Earnings Call: Q1 2018

Apr 27, 2018

Good morning to everybody, and welcome to the Q1 morning info meeting here in Helsinki, Finland. Good morning to everybody as well who is joining through video or online. My name is Lauri Veijalainen, and I'm the CEO of Stockmann. Let's start the brief. Altogether, we landed roughly on par with the result compared to last year. The sales, as such, were not exactly as we expected. Of course, you always hope for higher sales, but we have couple of things that are impacting, and my colleagues here will go through their individual divisions. One of the things is obviously the rather soft fashion market, you could say especially in the Nordics and primarily in Sweden, which is a little bit challenging at the moment. The second issue is that we do have some headwind with the currency rate at the moment, also compared with the euro and the Swedish crown. But we have been able to compensate the top line with significantly better margin in the department stores. Of course, the main reason behind this, that we had visibly lower stock for the sales for the beginning of the year. So the group gross margin improved to 55.1% compared 53.3% last year. I see that the trend will continue with the better gross margin for the whole year. The Tuusula warehouse, which was open about a year and a half ago, is working really well now. When you open a DC, there is always issues when you have these, I call them teething problems, when you have a small child and the teeth start to come up. There are always these kind of things, but if I remember correctly, we manage now to get our goods through in one, maximum 2 days. The time was significantly longer last year. The profitability improvement as such, we have finalized the co-determination talks with the Finnish organization. We had 74 people reduced further in the head office or the support functions here in Finland, and we also have reduced the head count in Lindex by 20%. Attacking rather hard, you also saw that we are reducing more Lindex stores than anticipated initially, and Elisabeth will tell about that. But we are also challenging our landlords quite hard now for the existing agreements. This is something that this work will continue, and this will be visible also in the Lindex result going forward to the next quarters. The Lindex store network is being reviewed. As said, more stores will be closed this year. We will close all the loss-making stores. We can't afford to have loss-making stores. We did have a lower result in Lindex compared to last year, but this is something that the reasons were what I explained with the soft market. Retail revenue was down also due to the reasons I explained, but the gross margin compensated quite well, not enough, but quite well with the situation on the bottom line. Real estate, we are progressing actively. We have now changed the wording a bit from last guidance and last report. We are progressing actively with the divestments and both for Nevsky and Book House, and Björn Teir will share that information with you as well. As said, real estate is going forward like a train. We have new tenants coming in. We haven't had any issues with Nevsky Center with the ruble fluctuations. Things are moving rather stable there, even though there was some concern with the sanctions that were established by the U.S. government. But things have stabilized also, at least for now in the Russian market. Revenue was down by 6.7% to EUR 202.4 compared to EUR 216. Lindex and retail down, real estate improved. Gross margin we already discussed. The impact of the sale is rather visible in the first quarter, but you also have to remember that the first quarter is the smallest of our quarters. If I remember correctly, we haven't had a positive first quarter for the last 10 years. It has been more of a trend and also in retail business. Operating costs are very strongly on the agenda. We are looking at all the costs. Retail is detail, and even the smallest flaws mean and are important. The costs, indirect especially, we are looking at those very diligently. We had provisions of EUR 2 million and then the Lindex reduction of 71, 20% or 74 as well here in the Finnish organization. Depreciation is roughly on the level of last year, and we landed with the adjusted results more or less on the same level as last year. Key figures perhaps to point out the inventories, it's roughly EUR 20 million less than last year, and this is due to the fact that we are now buying better. This is also a cash flow issue. Release is cash. It's not tied in the inventory. Related to this, we have also changed all the category managers in the supply chain. The buying department is streamlined, and we also have a fresh way of buying and selecting the selection. The top management is the same, but also on the middle management, we have wanted to bring fresh ideas and fresh views, and we have reorganized the supply chain. This was part of the co-determination talks that we had, which started on January 29. Because we have to also be able to reflect and react to the changes, and this is something that we need some new views as well. As for the outlook, the economic situation in Finland, I expect it to improve, but we do see some uncertainty in the fashion market and fashion business going forward. Baltics have been, at least for the bit over two years that I've been in this position, doing better than the Nordic neighbors upstairs or in the north, and this trend we expect