Rapala VMC Company report 10/2020 - Inderes Yhtiöraportti
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Rapala VMC Company report 10/2020 Inderes Corporate customer
Rapala VMC Company report 1 October 2020 at 20:34 Analysts
Patience may yet be rewarded with a great catch Olli Vilppo
+358 40 761 9380
We are increasing our target price for Rapala to EUR 2.8 (previously EUR 2.6) and changing our recommendation to olli.vilppo@inderes.fi
Accumulate (previously Reduce). We have grown slightly more confident that, in the hands of new management, the
execution of Rapala’s strategy will start to bear fruit and the EBIT margin may return closer to the company’s historical
levels and the levels of its competitors. Extracting the latent potential of the brands will take more time, even in a good
scenario, but the markets are currently not really pricing in the improvement of profit performance and we believe that
the return/risk ratio is now in slightly positive territory.
We estimate that the company is getting back on track
Rapala’s EBIT margin was around 10% during the 2004–2011 period, but the company’s modest performance since then
has been characterised by problems with the fishing lure factory established in Batam, supply chain issues and a sharp
Recommendation
decline in sales in Russia, amongst other things. Rapala’s key competitive advantage – its strong brands – has been R iski Accumulate
overshadowed by problems for a long time now. The strategy launched by the company in 2017 recognised the (previously Reduce)
problems, but progress in carrying out the necessary changes has been slow. The change process appears to have Osta
accelerated under the new CEO who took the helm in March 2020, with the decision to close the Batam factory being EUR 2.80
Suositus
the most visible action taken by the company. Following the strong negative impacts of the early days of the restrictions Lisää (previously EUR 2.60)
imposed in response to the COVID-19 pandemic in the spring, the outdoor and hiking market has seen a clear boost,
which creates good conditions for the recovery of Rapala’s demand. Vähennä Share price:
We have made slight adjustments to our forecasts
EUR 2.60
M yy
Potential:
During the next 12 months, Shimano sales amounting to MEUR 25 will be removed from Rapala’s distribution operations.
We estimate that this will reduce EBIT by about MEUR 8. The key strategic projects – namely the MEUR 10 cost saving Korkea M atala 7.7%
programme, 13 Fishing sales and the start-up of distribution in countries freed up from the Shimano agreement – aim to Key figures
gradually compensate for the negative impact of the end of the exclusive distribution arrangement with Shimano. In
particular, we believe that achieving the cost savings of MEUR 10 by 2022 is a realistic goal. As a whole, Rapala’s results 2019 2020e 2021e 2022e
for 2020 will be very weak, particularly due to the COVID-19 restrictions, and our forecast for total revenue for the year is
Revenue 275.4 239.3 249.1 259.4
MEUR 239 (2019: MEUR 275), adjusted EBIT MEUR 5.6 (EBIT margin 2.3%) and earnings per share (adjusted) EUR -0.07.
growth % 5% -13% 4% 4%
Our forecast sees 2021e revenue rebound from the COVID-19 drop to MEUR 249 and EBIT to MEUR 14.5 (EBIT margin
5.8%), with the adjusted earnings per share improving to EUR 0.20. EBIT adj. 17.9 5.6 14.5 17.7
EBIT % adj. 6.5% 2.3% 5.8% 6.8%
The expected returns are highly dependent on the success of strategy execution
Net income 4.4 -7.3 7.1 11.2
Rapala’s 2020e multiples rise to very high levels as COVID-19 weighs heavily on the result, and the multiples do not EPS (adj.) 0.21 -0.07 0.20 0.26
provide support for the share. However, as early as 2021e, our forecast indicates that the P/E ratio will decline to an
attractive level of 13x and EV/EBITDA to 7x in spite of the profits remaining modest. If the execution of Rapala’s strategy is
successful and the company’s profitability starts to recover in earnest (EBIT over 10%), we see substantial upside in the P/E (adj.) 13.1 neg. 12.7 10.0
share. If the progress of the change process continues to be slow (EBIT around 5%), the value of the share will be close P/B 0.7 0.7 0.7 0.7
to the current level, as the current valuation does not, in our view, expect much better from Rapala. In our opinion, for the Dividend yield, % 0.0% 0.0% 3.9% 5.8%
share price to decline substantially from the current level, the company would need to become mired in crisis, but the
EV/EBIT (adj.) 11.6 33.5 12.6 10.1
probability of that scenario has been reduced now that the company has made it through the restrictions caused by
EV/EBITDA 8.0 13.8 7.3 5.8
COVID-19 unscathed and its cash flow has remained positive by a clear margin. The middle scenario is the most likely,
but we believe the probability of the positive scenario is higher than that of the negative scenario, which pushes the EV/Revenue 0.8 0.8 0.7 0.7
return/risk ratio of Rapala’s share to positive territory. Source: Inderes, EV includes hybrid bondShare price Revenue and EBIT % Earnings per share and dividend
8,0 0,26
275 8,0 %
7,0 0,21 0,20
7,0 % 0,17
262 0,15
6,0 259 6,0 %
253 0,12 0,10
5,0 %
5,0 249 0,06
4,0 % 0,04
4,0 239 3,0 % 0,00 0,00
3,0 2,0 %
2,0 1,0 %
9/15 9/16 9/17 9/18 9/19 0,0 % -0,07
2017 2018 2019 2020e 2021e 2022e 2017 2018 2019 2020e 2021e 2022e
Rapala VMC OMXHCAP
Revenue EBIT-% (adj.) EPS (adjusted) Dividend / share
Source: Thomson Reuters Source: Inderes Source: Inderes
Value drivers Risk factors Valuation
• Successful strategy execution • Unsuccessful strategy • The P/E ratios for 2021e–
MCAP P/E (adj.) • Revenue turning to growth execution 2022e are low (13x and 10x)
100 12.7 •
•
Improving cost-efficiency
Shutdown of loss-making
• Rapid digitalisation of
distribution channels
and we see a clear upside as
Rapala moves forward with
MEUR 2021e
Batam plant supports profit • High fixed costs the execution of its strategy
performance • Significant seasonal variation • The low P/B valuation of 0.8x
• Release of capital from in demand relative to the strong brands
warehouses • The end of the Shimano reflects the market’s low
distribution agreement brings confidence
EV P/E (adj.) uncertainty to forecasts • Dividend payouts in the
187 neg. • COVID-19 related difficulties in
Rapala’s customer base and
coming years depend on the
success of the turnaround in
MEUR 2020e
potential new shutdown profitability which the strategy
measures if the pandemic aims to achieve
worsensContents
Company description and business model 5–13
Industry 14–16
Strategy 17–20
Historical performance 21–22
Financial position 23–24
Investment profile 25
Forecasts and valuation 26–33
Tables 34–37
Disclaimer and recommendation history 38
4Rapala in brief
Rapala is the world’s leading manufacturer and seller
of fishing lures, treble hooks, fishing accessories and
filleting knives
1936
Established
1998
Rapala is listed on the stock exchange
MEUR 275 (+5% vs 2018)
Revenue 2019
MEUR 17.9 (6.5% of revenue)
EBIT (adj.) 2019
35
Countries of operation
2304
Number of employees at year-end 2019
• Own distributioncompany Distribution joint venture with Shimano
67% / 33%
Own products / Third-party products 2019
• Own factory Sourcing unit
Source: Inderes 5Company description and business model 1/3
The market leader in fishing lures in North America is very strong especially in the
fishing lure segment and the company is the clear
Rapala is the world’s leading manufacturer and Revenue split by geographical area,
market leader in hard lures in the region. Rapala’s
seller of fishing lures, treble hooks, fishing global, 2019
revenue from North America comes primarily from
accessories and filleting knives. Rapala’s total
its own products.
