VRG – Adapting To a New Reality
VRG stock plunged on coronavirus fears and markets opt to overlook the Company's record-high earnings for FY2019 and low ending net debt of 0.6x of EBITDA. With the global retail landscape dramatically changed by the COVID-19 epidemic, we are prompted to revise our base-case earnings scenario for VRG: Assuming the Company can reopen locked down stores in mid-May (VRG itself is holding our for early May), we see a gradual rebuilding of foot traffic from low initial numbers, with fewer overall visits from Q2 through the rest of the year than in the same period in 2019. The resulting declines in sales will probably be more pronounced at fashion stores than at jewelry stores (the jewelry stores demonstrated great resilience back in 2009). With shoppers moving online, VRG is set to experience downward pressure on gross margins in 2020, underpinned by a likely increase in marketing activity from Q2 2020. On the upside, our base case scenario assumes reductions in store rental rates (-40% in Q2 and -20% each in Q3 and Q4) and payroll (-20% each in Q2 and Q3, -10% in Q4), on top of PLN 10m cutbacks in marketing expenses. It is worth noting that, amid extreme uncertainty, our updated base case assumptions are somewhat more conservative than the assumptions outlined by VRG: namely, for our 31% y/y sales fall estimate, VRG's guidance is for a decline of 20%. We expect to see online sales revenue of PLN 181m this year, while VRG sees PLN 20m. Our 6% rate of expected floorspace reduction is higher than VRG's 2%. We anticipate an EBITDA loss of PLN 15m in FY2020 against VRG's belief in a positive operating profit. Finally, we differ in the assumed rates of inventory reduction in 2020 at -8% us vs. -11% VRG. Below we also analyze a best- and worst-case scenario for how the coronavirus epidemic might impact VRG's business. After updating models, we lower our target price for VRG to PLN 2.00 and we downgrade the stock to hold.
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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