Duty free and travel retailer, Dufry, has seen losses significantly widen in the first half of 2016 despite a +62% surge in turnover to reach CHF3,610.9m /$3,660m, and an EBITDA increase of +61.1% to CHF381.3m/$386.6m.

In what the company describes as “a volatile period”, pro-forma organic growth, including World Duty Free, slipped by -1.6% as the company felt the further decline in Russian passengers worldwide especially in Turkey where Dufry expects a further hit in Q3.

EBIT fell to CHF 31.7m/$32.1m (from CHF45.7m in the same period in 2015) a factor being the linearisation charges from WDF’s Spanish concessions. Overall the company saw a net loss of CHF58.8m/$60m, (up from CHF14.1m in the same period in 2015).

This morning the stock market reacted with an initial plunge of -5% from Dufry’s early peak price of CHF113.10, but it is currently recovering the lost ground.

‘EXTRAORDINARY EXTERNAL EVENTS’

Commenting on the half-year result, Julian Diaz, CEO of Dufry Group, says: “I am optimistic, based on the results achieved in the first half of 2016 despite the many extraordinary external events (that) occurred in the period. The performance proves the strength and validity of our geographic diversification strategy, which has made the company less dependent on single locations.”

On the weak organic growth he adds: “Two factors negatively impacted some of our locations: the decline of sales to Russians worldwide, which had a particularly strong impact on our businesses in Turkey and Russia; and the devaluation of some emerging market currencies, most notably the Brazilian real and the Argentinian peso, which were still negative but continued to improve in the second quarter.

“In terms of business development, we have continued with our refurbishment programme of 60,000sq m of retail space, as well as with the opening of new stores. Since January 2016, we refurbished 25,000sq m and opened 15,800sq m of retail space.

“On the longer term view, we are very pleased with the renewal of a number of concessions including some attractive contracts in Brazil, Mexico, the UK and Switzerland. Securing these contracts allows us to develop and grow the business in the long term.”

Regarding the integration of World Duty Free, Diaz says: “We are on track and we expect to fully complete by mid-2017 (at the) latest. The initial synergy targets remain unchanged at €100m.”

DUFRY BY REGION

Most regions were flat-to-falling in terms of underlying growth – the one exception being North America.

Southern Europe and Africa – Turnover grew to CHF744.2m  in the first half, versus CHF 364.6m a year earlier, however underlying growth in the division was flat. Spain continued to perform strongly in the second quarter as well as Portugal and France. Northern Africa remained subdued while a relative improvement in Q1 with respect to Russian passengers was not sustained in Q2, which resulted in a decline in Greece, and most importantly in Turkey.

Central and Eastern Europe – First half turnover lifted to CHF964.1m from CHF350.8m in the previous year but again, underlying growth “was flattish”. In the UK, the most important operation in the division, moderately positive performance in Q1 continued in Q2. The same applied to the other operations such as Finland and Switzerland. Russia and Armenia continued to face a challenging environment, while other Eastern European operations like Serbia and Bulgaria saw growing sales.

On Brexit, Dufry notes no impact from the devaluation of the British Pound by almost -10%, due to “natural hedging already implemented beforehand”.  Dufry adds: “In the short term, first data suggest acceleration in turnover growth in the UK due to the weaker pound, while other European markets have remained unchanged so far.”

Asia, Middle East and Australia – Turnover reached CHF372.4m in the first half versus CHF267.4m in the same period in 2015 but the underlying growth was flat. Most operations in the Middle East and India did well. Dufry says: “In southern Asia, South Korea continues to perform extraordinarily, helping to mitigate the lower spend from Chinese seen in most other locations in the region.”

Latin America – First half turnover reached CHF719.9m up marginally from CHF649.4m a year earlier, however, underlying growth fell sharply by -11.1%. Operations in Central America and the Caribbean were positive, but South America “continues to be impacted by the devaluation of some of the local currencies”.

North America – Turnover reached CHF790.1m compared to CHF574.6m in the first half of 2015. Underlying growth was +3.2%, due to a strong performance of Hudson and other duty-paid concepts. On the duty-free side, the stronger US dollar positively impacted operations in Canada, while the opposite effect was seen in the US.

CONTRACT EXTENSIONS

In 2016, the renewal and extension of contracts has been a priority, says Dufry. Among them were the extension of two important Brazilian contracts in Sao Paulo until 2032 and Rio de Janeiro until 2023 in May 2016; the renewal of concessions at Cancun Airport for an additional 10 years in July 2016, which also includes Cozumel Airport operations [one of the larger contracts in Central America]; the extension of UK contracts in Birmingham and Bristol for 7 and 8 years respectively; and the renewal for 10 years of the concession at Zurich Airport in Switzerland, Dufry’s home country.

Looking ahead, Diaz says: “We believe that volatility will continue in single markets, but provided that currency levels remain relatively stable, we expect an overall improving performance in the second half. Developed markets in general have a good performance.

“Moreover, thanks to our variable cost structure we are in a good position to protect our profitability and cash generation when compared to, for example, the luxury or airline industry.”