Earnings Call: Q2 2019

Aug 9, 2019

Good morning, everybody. Welcome to this Q2 session. As you remember, at the end of April, we announced Stockmann's new strategy, repositioning ourselves to be the leading fashion and style authority of Finland. After that, we have started the transformation journey very diligently. It's based on 16 main work streams, 280 initiatives, and over 2,000 milestones. There is a responsible Stockmann person for each of the work streams. The work streams and the whole setup is supported by a transformation office headed by John Edgar, who is the previous CFO of Harrods and Selfridges. We are spot on on our target concerning the announced EUR 40 million cost savings program. We have also done deep dive in terms of strategy concerning our Baltic operations. I'm very pleased to say that there are good growth opportunities in the Baltic operations, both in Estonia as well as in Latvia. Likewise, we have gone through a very diligent strategy process in Lindex during the summer. The board has concluded that we have excellent potential in Lindex, in terms of international growth as well as the digital transformation. Therefore, we have decided that we will investigate different strategic alternatives, including possible ownership change concerning Lindex. As you know, part of the strategy announced at the end of April was to simplify our business model, which we have done. We have combined the Real Estate and Retail divisions into one Stockmann, and the new organization was put in place July 1. We are working very hard to reposition ourself as the leader in fashion and style in Finland, and we are working together with international creative support in renewing our selection. I'm talking of both brands and how we set up everything in our stores. Our clients will start seeing differences in this house already this autumn, and the speed of change will accelerate during the spring of 2020. As you know, we are completing very soon the Tallinn delicatessen investment refurbishment. It will be completed by the end of this month. We also announced earlier that we will totally refurbish the Jumbo store in 2020. One of the examples in this house is that we will refurbish the ladies fashion department in 2020. In Baltics, obviously, our growth opportunities lie both in fashion and grocery, and those are very much on focus. I'm very pleased to announce that our recruitment process concerning the CEO has been successful, and I'm happy to present you the coming CEO, Jari Latvanen, who has the proper background of guiding the transformation process in Stockmann further. You see his credentials here. The other change which is happening is that our current CFO, Kai Laitinen, has decided to take on new challenges outside Stockmann. I'm extremely happy to welcome back Pekka Vähähyyppä as the CFO of Stockmann. Both gentlemen start their journeys here August 19. That is in one week. So for both of you, heartily welcome. Thank you. Thank you. A couple of words of the performance. I think that one of the key issues for us was that instead of the sales going down, but better than we expected, I might add, the gross margin went up, which was a very positive news. The result went down, but as I told you already in April, the transformation process is a two-year journey, and we will start seeing savings affected 2019 towards the end of the year, and we will see a very clear change in 2020. By these words, I give the floor over to Kai, who will go through the numbers, and after that it will be followed by Susanne Ehnbåge from Lindex, Tove Westermarck, who will go through the Stockmann Retail, and Elena Stenholm will go through the Stockmann Real Estate. This is the last time. Next time, we will only report Stockmann and Lindex divisions. Thank you. Thank you, Lauri. Let's have a look at the numbers in the second quarter of 2019. In revenue, we went down by 12.1%, to great extent explained by the timing of the Crazy Days in the spring. We landed at EUR 242.3 million against EUR 279.4 million the year before. Gross margin went up. We have a healthier inventory for the period than the year before. It was up both in Lindex and Stockmann Retail. Operating costs were down, not only because of IFRS 16, which we will come back to somewhat later, but also comparable costs down by EUR 8.5 million. It was personal savings, but also rental costs, especially at Lindex. Adjusted EBITDA at 51.6. That is including the IFRS 16 impact. As of today, of course, the depreciation is higher as well coming through the different treatment of our lease liabilities and right of use assets. Adjusted operating result at 60.2, including EUR 3.8 million of changes due to IFRS 16, basically against 19.3, year before. On the charts on the right, you can see the quarterly development also showing very clearly the seasonal fluctuation we have typically in the business, especially in the operating result. You can see the first quarter typically has been on the loss, then somewhat better for the second quarter and later in the year, the fourth quarter being the most important quarter of the year, typically. One of the key topics what we have been facing, of course, is the tight situation of Stockmann, and especially when it comes to the interest-bearing net debt. Here you can see the development in recent years. That is from the beginning of 2017 or actually the first quarter of 2017. We were at the level of EUR 800 to EUR 831 million. Now we have been able to reduce it down to approximately EUR 430 million at the end of second quarter. That is partly due to the divestments mentioned here. Those are in total EUR 250 million, but roughly EUR 100 million is coming through the business performance, including also the working capital management, which we have worked on. Operating profit 12 month adjusted on a rolling basis. You can see a fluctuation volatility, but it all starts from negative numbers in 2015. There was a certain level of recovery at that point, improvement coming through the department store business all the way until +30 in the rolling basis until we had certain challenges with