Earnings Call: Q1 2019

Apr 30, 2019

Good morning, everybody, and welcome to Stockmann's interim report Q1 2019. My name is Lauri Ratia, and I am the Executive Chairman of Stockmann at the moment. I want to start by saying that we have been working diligently during the past eight weeks to rejuvenate the strategy of Stockmann and to lay the ground for future growth. Stockmann Group's largest division, Lindex, is estimated to continue its steady performance. The strategy, as I said, concerned particularly the Stockmann Retail and real estate during the past eight weeks. We are thus starting a journey of two years, which the Stockmann customers will by and by see the outcome of the results. The changing fashion, beauty, and home selections will be on the more high quality and premium side, and we obviously also want to secure the excellent customer service we are well known of. Digital acceleration also remains high in our focus. We are also very determined to create inspiring experiences, particularly in this magnificent flagship building in the center of Helsinki. The strategic actions aim at returning the Stockmann Retail into a growth trajectory by 2021. This means that we need to make substantial changes to the Stockmann's current business model and a much simplified organizational structure. Our target is to reduce costs by at least EUR 40 million by spring 2021, and of this, a major part will be visible already in 2020 results. I also want to point out that out of this savings program, two-thirds are estimated to come from non-personnel costs and less than one-third from personnel costs. This, however, means, of course, that we need to start co-determination negotiations, and this is affecting approximately 1,600 Stockmann persons. A maximum of 160 positions may be reduced, but this does not concern the sales staff in department stores. The planned group structure consists of two divisions, Stockmann, whereby we combine the retail and real estate, and Lindex. Both these divisions will have a clear management structure and profit and loss responsibility, and with own support functions and no shared group functions, with the exceptions of finance and treasury. Corporate management will be very lean, consisting of three persons, CEO, CFO, and CLO. In the bottom of the slide, you can see the pro forma revenues concerning the quarter one 2019 of these two divisions. Very briefly, Q1 2019, it will then be elaborated by my colleague sitting here on the right-hand side. Group's gross margin went down slightly, and this is of course due to the Crazy Days we had in March instead of April last year. Also, it is important to note that we nearly halved our net debt from EUR 802 million to EUR 457 million. Group's adjusted operating result, which I failed to say, was minus EUR 20.6 million. As far as Lindex is concerned, the comparable sales went up 2.8%, and the growth in online an impressive 41%. Also, the gross margin improved as well as the operating result. Stockmann Retail revenue went up 15.4%, and as I mentioned, this is due to the timing of the Crazy Days campaign in Finland. Gross margin went down, but operating result went slightly up. As far as real estate is concerned, as you know, the divestment of Nevsky Center was completed in January 2019. Of course, revenue and operating result have declined in the real estate division due to the property divestments. This is natural. Then I hand over to Kai Laitinen, who will carry through the figures. Thank you, Lauri. Looking at the first quarter for the group, as Lauri mentioned, we basically had a revenue of EUR 207 million compared to EUR 202.4 million a year ago, up by 4.2% in comparable currency rates. Gross margin went up in Lindex, but down in retail. We will hear later the details from my colleagues on Lindex and retail. The main effect actually was in the numbers coming through the IFRS 16, where the changes in income statement and balance sheet led to changes in our operating costs and EBITDA and EBIT. Basically, operating costs went down by EUR 26.6 million, approximately EUR 25 million coming through the changes due to IFRS 16. The EBITDA equally went up approximately EUR 25 million. Part of the impact is also in depreciation, and thus the impact on adjusted operating result is netted partly. On the right-hand side, you will see the quarterly development in earlier years. As you can see, there is the seasonal effect, what we have experienced or typically experience during the year, both in the top line and also in the operating result. Looking through the development over the past, let's say 2, 3 years, and this is a rolling 12-month adjusted operating profit. We have started the journey in 2015 from almost EUR 30 million in loss and basically reached positive EUR 30 million early 2016 until Lindex experienced some challenges in the assortment and also cost-wise, which were fixed during the latter part of 2017 or early 2018. We started to see from the EUR 10 million level on rolling basis a development towards EUR 30 million again. Now