The Longines Swiss made - - Harry Connick ... · The Longines Swiss made - - Harry Connick, Jr....

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Untitled-1 1 28/9/06 13:17:14

34 The Moodie Report

ANALYSIS • Dufry October/November 2006

When Dufry Group launched its initial publicoffering (IPO) in November 2005 CEO JuliánDíaz set out a series of ambitious targets for

the years ahead. Chief among these were organic growth– through new concessions and space expansion at exist-ing operations – and growth by acquisition, goals thatwould be facilitated by an increase in liquidity by going tomarket. Dufry’s half-year results to June 2006, announcedlast month, show just how far the retailer has come in thepursuit of growth. And they deliver a fascinating insightinto Dufry’s efforts to manage its rapid growth trajectory.

Turnover: “We’re on track with our strategy”Dufry Group turnover increased by +46% to CHF622.3million (US$496 million) in the first half of 2006, com-pared to CHF425.4 million in the first half of 2005. Butthe headline-grabbing figure of +46% doesn’t tell thewhole story. It underlines Dufry’s growth ambitions, andbacks the company’s assertion that the increase in liquid-ity delivered by its IPO would deliver volume – and fast.

But the +9% increase in organic turnover is the key fig-ure to note, because it gives a more rounded picture oflike-for-like growth in the period.

Of the +46% increase, over a quarter – +14% – can be

Almost a year on from its IPO of last November, Dufry has already realised many ofthe benefits promised by the addition of liquidity from the financial market. A +46%increase in sales and a surge in gross profit in the first half of 2006 tell a story of rapidgrowth. But managing that increase in volume is no easy task: it has brought hugeadditional costs and potential headaches in key areas such as human resources. CEOJulián Díaz acknowledged as much when he spoke to analysts and The Moodie Reportafter last month’s half-year results presentation. By Dermot Davitt.

Dufry makes its“quantum leap”

into a new era

Bullishoutlook:

Julián Díazconfidently

predicts+9% organic

growth insales for the

full year

425

3962

622

Source: Dufry; The Moodie Report

Dufry turnover and EBITDA evolutionH1 2006

� EBITDA � Dufry turnover � Brasif turnover

H1 2005 H1 2006

525

97

CH

F(m

illio

ns)

700

600

500

400

300

200

100

0

+46%

+56%

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attributed to new concessions and expansion of space;and half of it, +23%, comes from the contribution ofBrasif, whose numbers kicked in to Dufry results fromMarch.

The remainder – the organic growth – suggests that theunderlying performance, including Dufry’s investments insystems and consolidated buying, is starting to pay off.

For CEO Julian Díaz, that +9% rise means “we are ontrack with the implementation of our strategy.” Bullish-ly he says that organic growth will remain consistent forthe rest of the year. “We’ll deliver what we set out toachieve,” he says of the period ahead.

Because sales in the second half are traditionally strongerthan the first (pre-Brasif acquisition) that +9% organicgrowth will be the minimum the financial markets wantto see.

But the Brasif deal pushes Dufry into a new league.Turnover in 2005 grew by +11.7% to CHF949.8 million.Based on its growth path to date, sales will easily surpassthe CHF1 billion mark for the first time.

And at CHF1.2 billion (US$956 million) or more, Dufrywill cement its position as the world’s third largest travelretailer – and will be fast closing in on The NuanceGroup’s second spot.

