IKKS : It's all about summer

Publication date 19/04/2017 10:42 - Writing date 12/04/2017 11:02 - - - - / - Late May 2017: Q1 2017 results - - - - The 2021 IKKS notes have shed 20 pts since early February, including 10 pts following the Q4 2016 earnings release. They are currently trading at 58%, yielding 22.7%. Despite this steep discount, we have chosen to leave our Reduce recommendation unchanged. Moving back into the credit today is to wager on the resumption of like-for-like sales growth in 2017, the only genuine catalyst to boost earnings, halt the upsurge in leverage and avoid a fresh pressure on covenants. Q1 2017 results, still on a downtrend in our view, are due out in late May. Only more upbeat comments about business trends in April and May could trigger a material rebound in the bond price. This scenario seems too uncertain to be played at this juncture in view of the initial comments about Q1 2017 and March in particular. - It appears increasingly clear to us that the degree of success of the current IKKS Women collection will be the key factor in the bond's future. In a worst case scenario, the recovery rate on the 2021 paper is regularly estimated at between 30 and 50%, theoretically paving the way to a further steep fall in the bond's price if there is no recovery. - > - Support factors - - A broad range of brands covering various demographics (men, women, children), ages (0-55 years) and styles. IKKS Junior is in our view the strongest brand in the chain (reputation, performance, identity).- The base of comparison has become undemanding since March 2017 (unfavourable weather effect of 2016 with market declines of 2.9% in March 2016, -6.1% in April 2016 and -2.6% in May 2016, according to IFM). The sector data due out each month between now and IKKS' forthcoming earnings release late May will probably be positive. - A more conservative strategy expected in 2017 with a marked reduction in capex (expansion exclusively though affiliates) which could reduce cash flow burn.- Banking support obtained in Q3 2016 with renegotiation of covenants and a € 5m medium-term loan to finance capex. - Points to watch - - High exposure to France (around 80% of sales), a fiercely competitive market that is projected to contract by 1.4% in 2017. Additionally, it can be highly volatile, as in recent months (inclement weather and security risks).- Risk of prospective deterioration of the IKKS Women brand image. After two poorly received collections, a further disappointment over the current collection could lead to a more protracted loss of customers.- Despite a number of positive signals, comments on the start of the new collection remain timid, with continued negative footfall in March despite a flattering base of comparison.- Despite the sharp reduction in capex anticipated in 2017, the group is set to see further increases in fixed costs with the full-year accounting of store-opening costs in 2016.- Reliance of liquidity on the RCF during periods of cash needs (Q1 and Q3), bearing in mind that a fresh increase in leverage would result in a covenant breach and the need to negotiate a third waiver.