Earnings Call: Q3 2019

Oct 30, 2019

Good morning, everybody. Welcome to this interim report session. I have with me here the new CEO of Stockmann, Jari Latvanen. Good morning. Our new CFO, Pekka Vähähyyppä. Good morning. The CEO of Lindex, Susanne Ehnbåge. Good morning. Very shortly, our strategic transformation continues. The rejuvenation program is progressing as planned. As you know, the board has approved a new strategy for Stockmann, so also for Lindex. We are also assessing the strategic options for Lindex. The board has given us a full support for the planned investment program, which is associated with the rejuvenation. We have the new organization and the key leaders in place, which I'm very pleased with. The cost savings program, which we have published earlier, which targets for EUR 40 million annual savings, is on track. We have also a hybrid bond consent solicitation process will start shortly upon the release of the results of January, September. We are looking to get the bondholders' agreement to postpone the first reset date by 18 months. Q3 very shortly, and after that, my colleagues are going to go more into the details. The revenue was EUR 225 million, down 1.8% in comparable currency rates. Adjusted operating profit was EUR 5.4 million, compared to EUR 1.4 million excluding Nevsky Center last year. As you know, we merged retail and real estate divisions to Stockmann division July 1st. In Lindex, the comparable revenue was EUR 147 million, up 3.3% annual growth, and online store was 24%, which we are obviously very pleased with. Gross margin declined a little bit due to the currency effects, but the operating profit for the quarter improved. In Stockmann, the revenue was EUR 78 million, down 8.6% due to the divestment of the properties and the renovation of Delicatessen in Tallinn, which is, as we speak, completed, and the result is very pleasing for us. Gross margin, as well as the operating costs, declined, but the operating result improved. Also, as in Lindex, the growth of the online store continued, and in the case of Stockmann was 14%. I think I will now give the floor over to Jari, who will go into the details of Stockmann. Jari. Good morning. If we look now at the Stockmann division results, as Lauri stated, the revenue was down by 8.6%, and it is due to the divestments. But we had a growth online store plus 14%. Gross margin slightly down, and operating cost was EUR 44 million. It was down by EUR 3.5 million, like for like, and it is coming from personal and support functions cost, which were declining, and the rents were slightly increasing. So our operating result was minus EUR 9.4 million in this quarter. As we say, the transformation continues. Highlights is that we introduced the new values with our teams and people. We have refurnished our Tampere department store, and Crazy Days online store was launched first time in Baltics. We have changed our way of operating. You could say we have been reducing the prices every second week, and September was the first month when we did not decrease the prices at all, and our buying and markdown processes has been changed so that we are moving from 27 weeks of price reductions to 13 weeks of price reductions. Now we have just last week launched our new loyalty program. In this transformation process, we want to be the number one source of inspiration in fashion, home, and beauty. We want to develop our operations that they are serving our customers, inspiring with experiences. We have a clear focus defined by who are we targeting to, and this is now in the implementation phase from our strategy work. Then we are renewing our selections with newness, introducing over 100 brands which are unique, and some of them focusing clearly on sustainability. We are putting more efforts on our digital focus. We want to develop further the new loyal customer program. We want to increase our marketplace offering further with exclusive online partners. We are fully aware and fully working with improving our e-commerce customer experience, and that we will communicate more later on this year. We are also upgrading our stores to be more inspiring in terms of experience. Tampere and Helsinki are the first ones. Jumbo, we have already communicated, the renovation will start in February next year. We have also taken a clear position that both Tallinn and Riga department stores are part of our flagship chain with Helsinki. The My Stockmann launch that we did last Monday. It has caused a lot of attention, both in media, social media, and with our customers. But I am happy to say, we are really positively surprised that in one week we have over 50,000 applications loaded. So we have been the number one app loading in Finland. This program, we want to have a dialogue with our loyal customers. It is My Stockmann, and we, with this program, want to focus on rewarding our loyal customers. You are welcome as you are, and this is a lifetime relationship with us, so you will not lose your levels. But we want to have a dialogue and better understanding how customers experience our offers, and we will be more surprising in future to our customers. Also, I would like to tell about the Crazy Days. We had the campaign in the beginning of October. Sales in the online stores increased with 11%. And if you look at the campaign sales totally, Finland was +2% and Estonia was -8%. As Lauri stated before, the key reason is Tallinn, our newly renovated food court. So there we just opened a new food court, and it is improving its sales performance as we speak. Riga was performing better. As said, crazydays.com in Baltics was launched first time this year. We also increased our customer traffic with Crazy Days by 16%. So this campaign has its loyal customers, and this year we had stronger campaign sales. We had a smaller stock after the campaign, and we focused more on the brand selection, what we are offering during this campaign. Out of the top 20 brand list, six of our own brands were among these top 20 brands. And now I would like to hand over to Susanne. Thank you, Jari. Let us focus then on Lindex. So starting with the financial performance for the third quarter, we continue to