Earnings Call: Q3 2018

Oct 26, 2018

Okay, good morning, everybody. Good morning online, and welcome to the Stockmann Q3 results morning event here in Helsinki flagship. My name is Lauri Veijalainen, I'm the CEO of the company. Q3 in brief, we got back into profitable figures. The adjusted operating result improved by EUR 7.3 million, up from minus EUR 1.4 to plus EUR 5.9. The group gross margin also went up. Primarily, the driver for the improvement was Lindex, which nearly doubled its result during the third quarter. We are still a bit challenging with retail. The revenue was down 7.2%, but we managed to improve the result primarily due to our stringent cost control. All the three divisions are improved, as well as real estate, because even without the Book House income, we managed to improve the numbers. The big milestone that we reached was the signing of the SPA, the divestment for Nevsky that we plan to close now by the end of the year. In more detail, the revenue was down by 3.9%, down from EUR 242 million to EUR 232 million. The positive thing is that the gross margin improved, and this is, of course, due to the fact that we do have less markups and the stock is in healthier shape than in a year ago, so over 2% improvement. Costs are under control, as said, so the adjusted operating result improved to EUR 7.3 million. If we look at the rolling 12 months EBIT development, we have now recovered from the difficult last year, and the track is again upwards, and the plan is really now to keep the focus on the top line, as well as keep the margin and the costs in line. The big issue is clearly the Christmas sales or the Christmas season that will eventually kick off already this weekend with our Christmas campaign. Big development is also in this building, the opening of the new Herkku that officially opened yesterday. Please go and have a look. I took our board there yesterday, and they were extremely impressed of the work that S Group has done. This is something that we are proud that we have a strong food now here in the Helsinki flagship, and this is important. From the key figures, perhaps to point out the inventories, they are on a lower level than last year. Our CapEx, in Q3 last year, we were around 8.5. We're slightly lower. We have also taken down a little bit the CapEx estimate for this year. We earlier estimated that it would be around EUR 40 million to EUR 45 million, and now we estimate it to be around EUR 35 million to EUR 40 million. Due to the divestment of the Book House in May and now the upcoming divestment of the Nevsky Center, our net debt is going down, and we expect it to be significantly lower once the Nevsky Center transaction is completed. Here you can see the development since quarter one 2016. For the market environment and the outlook, we have now taken down the guidance for the revenue for this year, primarily due to the impact of the currency rates. The SEK is very weak, so in euros, we do have less income or revenue. We, however, expect that the economic development and consumer confidence will continue to positively in the Nordics, Finland and Sweden this year. The digitalization, of course, is an issue that we also have to tackle in retail as well as in Lindex. Maiju will tell a little bit more about the things that we will do. Perhaps just to point out that we have really focused on the digitalization, and one of the things that we now will take down is the delivery times. For the stockmann.com, we will now get the parcels in between one to three days, and it used to be three to five days. So we are really picking up the pace there as well. In the Baltic countries, the good outlook is also expected to continue for retail, and the efficiency measures at Lindex and Stockmann will be fully visible now in Q4 and especially in 2019. So the work continues. Okay, that was my part. I will continue a little bit later with real estate, but I will give the word now to CEO of Lindex, Susanne Ehnbåge. Please, Susanne. Thank you, and good morning. Looking at the highlights for the third quarter for Lindex, we see both increased sales and profitability. We have had a good transition when it comes to our collection, which has resulted in a good start of the autumn with increased sales in all our business areas. Our Traffic has also increased, both to our physical stores as to our online store, and we also managed to increase our average purchase. Our strong sales growth online continues, and it increased by 65% during the third quarter. Now we can also start to see the impact of all the changes made within the profitability program, aiming to strengthen Lindex' competitiveness as well as profitability. It was initiated last autumn, with a saving target of over EUR 10 million, which has now been reached, and we will start to see the full effect of this from the fourth quarter and onwards. We also continue to develop our online offer, and we are growing digitally, both through our own channels, but of course also through cooperations and collaborations with the big fashion platforms. In addition to our cooperation with Nelly, we have now also signed with the global platform ASOS, which means that we are now reaching customers worldwide. Then to the financials. During the third quarter, we show an increase in sales by 2.7% in comparable stores, but due to currency effects, our revenue in euro was down by 2.8%. We have had sales growth in all our markets except U.K. and Poland, and we are also increasing our market share in our main markets, the Nordics. Our gross margin has strengthened during the third quarter due to decreased markdowns, but also higher start margins. The operating cost was down by EUR 4 million, and our operating profit amounted to EUR 10.8 million, which is almost double the profit that we presented last year for the same period. Then to our stores. By the end of the third quarter, we now have 476 stores in 18 countries, which are 41 franchising stores. We have, during the third quarter, closed 12 stores, and we have opened four