CVC’s German perfume float may fail the smell test

Pungent aroma. Like private equity buyouts, fine fragrances have an average shelf life of three to five years. Given CVC Capital Partners has had German perfume retailer Douglas in its cabinet for almost a decade, it’s starting to give off the wrong sort of smell. A 7 billion euro listing in Frankfurt is therefore logical – but high debt, slow online growth and its lack of expansion in new markets may just divert the pungent aroma elsewhere.

Douglas, which operates 1,850 stores in continental Europe including in France, Italy and Poland, has already gone through several rounds of private equity ownership. The Düsseldorf-based perfumery and cosmetics chain – founded in 1821 as a soap manufacturer – traded publicly in Frankfurt until 2013, when U.S. buyout fund Advent made a 1.5 billion euro swoop to take it private. Two years later CVC paid almost 3 billion euros to secure control.

Covid dealt Douglas a big blow – revenue dropped 45% in 2020 amid store shutdowns. But adjusted EBITDA grew at a record 22% to 726 million euros in 2023 and operating margins have hit 18%. The company said on Jan. 15 it expects to hit net sales of 5 billion euros in 2026, growing at a compound annual growth rate of 7%. Combining the rumoured 7 billion euro equity value with 3.4 billion euros of net debt, investors would be paying a multiple of nearly 13 times what Breakingviews calculates as Douglas’s likely 2024 adjusted EBITDA of 813 million euros.

How reasonable that is depends on whether investors see Douglas as akin to U.S. rival chain Ulta Beauty, which trades on 12 times its 2024 EBITDA. That could be justified: Douglas boss Sander van der Laan seems confident the company can hike EBITDA by a quarter to 900 million euros in 2026 while keeping margins at 18.5%. By comparison, LSEG forecasts assume Ulta Beauty may only grow 10% and margins may contract from 18% to 16%.

Still, Douglas has some pungent factors. Investors may categorise it more like retail giants such as Walgreens Boots Alliance or Avolta, formerly known as Dufry, which trade at 5 and 4 times their 2024 EBITDA, respectively. Its growth hinges on striking so-called selective distribution deals with luxury firms such as Chanel, Christian Dior or Yves Saint Laurent as well as influencers such as Kylie Jenner. These aren’t guaranteed and leave it exposed to influencer downfalls such as befell Italy’s Chiara Ferragni, another Douglas brand. EMEA retail spending is expected to be sluggish in 2024, Fitch estimates, and while Douglas’s leverage has fallen since 2021 net debt is still 4.7 times 2023 EBITDA. The company has no plans to enter new markets and while it recorded an 11% boost in first-quarter online sales, it still lags peers like Britain’s Boots whose online sales grew 17.5% in the first quarter.

That makes a Douglas listing a double-edged sword for CVC. If it works out, the buyout shop’s long-awaited listing will get a shot in the arm. But Western Europe hasn’t seen a large retail IPO in a decade, since Zalando’s 5.3 billion euro one in 2014. The risk is investors turn up their noses.