6355


Dufry net sales by region H1 2006

� 2005 � 2006

Africa Eurasia South North America Europe& Asia America & Caribbean incl. HQ

86

67

95

1

192

144

173

150

CH

F(m

illio

ns)

200

150

100

50

0

418

609

Net sales Gross profit& margin

EBITDA& margin


Dufry key financial indicators H1 2006 vs H1 2005

June 2005 June 2006

CH

F(m

illio

ns)

700

600

500

400

300

200

100

0

+46%

209

320

June 2005 June 2006

(51.4%)

(49.1%)

CH

F(m

illio

ns)

400

300

200

100

0

+53%

39

62

June 2005 June 2006

(9.9%)

(9.3%)CH

F(m

illio

ns)

70

60

50

40

30

20

10

0

+59%

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Global supply deals boost gross profit marginThe strong top-line performance in the first half wasn’tjust notable for its big numbers, it also had a positiveimpact on profitability. Gross profit spiralled toCHF320.1 million (US$255 million) compared withCHF208.9 million in H1 2005, with a gross margin of51.4%. This figure is significant for two reasons. First, itmeans that gross profit for the half now matches grossprofit for the entire year 2003. Second, when AdventInternational acquired Dufry, gross margin was consid-erably lower, at 46.4%. And in the first half alone that fig-ure of 51.4% is up by +2.3 points, from 49.1%.

What are the reasons? The group’s strategy of focusingon duty free business is one answer. The emphasis on

acquiring new business in the duty free regions of SouthAmerica, the Caribbean and Asia Pacific is the platformthat underpins this strategy.

From 79% of net sales in the first half of 2005, duty freenow accounts for 82% of net sales. Crucially, business atairports is also increasing its share, from 73% last year to76% of net sales in the latest half-year.

But it’s not all good news. Volume growth in this businessdoesn’t come without additional costs, and these havearrived with considerable force on Dufry’s P&L. Theimpressive rise in gross margin is dampened by a bigincrease in Selling Expenses, from CHF73.1 million inH1 2005 to CHF121.8 million today.

Those added costs came mainly from increased conces-sion fees in the period, partly through the Brasif acquisi-tion, but also with new projects and expansions. DufryCFO Xavier Rossinyol says: “We’ve made big improve-ments in our gross margin, but we can do more. Thegross margin figure for the half is mitigated by aboveaverage concession fees in our new businesses.”

While there’s no easy way to lower the costs of conces-sions, especially in an expansionist phase, as Dufryundoubtedly is, it does have plans to improve its grossmargin in other ways.

Increasing that gross margin is – at least in part – downto how successfully the company can negotiate dealsbased on volume, and this is a key plank of the DufrySource: Dufry;The Moodie Report

Dufry net sales by market sector H1 2006

� Duty free � Duty paid

Net salesCHF606.8

million

82%

18%

Source: Dufry;The Moodie Report

Dufry net sales by product categoryH1 2006

� Perfumes & cosmetics � Wine & spirits� Tobacco goods � Watches & jewellery

� Food � Electronics � Other

Net salesCHF606.8

million

Source: Dufry;The Moodie Report

Dufry net sales by channel H1 2006

� Airports � Cruise liners & seaports� Downtown stores, hotels & resorts

� Railway stations & other

Net salesCHF606.8

million

23%

76%

7%

14%

16%

10%

9%

6%

17%

12%

11%

Untitled-5 1 6/10/06 11:26:34

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Untitled-3 2 4/10/06 10:18:58

strategy. Global deals with key suppliers are at the heartof its ability to continue to drive profitability. Díaz says:“We have concluded global negotiations with our majorsuppliers. Our number one supplier is Philip Morris,and we have finalised negotiations with them; and wehave sealed agreements with L’Oréal and BAT, and arefinalising a deal with Diageo. Others will follow. Wehave also introduced a new product mix at our renovat-ed stores worldwide, specially focused on luxury goods,perfumes & cosmetics and confectionery.”

That these categories come in for special mention comes asno surprise. In the first half the share of perfumes & cos-metics has risen by two percentage points to 23% of sales,and that’s welcome news for Dufry. It’s consistent with theretailer’s strategy of growing the most profitable categories.

Watches, jewellery and accessories now account for 17%of sales, with confectionery at 12%, giving Dufry a morebalanced product mix than most other multinationalretailers. Don’t write off the traditional categories ofliquor and tobacco just yet though; at 16% and 11% ofglobal sales, they remain core to Dufry’s growth, and arekey elements in its emerging markets operations.

