Portobello — Scaling to a national presence

Portobello was founded in 2016 with a key focus of developing a national presence for its Portobello-branded retail outlets (company-managed and franchises) over the long term, from its current base of 24 stores. Management has yet to elaborate on its definition of ‘national coverage’, but some competitors have over 700 stores in Italy, suggesting significant potential for future space growth. Portobello’s integrated business model is unique, in public markets, as it sources its products through a combination of media barter (own and third-party) and cash purchases more cost effectively than its competitors, enabling it to act as a price leader in its chosen categories. Portobello’s core offer of branded homewares, electronics, personal hygiene and home care, clothing, and other (eg jewellery) is likely to evolve further. In addition to retail outlets, it sells to the consumer via marketplaces (eg Amazon). Beyond, its consumer-facing activities, Portobello clears unsold inventory and sells other more opportunistic products not suited to Portobello’s retail outlets (eg cars) via its B2B business to other distributors.

Our primary valuation method for Portobello is a DCF analysis, which results in valuation of €121/share. Our key assumptions are that Portobello’s footprint increases to c 240 company-managed stores and 100 franchise stores by FY31, with a normalised operating margin of c 16%. We factor in a cost of capital of 12% (risk free rate 1.9%, company-specific risk premium of 15% and company beta 0.8 (source: Refinitiv)), and a terminal growth rate of 2%. As Portobello does not report using IFRS, comparing its multiples to international peers is not meaningful. Our growth forecasts for Portobello (see below), which are much higher than consensus estimated growth rates for the peers, would point to a premium valuation, prior to any discount for liquidity or execution risk.

From FY16–21, Portobello’s revenue CAGR has been c 145%, with the highest rates of growth from Retail (c 282%) and Media (c 175%) followed by B2B (c 100%). Despite the short-term disruption from COVID-19, Retail (and other revenues) continued to grow in FY20 and FY21 as the company continued to increase its store numbers and average store size. The increasing relative contribution of higher-profit Retail at the expense of lower-profit Media and B2B has driven strong growth in Portobello’s gross margin from c 20–25% in the early years to 37.3% in FY21. We forecast total revenue growth of 61% to c €138m in FY22 and 53% to c €211m in FY23. The key driver to our forecasts is the rapid expansion of the Retail portfolio, with new and larger Portobello stores and the gradual maturing of the new space over the following three years. These lead to EBITDA growth of c 34% in FY22 and 53% in FY23.

Portobello is a young company with limited operating history, albeit good progress has been made already. Therefore the most apparent risk is management’s ability to execute the ambition to scale the business nationally (including new franchises) while continuing to enjoy the benefits of the barter business model as it grows. The barter model includes non-cash transactions, which complicate the accounting. As a small consumer-facing company Portobello faces potential macroeconomic challenges and shocks (eg COVID-19) that may affect consumer discretionary income, and a high level of competition from better-capitalised companies. The share has a limited free float, albeit that has been increasing (currently 35%).

Portobello was founded in September 2016 by four partners: Simone Prete (chief executive officer), Roberto Panfili (chief operating officer), and Stefano Caporicci and Luca Nardi (two investors who had no executive involvement). They recognised the ongoing changes in the retail market (increasing competitiveness), the changing purchasing habits of consumers (moving online and greater value focus), and the opportunity provided by the use of media bartering activities in helping to maximise the profit potential of a new retail format. The shares were listed on 13 July 2018 on the AIM Italia market with the issue of 444.3k new shares at a price of €4.4, raising gross proceeds of c €2m, to give a free float of 16.4%.

Portobello has a clear mission: to provide quality products at affordable prices, anytime, anywhere to consumers. The primary focus is to grow its retail activities to a national presence level (from a current base of 24 stores). At the time of the IPO there was an aspiration to develop the business in other European markets, but we believe this is now unlikely in the medium term given the perceived opportunity in Italy.

Portobello sources branded products from its suppliers/clients through a combination of media barter (ie using the exchange of owned and third-party advertising inventory in return for the purchase of those goods) and cash purchases. The use of barter and third-party media enables Portobello to acquire goods at more competitive prices than its competitors, and in turn, sell those products at lower prices than its competitors. Any residual stock that cannot be sold in its retail outlets, as well as other more opportunistic product purchases are sold through its business to business (B2B) channel to commercial partners, typically at a significant (greater than 50%) discount to prices it achieves in the retail outlets.