report good sales development as well as a strong result. We increased our revenue by 0.4% in euro. But looking then at the same-store sales in comparable currencies, we can see it increased by 3.3%. The online sale, at the same time, increased by 24%. This means that we grew in all of our markets, both in e-com as well as in stores. We can also see that we managed to increase our average purchase as well as our conversion rate during the third quarter. If we look then at the gross margin, we can see that it has decreased slightly by 0.2%, and this has to do with the Swedish krona being more weakened against the U.S. dollar. But what we have done then is to be able to challenge that somewhat, so we have increased our start margins and also reduced our markdowns. Looking at the operating result, we can see that it has increased, and we also managed to decrease our operating cost by EUR 0.9 million. If we look at the result for the first nine months, it has now increased by 29% in Swedish krona. Then, if we look at the highlights for the third quarter, we continue to roll out our new e-commerce platform into our markets, and we now have the new e-commerce platform in all of our markets except in the Nordics. Sweden, Norway, and Finland is yet to go, and we plan to launch there very soon. We also launched a new partnership with Boozt, and this means that we now have five partnership within third party. Just after closing the third quarter, we opened our first store in Denmark, which was a really strong and good success. This store is located in Copenhagen, and the first weekend we had almost 14,000 visitors, and we sold almost eight pieces per minute in that store. This store also has a self-checkout, and we are using RFID in that store. By the end of September, we had 460 stores in 17 countries. Looking at today, we are now established in 18 countries with stores. Looking at our way forward, we have big ambitions for Lindex. To further strengthen our international growth and digital transformation, we are implementing our updated strategy. That strategy is focusing on driving efficiencies to grow our current business, as well as exploring new growth opportunities. We will, of course, continue our growth online, and that is both through our own channels, but also in collaborations with third party. We also see the possibility to grow into new markets within franchise. One of the world's largest markets is China, and here we see a great potential for Lindex. We have therefore decided to sign with a local partner, and we plan to launch there in the beginning of next year. We will do a gradual introduction, starting with the baby assortment. We have also, for some time, been working on a new business venture within lingerie. This is also a very exciting project, and this we will give you more information about in the middle of November. When it comes to our stores, we continue the work with both doing them more efficient to make them more profitable, and also, if needed, to close non-profitable stores down. We are also looking into new flexible formats. We have now had a pop-up store in U.K. in London, and we will soon also open a pop-up store in Helsinki, here at the airport, also focusing on the baby assortment. We are very soon entering the most important season for us. That is the Christmas sales period, and I see that we have a really strong commercial offer to our customers. We are also soon closing October, and that means that we will soon know how much we have managed to contribute together with our customers to the cancer research. Lindex has been part of the Pink Ribbon campaign for 17 years in a row, and I know that that is something that is very special for the Lindex employees, and it is a strong commitment both from the employees together with the customers. To summarize the Lindex quarter and also looking ahead, I truly see that we have really exciting times ahead for us. Thank you very much. Let's give the word to Pekka. Thank you. Thank you, Susanne. Good morning on my behalf as well. Just summarizing the figures, which my colleagues have already been explaining to you. Before that, just to remind that we have adopted the IFRS 16, the lease standard reporting in the beginning of this year, but the last year's comparison figures have not been restated, so they are not fully comparable. We have also, like Lauri said, we have changed our reporting structure so that we currently have two segments instead of three segments earlier. Our reporting segments right now are Stockmann, which consists of previous Stockmann Retail and Stockmann Real Estate, and Lindex is the same. Just to remind that there have been some changes in our reporting. To the figures, our consolidated revenue was EUR 225 million, down slightly with comparable currencies. Coming down to the adjusted operating result, which is in the bottom of that was EUR 5.4 million, and I think as reading some of the analysts' report, no big surprises in this. Moving on then to our financing. Over the years, we have been able to reduce our net interest-bearing debt, and now end of Q3, we have within a year the highest stock in our balances, and therefore the net interest-bearing debt is also within a year at its peak, and it amounted to EUR 452 million. Considering our debt and financing, as stated in the release, we are in the process of negotiating terms of our financing with the banks in good faith. Our rolling 12 months comparable operating profit is visible here, and here again, the changes which we have made during the years and this year also, so that these are not comparable. Specifically this year, the Nevsky divestment in the beginning of the year is visible in this year's figures. Key figures. Some highlights I want to have here. The equity ratio comparable, i.e., excluding IFRS 16 impact last year was 45%, and this year it went up by 3 percentage points or nearly 4 percentage points to 48.8%. That is related to the fact that we divested the Nevsky and decreased our debt. Gearing or net gearing, similarly, last year end of Q3 was 74%, and now it's comparable 59%. The reported figures consist of the IFRS 16 debt, so therefore they are higher. We