And the impact on the bottom line? Net earnings amount-ed to CHF24.7 million (US$19.7 million) for the first half,compared to CHF15.3 million for the first six months of2005. Net earnings attributable to equity holders of theparent group increased to CHF18.3 million (US$14.6million) for the first half year of 2006 compared to CHF6.3million for the first half year of 2005. EBITDA (beforeother operational results) amounted to CHF61.6 million(US$49.1 million) in the first half, up +56%. And EBITrose by +57% to CHF41.5 million (US$33.1 million).

The net profit margin, at 2.9%, might not make suchobvious headlines as the +46% rise in sales, or the +56%increase in EBITDA, but it too is significant. First, it ismore than double the figure for the same period last year.Second, it comes amid a period of huge investment. Thetrue impact of this investment on the company’s financeswill probably only filter through next year, if not later.

Improvements in earnings during the period were sup-ported by refurbished and expanded existing spaces, butthey were also negatively affected by the start-up costs atnew operations. These include new shops in Spain, anew location in Grand Turk and a concession in Belgrade,plus revamped stores at Basel-Mulhouse, Rome andMilan airports, Mexico City’s new airside complex andnew stores onboard Norwegian Cruise Line.

Because the first year of any operation tends to take theburden of costs, expect the new Dufry businesses to maketheir presence felt on profitability in the years to come.

Regional breakdown: Mexico Arrivals on the horizonAny retailer will tell you that new concessions are hardwon and expensive to achieve; so when regulatory changeallows new channels to open, it’s like being handed agift. That’s the situation in which Dufry finds itself inMexico, where Article 121 of the Customs Law has beenmodified to allow Arrivals duty free shopping.

Díaz says: “We’re almost there. It requires a rule ofimplementation, but the shops are approved so it’s aprocess of administration now. We have applied forlicences at Mexico City, Guadalajara and Monterrey.”

The Moodie Report 41

October/November 2006 ANALYSIS • Dufry

A new template: Dufry’s Mexico City ‘Boulevard’offers a preview of how the company would like todevelop its airports business

*Includes contribution from Brazilian operations since 1 April 2006Source: Dufry;The Moodie Report

Dufry net sales by region H1 2006

� Europe � Africa � Eurasia & Asia� North America & Caribbean

� South America*

Net salesCHF606.8

million

28%

10%

14%

32%

16%

Global Power

Masterfoods International Travel Retail

Any new stores it adds will boost the impressive shoppingcomplex Dufry already operates at Mexico City Airport,where it opened its ‘Dufry Boulevard’ in March. In a fur-ther boost to the group’s fortunes in that country, Dufryhas also opened a new 400sq m store at Punta Langostain Cozumel.

Young Caribbean Jewellery was also consolidated intoDufry’s numbers this year. Along with new stores onGrand Turk and on board Norwegian Cruise Line, thathelped North America and Caribbean cement its posi-tion as Dufry’s largest region by turnover, with 32% ofsales. Sales grew +33% to CHF191.6 million (US$152.8million) in the half. But recent volume growth alsomeant extra costs, and the region contributed just 24%of EBIT. “The major sales increase came in North Amer-ica,” says Rossinyol, “but it hasn’t contributed stronglyto profits.”

Europe: Dynamic growth in ItalyRegion Europe increased net sales by +15% to CHF173.0million (US$137.9 million) from CHF150.4 million in thehalf, and accounted for 28% of the business. But earningsfrom the region weren’t nearly as strong, at just 17% of thegroup’s total. Although Europe is the second-largestregion by sales volume, it is second lowest in terms ofearnings for the group, only marginally ahead of Africa.

Expansion at Basel-Mulhouse and new business in Spaincontributed to the growth in sales, but Italy proved a“dynamic” force in the half, following refurbishments atRome and Milan airports in late 2005, whose effects havenow filtered through into the business.

