Earnings Call: Q4 2017

Feb 14, 2018

Okay. Good morning to everybody here in the Helsinki flagship, and also good morning to you through the webcast connection. First time we are doing this also via webcast. My name is Lauri Veijalainen, and I am the CEO of Stockmann. The topic of today are the financial statements of the past year 2017. Overall, we cannot be satisfied with 2017. We had some positive things that took place, but we also had some things that went backwards or to the wrong direction. I will go through now the things that have happened, but moreover, what actions shall we take now to correct the situation. Positive news was that we were able to improve visibly the results in retail and real estates. The retail result improved by some EUR 18.5 million during last year. We are still loss-making, but our target is this year to break even, so it was not anticipated we would break even this year. The main challenge at the moment, or even the headache now is Lindex. The performance was far from satisfying and we, however, have taken firm actions to improve the situations. The four things that are really in focus, and Elisabeth will go through them, but I want to say them also here, is the efficiency that we have started a clear cost efficiency program. Number two is that we will look at the store network and the non-profitable stores will be closed down. Number three is that we are focusing on the digitalization in a more and bigger scope than ever before in the history of Lindex. Number four, that we are really correcting the mistakes that we have done with the collections last year. Lindex is really the main focus going forward in this year. Positive is also that we have agreed with the banks to refinance the long-term credit facilities last year, which is of course, a positive thing going forward and gives us latitude to operate our strategy and execute it. Lindex adjusted operating profit was 16.1 and we have identified and recruited a new CEO, Susanne Ehnbåge, with a very strong digital background and retail background, who will start latest August. As said, Stockmann Retail operating result was up by roughly the 18.5 million. The positive thing was also that we have been able to stop the bleeding with the sales, that the sales increased in comparable businesses during last year. However, we cannot be completely satisfied or satisfied with the Q4 because we did not perform as expected also in the department stores. But this we have analyzed and have learned and will correct this for the next quarter four. The positive news was with real estate. Operating profit was up nearly EUR 8 million, and we are continuing the investigations of Nevsky Center and Book House divestments. On the left-hand side, we have the gross margin on the group, which was almost on par to last year, 55.8. The result, as said, was not where we wanted it to be. It went down due to Lindex performance, and the fair value of properties went up by some EUR 23 million from a year ago. We will go forward with the strategy on our core competencies and strengths and the brand focus on Lindex and Stockmann will go forward. We have completed divestments of Seppälä, Academic Bookstore, Hobby Hall and Delikatessen now. The focus is really now to emphasize that Stockmann is the destination to do premium class shopping in Finland and in the Baltics. The geographic focus will be on these countries. We have retail already exited from Russia. We have a license agreement ongoing, so the brand continues to be there at least till 2023. We get a franchise fee from our operator. This is really the focus. It is also the challenge. The Nordic markets are the ones that we are struggling with Lindex, although Finland has now picked up. For Sweden, if you only look at the January development of the fashion market, the fashion market went down by 7.2% going forward. It is a challenging market situation also, and that's why the focus on Lindex will be on the digitalization more than before and the three other actions that I described in the beginning. The merchandise focus will be on fashion, beauty, and home in the department stores, as well as, of course, fashion in Lindex. The Delikatessen divestment created a lot of emotions in the summer. It was cooler in the Christmas time when we got the permission from the competition authority. The first month has gone, no big changes. Stockmann-Herkku is still Stockmann-Herkku. S Group has already given some comments on their performance, but the cooperation has started well with them. We will be expanding the offering with the partner products and partner operators. These buildings, for example, and especially this Helsinki flagship, will be more of an experience center going forward. We need to create the experiences, the feelings that makes our customers come here more often again. One part of this is also the fact that we will be opening new restaurants and cafes going forward. Already, we have announced the first-floor plans, and we'll come back on those more on the brands and others, I believe in the next one or two months going forward. The seamless omni-channel experience is very high on the agenda, and I have to admit that we have not perhaps been the most active, and we are starting from behind with