Earnings Call: Q3 2017

Oct 27, 2017

Good morning, everybody. This is whoever is on the line. This is Lauri Veijalainen, the CEO of Stockmann, and I have with me here the Group CFO, Kai Laitinen. Welcome to this webcast on the Quarter 3 results, and I would propose we kick it right forward. Questions at the end, please. Overall, I am not satisfied with the performance of the group. We do have challenges with Lindex, but we also have actions identified with Lindex. Positive is that we have been able to continue the positive track of Stockmann Retail and Real Estate. Stockmann Retail improved its result by over EUR 5 million, and I think we have improved the result by some EUR 20, EUR 23 million this year, but the work is still very much undone. The Lindex impairment we did this quarter, and then the food deal, I will share information about that also a bit later. But as said, Lindex is by far our biggest challenge. It's a bit of a paradox that some 12 months ago we had the situation exactly the opposite way, that Lindex was the star of the group and department stores were struggling. Well, we're still loss-making in department stores, but the track is definitely a correct one. But now we have challenges with Lindex. But as said, we have clear and firm actions now starting already today and already actually before to work on the profitability so that we get Lindex back on track. Real Estate doing a firm, solid performance also in third quarter. On the next slide, you can see the operating result during the strategy period. We had a very good run until the third quarter or the situation until we had these issues with Lindex and therefore the graph has gone down. But as said, actions are taken to correct the situation. On the group level, if we look at the financial performance, revenue went down from EUR 264 million to EUR 242 million, but it is on par with comparables compared to last year. Gross margin was more or less flat. It was up in Stockmann Retail, but primarily due to the divestment on Hobby Hall. Lindex took a hit on gross margin as well. Operating costs, as you remember, we have been taking firm actions on the costs. The EUR 20 million program was completed now in this quarter, and then we can see it here that EUR 9.2 million lower personal and other costs are a reality. EBITDA didn't reach last year, and therefore the operating result was not where we wanted it to be purely due to Lindex, but Stockmann Retail and Real Estate picked up. This, of course, was more or less the trend also in Quarter 2 when we had the same discussion here in the webcast. On the key figure side, perhaps to point out the CapEx or capital expenditure, we have said earlier that the CapEx would be roughly EUR 45 million to EUR 50 million. We now clarify it or give a new estimate of EUR 40 million, approximately EUR 40 million will be our CapEx this year. Stock levels are roughly on the same level as last year. Otherwise, I don't see any major issues. Of course, the impairment amount looks extremely nasty in this report for the result of the period. For the outlook, Finland, the economy has started to come back. We do see it also in our figures, but we also see that the purchasing behavior is changing quite visibly. We saw it especially in the Crazy Days campaign. In Sweden, fashion market expected to decline in 2017, so the other companies also in the same situation, but we cannot blame this on the market. This is also quite visibly our own doing that we have not been successful with the collections. As said, Elisabeth Peregi, who is the CEO of Lindex, has identified the main issues, and these are being already corrected and visible already in Quarter 1 next year. The operating result, yes, improvements came primarily from, or mainly from Stockmann Retail, Real Estate doing okay, and Lindex, then the situation as I explained earlier. Guidance, we keep unchanged based on the reasons below. If we look at the divisional, more detailed information, I start with Lindex. It is a significant challenge for us. It is a bit like 12 months ago, we had a very poor department store business, but we have managed to turn the business to the right direction. The work is definitely not done yet, but the direction is the correct one. We will do now the same with Lindex, that we have to fix the company and fix especially the top line. So during the last month, we did a private equity type of efficiency analysis. We dug through everything in the company, all the processes, and did a quick X-ray analysis on the operations. Based on that, we launch now a EUR 10 million-plus efficiency program, both on the top line, but also on the cost side. This will be visible in 12 months. We will take a EUR 3 million provision on this in quarter four, but this actually started today. This will be executed with full force. We had a successful launch with the pant solution concept. Smart shopping app has been released. My Store successful rollout and two new franchise markets are Tunisia and Qatar. Of course, these are drops in the ocean. We have to fix the Nordics, and this is primarily Sweden and Norway and Finland that are the main challenge at the moment. On the financial side, revenue was down by 3.2% on third quarter. The decrease came, as I said, in the Nordics. Gross margin, lower, we had to have higher markdowns. Operating cost was up. We will take now this under scrutiny as stipulated earlier. So the operating profit went down dramatically, over EUR 10 million, and this is, of course, the main issue at the