VRG – Menswear Sales Underperform in 2019
VRG's 2019 third-quarter results came in line with market expectations, but they showed a sales slowdown at key fashion stores which continued into October, as reflected in further declines in the like-for-like sales generated by the menswear label Bytom. On top of a changed pricing policy, it would seem that Bytom's autumn/winter collections failed to appeal to shoppers. Bytom's more casual sister brand, Vistula, improved per-square-meter sales in October, with the new pricing strategy this case helping to curb the pace of year-over-year contraction. VRG's jewelry stores have been doing very well this year, and they will most likely continue to grow sales at double-digit rates in Q4 2019 and further into 2020, when like-for-like sales are projected to grow by 3% despite negative base effects. Rising labor costs present a major challenge for VRG going forward, but we expect expanding sales margins and improved sales at Bytom and Vistula stores to mitigate the impact. We have adjusted our 2019 and 2020 EBITDA estimates lower to reflect the better-than-expected results of the jewelry business on the one hand, and the weaker performance of the fashion business on the other hand (though the temporary clothing slump in our view has been excessively discounted by the market). On the updated outlook, we downgrade VRG from buy to accumulate.
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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