Obuv Rossii - New Business Model, Uncertain Market Lead to Revision

Obuv Rossii's sales density decline, combined with intensifying competition, has prompted the management to put expansion on hold and implement a new business model focused on improving operating efficiency and expanding assortment. However, the pandemic has undermined sales and made competition from online stores even more formidable. We have slashed our EBITDA forecasts for 2020 and 2021 by 42% and 39%, respectively. We downgrade our target price for the stock to R40 per share and our recommendation to HOLD.> Perfect storm of declining incomes, lockdown. SberIndex data suggests that apparel and footwear sales tumbled 50% y-o-y in 2Q20. Meanwhile, traffic thus far in 2H20 seems weak as well, as customers are still avoiding public spaces. Against this backdrop, we expect a 25% drop in the footwear market in 2020. Competition with online marketplace Wildberries has only intensified, as the lockdown has encouraged online shopping. > Obligatory merchandise labeling to gradually reduce gray market. Sales of unlabeled footwear were prohibited last month, so the share of counterfeit shoes - which the National Footwear Union estimates at 35-40% of the market - should decline. Large retailers such as Obuv Rossii should benefit from higher prices (including taxes and import fees) and becoming distributors for smaller retailers.> Sales densities to increase on assortment diversification. At the end of 2019, the management made the decision to expand assortment into other product categories that are expected to appeal to the same customers. What it decided to do was introduce a model whereby it sells inventory provided by suppliers - what the company calls its "marketplace" model - for which it takes a 30% commission. The GMV is accounted for in revenues. Sales densities are expected to rise, which should underpin an improvement in ROIC. > Target price cut to R40 per share, recommendation downgraded to hold. We slash our EBITDA forecasts for 2020 and 2021 by 42% and 39%, respectively, on (net) store closures, the sluggish macro environment and the sharpening competition in the sector. We downgrade our target price to R40 per share and our recommendation to HOLD. The stock is trading at a 2021E EV/EBITDA of 4.8. Nevertheless, the pause in rapid expansion into small towns, combined with a growing share of maturing stores, is favorable for profitability, in our view. Further upside could emerge if the sales of new assortment perform in line with the company's expectations (we expect them to be lower) and the cash loan business is ramped up faster than we expect.