Last recommendation BDM: HOLD with target price 37,0 PLN/share (2021/08/31) LINK
Q2'22 results well below our expectations - increased sales costs impact profit (negatively)
Q2'22, in line with our expectations, brought an increase in sales revenues to PLN 55.5 million (+12.9% y/y). The company posted a record gross margin on sales of 67.7%. Significant growth is also seen in cost of sales (+34% y/y), which outweighed the lower-than-forecast operating profit. The increase in these costs can be explained in part by the increase in sales - a significant portion is commission to franchisees. Other cost increases can be explained by the larger scale of salary increases, the high EUR exchange rate (rents are denominated in this currency) and the increase in the price of energy. We expect that the increased other operating income is mainly due to a higher-than-expected level of advances from NCBiR related to the RFiD labels under development.
The company continued to see a trend of female customers returning to stationary stores, which contributed to a decline in sales in the online channel (-18% y/y). Sales campaigns in Q2 and Q3'22 were intensified to reduce inventory, as shipments of the new collection were already starting to arrive. Because of this, gross profit margin on sales declined in July and August'22, but sales increased very strongly (about PLN 55 million in two months vs. PLN 55.5 million in the entire 2Q'22). At the end of Q2'22, inventories were lower by about PLN 2.6 million k/k. Despite the ongoing armed conflict in Ukraine, the company is operating there, although on a limited basis. Esotiq has started sales on the Zalando platform in Germany and is very positive about the first sales results in this channel, so it wants to enter more German-speaking countries with its offer. Esotiq's mobile app is expected to be launched in October'22.
In Q2'22, the company generated positive cash flow from operations. A reduction in accounts payable and an increase in depreciation and amortization had a significant impact on this part of cash flow. Net debt after equity was PLN 45.2 million, or 1.3x EBITDA.
BDM's comments: 2Q'22 results disappointed us, mainly due to an increase in selling expenses, which are expected to rise further in 2H'22. The company's net profit was PLN 2.2m vs. PLN 3.8m expected. Unfavorable exchange rates not only raise rents, but also negatively affect purchase prices in future periods. For now, the company is managing to maintain margins mainly by increasing selling prices, but in the current macroeconomic environment, this may become increasingly difficult in the long term. The one-time significant margin decline in August'22 (55%) is justified by the need to reduce inventories and apply deeper sales.
Analyst: Anna Madziar anna.madziar@bdm.pl tel.: (+48) 666 073 972