revenue in 2019 amounted to MEUR 275. The
Group’s own products accounted for 67% of total The Nordic countries accounted for 21% of
12 %
sales, with the remaining 33% coming from the Rapala’s total revenue in 2019. In the Nordic
North America
distribution of third-party products through the region, the company has a very strong market 38 %
company’s global distribution network. position and it fully dominates several product Nordic countries
categories. Thanks to its strong distribution chain, 29 % Rest of Europe
Rapala has a very extensive distribution network
the company also sells large amounts of third-
that comprises about 35 countries. In addition to Rest of the World
party products in the Nordic countries. However,
its wholly-owned distribution companies, Rapala 21 %
the most significant of the third-party distribution
has jointly owned distribution companies with
deals, an exclusive agreement for Shimano’s
Shimano (Russia, Kazakhstan, Belarus, Czech
fishing products, will end on 1 October 2020.
Republic, Hungary, Romania, Croatia) in which
Rapala exercises control. Rapala also uses Rapala’s second-largest market is Rest of Europe,
external distributors in about 100 countries. Rapala which accounted for 29% of total revenue in 2019.
also has an online store targeted directly at It includes all European countries outside the Revenue split by geographical area,
consumers in North America (since 2011) and in Nordic region. The most significant countries are Europe, 2019
Europe (since May 2018). France, Russia and Spain. The company is
currently in the process of carrying out
We estimate that approximately 95% of Rapala’s Finland
consolidation measures related to its distribution
B2B revenue from retailers goes through its
companies in the Rest of Europe market area to 20 %
distribution companies. The share of local 23 % Other Nordic
improve cost efficiency. This is important, as the
distributors is relatively limited in spite of the large
distribution of Shimano’s product portfolio will end
number of countries covered. We estimate it Russia
in France, Switzerland, Spain, Portugal and the
comes to about 5% of the company’s total
Baltic countries on one of two dates depending on 21 %
revenue. The company’s online store sales are France
the country (1 July 2020 and 1 October 2020).
directly to consumers (B2C) and we estimate that 27 %
their share of total sales is still modest at only a The Rest of the World market area represents 9%
Other European
few per cent in spite of the increase in online sales about 12% of the company’s total revenue. The countries
caused by the COVID-19 pandemic. Rest of the World market area is geographically
fragmented and includes business in Asia, South
Rapala’s largest and most important market is
America and Africa, for example.
North America, which represented 38% of total
revenue in 2019. The company’s market positionCompany description and business model 2/3
Rapala’s business model is based on the each profit centre in the chain makes its own
company’s in-house production and local decisions. Consequently, the country-specific 285 Development of sales and profitability 9,0 %
distribution companies. The company’s production distribution companies have had to order their 280 8,0 %
plants operate as independent profit centres and products from the factories and sourcing units
275 7,0 %
are largely responsible for their own sourcing several months in advance to ensure product
activities. The company’s in-house production availability. The lead times of the production plants 270 6,0 %
MEUR
operations include fishing lures (Finland, Russia, have occasionally been remarkably long, as the 265 5,0 %
Estonia), hooks (France and Indonesia), ice augers orders from the country companies have been
260 4,0 %
(Estonia), knives (Finland), skis (Finland) and bait processed by the production plants one at a time.
(UK). The rest of the Group’s own products are At the same time, the country companies have 255 3,0 %
sourced using subcontracting primarily in Asia. The promised their large retail customers (Walmart, 250 2,0 %
company’s main sourcing unit is located in Taiwan. Bass Pro/Cabella) to deliver products in a matter of
From the perspective of the Group’s operations, days, which means that the country companies 245 1,0 %
the sourcing units can also be viewed as have had to keep substantial buffer stocks. 240 0,0 %
production plants, as they are also separate Accordingly, high inventories have been the most 2014 2015 2016 2017 2018 2019
companies and their operations are comparable to obvious weakness of the business model, as they Revenue EBIT-%
the Group’s actual production plants. have tied up a lot of capital and substantially
reduced the company’s return on equity (ROE %).
Of the 35 country-specific distribution companies,
the larger ones operate as independent profit As part of the strategy launched by Rapala in 2017,
centres and the smaller ones as commission- the business model has been developed to better Inventory relative to revenue
based agents. The distribution companies order prioritise the interests of the Rapala Group as a 45%
products from the production plants based on whole, with a more comprehensive approach to 40%
their own demand forecasts. They also the supply chain and several projects to streamline 35%
independently order third-party products directly the supply chain. These projects are discussed 30%
from suppliers under terms of delivery that are later in the strategy section. The Group has also
25%
based on the agreements signed by the Group. taken a more centralised approach to supervising
20%
Unlike many other consumer goods businesses, the purchasing activities and inventory balances of
15%
the Group’s involvement in controlling the the country companies. Rapala’s inventories have
purchasing activities of the country companies has begun to decrease following these changes. 10%
historically been very minimal. The idea behind the Inventory relative to revenue has declined from 5%
structure is that it enables the Group to make 41.8% in 2015 to 33.6% in 2019, which indicates 0%
better use of the local expertise of the country that the business model has developed and -5% 2014 2015 2016 2017 2018 2019
companies in decision-making and demand become more agile. Nevertheless, the
forecasting. At the same time, however, the organisation remains very complex and the Inventory relative to revenue ROE-%
complexity of the structure has been a significant changes are slow. We expect the streamlining
disadvantage. Product flows and the supply chain efforts to continue at least until 2023.
are difficult to manage comprehensively whenRapala’s value chain
Materials Own factories Wholly-owned Retailers
distribution (B2B)
companies
External
Sub-contractors Sourcing unit distributors
(B2B)
Joint distribution
Manufacturers of companies with Rapala online
third-party Shimano in
store (B2C)
products Eastern Europe
• Rapala’s factories source • Rapala’s factories and the • The country-specific • B2B sales represent the
their materials themselves sourcing unit operate as distribution companies (35 majority of Rapala’s sales,
• For those of Rapala’s profit centres that in total) order products with retailers accounting
products for which in- manufacture/source and deliver them to their for most of these
house production is not orders based on orders customers • The share of the Group’s
sensible (e.g. fishing received from the • Previously, the distribution own B2C sales (Rapala’s
accessories), distribution companies companies have typically online store) remains
subcontracted • The distribution had their own inventories, small
manufacturers are used, companies order third- but Rapala is now
mostly in China party products directly centralising these
from manufacturers • Rapala has also started to
use various centralised
purchasing budgets for
the distribution companies
8
* Source: InderesThird-party Functions Business idea Customer segments
The main goal is to Rapala VMC manufactures and
increase the utilisation Product development distributes the Group’s own products B2B – large retail Walmart, Bass Pro Shop,
rate of the distribution chains Amazon, S Group, Motonet
and distributes selected third-party
channel
products to retailers.
The common denominator Manufacturing,
subcontracting B2B – smaller Fishing supplies stores,
between all of the product
and sourcing retailers sporting goods stores
categories is the same
customer base (third-party)
Exclusive distribution deal Strong brands In-house production Own online stores:
Distribution and sales B2C – consumers
with Shimano will expire in Rapala.com, Marttiini.fi
2020
Products
Markets Resources
North America
38% of revenue Strong brands
Lures and bait Hooks Fishing Rods and
Rest of Europe line reels
In-house product Extensive in-house B2B
29% of revenue
Manufacturing development distribution:
expertise of European +
Nordic Joint ventures with
production plants
21% of revenue Shimano in Russia and
Eastern Europe Fishing Other products: Third-party products:
Local expertise of +
Rest of the World accessories: Marttiini knives, Shimano + others
country companies External distributors in
12% of revenue Pliers, clothing, ice Peltonen skis (hunting, outdoor
about 100 countries augers goods, winter sports)
Cost structure Revenue MEUR 275.4 (2019) 285 Revenue streams 10,0 %
Employees: 2,304 (EOY 2019) 280
275 8,0 %
270
6,0 %
MEUR
265
260
4,0 %
255
250 2,0 %
Materials and services Personnel expenses Other expenses 245
(47.6%)* (26.0%)* (17.6%)* 240 0,0 %
2014 2015 2016 2017 2018 2019
Source: Inderes * % of revenue Revenue EBIT-%Risk profile of the business model
Estimate of the overall risk level of Rapala’s
business
The rate of change in the industry is slow
Market consolidation
ENVIRONMENT
Rate of change in The outdoor and hiking market is growing
OPERATING
1 and COVID-19 has accelerated its growth
the industry
1
The company’s The business is in a stage of
development 1 restructuring, which creates significant
phase uncertainty regarding the outcome
The market is defensive and the overall
Market economic trends have a limited impact
2
REVENUE
cyclicality on the purchasing patterns of end
2 customers
Distribution and Fragmented global customer base,
continuity of 2 which reduces the weather-
dependence of the sales of retailer
revenue customers, for example
The cost structure is mostly fixed and
CAPITAL STRUCTURE PROFITABILITY
Scalability of costs 3 changes in high-margin sales are
quickly reflected in the bottom line
The current strategy aims to increase the
efficiency of distribution operations in
Cost structure 3 Europe and Rapala has decided to close its
loss-making lure factory in Batam
The business model ties up significant
Commitment of 4
capital in inventories, in particular. The
capital company aims to improve in this
4 respect.
The balance sheet provides limited
Need for financing 4 room to manoeuvre due to low
profitability and the company has had to
LOW RISK LEVEL HIGH RISK LEVEL introduce a hybrid bond
Source: Inderes 10Products
All categories now in Rapala’s own portfolio estimate that the share of this category has the time of the acquisition, Sufix generated annual
increased slightly thanks to positive development revenue of approximately MEUR 10, but Rapala’s
Rapala’s own product portfolio can be divided into
in North America. Lures are the most profitable of strategic objective was to pursue strong revenue
six categories: “Lures and bait”, “Hooks”, “Fishing
the Group’s own products. We estimate their sales growth and expand the Sufix product family. The
line”, “Fishing accessories”, “Other products” and
margin to be approximately 50–60% depending company’s goal was to increase the revenue of
“Rod and reel”. In practice, the last of these
slightly on the annual sales mix. We believe that the fishing line business to MEUR 30–50 over the
categories was missing from Rapala’s own
the profitability of lures has remained stable due long term by improving its brand position and
portfolio for a long time. However, the situation
to high brand loyalty and the ability to maintain expanding distribution. However, the growth of
changed following the end of the Shimano
pricing power, particularly with regard to Rapala the fishing line business has not met Rapala’s
partnership announced in 2019 and the
hard-bodied lures. expectations. In 2016, it generated revenue of
acquisition of a minority interest in DQC
MEUR 18 (7% of total revenue) and we estimate
International that it enabled. Rapala also has a high market share in hooks
that the segment’s sales have not increased
Lures and bait is the most profitable category Rapala acquired the French fishing hook significantly thereafter. The fishing line business is
manufacturer VMC in 2000. VMC is the global also highly profitable. We estimate the sales
Rapala is the world’s largest manufacturer of
market leader in treble hooks (with an estimated margin to be approximately 50%.
fishing lures by a clear margin, and lures are
market share of approximately 25-30%). The
clearly the Group’s most significant product group. The fishing accessories category includes a wide
company also produces single and double hooks,
The company’s most valuable brand is Rapala by range of fishing products
but its market share is smaller in those categories.
some distance. Examples of its other brands
The VMC acquisition was also partly strategic for The fishing accessories business consists of
include Luhr Jensen, Storm and Blue Fox. The
Rapala, as nearly half of VMC’s production goes smaller fishing-related product groups, such as
segment also includes bait, which Rapala
into Rapala’s own products, with just slightly over knives, pliers, clothing, ice augers and storage
produces for carp fishing under the brands
half sold outside the Group. The revenue of the systems. The revenue of fishing accessories was
Dynamite Baits and Carp Spirit. Bait is mostly sold
hook business was MEUR 20 in 2016 (8% of total MEUR 44 in 2016, or 17% of total revenue. The
in Central Europe. Rapala’s market share in hard
revenue). We estimate that hook sales have biggest challenge in the fishing accessories
lures in the US is about 20% and we believe it is
developed favourably, aided by the sale of fishing business is that many of the product groups have
similar in the Nordic region. In these market areas,
lures. Hooks are also a highly profitable product very modest volumes, which means that the
Rapala’s growth in fishing lures largely follows the
group. We estimate the sales margin to be around Group does not have significant pricing power
development of the overall market due to the
50%. Rapala’s competitive advantage in the hook with subcontractors. Consequently, sales margins
well-established market positions of the players
business is based on economies of scale and in the fishing accessories segment are
involved. However, the company has begun to
competencies related to the hook manufacturing substantially lower than the other product
focus its innovation efforts particularly on growing
process. categories. We estimate them to be approximately
product categories and the commercialisation of
40%. One good example of acquisitions in the
microtrends in fishing to exceed the market The development of fishing line sales has lagged
fishing accessories category is the expansion into
growth rate. behind expectations
the ice auger business in 2011, which increased
Rapala last provided information on the Group’s Rapala is a small player in the fishing line the category’s revenue substantially (approx.
product-specific revenue breakdown in 2016. At category. We believe its global market share to be MEUR 10).
that time, lures and bait accounted for MEUR 82 in roughly two per cent. Rapala expanded into the
revenue, or 31% of the Group’s total sales. We fishing line business in 2008 by acquiring Sufix. At 11Products
Other products (skis and knives) generated most of its revenue of USD 23.5 million
in the US. The competitiveness of 13 Fishing Revenue by product category 2019
Sales of the Group’s other products amounted to (Inderes’ estimate)
products is illustrated by the category awards it
MEUR 8 in 2016, with the main product groups
won at the US iCast fair (Best Rod and Reel
being Marttiini knives and Peltonen skis. Based on
Combination 2013 and Best Rod 2017).
the financial figures of the factories (Marttiini Oy
and Peltonen Ski Oy), we estimate that the The agreement between Rapala and DQC gives
segment’s revenue had risen to about MEUR 12 in Rapala exclusive rights to the 13 Fishing brand
2019. Ski sales accounted for just over one-third of outside the US. The 13 Fishing products sold by
that total. We do not see significant longer-term Rapala outside the US are included in Rapala’s
growth potential in these products, and we believe own products and they are comparable to the
33 % 32 %
that their impact on the bottom line has been products subcontracted through the sourcing
minor. The company recently relocated the knife units. The result of DQC International’s US
factory from Rovaniemi to Vääksy in an effort to operations is shown in Rapala’s income statement
improve the cost efficiency of manufacturing. under “share of results in associates and joint
Peltonen skis have a market share of about 30% in ventures” and it was MEUR -1 for the past 12
Finland, with sales and profitability fluctuating months (with DQC included since September).
8%
mainly based on the snow conditions. DQC’s US operations have thus far been loss-
making, which is understandable due to the initial 20 % 7%
The rod and reel category is only just getting
investments needed to grow sales and capture
started
market share. The company’s capital was also
The discontinuation of the exclusive European strengthened in connection with Rapala’s
distribution deal with Shimano finally presented acquisition of a minority interest, with Rapala’s
Rapala with the opportunity to add the rod and share of the cash injection being approximately
reel category to its portfolio. Outside Europe, the MEUR 10. Lures and baits
Group has already previously sold rods and reels Hooks
The start-up of Rapala’s sales of 13 Fishing rods
under the Rapala brand on a small scale. To
and reels is still in its early days and its success Fishing lines
accelerate its expansion in the rod and reel
involves uncertainty. Rapala intends to launch the Accessories and other products
category, Rapala acquired a 49% minority interest
products globally in its various markets in 2021.
in the US-based DQC International Corp in autumn 3rd party products
The rod and reel market constitutes more than half
2019. The company owns the 13 Fishing rod and
of the sport fishing market, so there is plenty of
reel brand. The company’s production it
potential for growing the sales of 13 Fishing
outsourced to China and it has in-house design
products through Rapala’s global distribution
and product development teams in Florida and
network. However, the company will be up against
Taiwan.
large well-known rod and reel manufacturers
Established in 2012, DQC has grown quickly in the (Daiwa, Shimano and Pure Fishing) whose rod and
highly competitive US market. In 2018, it reel revenue is in the range of MEUR 200–400. Source: InderesProducts
Third-party products example, and the company recently discontinued
its distribution operations in the hunting category Development of sales and profitability of
Rapala also makes use of its global distribution
in Sweden. One example of an area where the Rapala’s own products
network by distributing products from other
distribution of third-party products works very well
manufacturers. They include fishing products as 200 12,0 %
is winter sport equipment distributed alongside
well as winter sport, hunting and outdoor products. 180
Peltonen products in Finland (e.g. Alpina, Rex), 10,0 %
The common denominator between all of the 160
with the sales of these products being nearly
product groups is the same customer base, which 140
equal to ski sales. The distribution of Johnson 8,0 %
includes e.g. large sporting goods stores and large 120
Outdoors products in Finland, Russia, Norway,
MEUR
retail chains. In practice, Rapala purchases the
Denmark and small Eastern European markets are 100 6,0 %
products from the manufacturers and distributes
another example of a synergistic product category. 80
them through its network. This means that Rapala 4,0 %
60
takes on the inventory risk associated with the The discontinuation of the Shimano partnership
products. The company’s sales margin on third- will reduce volumes 40
2,0 %
party products is naturally lower (our estimate: 20
Shimano has been a strategic partner for Rapala
30%) than the Group’s own products. Rapala only 0 0,0 %
since 1993. Following the termination of the 2014 2015 2016 2017 2018 2019 Last 12
earns a distribution margin on these products,
exclusive distribution agreements, their months
whereas it also earns a manufacturing margin on
partnership will be limited to the jointly owned Group products EBIT-%
its own products.
distribution companies in which Rapala exercises
The decline in Rapala’s revenue in the past few control. The most important of these is the joint Development of sales and profitability of
years has been particularly related to third-party venture in Russia and Eastern Europe (50/50 third-party products
120 10,0 %
product sales. Revenue has declined sharply since ownership), and Shimano also owns a 33% stake in
peaking in 2013 (MEUR 110), mainly due to lower Rapala’s distribution companies in Hungary, 8,0 %
sales in Russia. At the same time, the division’s Romania and Croatia. 100
profitability has declined, with the EBIT margin 6,0 %
Particularly during the next 12 months (H2/20–
falling from approximately 7% to last year’s -1.9%. 80
H1/21), a significant proportion of Rapala’s
The negative EBIT margin of third-party products 4,0 %
European revenue will be removed (approximately
MEUR
does not, however, mean that third-party products 60
18%, or MEUR 25) when the distribution agreement
generate a loss for the Group. The Group’s fixed 2,0 %
for Shimano rods and reels expires on two dates, 1
expenses (distribution+management) are allocated
July 2020 and 1 October 2020. Rapala was 40
to Rapala’s own products and third-party products 0,0 %
previously able to allocate some of the fixed costs
in proportion to revenue. This means that the
of the distribution channel to the volume 20
distribution of third-party products plays a -2,0 %
generated by the Shimano deal. It is partly for this
significant role by allowing the costs of Rapala’s
reason that Rapala currently has an extensive cost
distribution channel to be distributed across a 0 -4,0 %
saving programme under way in its European
higher volume. However, the distribution of third- 2014 2015 2016 2017 2018 2019 Last 12
distribution operations to improve profitability 3rd party EBIT-% months
party products has not been particularly profitable
through the centralisation of operations. Source: Inderes
across the board in terms of return on equity, forThe Industry
The industry is defensive had decreased in the US for a long time but, since of approximately 4–6%. The drivers in these
2013, the number has returned to a growing trend markets are an increasing standard of living,
The global fishing equipment market can be
of approximately 1% per year. In 2018, the total growth in the number of fishing participants and
divided into sport fishing and commercial fishing.
number of fishing participants was 49.4 million. It increasing awareness. Rapala’s sales in
Here, we focus solely on sport fishing, which is the
is worth noting that, in 2018, the number of new developing markets has lagged behind our
key market for Rapala. The availability of concrete
fishing participants was high at 9.4 million, but the estimated overall growth rate of those markets.
data on the global sport fishing market is limited
number of people who stopped fishing was also We believe this is due to lower brand recognition
and, as a whole, the industry is fragmented. We
high at 9.1 million (Source: 2019 Special Report on compared to the US and European markets.
estimate that the total size of the market relevant
Fishing). The latest statistics indicate that COVID-
to Rapala is approximately EUR 6–7 billion. Rods A fragmented competitive field
19 has increased the number of fishing permits by
and reels account for about half of that market.
about 20%. Equally accurate figures are not The global sport fishing market is highly
The next-largest product groups are lures and
available for Europe, but it is our understanding fragmented. We estimate that Rapala is the fourth-
bait, with fishing line being another large product
that the European market grows at least at a rate largest player in the industry with annual revenue
category.
equal to GDP growth. The development of the of MEUR 275. The largest players – Shimano,
The industry is highly defensive and the general Japanese market is not relevant to Rapala, as its Daiwa and Pure Fishing – have annual revenues
economic situation has only very limited impact on revenue there is very low due to market in the range of MEUR 400–500. We estimate that
overall sales, as evidenced by the stable dominance by the local players. Our overall Lew’s has grown its revenue close to MEUR 200
development of Rapala’s revenue during the estimate of the market growth rate in the following aggressive acquisitions.
financial crisis. The sharp decline in Rapala’s sales developing markets is approximately 2–4% per
Of the largest players in the industry, the
during the COVID-19 crisis was primarily due to year.
Japanese companies Shimano and Globeride
the closure of the Group’s own distribution
Winning market share in the developing markets (Daiwa) have focused on rods and reels, although
centres in North America and the closure of
is difficult for Rapala because it already has a high they do have other product categories to some
customer stores rather than reduced consumer
market share in several product groups (e.g. extent as well. Amongst the large players, the US-
demand.
hooks and lures). Rapala has also sought growth based Pure Fishing has a broader, nearly all-
Geographically, the sport fishing market can be by expanding its product selection. Previously, encompassing product portfolio. Behind the five
divided roughly in two: developed markets and growth has mainly been sought through largest players, there are many medium-sized
developing markets. The developed markets acquisitions. The Rapala brand has also been operators (MEUR 25–100) in the industry and
(Europe, US and Japan) represent a majority of the extended to new product categories, particularly countless smaller local operators, which often
global sport fishing market purely due to the large to fishing accessories. Recently, the focus of started out as family companies. In addition, there
number of fishing enthusiasts and a higher Rapala’s product development has also begun to has been a growing trend in the past decade of
standard of living. shift more to growing product categories and the retailers’ private label brands. Examples of retail
commercialisation of microtrends in fishing. chains that have been active on this front include
In Rapala’s most important individual market, the
Cabella/Bass Pro (USA) and Decathlon (Europe).
United States, fishing is one of the most popular We estimate that the sport fishing market in the
outdoor sports. The number of fishing participants developing markets is growing at an annual rate
14The industry
The brand companies in the industry typically do Fishing, to the US-based private equity firm Rapala is also a potential acquisition target
not have their own stores. Instead, their products Sycamore Partners. It is our understanding that
Rapala has previously been an active consolidator
are sold through retailers. This is due to the Pure Fishing was sold for a debt-free price of USD
in the industry but, except for the acquisition of a
significant seasonal fluctuations that would make 1.3 billion, which translates to a high EV/S multiple
minority interest in DQC International in 2019, the
it very difficult for the companies to operate their of 2.4x. We believe the company’s profitability
last large acquisition happened quite a long time
own brick-and-mortar stores. Consequently, the was considerably higher than Rapala’s, with an
ago (Sufix in 2008). We believe that the company
brand manufacturers have limited means of EBIT margin of approximately 18%, which would
will make a return to the field of acquisitions at the
avoiding the competitive pressures created by the put the transaction’s EV/EBITDA multiple at 13x.
earliest when it has made progress with its
retailers’ private label brands. While it is difficult to The company has subsequently gone on to
strategy, straightened out its profit performance
estimate the overall market share of private label acquire smaller brands, such as Fin-Nor and Van
and released capital previously tied up in
brands, we believe it is in the range of 10–20% in Staal, to complement its strong brand portfolio.
inventory by increasing the efficiency of its supply
the developed markets and considerably lower in
The US-based Lew’s is currently majority-owned chain. We also estimate that the increased
the developing markets. We estimate that the
by the private equity firm BDT Capital. In 2019, it uncertainty caused by the COVID-19 crisis
large and medium-sized players and the retailers’
acquired the UK-based Fox International from reduces the probability of acquisitions.
private label brands combined account for about
equity investors for GBP 150 million. Prior to the
two-thirds of the total market, with the remainder Rapala is also a potential acquisition target, and
acquisition, Fox had achieved strong organic and
being held by smaller local players. we believe that a private equity firm is the most
inorganic growth and acquired the Salmo brand in
likely buyer candidate. We believe that the
A playing field of private equity firms 2016, amongst others. In 2017, Lew’s acquired the
probability of that scenario will also only increase
Strike King brand, whose lures are second in sales
The market has been consolidating for a long time if Rapala is able to use its current strategy to
in the hard lures category in the US behind
now and we expect this trend to continue, as improve its performance. There are two reasons
Rapala. Accurate financial figures for Fox are not
small and medium-sized players still play a for this: 1) It would make the company a more
available after 2015, when its annual revenue
relatively large role. The industry is characterised attractive acquisition target by eliminating
amounted to approximately GBP 30 million.
by very obvious synergies, with larger volumes uncertainties associated with the organisation’s
Calculating the precise multiples for the
providing economies of scale and bargaining ability to adapt. 2) The acquisition price could rise
acquisition price is therefore not possible, but we
power against large retailers. Strong local brands to a level that is considerably higher than the
estimate that the EV/S multiple was in the range of
present the larger players with attractive current market value, which could also make the
2–3x.
opportunities to use their channels to distribute main owners more willing to sell. At the current
them more extensively. As an example of a smaller transaction, the private market value, Rapala’s EV/S multiple is only 0.8x
equity firm Maj Invest acquired a majority stake in due to the company’s weak profitability, which is
Fishing equipment companies owned by private
the Danish fishing tackle brand Svendsen Sport very modest compared to the transaction prices
equity firms have led the way in the consolidation
and the German fishing equipment manufacturer discussed above. However, we see this scenario
of the market in recent years. The synergy
D.A.M. for EUR 67 million in late 2015. According as more of an option for the investor, as an
potential of mergers and acquisitions has seen
to our calculations, the multiples of that acquisition is something that has been expected
acquisition prices rise to high levels at times. In
transaction in 2015 were EV/S 2.0x and for a long time now.
November 2018, the listed company Newell
EV/EBITDA 10.6x.
Brands sold the largest player in the market, Pure
15Competition
Importance in Growth Market share
Product category Rapala’s brands Competitors
Rapala’s business potential (sport fishing)
New: Japan: Shimano, Globeride, Gamakatsu
Rods and USA: Pure Fishing, St. Croix Rod, Eagle 52%
Very
reels Claw, Zebco, Pradco, Cabela’s, Lew’s
minor Taiwan: Okuma
USA: Pure Fishing, Pradco, Cabela’s,
Lures and Lew’s (USA)/Fox (UK)
Japan: Globeride
10%
baits
Denmark: Svendsen Sport
USA: Eagle Claw
Hooks Japan: Gamakatsu 3%
Norway: Mustad
Fishing line Japan: Shimano, Globeride
USA: Pure Fishing, Zebco 10%
Fishing USA: Pure Fishing, Flambeau, Simms,
accessories Plano, Cabela’s, Lew’s (USA)/Fox (UK) 25%
Japan: Globeride
Fiskars: Gerber
16
Source: InderesRapala’s strategy
Rapala needs to get more out of its competitive eyes of consumers. Distribution
advantages
Production and subcontracting In our view, Rapala’s country-specific distribution
Rapala’s competitive advantages have been companies have previously been a significant
The large market shares give the company
historically built around strong brands, product competitive advantage for the Group. The
economies of scale in production and sourcing,
development, in-house production and company has been forced to take a critical look at
which provides a good foundation for their
distribution. However, following numerous their role particularly as the transformation of retail
organisation. Rapala has strong manufacturing
acquisitions, their weak integration and moves forward. The rise of online shopping has
expertise at its European production plants, which
geographical expansion (p. 18), managing the created new routes for consumers looking to buy
is where the Group manufactures its most
Group as a whole has become difficult. Rapala still fishing tackle as alternatives to brick-and-mortar
important Rapala balsa lures. The current strategy
aims to build its strategy around its strengths but, stores and the distributors that serve them.
has enabled Rapala to reduce the lead time at its
at the same time, the Group has sought to Keeping distribution in the Rapala’s own hands
European production plants to four weeks
eliminate inefficiencies particularly by centralising has been historically justified by the view that it
(previously eight weeks).
its operations. improves the Group’s ability to have its own
In 2011, Rapala established the world’s largest lure products included in retail selections, provides
Brands and product development
factory in Batam, Indonesia. Lure manufacturing better insight into end market customer demand,
In our view, Rapala’s brands are still its most includes a lot of manual labour, and the Group increases the Group’s sales margins and enables
sustainable competitive advantage by far. The believed it could take advantage of the low wages quick reactions to changes in demand. However,
brand portfolio includes many leading fishing in Indonesia to reduce unit costs. The factory we believe that the Group having its own
tackle brands, which gives Rapala strong pricing began manufacturing lures acquired for Rapala’s distribution companies comes with significant
power towards consumers. Brand loyalty is very portfolio through acquisitions in particular (soft disadvantages in the form of high costs and
high especially among consumers of fishing lures. plastic, hard plastic and metal lures), which had inventories.
We believe that the strength of Rapala’s brands previously been mostly manufactured by
As part of its current strategy, Rapala has initiated
and their pricing power have substantially subcontractors in China. Nevertheless, there were
measures to reduce overlapping costs in its
mitigated the company’s decline over the past few significant profitability challenges in Batam’s
European distribution operations by centralising
years. Nevertheless, there is still room for manufacturing operations throughout the plant’s
its warehouses, for instance (page 19). It has also
improvement when it comes to sharpening the history due to the small production batches and
begun to supervise the operations of the country
positioning of various brands, and we understand complex product flows. In 2019, Rapala decided to
companies much more closely than before and
that this is something Rapala is currently focusing outsource its entire production of metal lures from
issued centralised purchasing budgets to them,
on. Batam back to subcontractors in China. In spring
amongst other things. The Group has also
2020, Rapala decided to close the entire lure
The Group’s current strategy has also made the outsourced some its warehouses in Asia and
factory, leaving only a separate fishing hook
product development process more systematic Australia, for example.However, we believe that
factory in Indonesia. 2/3 of the remaining
than before. Rapala’s product development efforts resistance to change arising from the previously
production of Batam will move to Pärnu and 1/3 to
are focused on generating additional sales in new highly independent culture of the country
subcontractors in China. Closing down the Batam
fishing segments instead of cannibalising its old companies continues to present a clear risk to the
plant was a radical move, but we estimate that it
products as before. Product development will optimal execution of Rapala’s strategy.
was necessary for restoring the competitiveness
continue to play a central role in Rapala’s future
of Rapala’s manufacturing operations.
efforts to maintain the appeal of its brands in the 17Rapala’s strategy
Key projects of the new strategy Norway + Sweden), which has reduced inventory products exclusively in Germany, the Netherlands,
levels. The greater geographical coverage of the Belgium, Luxembourg, Italy, the UK and Turkey. In
Rapala’s new strategy period began in February
centralised inventories helps balance out our view, Shimano’s sales volumes of Rapala
2017 under the leadership of the previous CEO
fluctuations in weather-dependent demand and products in these countries have been
Jussi Ristimäki. The strategy launched by Ristimäki
makes it easier to forecast demand. Rapala has disproportionately small (with the combined
saw the Group initiative significant – and, in our
also established a buffer stock in the Baltics for revenue for Rapala being under MEUR 25)
view, appropriate – measures to develop its
the production of the Group’s factories, which has compared to France, for example, where Rapala
organisation and supply chain. The core
improved its delivery reliability. When the country handles its own distribution and generated
objectives of the strategy are to achieve a
companies can rely on the on-time delivery of revenue of MEUR 34.6 in 2018. Rapala began to
turnaround in sales growth as well as higher
supplementary orders, the need for country- distribute its own products in the countries
return on equity. The Group has also streamlined
specific inventories is reduced. previously handled by Shimano starting from 1
its supply chain. Rapala has also increased the
April 2019. Rapala did not have to start its
share of digital marketing and expanded its Rapala needs to accelerate the execution
distribution operations from nothing, as the Group
European distribution operations to include its
While the development priorities identified in the has previously had its own distribution operations
own online store. As part of the strategy, the
current strategy are correct, the execution of the for carp fishing products in the UK and for VMC
Group has also restructured its internal incentive
strategy has lagged behind our expectations in hooks in Central Europe.
system (country companies, factories) and the
2017–2019. In September 2019, Chairman of the
management now also owns shares in Rapala. We believe that Shimano’s approach to
Board Louis d’Alançon replaced Jussi Ristimäki
distribution is very different from Rapala’s, as
Rapala has sought to take significant measures to and became interim CEO, and a MEUR 10
Shimano sells rods and reels through carefully
develop its business model in a direction that efficiency improvement programme was
selected sporting goods stores and fishing tackle
reduces the need for large buffer stocks. Rapala announced under his leadership (next page). In
retailers. The idea behind Shimano’s approach is
has invested in an IT system that allows it to March 2020, Nicolas Warchalowski took the helm
to protect its brand image. Rapala, on the other
monitor product demand and the product-specific as Rapala’s new chief executive. The new CEO
hand, has chosen to sell its lures and baits
inventory levels of the various country companies has a convincing track record in management and
through a wide range of outlets, such as service
through a single centralised system. The Group the development of consumer brands from his
stations, which is understandable since they are
can now use data to manage orders made by the previous posts at Peak Performance, Haglöfs and
consumer goods and their broader availability
country companies and better coordinate the BabyBjörn. In our view, Warchalowski has taken a
does not compromise Rapala’s strong brand. We
production operations of its factories in the much more determined approach to strategy
estimate that Rapala has good potential for
intermediary stage. The country companies still do execution than his predecessors, as evidenced by
increasing its sales in the region by handling its
not operate under a centralised sourcing function, the quick decisions to shut down loss-making
own distribution operations. Distribution in the
but the available data has enabled Rapala to units (Batam, ice auger factory, knife factory) and
new Central and Southern European countries
make the country companies’ ordering process transferring their production operations to other
takes place through a central warehouse in
for the Group’s own products more closely factories in Europe and subcontractors in China.