Lindex, with the collection which took roughly a year to fix it. In 2017, 2018, we started to see the impact of Lindex recovery and coming back to a level of EUR 30 million on rolling basis. Now the impact of Nevsky or excluding Nevsky from our numbers is clearly visible here. The impact was EUR 10.2 million in that period now what we are using here as 12 month rolling period. I mentioned earlier these IFRS 16 changes. As we are applying a method where we do not restate the earlier years, we understand it becomes difficult to make comparisons. So we have prepared a couple of tables which help you to compare numbers where we exclude the IFRS 16 impact. Here you can see the reported quarter, the IFRS 16 items included in the reported numbers. The third column being the numbers excluding the IFRS 16, which is making that column comparable very much to the last column, which is reported a year before where we did not yet have the IFRS 16 implemented. Just taking a couple of numbers here. Adjusted operating result, EBIT level EUR 3.8 million as mentioned earlier was the impact of IFRS 16. So leading to EUR 12.4 million in the recent period, quarterly period, and EUR 23.8 million a year before. We have a similar table for the first half of the year. You can see the profitability numbers and the impacts. Here you can also see the balance sheet items, what we have taken here, interest-bearing net debt, for instance, currently or now in connection with Q2 reported at EUR 961 million, having an impact of EUR 529 million through the IFRS 16 and basically EUR 431 million against EUR 623 million a year before is our net interest-bearing debt on a comparable basis. Some key figures. Equity ratio recently, now the recent quarter at 37.2%, excluding again the IFRS 16 to make it comparable, it's 50%, against the earlier periods of 45.7% a year before or the recent year-end 2018, 46.2%. Similar impacts, of course, visible through the net gearing numbers. In inventories, we are approximately at the same level what we were a year before and somewhat higher what we were at the end of last year. As mentioned before, in Q2, it was a healthier set up, healthier structure of our inventory leading to an improvement in gross margin overall. CapEx, we have let's say estimated a full-year CapEx of EUR 35 million. That's still intact and what we have spent so far is EUR 15.8 million for the first part of the year. Last year it was EUR 30 million or EUR 29.3 million for the full-year CapEx. For the market environment and outlook for 2019, we see that the economic situation has been or was moderate in Finland during the second quarter. In Sweden, the general economic situation has continued its relatively stable development. In both countries, of course, Finland and Sweden here, we have seen a negative development, somewhat negative development in fashion market. Retail market in Estonia and also in Latvia has continued its growth at between 3% and 5% in these two countries. For the guidance, as we revised our guidance earlier this year, we keep the same guidance what was revised. So basically, Stockmann expects the group adjusted operating profit excluding Nevsky Center, but including the impact of IFRS 16 to be on a par with 2018. For reference here, 2018 excluding Nevsky Center was EUR 10.4 million. That was all from my side. I thank you and pass it over to Susanne. Thank you. Looking at our financial performance for the second quarter, we report a continued strong result. We, like the whole fashion industry, were affected by the cold spring in the Nordics, and we also have a negative calendar effect due to that Easter was in April this year compared to March previous year. When the warm weather finally arrived, we could see that the sales increased, and for the first 6 months we are at the same level as last year when it comes to sales. We have increased our average purchase, and we have also continued to strengthen our gross margin thanks to selling more items at full price. This proves that we have strengthened our commercial fashion offer. Our sales growth online has continued, and we increased by 23.2% compared to previous year, and we have increased our sales in all markets as well as in all business areas. We have continued to increase both the number of visitors as well as customers. We have had a good cost control, and we have been able to decrease our cost by EUR 3 million during the second quarter, and we have the same operating result in SEK as previous year for the second quarter, and it amounted to EUR 18.8 million. If we look at the operating result for the first 6 months in SEK, we have improved it by 86%, and it has gone up from 35 million Swedish krona to 65 million Swedish krona. If we look at the highlights from the second quarter, we have focused a lot on our digital growth, and to support that, we have invested in a new e-commerce platform. This has been launched into 3 markets, and we will continue to launch it into more markets during the rest of the year. We have also changed into a new e-commerce premises that is bigger, and a big change like that of course has an effect on the lead times as well as the day-to-day business, but we are up and running according to plan. We had a design collaboration with By Malina, and that was very well received. We have now also signed an agreement to open a new store in Denmark. It will be in the attractive shopping center Fields in Copenhagen, and we plan to open this store in this autumn. This means that we will be in 18 markets. During the spring, we also launched our sustainability promise for future generations. Our sustainability promise is divided into 3 different major parts, which is about the work for women empowerment. It has to do with respect for human rights, as well as addressing environmental aspects such as water and climate, where we as an industry can make a huge impact. Lindex store network, by the end of June, was 465 stores in 17 countries, and our store network has decreased by 2 stores. As Lauri mentioned in the beginning, Lindex management team has put a lot of work during the last time into new strategic