Turnaround – Upside TBD
Wild West Capital has recently highlighted a very high-risk/high-reward turnaround play at Global Fashion Group. It’s a struggling fashion e-commerce marketplace that trades at a wide discount to its net cash position (€206m vs €65m market cap). GFG shares have sold off sharply over the recent years (down 98% from Covid highs) due to declining topline and increasing operating losses across all geographical segments amid macroeconomic turbulence and increasing competition. However, GFG’s management is pursuing a turnaround, and early signs suggest losses might have reached a bottom. The preliminary Q4’23 report indicates potential EBITDA break-even despite a 30% YoY revenue decline. Though Q4 is seasonally strong, further cost-cutting and potential divestment of underperforming operations, particularly in Latin America, could pave the way for future profitability.
Management has a track record of value-accretive actions, including issuing low-cost convertible debt in 2021 and then buying back over half of this debt at a 30% discount to par, as well as successfully selling its Russian operations in 2022. GFG’s two major shareholders are institutional investors Kinnevik and Rocket Internet (combined 61% stake), which have been involved with the company since founding it in 2011. Rocket Internet was also one of the founders of Zalando.
I want to highlight once again, that this is high-risk play as the stock is very volatile and trades more like an option on the potential turnaround. In my experience, e-commerce marketplaces with declining net merchandise value often end-up worthless. Nonetheless, the cash provides some margin of safety here as even if management fails to boost profitability and GFG burns another €60m-€80m of cash in 2024, the company would still end the year with double the current market cap in cash.
Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.