stores, and we will, of course, continue optimizing our store portfolio by turning around non-profitable stores. We do this either by lease negotiations or by changing our store format. If needed, we will also close non-profitable stores down. The forecast for the number of stores by the end of 2018 is now 474 stores, which is about 15 stores less than we had last year. I look positive to our way forward. We have a strong commercial assortment to secure the important Christmas sales period. Our profitability program is proceeding according to plan, and as I have already mentioned, we will continue our focus on our store portfolio as well as increasing and developing our digital stores. We have launched Lindex' new vision to empower and inspire women everywhere, to all Lindex employees. We have also done a thorough analysis of our own industry and its challenges. This has now resulted in an updated strategy for Lindex moving into the future. Thank you. Hi, everybody. Morning from Stockmann Retail. Looking back at the quarter three for Stockmann Retail, we can be glad about the improvement in the stock management that we have done that showed as a smaller summer sale. I told you last time we met that we didn't have the need to do additional heavy discounts at the end of the sale period to push out the volumes. That's how it was, and it generated higher gross margin for us. September was a nice month for us. We were able to pamper our loyal customers. Among other activities, we had, for example, a very successful loyal customer days, both in Finnish department stores and in Tallinn. If the communication to our loyal customers is something that has been in the core of our marketing always, then we also want to do something in marketing that creates emotions and wider attention. We have been able to do that with the past campaigns. You might remember the Stockwomann campaign that we had in March with Seela Sella on the cover of the Stockmann Magazine, and that was awarded in New York, the cover of that magazine. Then we also brought back One Way, the legendary One Way, for a short period of time as a pop-up in this store, and it was focusing on the gender-neutral fashion that is trending high in the world. Maybe even surprisingly, we get a lot of attention also from the international media about that pop-up. As Lauri said, we've been focusing on the digital and putting investments on the digital part, and that shows on the results. The online store has been our fastest growing market or channel also for this quarter. We've been wanting to bring new services or omni services, combining the brick-and-mortar and the digital side. One thing that we wanted to bring in right before Christmas is the new click and collect in this building. The click and collect point that is open until midnight every day, and customers can pick up their packages from there. The focus for the Christmas campaign and the season for us will be to help the customers to find time to focus on the things that really matter to them, the people around them. Therefore, we want to help them to make the preparations and the shopping for Christmas easier and as convenient as possible. I think that the fact that you can visit the store even after the normal closing hours will help with that. The picture of this slide, that is from the Habitare Design and Furniture Fair. We were present there with our lovely own brand, Casa Stockmann. The smaller summer sale, that shows on the figures in many ways when we look at the financials for the quarter. July sales were smaller because of that, but August was a disappointment for us. The fashion season started slowly for us. Then again, September, a good month, we were actually able to take market shares in Finland with the sales improvement that we did. Overall, maybe in a nutshell, the financials for the quarter, we were hoping for a quicker turnaround in the profitability. We have the gross margin on a very good level, and we've been able to deliver the cost savings that we have planned. But mainly August was a disappointment turnover-wise, and that shows on the result for the quarter. Q4 started, and we had the Crazy Days campaign. The online store in Finland did a record sales again for the campaign and was increasing in sales +7%. However, we did have problems with the fashion or challenges with the fashion sales, whereas other merchandise areas, beauty and home, were more or less on the previous year level. In Baltics, food, so delicatessen did pretty well. In Finland, we could see that the renewal of the concept for Herkku Finland had an effect on the campaign, and that shows on the traffic that we had in the stores coming from the Herkku side, too. But as Lauri said, in this building, the new Herkku has now been open and it looks fabulous and has been really attracting customers the first days. Going forward, digital acceleration, of course, our main focus. We have three points that we can see that the customers want us to improve on. They want to see the wider assortment, quicker delivery times, and then conveniency in shopping. What comes to delivery times, we are bringing in quicker delivery times, and for the Crazy Days, we were actually very quick this fall to send the packages to the customers. Wider assortment, we have been saying that we want to take a big leap in widening the assortment, and we are on track with that. We will have the figure, as you see there, by the end of this year in the online purchasable for the customers. The whole Helsinki flagship assortment or selection will be buyable online soon. Already now, the whole children's fashion is buyable there. Then we came out with the news about the Stockmann marketplace in October, that will be launched in spring 2019. That will be a great opportunity for us and the partners to bring in new brands and wider assortment online for the Stockmann customers under the Stockmann umbrella. We have already started a pilot with toys, so we brought back toys to the stockmann.com assortment right in time for the