Julián Díaz, CEO, Dufry Group

Sell-side analysts have responded cautiously to Dufry Group’s negative single-digit organic growth forecast for full-year 2020 given the indeterminable period of financial market turmoil precipitated by the coronavirus (Covid-19).

As reported, Dufry released its full-year earnings yesterday (12 March) revealing 3% organic growth during 2019 as turnover rose to CHF8,846.6 million/$9,428m.

Provided the situation regarding Covid-19 improves in the second semester, bearing in mind Q3 is typically the most important for the travel retail juggernaut, it expects to suffer a negative single-digit organic growth performance this year.

“It looks optimistic, but was probably written before Trump’s announcement on the travel ban for Europe,” commented René Weber Managing Director, Analyst Luxury Goods/Food&Beverage, Bank Vontobel.

“In the US, Hudson makes just 23% of sales with duty free and 77% with duty paid. It depends very much, how long the situation lasts — their assumption to come back to a normalised level in Q3 looks difficult today.”

‘VERY CHALLENGING YEAR ON ALL METRICS’

A first read of the results from UBS forecasts 2020 to be a ‘very challenging year on all metrics’ due to the inherent coronavirus risks.

Dufry Group recorded organic growth of 3% during 2019 as a result of solid contributions from new concessions.

Dufry’s share price on the SIX Swiss Exchange opened at CHF40 on 12 March before plummeting to close at CHF27.36, as investor confidence shuddered on news of single-and double-digit drops in growth across Europe, Africa, Asia Pacific and the Middle East in January and February.

“Impacted by the coronavirus risk, Dufry stated organic sales in February were -7.3% year-on-year, with further deteriorations in March,” a note from UBS analyst Joern Iffert read.

“Dufry implemented cash-saving programmes of CHF100m. We see the risk that Dufry sales could be -10% to -20% year-on-year in 2020E (guidance down single-digit) resulting in net debt/OpCF> (covenant 4.5X).”

Asked about how UBS sees investors reacting, Iffert added: “Muted near term, on coronavirus risk. But Dufry should maintain its leading position.”

Turnover across the business grew 1.9% to reach CHF 8,848.6 million/$9,428m last year.

Dufry’s share price improved to a high of CHF31.90 during early morning business on 13 March, slipping to CHF26.11 before gradually improving. At the time of writing, it was trading at CHF29.88.

Meanwhile, Dufry is renegotiating concession fees across various businesses in different DF&TR channels, as the Covid-19 pandemic spreads. New concession fees reflecting the crisis will help mitigate the impact of fewer passengers and declining sales post-January 2020, when the impact of Covid-19 kicked-in.

The year started positively for Dufry, but the strong impact of the virus in places where Dufry is exposed to Asian consumers put a different complexion on things.

Speaking during a presentation and conference call yesterday (12 March) on the company’s 2019 full-year results, Julián Díaz, CEO, Dufry Group said the Swiss company was drawing on its experience of renegotiating concessions during the 2008/2009 global financial crisis. He also indicated most contracts were based on a variable model, making it easier to find solutions.

VARIABLE CONCESSION FORMULAS

“In 2008/2009, we were able to adapt the reality of the concession payments to the reality of the business. Sometimes this has to be done a temporary basis. Concession fees must be variable in the case of significant impact [as the result of a crisis such as Covid-19].

“We are in a position to collaborate and have received several calls from airports which are keen to co-exist and understand the solutions.”

Business accelerated for the company in January 2020, before the impact of Covid-19 kicked-in.

Elaborating on the structure of concession contracts and how it can pave the way for relief measures Díaz explained: “Most of the contracts are based on percentage of sales or rent per passenger. If passengers drop, then rent automatically falls, especially on cruise lines and businesses like that.

“Today, we have around 1,200 concessions and I would say the most important part of the concessions will not be in the Minimum Annual Guarantee (MAG).”

