Geox S.p.A. : the FY 2016 results undermine the ongoing turnaround.

The FY 2016 results are under the expectations of the analysts' estimates and of the targets of the business plan. The revenues grow by 3% (vs the CAGR of the BP, about +6.5% or +5.5% with the lower range of the guidance). Of course, the margins are really under pressure : the gross profit decreases, the same both for the EBIT and for the net income. The results should be considered net of extraordinary items. However, the business is not proceeding well and the cost savings policy is not giving the desired results.

We have an increase of four percentage points, with regard to the cost of sales margin (from 48% to 52%). Overall, there is a great margins erosion. About the expectations, they were estimated stable or slighty higher compared to the FY 2015 results. 

See the link to read about the related press release and compare it with the consensus. 

On many fronts, they are disappointing, more so after the good trend of the 9 months 2016 (appreciated by the market at the time of the release) and a fortiori with the good progress of the triennium 2013-2014-2015 (appreciated by the market with an excellent stock market performance from 2 to 4 eur/share). 

In my opinion, the management's credibility is in doubt for the above reasons. The market is discounting it. Secondly, in particular :

1) They failed the previous business plan ;

2) With insight, the change of the CEO is probably regarded as a rupture ; I would have appreciated more if the management had much clarified about that. Instead, substantially, they only confirmed what it was said before, in the press release ; 

3) The results are now under the targets of the current business plan ; 

4) The 2016 was supposed to be a transitional year but the results marked a strong deterioration ;

5) The loss of the profitability in the first half of the year 2016 had to be compensated along the second half of the year but we have a clear decline of the margins. 

Press release, first half 2016 results

Press release, 9M 2016 sales

They should work well over the next two years of the plan, to regain credibility, also focusing on the new CEO and on the new markets, like China. The small margins are the great problem ; they must work in that direction (improvement of the margins). Otherwise, the market will probably dislike with a bad price performance ; the decrease of the stock is the evidence, after the earnings release  (the negative impact was partially offset by the good performance of the FTSE-mib ; Geox, beta of about 0.80/0.90). 

Chart from Investing.com

Geox S.p.A. : business turnaround & BP, drivers of the (possible) upside for the next months.

With the presentation of the strategic business plan (2016-2018), at the current prices (about 2 eur/share), the stock seems to be interesting, about the valuation (2018E) : EV/EBITDA 5X, 

EV/SALES 0.5X. The market multiples are more generous in its sector (luxury sector and the like). 

Secondly, the ratios must be adjusted for the high expected growth (see the following image).
Indeed, the expected growth is greater compared to its peers. The handicap is the profitability : the margins are low ; however, with the progress of the business plan, we will see a likely improvement of the EBITDA margin  (from 7% to 10%) and of the NET INCOME margin (from 1% to 4%). 

Then, the margins are supporting the growth and the investments.

Analysis dated December 4, 2016 ;  revised data from www.4-traders.com

The management is implementing a saving costs policy and they are streamlining the stores.
There is a change in the business : investments and advertising & promotions. The product is changing, compared to the past years, the geographical focus, too (sales increasing with a major growth rate in "other countries"). The last agreement with Pou Sheng International  was signed with that purpose (the italian market is stationary or declining). 

The valuation is interesting if we compare it with M&A multiples, too. 

                              

There are some risks, of course. The business plan could be not achieved even if the credibility and communicability of the management are better versus the previous business plan.
The current BP is far less aggressive with lower risk of PWs, the guidance is a range without interim targets, the starting point is the full year 2015 (in fact, radical and positive changes over the years 

2013-2014-2015).

Data source (except the chart, Investing.com ) : Geox S.p.A. Investor Relations

Finally, at the current prices, it could be an opportunity (not free of risks) because there is a potential 

that is not discounted in market prices.
Secondly, the risk is smaller : one consideration is buying at 4 eur/share ("bubble prices") and another is buying at 2 eur/share (more so with the mentioned assumptions).