After Ukraine/Russia Pullout, Polish Fashion Group LPP’s Inventory Weighs On Share Price

Russia’s invasion of Ukraine is starting to show clear ripple effects in nearby economies. Poland’s biggest fashion retailer LPP, which pulled out of both markets shortly after the war started on February 24, said today in an investor call that it now had inventory that needed to be shifted.

The family company, listed on the Warsaw exchange, saw its share price fall by 7.5% today on the news, with a year-to-date collapse of almost 40%. The biggest fall took place on the day of the Russian invasion.

Many western retailers have exited Russia and Ukraine, but few are as exposed to surplus merchandise as those in Eastern European countries. LPP’s biggest brands, in order of store count are: Sinsay (743), Reserved (447), Cropp (398) House, (368), Mohito (286) and Outlet (2). However, Reserved is the company’s flagship brand and had the highest sales volumes ahead of Sinsay in FY21/22.

The problem for the Gdańsk-based company is that of these over 2,200 stores, 553 are in Russia, and 159 are in Ukraine – almost a third of the company’s total estate. The decision to suspend business activity in Ukraine – and to discontinue all sales, both online and in retail stores, on the Russian market – means a nearly 25% loss of revenue for LPP, leaving behind an inventory headache.

With supply chains still in a mess, and warehousing and logistics costs rising, LPP is braced for a profits and margin squeeze, according to vice-president Przemyslaw Lutkiewicz.

Presumably, there will also be knock-on effects from reduced orders to core supply partners in Bangladesh (supplying 40% of product), China (33%), Myanmar (10%), Turkey (6%), plus others, all in South Asia.

In the year ending January 2022, LPP’s revenue reached $3.3 billion (14 billion Polish złoty), generating a net profit of $223 million. But the current and coming two quarters look challenging.

Diversifying in Western Europe

Last week, LPP issued a statement to calm investors, saying that the company’s financial condition “remains stable.” It estimated revenue for 2022/23 – excluding the Ukrainian and Russian markets – “may exceed” $3.7 billion (or 16 billion Polish złoty), implying an increase in year-over-year sales of 13%.

Helping to offset lost revenue is a planned pivot towards more e-commerce, where sales should exceed $1.17 billion by the end of the current financial year and which reached 30% of total sales in the fourth quarter of FY21/22; and the opening of new markets. However many of these stores will only appear in 2023 when Sinsay will debut in Italy and Greece, and Reserved franchise stores will open in Cyprus.

The company said it will also continue to expand the Reserved footprint in Germany and Great Britain while also exploring EU markets. “Given the inability to predict the future situation in war-stricken Ukraine, we have decided to focus our development on the European Union countries where we are already present. At the same time, we want to establish ourselves in new markets, especially in Southern Europe, where we see potential for our brands,” said Lutkiewicz.

LPP is putting a lot of faith in its youngest brand Sinsay, with a goal to open as many as 440 stores. “By doing so, we want to develop two solid pillars of the company – Reserved, our flagship, and Sinsay, and to implement further expansions from this stable position,” noted Lutkiewicz.