digitalization. When I look at the KPIs on our performance now and how much more we have been able to get goods into the online and the double-digit growth figures we have on digital channels, it is now our most or the quickest growing sales channel in our department stores. It's also growing very fast in Lindex. We will be putting more effort into this, both CapEx, both people investments. We have at the moment 30 to 40 open positions in Stockmann for digital professionals. We have to catch up. The competition has passed us. We have to make the most out of it now and excel. We believe very strongly that we still have a very good shot at increasing the digital channel going forward. Food service I already mentioned. The partnerships that we will introduce also going forward will increase in the future. On all levels, on all types of operations, there will be partners that we are already in negotiations and will be coming out shortly on those. Revenue in 2017, you have the apple pie or the pie here. Fashion is a significant part of the turnover. We have around 80%. Cosmetics is 10%, home is 6%, food, which is the Baltics foods, is 4%. On the right-hand side, you can see the division by division. Lindex at 56%, Stockmann Retail at 38%, and real estate at 6%. Here you can see that the big importance of Lindex to the whole group, 56% of the total revenue comes from Lindex. By markets, Sweden and Norway 45%, Finland 38%, and Baltics, Russia, and other countries are at 17%. Q4 figures, as said, not the best. We had a good run with the department stores up to beginning or middle of Q4, but the tempo slowed down. This was, of course, a disappointment that we were not able to keep the tempo fully in Q4, but overall, the result went well up on the retail. Total revenue went down. Revenue all over was roughly on par, 0.2% down, but Stockmann Retail +0.4%, Lindex -1%, and real estate +7%. Of course, the favorable ruble also in Russia helped with that through Nevsky Center. Gross margin was up. This was very good also in Lindex. Sorry, very good in retail, but down in Lindex. The operating cost, the work that we have been doing on the efficiency is bearing fruit. The costs were somewhat higher than we anticipated for Q4. They did not realize as fast as we were able to do, and that is why we also started in January the additional EUR 8 million efficiency program in retail to adjust or get the costs and the turnover on the correct balance. EBITDA lower, depreciation higher. The EUR 5 million write-off is related to the ICT projects and Herkku deal. The operating result was below in Q4, but in real estate, we were able to improve it. Overall, the operating result, 32.3%, last year 13.6%, was a disappointment. We did not deliver what we were hoping and expecting to do. As said, the firm actions are now in place to go forward for 2018. The level that we start is lower than we were also expecting. Some of the key figures are here. Perhaps to point out that our inventories are slightly lower, and CapEx also was quite a bit lower than last year, roughly around EUR 10 million. The market environment and the outlook. The economic situations in Finland and Sweden are expected to get better. The GDP and customer confidence, we saw some very good figures for Q4 this morning from the ministry here in Finland. If I remember correctly, it was 3.9%. The Baltic retail outlook is expected to be better also in 2018 compared to the other areas of the group. The Swedish fashion market is a question mark. It is not developing as to the direction as it has been during the last years, and this, of course, is a challenge to all the operators. Sweden is, of course, very important market for Sweden because most of our stores are there. The target is to improve the group's long-term profitability and the efficiency measures that I mentioned also prior are in force with full speed, and they will be implemented now during the spring 2018, and they will be already visible in 2018 and fully visible in 2019. It is EUR 8 million in retail, and we have, at this stage, the efficiency program of EUR 10 million in Lindex. First quarter is always a tough one in the department store business due to the seasonality. We believe that 2018 results are not likely to improve from the previous year's level. The efficiency measures that we have taken will not be immediately visible because there is a certain lead time for that. Our guidance for this year is as follows: we expect that our revenue will be on par with the previous year. We believe and we guide that the operating profit is expected to improve in 2018. Okay, now I hand over the microphone to Elisabeth Peregi, the CEO of Lindex. Elisabeth, please. Thank you. This one is for you. It's forward. Mm-hmm. Yes, Lindex. A tough time during 2017 on the top line, and that goes for all quarters. As we mentioned last time, we launched a profitability improvement program during autumn. The first phase is to focus on the head office cost, making our organization more efficient and flexible, adding also a customer focus into everything that we do. So during February and March, we will have negotiations. We are having the negotiations with the union, and the organization will be decreased with approximately 20%. What