also to continue compared to the other markets that we have. Efficiency measures will be more visible in 2019. We will see some impact already going forward or further impact, also based on the actions the management is taking, both in retail as well as in Lindex. Guidance for 2018 remains unchanged. The revenue is expected to be on par with the previous year, and the adjusted EBIT operating profit is expected to improve from 2018. That was shortly my part as an introduction and a summary. Now I ask Elisabeth to come here and give an update on Lindex Q1, and we will take the questions at the end. Thank you. Good morning. Lindex, then. A short summary of the highlights in Q1 is that we do have a sales increase outside the Nordics, and we can see that our strong sales increase coming from online is continuing quite strongly. We have also taken actions on our profitability improvement program that was started up in autumn, and we can see great progress in that work. As Lauri mentioned, the head office now is reduced by 20%, and we are attacking our indirect costs quite hardly. The store portfolio, we are doing now a deep dive in the number of stores, the location of the stores, and we are also looking very closely into the new customer behavior and the patterns of purchasing to have an optimal store network. We have already closed six stores during Q1. We have also opened one, but we have closed six. We have also opened the first lingerie-only store here at the Stockmann department store, excuse me, department store. Something also new about the brand then, and the expression, the visual expression of the brand, as you can see to the right. We have launched a new expression, and the key words are modern, Swedish, feminine, and positive with energy. At the same time, we are focusing, as always, on our sustainability initiatives. On International Women's Day, we donated 10% of our turnover to our HERhealth program, focusing on women's health in our production countries. We are also joining forces with WaterAid about the drinking water to increase the clean drinking water in Bangladesh. Those were the highlights. The financial performance, a bit weaker than last year, mainly due to revenue going down. In euro, it's 6.8, and in comparable stores, local currency comparison, it's 5.3, and that is mainly coming from the Nordic markets. We can see some positive developments in the markdown outcome. Thanks to the decrease in both clearance and promotion, we can see that the gross margin is improving. We also estimate the stock level to be quite balanced for this time of the year. Costs are going down in euro, and that makes the operating adjusted result lower than last year with EUR 1.2 million. Store network, we have talked about a little bit. As you see, we have 486 stores in 18 countries. We have opened two, and we have closed six. Now we are, as I said earlier, deep diving in the store network, closing unprofitable stores or moving them, if we can see an effect of that. We are also launching the new concept. We have the lingerie concept, but we will also launch a kids concept in Norway in May. We estimate that the store network as a whole will decrease approximately with 20 stores. Mm-hmm. The way forward then, as I said before, we launched the profitability improvement program this last autumn in Q3. Worked very intensely with that in Q4, and we will see effects on the cost side going forward from Q2. The full effect will be run rate 12 months from autumn, but we will see effects already in Q2. We have also looked through and adjusted the assortment strategies, making the assortment more commercial and spot on for our customers, and the effects from the assortment will also be seen from Q2 going forward. We launched a customer focus program called Customer First in all our stores in all countries, focusing on the visitors and the average purchase, giving our customers an improved impression and improved interaction with our colleagues out in the world. As I said before, we are closing, we are opening, we are moving stores, but we are also adding a new dimension with new concepts. It will be a more inspiring store portfolio as a whole going forward. We are anticipating very nice commercial campaigns going forward, and we have also launched, or we are launching at this very moment, our new communication concept called Sustainable Woman with a film expressing how much we would like to inspire and empower women everywhere. We are also inviting all our customers to have a dialogue about how we can be a positive element in their everyday life and make life easier. Together with this, of course, we are doing huge both investments, and we are spending a lot of time on improving our online business to be even closer to our customers, changing platforms and the visual expression together with a commercial offer. In August, we are welcoming Susanne Ehnbåge, who will start as our new CEO. Thank you. Yes. Morning, everybody. My name is Maiju Niskanen, and I am in charge of the Stockmann Retail. Looking at the highlights first for the Q1 in Stockmann Retail. The strong improvement in gross margin helped us compensate for most of the decline in revenue. Our stock is in good health, and we did not need an extensive sale period to get rid of the old stock. We also made the decision not to drive the top line with additional discounts. The strongest campaign of the quarter was Stockwoman campaign. The main message of the campaign is to be free of