The company has three strategic business units (Exhibit 2):

Portobello has demonstrated strong growth (Exhibit 1), with FY21 revenue of €85.5m and EBITDA of €16.5m. Media has consistently been its most important revenue source, but Retail revenue will become the biggest source of revenue given management’s anticipated growth in the number of stores, both company owned and franchised.

As the barter business model is relatively uncommon in publicly-listed equities, below we focus on the mechanics of the business, and how the transactions are reflected in Portobello’s financial statements, ahead of focusing on the activities of the individual business units.

The transactions with respect to the use of barter for the purchase of products acquired that are subsequently sold are shown in Exhibit 3 below.

The example shows the acquisition of goods valued at €100k by Portobello, in return for the sale of advertising valued at €100k. The goods are then sold through Retail at €120k. Depending on the cost of the media (zero/low cost if Portobello’s own advertising inventory or an indicated €20k if third-party media) the reported gross profit is either €120k or €100k, respectively. The key difference between this and the more typical cash purchase of goods is the use of an estimated market value of advertising inventory, in return for the goods acquired. Simplistically, at the group level, Portobello’s gross profit is the difference between the Retail selling price (€120k) and the cost of Media (€0–20k).

In the example above, Portobello’s Media business unit invoices the client for the imputed market value of the advertising, and the client invoices Media for the value of the goods; importantly, no cash changes hands. Portobello determines the imputed value of the inventory and associated advertising based on what it believes the products can ultimately be sold for. The Media revenue and associated cost are recognised as the advertising inventory is used/consumed. For Retail and B2B, there is no cost of goods sold as Portobello allocates all of the acquisition cost against Media, and there is no subsequent invoicing between Media and Retail or B2B. Under Italian GAAP, Portobello reports revenue and costs on a gross basis, so would recognise gross revenue of €220k (Media €100k and Retail €120k), COGS of €100k (all Media), with no inter-company elimination. As the company moves to IFRS, likely for the reporting of FY22 results, management believes Portobello would report lower revenue and costs as these are netted off, but would still report the same absolute gross profit. As an aside, in the interim, this makes comparison of Portobello’s sales multiples versus its peers, which may report under IFRS, not meaningful.

In determining the purchase price of the goods from the client, and therefore the estimated value of media advertising revenue, the skill is in the knowledge of the product markets, specifically competitors’ pricing, and taking a view on the ultimate selling price, with the aim of being a price leader. Portobello is then able to determine a media strategy based on the client’s brand requirements, for example geographic focus or demographic target, and the value of media acquired.

Extending the company’s example above in Exhibit 3, below we demonstrate the potential variability of Portobello’s income statement depending on the source of products and channel sold through. In both examples we assume all media consumed is Portobello’s own (ie with a zero cost of sale).

Exhibit 4 shows Portobello’s financials if 100% of goods purchased via barter are sold in Retail at the same mark-up as Exhibit 3 (ie 20%), and the goods acquired for cash are sold in Retail at a higher mark up of 65%. For the goods acquired through barter, Portobello would recognise revenue of €440k and gross profit of €240k, a gross margin of 55%. The addition of goods acquired with cash and sold physically in the stores increases group revenue to €770k and gross profit to €370k, but the gross margin reduces to 48%.

In Exhibit 5, we change the assumption for the channel split of goods acquired through barter to 50:50 Retail:B2B, with goods sold in B2B at an 80% discount to Retail price (and also a discount to the imputed value of the advertising inventory). For the goods acquired through barter, Portobello would recognise revenue of €340k and gross profit of €140k, a gross margin of 41%. The addition of goods acquired with cash increases group revenue to €670k and gross profit of €270k, a gross margin of 40%.

In all cases, the absolute gross profit for goods acquired through barter is equivalent to Retail plus B2B revenue less the cost of Media: €240k and €140k in the examples above. Portobello’s revenue, gross profit and gross margin are maximised when it is able to sell a greater proportion through Retail than B2B. However, B2B fulfils a key role in that it enables a faster sell through than might be achieved elsewhere, which is beneficial for the timing of cash flow, albeit at a lower revenue and gross profit.