is very positive during the year is our customers' interest for shopping online. Shopping online and picking up in store is a behavior that we can see is getting stronger every day. We were awarded for the best omni-channel of the year in Sweden. We can see that the smart way of shopping through the app is of high interest for our customers. We have also launched a tool in store where we can help our customers with the shopping. iPads in all stores in Sweden and Norway and Finland to start with. What we also emphasized during autumn is to find the clarity in the assortment and to have a better balance between peak fashion products and basic products. We could see a positive effect on that on the new season of 2018. So small signs of improvement. The pants solution concept that was also launched to ease up the shopping behavior for trousers has been very well received by our customers. We are doing a second launch now in February. Something that is also very positive for environment is the One Bag Habit, making the consumption of plastic bags go down significantly. Another sustainability ambition that we have is to empower women in leadership management positions in the factories, in the production. So we have launched WE Women program by Lindex, and the startup country is Bangladesh. Looks very good. Some figures then. To the right, you can see that the top line, the turnover has decreased in each and every quarter of the year. The highest decrease comes in Q2, but we have a decrease in all quarters. The decrease in Q4 was less bad, you can say. So the revenue was down 1%, somewhat lower decrease than the other quarters. The gross margin is still lower than last year. The markdown management has improved somewhat in Q4, but still, the markdown levels has increased between the years. We also can see some effects in the 2016 year's figures when it comes to gross margin coming from extraordinary measures in the obsolescence. Due to our ambition to restructure the cost side and improve our profitability in the future, we can see an effect from restructuring Reserve that was placed during Q4. Otherwise, the operating costs are under control. All in all, we can see that adjusted operating profit goes down, and the level is EUR 10 million. Store network. At the end of the year of 2017, we can see that we have 490 stores in 18 countries, of which 46 are franchise stores. The focus going forward would then be on optimizing the store network, putting focus on the loss-making stores, either close them or move them. So after this year, we will see a slight decrease in the total number of stores. We will open stores and close stores, but the net effect will be somewhat lower. Going forward, the profitability improvement program that was launched in October is now up and running with firm actions on headcounts. We must emphasize improvements in assortment, making our assortment much more commercial and balanced than before. We also have launched a new sales program in all our stores in all countries, focusing the customer interaction. During April, you will see a new visual expression of Lindex focusing on the Swedish culture and the clarity in the photos with a modern attitude. This will be visible during spring and also going forward during the year. Together with our efforts on optimizing the store network, we are also launching new store formats such as lingerie stores and kids stores during the year. We are also testing a digital showroom store in Iceland, and the outcome of that test will also be taken into account when creating the most optimal store network that we can have in the future. As Lauri mentioned, the focus is on the digital side. We have focused our e-com store and the connection to our network in the past, but in the future, we will have even more focus, and we will make investments in optimizing the shopping behavior, the shopping easiness together with the digital e-commerce. Then I also wish to welcome Susanne Ehnbåge, who will start as our new CEO in August with great digital experience. Morning, everybody. My name is Maiju Niskanen, and I'm in charge of Stockmann Retail. Looking at Stockmann Retail in 2017, our full focus was, of course, on turning this business around. Therefore, the main highlight of last year was the improved profitability that we were able to reach. The almost EUR 20 million improvement in profitability was done both by increased revenue, higher gross margin, but then of course, the large savings that came from the efficiency program that we started in 2016 were essential to the improvement. As part of the road towards the turnaround, we completed the selling of Stockmann Delicatessen operations in Finland at the end of last year. The selection is the heart of our business and one of the most important things to our customers. Also last year, we brought dozens of new brands into our selection. Some of them we did through pop-ups to be more agile, to test new brands together with our customers. We did bring in some new services that the customers were asking for. For example, a beauty studio in this store in Helsinki flagship to help the customers to navigate in the cosmetics department among all the different brands and products that we have in the department. We also did a