Konrad Krasuski
Fri, March 15, 2024
(Bloomberg) -- Shares in one of eastern Europe’s biggest fashion retailers plunged 36% after activist short-seller Hindenburg Research said the Polish company’s withdrawal from Russia was a “sham.”
Hindenburg’s report on Friday alleged LPP SA didn’t fully divest its Russia business as promised following the start of war in Ukraine two years ago and has been selling its goods there through third parties. The short-seller dispatched “secret shoppers” to Moscow and St. Petersburg stores which it said sold “identical” clothes to LPP’s.
The stock plummeted the most on record, wiping out $3 billion in shareholder value in one day. The selloff pushed Warsaw’s blue chip WIG20 stocks gauge down by 2.5%, making it the world’s worst performer among more than 90 primary indexes tracked by Bloomberg.
In a series of statements, LPP said it’s a victim of an “organized disinformation attack” that no longer owns or runs businesses in Russia and alerted Polish prosecutors about the matter. Still, investors remain concerned about LPP’s transparency and reputation.
“Polish consumer sentiment may not be so forgiving as it likely assumed a cleaner break” from Russia, said Charles Allen, a senior analyst at Bloomberg Intelligence.
Russia was the biggest market for LPP following Poland until the retailer, which owns several brands including its flagship Reserved label, suspended its fast-growing operations in the country in March 2022.
Two months later, it sold its Russian unit, with inventories, to a Chinese consortium, while pledging to support the buyer with logistics, IT and supplies on a temporary basis.
“We think LPP devised an elaborate sham ‘divestment’ strategy to continue retailing in Russia while trying to fool investors and consumers in Poland, Ukraine, and its other markets into thinking otherwise,” Hindenburg, founded by Nate Anderson, said in its report.
Hindenburg had a remarkable 2023, when it released reports on the empires of high-profile businessman Gautam Adani, followed by attacks on companies run by Jack Dorsey and Carl Icahn. Short-seller activists carry out investigations into companies and seek to make money when their findings depress the stock price.
‘Identical Designs’
Hindenburg said its “secret shoppers” in Russia’s two biggest cities had in December found and photographed garments with “identical designs and colors to fall/winter collections in LPP’s online catalogs in Poland.”
This, according to the short-seller, indicated that LPP products were still “somehow making their way into Russia at least 18 months after the claimed divestiture.” It also accused LPP of using Kazakhstan as a backdoor to help supply stores in Russia, a claim denied by the retailer.
LPP said on Friday that it had previously informed investors that as part of the sale agreement of its Russian business there would be a transition phase “during which the buyer successively assumes complete autonomy over the various business areas.” It added that this period would run out as late as in 2026.
“The degree to which merchandise assortment overlaps between LPP’s core stores and the sold Russian units can be explained by transitory contractual obligations could reassure about reported revenue from new countries,” said Allen from Bloomberg Intelligence.
The Gdansk, Poland-based company’s sales recovered swiftly after its exit from Russia, which was broadly attributed then by analysts to the reopening of shopping centers from pandemic shutdowns as well as new demand from Ukrainian refugees fleeing war.
Strong public pressure pushed Polish companies to retreat quickly from Russia following the start of war in Ukraine in February 2022, with shoppers boycotting brands which failed to do so.
LPP, controlled by the family trust of founder Marek Piechocki, has gained 10% this year before Friday’s tumble, compared with a 3% advanced by the WIG20. The company has 14 buy-equivalent ratings, one hold and two sell views, according to data compiled by Bloomberg.
Following Friday’s collapse, the firm is the 10th biggest company by market value in Warsaw’s blue-stock index. On Thursday, it was the seventh.
The import of food, essential items and clothes — with the exception of luxury goods — aren’t under any international sanctions in Russia. Products ranging from iPhones to Coca Cola and garments made by international producers continue to enter the Russian market through so-called parallel imports, when they are purchased and re-exported by third countries. Russia has imported $70 billion of goods using this mechanism since early 2022, the government said in December.
Poland’s financial regulator KNF said in a statement that it was analyzing the situation in LPP, as it does whenever “there are doubts regarding the correctness of the performance of disclosure obligations by public companies or suspicion of manipulation of shares.”
--With assistance from Piotr Bujnicki and Piotr Skolimowski.
(Updates with closing market prices, new comments from LPP and analyst.)
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