Earnings Call: Q4 2016

Feb 15, 2017

Good morning from Helsinki. This is Lauri Veijalainen, the CEO of Stockmann. Welcome to the financial statements 2016 webcast. I will go through the figures and the main issues. Then as before, we have a Q&A at the end. Let's start. Overall, I am encouraged by the results of last year. The result was what we have targeted at this stage. I also want to emphasize that this is a milestone for us. We are really pushing for the profitability of the department store business by 2018. However, I am very happy to see that Lindex landed at all-time high results for 2016. As well as real estate was able to improve its profit and fair value of properties. We have been able to get new tenants in. The main improvement came from retail. This is, of course, the main issue that we have been speaking about and what is the core of the strategy of the turnaround of the department store business. Two out of three of the divisions are already profitable and the third one is well on its way. We are right on track with the turnaround. Gross margin was up significantly from 50.6% to 53.4%. The adjusted operating result improved roughly EUR 50 million from EUR -28.5 million to EUR 20.2 million. We had an NRI related to the outsourcing of IT. The reported amount is slightly smaller at EUR 17.6 million. Overall, we are cautiously satisfied with the result. Again, the main focus is now for the turnaround of the department store business. On the next page, you can see the track record we have now delivered from the tough times in the beginning of 2015. This is the trend what we are going to extend. I want to point out, however, that the Q1, as with previous years, will be loss-making due to the seasonality of the retail business, both in Lindex as well as in the department stores. Overall, a very encouraging trend, which gives us confidence that we have done the right decisions and that we are on the right track and the path is correct. We will continue to focus on the key businesses. If we look at the merchandise sales and the split from last year, you can see that Stockmann Group is clearly a fashion-driven company with over 70% share. Food comes second, cosmetics is third with 9%. We also have some cosmetics in Lindex. Then we have home with 5%. On the right-hand top corner, by division, Lindex is half. Then we have 45% Stockmann Retail and real estate respectively. Then if you look at the geographical presence, Finland is 45%, Norway and Sweden are catching up at 41%. Then we have Baltics, Russia, and the other countries at 14%. It is still a relatively diverse geographical presence at the moment. Then shortly about Q4, we have lost revenue. We have less revenue, down from EUR 420 million to EUR 388 million. We have compensated that very well with the higher gross margin, during the last three months of last year. I am really happy to say that they came both from retail and Lindex. We have in the department store significantly cut down the price-driven campaigns. It is now visible in the margin. Costs have been very high on the agenda, the efficiency, a leaner organization. I am also happy to see that we were able to cut down around EUR 20 million in Q4, which is, of course, reflected in the bottom line. Overall, a very encouraging Q4 all over with an adjusted operating profit of EUR 36.5 million, up significantly from last year's EUR 18.5 million. Operating profit improved by nearly EUR 29 million, which is, of course, a good start for the year. Sorry, for the end of last year. Some of the key figures are on page six. Our equity ratio is up from 46.1% to 48.3%. Perhaps another line that I could bring up is the inventory, which is up by roughly EUR 10 million, and this is due primarily to Lindex. Then we have the CapEx, which is below last year's at EUR 44.2 million. We will have roughly this year the same amount of CapEx with the difference of last year that maturity of our CapEx this year in 2017 will go to Lindex. Depreciation is down from EUR 71.9 million to EUR 59.2 million, and as you can see, the CapEx was quite visibly below the depreciation. For the market environment, we do see some tiny light in the tunnel in Finland for the economy recovery. In Sweden, the situation is somewhat better than in its eastern neighbor here in Helsinki and Finland, and the steady growth in the fashion market took a little bit of a stagnation in 2016, and same level is expected for 2017. Situation is more dynamic in the Baltics. In Russia, we also see economy is getting gradually on its track. Ruble has appreciated for quite some time below 60 now. This is, of course, good news for the economy that it is stabilizing as well. As for guidance and outlook for next year or current year 2017, we expect the top line to decline mainly due to the decrease in store network and product mix. But we anticipate that the operating result will be better than the one this year. Again, the seasonality of the first quarter, I want to bring up. I am very happy also to say that the main improvement next year in 2017, we expect to get from Stockmann Retail. This is a really big thing for the organization and personally for me that we are really, really pushing for the turnaround of the department stores. However, we are not neglecting Lindex, and we are definitely not neglecting real estate, and those are very high on the agenda. But the main focus is now to get the third division of the group also profitable with the other two by the end of 2018. CapEx at EUR 4,550 for next year in 2017. The sales figures for January are encouraging. We are not quite there yet compared to last year, but we have been able now to stabilize the constant or drop in the top line that we experienced quite heavily last year. Overall, Stockmann Retail was at -1.4%, Finland at -1.6%, and then Baltics at -0.3%, so overall 2.7%. Lindex was with comparable currencies at -4%. We have also taken a decision in the board that due to the new market abuse regulations, as well as the fact that the merchandise sales do not give a comprehensive view of the monthly revenue or the