Ana Isabel González García, CIIA (IEAF) | Adolfo Domínguez S.A.is a small designer fashion textile group, based in Ourense (Spain), specialising (c. 40 years) in the design and sale (both retail and wholesale) of fashion items. With international presence (35% o/revenues), it is managed by the founding family (31% of the capital), which prevails in the Board.
AFTER 5 YEARS OF SIGNIFICANT RESTRUCTURING Against a backdrop of weak consumption and tougher competition, resulting in a dramatic downsizing (retail network c. -45% in 2012-2018), with revenues decreasing to EUR 115Mn in 2018 (c. -25% vs 2012).
WHICH HAS ENABLED THE COMPANY TO REVERSE THE FALL IN LFL REVENUES… achieving highs in growth in 2018 (+9.6% LFL, driven by the good performance of the online business and the closure of points of sale)
AND REACH BREAK EVEN IN RECURRENT EBITDA … (EUR 2.5Mn 2018,after almost a decade of operating losses).
ADZ FACES TWO CHALLENGES, which we believe can be overcome:
•To prove the sustainability of growth: Our central scenario (a stable retail network)envisages a CAGR of 1.9% for revenues in 2020-2021e (still below that expected for the sector) which implies a deceleration of LFL growth (2.4% 2021e, -7.2p.p. -3y), but a stable gross margin at levels of 57%.
•And to improve mid-term profitability, reducing the dependence on Puig,achieving operating break even in 2019 (EUR 1.3Mn EBIT), with growing EBIT (EUR 3.3Mn 2021, c. 50% of pre-crisis levels), and an EBIT/revenues margin of 2.7% 2021e (vs. 3.5% pre-crisis).
“STABILISATION”ABOVE BREAK EVEN TWO YEARS DOWN THE LINE (without aggressive assumptions and consistent with the macro scenario), with positive FCF 2020-2021e resulting in a FCF yield of c. 1% (still well below the sector’s c.7.5%).
The potential of the online business, plus the flexibility provided by a net cash position (EUR 12.0Mn 2018, vs. an indebted sector) to accelerate growth (both organic and non-organic) underpin the option of confirming a (slow) recovery. In an industry with a trend towards consolidation, ADZ has reached its “point of inflection”.
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