Matalan FY’23 Credit Summary

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Summary

Some key improvements have been made operationally at Matalan, with cash saving benefits, whilst the online segment remains generally weak. Inventory has been recently affected by the Suez Canal disruption, one-off FX loss in 2023 of -£37m, unlikely to be repeated in ’24.

Key to improved cashflow is Improved working capital, the result of rationalizing the inventory. Decline in freight rates, better rent and rates terms, but still incurring high energy costs.

IAS 17 EBITDA of £53m +£25m YoY. (above £50m guidance), IFRS 16 EBITDA of £146m, up £21m YoY.  Current cash position of £123m. Leverage c4.4x.

Operating Update

Matalan gross margin improvement of 8% to £495m. Much tighter cost controls now in place, key focus on restructuring the inventory from previous management, marking down excess inventory, benefitting £22.5m in EBITDA YoY. Previous management held too much inventory, which didn’t sell, too many sku’s and eventually sold at a discount.

Costs

Matalan benefited from a significant market rate improvement in inbound shipping freight costs as average container costs dropped year on year for an average from $7.5k per container to c$2.2k per container. Contributing an improvement of £44m to EBITDA YoY.

FX Hedging

However, with sterling weakening against the US dollar whilst Matalan were able to protect the internal buying rates, but were not able to hedge as strongly as the prior year and this broadly offset the gain in freight costs, with negative cost of -£37m.  

Furthermore In respect to property, Matalan saw savings on rents and rates, although this was partially offset by higher energy costs. (undisclosed).

With a significantly improved working capital position net positive £33.4m for the year. Infact Matalan have offloaded £26.8m of inventory, the clearest indicator that they are implementing changes to their retail strategy.  

In terms of liquidity Matalan closed the year with an unrestricted cash balance of £123m, a £36m increase YoY.  

EBITDA

EBITDA bridge for 2023, shows how the firm benefitted from reduced freight costs, down to £2.2k per container, along with £22m in product markdowns. But they couldn’t grasp these corrections as they were hit by FX losses, and still high energy costs. With freight rates expected to normalize in 2024, even though the Middle East, and in particular the Suez canal is disrupted, they are unlikely to benefit this year. On the flipside, they now have access to banks, and will not incur FX losses, and are able to hedge their USD exposures. Energy costs likely to still be elevated. Forecast EBITDA of c£50-£60m in 2024, on sales of c£1Bln, with a 45% gross margin, and an EBITDA margin of  4.9%. Though Matalan do have other levers to pull.

CFO vastly improved to £175m in 2023, due to the stronger underlying business result and the reversal of working capital commitments. Capex of £34m (3.2% of sales) includes 2 new shop fit outs and general maintenance. Interest costs on the bonds of £27m, along with lease interest payments of £40m, and lease repayments of £64m. With the issue of £25m in super senior notes in June’23, cash increased £36m in 2023. Ending year cash balance and liquidity of £123m.

Using IAS 17 EBITDA of £52.8m, Total Debt of £361m, less cash of £127m, Net Debt of £234m. Leverage has normalized, though still high at 4.44x.

Expect Leverage to fall to 4x by FYE’24, with an expected improvement in the cash position.

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