Earnings Call: Q4 2018

Feb 14, 2019

Okay. Good morning, everybody, and also good morning, everybody online. My name is Lauri Veijalainen, and I am the CEO of Stockmann. Welcome to the financial statements 2018 info session here at the Helsinki flagship. Let us kick it off. Not a year that we wanted to be. Positive thing is that the adjusted result went up by EUR 16 million. We have reduced nearly EUR 200 million of our debt position, and we do have strong growth in our online stores. I am extremely happy that Lindex has significantly improved its results since the difficult year 2017, but the main challenge still remains, and this is the department stores. We put all the efforts to turning the retail around, but unfortunately we did not succeed. Therefore we have launched a cost savings program now of EUR 15 million in retail and EUR 5 million in Lindex, which we will tell more about a bit later. In real estate, the steady performance continued. Book House was sold in the springtime. After 2 years of process and efforts, and I believe we had 5 processes in the time period, we have concluded the sale of Nevsky Center. So, a positive thing also for the debt position. Gross margin went up for the group, and as said, we came up from EUR 12.3 million last year to 2018 being EUR 28.4 million in EBIT. So, right direction, but not exactly fully where we wanted the improvement to come from. Revenue 2018 reflects rather well the very big importance of fashion for the Stockmann Group, obviously Lindex being a major part of it as well as the department stores. Cosmetics 10%, Home 6%, and Food is 4%. We still operate the food business in the Baltics. On the right-hand side, you can see the split by division. On the top line, Lindex 56%, Retail 37%, and Real Estate 7%. By market, Baltics, Russia 18%, Sweden and Norway 44%, and Finland 38%. The share of Russia, obviously after the Nevsky divestment, will reduce. The impact of Nevsky on the result last year on EBIT was EUR 18 million. So it had a big impact on the group and on the real estate results. For the Q4, Christmas sales were not as expected. As you know, the retail business is very cyclic. The most important quarter is the fourth quarter. We had the Crazy Days and obviously the Christmas and New Year sales. But in the overall picture on comparable currency rates, the sales were down 1.3%, and gross margin went down. We had to do price actions primarily in retail. There was a relatively big competition in the December campaigns, and competitors also started to do their campaigns quite early. We also did similar actions. Operating costs have been highly in focus. We have been working on those. They have gone down by 7.7% in Q4. EBITDA EUR 37.5 million compared to EUR 38 million, and adjusted operating result roughly a little bit less than last year, around EUR 700,000. But overall, we could have done better in Q4. Here you can see kind of the path we have taken since 2015. You can see that from very low figures of nearly -30, we have come up to around +30. The dent in the middle is the weak performance of Lindex in 2017, which we fortunately have managed to recover, and the turnaround of Lindex is visible. Net debt has gone down by EUR 196 million from EUR 739 to EUR 543, and the Nevsky figure is not yet in the figures here. We have repaid the debt, which we had a milestone with our financing banks in January, and that commitment is fulfilled. It was done with the Nevsky funds. From the key figures, perhaps to point out the inventories. We have been working hard on the efficiency of the inventory from EUR 162 last year to EUR 141. Perhaps the other one is the CapEx or capital expenditure. It's been hovering around the EUR 30 million line. We had around EUR 5 million lower figure this year, but the structure has changed somewhat. We do put a clear majority of our CapEx and investment into digital development, both in Lindex as well as in retail. There are some big changes in the accounting principles. The IFRS 16 leases. We do have adopted those from the 1st of January 2019 onwards. They will be impacting the profit and loss as well as the balance sheet side. They will be recognized now in the balance sheet as a lease liability and as a right of use asset. The lease payments will be depreciated, and the interest on the lease liability is recognized as a financial expense. Please note that the comparable figures for 2018 are not restated. If you have any questions on this, we have Kai Laitinen here as our CFO who can answer questions on the accounting principles when we have our Q&A. Market overall, the generic or the overall economic situation in Finland has remained strong last year, and consumer confidence is on a higher level. From that perspective also, the results are not where we wanted them to be. Please note that the fashion market in Finland during the year was down -2.6%, and since fashion being 80% of the total picture, of course, this has an impact. In Sweden, Lindex has outperformed the market. In January, December, the development in the Stilindex was -3%. As Susanne will shortly present, Lindex went to another direction, the positive direction. In the Baltic countries, the growth has been ongoing as in previous year. Therefore, the guidance for 2019 will be that we do expect our adjusting operating profit, excluding the impact of Nevsky, to