moment. How to fix it, and we will fix it. International expansion 482 stores, mentioned already the new franchise markets or countries, and then Iceland, we launched e-commerce. It is also a franchise setup. New stores and markets in 2017, we will roughly have around 490 stores at the end of the year. The Lindex profitability program is something that we will now kick off with full force. It is on slide 11. I have been as the chairman of the board for about a month now, and this is now the first thing I put into motion one month ago is, was the study, and now we have the results. We have identified a good, solid plan, and we start to push it forward. It is split into two, increasing the sales, the collections. We believe that there's a lot of potential improving the collections back to the Lindex values, back to basics to be more on the Lindex values instead of being on the high-end fashion, which has not obviously been working. The strategy of the assortment is revised. We will definitely revise the time from the design to the store. It's too long. This was one of the conclusions from the analysis. This has not been ever done in Lindex, so this was a good time to do it. Of course, the basic selections. Marketing and digitalization, we do not jeopardize digital expansion, and we will actually increase the share of digital marketing in media spend. On the other side, on the cost side is the profitability. There is first the gross margin. The markdowns due to the improvements in the offering, of course, is very heavily connected on the top line. We also have identified that we can utilize the hours what we have in the stores much better. There are no plans to decrease the number of sales staff in the Lindex stores. We want the time to be consumed in a more customer-oriented way. We will launch fixed cost savings of hard savings of over EUR 10 million, and this will include actions in the headquarters, the Nordic back-office organizations, and the distribution center. Possible personnel reductions primarily will be affecting the headquarters in Gothenburg, Sweden. We'll book a EUR 3 million provision on this, and we expect to have this in place within 12 months from today or by the end of 2018, but in practice, the target is 12 months. Lindex way forward is implementing the profitability improvement program. We have the Pink Ribbon campaign on the commercial side for the fight against breast cancer. The launch of the ever better denim styles. Of course, Christmas is approaching. This is extremely important part of also Lindex's performance, the new store formats and concepts, and the digitalization that we have been investing and we'll invest also more in the future. Okay, let's move forward to retail, the department stores plus e-commerce. I am satisfied with the performance of retail. We have had solid growth in sales, 4.6%. It grew all the department stores. Itis, which is in the eastern part of Helsinki, was the star in Finland. Tallinn and Riga in the Baltics also did well. Fashion was primarily, or particularly the solid performer in Q3. Campaigns worked well. We launched the Stockmann Magazine. We do have a pending significant issue with the Stockmann Delicatessen sale to S Group. This is pending the Finnish Competition Authority performance, and we expect they must give a decision not later than 18th of December 2017. This is the exact date of the deadline. I am happy that we have managed to push retail to the right direction already now for quite a few quarters, but I'm not at all satisfied that we are not there yet. There's a lot of work to be done, but it's good to see that the actions we have taken specifically with the department stores are bearing more and more fruit going forward. On the financial side, comparable revenue went up by 4.6%. Finland was about almost 4%, Baltics almost 7%. Gross margin was on par with last year, and here you can also see the operating cost going down from 54 to 43. These are the efficiency measures we took in 2016. The operating result went up, if we take Hobby Hall, EUR 5.3 million, if we exclude Hobby Hall, EUR 3.1. This is the right direction, and this has been the target all the time. The fashion went up as well, and this is of course good that we have taken market share now in Q3 instead of losing it for quite a long time. This proves that we have been doing the right things. The sale of the normal price goods is on the rise. Our stock is in a healthier situation. The D.C. works better and we have significantly more seasonal items and goods in the stores than a year ago. Then we had rather successful Crazy Days. It was for the first time in two years, we had growth. Eight department stores and the online was part of it. As a result, the total sales went up 2%. Finland, 1%, Baltic, 6%, and particularly happy we were with the online performance, +25% compared to last year. 1.2 million sales transactions, 60,000 online store orders, which we actually shipped the last ones two days ago. We have been very much better in efficiency in shipping out the goods and the orders than a year ago. Around 2 million campaign products, and then we were a little bit discussed in the media about the fact that we have started to charge our plastic bags from the beginning of September. You can also see here that the consumption only in Crazy Days went down by 50%. The sustainability is very high on the agenda of Stockmann also going forward. Okay, let's then take the last, and the most, let's say, solid performing division we have in Stockmann, which