the norms and rules and let the world show who you are. That was really well received by our customers, all the strong women and men out there, starting from International Women's Day on 8th of March when we changed the logo on top of the main entrance of this flagship building, and we were trending high on the social media platforms with that campaign. The campaign face of the whole campaign was Seela Sella, a Finnish actress, age 81 or 82, I think now. Her life has been all about being who you are, not asking for permission to do the things that you want to do in your life. You remember that we had a huge increase in tourist sales last year, 2017, and that continues to be one of our focus areas also going into this year and this summer that is supposed to be a large tourist summer in Finland. The very popular Alipay mobile payment is now one option in the Finnish department stores. We are one of the first Finnish companies to be present in the WeChat app. Hugely successful, they had more than 900 million users last year. City of Helsinki is coming into our premises. They will open next month a tourist information point on the street level of this flagship building. Starting from then, they will have three information points, one in the Helsinki-Vantaa Airport, one in Helsinki Central Railway Station, and then one here in the real heart of the city, so in Stockmann department store. Even wider focus we have on the digital shift that we are doing. We are strongly investing on the digital part, and we are constantly recruiting new digital people into our team. Reserve and collect, the new function, the new service for the customer, quickly became a very popular thing for them. We get almost 700 reservations each week. We have introduced OP Bank as a new partner for us. They will help us accelerate the change that we are doing on the digital side. As Lauri mentioned, our supply chain is now ready for the new digital world and new way of working. The main focus on the change that we did in the supply chain was to have a full total category ownership, going through all channels, both Finland, Baltics, and .com, so our online store, being able to take the whole view on how the customer sees, for example, women's fashion in Stockmann experience. Going through marketing events, all different kinds of partnerships. This will be done, of course, in close cooperation with the marketing and store operations. We have three new category heads, one responsible for women's fashion, one for men's fashion, and then for the category of home and cosmetics combined, Jessica Nyholm-Silvennoinen will be the new head of category. She moved from this store, used to be the director of Helsinki flagship store, and now we have an excellent opportunity to move knowledge of the customer and that great insight that she has of the Stockmann customer into other functions, too. So very nice move for us as a company to have her in a new strategic position there. Therefore, we have a new director for this store here. Jenni is present today. Good morning, everyone. Jenni has been working for Stockmann for a long time, has had several different positions in the company. Previously, she was working as a department store director in Tampere store, and she has proven expertise in leading change. Jenni's full focus, of course, will be on the customer and on developing the customer experience further. Yes, with the smaller clearance sales, we were able to compensate part of the decline that we had on turnover in Q1. On cost side, we have increase in rental cost, and to take care of the total cost, we have this efficiency program that will bring us savings from the support functions, too, to have the full picture in control. We started Q2 strongly with Crazy Days campaign. We were able to pull in increase in sales compared to last year spring, again, this spring. We did it already in fall, so now we have two campaigns in a row that we made increase in sales. The total sales increase was +4%, and the queen of the campaign was online store with the huge 19% increase in sales. At the most intensive times of the campaign, there were more than 2,000 items put into the shopping cart each second by our customers in the online store. We had more than 2 million campaign products in all markets. We really can see that we are truly multi-channel. This campaign is truly multi-channel. The web store became, or was again, actually, the second largest store in the whole group. Web store was nominated in this competition, Grand One 2018, as the best digital store in Finland. They really lived up to that promise and were worth that nomination with the huge success during this campaign. Crazy Days, we have had the campaign for over 30 years, and it is all about renewing, bringing in new things. We had several new brands also this spring that took part in the campaign. One new thing that we did was opening the stores, the physical stores, on Wednesday at 6:30 A.M. to our loyal customers. The first and exclusive customers had the chance to come to the stores and start shopping earlier before the doors opened to everybody and the huge traffic starts. That was appreciated by our customers. We had hundreds of people at 6:30 A.M., if you can imagine running into the store to see the very nice offering of the products that we had. This really gives us a very good kickstart for the Q2, which is a lot larger than the Q1 for Stockmann Retail. Thank you. I give the word to Björn. Good morning. Last