Management estimates that c 50% of its goods acquired for its own retail activities are acquired using barter, and goods for B2B are 100% sourced using barter.

As already highlighted, there are no cash flow implications on the initial invoicing between the client/advertiser and Portobello when barter is used to purchase goods. On the asset side of the balance sheet, the purchase of the inventory (goods acquired) is recognised when invoiced, and the advertising to be delivered is recognised as a deferred liability (deferred advertising income), which appears in creditors in Exhibit 13 (Financial summary). As the advertising revenue is delivered it is recognised in the income statement and the deferred income balance reduces. When Portobello contracts with a third-party media owner for the delivery of media, it recognises a prepaid advertising asset (equivalent to the value of the inventory acquired) and creditor for the value of the media acquired. As the media is consumed, the balance sheet asset is reduced and the expense of the media is recognised in the income statement.

At the end of an accounting reference period, as well as the physical inventory, Portobello’s balance sheet includes an asset for prepaid advertising (to be consumed) and a liability for deferred advertising income (advertising to be provided to the client). As these are both non-cash items and given the scale of the items, the movements can distort the working capital section of Portobello’s cash flow statement. The only media assets and liabilities for which there are cash flow implications are those with respect to the actual cost of third-party media, which is a small proportion of the rate card.

We believe Q4 is typically a seasonally important time of year for Portobello as its clients will have greater demand to sell unsold products as they approach the calendar year-end, therefore, according to management, Portobello’s physical working capital investment (inventory) is higher at the year-end than is typical through the year.

The advantages of the barter model to Portobello’s suppliers are:

The advantages to Portobello of the barter model are:

Portobello’s Retail activities include its own physical stores and the resale of products on other marketplaces (mainly Amazon). There is no internal e-commerce activity as management prefers to focus its marketing and promotion on developing its physical locations. In FY22, the company will begin the (delayed) rollout of franchise stores, which had been indicated as an opportunity for future growth at the time of the IPO. The rollout of franchises was delayed due to the operating restrictions caused by the COVID-19 pandemic.

The first Portobello store was opened in December 2016 and the first store in Rome followed in April 2017. The number of stores increased to 21 by the end of FY21 and 24 at the time of writing, with a geographic footprint for open and soon-to-open stores as shown in Exhibit 6.

Management has an ambitious target to grow the store portfolio to a national presence, through a combination of company-managed and franchise stores, but the extent and phasing of the ambition has not been quantified. Portobello’s competitors, albeit all do not overlap in all product categories, have store portfolios that range in size from c 40 stores (Dmail) to 80 stores (Satur) to 700+ stores (Acqua e Sapone, Kasanova and Tigota), with various models (ie a combination of company-managed stores and franchises). Therefore, there appears to be a significant growth opportunity for Portobello.

The original Portobello stores were conceived and developed as neighbourhood shops located in areas of high pedestrian footfall with a served population of over 100k inhabitants. The earlier stores typically have a trading footprint of 200–250 square metres (including on-site storage), but some of the more recent stores opened have been in shopping malls and ranged in size from 1,000–2,250 square metres, albeit the latter is an outlier. Across the store portfolio, the format is the same but the number of stock keeping units (SKUs) across the product ranges varies.

Portobello’s product offer is typically of branded products that are slow moving for its suppliers, and therefore the suppliers are keen to monetise the inventory more quickly than otherwise might be the case. The core product categories, in descending order of sales, are: homewares (25%), electronics (25%), personal hygiene and home care (20%), clothing (15%) and other, including jewellery, gifts and food and beverages (15%). The brands offered include Samsung, Panasonic, Singer, Candy, Sodastream, Palmolive and Dove. The brand owners do not place any restrictions on the level of discounts that Portobello can offer on the products. Management expects the product offer will continue to evolve including the likely addition of furniture (which is already being trialled in larger stores), vouchers (restaurants and hotels) and extending the food range in the near term. There are the usual seasonal changes in the offer, for example back to school and Christmas, but the number of SKUs by category through the year is relatively consistent. Portobello aims to be the price leader in all categories versus its competitors, instead of being a product leader (ie it does not carry the entire product range of a supplier, only those products that can be sourced cost effectively). With respect to product selection, the stores are restocked on a weekly basis with wider product rotations made on a monthly basis, and much greater seasonal changes made every three to four months. The stores do not target a specific demographic and there is no skew to lower-income customers.