want to emphasize that the comparable situation has developed. What I said also earlier that our net debt currently are at its peak. It's visible in the inventories line. We had nearly EUR 180 million capital tied in our inventories end of the quarter. When you look at what the figure was end of last year, that was 140, so nearly EUR 40 million less. That indicates the seasonality of our operations. Regarding our guidance, we state that market outlook is somewhat more challenging, specifically in Finland, than it was earlier. Sweden, the economic situation continues to be good. Also in the Baltics, we see that the market continues to grow, so no major changes in that. Therefore, our guidance remains unchanged, meaning that we expect that the group adjusted operating profit excluding Nevsky Center, but including the impact of IFRS 16 will be on par with 2018. Thank you. I think we are happy with the presentation and be happy to take any questions. Yes. The floor is open for questions. We have a number of people who are at your disposal. Juha-Pekka Raeste from Helsingin Sanomat newspaper. I would like to use the possibility to ask Susanne Ehnbåge about, first about the biggest trends that you see in the fashion business nowadays in Finland. I think that we have two different kind of trends at the same time. We see that there is lots of this Primark kind of cheap clothes that give you pleasure and they are selling extremely well at the moment, for example, in the Mall of Tripla. Then at the same time, there's maybe even a bigger ecological trend where you try to find sound and long-lasting things. Where do you see that is the future? My other question is that I would like to know what you mean when you say that you have a strong commercial fashion offer in Christmas? Can you give us a hint, what does it mean? All right. I will try to anyway. Regarding the trends, I absolutely believe that the sustainability is a trend that is lasting and staying. I think it's important, and we can see it's getting more and more important for the customers to know what they are buying and that it is from good sources. So that's one important thing. Regarding the price level, I do think that we have several types of customers, and I don't think we can just put one customer and thinking that that's the total market. So you definitely have different type of customers here. Looking for Lindex then, I would say we're not a premium brand, but we have really strong assortment, but to a good price level. Here you need to look into the different assortment. We have kidswear, and here we have a really strong offer with good quality as well as for the sustainability. And almost, I would say for the baby clothes, everything is sustainable. For womenswear, we are more in the middle. Again, it's important with the fashion offer again. Then maybe our strongest card is the lingerie, where we are the market leader in Nordics. That's in Sweden, Norway, and Finland, where we have the strongest market position in the market. So that's I think was the first question. Yeah. Yes, please. Then the other one was that again? The other one was Christmas. Christmas, yes. Yes. Of course. Yes. Give us a little business idea or just good design. No, of course it's both. And since the garments that we will have for Christmas is also garments that we're already taken into our stores and our e-com, and we can see that this is going really well. Other things that we have done recently that I would like to mention when I now have the chance is, for example, that we have now working on doing the style process a little bit different. Usually it takes many, many months from the starting of the process until you have the garments and the styles in the stores and on the e-com. Now we're trying to do this in six weeks instead. We're using the technology and the information that we can gather from the customers online, and then it takes six weeks until we have those products online. And that is working very well as well. I think just getting closer to the customers, understand her needs, then we have a good offer. It's been about the same like in Zara, for example, six weeks. I cannot compare with Zara. I'm just focusing on Lindex. Okay. Thank you. Thank you very much. Rauli, firstly, a question on your guidance. If I look at the numbers right, for 9 months, the number which you are guiding, you are EUR 10 million ahead last year, and you are guiding for flat for the full year. Is there something particularly negative in Q4 we should look out for, or is that just being cautious? Maybe I comment on this. We have seen earlier some negative surprises in Q4. At this point of time, we stick to the guidance which we had earlier. Christmas season, as said and mentioned also in this interim report is important for us profit-wise. We will be happy to exceed the guidance, but at this point we will stick what we have said earlier. That is clear. Then, I think, Mr. Ratia, you mentioned in some interview that the process around Lindex should be completed during the fall. Does that mean that we should hear some news still during this year how that will go forward? Well, the process is proceeding as planned, and I think we indicated that we are wiser once we are a little bit ahead with this year. Whether it will be completed this year is too early to say. Thank you. Yes. Pirkko Tammilehto from Kauppalehti. I think Mr. Ratia, I would like to ask, how do you think about the loyalty program? There is a lot of discussion about the bags and the color of the bags. I know it is a small thing, but how do you think? Was it a good idea to separate the customers? Well, I would actually like to give the opportunity for Jari to elaborate this because he has been following it even closer than I have. I would like to ask because you said that you have been the loyal customer for over 50 years. Yeah, 68 years. What color of bag you have? I have the opportunity to choose, so I chose black. Okay. My level is level 5, if you ask that. Now I think My Stockmann, we have had three levels in the previous loyalty system. We had black card holders, gray card holders, and then the basic, the green card. As I said