Dufry/airport retail: hard case
The duty free operator’s promise of a bargain offers little reason for good cheer
The promise of a bargain lures travellers to duty-free shopping. Dufry presented a similar offer to shareholders with terms of a SFr500m rights issue on Thursday, its second this year. The world’s largest duty free operator will raise new equity partly to repurchase and delist US subsidiary Hudson. The buyback presages belt tightening. A cannily priced deal is scant reason for optimism.
Dufry has lost altitude in parallel with airline groups. The first full-year operating loss since 2003 is expected. The stock is down 70 per cent since the start of the year. High gearing helps explain the dramatic fall — net debt was almost four times ebitda in December.
Liquidity is not an immediate concern. But with a recovery that will be measured in years, significant debts heighten risk painfully.
The Swiss group already consolidates the results of Hudson, in which it has a majority stake. The repurchase makes opportunistic good sense on paper: Hudson’s IPO in 2018 raised SFr671m, net of costs, and Dufry will spend about SFr300m to buy the stake back
Buyout group Advent is meanwhile prepared to invest SFr415m in Dufry at a price of SFr28.5. This could result in dilution of up to one-third for existing shareholders, depending on how the rights issue is priced.
The SFr1bn of cost cuts targeted by Dufry this year illustrates the challenge ahead. The bulk of savings will come from renegotiating revenue-sensitive contracts with airports.
For airport retailers, sales are a function of both the mix and number of passengers. Footfall is unlikely to recover before 2023. British Airways owner IAG has just downgraded its 2021 capacity estimates to 27 per cent below 2019 levels. A slower recovery in international flights means fewer high spending passengers from emerging markets.
Restrictions on customers per store could reduce revenues by up to half, thinks Barclays. Curbs would probably continue after passenger numbers recover. That suggests airport retailers, such as Dufry and SSP of the UK, face an outlook even worse than the airlines whose slipstream once pulled them along.