plan and business plan. Yesterday we presented this to the Stockmann board, and it was approved. We will continue our focus to increase sales and also to have a good cost control. It also has to do with growing internationally as well as speed up the digital transformation. Now we are at the important autumn season, and we see that we have a very well-balanced stock, as well as a strong commercial offer to our customers. We are proceeding our digital development according to plan, and we continue to grow online, both through our own channels as well as through our partners. In addition to our earlier partnerships, we have, during this summer, also added Boozt, and we have also signed with a new partner that we will launch with later on this year. Regarding the store portfolio efficiency, we of course continue to focus on rental reductions, but it also has to do with looking into store sizes, also stock efficiency, and new possible flexible store formats. By that, I would like to say thank you for listening, and I hope to see you again for the third quarter reporting. Thank you, and to Tubbe. Good morning, all. I will take you through the Q2 results of the retail division and as well open up what is going on on our way forward. The performance in the second quarter gave us revenue of EUR 84.9 million, being 19% less than the comparing quarter last year. The reason for this is the Crazy Days timing. As you can see on the chart on the right, the revenue was gained in Q1 this year. As well, an effect is seen from the full renewal of the delicatessen in our Tallinn department store. The good news is that the gross margin improved up to 46.7% compared to previous year, 45.4%. The operating costs are well under control and were down by EUR 4 million, mainly in the personnel and the support function costs, with a small increase in the rent. Thus, the adjusted operating result was -7.4% compared to -3.6%. This was above our expectations and forecast, and as well is due to the reason of Crazy Days timing. The highlights of Q2 is that marketplace was successfully opened. We have been introducing exclusive partners to extend the online offering. To be mentioned, Halo, Gauhur, and the Pelago Bikes. It has been a good summer so far regarding the tourist sales. We have seen well-developing sales in the pop-up tourist shop in this flagship store. As well, we have been, throughout the spring, renewing the Tallinn delicatessen, and it is about to open in a fully new shape now in the end of this month. Then I'm excited to tell you about how we are going forward. We have made a huge effort this spring creating the transformation strategy, which is gradually seen and coming into reality, and we will speed up by the end of the year. We are targeting the fashion and style authority position, which means that we have clarified our target segments. We are targeting mainly the modern working professionals. We are in a process of renewing our fashion, home, and beauty offering, and we promise to bring inspiring quality. We will create constant newness with relevant, unique, and sustainable brands. During the coming year, we have approximately 100 new brands coming into our assortment. Already there are several new brands seen. There is the NA-KD pop-up, and the Scotch & Soda, and Olivia Klein, to mention a few. As well, we are launching a new Stockmann private brand, Construe, this fall. The first drops are already seen of this selection in our men's department on the second floor. More efforts will be put into strengthening our digital shopping channel. We have seen a good growth in the first half year of our online, equaling to a 30% growth. We have the full selection online, and as said, we will continue increasing this selection by introducing new partners and new products. The store is the place where we create the full experience. We, as said, have renovated Tallinn Delicatessen. The Jumbo store will be fully renovated next year, and there are already several upgrades in flagship that is in men's fashion, and we are launching a denim wall in women's fashion this August. As well, the loyalty program will be renewed during the last quarter this year, and we are further targeting a further personalized, customized communication with our customers and as well, increasing the digital capabilities. Some words about Jumbo renovation and the new store. There will be a full redesign of Jumbo store, an upgraded redesign starting in the beginning of next year, where we will focus even more on the fashion and beauty. Beauty will be having a bigger area and more square meters. Jumbo will open at the end of the year. This is the opportunity to see the new strategy come into life, into reality, and see how the new fashion and style authority is formed into an inspiring and rich and omni-channel customer experience. Thank you on my behalf. I will give now the word to Elena. Thank you, Tove, and good morning to you, everyone. Looking at the real estate performance, it has actually been very steady and stable, and according to the budget. Of course, since we have been divesting some of the assets last year, there is a difference to last year as well. The revenue in the second quarter was EUR 10.5 million, and net operating income from our own properties was EUR 7.9. Average monthly rent was close to EUR 38. It is a little bit lower due to the fact that in the Book House that we divested, the rents were on a very high level. Adjusted operating result was EUR 2.3 million. If we take into account Nevsky Center, EUR 2.8, but including the Book House in this case. There were some highlights during this second quarter. For instance, we renewed the jewelry area in the flagship store. Actually, it is a very good example of what we want to do when it comes to the new strategy. We want to upgrade also the interiors, not only the selection, so that we will actually create the premium experience to our customers. It is very important to do things like, for instance, lower ceilings, make sure that every surface is clean, et cetera. It is basically some of the basic things, but also premiumization at the