But : A bump in the road

Publication date 28/02/2018 11:26 - Writing date 28/02/2018 11:21 - - / - 14 March 2018 : Retail trade – Bank of France - 22 May 2018: Q3 2017-18 earnings - - - - Following BUT's Q2 2017-18 earnings release, we shall take a fresh look at the issuer. We are confident that management is able to handle the temporary logistical difficulties, but we fear these could put a bit of a damper on earnings for another few weeks. Also, after a good month in January, according to Bank of France figures, we fear February might be significantly tougher for the sector given trading conditions and a demanding comparison base. Lastly, apart from broadly unfavourable market movements since late January, the Moblux 2024 paper did not take a hammering from the Q2 earnings release and offers a YTW of 4.0% in line with its peers. In light of these factors, we fear that the bond will lack catalysts in the months ahead and are lowering our recommendation to Neutral (Hold). - > - Support factors - - With strong market positions in France, BUT is one of the top three players that have cornered almost half of the market with a 13.4% share in 2016. - The global outlook remains satisfactory for the furniture market (estimated at € 9.8bn in France in 2017) underpinned by consumer confidence (+5.9 pts in 2017), GDP growth (+1.9% in 2017, +2% forecast in 2018) and the upturn in the construction market (+15.7% housing starts) and property transactions (+15.4%). - BUT has implemented a strategy to boost sales and improve margins which has showed tangible results for over three years now (improvements in the product offering, growth and margins).- The group has a good track record in maximising free cash flow and keeping its debt under control.- BUT still has some leverage to boost its growth (online channel, purchasing synergies with XXXLutz and development of decoration products, the most profitable segment).- Comfortable end-2017 liquidity position with € 100m in cash and an undrawn RCF of € 100m. The principal maturity is the € 380m 2024 note callable in 2019. - Points to watch - - The business is concentrated solely on France, a highly competitive market and, mirroring the specialist retail sector at large, sensitive to economic vagaries (discretionary spending), weather and calendar effects, and more recently, security risks.- The change of control in 2016 generated an increase in net leverage (3.3x at end-2017) which had fallen to an all-time low at 0.3x on 30 June 2016.- Following a spate of topflight releases, Q2 2017-18 results surprised with, on top of a broadly challenging retail environment, a fiercer competitive backdrop and difficulties encountered in the supply chain and logistics.- Management said these difficulties were being solved but that it would take several months. BUT's chief executive, however, said everything should be completed by summer (i.e. another quarter or two are likely to be impacted).