Natuzzi (NTZ): We Are Still On Hold

Last time, in our Natuzzi (NYSE:NTZ) initiation of coverage, we concluded that the company was trading at a very depressed valuation; however, we were not optimistic about the company’s future. Currently, we would not follow the same mistake as we did in our Clearwater Paper Corporation publication, and we do believe that Natuzzi, over a twelve-month time horizon, will face profitability pressure and most likely will deliver negative results. So, today, we can conclude that we were right and wrong about Natuzzi. On the one hand, the company is up by more than 50% at the stock price level, on the other hand, Natuzzi is disclosing a few of our negative downside note (Fig 2) in the company’s latest investor presentation (Fig 1).

Source: Natuzzi Investor Presentation November 2022 (Fig 1)

Fig 2

In the meantime, Natuzzi reported its 3Q 2022 numbers. Very briefly, the company delivered consolidated top-line sales of €116.6 million and there was an increase both compared to Q3 2021 and to the pre-COVID-19 level by 14.5% and 32.4% respectively. Gross margin followed the same positive trajectory, Q3 gross margin reached 37.7% versus the 36.0% achieved one year ago. This was due to better operating leverage, favorable FX, better sales MIX, and more efficiency in the manufacturing processes. At the nine-month aggregate, Natuzzi released an EBIT profit of €6.7 million, a result that was higher than the 2021 accounts which also positively benefitted from €4.2 million of temporary public measures savings from COVID- 19 related funds. 2021 accounts were impacted by disposal which generated a positive one-off for a total consideration of €4.8 million. In the third quarter alone, revenues reached $116.6 million and a profit €5.9 million compared to a loss of €3.3 million.

Despite that, we shared some high-level comments with the CEO. Indeed, Natuzzi’s top management is also concerned about the company’s future. Looking at the Q3 press release, the CEO said:

Natuzzi continues to improve its operating model, as shown by the Ebit result of this quarter. However, the business environment for the whole economy and specifically for our industry remains challenging. The high inflation is reducing the disposable income of our consumers. This, together with a perduring uncertainty on the geopolitical and economic outlook, is leading consumers to postpone their decision to buy furniture.

Source: Antonio Achille – Natuzzi’s CEO

Our take and conclusion

There are a few positive interesting developments to report. First of all, Natuzzi’s new business plan aims to optimize its operating model strategy, and this will also be coupled with new Chinese openings. In detail, in 2022 nine months, the company is already working on GEO diversification and added 55 franchise stores, of which 43 were ubicated in the Chinese region. Secondly, the company has cash in hand and reached €53.0 million in September end. In the Q&A, the CEO was pretty clear about cost streamlining and emphasized how the company is saving €3/4 million per quarter; however, there are no estimates of higher EBIT and these savings will offset the loss of revenue momentum. There are two important key catalysts to closely monitor: industrial reshoring plant with industry 4.0 – indeed, the Russian invasion is accelerating the repatriation of the Natuzzi industrial plant (from Romania to Italy); however, costs are at least 27% higher compared to the Italian standard. Natuzzi is proposing a production in three plants with three work shifts and 700 redundancy in order to optimize its cost structure (from the actual five plants and two work shifts). Still related to the onshore, Natuzzi aims to convert its industrial land into a 40 MW photovoltaic plant to be fully autonomous at the energy level. However, the process is still pending but it can be the positive key catalyst to revert our rating target. Therefore, we decide to leave unchanged our target price of €7 per share.

Source: Natuzzi Investor presentation

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