OR Group (MCX: ORUP), earlier "Shoes of Russia», operates a large retail chain, develops its own marketplace Westfalika, engages in microfinance and owns its own footwear production. IN 2020 the company rebranded and announced the launch of its own online service ecosystem.
29 March OR summed up the financial results of its work for 2020 year. According to them, you can observe a drop in revenue by 21% year-on-year and net profit for 67% and the growth of net debt by 8% - up to a record level.
I propose to understand the reasons for the weak results of last year.
Situation in the industry
Non-grocery retail was among the most affected sectors of the economy due to restrictive measures amid the spread of coronavirus. In April 2020 the entire OR retail chain was closed, due to which the company's sales fell to a historic low.
The company began to gradually restore the work of its retail outlets in May, despite restrictive measures, and in June sales returned to pre-crisis levels.
Based on the results of 2020 For the first time in many years, the holding's retail network reduced the number of its own outlets from 763 to 665 stores. The number of franchised stores increased slightly: with 172 to 175. The retail network shrank by more than 7% year to year, and the sales area of its own stores decreased by 9%.
To reduce dependence on offline sales, the company's management began developing its own online marketplace and financial services and rebranding, evolving from a shoe retailer to a one-stop retailer with its own ecosystem. IN 2020 the company updated the website of its Westfalika brand, which now works in the marketplace format. The site sells goods of OR and partner brands in a wide range.
Number of OR stores in 31 December
| Own | Franchise | Total | |
|---|---|---|---|
| 2016 | 378 | 74 | 452 |
| 2017 | 422 | 113 | 535 |
| 2018 | 566 | 161 | 727 |
| 2019 | 736 | 172 | 908 |
| 2020 | 665 | 175 | 840 |
Sales area of own stores on 31 December, thousand m2
| 2016 | 36,8 |
| 2017 | 40,1 |
| 2018 | 53,8 |
| 2019 | 61,9 |
| 2020 | 56,4 |
Financial indicators
Revenue fell on 21% year to year - before 10,8 billion rubles - due to a drop in retail and wholesale sales during 2 quarter 2020 year against the backdrop of restrictive measures and lower incomes of the population.
Sales. About 42% OR received revenue from retail sales through the Westfalika trading platform. At the same time, the share of online sales in retail trade increased to 20%. Management stated, that in the medium term, the share of online retail sales will be 50%.
As for the other two lines of business: wholesales were 33% and microfinance - 25% of total revenue.
I would also like to note the microfinance segment OR, since this direction has grown by 27% year on year and continues to account for a large share of the company's total revenues.
Following the drop in sales volumes, the cost of sales decreased by 26% year to year - before 4,5 billion rubles - due to a decrease in the total cost of products sold.
Selling and administrative expenses decreased by 8% year to year - before 3,5 RUB bln - due to a decrease in rental payments due to a decrease in the number of retail stores.
Besides, due to the economic crisis, the risks of non-repayment of loans by clients have increased, and management increased provisions for doubtful loans from 0,5 to 0,8 billion rubles.
Operating profit companies fell by 39% year to year and for the first time was lower 2 billion rubles.
Financial income OR fell by 20% year-on-year due to a decrease in interest received on loans issued, and financial expenses increased by 9% due to an increase in the cost of paying interest on bonds by 51% year to year. For 12 Months 2020 years, the amount of short-term bond loans increased by 4 times and amounted 3,3 billion rubles.
Net profit according to the results of last year, fell three times year-on-year and amounted to 0,6 billion rubles. The company has never earned so little in its public history.
OR's revenue structure 2020 year
| Westfalika trading platform | 42% |
| Wholesale of goods | 33% |
| Microfinance | 25% |
Dynamics of financial indicators, billion rubles
| Revenue | Operating profit | Net profit | |
|---|---|---|---|
| 2016 | 10 | 2,3 | 1,2 |
| 2017 | 10,8 | 2,5 | 1,3 |
| 2018 | 11,6 | 2,6 | 1,3 |
| 2019 | 13,7 | 3,2 | 1,7 |
| 2020 | 10,8 | 2 | 0,6 |
Debts
OR net debt increased by 8% year to year - to record 12,6 billion rubles - due to the growth of long-term and short-term loans and borrowings. The company reduced the total amount of loans from banks by 5% - to 9,3 billion rubles, but increased bond loans by 41% - to 3,8 billion rubles. Of them 87% made up short-term bonds with maturity up to one year.
At the same time, the level of debt, which the business calculates based on the ratio "net debt / EBITDA», grew from 3,3 to 5,5, for what, among other things, influenced by the drop in EBITDA on 36% due to a decrease in sales revenue.
Another risk is a significant increase in the company's reserves over the past years.. Based on the results of 2020 years stocks of finished goods and goods for resale increased by 27% - to 18,2 billion rubles. This amount is more than 32 times the net profit of the holding for the past year.
Good, if in the future demand increases and the company manages to sell all this product at estimated prices or even more expensive. But there's a risk, that stocks of finished goods will be revalued downward.
Main item for OR, despite the rebranding, there are still shoes, which may depreciate, if the model goes out of fashion. The longer the product stays in stock, the higher the risk, that it can not be sold at a bargain price. The company estimates its reserves at more than 18 billion rubles, but how much money can you actually make selling inventory, it is difficult to predict. Possible, that at some point management will reassess the fair value of finished goods inventories, and then in the reporting there may be a significant loss due to non-monetary write-offs.
Net debt dynamics, billion rubles
| 2016 | 7 |
| 2017 | 4,7 |
| 2018 | 8,4 |
| 2019 | 11,7 |
| 2020 | 12,6 |
Dynamics of the ratio "net debt / EBITDA»
| 2016 | 2,8 |
| 2017 | 1,7 |
| 2018 | 2,9 |
| 2019 | 3,3 |
| 2020 | 5,5 |
Dividends
The company's dividend policy has not been updated since September 2017 of the year. This document does not contain clear criteria for the amount of accrued dividends., but the company paid about 20% from net profit under IFRS to 2019 of the year.
In May 2020 year, the board of directors decided to abandon the payment of dividends based on the 2019 year due to restrictive measures and deteriorating financial position of the company.
Probably, based on the results of 2020 the company will also refuse payments to shareholders, given the high level of debt burden.
Dividend per share OR Group
| 2018 | 2,32 R |
| 2019 | 2,36 R |
| 2020 | 0 R |
What's the bottom line?
IN 2020 year OR Group showed weak financial results. This is not surprising., considering all the difficulties, faced by the business during this period. In fact, the management was forced to begin an accelerated transformation of the company in the context of the crisis in non-food retail retail..
Debt of the company reaches a record level, and the dynamics of recent years looks depressing. Net debt ratio / EBITDA "reached 5,5. This is one of the highest leverage levels for Russian public companies., and he talks about the high risk for the financial stability of the business.
The question is, whether the management will be able to cope with the difficulties and complete the transformation of the company into one of the largest trading platforms in Russia in a timely manner. In the meantime, investing in OR looks risky.