in my presentation, we had to upgrade the system to be personal from the law point of view. When we are making offers, they need to be personalized to the customer. So our aim with My Stockmann is that we build a relationship with the customer, regardless on which level you are, where we are surprising the customer, we are adding value, and the more you concentrate, the more points you earn. The bags and the colors is not relevant. If you are in a level, Lauri, for example, 6, I don't know if he's on the 6th, but because we don't know the customers' levels, he may choose what he wants. Level 5, I got to choose all colors as I wish, and it's up to the customer. I think this has been twisted from the beginning, by headings, and got an enormous media or rather, social media discussion. On the other hand side, we have, as I said, we have over 50,000 uploads in one week's time. The bags, the queues we have at the customer service have been over 40 minutes. So I think our customers know what we meant. We've been communicating with the customers through the loyal program, and that has not caused, in department stores, any issue. It has been more on the social media. If I compare this more openly, if you look what's going on in the market, there are other brands who are also having different colors in the bags. So in our point of view, you are welcome as you are. Regardless what level you are, we want to give you a unique customer experience, and we want to build a long-term relationship with our customers. This is part of a bigger program, and we will develop My Stockmann together with our customers. What kind of Christmas sales you expect this most important time ahead now for Stockmann Department Stores? Well, like I said, after the strategy was approved in June, we have looked into our buying behaviors. We told you already in September that we are introducing roughly 100 new brands. Some of the brands have already arrived. I can highlight, for example, womenswear jackets, Canada Goose, Zedrick for womenswear jackets. We have launched unique cosmetic brands for the Christmas. We have different Christmas selections. So we are focusing more now according to the strategy in every category. Christmas shop was, in this building, opened already mid-October, and now the Christmas shops have been opened in all our online stores and department stores. We are looking really positively towards the Christmas. Some surprising new elements in the Christmas, which you will see in our Christmas magazine. We have spent a lot of time understanding what the customers want from us, in terms of Christmas, and I would say you will see more bolder Christmas commercials coming also from Stockmann this year. Last question, you don't give in your guidance anything about the revenue. Have you already said why is that? Only the profit. Well, I think most important is the profit, so therefore, we stick to the guidance which we had earlier. I would like to add that obviously, the gross margin we earn with our merchandise is the key, and now we are focusing on that. Jari was already earlier explaining the new system we are getting into. Again, just minor details. One was about the Hullut Päivät, Crazy Days campaign. There you mentioned that you have 16% increased customer traffic, but at the same time the sales were on par. What does this tell you? Finland was +2% and Baltics was below. It means that customers, when we have the Crazy Days campaign, a lot of people want to come in. This year, we changed a bit the buying behavior, so we had also regular price sales. Everything is not just unique Crazy Days assortment. People come and see. It is happening. Some people come and see there are too many people, I go online. As we state in the paper, we had a nice increase online sales. It is to come and see, and then you might do your decision of buying the goods online. You come and see, we don't see that necessarily in the department store. Okay. You have to add the two figures together, the online and the brick-and-mortar visitors. Yes. That is why the number went up quite significantly. Finland is +2 altogether, you see there is a shift from brick-and-mortar to online. Especially in Tallinn, we had a decline and the key reason was the food court, which was newly opened. The last question, I do not know if you find this a bit insulting, but I have to ask, do you think that you will have the same kind of different colored bags also in Lindex, if it is a good idea? Compare that depending on the spending of customers. I have not even thought about that, I must say. Why? Regarding the bags, this was the first time I heard about it yesterday. For me, this is news. I am focusing my whole heart 100% on Lindex. So, yeah, I do not say more than that. Okay. That is fine. Thank you. Any further questions? Yes, one more from me. I think you mentioned in the renewed strategy in the spring, I guess, that you are looking into decreasing the floor space on your department stores, and you have not obviously communicated anything on that now. Is there anything you can elaborate how that process is going, or is there any changes in your thinking regarding that? Yeah, I think we said that we are looking into the concepts and the possibilities of reducing the floor space. The first case in point is Jumbo, which we are going to renovate totally in 2020. There will be reduced floor space after that. Anything further? We have one question from the web. How to ensure positive black results for retail the coming years? It will not take place with minor adjustments that are on the way, right? I would say that we are very determined to realize our strategy. As I said earlier, and we have said earlier, the Board has approved a new strategy for both Stockmann and Lindex. We have established in Helsinki, a transformation office, as well as in Lindex. We are implementing the strategy steps as planned, and that's the way we will improve the results both in Stockmann and in Lindex. Thank you very much for your attention. The floor is open for further questions, of course, if you still want to. Thank you. If not, do not forget to utilize the opportunity to do some shopping while leaving.