Dufry says its exposure to the impact of the UK terroralert was minimised because it has no business in the UK,and just three US operations.

Díaz admits the first week caused confusion among pas-sengers, although the global effect was “not significant”,he says.

“Despite this, it does raise two key issues,” he says.“There’s the question of how we communicate with pas-sengers about what they can take on board. And in thatcritical early period our marketing department did agreat job in delivering accurate information to passengersat the points of sale across our operations worldwide.

“Second, there’s the question of lobbying with our airportpartners. There have been differences in approach but weneed to work to find a common solution. For us, thatmeans the sealed bag initiative. I would reiterate that we

operate a secure, bonded channel directly from the sup-plier to the shop floor, with a defined transport routethroughout the process. In my view we are demonstratingthe security of duty free as a channel, and the sealed bagmove gives a measure of comfort to the authorities too.”

Eurasia & Asia: profit driver of the futureAlthough Region Eurasia & Asia is one of the smallerregions by volume, it punches above its weight in profitterms. That makes it a region to watch for future Dufryexpansion.

The region improved net sales by +29% to CHF86.3 mil-lion (US$68.8 million) in the half, a contribution of 14%to the total business. But at 19% of EBIT, it has excitingprospects for management. “We see the highest per-centages of future profitability coming from emergingmarkets and tourist destinations,” Díaz says. “And Asia iscrucial in that respect, alongside South America, NorthAfrica and the Mediterranean region.”



Swiss pride: Dufry’s revamped Basel-Mulhouseoperation is a jewel in its European portfolio

Untitled-2 1 5/10/06 15:31:54

Dufry makes no secret of its intention to bid hard for thekey forthcoming liquor/tobacco and fragrances/cosmeticstenders at Singapore Changi. It has also pre-qualified asa bidder for Saudi Arabia’s airport duty free concessions.For now, those are “aspirational” projects, but some bigprojects have already been realised in this region.

These include new stores at Siem Reap in Cambodia,opened in July, an Arrivals store at Sharjah (alongside arenovation at the same location), and a watch shop atChangi. Dufry will also begin new business at HongKong International Airport’s SkyPlaza in November. Allof these projects will make their presence felt in Dufry’syear-end figures, and the evolution of the sales-to-earn-ings ratio in this region will be fascinating to watch.

Africa: Punching above its weightNet sales in Region Africa grew by +14% to CHF 63.0million (US$50.2 million) from CHF55.1 million in thehalf. A key driver was the addition of new shops inMorocco, which opened in the fourth quarter of 2005.The group’s new shops in Algiers Airport’s new terminal,which opened in July 2006, will make a solid contributionto the growth going forward. Dufry was awarded a five-year exclusive concession in February by Algerian airportauthority EGSA (Etablissement de Gestion de ServicesAéroportuaires d’Alger) following a tender.

Dufry also secured a crucial deal to run the shops atSharm el Sheikh Airport earlier this year. That new busi-ness also illustrates the price-tag that comes with growth:Dufry offered US$15.7 million a year in guarantees plus31% of sales.

At 10% of sales but 15% of EBIT, Dufry has singled outAfrica as a key contributor to profitability in years tocome, one that fits its strategy of investing in emergingtourist markets.

South America: new focus on Departures in BrazilThe Arrivals business has long dominated Brazilians’spending habits under Brasif, but new owner Dufry hasbig ambitions, and plans to raise the profile of Departuresshopping at Brazil’s airports.

“It will be a key focus to expand the amount of squaremetres of shopping in Departures,” says Díaz.

Dufry will re-brand Brasif’s stores into Dufry over the nextsix to 12 months, with integration complete in the secondhalf of 2007. But it is also working hard on a number of ini-tiatives and opportunities identified during the due diligenceprocess, including the expansion of Departures space.

“We want to improve the supply chain and increase grossmargin, and we will implement group administrationprocedures, realign the assortment and improve mer-chandising,” says Díaz.

