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Financials

Ben Hoskin

An improved first quarter for Dutch DIY chain Maxeda has helped its debt recover from a brutal sell-off on the back of their Q4 21 results. The company is more than offsetting cost price inflation through increased prices that translated to gross margin expansion, albeit higher labor costs bit further down the income statement. Supply chain disruption was less severe than many worried, with good availability of stock and falling freight costs easing investor nerves.

Having traded down from 87 to low-70s following Q4 21 results and a disappointing conference call, Maxeda’s €470m SSNs due 2026 have recovered ~4pts to 74 at the time of writing (22 June). A €37.5m draw on the company’s RCF in Q4 21 was repaid during the first quarter, with cash at end May of around €44m. When pressed on whether they would consider bond buybacks given where the debt is trading, management said they aren’t thinking about that option right now.

Adjusted EBITDA matched 2019 levels (€24m) at €25m in Q1 following a disappointing Q4, alleviating concerns around inflation, increased wage costs, supply chain issues, and the strong dollar from the previous quarter’s numbers. Management told investors they expect year-end leverage to come in around historical levels of 4x.

Performance did diverge in its two key geographies of Netherlands and Belgium, which saw sales growth of 35.9% and -12.8% versus prior year, respectively. Management put this down to more stringent lockdowns in the Netherlands in the comparable period relative to Belgium, however, but also signalled lower consumer confidence in Belgium acting as a headwind in the region. Using the better comparable of Q1 19, revenue growth was 2.1% and 6.1% in the Netherlands and Belgium respectively.

Overall, revenues were up 4.4% against Q1 21, and 4.2% against Q1 19. Gross margins expanded to 37.1% versus 34.3% in Q1 21 and 34.5% in Q1 19. Breaking down the parts against prior year, management said 120bps came from increasing sales prices at a higher rate than purchase cost price inflation, with a 70bps uplift from the sales mix shifting more to store sales versus e-commerce, and 70bps from lower discounting.

The price increase effect came from cost price inflation of ~6.5% on new products (i.e. gross margin expansion isn’t coming from a large markup on old inventory being sold at current price levels), with price hikes reaching “around 8%”. Investors were told this effect is likely to be sustainable, but further souring of consumer sentiment in both regions may make customers less likely to accept price increases. Additionally, the sales mix and discounting effects roll off as sales normalise following Covid. Management reaffirmed gross margin of 36.5% for FY 22.

Providing some insight into the current state of affairs, management said sales for the first few weeks of Q2 were 9.2% higher than the comparable period in 2019, but ~10% lower versus prior year, when recently eased lockdowns in the Netherlands and Belgium boosted sales.

Selling and distribution costs rose from €109m in Q1 21 to €113m in Q1 22, attributed to €5m (~4.6% increase) in labor, rent and energy costs, offset ~€1m by saving initiatives that included reduced energy consumption and rent renegotiations.

Much of the €5m increase is likely to have come from increased labor costs in Belgium, where workers have their wages indexed to CPI. This translated to a ~5.5% increase in gross wages in the country. The Netherlands has no such arrangement. Management said the 4.6% increase in selling and distribution is expected to increase further to 5.5%-6%, but reiterated savings initiatives to offset these.

Supply chain disruption, or lack of, was an encouraging takeaway of today’s numbers. Maxeda brought forward their intake of seasonal goods from the Far East to combat anticipated disturbance, so the focus will now be on working capital management over the summer.

Inventories were much higher at the end of Q1 22 (€413m) versus prior year (€362m), albeit there will be some inflationary impact as well as the early stocking. Payables and receivables were at similar levels to prior year.

Working capital boosted operating cash flow of €31m by €6m, in line with historical trends. Management told investors they expect to see further but limited inflows from working capital during the second quarter, caveating that this is dependent on seasonal sales.

As well as reduced supply chain disruption, freight rates for the company are falling. 40ft container costs from Shanghai to Rotterdam have been falling since the start of 2022, with the expectation they will drop further.

Margins were protected by container costs that were contractually fixed at $7,000 for the first quarter, well below where spot rates were, for ~60% of the company’s imports. That contract expired at the end of Apr-22, with a new agreement in place that has locked in 50% of shipping expectations between May-22 and May-23 at ~$8,300. The other half will be agreed at spot, which management reiterated is expected to keep falling.

Cash flow was boosted in Q1 22 by the sale of freehold rights on three stores, booking a one-off profit of €20m. Investors were told this was an outright sale, not a sale-and-leaseback, with the company having one more smaller site that could potentially be sold, although said that would unlikely be done this year.

Maxeda management repair some of the damage

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