VRG - Hope for Rapid Post-Lockdown Recovery
Since posting disappointing sales figures for March through May, the post-lockdown sales momentum at VRG stores has consistently improved from month to month, supported by a sharp rise on online orders. By July, monthly sales returned to pre-lockdown levels, and with a similarly strong recovery reported in August it looks like VRG might be able to curb this year's profit contraction more effectively than thought, thanks in part to tight cost management. In addition, the Retailer expects to deliver positive movements in working capital. In the first half of 2020, VRG generated operating cash flow (ex. IFRS16 effects) of PLN 14.7m, representing a major improvement on the negative year-ago OCF of PLN 43.7m achieved despite a PLN 63.7m slump in sales profit. The Company owed the stronger cash flow to better working capital management, specifically cash unlocked from inventories. As a result, VRG was also able to reduce its net debt/EBITDA ratio by 0.2x to 1.3x as of 30 June 2020 vs. June 2019, reflecting a healthier balance sheet and reduced liquidity risk. We have updated our financial forecasts for VRG to reflect faster-than-expected recovery and tight cost discipline, and we raise our FY2020 EBITDA estimate from PLN 6m to PLN 39m, and revise the FY2021 forecast upwards from PLN 51m to PLN 67m. Note that, at the updated levels, our estimates stand below the FY2021-23 targets that VRG has set for its executives. Our new models also point to FCF of 8.2% in FY2020E and 5.6% in FY2021E. We upgrade VRG from accumulate to buy with an updated target price of PLN 3.14.
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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