profitability due to the fact that part of the merchandise sales is replaced by the rental income from tenants and real estate, as well as that part of the merchandise sales is replaced by service and sales due to concession and consignment in Stockmann Retail, it does not give a comprehensive picture due to these changes. As a consequence, we have decided that we will no longer publish the monthly sales releases, but instead come out with the results on a quarterly basis. This is according to the new MAR rules as stipulated by the stock exchange in Helsinki. Our strategy is entering really the next phase. We are over the mountain now with group level, from red figures to black figures, from minus 28.5 to plus 20.2. Now the next focus is really on the top line of retail business, as well as really focusing on the customer experience. It really starts with the people and the culture. We will give much more power to our employees. We have started to do it last year, but will extend that even further to the shop floor to motivate our people to create new reasons to enable better customer service and therefore increase traffic and sales in our stores. Efficiency is high on the agenda. The core businesses, fashion, cosmetics, home and food. Then again, cost efficiency. We saved EUR 66 million last year. I believe that we still have ways to become and things that we can do better also on the cost efficiency. We can do things more simple, and we can do things leaner. That is very much on the agenda also for this ongoing year. Then I am also happy to tell that part of the fact that we have now the new DC in place. It has started to operate. We had some teething problems in the beginning, and once we get the Baltic warehouse transferred to Tuusula, the DC outside of Helsinki, then we have all the operations under one roof, which will give more benefits and more add-on to our operations. The thing that is in the center now and always and will be is the customer. We have to be able to improve our shopping experience. We have too much experiences feedback from customers that their experience of shopping in Stockmann is not a consistent one. We have to get the number of the positive meetings with the customers number up and then completely avoid the negative encounters with our customers. Range, very important on the agenda, and then the premises. We have now completed all of our main investments. Primarily, Tapiola will be open on 15th of March outside of Helsinki, and then we will focus on selling. We are not investing because the department stores are ready now, we are going to focus on the top line, and selling, and the customer. Then a few words about Lindex. The sales were best ever for the first half of 2016, and the result was really all-time high for the second quarter. We had successful campaigns and improvements. However, that autumn was a bit tough and part of that was the footfall, but also we had very challenging numbers meeting us from last year. We have reduced the number of unprofitable stores. Cost has been very high on the agenda, and the new communication concept, We Make Fashion Feel Good, was launched. Plus sizes have been brought in, and sustainability has been high on the agenda. More than 50% of the range is now made of sustainable materials. Then launch of the new store concept has taken place, and digitalization is very high on the agenda for Lindex coming 2017. It already started in 2016, but 2017 it will really kick off. For Q4 in Lindex, the top line did not meet last year's, but we had a very good increase in the gross margin. But I want to be crystal clear here that we will not see this kind of gross margins going forward as 67.6%, up from 62.6%. There was a one-time booking and correction related to allocation warehouse expenses, where on EBIT line the impact was zero, but we took it from the gross margin to cost side. That's why the gross margin will not be on the same level in this year as it was in Q4 2016. Operating costs were up, partly due to the exchange rates, but in SEK they were below last year. Operating profit for the quarter was slightly below last year. However, the total year was over EUR 10 million better, which of course, made Lindex again the star of the group on money wise. But we have to say that retail also picked up significantly, although still a loss-making last year and will be loss-making in 2017, but target is to have it on black figures in 2018. Lindex CapEx slightly below last year's EUR 22 million. Lindex's international expansion, 475 stores in 16 countries. New stores and markets coming up, perhaps to point out the new franchising markets in Qatar and Tunisia, and also in the Balkans area. The network has been more or less moving around the 500 store line for some time. Most of the closed stores were in Russia. The focus for Lindex going forward is really focusing on the customer, the new assortment strategy, and then we will take in the digitalization in Lindex in much more focus than earlier. This will also mean that a big part or a good part of the CapEx, the investments, will go to digitalization, and we will also incur some extra costs on digitalization in Lindex in 2017. But this will be an investment for the future also on the profit and loss side. This is an important thing to emphasize already at this stage. Online is gaining foothold also in the markets, and we want to be a player in that area also in Lindex. Retail operating result, as said, improved by approximately EUR 20 million in 2016. Efficiency program ongoing, and we threw from the loss-making businesses which impacted the top line significantly. Primarily Russia and Hobby Hall were there. But we are continuing to build the premium shopping environments. As I said, the renovations are done in Helsinki, Turku, and then we have the new one opening in Tapiola, 16th of March, around 6 kilometers from the center of Helsinki. We launched a new Crazy Days online store in October, and the online presence was also improved with the new platform in stockmann.com in November. I mentioned earlier, the distribution center is