Tom Tailor Holding AG (DE:TTIGn) is a mid-market fashion retailer undergoing a radical restructuring. A new management team is attempting to turn around a loss-making company that expanded too aggressively and lost sight of its brand values. The newfound focus on profitability is welcome and recent Q3 results show an acceleration in cash generation as well as better than expected EBIT growth.
A year of transition
The company’s new management team has embarked on a new strategy, known as the “Reset” initiative, with renewed focus on sustainable profitability. As well as closing a significant number of stores (over 150 across the company’s two brands), management has exited from several overseas markets (eg South Africa and China), closed underperforming sub brands (eg Tom Tailor Polo and Bonita Men), reduced SKUs across the business and acted to improve operational efficiency.
Strategically sound
This period of retraction clearly means a decline in sales, but the strategy makes sense and investors should see beyond a shrinking top line – a task that is made more palatable when the company can show improved profitability as it has done in its Q3 results, with EBIT up more than expected at €14.4m representing an EBIT margin of 6%. A recent capital increase (well supported and raising €61m) should support badly need investment in e-commerce (just 5% of sales currently) as well as other IT related projects and new store format development. It has also helped to improve the equity ratio from 23% to 30%. Management will need to demonstrate continued progress beyond the “easy win” stage (closing loss-making stores has an immediate positive impact on group EBIT) and that its brands can outperform in a challenging segment of the market. A capsule collection designed by Naomi Campbell is a positive step in generating Tom Tailor brand momentum.
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