same time. We will continue to do this further. Workland coworking space in Tallinn will be open this September, and the contract was signed in June. It is a very nice example of what we can do with a historical building, which is actually next to our department store, but owned by us. Very contemporary coworking space as it is, and I am sure if you have a chance to see it, you will agree. Fair value of the department store properties was EUR 681 million, and the gross leasable area 88,000 square meters, which of Stockmann Retail is using 73%. Occupancy rate was a little bit lower than previous year, and this is due to the Tallinn. The fact is that the real estate market has been changing there quite a lot. You know the shopping center, T1, that opened actually brought quite a lot of oversupply to that area. However, this is not the reason for the drop in our occupancy rate, but the fact that two restaurant operators went bankrupt, not only at Stockmann, they also finished their business in three shopping centers in Tallinn. Luckily, that has now been changed. We have actually new and more efficient operators that have been operating since June, July. The situation is much better now. We are very happy actually about this change that we have a chance now to work together with retail in order to make sure that also our real estate assets are being used for the best possible customer experience. This is why we are doing this change, and looking forward to it. Thank you. Time for questions. We have a full row of people who can answer anything you may want to ask. Yes, please. Tuomas Niskakangas from Helsingin Sanomat. I would like to ask about the sales decline in both Lindex and the retail, if you look at the first half-year results. Is it something to do with the bigger trends in how customers are shopping, or is it something you can tackle, let us say, next year or sooner? The overall downward trend in the sales in both Lindex and retail. Yeah, I will ask Susanne to comment the Lindex part and then Tuula can comment the Stockmann part. Okay. Well, when it comes to Lindex, we are at the same sales level as last year if you look at the first six months in SEK. Well, it looks like it's down. In SEK it's about the same as last year. Well, it's a currency effect, actually, when you look it in euro terms. When you look it in Swedish crowns- Okay, so the currency explains the downward- Yeah. It is EUR 10 million down in the first half year in euros. Yes. But in SEK it is the same, but then we transfer it of course to euro. Okay. But then, of course, you have had worse weather this year than we had last year. All in all, we are very happy about the result, actually, with the sales improvement. Also to add that last year in the Q2 we improved the sales by 5% compared to 2017. So you have to have that with you as well. Great. Thank you. From the retail part, we see a developing better trend towards the end of the H1. We had some challenges with the Crazy Days campaign. Of course, we see the market being in difficulties as well. But we are confident when going forward with the changes we are making to the assortment that this is a changing trend, and we see it when we compare to last year that already this is happening. Any further questions? Rauli Juva from Nordea. Question on the alternatives for Lindex. Can you say anything further about that, whether the kind of idea is to fully divest the Lindex business, or is something else feasible for you as well? Well, like I said, the board of directors is very excited about the development opportunities in Lindex, and I'm referring to the international growth as well as the digital transformation. We concluded, which I think is the right thing to do, that we have to investigate the different strategic options, including a possible ownership. Mia Pernå, Handelsbanken. If the outlook is so good and you feel that there's plenty of growth opportunities, why are you considering divesting Lindex? Like I said, we are excited about the growth opportunities as well as the digital transformation. But we have said that as a responsible board of directors, we need to investigate different strategic options, and we don't exclude an ownership change. Any other questions? Petter Lang-Langen from Zenito. Would you like to give, or can you say, do you think your net debt will be smaller at year end? At the year end? Yeah. I mean ex IFRS effects. That's a very regrettable reform, but that's not your fault. That is not our fault. No But I will ask Kai for. The 430. Yes. Kai will give you a comment on that. As you know, we don't give guidance in relation to our net interest-bearing debt. I didn't know. Typically, I can comment at a general level. Typically, end of Q4 is the lowest with the working capital. Q1 higher, Q2 again lower, almost at the same level with the end of the year, and then Q3 we are accumulating typically the inventories again, depending a little bit on the timing of the Crazy Days. But this is the seasonal effects we see in typical years. But unfortunately, I can't give you precise numbers as such when comparing to, for instance, Q2 EUR 430 million. But this gives you an idea how it typically behaves. Thank you, Kai. Any further questions or comments? If not, thank you very much. Claus. Yes. Yes. We have some questions from the webcast. Okay. First of all, a question and a comment. Thanks for a good presentation. What is the strategy regarding the EUR 85 million hybrid maturing in January 2020? I will let Kai comment on that. Yes. It's a valid question and we are working on it and will certainly come back to the audience and public in due course. Another question: Has there been any discussion to renew the stockmann.com e-commerce website? It seems to be somewhat outdated compared to competitors. Tuula, do you want to answer that question or shall I? No, you can. We are working on it. I think that you will see changes during the autumn and the beginning of next year. So keep coming to the website and you will feel the change in due course. Thank you. No further questions from the webcast. All right. Thank you very much.