http://ftalphaville.ft.com/2015/07/09/2133993/folli-follie-and-the-receivables-question/

Folli Follie and the receivables question

Dan McCrum

| Jul 09 15:07 | 1 comment | Share

Back in April we jumped on the Folli Follie results conference call to ask the Greek listed jewellery retailer about the unusually large balance for trade receivables in a Hong Kong subsidiary.

Receivables are sales recorded, but where cash is still due from the customer. Wefocused on the total in the Hong Kong entity, audited by a small local firm, because it appears to have been persistently high, at times representing the best part of a year’s worth of revenues. A large and growing receivables balance can signal problems with the quality of sales shipped on a consignment basis.At the time, George Koutsolioutsos, FF Group chief executive told us the year end total for receivables in the Hong Kong unit was €350m. However, the company has now published subsidiary accounts for 2014, and the audited total looks to be rather larger.

The relevant section from the FF Group Sourcing Limited balance sheet there (US$ figures), which you can find on page five of the subsidiary accounts.

The balance sheet date exchange rate was 1.21 dollars per euro, so $552m of trade receivables equates to €456m.

It perhaps also makes sense to include the other receivables, deposits and prepayments line, which brings the total to $693m, or €573m. Again, four fifths of the group’s large receivables balance is found in an entity responsible for half of group sales.

The $693m total is 10 months worth of sales for the entity. Folli Follie ships on a consignment model to department stores in Asia, so sales are recognised when shipped. Still, 10 months might be considered a long time for the process of selling the stock, agreeing with the department store on the sales figure and receiving the money.

Folli Follie said:

With regard to the trade and other receivables of the Asian subsidiary accounts you have to take into consideration that on a Group consolidated level eliminations of ca. EUR 60 million are included in the receivables line and accounts should not be regarded on an individual level only. Another important element is the foreign exchange rates during the year 2014 (and here especially during Q3 and Q4 2014) where we saw an strong rebound of the usd. This had a negative fx impact on the Balance Sheet of about 12% whereas the fx impact on the P&L was limited namely 0,03%. So the comparison between P&L and Balance Sheet items should rather be compared in a constant fx environment.

So on a Group consolidated level and on constant currency basis, trade and other receivables would amount to EUR 627,6 vs. EUR 993,8 revenues which equals 7,6 months’ worth of sales.

With regard to CEO’s statement of EUR 350m receivables relating to FF Group Sourcing as stated during the FY 2014 results conference call, the figure mentioned here excluded a currency effect and eliminations.

So there you go. It might seem a bit odd for there to be a big currency effect for a year end balance sheet date (at €40m/$50m is would be about a tenth of the total) but maybe we weren’t clear when we asked the question. Here’s the relevant extract from the April conference call, on the €350m figure:

MCCRUM D: And could you tell us… could you tell us sort of what the total year end receivables were for FF Group Sourcing Limited in Hong Kong?

KOUTSOLIOUTSOS G: Yes, what was the amount of the total?

MCCRUM D: Yes.

KOUTSOLIOUTSOS G: 350 million.

MCCRUM D: Euros or dollars.

KOUTSOLIOUTSOS G: Now it’s almost the same, but we report in euros.

MCCRUM D: So €350 million.

KOUTSOLIOUTSOS G: Well, dollars was much more before, now it’s almost euros.

MCCRUM D: So sorry just to be clear, it was $350 million.

KOUTSOLIOUTSOS G: No euros.

MCCRUM D: €350 million.

KOUTSOLIOUTSOS G: Euros.

All that glitters at Folli Follie

Dan McCrum

| Apr 08 10:16 | 7 comments | Share

FF Group is the Greek listed seller of jewellery, watches and accessories behind the Folli Follie chain of stores you may have browsed in departure zones of the world’s better airports.

It also owns the Links of London brand, sells plenty of sparkly goods in Asia, has grown sales at a brisk pace, and was largely untroubled by the disruption to Hong Kong shopping caused by democracy protests last year.

A few aspects of the business are curious, however. For all the sales and profits, it has generated little cash. Trade receivables, the accounting line for cash to be collected in relation to sales made, are on the high side. And the auditor for the largest subsidiary of a listed company worth almost €2bn, where most of those receivables are found, is a small Hong Kong accounting firm. Let’s start with the sales line, which has grown steadily in recent years, from €500m in 2006 to almost €1bn last year. Sales dropped in 2013 when the group sold its remaining 49 per cent of Hellenic Duty Free to Dufry AG, for €328m in cash & shares.

Net income has ticked upwards as well, with FF Group producing €1.1bn of profits over the last nine years.

