Summary
- Analysis of Marimekko's financial and business performance highlights the company's steady growth and strong brand recognition.
- Despite the risks and challenges of investing in the fashion and retail industry, Marimekko's unique design and production methods offer the potential for stable returns and long-term profitability.
- With a projected IRR of 16% and a dividend policy of distributing 50% of earnings, Marimekko represents a compelling investment opportunity for those seeking a reliable source of income and.
Introduction:
Marimekko's (MKKOF) held its first Capital Markets Day in 2022. Here are some of the key takeaways from the presentation :
- Marimekko is a Finnish design company known for its bold prints and colors, and it has a strong heritage that dates back to the 1950s.
- The company's vision is to become a leading Nordic design company, and it aims to achieve this by growing both its brand and business globally.
- Marimekko is focused on sustainability and has set ambitious goals to reduce its environmental impact. The company aims to become completely carbon neutral by 2025 and to use only sustainable materials in all of its products by 2030.
- The company has a clear growth strategy that includes expanding its retail network, investing in digital capabilities, and strengthening its product range.
- Marimekko is targeting double-digit growth in the coming years, and it expects to achieve this through a combination of increased sales, improved profitability, and continued cost discipline.
- The company is confident in its ability to achieve its goals and create long-term value for its shareholders.
Overall, the presentation highlights Marimekko's strong brand, its commitment to sustainability, and its clear growth strategy. The company is focused on expanding globally and creating value for its shareholders, while also remaining true to its design heritage and commitment to sustainability. The same has been re-iterated in their latest Q4 results :
Financial Analysis, Growth, Valuation and Possible Internal Rate of Return
The financial analysis of Marimekko provides some valuable insights into the company's past and future growth prospects. The analysis covers three key attributes that are critical for any company to succeed: growth, debt ratios, and reasonable valuation. We are basing our analysis on their latest financial figures :
Growth:
In terms of growth, Marimekko has been performing very well in the past decade. Not only has revenue and EBITDA grown impressively, but free cash flow has also been growing very nicely. The fact that cash flow growth rates shadow EBITDA gives confidence in the quality of the reported earnings since these get translated into hard cash on the cash flow statement. This suggests that accounting is doing a fine job. Furthermore, cash flow and earnings are growing faster than revenue, which underscores the operating leverage at Marimekko and the improved net income margin. The company has grown net income margin to ~20%, which is possibly driven also by the pandemic and provides a cushion in case demand slows down.
Debt:
Marimekko has little debt, net debt to EBITDA ratio is 0.32. This is beneficial for shareholders in several ways. The equity-only capital structure means that all the cash produced can be distributed to shareholders or reinvested into the business. Higher EPS is possible as a company has higher earnings since there is no interest payment to be made, especially in an increasing rates environment. Solvency is also guaranteed, and a debt maturity cannot send Marimekko into bankruptcy because of the incapacity to refinance. Furthermore, a company with no debt could take on some debt in case it decides to change its capital structure. In the case of Marimekko, theoretically, they could issue 60 million debt to invest in growth, repurchase stock to boost EPS, or fund a temporary business deterioration where cash flows are 0 or negative.
Valuation and IRR prospects:
A reasonable valuation of Marimekko suggests that the stock is undervalued. The 10-year average EV/EBITDA is 11.5, and with the inputs of growing EBITDA at 10% (a growth rate estimation which is half their last 10 year growth rate and conservatively below their guidance) and utilizing an EV/EBITDA multiple of 11.5 (long term average), the stock could be at 25 by the year 2033 (see table below for more detail). This suggests that the potential return for a shareholder would be 15.4 in capital gains by purchasing today's Marimekko at 9.6 (on the Finish exchange in Euros), holding it for 10 years, and then selling the stock at 25. Additionally, a shareholder is entitled to the free cash flow the company is producing, which may or may not be disbursed directly via dividends (we do have a guidance of at least 50% dividend payout from management). The 2022 free cash flow per share is 0.48 and has been growing at a 17% CAGR in the past 5 years, and I will conservatively give it a 10% growth rate for the next 10 years. FCF per share shall eventually be $1.2 by the year 2033 and a total of 8.6 euro over the course of the next 10 years. These scenarios imply a IRR of 16% per annum suggests that a 100 investment would develop into 440 in the course of 10 years.
Risk and Challenges:
Consumer Demand: The retail industry is highly dependent on consumer demand, which can be unpredictable and influenced by a wide range of factors, such as changes in consumer preferences, economic conditions, and geopolitical events.
Competition: Marimekko operates in a competitive market with other well-established retailers and brands, some of which may have greater resources and brand recognition than Marimekko.
Supply Chain: As a company that sources and manufactures products globally, Marimekko is exposed to potential disruptions in its supply chain due to factors such as natural disasters, geopolitical events, and transportation disruptions.
Foreign Exchange Risk: As Marimekko operates in multiple countries, the company is exposed to foreign exchange risk, which can impact the company's financial results.
The company has a stated goal to distribute at least 50% of its earnings as dividends. Over the past five years, the company has achieved this objective. Although some investors may prefer the consistent payouts of a yielding stock, it is important to note that this dividend policy can reduce the potential for exponential profits. Instead of reinvesting the capital for growth, the company distributes it to shareholders.
Conclusion:
Marimekko is a well-established Finnish company with a strong brand and a global presence. The company has a solid financial position with consistent revenue growth, healthy profit margins, and low debt levels. While the company operates in a competitive and cyclical industry, it has shown resilience and growth potential through its successful expansion into new markets and channels. The company's dividend policy provides a steady source of income for investors, but may limit potential exponential profits. With the potential for a 16% IRR based on a reasonable set of assumptions, Marimekko represents an attractive investment opportunity for investors who are willing to accept the risks and challenges associated with the retail industry. Overall, the company's strong fundamentals, growth potential, and attractive valuation make it a compelling option for investors looking for exposure to the retail sector.
For further details see:
Marimekko: Steady Fashion Industry Performer, Promising Growth Prospects