INDUSTRY CHANGE

DSO 0.3 ⇓

DIO 7.8 ⇓

DPO 6.9 ⇑

DWC 7.4 ⇓

A strong performance saw the sector reduce DIO and extend DPO to shorten DWC by 7.4 days.

Our Retail sample reported strong revenue growth (c.11% on average) in 2020, a surprising result given the doom and gloom surrounding the sector and the onset of Australia’s first recession in nearly 30 years. Despite a modest softening in revenue and margin in H2 (compared to H1), 56% of the sample achieved both revenue and EBITDA increases for the full year as the sector was a beneficiary of Government stimulus, some “panic buying” and a redirection of consumer spending from sectors adversely impacted by COVID-19 such as tourism, entertainment, leisure and hospitality.

Key trends brought on by COVID-19 were an accelerated shift to ecommerce and the emergence of the “at home” economy as consumers spent in categories such as food, home office, basic and comfort apparel, exercise equipment, furnishings and renovations in response to the limitations on movement and travel.

The sector managed the second largest improvement in working capital performance, shortening DWC by 7.4 days on average through a combination of lower DIO and higher DPO. $3.7 billion in cash was unlocked from working capital cycles as a result.

Working capital management in Retail requires a focus on inventory and 74% of the sample managed to reduce average inventory (DIO). Overall the average reduction was 7.8 days to 105.2 days, with almost a quarter of companies managing an improvement of three weeks or more as some operators reduced purchasing or were limited by supply chain issues, particularly in H2.

Supplier payments (DPO) were extended by 6.9 days to 57.3 days on average across the year however we note that in H2, whilst DPO would ordinarily reduce as suppliers are paid down after peak Christmas sales (which did happen in part), this year retailers held onto more cash than in the same period last year.

The working capital trends combined with margin improvement, rent abatements/ deferrals, stimulus and JobKeeper increased total cash from operations across our sample by 170% to $18 billion at June 2020, with 91% of the sample reporting an improvement in operating cash flow.

Retail is a sector that may come under pressure as the abnormal levels of stimulus roll off and unemployment increases as forecast, so the improvements made are well timed leading into a period of some uncertainty.

A look at international comparators shows that Australian retailers generally carry more inventory than those in international markets. This is in part due to geographic location compared to suppliers.

“Proactive response to market environment with focus on right sizing of operations, preservation of cash and optimising liquidity…”

Eagers Automotive Limited
FY20 HY Report

COVID-19 IMPACT

COVID-19 Impact

Net working capital performance

2019
2020
Cash Impact*

*A positive cash impact is a “release” of cash from working capital (improvement). A negative cash impact is additional cash invested or “locked up” in working capital (deterioration).

Retail - Financial Year
Days 2019 2020 Change
DSO 18.4 18.1 (0.3)
DIO 113.0 105.2 (7.8)
DPO 50.4 57.3 6.9
DWC 46.6 39.2 (7.4)
Retail - Half Year
Days H1 2020 H2 2020 Change
DSO 19.5 18.4 (1.1)
DIO 118.6 110.7 (7.9)
DPO 77.0 58.0 (19.0)
DWC 38.2 41.9 3.7
Best & Worst
Days Best Worst Spread
DSO - 95.7 95.7
DIO 9.1 337.5 328.4
DPO 146.9 15.1 (131.8)
DWC (30.2) 148.7 178.9
International Benchmarking
Days Asia EU US
DSO 32.9 30.2 15.0
DIO 79.7 80.5 65.2
DPO 57.3 78.7 46.6
DWC 50.7 36.9 35.7