2023-07-31 17:01:06 ET
Summary
- Signa Sports United faces a potential need for a capital raise and an increasing risk of bankruptcy if that will not be possible, due to high debt and continued net losses.
- Absent acquisitions revenue is decreasing YoY and, more importantly, QoQ.
- The company's parent, Signa Holding, continues to provide substantial financial aid, but given its own situation, it may not be able and/or willing to indefinitely continue to do so.
I have previously been critical of online sports retailer SIGNA Sports United NV ( SSU ) due to its lack of profitability, growing debt load and dependence on constant acquisitions for revenue growth. I also criticized diminished transparency in its Q1 reporting, as the company did no longer report certain profitability and liquidity figures on a quarterly basis.
The release of the H1 financial report now affords somewhat more insight into the business’s development. I believe that it, also, underscores my bearish thesis in several central points. Below, I will update my thesis with regard to key takeaways from the Q2 and Combined H1 results, as well as certain developments at SSU’S parent company.
Declining Revenues And Massive Losses
The company focuses on four main segments: tennis, bicycles, team sports (ball sports in particular) and outdoor equipment. It operates various individual shops, some of which have a certain overlap in terms of geography and product mix. Q2 net revenue decreased by 23 percent YoY, which underlines the lack of organic growth (Q1’s 27 percent YoY growth rate was driven by acquisitions). The number of active customers also decreased by 15 percent to 6.1 million. Gross margin fell to a mere 22.5 percent during the first six months of FY2023, almost a quarter below the already weak Q1 figure. Maybe the most concerning – at least in my opinion, that is - takeaway is that reported net revenue decreased considerably (20.7 percent, to be precise) to €195 million (from €246 million) QoQ.
Unsurprisingly, this is not good news for the company’s profitability. After not reporting numbers for Q1, the half-yearly figures now afford more transparency as at least some Q2 metrics are individually reported, which in term makes it easy to calculate Q1 figures, too. Q2 adjusted Ebitda of - €59 million and H1 adjusted Ebitda of €97 million add up to Q1 adjusted Ebitda of – €38 million. QoQ this results in a deterioration by almost a third compared between Q4 2022 and Q1.That, in turn, makes me feel emboldened in my hypothesis that Signa Sports United’s decision to discontinue quarterly transparency regarding certain metrics was indeed indicative of Q1 figures not being too flattering. Quarterly net loss figures are notably still absent. That may or may not be indicative of a downward trend QoQ. The net loss amounted to €180.5 million during the first six months of FY2023, while EBITDA improved to -€142.8 (H1 2022: €185.4).
Debt Problem Gets Worse
As I had previously expected , the company is more indebted now compared to when it last reported liquidity and debt figures. Net debt grew to €771.8 million (from €649 million as of September 30 th ) as of the end of Q2. A path to handling the existing debt without an equity raise, appears increasingly unrealistic to me. So far, 2023 net losses after only half of the fiscal year already surpass the total net loss of FY2022 when excluding one-off charges such as goodwill impairments and losses related to discontinued operations, which amounted to around €174 million.
The company’s parent, Signa Holding, made a “ hard ” financing commitment of €150 to fund operational and investment requirements. That is on top of the €180 million (€130 millions of which in the form of convertible notes) already contributed in Q1. Taking into account that Signa Holding provided €200 million through convertible notes in 2022 , the pace at which it has to lend financial aid to Signa Sports United has massively increased. At the same time, other -arguably more important - parts of its portfolio face challenges, too. First and foremost, its real estate arm had to make nine-figure downward adjustments (€1.16 billion according to internal presentations quoted by Handelsblatt ) to the value of its portfolio. Even the ECB seems to be increasingly concerned for the group’s financial health as it has conducted on-site inspections regarding credit exposure to Signa Group at several banks, according to insiders quoted by Frankfurt based newspaper FAZ . I previously alluded to some of Signa Group’s in the context of a prior article on Raiffeisen Bank International AG ( RAIFF ). Increasing scrutiny faced by creditors of Signa Group as a whole regarding the overall exposure surely does not help Signa Sports United in terms of securing further funding. So, all in all, recent developments do not instill confidence in my, that Signa Sports United can indefinitely rely upon its parent to keep it afloat.
Notably, the company itself explicitly warns that failure to extend or refinance an existing revolving credit of €100 million facility by May of next year “could […] ultimately cause our business to fail and liquidate with little or no return to investors”. Basically, I understand this to be contradicting the company’s claim of Signa Holdings commitment of €150 million financing the business “into FY2025” farther above in the very same financial report . Also, keep in mind that refinancing would most likely come at less attractive terms given the higher rate environment and a weaker balance sheet.
Conclusion
Signa Sports United is not even close to achieving profitability in 2023. While I did not expect much organic growth in the first place, I was nonetheless surprised by the amount of revenue decline between Q1 and Q2. As previously stated , I see the company headed for a painful capital raise and accompanying dilution of no less than 20 percent (and potentially more) for shareholders at best, for bankruptcy at worst in the medium term. The fact that the company itself warns of potential liquidation if a revolving facility of €100 million cannot be replaced or extended, despite the parent contributing more than that amount each of the last two quarters and twice the sum in 2022, makes me lean more towards the latter scenario.
I also find it somewhat concerning that goodwill makes up more than two thirds of the company’s market capitalization. Previously, Signa Sports United had € 677 million of goodwill on its balance sheet. As the most recent reporting makes no mention of goodwill impairments and absent acquisitions, I suppose this figure remains unchanged. Given the recent operating performance (or lack thereof) and continuing macro headwinds, I would certainly not rule out the possibility of significant impairment charges down the line.
I, therefore, am reaffirmed in my view of Signa Sports United as a sell.
For further details see:
Signa Sports United NV: Q2 Numbers Support The Bear Case