Generating the growth appears to have consumed cash, however. The total for cash produced from operations over the same period is just €300m. Deduct capital expenditures of €230m over the nine years and, for all the sales of watches, cuff links and bangles, we are left with just €70m of what might be deemed free cash flow.

What happened? Part of the story is a change in the business model, away from duty free outlets towards sales in Asian department stores. So called “multi-brand location” sales effectively take place on consignment. Goods are shipped from a warehouse to the store within the store, and it can then take months to work out what was sold and the department store’s cut, before cash for the shipped goods finally arrives.

Effectively a short term loan to the customer, growing in such a manner requires money, so-called working capital.

In terms of the accounting, a sale is recorded when goods are sold or shipped with reasonable assurance they will be paid for. The expected payment is recorded as an asset on the balance sheet, known as a trade receivable. Aside from a small drop in 2013, these trade receivables have risen steadily at FF Group, from €140m in 2006 to €530m at the end of last year.

A way to think about such receivables is the number of days’ sales they represent: how long does it take to get paid? Before 2010 it was typically around 100 days, but since then the figure has risen, to 195 days at the end of 2014, or more than 6 months.

Also note Follie Follie reports an “other receivables” figure as well, which takes the most recent total for trade and other receivables to €700m.

We jumped on the recent call for analysts and investors to ask some questions, including what are the main constituents of the trade receivables. George Koutsolioutsos, FF Group chief executive, said:

Yes, so it has to do with all activities. There is a bigger part which is the Jewellery and Watches Division, it has to do because both brands are, especially the Folli Follie brand is very department store driven, we have a lot of also wholesale business especially the Travel Retail is a wholesale business, selling to, having shops in airports or in in-flight in airlines. And also with this franchise business that we started in China, that is part of these receivables. And the same goes to the retail/wholesale, we have a lot of brands that were distributing exclusively that mainly are wholesale driven, it is not freestanding shops, but it’s more wholesale in multi-brand environment, that’s it.

FF Group also publishes some financial information for its subsidiaries on its website, including FF Group Sourcing Limited (formerly known as Folli Follie Hong Kong Limited).

One perhaps surprising aspect to the accounts for the Hong Kong subsidiary is the size of trade receivables reported each year. Since 2007, (the earliest year available) these have contributed at least three quarters of the group total. In 2012 and 2013 almost 90 per cent of FF Group’s trade receivables were owed to the Hong Kong entity at year end, even though it was responsible for about half of group sales.

Here is the first page of the 2013 balance sheet (click for the full document — FF Group Sourcing Limited is pages 49 to 52, and the figures are in US$). As usual it is signed by Dimitris Koutsolioutsos, FF Group Chairman.

On average, receivables were worth 280 days worth of sales at the Hong Kong subsidiary. Add in “advances to suppliers” of $82m and “other receivables” of $39m and the total hit 400 days worth of sales at the end of 2012. There is no indication in the group’s or FF Group Sourcing’s published accounts that there has been any significant recent write down of receivables.

We asked George Koutsolioutsos why there is such a concentration of receivables in the business. He said:

Because it’s all the wholesale business from there. And this is also, we do also don’t forget also businesses that we sell even if, you know, it’s either it’s a Travel Retail, and we have an operation let’s say in Heathrow Airport we, and this is you know the deal that we do with also Reliance, we book our sales in Hong Kong and not through…we don’t ship in our subsidiary in UK, and then you know, deliver to Heathrow Airport for example…

…plus we have also operations in Hong Kong that are doing a business and especially on the sourcing for all our group activities, not only for the Jewellery Division.

The auditor for FF Group as a whole is Baker Tilley, however the auditor for FF Group Sourcing Limited is Chung & Partners Limited, a small Hong Kong based operation.

You can see the Chung & Partners team here.

We asked Mr Koutsolioutsos about the auditor, and what confidence he can give us that all the receivables will be collected. He said:

historically we didn’t have any loss. This goes to all our activities even in Greece in the difficult times we didn’t have any loss on that. So it’s all secured, usually our long term relation. Now with auditors, I mean were using…no sorry.. even Big Fours …we are happy with the auditor we have now in Hong Kong, because they do a service that is much more than, you know, what they do in the Big Fours and much less expensive, they even do stock check, accounts in every point of sales, our factories or logistic centers. So you know, we are very happy with them.

He said Chung & Partners provide “a better service” than the big four accounting firms, and said, “you can go and see historically we didn’t lose any money from these receivables. So there is no worry or anything on stake that you know, will not be paid.”