Polish clothing giant LPP sees share price collapse after report alleging “sham” exit from Russia

Poland’s biggest clothing company LPP, owner of brands such as Reserved, Cropp and Mohito, has seen its shares nosedive on Friday after a US investment research firm published a report alleging LPP has secretly maintained its operations in Russia despite pledging to leave.

The company has lost about 11 billion zloty (€2.5 billion) in market capitalisation and ended the day with an almost 36% drop in share prices.

LPP denounced the accusations, saying the report prepared by Hindenburg Research was part of an “organised disinformation attack” designed to drive down its share price.

The report, published on Friday morning and titled “Operating Behind Enemy Lines”, presented evidence purporting to show that LPP carried out a “sham” sale of its business in Russia and, in fact, continues to profit from the country’s market despite EU sanctions and public disapproval.

LPP, which has 2,206 stores with a total of over 1.9 million square meters of retail space across 27 countries, was valued at 33.1 billion zloty (€7.7 billion) before today’s falls. In the fiscal year ending in January 2023, it recorded revenue of 15.9 billion zloty (€3.7 billion).

Hindenburg Research noted that, despite LPP saying it lost about 20% of revenue from divesting its Russian operations in June 2022, it still saw noted that total revenue “remarkably grow 13% overall”.

The research company also pointed out that LPP’s reported rise in revenue across markets excluding Russia was  40.5% year-on-year, a level “virtually unheard of in the retail apparel industry”.

“We believe LPP was able to post these remarkable results because its divestment of its Russia business has been a complete sham,” wrote Hindenburg Research, which specialises in researching cases of alleged corporate fraud and malfeasance.


Operating Behind Enemy Lines: How Fashion Powerhouse LPP S.A. Masked A Fake Russia ‘Sell-Off’ Using Front Entities And Encrypted Barcodeshttps://t.co/m8a5OphdoI$LPP.WSE


— Hindenburg Research (@HindenburgRes) March 15, 2024

Russia was LPP’s biggest international market before the invasion of Ukraine. But, like many international firms, soon after the full-scale invasion of Ukraine in 2022, the Polish firm announced that it would divest its Russian business.

LPP said it sold its Russian assets, called “RE Trading”, to a “Chinese consortium” in a $382 million deal (€350 million).

“We found that the buyer was a Dubai-based shell called ‘Far East Services’ with no disclosure of its owners or directors,” wrote Hindenburg Research, which attached to its report a document from the Russian tax authority, showing that the sale of 95% of LPP’s Russian subsidiary was finalised on 30 June 2022.

Far East Services was incorporated just one day before LPP announced it had reached an agreement to sell its Russian subsidiary, noted the research company, adding that Far East Services “has no externally verifiable presence, track record in the fashion industry, or apparent associations with China”.

Retailers in Poland have rushed to remove Russian products from their shelves since the invasion of Ukraine.

Meanwhile, firms that continue to operate in Russia – such as Leroy Merlin and Auchan – have faced protests and boycottshttps://t.co/caLiEjyUP1

— Notes from Poland 🇵🇱 (@notesfrompoland) April 1, 2022

Hindenburg Research also claims to have confirmed the false nature of the divestment with former senior LPP employees and managers, who reportedly claim that LPP’s Russian operations are still “directly controlled by LPP HQ and board”.

“A former manager described LPP CEO and founder Marek Piechocki’s approach: ‘He didn’t “give a f*ck about some war between Russia and Ukraine. This [war] is just temporary’,” they quoted an anonymous former employee as saying.

In December 2023, Hindenburg Research also dispatched secret shoppers to Far East Services’ flagship stores in Moscow and St Petersburg.

They found that “almost all garments were identical designs and colours to fall/winter collections in LPP´s online catalogues in Poland, indicating that LPP’s products are still somehow making their way into Russia at least 18 months after the claimed divestiture”.

To compensate for losing 25% of its revenue by pulling out of Russia and suspending business in Ukraine, Polish fashion retailer LPP – owner of the Reserved, Cropp and Mohito brands – aims to enter Italy, Greece and Cyprus and expand in the UK and Germany https://t.co/VVYxEks3Y1

— Notes from Poland 🇵🇱 (@notesfrompoland) April 18, 2022

The research company alleged that LPP waas managing to supply the Russian market “using Kazakhstan as a backdoor”.

“Import-export records show that LPP shipped ~$755 million of merchandise to its Kazakh subsidiary in 2023, despite Kazakhstan only accounting for 1% of LPP’s brick-and-mortar stores,” they said.

The Central Asian countries of Kazakhstan, Uzbekistan and Kyrgyzstan have seen a rise in Polish imports since the invasion of Ukraine, with many firms believed to be using them as a way to indirectly ship products to Russia, bypassing sanctions.

Hindenberg Research also accused LPP of “accounting manipulation” to cover its tracks. It noted that over two thirds of the firm’s revenue growth in 2022/23 was reported as being in an “unexplained ‘Other’ segment” of its annual report, much higher than in previous years.

Polish exports to Kyrgyzstan have boomed since Russia invaded Ukraine.

Kyrgyzstan is seen as a route to bypass sanctions on Moscow and many Western countries have increased exports, with Poland and Germany having the largest figures.

See our full report: https://t.co/g4z6Ttuykj pic.twitter.com/0ev7lkyj4w

— Notes from Poland 🇵🇱 (@notesfrompoland) January 24, 2024

LPP has strongly denied the allegation in several statements published throughout Friday. It called the contents of the report “either false or manipulated”, saying it “is part of an organised disinformation attack, which has been in preparation for the last five months and is designed to drive down the LPP Group’s share price”.

It announced that it has notified prosecutors in Poland about a possible “offence to the detriment of LPP SA and its shareholders, listed investors, threatening the security of the financial market”.

Hindenburg Research did disclose that, following its investigation, the company has taken a short position in shares of LPP S.A., meaning it is betting on its further falls.

Wywiadownia @HindenburgRes działa na zlecenie. Nie można wykluczyć, że to próba przejęcia wpływów – tak #LPP kierowane przez #MarekPiechocki reaguje na zarzuty, że tylko udawała zakończenie działalności w Rosji

Kliknij w zdjęcie, aby przeczytać więcej⬇️https://t.co/uLIBhMpX6H

— Rzeczpospolita Biznes (@RPEkonomia) March 15, 2024

Main image credit: AnnaUrszula/Wikimedia Commons (under CC BY-SA 4.0)

Alicja Ptak is senior editor at Notes from Poland and a multimedia journalist. She previously worked for Reuters.

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