2015-16 figures confirm positive operating trend

Last week, Douglas published its full-year 2015-16 figures (fiscal year ends 30 September). Overall, the figures confirmed the company’s positive operating trend seen in 2014-15. 2015-16 sales grew 3.9% yoy mainly driven by the e-commerce business, and the adj. EBITDA margin improved on a higher share of e-commerce sales, exclusive brands and “Douglas Nocibé Collection” products. Having said that, higher interest costs weighed on FFO, which was € 65m lower yoy at € 25m. - We maintain our Stable credit opinion. On the positive side, we stress the still-favourable macroeconomic environment and the company’s growing adj. EBITDA. The main risk, in our view, is that potential acquisitions could lead to rising leverage. Overall, acquisitions seem very likely. - We change our recommendation on 2022 notes from Neutral to Reduce and maintain our Neutral recommendation on the 2023 notes. It is difficult to say when CVC will exit its investment; we note, however, that Advent (the company’s previous shareholder) made its exit after three years. The improving operating numbers support an earlier exit, e.g. in 2018 or 2019, we believe. Both corporate notes are callable starting in 2018. We consider the securitization of the 2022 notes rather weak. Due to the 230bp spread between the 2022 and 2023 notes, we generally prefer 2023 notes over 2022 notes. The 2022 notes are currently trading at a YTW of 1.8%, which is calculated based on the first call date in 2018; compared to the average YTW of 3.0% of a larger group of non-sector peers rated in the B range with workout dates around July 2018 (Appendix 2), the notes seem overpriced. We downgrade our recommendation on these notes from Neutral to Reduce. Compared to peers (Appendix 3), the 2023 notes offer a fair yield in our view with a YTW of 4.2% vs the peer group average of 4.3%. - - - - >