improve compared to 2018. I also want to state that it is a guidance even without the IFRS impact. The guidance is Stockmann expects the group's adjusted operating profit, excluding the impact of Nevsky Center, to improve compared to last year. Thank you. I give the helm now to Susanne, who will go through the Lindex and its last year. We'll take questions after all the divisions have presented their part. Thank you. Thank you, Lauri. We had a challenging start to 2018, but we were able to turn it around during the second half. The adjusted operating profit amounted to EUR 30.4 million, which is almost double that of previous year. We increased our profitability in all of our markets and in all business areas. We improved our margin from 59.9% to 61.5%, thanks to lower markdowns, but also through a different product mix. Our strategic actions within the profitability program have resulted in both increased sales and decreased costs. We have decreased our non-commercial costs by 4.6% in local currencies. Our comparable sales for 2018 increased by 1.4% in local currencies, and we can see that we continue our strong growth online, which increased by 46.6%. We had a better sales growth than the market in all of our main markets, which is the Nordic countries. Our work and our focus on optimizing our store portfolio and securing profitable stores have proceeded very well during the year. We have both reduced and successfully turned around non-profitable stores and lowered our costs. Looking then at the financial performance for the fourth quarter, our comparable sales was on par with previous year, but due to currency effects, the revenue was down by 3.1% in euro. Our business area, womenswear, increased the most, and our online sales increased by 38%. Our gross margin was strengthened, and our operating costs decreased by EUR 7.4 million. The operating profit increased and amounted to EUR 14.8 million. When it comes to the development of our store channels, we have reduced Lindex store network with 16 stores during 2018, and we now have 474 stores in 18 countries, of which we have 41 franchising stores. To strengthen the customer interaction further in stores, we have during the year launched a customer first sales program in all of our countries. This work will continue and now also with digital tools. What we can see here is that we have improved our average purchase already. Online, we see a strong increase in all our countries as well as in all business areas, and we have increased our assortment as well as our volumes. We grow both through our own channels as well in collaborations with our partners such as ASOS and Nelly. Looking at Lindex way forward, I see that we will continue to have a clear focus on sales growth and of course, good cost control. During 2019, we plan to open in two to four new franchise markets, and we will continue our strategic actions and for increased profitability and competitiveness, as well as our focus on optimizing our store portfolio with the right customer offer. Our e-commerce and to enhance the digital experience are also key focus ahead. We will launch a new platform this year in all of our countries, and we will also develop and expand our online assortment further. To support our continued growth online, we will also move into a new e-com warehouse, where we plan to be up and running by June this year. We are already seeing a positive response to our spring collections and having a strong commercial and inspiring assortment and campaigns to look forward to. Last week, we launched a sustainable baby collection with great success, and we will later during this spring, also launch a new sustainability ambition. Here we will announce our focus and our future work over the coming next years. Thank you. Morning, everybody. Looking back into 2018 for Stockmann Retail, for the first three quarters of the year, we were able to compensate for the decline in revenue with improved gross margin. But then during the last quarter, we decided to secure the sales, and that had an effect on the gross margin. For the full year, the revenue was down. Gross margin was on the level of previous year. We had the savings plan and we did the savings, but those were not enough to help us improve the operating result for the year. Therefore, in January, we launched a new program, with the aims to reduce the cost level, improve gross margin, and improve sales efficiency. On top of other things, we need to secure that we are staffed correctly, that we have the right amount of salespeople on the sales floor when the visitor flows are highest. This according to the changing customer behavior. For the online, we had very good growth numbers in 2018. We had double-digit growth in both our online platforms, so stockmann.com and the Crazy Days site. However, over 90% of our turnover still comes from the brick and mortar. So the growth in online was not enough yet to compensate for the decline in revenue in the brick and mortar stores. The year for the brick and mortar stores was not identical between the stores. In Baltics, especially Riga, continued to develop nicely. In Finland, some of the shopping centers did well despite of the increased competition. For example, Itis, as a shopping center, made many good development initiatives to compete well against, for example, the