In order to increase the recognition of the brand, Portobello advertises and promotes itself both through traditional means of communication (adverts, flyers, posters etc) and through the website. Each month, Portobello creates and distributes a flyer (manually within a 1km range of each store, electronically and a 3D replica flipbook version is available on the company’s website). The flyer typically promotes the best offers available on c 150 products. At the time of the IPO, the flyer was typically four to eight pages and has grown to 12 pages at the time of writing as the store base and number of SKUs have increased. The March 2022 flyer included the following:

In February 2021, PB Retail Srl (PBR) was established as the vehicle through which Portobello would accelerate its space expansion plan across Italy. Portobello owns 51% and the balance is owned by a commercial partner with strong expertise in apparel retail stores in shopping malls.

Franchises will be used to develop the Portobello brand in regions where local knowledge is required and the stores are likely to be a combination of small and large stores.

Under the new franchise relationships, the franchisee is responsible for the investment in setting up the store using Portobello’s prescribed store formatting. Portobello will sell inventory to the franchisees on consignment (ie the franchisee has no inventory risk as unsold inventory can be returned to Portobello), and in return Portobello receives a royalty equivalent to 50% of the gross profit of the franchisee.

The competitors (mentioned above) do not compete with Portobello across its entire product range. Acqua e Sapone’s offer is more focused on household care and personal care; Kasanova is focused on homewares, furniture, textiles and gift ideas; Tigota’s offer is more aligned with that of Portobello, although Tigota has a significantly higher representation in cleaning products and personal care; and Satur offers domestic appliances, table/kitchenware and home furnishings (including bathroom). In the majority of categories, Portobello also competes with local and national food retailers and online with Amazon.

Following the IPO, Retail generated strong revenue growth through FY19 as space grew (number of stores and increase in average store size) and sales densities increased. The effects of COVID-19 can be seen in the slowing rate of new store growth from H120 through H121, and the decline in sales densities through FY20. The recent addition of larger stores is positive for the group’s average sales densities.

We expect Portobello’s expansion plans for the company-managed stores including larger average store size, the maturing of new space added (typically within three years), the addition of franchises and the recovery from the initial effects of COVID-19 that affected FY20 and FY21 will lead to strong revenue growth. We forecast revenue growth of c 230% to c €38m in FY22 and further growth of 115% to c €82m in FY23.

We assume Portobello adds 20 company managed stores and five franchise stores in FY22 and a further 30 and 15 stores, respectively, in FY23, an almost doubling of company-managed space in both years. With respect to sales densities, we assume a large uplift in FY22 (fewer days’ disruption from COVID-19 and more, larger new stores) and FY23 (larger new stores)

Portobello’s Media activities focus on the sale of advertising space in its proprietary fully-owned media (magazines), partially-owned media (five local newspapers), concessions (outdoor advertising in Rome and Milan, and Metro (free newspapers) in major cities including Rome, Milan and Turin, and in third-party media (Il Giornale, Forbes, Mediaset, RDS (radio), Mondadori, Gedi Group and Sky Italia).

The advertising is sold either for monetary consideration or, primarily for barter (ie in exchange for products, which it subsequently sells via its Retail or B2B channels). Therefore, with zero/low cost to Portobello, the use of its own media for barter gives Portobello a competitive advantage versus its retail competitors. With respect to third-party media, management believes it has very good relationships with media owners and therefore gains high discounts to the rate card.

Portobello's publishing activities include a number of proprietary and licensed titles. Its sole focus is selling the advertising inventory, with functions such as printing and distribution outsourced. Content creation for the individual magazines is either done in house or outsourced.

Portobello entered the publishing market in 2018 with the February launch of ORA.IT WEEKLY, a weekly magazine with a focus on gossip and entertainment, and the May launch of LEI STYLE a monthly magazine dedicated to fashion and style, both in print and online. There followed three further launches in 2018 and one in 2019. VOI, a biweekly magazine with a broad demographic focus in the family segment was launched in 2019. The number of publications has varied (six in FY19 including MONDO PET, ORA CUCINA and VOI NUOVA CRONACA. There are currently two magazines published, ORA and LEI STYLE.