we are approximately at EUR 30 million on a rolling 12-month adjusted operating profit basis. Of course, this is now showing also the impact of Nevsky as such in the last quarter. Now almost fully we do not have the Nevsky impact visible any longer due to the divestment of Nevsky in January. A few more details about the impact of IFRS 16, and as we have a substantial amount of lease liabilities due to the nature of the business, it has a certain impact on the both P&L and balance sheet. As mentioned, EBITDA for the quarter actually went up by EUR 25.5 million due to the IFRS 16. Impact on depreciation was EUR 21.7 million and net at operating result level was EUR 3.8 million positive. The other part of the impact in income statement comes through the net financial expenses where the impact is EUR 6.7 million, increasing the net financial expenses. Excluding the impact of IFRS 16, it was EUR 7.1 million against EUR 8.7 million a year before on the financial expenses. Similarly, the impact is relatively large on the balance sheet side. We have recognized on the asset side right of use assets of EUR 532 million and on interest bearing net debt lease liabilities of EUR 533 million. These are the numbers at the end of Q1. Cash flow from operating activities is also changing as rents are partly taken down from the operating activities to the financing activities. These changes are also visible in our key ratios. Our equity ratio is now impacted by the IFRS 16. Now the end of Q1 number being 36.7% net gearing moving to 123.7. We also have certain impacts on the total balance sheet, but inventory is of course not affected by these accounting standard changes. Here we see a positive development against the year before of approximately EUR 80 million lower inventories, thus leading to a better turn in inventory and thus more efficient operations. In our market environment outlook for 2019, we are expecting somewhat decline in Finland retail due to the economic slowdown. In January, March, fashion market was at 2.7. In Sweden, we are expecting the retail growth to continue, and we are following here the certain institutions mentioned on the slide who forecast the development. In both the countries, the outlook for the retail trade is expected to be better than for the other parts of Stockmann Group. As revised in our guidance on the 24th of April, we are expecting group's adjusted operating profit, excluding Nevsky Center, but including the impact of IFRS 16, to be on a par with 2018 adjusted operating profit. Now I'll hand over to Susanne, please. Good morning. I would like to present a summary of Lindex performance during the first quarter. During the first quarter, we were able to increase our operating profit. We did this through increased sales, increased gross margin, and also a controlled cost level. Our total sales increased by 4.2%, and the comparable sales by 2.8%. But due to currency effects, the revenue in euro was down by 0.3%. We increased our sales in all of our business areas, and we also strengthened our market position in our major markets. The strong sales development online continued, and we increased 41%. We increased our sales in all of our business areas and also in all countries. We increased the number of visitors as well as customers. We also continued our nice development with our online partners, and the sales are exceeding our expectations so far. Our gross margin has strengthened, mainly thanks to increased share of full-price sales. We also have a much more balanced stock situation at this moment compared to previous year, and we can also see that we have a highest share of new stock. The operating cost was down by EUR 1.8 million. We did several activities during the first quarter, for example, a sustainable baby collection that had a really successful start. We also launched our new concept, Your Smart Wardrobe, where we help our customers to find her favorites and style, which was also very well-received by our customers. Looking at our store network, we had 467 stores in 17 countries, of which 40 stores are franchisee stores. We continue to increase our store portfolio profitability. Looking forward then. For the second quarter, we expect some calendar effect due to that we have Easter this year. Looking at the full year for Lindex, we see a steady performance. We continue to our high focus on online, and this spring we launched our new EU site, which is on a much faster and more flexible platform. When we now have this platform, we will be able to develop new functionality to meet our customers' demands. We are going to continue our rollout regarding this platform to the rest of our markets, where the next launch will be in June. During this year, we will also launch with a new online partnership. This will happen in July. We will also move into new e-commerce warehouse facilities, and this will happen also in June. Next week, we will launch a new inspiring summer collection. We will do this with a designer, By Malina. We will also continue our expansion through our