Isabel Marant - steadying the ship - Model Update
All,
Please find our updated analysis on Isabel Marant here.
We continue to sound like a broken record. Despite marginally improving numbers, we remain uninvested in the Isabel Marant bonds. We maintain our view that the lack of protection in the bond documentation, coupled with the requirement to involve Isabel Marant in any future restructuring, makes these bonds near impossible to invest in. It should also be acknowledged that even with the current momentum and upgrading our forecasts for sales growth in FY26, the business will remain cashflow negative.
Investment Considerations:
- Despite our expectations of improving results, we are not taking a position in the bonds. Our base case scenario is further marginal improvement in the earnings, with sales likely to increase in FY26. However, even accounting for an improvement in Gross margins and reduction in costs, EBITDAR (as defined by the Company) only grows to €66m by FY26. This is insufficient to refinance the bonds. In fact, the business would need to see sales increase c.10% in FY26 for the business to be cashflow neutral, after interest. We remain sceptical that this is achievable, even with the momentum the business currently has.
- There is significant downside risk with any restructuring, and without support from IM Creation, Isabel Marant’s vehicle, creditors have limited control over the brand name. The downside could be as much as 30-40pts, but in the short-term, with no near-term maturities to be dealt with, downside before FY25 numbers in April is limited.
- The Company has momentum, and with optimistic forecasts, the entreprise value exceeds debt levels. However, we don't see much upside above 80 given the shortcomings in the debt documentation. With no triggers imminent, the bonds could settle in the 70's for the next couple of months.
Model Projections:
- We have upgraded our sales forecasts for Q4 25 and FY26, assuming that the Company will build on recent momentum. We project revenue to grow c.4% in FY26 with margins to increase by 100bps over FY22 and FY23 levels.
- Despite these growth assumptions, the business remains cashflow neutral, after interest.
- We define EBITDA as after leases and after capitalised design costs. On this basis, LTM EBITDA is only c.€20m. We project it to improve to €29m in FY26, but the absolute number highlights the overall problem for Isabel Marant.
- We expect the Company to report c. €60m EBITDA, but this is before lease payments of €22m and capitalised lease costs of €16m for FY25, leaving actual EBITDA at €23m. With working capital neutral and minimal CAPEX, cash flow conversion is significant from the low number. However, interest costs is c. 26m p.a., highlighting the fact that the business is overleveraged.
Next Steps:
- There is no doubt that the Company has some momentum, and with Q4 2024 weak, the Company will report an improvement in financial metrics when they report FY25 numbers in April next year.
- There are no upcoming maturities, and with the RCF unlikely to be drawn, the debt covenant will not be tested.
- Therefore, we see limited bond movement in the coming months.
Happy to discuss.
Tomás
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk