Description

"What's your favorite China re-opening beneficiary that isn't commodity related, doesn’t have Chinese governance, and isn’t obviously over-earning already from Europe and US re-openings?"

Global Blue is an ~$2bn EV company that's been public for 3 years and never written up on VIC.  You'll soon understand why.  I believe GB represents what Michael Price called the "steak and sizzle." 

The steak is a business with >40% EBITDA margins, 85% FCF conversion, low cyclicality, and 70% market share defended by a strong network effect with exposure to 3 very strong secular tailwinds: international leisure travel, luxury goods consumption, and taxation.  The sizzle is that investors are searching high and low to find exposure to the China's re-opening without chasing already bid up obvious beneficiaries or exposing themselves to a Europe / US recession or inflationary cost pressures.  Global Blue's business is essentially a small royalty on international travelers (read: Asia) purchasing luxury goods abroad and a massive inflation beneficiary to boot.  The company had the misfortune to come public, via SPAC, literally weeks before the COVID-19 pandemic shut down the primary luxury travel good consumer (China) for the subsequent 3 years.  With China's borders closed/tight for the ensuing period, the company has languished in obscurity with no sell side coverage and muddy financials.  The company raised financing from Certares and Knighthead, adding a complicated capital structure, to leverage, to SPAC hatred, to minimal LTM profits, further keeping investors far, far away. 

We believe that as China is actively re-opening, GB's profits will inflect, potentially dramatically, above pre-COVID levels as the pent-up demand, elevated consumer savings in China, and inflated luxury good prices meet a tightly reduced cost structure at GB.  As the world re-opened, some regions are spending 3x on a LFL basis through GB vs what they were pre-COVID ….and this business has 80% incremental margins.  Part of this is pent up demand, part is that luxury good prices have increased materially and GB simply takes a toll on that price with limited incremental expenses.  As China, the much larger portion of the business re-opens, the co could do $1+ of FCF per share, resulting in a $20+ stock (vs ~$6 today).  The downside is nicely protected as we're currently paying <10x 2019 EBITDA without any credit for dramatically higher luxury goods prices or cost take-outs since then. 

As the business's prospects and profitability inflect over the coming 6-12 months, the company will likely begin more actively interacting with investors and sell-side analysts and take a thoughtful path to improving trading liquidity. 

Business Overview

Global Blue is the leading enabler of VAT tax refunds (~70% market share).  When foreign travelers purchase luxury goods in Europe, they pay European VAT embedded in the purchase price.  For luxury brands like GB's customers Hermes and Louis Vuitton, more than 50% of their European business is non-domestic travelers.  These travelers are entitled to a refund of their VAT tax. 

The traveler could go to the local Italian city hall, between the hours of 2 and 415 pm, on a Tuesday or Thursday, as long as the bureaucrat isn't out for an espresso or a smoke, and fill out 15 pages of paperwork in Italian, then come back a few weeks later for their refunds (after their flight has already departed).  Alternatively, they can utilize the Global Blue form that the merchant already gave them, at a Global Blue partner location in the airport or mall, and get the refund in cash immediately, without using Google translate or interrupting any bureaucrats' espresso.  That's hopefully obviously just a fun over-dramatization of the value proposition, but you get the picture. 

Global Blue enables has a three-pronged value proposition.  Travelers get free money from the government they'd realistically otherwise never get.  Merchants get to make it easy for shoppers to feel like they're paying slightly less for their handbag.  Additionally, some of GB's fee is shared with the merchant, so it's a free revenue stream.  Finally, governments attract shoppers who pay spend heavily on hotels and entertainment. 

Prior to COVID, GB enabled the transaction of ~$18bn of predominantly luxury goods.  70% of the business was in Europe, as well as Japan, Singapore, and Korea.  This was across ~36mm transactions across ~30mm consumers in  400,000 stores in >50 countries. 

Very simplistically, on a $1,000 purchase, there might be $200 VAT, so the customer pays $1,200.  They have a right for $200 to be re-imbursed, but by using GB's infrastructure, the customer gets back $140 and ~$30 goes to Global Blue as revenue (~2% of purchase value) and another $30 goes to the merchant.  The split with the traveler varies based on the cost of the item (lower for a $50k watch than a $300 pair of shoes).  The split with the merchant also varies with the bigger names getting more of the split and some merchants getting none. 

The business can be broken down by country of origin and country of destination.  Prior to COVID, ~70% of the business originated with travelers from EM's - 40% China, 5% Russia, 11% SE Asia and India, 14% other EM's.  The 30% from developed markets was 6% US, 8% Gulf Council Countries, and 16% other developed markets.  By destination, 70% of the business is in Europe with 14% in France, 14% in UK, 13% in Italy, 7% in Germany, and 7% in Spain.  30% of the business in APAC is primarily Japan at 17% and Singapore at 9%. 

As context, the original SPAC deal in Jan 2020 was sponsored by current Chairman Tom Farley, the well-regarded former NYSE President and was anchored by Ant Financial and Third Point.  Silver Lake originally acquired Global Blue in 2012 for ~$1.2bn, so it's stunning to see the EV of the business today only moderately higher given the growth since then.  CEO Jacques Stern has previous experience as a public company payments CEO at Edenred from 2010 to 2015. 

The Steak

Even without the China re-opening leverage, I find Global Blue to be a very attractive business even if the post-COVID world simply looks a lot like the pre-COVID world.  The company enables consumers to get what is essentially free money (vs not getting a refund) for a reasonable cost and enables merchants to get consumers to spend more by getting their refund on top of the monetary incentive the merchants receive.  This is clearly an attractive consumer value proposition.  It's also a critical function for many merchants - international customers is often >50% of revenue for European luxury goods. 

Further, the business has all of the typical attractive financial characteristics of payments businesses: high margins, strong operating leverage, and low capital intensity.  These attractive financial economics are defended by what seems to be a very strong competitive position driven by a two-sided network effect.  A competitor or new entrant would have to have thousands of global points of presence for refunds to pursue merchants, then would need to pursue 300,000 merchants that Global Blue is already embedded in.  The "cold start" problem here is pretty tough and the company is pretty nicely embedded within and trusted by merchants to make a complex headache simple for both merchant and consumer.  This becomes evident in GB's ~70% market share, 3x larger than their next competitor.  The competitor (Planet) has ~22% market share and is only in Europe, so struggles to serve international merchants.  The business also requires significant domain expertise to work with all of the various customs regimes and regulatory compliance, so Global Blue's 40 year history and track record in the industry is critical.  Merchant gross churn has averaged around 3% and net churn around 1%, with an average merchant tenure of greater than 20 years. 

From 2009 to 2019, Global Blue CAGR'd revenue at ~10%, with operating leverage driving EBITDA margins to nearly double from 23% to 41%, resulting in a 19% EBITDA CAGR, while converting approximately 85% of EBITDA into FCF.

Global Blue also enjoys multiple long-term secular growth drivers.  First, as emerging markets became wealthier and modernize, they travel more, and shop more.  There is a 97% correlation between tax-free shopping and EM middle class growth.  Second, more countries are adopting tax free shopping to attract consumers.  Before COVID, countries with tax free shopping enjoyed 3 pts faster (10% vs 7% CAGR) luxury market growth.  Countries have noticed - we've seen Peru and Colombia in Latam recently institute tax free shopping schemes in partnership with Global Blue.  UK, which had shut theirs down, has debated re-introducing it.  40 years ago, there was only 1 country with a VAT tax; today there are 170.  Of those, 73 now offer tax free shopping and that will continue to increase, not decrease.  Tax-free shoppers spend a lot of money on hotels, entertainment, etc.  Global Blue also participates in rising tax rates. 

Lastly, luxury spending is not only out-growing other categories, but surprisingly cyclically resilient.  Businesses like LVMH and EL have garnered very high multiples due to this dynamic.  I believe GB is a way to participate in luxury goods in a capital light, high margin, portfolio approach at a more attractive valuation. 

While the core of the business is quite attractive, there's also some further kickers in terms of the data the company collects and its value to merchants.  The company is required to collect passport and SKU data for tax-free compliance.  This combination of shopper and SKU-level data is extremely valuable.  The company has done some bolt-on acquisitions here and will leverage their strong relationships with their luxury merchant base to continue to add incremental offerings.  I'd note Ant Financial invested $125mm into the original SPAC deal. 

The Sizzle

"Re-opened corridors" on average are running at ~150% of revenue/spending relative to pre-COVID.  However, narrowing down into specific corridors points to an even more extreme opportunity.  In January of 2023, US and Gulf origin shoppers were spending 300% and 225% of what they were spending pre-COVID, a continued approvement from 253% and 233% respectively in the 12/31/22 latest quarter. 

Interestingly, the best "leading indicators" that we can see are that as HK and Taiwan have opened their borders and resumed traveling, they are now spending at a run-rate of approximately 3x their pre-COVID pace.  This is despite only a ~30% recovery in air capacity, which we find completely stunning. 

We have all observed the discretionary spend implications and ensuing inflation in the US, in part driven by the meaningful step up in household savings during COVID.  China is not only larger, but has been locked down for longer, accumulating nearly 2 trillion dollars of excess savings over the past 3 years.  Another way to frame it is that China spent ~95bn on luxury goods in 2019 vs 60, 65, and 70bn respectively in 2020, 2021, and 2022, indicating there's ~100bn of "pent-up" luxury spending.  

Across all cohorts, the spend per shopper is up ~60-70%. 

