DUFRY

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Dufry is a global travel retailer operating duty-free and duty-paid shops primarily in airports, cruise lines, seaports, and other tourist locations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Dufry’s operations are structured into two main divisions: EMEA & Asia and Americas, and they operate across more than 70 countries. The company sells a diverse portfolio of products, including fragrances and cosmetics, wines and spirits, fashion and accessories, confectionery and food, and tobacco.

Business Overview

Dufry operates a vast network of retail locations, primarily in travel hubs like airports, cruise lines, and seaports. Its business model is predicated on capturing the spending of travelers while they transit these locations. As of the latest information available, the company operates in over 70 countries, and most of its locations are in airports, this business model is highly dependent on global passenger traffic and spending. The company has two main divisions: EMEA & Asia and Americas. The EMEA & Asia division covers operations in Europe, the Middle East, Africa and Asia. The Americas division covers the company’s business in North America, Central America, South America, and the Caribbean.

Revenue Streams

Dufry’s revenue is primarily generated from the sale of goods across several categories.

  • Fragrances and Cosmetics: This category is often a major contributor to sales, driven by impulse purchases and traveler preferences for premium brands.
  • Wines and Spirits: Duty-free and duty-paid sales of wines and spirits are significant revenue drivers.
  • Fashion and Accessories: This includes sales of apparel, bags, jewelry, and other personal accessories.
  • Confectionery and Food: Offers a range of packaged goods.
  • Tobacco: A traditional staple of duty-free operations, though facing increased restrictions.
  • Travel Recovery: After the COVID-19 pandemic, the travel industry is experiencing a rebound which is benefiting the company with increased airport and cruise line traffic, directly translating into increased potential for spending.
  • Increased Spending in Emerging Markets: The growing middle class in emerging markets continues to be a key source of potential revenue growth for travel retailers, and this is a region where Dufry has prioritized development.
  • Digitalization: E-commerce and mobile applications are growing in importance in the travel retail space.
  • Focus on Experiences: Travelers are increasingly seeking enhanced experiences rather than merely transactions at airport shops, which makes creating engaging retail experiences important.

Competitive Landscape

The competitive landscape is fragmented across geographical areas with varying local competitors. Airports often have unique agreements to cater to specific vendors and the company has to be able to win these competitions. However, globally, the main competitors for Dufry are other large travel retail operators like Lagardère Travel Retail, Lotte Duty Free, and DFS Group.

Competition in travel retail is intense, with each retailer fighting for prime terminal locations and brand partnerships.

What Makes Dufry Different?

  • Scale: Dufry operates a very large global network, with presence in many countries and locations, which creates a significant advantage due to the ability to negotiate better supplier terms and brand partnerships.
  • Data Utilization: In the words of the CEO, “We are moving to a stage where our data should be at the heart of everything we do.” The company is leveraging customer data to personalize offers and experiences, which helps improve brand loyalty.
  • Focus on Emerging Markets: The company is actively expanding its presence in emerging markets.
  • Multi-Channel Strategy: Dufry has started to expand beyond traditional travel channels and into e-commerce.

Financial Deep Dive

Let’s take a look at Dufry’s financials.

It’s worth noting that the company’s financials are highly complex because of the different accounting standards they employ around the world, the different currencies they report on, their hedging strategies, and many other financial complexities, all of which makes it difficult to give an easy to understand overview of the company’s financial health.

Revenue Growth and Margins

The company’s revenues have seen substantial growth over the last few years as a result of recovering travel demand. However, it is still somewhat below 2019 levels.

This is because the company’s revenues are highly correlated with passenger traffic.

Dufry has been focused on cutting costs, which should lead to better margins. The company’s gross profit margin is at around 65% but EBITDA margins are less robust (historically around 13-14% at peak performance), and profitability has not yet reached consistent levels. These margins are highly volatile due to the effects of currency, inflation, and competition in specific areas. The company is targeting a 15% operating margin by 2024 and aims to achieve this through several strategies, including increasing gross margins by improving product mix and pricing, and reducing overhead costs.

Balance Sheet

Dufry’s balance sheet reflects the company’s significant debt. The company carries a net debt of over 3 billion euros and has a high amount of leased-related liabilities. In the short term, this high leverage will be one of the most important things to consider when analyzing the company. The company’s equity has been improving slightly over the past few years with an equity ratio of 15.4% at end of 2022, while this is below 2019 levels.

Cash Flow

Dufry’s ability to generate positive free cash flow is improving with the business recovery but has yet to reach pre-pandemic levels. The company has been using the increased cash flow to deleverage and pay down the high debt levels. It expects to continue to improve cash generation in the coming years.

Recent Concerns and Controversies

  • Debt Burden: Dufry’s high level of debt is a major concern and could constrain its strategic flexibility. The company is working to reduce its debt but has to make considerable progress.
  • Currency Volatility: The company is subject to significant foreign currency risk. For example, a change in the euro to the dollar can impact financial performance significantly because many of their revenues are reported in other currencies. The company has been working on various hedging strategies, but these are not foolproof.
  • Geopolitical Risk: Dufry has stores located in many countries, and some of these countries are undergoing great turmoil.
  • Limited Pricing Power The company may struggle with rising inflation and cost of goods sold while having a tough time passing on prices to customers.
  • Impact of Covid: Although things are getting better, and travel is slowly recovering, the company is still far from where it was in 2019.

Moat Rating: 2/5

Dufry has a very fragile moat that is susceptible to changes in the industry.

  • Brand Recognition: Though a major point of difference, Dufry doesn’t own most brands it sells, and is more akin to a reseller than a brand owner. This doesn’t mean that their brand doesn’t provide any advantage, only that they have little pricing power.
  • Economies of Scale: Dufry’s geographical scale does give it some advantage when negotiating better deals with suppliers, but this is unlikely to create a true moat as many players are equally capable of doing it.
  • Switching Costs: There are no switching costs for the customers, and if customers prefer to buy their stuff from a competing business it’s likely the store will be passed by for the next sale.
  • Customer Loyalty: The company is not very effective at attracting high-spending customers or generating high levels of loyalty to any brands or stores, and can be passed by once a better offer presents itself.
  • Regulatory Approval: Dufry relies on several airport and port authority concessions, and their renewal and stability will significantly change the company’s operations and profits. It can also lose this advantage to competing players.

Risks and Resilience

  • High Debt: Dufry’s high debt-to-equity ratio poses a significant financial risk and it can hinder future plans.
  • Dependence on Passenger Traffic: The company’s fortunes are tied to global passenger traffic, making it vulnerable to economic downturns and global health scares that can reduce travel.
  • Competitive Pressures: Due to the low barriers to entry for new entrants, competitive pressures can be hard to stave off, and if it’s a highly cyclical industry a competitor can quickly steal customers away once times start getting bad for Dufry.
  • Global Disruption: The company has operations all around the world, which exposes it to many different geopolitical risks and is heavily influenced by global economic factors.

Understandability: 3/5

While the core business of retail is relatively simple, Dufry’s global operations, complex financials, international accounting standards, and reliance on macroeconomic factors make it difficult to understand fully, also the many parts of their business can be confusing.

Balance Sheet Health: 2/5

Dufry’s balance sheet is not in an ideal situation with a large amount of debt that requires deleveraging to achieve strong financial health. However, the business is generating better cash flow as travel recovers, and is on track to lowering debts, which increases future prospects.