in full capacity since autumn 2016. Q4, in a nutshell, top line was down. I am not happy with the development of the top line. I am happy that it has stabilized now in January. Fortunately, we were able to compensate with the lower cost and the improved margin, which led into a significantly better operating result for the fourth quarter of over EUR 13 million improvements. Of course, department store business constituted part of it and then Hobby Hall, which we sold at the end of last year to SGN Group. Overall, the operating result improved from -72.9 to -49.8. Still heavily loss-making, but the direction is the one which we are going to speed up now, and it is definitely the correct one. CapEx was below 2015. Here on page 18, you can see some of the brands and pop-ups that we are bringing in spring 2017. You have on the left-hand side, you have fashion brands. On the top right-hand side, you have cosmetics, and then you have home brands on the lower right-hand corner. Some of these are actually direct requests from our customers. We really want to expand the range and the choice that our customers can find when they come to our department stores. I already mentioned briefly about the new opening of the Tapiola department store. It will open on the 16th, so in one month's time. It is a completely new department store concept. It is quite smaller, a bit smaller than the one we have there already now. The current one will be torn down by the landlord. They will develop some new real estate there, and we will have new international and Finnish brands in the selection of the new department stores with wide walking boulevards, seasonal themes, new arrivals, and offers. Responsibility has been taken care of. We actually involved our customers from the area with the planning of the department store. Also, we have worked very well on the sustainability with LED lighting and energy-saving refrigerators or fridges. The parking facility, which is very important for us, is extensive, and we will continue to offer the one-hour free parking for our first and exclusive loyal customers, which has been in place also in other locations. One thing that I am somewhat or quite disappointed, there are two things. One is that the subway to the center is delayed because the project is delayed. The second issue is that the navigation, especially when you drive with a car, needs further improvement. We are in good contact with the city of Espoo as well as the landlord to have the best possible navigation and signage to the department store. Here you can see the location of the old department store and the new one. The new delicatessen, which will be an important one in the premises, and we will have longer working hours there, opening hours, parking facilities again, and piloting some new concepts, more semi-prepared foods and food market. Ecological special diets will be there. Service counters will be open also on Sundays, which is quite unusual for the capital area as of today's offer. The third division, real estate, shortly, page 23. We have been able to increase the fair value of the department stores by roughly or a little bit over EUR 30 million. The EBIT is better, the operating profit is better, but also partly due to the reclassification of Nevsky Centre. New brands, new tenants have come in to Helsinki, and we have extended the product offer. Also we invested quite a bit of money on the Tallinn fifth floor. The restaurant world was renewed there completely, as well as in the other Baltic store, Riga. We had new partners coming in the second floor. The investigation of the divestment of Nevsky Centre has progressed. Nothing happens super fast in Russia, but we are exactly on the timeline on this one, and I hope that I have something more to tell you next time we talk via the webcast. For Q4, I said the fair value is up, occupancy rate is up, net operating income is up, revenue is up, and operating profit for Q4 is up. So a solid Q4 for real estate. Also here I want to emphasize the appreciation of the ruble, which has a very positive impact, which already happened last quarter in 2016. So all together, the operating profit was up nearly EUR 5 million from EUR 16.3 million to EUR 21.1 million. OPEX, roughly on the same level as in 2015. Some of the key figures on the properties, the five buildings, which are the backbone of our balance sheet. So the fair value of the properties was up from EUR 918.2 million to around EUR 950 million. The usage of properties is nearly 50/50. Stockmann Retail still has 52%, external tenants 48%. If we exclude Nevsky Centre, it's around 76% for retail. This number is now slightly changing further towards the external tenants, but they will not be a big bang like we had in 2015 when we brought in several large tenants. It's more streamlining now and bringing in the most interesting, attractive tenants to our properties. So overall, if I just summa summarum wrap up the presentation. Overall, cautiously satisfied, encouraged with the result on group level. Two out of the three divisions are profit-making. One is not, but we have significantly been able to improve the result. We expect for 2017 further improve the results on group level. Majority of that improvement will come from the department store business and retail with the target that also the third division, retail, will be profitable by 2018. I thank you for your patience and listening, and I'm ready to take your questions now. As a reminder, to ask a question, please press star one on your telephone keypad. We'll pause for a moment to allow everyone to There are no questions at this time. I would like to turn the call back for any additional or closing remarks. Okay. I am very happy that I was coherent with what I said, but I really want to thank all of you who have had the patience and interest to participate in our webcasts for the year of 2016. I really want to wish you a happy new financial year of 2017 and hope to talk to you then again when we publish the Q1 results in April. So thank you very much from Helsinki and have a good working day. Thank you.