Interesting stock

I’ve bought a few of these. A bit optically risky.

My high level thoughts are:

1. They won’t go bankrupt- they have sufficient headroom on their banking facilities to meet the adjusted covenants & in the worst case scenario they would recapitalize rather than go into VA for a number of reasons. Jobkeeper (>50m) + carryover losses (10m) provisions should provide a cushion for FY21 and the online offering should kick in by FY22. Hopefully with this in mind they can stay within the quite generous covenants extended by their lenders. Given multiple acquirers would be keen to buy the brand, and the landlords will be keen to negotiate a workable deal (particularly Scentre, who has very secure long term funding now) + strong large holders including Premier and Wilson- VA is less likely.

2. Their digital offering is substantially improved and competitive with pure play online retailers, in the long term the brand goodwill and omnichannel capabilities will win out. They have set a goal of 1B in online sales which is achievable. They are already one of the nations largest e-commerce players by revenue (just annualising H2 and adjusting for seasonality gives >600m sales).

3. There is a very high % of the free float short (~10%), since approx 2012, if the tides ever change, they will be forced to cover (it is almost a month of volume short).

4. A number of structural reductions in the cost base have been made and will flow through in the years to come (eg switch support office to la trobe st in 2022, sublease arrangement currently, substantially reduced board fees, FY20 redundancies into FY21)

5. There is early evidence (from reported numbers from other retailers) + web traffic data (similarweb + trends). I have also done my own benchmarking on the website usability over time to indicate the tide may be turning/has turned. They are also hiring a number of permanent staff (they weren’t in July), indicating some degree of confidence. Their web traffic is a lot better than David Jones suggesting either market share gain or due to different demographic profiles.

6. This is an iconic brand with a lot of customer goodwill. When the offering catches the incumbent pureplay e-commerce players (and it is already close), they should have a fundamentally lower customer acquisition cost.

7. There is a scenario where they can do 150m NPAT off 3B in sales in 2yrs if things go right. I think that >30m NPAT is a much more likely scenario than any other, yet this is being priced for likely VA.

8. There has been heavy insider buying this year since Covid often at prices above the current price.

It is not without risk, so the usual caveats. If there truly is no demand for a department store model in the future (as seems to be widely accepted), nothing can stem the tide. A more widespread local second/third wave, particularly in the next few months, could also be a death knell. That being said, the proven performance of the online business since Covid started (250m in sales in H2 alone and homewares, beauty growing much faster than pure play retailers), suggests to me that there is and always will be a place for department stores.

Would be interested in the thoughts of others.