IKKS : Lacklustre clothing market

Publication date 08/03/2018 14:21 - Writing date 08/03/2018 14:20 - - - / - 14 March 2018: February retail sales - BDF - Before end of April: IKKS' Q4 2017 results - - - - - - - - - - - - - - - - - - - Given that: 1/ all the catalysts now in place to foster a rebound in earnings in 2018, 2/ the repositioning of IKKS Women was beginning to pay off; and 3/ the comparison base was highly supportive in Q1 2018, we were reasonably confident in the group's ability to embark on its recovery early this year. - > - - But the key variable for staging a sustainable recovery, namely like-for-like sales growth, may be absent in Q4 and Q1 given far tougher-than-forecast trading conditions (-4.5% in January 2018 for France's textile and clothing market despite an undemanding comparison base (-6.5% in January 2017) and the risk posed by February (tough weather conditions), prompt our concerns about a further decrease in EBITDA in Q1 and an increase in leverage with potential pressure on the covenant at end-March. However, should covenant pressure be primarily related to market conditions, the banks should mostly show leniency, unless the group significantly underperformed the market. - - Hopes would then primarily be transferred to Q2 2018 on an easy base effect (-7.8% lfl in 2017 for IKKS in Q2 2017 and -3.5% excluding the later start to the summer sales season). In this regard, the design of IKKS Women's new spring-summer collection and the marketing and digital campaign around it seem quite promising to us and able to offer the group the recovery potential it needs. But the broader environment and weather will be key and the comparison base will become less comfortable as the months go by. - - Amid such poor visibility, we prefer to err on the side of caution, as the risk of negative newsflow in terms of sector statistics, ratings after the earnings release or even the covenant test in Q1, may still create some volatility although the 6.75% 2021 IKKS notes (72.4%-mid, i.e. a YTM of 18.1%) has already been adversely impacted (-7 pts over three months) by the broadbased deterioration in market conditions in recent weeks and probably also by disappointing January retail sector statistics in France. We are lowering our recommendation to Neutral pending the forthcoming earnings release (Q4 2017, between now and late April) which will provide greater visibility on the performance per brand compared with the market and on the outlook.