CONSUMER CYCLICALS
- 1H earnings come on the 14th of November - we may get a profit warning leading up to it and reminder guidance (at the time based on Q1 and early July trading conditions) was for a operating loss in 1H and FY operating profit below consensus (at the time was at £310m/-26%yoy).
- Consensus is now at £110m/-74%yoy. For reference it carries £1.2b in lease liabilities and £600m in bonds, add about £300-400m to EBIT for annual D&A to get to leverage (gross ~4x by year-end).
- Ratings are not really relevant here - bonds trade low double-BB like. Moody's is staying put hoping earnings will pick-up again. If it doesn't we are looking at a likely double-notch downgrade. No HY covenant protections.
- BS governance; yes halting dividends last quarter was positive but it only partially reverses the stain of it issuing £300m in net supply to fund a sizeable (and clearly mis-timed) £635m in equity pay-outs last year. It does still leave the £300m Sept 25's unfunded - we see refi as the more likely option (than gross paydown which would take cash on hand to likely uncomfortable levels) - but again current conditions in secondary may wave it off and small property disposals may help with liquidity; £400m in PPE. Net we are more interested to hear this new CEO's strategy on capex/BS. Guidance is currently for £150m this year - relatively mute and looks manageable still.
- We would see the creative director, Daniel Lee, being fired as unfortunately a credit positive. Clearly the board thinks (for now) that his work since entering in late '22 have not been a contributor for the flat-lining growth. His winter collection will be tested soon - we imagine he may be the next target if they don't pick up traction.
A new CEO with no publicly stated strategy, no change of control on PE/lower rated comps taking over, high exposure to the Chinese consumer and equities still in free-fall (~15yr low, at 8x trailing PE) are all reasons we are still cautious here despite levels.
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