Working hard or hardly working? Capital and cash conversion in a post-covid era (Part two)

Retailers and Automotive Manufacturers

Part two of our look into Q3 working capital dynamics across European HY, this time focusing on the Retail and Automotive Manufacturer sectors.

Retail 

-18.8 day ∆ CCC; -18.9 day ∆ inventory days; -5.1 day ∆ receivables days; -5.2 ∆ payables days

BUTCotyHornbach and Oriflame along with others witnessed improvements in their CCCs of >10 days in the retail space. But as mentioned in part one, CCC performance was determined by changes in a number of their component combinations. 

A lockdown DIY boom helped one home improvement retailer (first on the left) boost inventory turnover ~27%, whilst at the same time delaying payments to suppliers. In their “Moving from cash preservation to cash excellence for the next normal” report, McKinsey highlighted the need for companies to tinker with supply chains in order to deal with changing consumption patterns to prevent inventory build-ups during the pandemic, a strategy that Coty mentions they have taken advantage of.

However, where the DIY retailer improved inventory turnover via increased COGS resulting from building demand (with average inventory around flat), Oriflame improved the comparable figure (~+40%) through a 25% drop in inventory with COGS flat. Management cited in their Q2 earnings call of efforts to shift ageing inventory through heavy discounting, aiding cash flow but pressuring margins, and continued to delay inventory replenishment into Q3. 

Elsewhere, a 70% rise in payables days helped another retailer (third from right) offset DIO and DSO increases, with non-current payables soaring to ~10x their typical levels in the quarter. The company note some of Q2’s $635m WC inflow unwound in Q3, however, there was still a net positive effect of $74m during the quarter. It will be interesting to observe whether higher longer-term payables become a regular fixture on the balance sheet in future quarters. 

In contrast, Shop Direct (The Very Group), a pandemic winner, used a boom in sales to unwind working capital positions and pay suppliers quicker, whilst also decreasing DIO and DSO. The net effect was an increase in CCC.

Automotive Manufacturing

+5.1 day ∆ CCC; +3.3 day ∆ inventory days; +4.7 day ∆ receivable days; +2.9 ∆ payables days

Automotive Manufacturers generally reduced days on hand in all areas, but, as can be seen, two outliers skewed the headline numbers. It was the British supercars that lacked any real speed, with Aston Martin and McLaren noticeably significantly slowing across the grid. 

McLaren’s £64m Q3 unwind is expected to be supplemented by a further £90m in Q4 as the delivery of Ultimate Series cars reduces its customer deposits balance. A timing mismatch between the inflows from retailers and outflows to suppliers (immediate vs. ~60 days) mean current quarter sales foot the previous quarters bills which are eating into already fragile liquidity; compounded by the sale-and-leaseback deal on the F1 HQ falling through recently.

Aston Martin’s increase in inventory days can be attributed to production of its new SUV - the DBX, and resumed production at its Gaydon plant. Increased supplier spend to ramp up the St Athan facility and “timing of payments” unwound £110m of payables positions YTD, but frail demand saw a larger reduction in COGS, which amounted to ~95% of revenue in the nine-months to September 2020 (vs. 63% in 2019), explaining the jump in payables days.

Stay tuned for our final piece on working capital dynamics, which will be looking at the Energy and Gaming sectors, as well as some notable moves in single names

*Redacted company names where login credentials are required to view financials