franchisees partners, where we will enter new markets during this year. In April, we also launched our new sustainability promise, where we are upscaling our sustainability work, where we, as a company, promise to make a difference for future generations. We also have several new management appointments, Director of Sales, Director of Logistics, our new positions in the management team, where Caroline Öhgren and Johan Engen has been appointed. Annika Elfström will be our new CIO, and she will start in June. I believe that they will be a great complement to the existing management team. Thank you. To Tove then. Thank you. Good morning. My name is Tove Westermarck, and I started as Chief Operating Officer at the end of March, and I am responsible for the commercial operations in retail. I will now take you through the results of retail in Q1. The revenue for Q1 was up by 15.4%. The growth in the online store during this period was 119%, mainly due to the Crazy Days campaign. The total Crazy Days campaign sales, held in Finland in March and in Baltics in April, were down by 6%, despite the good online growth of 12%. For the first time, the online channel reached the same level of sales as the flagship store. For the same reason, Crazy Days, the gross margin were down compared with the figures for previous year, down to 43%, previous year, 44.7%. The operating costs were slightly up with a EUR 0.4 million. The personnel and the support function costs, though, declined even though having Crazy Days campaign, but the rents were up due to a normal indexation. As highlights for this quarter, the digital acceleration is going well. There is a continuous widening of the assortment online. At this point of time, compared with one year ago, we have four times bigger assortment online than we had a year ago. During Q2, there will be 40 new brands coming as well online. Sustainability is at the core of our doing, and we are working with, own brands regarding this, and as well, we are introducing new sustainable brands, out of which three are mentioned here. Ecoalf is a brand in men's fashion, Freedom Moses in shoes, and Kaiko, a children brand. We see that there is a shift in demand, which is affecting us as retailers. We are addressing these shifts in our new strategy in order to be competitive. The shift is regarding the channels, the products, and the consumer expectations. Regarding the channels, the growth of online is foreseen to be growing. By 2023, the penetration of e-commerce in Finland is more than to double, foreseen to be at 24% in 2023. The brands are seeking to establish direct consumer contacts. Regarding products, there is a trading of consumers moving upwards or downwards. Downwards for value and upwards for quality. Meaning in concrete example that affordable T-shirt in a combination with an exclusive bag is quite okay. There is a trend towards a more casual dress code, meaning that jeans are quite okay at work for now and compared to the more traditional suits, and we see good trading in denim for the moment. The consumer is expecting newness and increasing fresh items to be brought in regularly as part of the assortment. The traditional seasoning is moving towards regular drops of merchandise, meaning once a month, meaning twice a month, et cetera. As well, the demand for sustainability also at core in our operations. The consumer expect even further personalized engagement, and what is the relevance for him or her in the offering. Stockmann Retail path forward. The target is to launch the fashion and style authority position. What does this mean? This mean that we are clarifying. We will have a clear focus on our core target customer, a broad target customer group, the modern working professional. We will reset our fashion, home, and beauty offering, and strengthen the premium selection in all price categories. Our promise is to inspire by quality. Not only in the selection, but in the full customer experience. We will create newness with unique, relevant, and sustainable brands, with pop-ups, with happenings. The target is to create a category-driven business and organization what comes to fashion, home, and beauty in order to be the winner. The digital shopping channel is very highly valued by our target customers. We will continue widening the online assortment, and by launching the marketplace later in this quarter, we will further increase the assortment by 30%. As well, we are looking for building new partnerships to accelerate both the digital sales and the sales in the stores. The fourth part of this is to create an inspiring store experience and focus on the high-quality customer service which Stockmann is known for, and this high-quality customer service in all channels. We will invest in Helsinki Flagship and give space to traffic driving purposes. As part of the market and consumer studies have shown us that there is potential in all the department store cities for a premium concept, but we will carefully review the locations and the space to be used in each department store. Further, the