is Real Estate. No big surprises in the Real Estate part. Increased revenue, operating profit going forward rather steadily. We have been able to collect higher rents in Nevsky Center. The RUB rate has been favorable in Q3, and we have continued to bring in new experiences, new partners into the stores. A list of them is here. The Nevsky Center has been on sale now for exactly a year. Of course, I promised some months ago that we would be giving you information where we are or that we have concluded it hopefully. We are in active negotiations with O1. The question is that we want to do this properly. We want to get the best price out of it, and this takes time in Russia. It's a different negotiation market than it is in Finland or in the Western world. We don't see anything out of the ordinary about this. This is something that we will hopefully conclude. We have very strong indications we do. It takes more time, and meanwhile, we are operating a successful Nevsky Center. As said, we want to do it properly, and we want to get the best possible price out of it. Financials are here for the Real Estate business. Occupancy rate went up slightly. Net operating income went up a bit. Revenue is up. The KPIs are good for Real Estate, and I'm happy that this is the situation. A list of the assets is here. Fair value is the 950, and the usage of properties is also here. Once Nevsky is sold, the share in our own use is 75%. Hopefully when the Finnish Competition and Consumer Authority gives a positive ruling on the Herkku or the Stockmann Delicatessen transaction, then their own use will go down to 69%. We have to wait and see what the Finnish Competition and Consumer Authority and respect that decision. We cannot talk too much or prepare even before because of the competition rules in Finland. We are prepared to have the transaction then completed at the end of the year, this year, once we get the decision latest 18th of December. Christmas is approaching. I am ready to take your questions now. Thank you. As a reminder, to ask a question, please press star one on your telephone keypad. We will pause for just a moment to allow everyone to signal. We will take our first question from Fredrik Ivarsson from Kepler Cheuvreux. Please go ahead. Yeah. Hi, everybody. Thanks for taking the questions. Three from my side, if I may. First one on the EUR 10 million savings plan in Lindex. If you can give some color on those EUR 10 million, where they are actually coming from, that would be helpful. Second one, on the gross margin in Lindex, obviously being down almost 3 percentage points. If you can quantify the markdown effect you saw in the quarter. Then the last one on the fashion market in general. You mentioned the first two months in Q3 were tough, whereas September improved some. If you can give some color on what you have seen in the beginning of Q4, that will also be helpful. Thank you. Okay. The first question is then the Lindex EUR 10 million. As I said on slide 11, this EUR 10 million is so-called hard savings. We expect to do actions in the headquarters, Nordic back offices. It will require personnel reductions, and that will hit mainly in the Gothenburg. It is also focused on indirect procurement. There has not been too much tendering of indirect services in Lindex recently. We see a big, big positive impact on that as well. These are the main things that will be targeted now. The second question was about the margin markdown, and it has gone down at the GM. This is a consequence of the lower sales that we have been forced to go to the price game. This is particularly caused by the fact that the collections have not been successful. Elisabeth Peregi has now taken a firm action, has identified specifically from the store perspective, because she has been running Lindex in Sweden. What has been from the store's perspective, and this is, of course, extremely valuable information. I also want to remind that we did have this one-time redefined treatment on inventory obsolescence, which the comparable gross margin figures are higher from last year for the gross margin due to this. The last question was about Q4 and the fashion market in general. In Finland, we do see the consumer behavior moving, and what is very positive, especially in the department stores, which is the fashion-focused business we were particularly doing okay or well even in the fashion business and fashion segment, which gives us confidence that fashion is increasing its importance. But of course, in Sweden, there is a challenge that the fashion market is going down in general, and that is an additional challenge for Lindex. As I said, I believe, and we have identified that the main issue has been that we have not been successful with the collections, which has then impacted the gross margin because there's been becoming a stock issue. We have been forced to get the stock down and new collections in. So those are the answers to your three questions. Thank you. A follow-up on the quick answer on the last question there. Have you actually seen October being stable versus September, or is it more sluggish as the beginning of Q3? Unfortunately, I can't comment yet the October figures, because we haven't said anything to the market yet about it. So I can't, unfortunately, answer your question. Yeah, fair enough. Thank you. All right. Thanks. Just a reminder. To ask a question, please press star one. We have no further questions at this time. Okay. I wish everybody a good Friday and an approaching weekend, and thank you.