newcomer, Redi, which opened at the last part of the year. Then again, on the other hand, in Tampere, we did see a clear effect on the visitor amount to our stores because of the construction work in the city center. Tapiola Center being under construction and Ainoa shopping center extension being built, that shows on the visitor amount to our store. So that is not on the desired level where we want it to be. Gradually, during last year, we took into use the new sales roles in the Finnish stores, and those changes have been received mainly well by our customers. We measured the NPS, so the net promoter score in the Finnish stores and for the brand in Finland, and we saw a clear improvement in the NPS figure in 2018. We went up from 35 to 51. As we launched the new sales roles, we of course followed carefully the feedback from the customers, and we saw an increased amount of positive feedback on the convenience of payment, and then also the devoted professional customer service that we are now able to provide to them. Selection is in the core of our brand, and we were happy to bring in new brands also during last year. Many of them are brands that are available in the market exclusively at Stockmann. Tourists, they are a small but important customer group for us, and we did changes and development in our offering to attract them more. Q4 in financial figures for Stockmann Retail, the disappointing Crazy Days sales weighed heavily on the Q4 for Stockmann Retail. Towards the end of the year, as I said, we did actions to secure the Christmas sales, and we did improve in sales towards the end of the year. That then shows on the gross margin. The savings that we did were not enough, so the operating result was positive for the quarter, but was not what we wanted it to be to improve the full year result. Online had good, +17% growth figures also for Q4. Of course, our main focus on the digital acceleration, as being said. Before I talk more about the digital projects that we have going on, I wanted to show you this study by Finnish Commerce Federation about the most used fashion stores in Finland. You may have seen the same study results when we look at the whole country, so Finland as one. The brand that is on the list here ranked as three, Prisma becomes number one. When we look at the capital Helsinki area, it is Stockmann that leads the way. So we, with our four locations and online, are the most used fashion store, both for women and men. Then you see some pure e-com players on the list too. But those are still behind the established players on the market. So online, our focus has been and is on the digital acceleration. Widening the assortment has been the main focus lately. During spring 2018, we went up in SKUs to 60,000, and then in the fall, over 100,000 SKUs on our online site. Next big step towards having the full Helsinki flagship collection available online will be taken in March when we bring fashion brand Boss into our online selection. In the spring, we will also launch our marketplace that gives us new great opportunities of bringing in new brands and even totally new merchandise areas available for our customers. We started that with a pilot with XS stores in September, and after that successful pilot, we are now thriving towards bringing in new brands in fashion, home, even beauty, and as I said, even new merchandise areas. We will also take a big step in our digital journey in Baltics. We have been only present there in brick and mortar until now, but next fall we will launch the Crazy Days site online, both in Estonia and Latvia. Going into 2019 and forward, we expect to see high growth numbers from online also going forward. The combination of online and brick and mortar is crucial for us, combining all the new services that we can bring to the customers in that setup. Yes, we have a tough year ahead of us, but we are determined to make a comeback. I give the word to Elina. Thank you, Maiju, and good morning, everyone. Real estate had a quite stable and overall quite a positive year in general. We managed to increase the full-year revenue and net operating income from our own properties, also adjusted operating profit. Since we had quite big transactions last year, we need to look at the adjusted figures in general. The sales were done quite well, I would say, with the successful results. The Book House property was sold at EUR 108.6 million, which is actually above the book value, which is EUR 100 million. That went according to the plans. With the Nevsky, that took a little bit longer than anticipated, but the process was actually finished last autumn, and sales price was EUR 171 million. Book value was EUR 181 million. Of course, there are changes in rubles, et cetera, but still a quite satisfying result, I would say, with the sales. Overall, we are actually concentrating on developing our food and beverage offering, so we had quite many new openings last year, especially when it comes to the city center, our flagship store. For instance, Fish Market, Biáng!, Comptoir des Farouches, Hanko Sushi, et cetera. If we look at the financial figures of the last quarter, the revenue was EUR 16.9 million. Net operating income, EUR 20.1 million. Average monthly rent, 38.82, and net rental yield was 5.6%. Occupancy rate remained at a very high level if you compare, for instance, to the shopping