Q1 23 and more recent trading gave management the requisite confidence to confirm guidance outlined during FY 22 earnings in mid-December, and to reiterate that their ‘scenario 1’, the more optimistic scenario, remained the more likely. This reinforces our view that the company is on track to keep FY 23 leverage below 2x and that risks still being priced into the company’s €500m 1.75% 2026 SUNs are diminishing further.

Bond prices have reacted more positive than equity, but not substantially so. As of writing, the SUNs are up around four points to ~72.9-mid, still a long way short of a majority of peers, while the equity is up just 1.5%, per Google finance. Like similarly “stressed” peers, Maxeda and Douglas, Ceconomy’s SUNs have rallied more than European retailers in 2023. This could largely be a function of their relative underperformance in 2022, with Maxeda and Ceconomy in particular the worst performers (more here).

While Ceconomy is slowly closing the gap to other European retailers, the current yield-to-maturity of ~11.8% is 500bps-600bps wide to a peer group of high single-B retailer peers. Like we said in our January analysis, the market may be looking for further insight and reassurance from management during a Capital Markets Day (CMD) earmarked for sometime in April or May.

Two important earnings releases have come and gone, without any significant change in Cecomony’s bond performance. Our perspective is that Q1 23 earnings were further evidence that there is no dramatic working capital dynamic on the horizon and that the outlook, while volatile and uncertain, is improving with downside risks manageable.

With regards engagement and sentiment, there is a palpable intention from management to boost investor dialogue and restore confidence. New CFO, Kai-Ulrich Deissner, who joined only on 1 February, partook in the call and was reassuringly forthcoming and transparent. Similarly, the company has made an interesting hire as head of IR with Fabienne Caron, a former Kepler Chevreux retail analyst, taking the reins. Analysts joining the 8am UKT earnings call were reminded to reach out to Fabienne with follow-up questions after the call.

Working capital stays on track

A key consideration in our minds in the lead up to earnings was the trajectory of working capital across Q1 23. Management had guided to cash (ex RCF) of €2bn at Q1 23 during FY 22 earnings in mid-December, with working capital driving this. In fact, cash reached €2.6bn, indicating working capital or a combination of this and other operating cash flows exceeded expectations.

Net trade working capital dropped to negative ~€2bn, driving a ~€1.6bn sequential cash inflow. This was mostly down to the typical cyclical pattern of payables, ticking up by €2bn sequentially to €7.3bn as payments for Christmas stock only come due in Q2 23.

Surprisingly, working capital was not a central topic raised during the earnings call Q&A. Only one analyst, a former colleague, Neill Keaney, managed to get a question in at the end around tightening credit insurance terms. In response, CEO, Karsten Wildberger, said related parties had taken note of the company’s strong liquidity position and that payables terms were very stable.

This assertion is reinforced by payables days (DPO) across Q1 23 of 114-days which is flat sequentially and only seven days shorter than in Q1 22. There was no reiteration that working capital was expected to follow its normal course across FY 23, but there was similarly no mention of any significant deviation.

Management saying the right things on inflation

Management provided helpful guidance during the Q&A that a 4.5% LfL growth in sales to €7.1bn was driven roughly 50/50 by inflation and “real” growth. This is reassuring, as it indicates there was some contribution from volume in the quarter.

Further, the new CFO offered insight into new internal analysis on pricing. He explained that selling prices in principle fall over time. But, based on double-delta analysis done on 12-month price declines to Q1 22 vs Q1 23 in Germany, there is evidence that the comparable price decline in LTM Q1 23 was only half of the prior period’s level. He went on to say there is confidence this same phenomenon would be expected across all geographies.

Cost inflation was not entirely offset in Q1 23, nor was it across FY 22. But some headwinds have since abated and management are taking action on mitigants elsewhere.

A one-off restructuring spend of €60m-€80m mostly in FY 23 will have a two-year payback period, delivering savings of €15m-€30m in FY 23 and more thereafter on a recurring basis.

Rent or lease costs arose during the Q&A session and management helpfully outlined that though a “significant share” or rental agreements are indexed, the company is countering this by reducing floor space such that the net impact of location cost inflation is “very, very small”. With a helpfully continuously trending downwards average duration of lease agreements, management say there is room to mitigate further with a mid-term plan that the relative cost of location as a function of sales actually reduces. This does seem an ambitious plan, but we are inclined to give management the benefit of the doubt on this.

Separately, management asserted that Ceconomy wants to have a leading omnichannel cost structure. Yet another ambitious but reassuring objective. Overall the narrative is positive and the impression is that management are clear in their intention and focus, it’s now a matter of reinforcing plans with quantitative evidence and perhaps further insight during the CMD.

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