In 2019 Portobello acquired 24.5% of Web Magazines Maker, which holds the exclusive Italian licence for Rolling Stone and Variety magazine under a rolling five-year licence.

Media has consistently been Portobello’s largest source of revenue, and at €54.6m in FY21, it represented 64% of group revenue. (Note Publishing’s revenue was separately disclosed until it was subsumed into the wider Media business after H119.) Media’s revenue has grown in every six-month period since IPO, except H121, as the inventory available has grown and Portobello’s client base has increased. In H121, media revenue declined by c 11% y-o-y as economic weakness surrounding COVID-19 related lockdowns led many clients to shift their advertising spend to H122, when Media revenue grew by c 50%.

All products sold through B2B channels are acquired through barter and are made to other commercial partners. Historically, the products sold through B2B were typically residual inventory (ie products not able to be sold through the other channels due to having higher inventory than the smaller store base, at the time, could sell). However, this has progressed to now include more opportunistic purchases of products that are not suitable for the retail outlets, for example cars and food and beverages, as well as remaining an outlet for residual retail inventory. Cars are only purchased after a resale channel has been identified. The cars are then retrieved from the seller and despatched to the buyer without passing through the Portobello warehouse. There is no inventory risk to Portobello.

As Portobello’s Retail channel develops, B2B is likely to become a less important source of revenue to the group, which should be positive for the absolute level of sales and profitability from a group perspective given products sold via B2B are typically at a significant discount to prices achieved in Retail.

Management believes the main benefit of the B2B channel is it improves the cash cycle by enabling it to get rid of excess stock quickly.

B2B’s revenue growth has been volatile with declines reported in H218 (c 20%) and H120 (c 33% due to COVID-19 restrictions and a greater proportion of sales through Retail, albeit both were preceded (H118: +124%) or followed (H220: +116%) by strong rates of growth.

There are no stated KPIs for B2B, and management’s narrative typically highlights the activity as opportunistic.

We believe the main sensitivities are:

Our primary valuation method for Portobello is a DCF as it reflects the long-term growth potential as Portobello builds its national retail presence, albeit short-term macroeconomic shocks are difficult to predict.

Our 10-year DCF assumes Portobello grows to c 240 company-managed stores (with a sales density of €2,640 per sqm) and 100 franchise stores by FY31, with a normalised operating margin of c 16% (versus c 14% in FY22e). We factor in a weighted average cost of capital (WACC) of 12% (risk-free rate 1.9%, company-specific risk premium of 15% and company beta 0.8 (source: Refinitiv)), and a terminal growth rate of 2%. In Exhibit 10 below we show the sensitivity of the valuation to differing terminal growth rates and cost of capital assumptions.

To demonstrate the sensitivity of the valuation, if we keep a consistent operating margin of 14% from FY22–31 versus our assumption above of a terminal FY31 margin of 16%, the DCF-based valuation reduces to c €102 per share.

Portobello’s unique business model in the public markets, with a combination of media and retail assets and the use of barter to source products, means there are no direct peers with which to compare its valuation. In addition, financial reporting under Italian GAAP rather than IFRS means that enterprise-value based multiples are not meaningful, given for example no capitalisation of lease liabilities. In addition, under Italian GAAP lease costs are expensed through the income statement, and EBITDA is lower than under IFRS.

Notwithstanding the above, below we show consensus estimates (source: Refinitiv) for sales growth, profitability and P/E multiples for a range of general merchandise and electricals retailers across Europe and the United States. The peer group is not perfect due to the range of product exposures and the relative maturities of those businesses.

Our forecast revenue growth for Portobello of c 50–60% in FY22e and FY23e is significantly ahead of the median growth rates expected for the European peer group (5% and 6% respectively) due to its earlier stage and consequently higher rate of new space growth versus the peers. Portobello’s higher growth in sales translates to significantly higher EPS growth of 33-53% in FY22e and FY23e, which should warrant a premium valuation ahead of any discount for share liquidity and other company-specific (ie execution) risk. Attributing the median consensus European P/E multiple for FY23 of 9.9x would provide a share price for Portobello of c €52.