France and the sales count towards French
supervised. Historically, the country companies We expect Warchalowski to continue to focus on
revenue. In 2019 the French revenue had grown
have not had typical intermediate inventories. the development of the brands and sales growth.
by MEUR 2.7, and we believe much of this growth
Instead, they have all had their own inventories.
Ramp-up of own distribution operations came from the new countries.
As part of the new strategy, Rapala has begun to
consolidate its country-specific inventories (e.g. Shimano has previously distributed Rapala 18Rapala’s strategy
New rod and reel strategy for success are discussed on page 12. Rapala has had an online store in North America
since 2011. As part of the new strategy, Rapala
Rapala’s rod and reel strategy was previously Cost saving programme 2020–2022
opened an online store in the EU in 2018. We
based primarily on the exclusive distribution of
In autumn 2019, Rapala launched a MEUR 10 cost believe the B2C interface presents Rapala with
Shimano rods and reels in certain countries (the
saving programme that included Batam efficiency significant advantages. The Group earns higher
Nordic countries, Spain, Portugal, Switzerland,
improvement measures (that subsequently turned sales margins on its products sold online, gains
France, the Baltic countries and South Africa).
into the closure of the Batam factory) and access to customer data and achieves better
Outside Europe, Rapala has already previously
enhancing the operational efficiency of the control over its brand. In Rapala’s view, consumers
sold rods and reels under the Rapala brand on a
European distribution companies. Under the choose to shop in the online store especially if
small scale as well as certain smaller brands. It is
programme, Rapala has begun to pursue they seek a broader selection than they can find
our understanding that their success has been
increasing centralisation of its European at their local retailers. The online store is also part
modest. The termination of the Shimano
businesses and distribution operations. We see of Rapala’s digital brand building campaign.
distribution agreement presented Rapala with the
this as a sensible move, as historical factors (such Indeed, Rapala has clearly become more active in
opportunity to make bigger moves with regard to
as acquisitions) have resulted in a number of using high-quality digital marketing instead of
this segment. This led in autumn 2019 to the
overlapping functions in different countries relying strictly on print media as before. The
acquisition of a minority interest in DQC and the
(sourcing, warehousing, IT systems, management). warehousing, packaging and dispatching
acquisition of licensing rights to the 13 Fishing
Centralising operations will enable Rapala to operations of the European online store are
brand outside the US. We believe that, during the
reduce its fixed costs, which is important currently outsourced to Estonia. We estimate that
past year, Rapala’s focus with 13 Fishing has been
considering the fact that a significant volume of the online store operations are still in a relatively
on developing suitable products to be distributed
Shimano sales will be lost in H2/20. early stage, with only a few per cent of Rapala’s
outside the US market. Rapala has recently begun
total revenue coming from direct B2C sales. The
to launch the products amongst its distribution The local sales power of the country-specific
online store has also been important during the
companies and we expect the sales of 13 Fishing distribution companies will not be reduced so, if
COVID-19 crisis, as it has slightly mitigated the
products to show in Rapala’s income statement the programme is successful, the cost cuts should
decline in Rapala’s sales during the shutdown
starting from 2021. Nevertheless, our forecasts for not have much of a negative impact on Rapala’s
measures.
the next few years do not expect Rapala’s rod and sales. However, we estimate that this process will
reel sales to replace the lost sales of MEUR 25 in take time, as the planned measures will be locally Rapala currently uses Amazon only as a B2B end
2020–2021 caused by the termination of the negotiated in each affected country. The second customer rather than using its platform as a B2C
Shimano deal. We also estimate that the ramp-up focal point of the efficiency improvement marketplace. We believe Rapala could have B2C
will initially lead to additional expenses in areas programme is the Batam factory, which will be sales opportunities in marketplaces such as
such as brand development and marketing as shut down. We estimate that it will represent Amazon and Alibaba, but it is our understanding
distribution companies begin to familiarise their approximately half of the cost savings to be that the Group has not yet decided to make use of
customers with entirely new products. achieved, or MEUR 5. Rapala expects the cost marketplaces in its online sales strategy.
savings to be gradually achieved over a two-year
The global ramp-up of Rapala’s sales of 13 Fishing
period starting from 2020.
rods and reels is still in its early days and its future
success is therefore uncertain. The requirements Online distribution strategy and B2C
19Rapala’s strategy
1998 2017 2018 2019 2020e 2021e
Revenue MEUR 100 MEUR 253 MEUR 262 MEUR 275 MEUR 249 MEUR 259
EBIT margin 20% 3.5% 5.6% 4.9% -0.2% 5.0%
Positive Capital released Substantially
EBITDA/net debt Hybrid bond
development of by reduction in weakened by the Gradual recovery
(target: under Strong issue to improve
profitability inventories COVID-19 crisis (forecast 2.9x)
3.8x*) the ratio
supported the ratio 3.5x (forecast 7.6x)
Trend
Negative impact
New strategy to Batam savings from the decline Requires progress
Trending slowly in
Comment IPO halt a prolonged started to show in in Shimano in strategic
the right direction
decline H2 volumes will begin projects
1998 2017
to show
- - 2021
2016 2019
Focus on inorganic growth Improving capital efficiency and profitability Sharpening the strategy
• Success in the centralisation of production
• Decentrally managed and partially optimised • Improving supply chain management
• Development of the 13 Fishing rod and reel
organisation brand and start-up of 13 Fishing product sales
• Increasing the efficiency of the Batam plant
• Poor integration of acquisitions • Growing the distribution of Rapala’s own
• Success in product development
• Strong revenue growth (+150%) products in Central and Southern Europe
• The efficiency of digital marketing
• Concurrent decline in EBIT • Adapting the costs of the traditional B2B
• New digital distribution channels distribution channel to declining volumes
• Growth in inventories
• “One Rapala” organisational structure • Growing the online store’s high-margin
• Sharp decline in Russia volume
Source: Inderes, *the ratio excludes the IFRS 16 impact 20You can also read