He added: “The reality of the business will require three or four months of adaptation before things are normalised. This is based on what we have seen [during situations like this] in the history of travel retail.”

Responding to an analyst who questioned the receptiveness of landlords — airport operators in particular — to engage in relief negotiations, Díaz said: “Asia [which includes the Middle East and Australia] is the most cooperative in terms of revisiting MAG. Discussions started in January and we have received positive responses from landlords.”

Dufry unveiled new stores at Marrakech Menara and Casablanca Mohammed V International Airports in 2019.

Discussions over contract relief have also started with landlords across Europe. Initially, the impact of the virus was felt the most in Asia, but the spread of the pandemic in Europe has forced Dufry to enter negotiations.

The renegotiation of concession fees will not only help Dufry, but other companies as well, according to Díaz. “It is not only for Dufry, but for everyone working in the same type of business,” he remarked.

During the call and presentation, Díaz highlighted several instances when the DF&TR industry was forced to demonstrate its resilience. These include the global recession of 2008/2009, SARS (2003) and the 11 September New York terror attacks in 2001.

“These events had a similar impact over a two-or three-month period,” he commented: “The recovery in each case was very fast, but will this be the case for Covid-19? I think so. This is because the way the crisis is mitigated in terms governments’ approach is going to change.”

A dedicated group has been established at global executive level to focus on leveraging the resilience of the business during this challenging period.

Referring once again to previous crises, Díaz revealed two key learnings. “One, is that we must react very quickly. Another, is the need to focus on cash generation and to protect the company’s profit and loss. The process of accelerating sales has started. We need to utilise our capacity to sell more. It is the only way.”

In the meantime, Dufry has introduced a global promotion to boost sales. “Anyone purchasing two products from the same supplier will receive an extra item free of charge,” he explained.

COVID-19 ACTION PLAN

A number of other initiatives have been implemented to limit the impact of Covid-19. A dedicated group at global executive level, for example, has been created to leverage the resilience of the business.

This is part of a comprehensive action plan to secure cash flow generation, drive sales and safeguard profitability during the deadly crisis.

Díaz said: “From a profit and loss perspective, the action plan focuses on the acceleration of sales, gross profit margin maintenance and protecting the cost structure of the company.”

Liquidity, for example, can be quickly managed as Dufry is a centralised company. “We are not 65 companies working independently. We are controlled by information technology and our operating system. Decisions can be integrated quickly. If something needs to be done tomorrow, it will happen. This is because we control the cash and merchandise and our various global spaces.”

Regarding liquidity, Dufry is not anticipating any issues in in full-year 2020. This is providing the slow recovery it predicts to begin in May comes to fruition.

“We have protected the cash for a terrible period like April and May in case it is needed,” Díaz acknowledged.

The opening of Dufry’s first Brazilian land border duty free shop in Uruguaiana, Rio Grande do Sul, at the border with Argentina last year was a major highlight.

The company also indicated it will be assisted by a risk diversification strategy, as it comes to terms with Covid-19. “Sometimes in the past, we have experienced negative performance in South America, for example, and positive performance in Asia or Europe.

Now, we may have positive performance in South America and the US and negative performance in other regions.

“Establishing a highly diversified risk profile [to mitigate the impact of single operations in the face of Covid-19] was extremely important.”

Throughout the call and presentation, Díaz was reluctant to speculate too much on how 2020 might pan out. What we have learnt from the presentation is that the negative impact of Covid-19 will lead to temporary negative organic growth in the first few months of the year.

Díaz commented: “March will be a difficult month. Negative double-digit organic growth is a given. In April, we also believe things will be difficult, but in the second part of April and throughout May and June, things will slowly improve [based on statistics from other crises].”

He concluded: “We can learn a lot from 2019 in terms of how we understand the evolution in 2020. In locations where business does not performing well, such as South America last year, the company can still benefit from strong performance in other locations. This is the main lesson of 2019.”

Stay close to TRBusiness for more on Dufry’s performance and development last year.