While Geox shares still appear undervalued, lackluster fourth-quarter and full-year results do not install any more confidence in the firm’s ability to execute a substantial near-term sales and earnings turnaround. Wholesale is now rationalized and peripheral Europe has bottomed, hopefully, but risk remains.
Cash flow is still solid and working capital well controlled, and while 2012 reported results were down significantly from 2011, cash flow improved. Total sales declined 9% for the year, with continued negative trends in wholesale, which are now (at least) countered by mild yet positive comparable-store sales results (up 3%) in directly operated stores.
In 2013, analysts expect some pickup in store openings in new markets including China, which should help the flagging top line. Other restructuring plans, including a new factory in Serbia, suggest that improving gross margins (which rose 200 basis points to 48.1%) can be maintained or go higher. Importantly, incentives from the Serbian government will account for about 80% of the capital spending needed for the new plant, which indicates that management’s forecast for stable capital spending is feasible.
Despite the better gross margins, fixed-cost deleveraging on the sales decline, along with restructuring charges, drove total reported profits down to EUR 10 million, or EUR 0.04 a share, from EUR 50 million, or EUR 0.19 per share, last year. Adjusting for asset impairment and restructuring charges, EBITDA was EUR 86 million in 2012 compared with EUR 122 million in 2011. While the firm maintains a solid net cash position (EUR 54 million at yearend, compared with EUR 91 million at the end of 2011), the company wasn’t able to maintain last year’s EUR 0.16 dividend (a 83% payout ratio) and it has been reduced to EUR 0.06.
Looking ahead, while store openings can reach 70 per year, the firm now targets more than 100 stores in China, where it has signed a new distribution partner. The new-markets growth is a long term positive, but the work being done to restructure the wholesale accounts and improve inventory turns in the Southern European markets will take time before it bears fruit.
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