Christmas. Yes, the strength for us will be to combine the unique brick-and-mortar locations and developing online in a way that no one else can. The click and collect is one of the ways that we can utilize the top locations that we have and offer something exceptional for the customers. Thank you. Lauri. Okay, the last division of our group is the real estate. The revenue and operating profit increased. It has been going very stable throughout its operations since 2015, and the revenue went up even without the revenue from the divested Book House. May 25th, if I remember correctly, the transaction was completed. Then after two years of hard work, we have now finalized the SPA or the divestment or signed the agreement for Nevsky. It will now take roughly six to eight weeks to finalize the transaction to get the necessary approvals and our plan is to finalize the deal by the end of the year. Primarily, the main issue is the Russian anti-monopoly service that we need to have an authorization from. Then I am here because we do have Elena Stenholm starting as the Real estate director in November, so I am covering up for her at the moment. Book House was divested, as said, in May, and now Nevsky Centre is ongoing. The Book House was sold to a German-based retail fund, and Nevsky Centre is sold to a Czech company called PPF Real Estate. Financial performance of the division. The revenue was up from EUR 16.5 to EUR 16.7. We have higher rent levels and new tenants coming in. Net operating income was EUR 12.5 versus EUR 12.6, roughly on par, and the average monthly rent is around EUR 38 per square meter. It is up from EUR 36.61. Occupancy rates, we more or less have a full house, 99.4%. It has been very stable, almost 100% on a monthly basis. The adjusted operating profit up by EUR 200,000 from EUR 6.3 million to EUR 6.5 million since a year ago. Key figures. The fair value of the properties is at EUR 677, and we do have Helsinki, Tallinn, and Riga in our portfolio at the moment and of course, Nevsky until the transaction is finalized. The usage is by our own department store business or retail are seen also here. About two-thirds of the area here in this building is by retail. In Tallinn, it's around 82%, and in Riga, around 86%. Here is a little bit of a feeling of the Christmas campaign that we are going to launch. Here in the corner on the left lower side, you see our new Christmas icon or representative, a squirrel called Manteli. He will be running around starting from Sunday until Christmas in our Christmas campaign. This was my part and the divisions part. We are ready now to take your questions. Olli Vilppo from Inderes. About the Lindex new cooperation with this ASOS platform. It's for you. When has it started and does it show already in this online growth numbers? One more time. I heard ASOS and the platform, but what was the question again? When has it started? Does it show already in these growth numbers of the online? Well, we started in August, and it has done really well. It is above our expectations. I don't think we will give out any numbers, but it is doing quite well. Okay. Thank you. Yep. Thank you. Niclas Catani from OP. I would like to ask about the Crazy Days in October. It was -9% and you said that the renovations were affecting it negatively. How about in those department stores, how did the sales develop where you don't have delicatessens? We don't give separate figures for the buildings or separate locations. All over the sales were down by 9%, a clear disappointment for us. Helsinki, of course, is a big factor, so the impact of the food is bigger here. But we do not disclose buildings separately. What we said that Baltics did better than in Finland. Okay. And, well, another question related to the real estate portfolio. Do you give any information about the yield assumptions, what you have in the valuations? Because I remember that you had stated that it was 5.6, the weighted yield, but then you have divested two buildings. Yeah. The yield expectations are very dependent on the market. You are right, we have not given out the expectations or yields based on separate locations. Not for the rest of the portfolio? No, unfortunately, we have not. Okay. Pia Rosqvist-Heinsalmi from Carnegie. Can you describe your refinancing needs after the divestment of the Nevsky? We do have a loan portfolio that is maturing in 2021, if I remember correctly. We do have a loan milestone in January coming up. Do we have any other questions from the hall or do we have any other questions online? Question online from Fredrik Ivarsson, Cheuvreux. First on the gross margin in Lindex. The question is, I assume that part of the 2 percentage points improvement is due to foreign exchange rates. Can you shed some more light on this? Also what we should expect when looking into 2019, given both stronger US dollar and significant raw material inflation? All right. As I said before, some of the strengthening of the gross margin has to do with the decreased markdowns and also that we have better stock margins. Of course, now we see a weakened Swedish krona and we see a stronger US dollar, and that we need to do our best to correct for the next season. We do this by changing garments. We have negotiations with our fabrics, and we will do also some small changes in prices, but that's in small levels, primarily on womenswear. Thank you. Thank you. There is also another question to Stockmann Retail to Maiju. Can you say anything about what you have seen in terms of declining footfall in your department stores? Well, per store, we do not still give those numbers, but we see transfer to online and we see changes in the consumer behavior. We do see declines in the visitor amount, as I think that many retail players do see. Do we have any other questions online? Nope. Do we have any from the participants here in Helsinki? Apparently not. Then I want to thank all for coming here this morning and wish everybody a good week and approaching Christmas and Christmas sales. Thank you. Thank you also online.