Putting it all together, if you extrapolate this sensitivity towards 150% of pre-COVID revenue (which is what the aggregate of re-opened corridors is running at, with some materially higher), you get to >350mm of EBITDA which implies $1+ of FCF (on a 1.9bn ev and $6 stock today).

To help with the math, starting with 187mm of pre-COVID EBITDA, the company permanently took out ~35mm of fixed costs during COVID.  This is partially offset by ~20mm of public co costs and inflation.  Further, the loss of UK (more on that below) is a ~25mm EBITDA headwind (7% of revenue lost at 80% decremental).  From there, choose what you want revenue to look like vs pre-COVID (goal posts being anywhere from 100% to 300% and re-opened corridors currently at 150%) and apply an ~80% incremental margin. 

Lastly, I'll note there is a long runway to increase VAT refund penetration.  Some changes in the refund process during the pandemic likely enable a permanently higher sustained level of revenue even if spend converges to pre-pandemic level.  Only ~39% of transactions that are eligible for tax free shopping actually get a refund.  During COVID, many merchants and airports increased their digital capabilities in partnership with GB.  These further reduce friction, and increase conversion.  Digital conversion is near 100% vs physical conversion around 60%.  This tailwind is likely permanent. 

Risk-Reward

Putting a precise price target on this is a bit of a choose your own adventure.  We can debate what's the right multiple, especially if we're capitalizing elevated earnings and how long those are sustainable.  Further, payments companies have materially de-rated since before COVID.  We can debate whether 100% of pre-COVID revenue or 250% of pre--COVID revenue is the precisely right EBITDA and that makes a massive difference as well. 

The way we choose to frame it is that we have limited downside if we believe 100% of pre-COVID EBITDA is achievable given we're paying ~9x that which in my opinion is very reasonable for a business with this type of cash conversion, secular growth, and cyclicality.  Then we have extremely asymmetric upside in that 150%+ scenario.  As an example, if the co can sustainably do $300mm of EBITDA, at 13x, that would imply a $16+ stock price.  One can somewhat reasonably make the case for $350mm+ of EBITDA and a 15x+ EBITDA multiple (would only imply 5% unlevered fcf yield) which gets you to a $22+ stock. 

We would also note that Advent, a prominent private equity firm, acquired a stake in far smaller competitor Planet, at a price implying an ~$2.2bn valuation, higher than GB's entire enterprise value today, despite Global Blue being by far the leading player. 

Key Risk/Debate: UK Precedent

You may have noticed we casually mentioned the loss of business in UK above.  That is a key issue that needs to be discussed.  Essentially, as a consequence of leaving the EU, the UK became a tax-free shopping destination for 350mm Europeans.  That became politicized and in response the UK ended tax-free shopping completely in 2021.  

Interestingly, given the proximity of Paris (and other European destinations), many shoppers have simply decided to re-allocate their spend from London to Paris where they can receive a refund.  Further, the 50mm people in the UK can now shop tax free in Europe.  So ultimately, this has only ended up being a 5-6% headwind as compared to the ~14% of the business that used to happen in the UK.  More of this may be recovered as more UK citizens realize they can shop in Paris without paying taxes.  Additionally, it's quite easy to show with data that the UK has lost out on significant spend from travelers who are shopping in Paris/other cities as well, so the UK has considered re-instituting tax-free shopping. 

Additionally, the clear trend is towards increased tax-free shopping.  As noted above, we've gone from 1 country in 1980 to 40+ countries today.  You'll note that Global Blue recently won business to essentially be the default partner to open tax-free shopping in a couple Latin American countries.  That opportunity is hard to quantify. 

Risks

• Countries remove tax-free shopping.  The UK did this in 2021, but seems to be potentially about-facing and many other countries (primarily Latam) have introduced tax-free shopping where it previously did not exist.  Additionally, much of the lost UK tax-free shopping seems to have simply shifted to other geographies.  If you intended to spend $5k shopping on your UK vacation, it's not shocking one would simply visit France or Italy instead (or take the train 2 hours from London to Paris for a quick shopping detour)

• Competition - Advent recently acquired #2 player in the space, there are always VC-backed payments startups, though that seems less of a risk today than a year ago

• Cyclicality - luxury shopping is discretionary and this cycle may not look like prior cycles.  However, the re-opening tailwinds seem profound relative to the limited cyclicality the business has historically experienced

• PE take-under.  Silver Lake has been in this since 2012.  We hope this write-up will encourage some bigger check books than mine to take a look and prevent the company from being stolen from the public markets. 

Catalyst

• Profitability inflects from negative (6 months ago) to positive (now) to gigantic (6 months from now)

• Leverage goes from screening as >10x LTM leverage to closer to <3x

• Continued upwards estimate revisions as China re-opening takes hold

• Increased engagement with investors / sell-side

• Re-IPO / NDR's to improve liquidity