth at an annual rate of 35%. After factoring in the estimated effects of tighter cost management, we lowered our 2020 sales estimate for LPP from PLN 10,981m to PLN 7,499m, and we reduced expected EBITDA from PLN 1,604m to PLN 292m. After overcoming the headwinds of 2020, we see resilience in LPP, which in our view has the ability to bring back shoppers back to its stores and turn sales around from 2021. Accordingly, we continue to rate LPP as a buy after a target price reduction to PLN 5,800 per share.
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.
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