SSI Group, Inc. unlikely to make returns to shareholder in the near term as lease improvements become stranded

SSI Group, Inc. (SSI) is a specialty retailer in luxury, bridge, casual, fast fashion, footwear, accessories and luggage.

COVID-19 pandemic mitigating measures shrunk SSI’s 1H 2020 sales by 49% as compared to 1H 2019. The decline in sales resulted to a net loss of 476 Million Pesos for SSI.

SSI’s gross profit margin remained healthy at around 46%. Despite the healthy profit margin, SSI resulted to a net loss because of its massive opex (operating expenses). Agile companies adopts to emerging circumstances. They are flexible in their cost structures. They can ramp up in times of surging demand and can scale down their costs fast in times of downturn.

SSI’s 1H 2020 operating expenditures show that their is an increase in the depreciation and amortization of about 541 Million Pesos. That is 130% larger than the 1H 2019 depreciation and amortization.

Depreciation and amortization are non-cash expenses. SSI would have generated cash from operations of around 610 Million but then SSI ramped-up its merchandise inventory by 1.1 Billion and paid its suppliers more thus erasing its cash from operations.

SSI would have broke-even or turns a small net income had it not accelerated and increased the depreciation and amortization by 541 Million Pesos. Net loss for the period 1H 2020 is only 476 Million Pesos, reversing the depreciation increase of 541 Million Pesos would turn a profit of 65 Million Pesos.

The acceleration or the increased in depreciation and amortization is a recognition by SSI that there is a sea change in the way customers do their shopping and COVID-19 pandemic accelerated the change.

SSI said that is has seen a significant growth of its e-commerce business, with e-commerce sales increasing by 375% during the 1H 2020. SSI said that it is focused on building out what is already the most diverse e-commerce presence amongst local specialty retailers, into a world class e-commerce portfolio. SSI will be launching an online marketplace that will carry a range of brands from the group’s portfolio as well as other brands and products to complement the marketplace’s online offerings. This e-commerce site will be unique in that it will carry a wide variety of brands from luxury, to casual and fast fashion, home, personal care products and food on one premium marketplace.

E-commerce has dawn on retailers and its investment in physical stores development and improvements have become less relevant making them stranded assets. As of end of 1H 2020 SSI has a total of around 3.6 Billion Pesos net book values of leasehold improvements and right of use assets. SSI may have to accelerate their depreciation and amortization as they become less relevant in an e-commerce age.

Disclaimer: This is an independent analysis for discussion purposes with the aim of giving stock traders and investors an independent perspective.  Accuretti Systems Inc. does not hold any SSI shares.

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