lot more of personal shopper services, especially right before Christmas. It was well received by our customers, the gift shopping assistant that we could offer in our department stores. Stockmann Magazine, our new lifestyle magazine, the next issue is out in March. Then, of course, one of the dearest highlights of last year was the opening of new Tapiola store, which is the most forward-looking store of all our department stores. Last year, we also tested something new, mainly in Tapiola store, also in small scale in other stores. We wanted to bring even better customer service and shopping experience to our customers, and we decided to divide our sales staff into two teams to be able to cover the payment function in a more convenient way in the stores. At the same time, letting part of our staff, some of the salespeople, major part actually of the salespeople, to do the customer service in full scale, almost as personal shoppers responding to the needs of the customer in the department store. Together with this, we tested a new motivational system to our salespeople. Now this year, at the beginning of February, we launched the same system in all our department stores. These service salespeople in our stores nowadays get bonuses according to their personal sales on top of the base salary. We follow the personal sales performance, and they get commission against it. Looking at Q4, Lauri was mentioning already that it wasn't completely what we were looking for. We had increase in revenue, but it was pretty much the revenue on par with last year in the Finnish stores. Baltics continued really strongly like they have been doing throughout the whole last year. They had great sales both in food and then in non-food, especially in fashion. Gross margin went up. We were able to keep away from driving the sales with discounts, and that shows on the gross margin. It improved mainly or especially in fashion. When it comes to costs, the efficiency program that we launched in 2016, we had gotten out all the effects from that, and that kind of slowed down during the end of the year. The costs were increased. That's why already in January we have launched a new efficiency program to cover this situation. Yes, as you show on the figures or on the stats, it was a dip in the improvement in operating profit, and we plan to make it temporary. Online was the fastest growing channel in Stockmann Retail last year. To be able to fully embrace the strengths of our brands and to respond to the customer needs that are changing as the retail environment is changing, we need to invest very strongly into digital part. We are putting more resources in the digitals, also as recruiting new people, and then we are looking into more new partnerships to speed up the change. We want to bring more of the large impeccable assortment that we have in Stockmann Retail available for our customers also in digital channels. If earlier the amount of products in our online store was more or less at the same level with a smaller Stockmann store, now we aim to have it closer to the assortment of this large flagship store. We are of course also looking into possibilities of bringing quicker delivery to the customers if that is something that they wish from us. Then adding more services that make it seamless, the shopping experience. Customer gets to choose the channel that she wants to shop in. The latest of these services is something that we tested in December in small scale in Helsinki flagship, offering the possibility for the customers to browse online and then reserve a product and come pick it up in the store. Very fast, we decided to launch it in all stores. That is done now this year. Customer goes online, sees a product that she's interested in that is available, for example, in this store. She reserves it, gets a confirmation in 2 hours if the product is available, and then she has time today and the next day until the end of next day to come pick the good up. They pay it in the store then. That is something that showed us really that the customers are looking into services like this. It was a very successful pilot at the end of last year, and now we are launching it in all stores. Then I give the word to Björn and real estate. Thank you. Good day to all, both here in Helsinki and participating over the webcast. My name is Björn Teir. I am the Director of the real estate division and real estate business. Real estate had a stable and a positive development during 2017. Actually, in all the key areas that are important to follow in a real estate business, both when it comes to the revenue through the rental income we get, through managing the costs for the properties and finding efficiency measures in those, and also when it comes to the fair value development of the properties we have on our balance sheet. Of course also then boosted by the current market situation globally in the real estate business when we talk about the fair value. We had a positive development also in the Russian market. The Nevsky Center shopping mall had a good year, mainly due to the more stable environment and macro economical situation also in Russia that we saw during 2017. We made some new things during 2017 to improve the visitor flow to our department stores and