I think the brand EBIT calculation makes a lot of sense from acquier perspective.
However, without indication of an imminent deal I am wondering about the cash burn - my FCF pre-NWC calculation is -15m for 1QFY26 and -5m for 2QFY26. Typically 2H is just a little stronger vs 1H (they seem to have always a strong 2Q, no idea why) so let's settle for -30m p.a. which means that they will run out of cash quickly and the real estate sale/leasback is not an upside, but a necessity to fund cash flow gap.
So it seems to me the case requires a fast return to cash breakeven, which is of course possible given the amount of op leverage in the business. Am I wrong in my thinking (I probably am :))?
So, suppose you go back and look at CFO over time. In that case, they typically generate cash in the back half of the year, particularly in Q4, when a lot of working capital is released (working cap builds over the year, as they invest in inventory, and then they have their biggest sales quarter in Q4 for the holidays). If they have a good Q3/Q4, they could possibly be flat in terms of cash flow, and if they can grow a bit, they should be CFO positive next year. Obviously, we will see if this plays out or not over the next few months, but that's how I'm thinking about it.
Hey, apologies if I wasn't clear - my comment and calculation was about FCF normalized for WC change (WC was additional -4m in 1HFY26). So even if they release some cash from WC in 2H, the underlying business is still far from FCF breakeven. For the future it is hard for me to imagine growing the business and decreasing the NWC at the same time...
Ah got it. I think you can't really look at this year and say those are the normalized results. If they prove to be, then this won't work. I'm betting things improve sequentially from here. Cash flow will likely be positive in 2H, and hopefully they can return to growth this year. So far, the trends are encouraging (mgmt noting sequential improvement, web traffic improving, some notable collaborations selling out quickly, etc.) but we shall see.
Interesting and underfollowed find, thank you!
I think the brand EBIT calculation makes a lot of sense from acquier perspective.
However, without indication of an imminent deal I am wondering about the cash burn - my FCF pre-NWC calculation is -15m for 1QFY26 and -5m for 2QFY26. Typically 2H is just a little stronger vs 1H (they seem to have always a strong 2Q, no idea why) so let's settle for -30m p.a. which means that they will run out of cash quickly and the real estate sale/leasback is not an upside, but a necessity to fund cash flow gap.
So it seems to me the case requires a fast return to cash breakeven, which is of course possible given the amount of op leverage in the business. Am I wrong in my thinking (I probably am :))?
Hey, thanks for the comment! Appreciate it.
So, suppose you go back and look at CFO over time. In that case, they typically generate cash in the back half of the year, particularly in Q4, when a lot of working capital is released (working cap builds over the year, as they invest in inventory, and then they have their biggest sales quarter in Q4 for the holidays). If they have a good Q3/Q4, they could possibly be flat in terms of cash flow, and if they can grow a bit, they should be CFO positive next year. Obviously, we will see if this plays out or not over the next few months, but that's how I'm thinking about it.
Hey, apologies if I wasn't clear - my comment and calculation was about FCF normalized for WC change (WC was additional -4m in 1HFY26). So even if they release some cash from WC in 2H, the underlying business is still far from FCF breakeven. For the future it is hard for me to imagine growing the business and decreasing the NWC at the same time...
Ah got it. I think you can't really look at this year and say those are the normalized results. If they prove to be, then this won't work. I'm betting things improve sequentially from here. Cash flow will likely be positive in 2H, and hopefully they can return to growth this year. So far, the trends are encouraging (mgmt noting sequential improvement, web traffic improving, some notable collaborations selling out quickly, etc.) but we shall see.