centers, so 99.4%. Adjusted operating profit, EUR 6.8 million, and reported EUR 5.6 million. Has to do, for instance, with the sales costs. In our own properties that remained, so the three properties that we currently have, the fair value was EUR 681 million. The main change actually comes from the flagship store in Helsinki because the market has changed a bit. The yield requirement has been rising. That is a very understandable development. For instance, you have all heard about Redi, et cetera. It is not an easiest market at the moment when it comes to the commercial real estate in general. But of course, on our strong side, we have the excellent location, strong visitor flow, et cetera. Overall, it is still a very good value. Gross usable area, 88,000 square meters, of which Stockmann Retail was using 73%. Perhaps notable that in the flagship store, we actually have 34% external tenants and 66% is occupied by Stockmann Retail. Somewhat higher in Tallinn and Riga. Thank you. We will have time for the questions right now. Okay, thank you, Elina. Please, Q&A. If anybody has any questions, please speak up. Yes. Pirkko Tammilehto from Kauppalehti. I would like to ask a little bit more about that new roles on the sales floor in the department stores. What does that mean? Do you have to put people out, or what does it mean exactly? No, we did it during last year. We kind of recognized that it is needed to have two different roles on the sales floor. We have the centralized cash register areas where we have the team that takes care of the convenience of the payment. They are present there, so the customer always has the possibility to pay when she or he is Redi. Then we have another part of the team, which are working almost like personal shoppers. They have an incentive based on the sales efficiency, and they can go throughout the whole building if the customer wishes. So they are able to not worry about the payment, but to focus fully on the customer. So those are the role changes that we did. No less personal in future? No, we organized us differently inside the teams, the department stores and inside the teams. Yes. Hello, Rauli from Nordea. A couple of questions, maybe starting from Lindex. You had good improvement last year, but still your EBIT is quite a long way from the levels it was a couple of years ago, being like EUR 50 million or so. The question is that, do you see that the market has kind of permanently changed, so those kind of levels are out of reach for the foreseeable future? Or what's the situation in the big picture? I think, of course, that that's a very hard question to answer. I can't say anything about the market's development for the coming years. What I can say is that I want to outperform the market and that we should do our best to meet the customers' expectations and then increase our sales. All right. Yeah. Then a couple on the financing side. First of all, on the IFRS 16 change, can you explain why there is a negative change on the net result for you? I understood that most of the companies have it kind of neutral. What is behind that? On the IFRS 16, basically, the way it is measured, it is the impact of the interest expense, which will originally or typically have a high impact on the numbers on the income statement. Later on, as it is measured, it will have a lower impact or reducing relatively lower impact on the numbers. It is typically not necessarily net result zero impact in these cases. In our case, when the numbers are what they are, it produces this kind of outcome. In income statement, you have the, let's say, the depreciation basis coming through the right of use asset, and then you have the financial expense coming through the asset or the liability. As the liability is decreasing over the term of the leases, assuming that there would be no new leases put in place, then the interest expense, of course, is not evenly spread across the term of the rental agreements. All right, good. On the working capital, you had nice improvement last year. How do you feel going forward? Do you still have a lot of room to improve, or do you feel you are at really good levels? Good working capital remains to be in focus, and it is not only the capital management, but it also has clear links to management of our markdowns, management of inventory overall, and later on the profitability through the gross margin and possibly avoiding unnecessary clearance sales. All right. Thank you. Niclas Catani from OP. First of all, did I understand correctly that you expect your operating profit to improve despite the IFRS 16 impact? Correct. All right. Secondly, could you describe a little bit about the lease liabilities that now go to the balance sheet? Divide how much is Stockmann Retail, how much is Lindex? I do not know if we have split it like that, but what I can say is that traditionally, if you compare the retail and Lindex, the longer ones, since the investments have been bigger, are in retail, and the shorter ones are in Lindex. I am not going to disclose exactly the amounts because we have not done that earlier. But they are significantly longer on the department stores than on the Lindex side. Okay. That, of course, impacts the amount of the liability. Okay, thank you. If no other questions, I thank you for the participation and wish you a good Valentine's Day. Thank you.