locations both here in Helsinki and Tallinn. We opened roof terraces that were very successful in supporting visitor growth. When it comes to the divestment processes that we have communicated earlier, the Nevsky process has been a long process in a market that is fairly difficult and not that active at the moment when it comes to property investments. While the Book House will be a faster process as we see it. We are now out in the market globally with this very attractive asset, and we see a lot of interest for this investment property that we have on our balance sheet. A lot of work there behind when it comes to the Book House. Three years ago, it was a property that was mainly occupied by our own business. At this moment, it is a pure investment property with only actually a few premises that we use ourselves, otherwise totally leased to external partners, tenants. In Q4, positive development in the occupancy rate. Also in the average monthly rent per square meter and a higher income in the Nevsky business compared to earlier year. When it comes to the net operating income, that is the most crucial KPI in this business, of course, also the operational costs are very important to keep in a good development. There we have done several things during 2017 to try to reach cost efficiency, and it was quite a successful operation. The operating profit needs to be said, is, of course, also now boosted here with the change in the fair value of the investment properties. So 4 million EUR out of this comes from growth, the net growth from the fair value of investment properties that is visible in the P&L of the business. On this slide, you see the properties we have on the balance sheet. You also see both the investment properties we have, the Book House and Nevsky. As I mentioned earlier, in the Book House, we have only actually one social premises that are still in the own use. Otherwise, it is fully leased to external tenants and this will also change in a near future, and the building will be fully leased to external tenants. When it comes to the own use of properties, you can see down there on the right-hand side, 75% in the department store premises is in use by our anchor tenant, Stockmann Retail. If we add to these premises the square meters we have in the investment properties and take all the properties we have on the balance sheet, 46% is in the use of Stockmann Retail of the total. Basically, finally, this is what we do and what we focus on in our business also to give the top-notch customer experience to people to come and enjoy life into our premises, both do the shopping you need and to get the experience to find the products that you didn't know that you need before you open the door, but also to enjoy life by your own or together with your friends and through the food experience that we are investing a lot in at the moment. As Lauri mentioned, we will open during the springtime a few new concepts down in the flagship building in the first floor, street floor. A bit over one hour ago, we opened a new cafeteria in the Tampere department store, and this development will continue together with partners in the market. You see two of these partners actually in the picture here. When it comes to the sales volume, for instance, in this flagship building you clearly see the figure of 300 million EUR in 2017, and that makes this flagship by far the biggest location for shopping and food experience in the Helsinki downtown area. That we are aiming at developing further on. This was actually my part. Now we take the questions and answers. Okay, we are ready to take your questions now. Thank you, Mikko Ervasti, Nordea. This guidance troubles me a little bit starting from 12 million EUR you say that the operating profit will improve while if it was 15 it would be improvement. If it was 20 it would be quite clear improvement and 30, 40 it would be in multiples already. Why do you put the bar like this and why do you make the wording like this and do not clearly state what you expect in terms of the improvement? Well, we have had revenues on a certain level and we believe that we will be able to pick up both Lindex and retail. The cost we are working on and the main of course is that to stipulate very clearly what we plan to do is something that we had a long discussion about it. But then concluded that this wording is the most optimal at this stage. I cannot really start to comment our goal or budget for this year because then I would not be following the rules, but we believe that we will be able to improve. Then it is up to you to determine what is the improvement. But of course, we expect the improvement to be visible or we expect that we will improve the result of this year or last year or so. I cannot unfortunately comment too much in figures or detail your question due to the rules of how the guidance is set. Apologies for that. Okay. You mentioned about that Q4 had a good start in terms of the retail sales but then slowed down. Yeah. From some other retails we've heard that up until Black Friday it was a bit quiet and then it kicked off when people Yeah saw the promotions and then started doing the real Christmas shopping. What happened with you? It more or less happened the same that we had a very good