Company Outlook | Mavi: Emerging stronger

Managing inventories, preserving margins: Despite a c26% drop in retail
revenues in FY21 and an increase in the share of e-commerce sales, the decline in
gross margin for FY21 of only 80bp (of which c50bps came from lower imputed
interest rate effect) reflects upon its strong flexibility in inventory and sell-through
management. More encouragingly, the trends for first two weeks of March 2021 (with
gradual normalisation of weekend lockdown restrictions in Turkey) are positive
across both offline and online channels. Considering the low base due to the
lockdown periods of last year, we see a strong Q1 recovery for Mavi.

Digitalisation initiatives: We note a strong focus from management on digitalisation of
the company, which we think is positive for driving e-commerce sales. Mavi was seen
lagging behind global peers in terms of e-commerce adoption, which we think got a
boost from the COVID-19 pandemic, narrowing the gap and, more meaningfully,
accelerates Mavi’s shift towards the online channel. We take a positive view of
management’s plan for investments in warehouses and customer service levels to
support e-commerce operations. We estimate Mavi will reach high-teens sales
penetration in three years’ time (from 12.7% in FY21, ex-wholesale e-commerce).
Low debt levels, more flexibility: Mavi ended FY21 with net debt of TRY37m with
leverage (net debt/EBITDA) of 0.17x. Just as Mavi’s supply chain flexibility limits
inventory risk, we think Mavi’s strong balance sheet limits downside on liquidity
concerns, even if COVID-19-related restrictions return in the coming months. We
expect Mavi to be in net cash position by the end of the year, leading to the
possibility of increased investments (more stores, higher digital investments) driving
an even higher growth path in the medium term.

Management is currently flexible on store expansion plans, which it can accelerate if satisfactory ROIs are achieved. Reiterate Buy at revised TP of TRY70 (from TRY65): We increase our sales and margin estimates marginally for the medium and long term, driving the upward revision in our target price. We think Mavi is strongly placed in Turkey to benefit from the rising trend in e-commerce shopping and opening up of the economy post- COVID-19, while the expansion opportunity remains strong in both Turkey and Russia. We believe it’s only a matter of time before we see a sales recovery (with
normalisation of macro environment) and Mavi shifts to a higher growth trajectory,
driving profitability along with it.



Source: HSBC Global Research