VRG - Taking Back Momentum
VRG used 2020 as an opportunity to improve working capital, bring down costs, close loss-making stores, and maximize e-commerce sales. As a result, despite a 79% fall in EBITDA, the Company was able to end the year with a safe level of net debt-to-EBITDA by significantly reducing financial obligations. With better working capital management, VRG unlocked PLN 44m in cash in 2020, mostly working capital tied up in inventories. With these efforts, VRG positioned itself to enter the new fiscal year of 2021 with a leaner cost base and ready to restart sales. From a low 2020 base, VRG is expected to deliver increasing sales and margins this year, as evidenced by March figures which showed revenue as rebounding 40% year on year alongside a 5.7pp bounce in gross margin. VRG’s jewelry business is demonstrating resilience in the face of challenging market conditions, while its clothing stores, in particular those carrying mostly formalwear, are experiencing pressure.
After adjustments to reflect a slower-than-expected recovery in fashion revenues, and after accounting for reined-in SG&A expenses, we revise our 2021 and 2022 EBITDA forecasts for VRG upwards by 6.8% and 3.6%, respectively. Even after rallying 29% since our last recommendation, we still see upside potential in VRG, which on our updated estimates is currently trading at 26.2x 2021E P/E and 14.4x 2022E multiple, showing a 2% premium and a discount of 8%, respectively, to comparable retailers. We downgrade VRG one notch to accumulate with a raised price target of PLN 3.65.
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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