2023-06-23 16:20:00 ET
Summary
- Signa Sports United faces high debt and no near-term profitability, with potential need for a capital raise and shareholder dilution.
- The company's parent, Signa Holding, may not be able to provide further financial support due to its own financial pressures.
- Signa Sports United's nontransparent reporting practices make it difficult to assess the investment case.
SIGNA Sports United N.V. ( SSU ) has had a challenging few quarters. The company reported a 2022 net loss of €565 million. And it seems not out of the woods yet. The company’s portfolio is focused on online retail catering to four main segments: tennis, bicycles, team sports (mainly ball sports) and outdoor equipment. Notably, some of the individual shops have a certain overlap in their offerings, especially in the bicycle and tennis segments. Q1 revenue grew 27 percent YoY, but that was largely due to acquisitions. Notably, Signa Sports United’s acquisition track record is not a pure success story. In fact, so far, it has mostly resulted in goodwill impairments. And even after impairments of 244 million in 2022, there is still 677 million of goodwill on the balance sheet as per the most recent reporting. The stock has lost almost three quarters of its value since its all-time high in February 2021. Nonetheless, I believe that there is more downside risk than upside potential. Below, I discuss the aforementioned thesis.
Debt
Signa Sports United reported debt of € 692 million as of September 30 th , with cash and equivalents of a mere €43 million, adding up to net debt of €649 million. The company does not report quarterly liquidity or debt figures. However, given the fact that the company is not profitable, I believe that the net debt will not have decreased (and could potentially have increased) since.
So far, the company was kept going by cash injections from parent Signa Holding. Signa Holding provided €200 million through convertible notes in 2022 . It provided another €130 million in convertible notes plus a €50 million credit, in 2023. As I discussed in more detail in the context of a prior article on Raiffeisen Bank International AG, Signa Group is under significant financial pressure itself. It is, therefore, not guaranteed, in my opinion, that Signa will be able to continue keeping Signa Sports United afloat indefinitely if it does not turn a profit.
According to rumors , Signa Group enlisted the services of former Austrian chancellor Sebastian Kurz in the hopes of securing investment into Signa Sports United from Abu Dhabi’s Mubadala sovereign wealth fund. Notably, a spokesperson for Mr. Kurz did not deny the report. While, at least so far, a deal has not materialized, this illustrates that there is certainly the possibility of a capital raise going forward. That, in turn, would lead to dilution. The same would be true, if debts owed to the parent were converted.
No Profits In Sight
In order to address the aforementioned debt without the need to raise additional equity, the company needs to start operating profitably as soon as possible. And, unfortunately, from the most recent IR communication, I do not derive the impression of imminent profitability. Quite the contrary, actually. To me, the fact that the company does no longer mention any profitability metrics other than gross profit in its most recent quarterly statement speaks volumes. Until Q4 2022, net loss was highlighted at the top of each earnings release.
Even when excluding one-off charges such as goodwill impairments and losses related to discontinued operations, 2022 net loss amounts to €174 million. On revenue of €1,063 million that is pretty high. EBITDA, too, was negative at – €66 million, even after adjusting for reorganization and restructuring costs, consulting fees, and other unspecified “items not directly related to current operations”. Without the aforementioned adjustments, the company reported an EBITDA of – €507 million. As there is no mention of any relative improvements in this regard– which one would probably expect given the company’s inherent interest in highlighting positive developments – I am compelled to assume that 2023 numbers will not look materially stronger.
If Signa Sports United were to ever reach profitability, I would expect a margin in the low to mid single digits based on averages of profitable online retailers. If one were to assume net profitability from 2024 onwards and annual revenue growth rates of around 30 percent for the coming two years, it could theoretically (though, in my opinion not realistically) reach profits of around €100 million annually. In a scenario like this, there would certainly be upside potential for the stock price. But to be perfectly clear: I do not see how the company would be able to simply flip a switch to go from huge losses to profitability. As those growth rates would most likely have to be achieved by inorganic means, EV multiples would be significantly higher, too.
Conclusion
Signa Sports United is highly indebted and does not appear to be on track for near term profitability. At the same time, its parent may not be able to keep sinking ever more cash into the company. In the medium term, I see the company headed for a painful capital raise and accompanying dilution for shareholders at best, for bankruptcy at worst. The exact amount of dilution would, of course, depend on the precise terms of a raise, but based on the assumption of a volume of around €200 million (which is in line with what Signa Holding provided in 2022 and to date this year) and the current market capitalization of around $1 billion (= about €910 million), I would expect a dilution of at least around 22 percent.
One point that I consider a particular red flag is the comparably nontransparent reporting practice - especially, the company's decision to stop reporting profitability measures on a quarterly basis. What bothers me most is not even that other company's routinely report profit/loss figures, but that Signa Sports United itself used to report those but no longer does. Absent positive news, I assume that the overall financial situation will not have materially improved. Otherwise, I cannot think of a reason to stop reporting figures such as quarterly net results after including them in previous filings. In fact, it could have deteriorated further. Without knowing if the latter is the case and if so by how much, I believe that it is near impossible to assess the investment case on a sufficiently informed basis. Therefore, I view Signa Sports United as a sell.
For further details see:
SIGNA Sports United N.V.: More Risk Than Upside