[UPDATED] First Brazil border shop looms for Dufry as sales lift 2% in H1

By Luke Barras-hill |

Dufry-Cancun-fasciaDufry Group will unveil a 850sq m duty free shop on either Friday or Monday at Uruguaiana on the Brazilian border with Argentina and Uruguay, TRBusiness is reliably informed.

The long-awaited development following approval for duty free shop operators to run stores at any of the 32 twin cities that border variously with Brazil comes as the travel retail giant reports turnover of CHF4,180.1m/$4,219.9m (+2%) in the first half of this year.

Despite continued currency hurdles in South America, Group organic growth edged up 2.2% year-on-year (+5.4% excluding the impact from South America).

Second quarter organic growth increased by 2.3% with improvements in the first weeks of July and like-for-like growth accelerating in Q2.

REGSTAER BOOST

Adjusted net profit was CHF72.8m/$73.5m for the period, while net profit to equity holders reached CHF -116.8m and adjusted operating profit (adjusted EBIT) netted CHF237m. Adjusted operating profit margin (adjusted EBIT margin) was 5.7%. Net debt totalled CHF3,291m at the end of June. Gross profit reached CHF2,515.1m, with gross profit margin at 60.2% from 59.8% one year earlier.

Aside the confirmation of the new Brazilian border operation, Dufry moved to increase it stake in RegStaer Vnukovo from 51% (in 2012) to 60% in June this year.

H119-financials-Dufry

Source: Dufry Group. Click to enlarge.

When the acquisition completes (expected in H2) Dufry will consolidate a formidable presence in the Russian airport duty free and duty paid market at locations including Sheremetyevo, Domodedovo, St Petersburg, Sochi and Krasnodar. Additionally, it is likely to provide a valuable springboard to swoop for duty free arrivals shops in Russia as the market opens up.

That aside, Dufry refurbished 31,700sq m of retail space and opened and expanded 15,400sq m of gross retail space (see below). It has signed contracts for a further 15,300sq m in 2019/2020, including new shops in Russia, Kuwait, Boston, Nassau and the Dominican Republic

APAC AND ME PERFORM; SOUTH AMERICA SLUMPS

The impact of new net concessions added +2.8% to the turnover result with resilient performances across the regions in the face of a translational FX effect of -0.2% for the period due to the strengthening of the US dollar and weakening in the Euro and British Pound.

Europe and Africa returned CHF1,725.5m in turnover with organic growth at +3.9%. A notable performance from London Heathrow Airport coupled with strong showings in Spain, Turkey, France, Italy, Malta and Africa.

In Asia Pacific and the Middle East, organic growth surged by 13.9% as turnover reached CHF623.8m, mainly due to the contribution from new concessions.

Dufry-Kowloon-Station

Double-digit organic growth in Asia Pacific was supported by the successful opening of the MTR high-speed railway station in Hong Kong. 

In Hong Kong, Dufry inaugurated its MTR high-speed railway station operation, with positive performances from China, Macau and Cambodia and a timely boost from Australia due to the start of operations in Perth.

Central and South America regional turnover dropped to CHF761.8m from CHF896.6m year-on-year, as organic growth plummeted to -10.6% due predominately to the aforementioned negative currency impacts, particularly in Brazil and Argentina.

On the other hand, operations in Mexico and the Caribbean posted good returns supported by Dufry’s growing cruise business.

Dufry confirms its mid-term organic growth guidance in the range of +3-4% and 2019 equity free cash flow generation in the realm of CHF300-400m.

In a statement, Julián Díaz, CEO of Dufry Group points to the 2.2% organic growth result as ‘positive development’ and notes the strong performance in Asia Pacific and the Middle East.

“Recovery has started in Europe with Spain performing well, while North America has continued with its resilient growth,” he said. “Even South America has shown encouraging signs of recovery in the first weeks of July.

Breakdown-Dufry-1H19

Source: Dufry Group. Click to enlarge.

 

“In this context, I would like to highlight the considerable improvement we have seen in the like-for-like performance with respect to the first quarter this year which reached a turn-around in June and July. This was the result of a combination of commercial and market initiatives launched in several markets. Organic growth further benefitted from strong contributions from our new concessions.

“The improving market conditions in all divisions seen in the first half of 2019 continue as expected and are encouraging. Organic growth in the first three weeks of July accelerated and reached around 3%. Our goals for 2019 remain unchanged; to drive further growth with a strong focus on the customer, to leverage our business model to generate efficiencies, and to accelerate the implementation of the digital strategy.”

WHAT THE ANALYSTS THINK

In a note shared with TRBusiness, Baader Helvea Equity Research CEFA Executive Director Co-Head Equity Research Retail and Consumer Volker Bosse said: “Organic growth momentum in Q219 improved to +2.3% (after +2% in Q119). But the magnitude of developments remained disappointing given a much lower previous year’s level and the support from a positive calendar effect (late Easter). The Group’s main drag was South America. Excluding South America, the organic growth would have been +5.4% in 1H19.

Shops-opened-Dufry-H1

Source: Dufry Group. Click to enlarge.

“CEO Diaz sees improving momentum in Spain and even encouraging signs of recovery in South America in July. Therefore, the organic growth improvements should continue in 3Q (group’s most relevant quarter) – also benefitting from a very poor previous year’s level of just -0.7% in 3Q18.”

UBS Global Research says organic growth of +2.3% was circa 30 basis points better than Q1 but adjusting for the circa 50bp Easter benefit the result was unchanged/slightly deteriorated.

In response to how investors would expect to react, UBS Global Research stated: “Mixed reaction, but some investors could like the organic sales acceleration in July.”

It adds that the outlook points to improving organic sales, with margins remaining ‘light’ due to concession fees.

Dufry points out that it has begun to report its financial obligations under the new IFRS 16 framework, which it says mainly concerns the way leases are declared. Previously, leases were accounted as expenses, but fixed components are now capitalised and amortised over the lifetime of contracts.

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