We consider the US-listed peers to be less relevant for comparison given the greater size of their addressable market and market capitalisation versus Portobello. However, we note there is some product overlap in lower-priced goods such as homeware, house, personal care and food. Attributing the median consensus US P/E multiple for FY23 of 19.1x would produce a share price for Portobello of c €101, and the median consensus P/E multiple for FY23 for all companies (European and US) of 13.0x would give a share price of €69.

The expansion of all Portobello’s activities has led to strong growth in revenue and profitability, including gross and EBITDA margin expansion, while its cash flow reflects the ongoing investment in the business.

Between FY16 and FY21 Portobello achieved a revenue CAGR of c 145%, with the highest rate of growth from Retail (c 282%) and Media (c 175%) followed by B2B (c 100%). The increase in the relative contribution from the higher-profit Retail at the expense of lower-profit Media has resulted in Portobello’s gross margin growing from c 20–25% in the early years to 37.3% in FY21. In addition to revenue, Portobello reports ‘value of production’, which includes revenue and ‘other income’ (eg government grants and landlord refunds due to COVID-19 closures). As all margins quoted by the company are calculated with reference to value of production, we have adopted this method in our model. At €2.7m (c 3% of revenue) in FY21 and €1.2m (c 2% of revenue) in FY20, ‘other’ income is not material, and, by definition, quite variable. In our forecasts we assume other income continues at €1.5m pa.

We forecast total revenue growth of 61% to c €138m in FY22 and 53% to c €211m in FY23. The key driver to our forecasts is the rapid expansion of the Retail portfolio (see Retail section), with new and larger Portobello stores and the gradual maturing of the new space over the following three years.

With limited visibility for the outlook for B2B revenue, we forecast revenue growth of 20% to c €23m in FY22 and c 10% to €26m in FY23, which is much lower than its historic growth rates. Portobello’s future gross margin should improve as B2B’s relative contribution to group revenue reduces over time.

Our revenue forecasts for Media assume that c 40% of Retail revenue and 100% of B2B revenue (ultimately sold at 40% of acquisition cost) are acquired via barter.

For gross profit we assume company-managed stores generate a gross margin of 60% (40% margin on cash-purchased items and 90% margin on barter-purchased items), and B2B’s gross margin is 100%. Our estimated gross margin of c 33% in FY22 and c 36% in FY23 compares with FY21’s 37.3%, which was flattered by other income due to the pandemic.

Below the gross margin line, we assume other operating costs, including personnel, grow in line with Retail and B2B revenue. These lead to EBITDA growth of c 34% in FY22 and 53% growth in FY23, with a slightly lower margin than FY21 due to the dilutive effect of the addition of new space with lower sales densities.

Portobello’s effective corporate tax rate has been quite volatile since IPO, ranging from c 23% in FY18 and increasing to c 32% in FY21. Our forecasts assume a corporate tax rate of 32%.

The cash flow dynamics of the use of barter were described earlier. To summarise, the company’s cash conversion cycle in barter is favourable as advertising services are typically provided over a few months while Portobello sells the products over a shorter timeframe.

A good portion of sales of advertising campaigns are concentrated in the second half of Portobello’s financial year, and more precisely, in the fourth quarter. As a result of this seasonality there may be greater concentration of advertising sales revenue and a consequent increase in the inventory of goods received in payment for the advertising sold at the end of the year.

We assume that each new store requires capex of €300k, with an additional c 15% to help fund central investment (warehouses etc) to support the growth, which we allocate equally across fixed and intangible assets. In August 2020, the company transferred its operational headquarters and warehouses in Rome. The site has approximately 2.5k sqm of office space and approximately 7.5k sqm of warehouse space. We believe the company will increase its investment, including the addition of further warehouses in new parts of Italy, as it builds its presence. For each new store, Portobello must invest capex (30–35% of total initial investment), inventory (c 50%) and a down payment to the landlord (c 15%), with the latter expensed through the income statement.

Portobello’s growth has been funded by debt raises in every year since IPO and an equity raise (a private placement that resulted in the company’s free float increasing to 26.5% from 22.7%) of c €10m in June 2021 at a share price of €41. We believe further debt raises are likely to fund the company’s expansion and initial investment in new stores.

At the end of FY21, Portobello’s gross debt was €19.8m and its net debt position was €17.3m. Portobello does not report using IFRS, therefore lease liabilities are not capitalised and its net debt position appears lower than companies that have adopted IFRS.