Hi Zeljko, this is great analysis. Thanks for your efforts. Do you know if lease expenses are already subtracted in getting to the EBITDA number? I'm guessing yes, in which case the company may be even cheaper than it appears, as then including lease liabilities in EV is effectively double-penalising the company for them. It's a pet peeve of mine with IFRS accounting.
Hello Guy, it is not already substracted from EBITDA. So you have to put the EBITDA in relation to the total EV (including lease liabilities), but I would caution against looking at EBITDA at all tbh. What matters is FCFE. Even OCF - CapEx is overrepresenting what the company is earning for the equity, because you still have to deduct the principal portion of the lease payments. Net income and FCFE are both good measures of actual owner earnings for this company.
Hi Zeljko - thank you for the interesting idea. What are the key factors supporting 12% operating margins longer term? How do you think of the impacts of competitive landscape as Sephora calling out intense price competition from Amazon?
First of all, I don't think they need to get to 12% EBIT margin for this idea to work. At 8-10% the stock should still work out fantastically.
And the 12% is supported by the initiatives I talked about, i.e.:
- Increased penetration of higher-margin corporate brands
- Store productivity improvements through closures and refurbishments
- Growth in the high-margin retail media business
2. Competitive landscape
Amazon has been around for a while. E-com cosmetics pure plays like Flaconi as well. That's not new. And remember that Douglas has the leading market share in e-commerce as well, and the biggest loyalty card program of any beauty retailer with 60 million members. Sure, Flaconi et al compete on price, but I believe that the omnichannel approach (Douglas, Sephora, Ulta) ultimately wins out in beauty and cosmetics in the end, because the ability to touch, feel, and test cosmetics is a critical part of the beauty shopping experience. There's also some data/surveys that support this, but I think it makes intuitive sense as well.
McKinsey found, "consumers are increasingly shopping across price points and report that both online and offline stores influence their shopping behavior. Their preference for omnichannel shopping is expected to continue to fuel legacy brands’ shift online and independent labels’ move into a brick-and-mortar presence."
Hi Zeljko, this is great analysis. Thanks for your efforts. Do you know if lease expenses are already subtracted in getting to the EBITDA number? I'm guessing yes, in which case the company may be even cheaper than it appears, as then including lease liabilities in EV is effectively double-penalising the company for them. It's a pet peeve of mine with IFRS accounting.
It looks like you've found an orphaned gem here.
Hello Guy, it is not already substracted from EBITDA. So you have to put the EBITDA in relation to the total EV (including lease liabilities), but I would caution against looking at EBITDA at all tbh. What matters is FCFE. Even OCF - CapEx is overrepresenting what the company is earning for the equity, because you still have to deduct the principal portion of the lease payments. Net income and FCFE are both good measures of actual owner earnings for this company.
Thanks Zeljko, I appreciate your follow up and agree that FCF is the best metric if good allocators will be in charge of the capital.
How did they pay so much debt down between 2022/23 and 2023/24?
Hi Zeljko - thank you for the interesting idea. What are the key factors supporting 12% operating margins longer term? How do you think of the impacts of competitive landscape as Sephora calling out intense price competition from Amazon?
Hi!
1. Margins
First of all, I don't think they need to get to 12% EBIT margin for this idea to work. At 8-10% the stock should still work out fantastically.
And the 12% is supported by the initiatives I talked about, i.e.:
- Increased penetration of higher-margin corporate brands
- Store productivity improvements through closures and refurbishments
- Growth in the high-margin retail media business
2. Competitive landscape
Amazon has been around for a while. E-com cosmetics pure plays like Flaconi as well. That's not new. And remember that Douglas has the leading market share in e-commerce as well, and the biggest loyalty card program of any beauty retailer with 60 million members. Sure, Flaconi et al compete on price, but I believe that the omnichannel approach (Douglas, Sephora, Ulta) ultimately wins out in beauty and cosmetics in the end, because the ability to touch, feel, and test cosmetics is a critical part of the beauty shopping experience. There's also some data/surveys that support this, but I think it makes intuitive sense as well.
McKinsey found, "consumers are increasingly shopping across price points and report that both online and offline stores influence their shopping behavior. Their preference for omnichannel shopping is expected to continue to fuel legacy brands’ shift online and independent labels’ move into a brick-and-mortar presence."