part before we go over to questions and answers. I am Björn Teir, I am responsible for the real estate business within Stockmann. The real estate business in Q1 could actually be summarized by perhaps two words. It is stable growth and very hectic times. Very hectic times describing what we have been doing when onboarding new tenants in one of the areas that we consider as one of the most important for the department store business, and that is food experience. We have onboarded new tenants. We have been doing construction projects mainly in this building in street floor. The last of the new restaurants opened today at 9:00 A.M. It has been a challenging time also for Jenni, for which I apologize because always when you bring in a construction site in the street floor of a retail business, it affects negatively the footfall. That we have partly seen also during Q1, but therefore, we are especially glad to have been able to remove the last parts of the construction site the last night. Now we have new businesses operating in this field. The other thing that has made life more hectic than usual is, of course, the two divestment projects ongoing very actively at the moment when it comes to our two investment properties, Nevsky Center and Book House, that are proceeding. Stable growth is the other part reflecting this business Q1 2018. We have had good growth in all areas, in all markets, and in all KPIs for the real estate business. The net rental yield is down a bit, but that is then reflecting the higher market value of our property portfolio from the beginning of this year. Here you can see the current portfolio, where we have three department store flagships in capitals in the Baltics and Finland, and then the two investment properties where we are in the middle of divestment processes. You also see the market values for the investment properties that we are obliged to report separately, and then in the third basket, the market value of the three department store properties within the group. The last slide pictures exemplifying the new partners we have in the different properties we are operating. Very much focused on the food experience. As we have said many times earlier, we regard that as one of the most important things to get customers and consumers interested for brick-and-mortar shopping is to have also as one dimension, the food experience. Maiju told you a bit about the cooperation with the City of Helsinki. This flagship in particular is very important when it comes to tourists. What is really a dream project for a real estate guy is to be able to have leasing operations in areas that are usually seen as non-leasing areas. I am talking about the extension project we have been doing this spring when it comes to the Helsinki roof terrace and also in the Tallinn roof terrace. These are really both from a financial point of view, business point of view, important. We have seen already last year the impact on footfall through these businesses. Of course, it is very nice for everyone as a human being also to be able to enjoy summer when it comes at some stage in premises like this, overviewing the City of Helsinki and Tallinn in good company with something nice to drink in a glass in front of you. This we are really looking also forward to opening when the time is right and the summer is finally here. This actually has the real estate input, and now we go to questions and answers. Okay, so please, if any questions, we are here to answer them. It seems that there are, for the first time, no questions. So, thank you, Nora, for making it very coherent. Unless there are questions through the video. Yes. Questions through the webcast from Fredrik Ivarsson from Severin. Three questions on Lindex. Number one, can you say anything about the level and/or the growth of Lindex e-commerce? It's a strong development on the e-commerce. We are still below 10% of the total. How is the growth? Can I say? Yeah. The growth is moving up to 30%, so between 25% and 30%, depending on month. But we see a strong development in the online business. Then question number two, thinking about the future store network in Lindex, should we expect the average number of square meters per store to come down significantly? No. We will of course launch small concepts, but significantly down on the whole store network, I don't think that will happen. We will have smaller stores and larger stores. And then number three, should we expect to see lower costs related to rents in Lindex? Yes. We are looking forward to have good but intensive dialogues with all our landlords going forward. Okay. Then other question through the webcast about Nevsky Center. How is going the negotiation about to sell Nevsky Center? Can it happen in Q2 2018, and can you confirm negotiation with Morgan Stanley about this asset? First question was, can it happen in Q2? Yes, of course, it can happen in Q2. We unfortunately don't comment individual counterparts with whom we negotiate. Thank you. Then we move on questions via telephone. Thank you. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. A quick reminder, everyone, it's star one to queue up for a question. There are no questions from the audio participants at this moment. Okay. In that case, I thank everybody for being here, taking part. I wish everybody a very good 1st of May weekend coming ahead. Thank you. Also thank you for the participants through the webcast, the video, and telephone. Have a good Friday. Thank you.