Other measures, recently introduced, are also making animpact. Since August travellers can buy in Reals for thefirst time in Brazilian airport duty free, a move expectedto bring additional impulse purchasing from Braziliansand tourists alike.

Described by Díaz as the company’s “quantum leap” intoSouth America, the Brasif acquisition, consolidated since1 April by Dufry, is not just an end in itself. “Our prime



*Before eliminationsSource: Dufry;The Moodie Report

Dufry EBIT by region* H1 2006

� Europe (incl. HQ) � Africa� Eurasia & Asia � North America & Caribbean

� South America

EBITCHF41,463

million*

17%

15%

19%24%

25%

African ambition: New openings such as this summer’sat Algiers will drive profits at the African division

Untitled-2 2 8/10/06 23:41:15

position in Brazil will allow us to expand into other coun-tries and tourist locations in Latin America,” adds Díaz,outlining the group’s ambitions for the region.

A glance at the region’s contribution to date shows whySouth America carries such appeal. It’s only 16% of sales(including Dufry’s Bolivian business), but is already 25%of EBIT for the group.

The region’s net sales amounted to CHF94.7 million(US$75.6 million) for the reporting period compared toCHF0.9 million for the corresponding period in 2005.And the region contributed half of Dufry’s +46% growthin sales in the first half.

Outlook: Meeting the challenge of growthDufry can point to an impressive first half, but what chal-lenges does it face in sustaining that growth and ensuringit is profitable? One clue lies in the recent senior appoint-ments it has made. Luis Zamora joined the group asHuman Resources Director in August, and former WorldDuty Free Head of Category for Perfumes and Cosmet-ics Nigel Keal joined in June as Procurement Director.

Both appointments signal a determination to better man-age the company’s rapid growth, and a focus on aligning theassortment across an increasingly diverse range of markets.

Díaz admits as much: “There are areas that we need tostrengthen, and we want to standardise and use our syn-ergies better in several key areas. These include a globalIT focus; we will also reorganise our logistics platform ona global basis, and we’ll develop the Human Resourcesfunction. Our organisation is growing so fast that weneed to support that growth effectively from a HR view-point, or the growth can overwhelm us.”

But far from being overwhelmed, Dufry is eyeing furthergrowth; and acquisitions remain firmly on the agenda.“The consolidation process in this industry will contin-ue,” says Díaz. “Suppliers and airports have consolidat-ed in their own sectors over the past five to ten years, butto deal with both of those sectors with the same level ofinfluence, we as retailers need to recognise this phe-nomenon and move towards greater consolidation our-selves. I’m convinced that will happen.

“With the increase in liquidity we have, we are commit-ted to the plans laid down for our growth this year. Wewill also be looking for an adequate capital structure – tofurther our growth and for potential acquisitions. We’lldo this in dialogue with the market and in the interests ofour shareholders.”

At the time of the IPO Dufry laid down a marker: notnecessarily to be the world’s biggest travel retailer, but tobe its most profitable. There are some however whoargue that Dufry has bought its critical mass too expen-sively, and say that profitability will suffer in the face ofrapidly increasing volume. Are they right? That’s a ques-tion that will only become clear a year or two from now.But there are some positive early signs, not least theincreases in earnings and margin.

It will be a hard road. Maintaining – and growing – prof-its at a time of huge increases in volume is no easy task.Many of the investments in expansion and new contractsthat it has taken on in 2006 will show in the figures nextyear and beyond. One thing is clear: the industry willwatch Dufry’s evolution with intense interest. �



15

6

18

25


Dufry net income & margin H1 2006

� Net income � Net income before minorities

June 2005 June 2006

(1.4%)

(2.9%)CH

F(m

illio

ns)

25

20

15

10

5

0

+200%

Reaping the rewards: Dufry’s Cambodian businesstypifies the company’s careful targeting of emerginglocations in Asia and worldwide

Untitled-1 1 26/9/06 09:52:29

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