plan, as said, is to combine Stockmann Retail and Real Estate to enable a more coherent one Stockmann customer experience. Thank you. I will now give over to Elena. Thank you, Tove. Good morning, everyone. My name is Elena Stenholm, and I am running the real estate division. As for the financial performance in Q1, it was actually quite stable. The revenue was about EUR 12 million, and it was down to the Book House divestment last year and the Nevsky Centre property in St. Petersburg in January. Net operating income from our own properties was EUR 8.5 million, and average monthly rent around EUR 38 per square meter. Occupancy rate of our own properties was close to 99%, and that little change from last year is due to Tallinn. There was an F&B operator that went out of business at us and also a couple of shopping centers in Tallinn, and has now been replaced with a new F&B operator. Also in the Flagship, Westerback finished their contract, and now this space has been now adopted by a new tenant. Adjusted operating profit, EUR 2.4 million, is related to the Nevsky Center sales, as mentioned earlier. And reported operating profit, EUR 1.6 million, includes an adjustment of EUR 0.0 million from the sales of the Nevsky Center, as there were also costs involved. Another effective matter was also the property tax in Finland. There is a timing difference, so it has all been charged in the first quarter. And that effect is EUR 0.7 million. We also had some very nice changes by our main tenant. The food market Herkku opened now in Stockmann and Tapiola, revamped. So they have been revamped according to the same style as in the Flagship. Fair value of the department stores or own properties, which are three at the moment, Flagship, Tallinn and Riga, the value was EUR 681 million in January. Gross Leasable Area, 88,000 square meters, which of Stockmann Retail is using 73%, and occupancy rate 98.9%, which is still very high comparable to the market. As Tove mentioned, we are planning to give more space to traffic purpose, which means that we are selecting the tenants and partners based on how they fit the Stockmann brand and how lucrative they are in general in comparison to our strategy. That might mean, for instance, increasing the food and beverage offer. As for the Helsinki, high occupancy rate still, and usage by retail is 66%. Tallinn, as mentioned, the market is changing somewhat, and there are some changes, but still pretty much a full house with occupancy rate of 98%. Riga department store, 100% occupancy rate. Thank you. I suppose it's time for questions and answers. Now we are happy to entertain any questions you may have. Yes, hello. Rauli Juva from Nordea. A couple of questions to start with. First of all, on the guidance downgrade, can you explain a bit about the reasons for that, given it was quite notable downgrade quite early in the year? So what's driving that? We have evaluated the market development very carefully, and we have concluded that the footfall in the brick-and-mortar stores is going to continue its decline, and therefore, we adjusted also the guidance. The earlier ideas was just too optimistic? I cannot the guidance made by others. Okay. Fair enough. The second question on the cost savings, can you elaborate a bit where you are aiming to take these EUR 40 million, especially the part not coming from personal? We are looking into the whole support organization and related costs. They are going to come from many different sources. It would be not wise to say exactly from where, but we are going through all our budgets line by line. Is there any impact included in that on the potential relocations or decrease in space which you mentioned? As Tove Westermarck mentioned, obviously, we are taking a very hard look on the locations as well as the space we are going to use in the future. So that's part of the strategy work, obviously. Okay. Thank you. Hi, I'm Sophia Hamnehed from Hufvudstadsbladet. I was wondering, it seems like Finns are not interested in shopping in department stores anymore. Why is that, and what can you do about it? Well, I wouldn't say that they are not interested in shopping in department stores. I think that the general trend in the world is that there has been declining footfall all over the world. But there are places for well-run department stores. There are very good examples in the world. I can mention a couple, Nordstrom in North America, which is a fashion authority, and Selfridges, which is a location in London, particularly, and elsewhere in the U.K., which is an event location. So obviously, we have studied carefully what others have done in the world, and we have come up with the ideas. I think, and as Tove Westermarck said, we are looking to be a fashion and style authority, which we think fits very well into the Stockmann brand. Pirkko Tammilehto, Kauppalehti. Could you tell a little bit more about this, that you're putting together these two segments, retail and real estate? Why is the reason for that, and what will happen after that? The