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Greece’s securities regulator launches audit into Folli Follie vs QCMFund war

The Hellenic Capital Market Commission has launched an independent audit into Greek luxury goods retailer Folli Follie after hedge fund Quintessential Capital Management expressed doubt about the chain’s financial report of last year. The company refutes the claims and threatens with legal action.

Greece’s securities regulator HCMC said on Monday it will ask luxury goods maker Folli Follie to have its 2017 consolidated accounts scrutinized by an independent auditing firm. At the same time it will ask the OCM Investments Fund to provide a detailed explanation of the arguments listed on its report [see below] and provide evidence.

QCM, which has a short position on FFG shares, told a conference in New York on Thursday that Folli Follie may be operating 289 outlets, compared with a tally of 630 outlined in financial statements to the end of 2016. The report prompted the shares to slump -30% the next day, with 300 million euros to have left.

“The findings are staggering,” the New York-based fund’s founder Gabriel Grego told delegates at the event. Sales in Asia, which FF Group says accounts for as much as 68 percent of revenue, “are probably a small fraction of what it looks,” he said.

A. The network of points of sale (POS) appears materially smaller than expected: We performed an extensive due diligence and checked each individual POS, often in multiples ways: contrary to the 630 POS mentioned in the 2016 annual report for the FF brand, we found evidence of only 289 operating POS. The majority of the remaining POS appear to have ceased operations.

B. Onsite checks: we personally visited several FF POS in key strategic locations (e.g. New York City and Tokyo, Japan) and can confirm that many critical assets that the company, still listed on its website (e.g. FF Soho or FF Madison Avenue shops), are indeed closed. We also noticed how a number of POS, including in key locations, appear to be of negligible size (often just a small window) and in the process of liquidation.

C. Digital presence: we ran an audit on FF presence online, checking website traffic and popularity on social media and benchmarking it against FF competitors. Our findings suggest that FF digital presence, especially in Asia, may be indicative of a far smaller company.

D. Financial analysis: FF official figures indicate growing revenue and profit, but constantly negative free cash flow, the bulk of which is explained by large and increasing working capital in its Asian subsidiaries. The amount of receivables and inventory of FF Asian subsidiaries seems clearly disproportionate if compared to its peers.

 E. Chinese subsidiaries: FF claims $1bn of revenue originating in Asia, of which China has presumably the lion’s share (70% of the Asian network would be located there). Surprisingly, we found that the only two mainland Chinese subsidiaries of FF, Fu Li Fu Lei and Binlianyun, generate only some $40m of revenue and together count only some 50 POS.

 F. Concerns about auditors: after auditing their accounts for several years through Baker Tilly, a 2nd or 3rd-tier accounting firm, FF recently switched to “Ecovis” a relatively unknown firm. Moreover, the auditors of the entity consolidating FF sales in Asia, totaling approximately $1bn, appear to be an obscure firm with a staff of only two people. According to senior Chinese auditors from Big Four firms, this firm may well be inadequate for an audit of this scope ($1bn of sales; hundreds of POS in multiple countries).

The QCM report prompted Folli Follie shares to slump 30% of their value on Friday.

The FF Group responded on Friday that QCM’s report is “false, slanderous and misleading” and that it has ordered its legal advisers to defend its legal rights, without specifying what that entailed.

“Quintessential Capital Management’s report is unfounded, false, defamatory and misleading which results in damaging the interests of the firm and its shareholders,” Folli Follie said in a statement to  Athens Stock Exchange on Friday.

On Sunday, the CEO of Folli Follie Group, Tzortzis Koutsolioutsos issued a statement and spoke “an organized speculation plan,” against the FFG and reassured  shareholders and workers that the company will take all necessary measures to restore the truth and trust.

On Monday, the FFG group published a detailed list of all sales points (POS) of Brand Folli Folliea around the world.

QCM insisted on its reported and said it would release a more detailed update.

When Athens Stock exchange opened on Monday, FF’s shares were exposed to a new limit down reaching up to -26%. By noon, the limit down was temporarily halted, the shares stood at 8,420 and the losses were at -22.63%. Another 200 million euros left. By 1:45 pm Monday, FFG shares in Athens Stock Exchange had lost more than 50% of their value.

  • By the end of ASE session on Monday, FFG had suffered losses of -29.98% and shares closed at 7.5200. The total losses are -60% in two ASE sessions May 4 and May 7 2018.

Folli Follie was founded by Dimitrios Koutsolioutsos in 1982. He retains a 35 percent stake in the business and chairs the board of directors, while his son George is chief executive officer. The company started a push into Asian markets in 1998 and China’s Fosun International Ltd is its second-largest shareholder with a 13 percent stake, according to data compiled by Bloomberg.

According to Reuters, Folli Follie Group has activities in Greece, China and other countries around the world. It has a market value of about 1 billion euros.

QCM is a long-short equity fund based in New York with less than $50 million under management. In October 2015, it published a report on Globo Technologies Plc, a software company based in Athens and listed in London, claiming that at least 60 percent of the company’s sales were fabricated. The report, initially refuted by Globo’s top management, led to the resignation of the chief executive and financial officers and the collapse of the company days later.

QCM’s research on FF Group, based on months of phone calls and site visits, points to a company with “decreasing revenue, network size and cash balances,” the fund said in a statement on its website published after the presentation.

Folli Follie has been one of the few Greek companies that seem to have gone through the economic crisis without damage.

According to a Bloomberg report on May 4th, “Cumulative earnings over the last seven years were about 1.6 billion euros ($1.9 billion) alongside negative free cash flow of 6 million euros, according to data compiled by Bloomberg. Revenue for 2017 was 1.4 billion euros. FF Group has 613 million euros of debt, including 250 million euros of bonds due July 2019 and 150 million Swiss francs ($150 million) of notes due November 2021.”

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