Black Friday or Black Weekend but then somehow the Black Friday cannibalized the Christmas sales. The people were out earlier and then we also saw that we did not go into the price game. We also saw that the competitors were out already on the 15th, 17th with 40%, 50%, even 60% discounts and this was positively visible in our margin. But the Black Friday is a strange factor or component and it's going to be interesting to see how long that will hold because it's not really a traditional Finnish way of shopping. It has been very recently introduced especially to our country. So we shall see also going forward this year how that will be handled and how that will treat the Christmas sales. Black Friday has, in our view, cannibalized the Christmas sales. All right. Thanks a lot. Niklas Kalani from OPR. You have been investigating the sale of Nevsky Center for over a year. To me it seems a little bit long period of time for this kind of process. Could you elaborate a bit what is going on there? I have to admit that it has taken longer than we have expected. That is a fact. I have lived in Russia for quite a long time and as Björn said the market is not the same as in Finland and the things may seem to be going to the right direction and then at the end they may just fall apart especially when you do these kind of transactions and also the market for large real estate transactions has been a little bit slow. There has not been too many deals done for example in St. Petersburg on commercial real estate. We are currently in negotiation, active negotiations and we target to close the deal. I agree with you that it has taken longer than we have expected. Okay, thanks. Yes, Pirkko Tammi-Lehto from Kauppalehti. I would like to hear a little bit more about the online sales on warehouses. You said it is growing very fast. Right. How big that is already now and how big part that is from the whole sales? Shall I take it or I can take it. Okay. It is less than 10% the online sale share both in Lindex and in retail. Fashion is growing very fast. What we have seen is that when we have been able to get more goods into the online it has an immediate impact on our sales. We have not been optimal in getting the goods. Second issue that we have been improving is the quality of the data what we have in the stock and what is available. That is also being improving. Number three, which we are now working is the delivery times. I have a solid target that we should be able, during this year, to deliver, if not the same day, but the next day for online in retail. Lindex has already started in the main cities of Sweden, Stockholm, Gothenburg, and Malmö, to deliver the next day, maximum two days. That is already ongoing from the Lindex part. When we talk about the customer experience in the department stores or in Lindex, it is as important to offer a solid customer experience online. Customer actually doesn't see the difference. It has to be as solid, and that means that the systems have to work, and the balances have to be correct, and the range has to be as wide, as interesting, as recent, as current as possible. About the other department stores in Finland, could you tell me a little bit more about the sales in Vantaa, Itäkeskus, Tapiola? Tapiola has been the best performing with growth. We saw very quick impact on the opening of the metro or the subway. It's not yet optimal. The works are ongoing in Tapiola with the whole area. They are now tearing down, I believe, one big building next to our department store. I think it's the old Academic Bookstore, if I remember correctly. The walk from the metro is still around three minutes. But the situation will significantly improve when the bus station opens next year. Then it will be right on spot. Jumbo has been performing well. We have had also positive experience in Itis. Turku and Tapiola we are working on. One good thing, for example, Turku and Tapiola is that now the question about the Herkku that we are really working together with S Group, and they also works to improve the Alko concepts in both Turku and Tampere. That will bring- What does that mean, Alko concepts? They will enlarge the stores in both Turku and Tampere to make them flagship stores in both of the department stores in these cities. Any other questions? Oh, yes, one more. Jussi Nikkanen from Handelsbanken. What was the amount withdrawn from the commercial paper market in the year end 2017? Kai, do you have the figure in your head? Take the microphone and yeah. It was approximately EUR 140 million. Okay. If no other questions, I want to thank the participants. Sorry, we have some questions from online. Yes, there is one question from online. Is that true that Morgan Stanley is purchasing Nevsky Center in St. Petersburg, Russia? We are currently in negotiations about Nevsky Center, and we have not been disclosing any names of potential buyers. I will also not do it now. Now we are taking questions from the telephone lines. Just a moment. If anyone has a question over the phone, please press star one. There are no questions over the phone. Okay, in that case, I want to thank you all here in Helsinki Flagship for taking part and also everybody via telephone lines and also via the webcast. Thank you, and have a good day.