While predicting a drop of between 10 and 15 percent in its global sales for this year, due to the Covid-19 pandemic, Decathlon is planning to accelerate its investments in omni-channel retailing and the development of certain product categories to improve its chances for a relatively quick recovery. Thanks in part to new store openings, Decathlon grew by 5 percent in 2018 and by just over 9 percent last year, reaching a very high level of €12.5 billion, but representing a slowdown from the double-digit growth rates that it was previously accustomed to.
These were some of the comments made to us by a top executive of the world’s largest sporting goods retailer in reaction to an interesting and detailed analysis of Decathlon’s performance published by Standard and Poor’s (S&P). The global rating agency had forecast a drop of between 20 and 25 percent for this year, based on the median of Decathlon’s previous three alternative scenarios, but its sales have been better lately.
Sales are still in slightly negative territory at the company’s numerous stores in China. They have been recovering strongly in Eastern and Northern Europe. They are “back on track” in France, Italy and Spain, with Spain trailing Italy. In particular, sales over the internet, which represented only 7.5 percent of Decathlon’s total sales around the world last year, accounted for about 25 percent of the total worldwide turnover during the month of May and for 20 percent of sales in the first five months of this year, with a strong contribution from China.
As previously reported, many French stores offered a special drive-in click & collect service to customers, giving them the option of placing orders online and getting them delivered by the store’s personnel to their cars in a dedicated parking lot. The same service has been implemented in Belgium, Germany, Spain and Italy.
As reported by S&P, Decathlon has decided to reduce its capital expenditures this year to about €400 million from a planned level of €550-600 million as part of its efforts to save cash. The company’s executive said that there are no plans to enter any new markets around the world in 2020. He said that territorial managers have been asked to delay the opening of new stores wherever it is feasible, and to invest more in digitalization instead.
In another strategic move, Decathlon will strengthen its wide range of private label items, notably in currently fast-growing segments like cycling, fitness and running, as well as in lifestyle clothing and footwear, a relatively new category of sportswear for Decathlon, which is internally defined as “extension of usage.” These and other initiatives are expected to take the company back to last yar’s growth rate by 2022 or sooner, said the executive, supporting S&P’s forecast.
In its analysis, S&P confirmed its honorable A-2 short-term debt rating for Decathlon, but the executive noted that its debt had declined slightly in 2019. S&P has projected that the company’s adjusted Ebitda will decline this year by between €750 million and €850 million from last year’s level of €1.1 billion, reducing the Ebitda margin to 7.1 percent from 12.5 percent in 2019. This would lead the adjusted debt/Ebitda leverage to peak at between 3.0 and 3.5 times in 2020 from 1.3 times in 2019, in spite of considerable planned savings. However, given its strong fundamentals and its attractive business model, Decathlon should return to an adjusted credit ratio of 1.5x to 2.0x by the end of 2021, while reinforcing its market position against financially weaker competitors.
As it controls much of the production of its private label products, Decathlon has the ability to significantly decrease its purchases, reducing its short-term debt. The company has already cut its purchases for the next season by around €1 billion, and the Decathlon executive pointed out that this was done in concert with the suppliers, who have been fully paid in accordance with contractual terms.
Decathlon also expects savings of €750 million in rental costs, personnel and other operating expenses. It has already started to renegotiate contracts with landlords on more favorable terms. Furthermore, Decathlon’s sharehoders have agreed to withhold payment of dividends until earnings go back to pre-Covid-19 levels.
The executive confirmed that Decathlon expanded its commercial paper program in late April to €1 billion from €750 million to cope with the coronavirus pandemic, with the French Central Bank participating with a contribution of up to €490 million (not €560 million as S&P reported), charging normal interest rates.