reason is that as you could see, we have now three properties left, although we're 88,000 square meters, and the combination of retail and real estate is a natural way of running our business, and we simplify the organization by doing that also. What is going to be exactly the way we operate is still at the planning stages. What about the warehouses here, I mean, the department stores here in Helsinki area? Do you still have need for all those in Itis, Jumbo, and so on? Like I mentioned, as part of the strategy process, we are taking a very hard look on the locations as well as the square meterage we are going to use in the future. You are not going to close one of those? Like I said, we are going to take a very hard look on the locations, and it may include different types of actions. Are you sure that there is enough customers in Finland to this kind of premium department store? Like when we look at Stockholm, there is enough customers, but what about Finland, Helsinki area? We made a very careful analysis when we made this definition of our key client, the working woman and man or professional, and we think that there is enough clients for a premium and aspiring brand set up. That is why we obviously chose this. I can just pick it up from here. I am Anni Lassila from Helsingin Sanomat. Just to continue Pirkko's line of questioning, are not you afraid that you are going to alienate a very important customer group, the aging population, by saying that you are for working men and women? Well, I am a living example of a person who has a little bit later stage in his career, and obviously, the working person entails a very large age group. I hope and I believe that we are not alienating any of our clients. Just one more question. When you are combining retail and real estate, a big part of the department store is rented to shops in shop, and that is part of the not so great customer experience that people do not know where they are shopping. Is that going to change in some way, or are you going to continue this way? We are going to work very hard with our partners and concessions partners. I think that we are going to concentrate very much on the customer experience. Obviously, that is also one set of tools we are looking at. I.e., we want that the customer experience, independent of the brand or the operator, is the same. Jussi Nikkanen, Handelsbanken. You are planning to revise your space locations and efficiency enabled to achieve the cost savings. Should we understand that in your rental operations you might be moving to smaller premises? Well, like I said, we are taking a hard look on the square meterage as well as the locations. It can entail, obviously, that in the future we will use less square meters than currently. A follow-up for that. Is there a possibility that you could sustain the sales volumes from a smaller square meter area? Well, it will obviously change the way we operate there. It may change the concepts as well, but this is part of the strategy work which we are currently carrying on, and it is going to be part of the implementation which we embark next. Just to verify, the EUR 40 million cost savings that you announced, is there incorporated the last year EUR 20 million cost savings program you announced? Yes, it is part of the program. It was just SEK 50 million for the retail and EUR 5 million for Lindex, so how should we understand that? Well, when we talk about the EUR 40 million, the EUR 5 million in Lindex is on top of this EUR 40 million. This EUR 40 million is related to retail and real estate, obviously. Could you elaborate on the cost savings on Lindex? Where have you gone at this stage? The program is proceeding as planned. I'm confident that the SEK 50 million or EUR 5 million savings program will go through as planned. Okay. Last question. Could you give the amount of commercial paper withdrawals at the end of March? Thank you. We have been recently at the level of EUR 50 million-EUR 60 million in recent quarters. 5060. EUR 50 million-EUR 60 million. Yes. Okay. EUR 50 million to EUR 60 million. Any further questions? Yes, a couple of more, if I may. Will there be any kind of plans or review of disposing some of the assets or businesses you have as part of the strategy review? When you go through a strategy process as carefully as we have done, obviously, you also consider structural changes. But as you know, it is still something which is part of the strategy work, so no announcement at this point of time. Okay. On the timeline, when should we expect basically this strategy work to be fully done? When we are ready to tell something, we will certainly advise. Good. Thank you. Yes, there is one question from the webcast further on the department store. How will combining retail and real estate affect department stores in Finland, particularly Turku and Tampere? Will there be shutdowns or reductions of sales space? Like I said, we are taking a very hard look on the square meterage and the locations, and Turku and Tampere are part of this package. Thank you very much.