VRG – 2019: A Year of Unprecedented Growth
With the acquisition of rival suit maker Bytom at the end of 2018, VRG made a major step toward fulfilling its strategic objective of establishing a presence as a "house of brands" with regional reach. In Q2 2019, the Company saw the first effects of a new pricing strategy applied to its fashion collections, reflected in gross margin expansion of 1.6pp over the year-ago period, achieved despite higher costs in dollars paid for the spring/summer lines. With positive shifts since in the USDPLN exchange rate, reinforced by synergy effects, VRG's fashion business is poised for further margin growth in the second half of the year. In the jewelry business, we see improving like-for-like sales supported by strong market fundamentals and an attractive sales mix with a better selection of watches. With this in mind, assuming consistently tight cost management, we expect VRG to report 39% growth to PLN 124m in FY2019 recurring EBITDA ex IFRS 16. On growing earnings and reduced capital expenditure, curbed by the increasing use of the franchise model, free cash flow in the 2019-2022 period is likely to increase to PLN 57m on average per year from PLN 20m in the 2015-2018 period. On our estimates, VRG is currently trading at 13.3x 2019E P/E and 11.6x 2020E earnings. We maintain a bullish view on the stock, with the new price target set at PLN 5.20 per share.
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.
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