Earnings Call: Q2 2017

Aug 16, 2017

Good morning from Helsinki. This is Lauri Veijalainen, the CEO of Stockmann, and welcome to the half-year financial report for the Stockmann Group. I would propose that we kick it off right away. As a summary, Q2, there were highs and lows on the quarter. Definitely the positive development has been or was the improved EBIT of especially Stockmann and also Real Estate. The department store business was able to improve their results by over EUR 9 million, and this of course is a solid sign that the things we have been doing on the turnaround of the department store business are on the right track. On the low side, the quarter was rather challenging or was very challenging for Lindex, primarily due to the Swedish market. As said, Real Estate continued its solid performance. Group gross margin was down due to Lindex and the markdowns taken there from 57.3% to 56.1%. The operating results down from 17.5% to 14.6% profits. But then again, the last key figure on the slide is the improved EBIT of retail, which has been the main issue and challenge, but I'm happy to see that the turnaround is gradually happening. The divestment of the Nevsky property in St. Petersburg is moving according to the schedule we had anticipated. So there's nothing new to report on that beside that the process is ongoing. The strategy is moving forward. Just as a reminder, the steps that we are gradually taking, the aim is to have the retail results positive by the year 2018 and thereafter. The Stockmann Retail and Real Estate partnership is in the key, and you could say that the setup will be hybrid. We will continue our own retail operations, but simultaneously then we'll also look for good new tenants going forward and cafes, book stores, electronics to have the full One Stockmann concept in our buildings. Then I'll tell a few words about the food transaction that we did at the end of June or signed at the end of June a bit later in this presentation. Yes, food, as I said, we will transfer the food operations in Finland to S Group. This will cover the six delicatessen stores in our department stores, the Kitchen located in Vantaa, and the chain support operations and the whole personnel of around 800 people. Important to remember, though, is that the stores will continue under the Stockmann Herkku or delicatessen name in all the locations in Finland. As said earlier, the food operations in the Baltics will remain under Stockmann operations, and they are already profitable in those locations, Tallinn and Riga. The purchase price was a little bit less than EUR 30 million. The cash flow impact is very positive at EUR 20 million, and the capital gain one time effect is around EUR 3 million. This will improve our results from day one in January for the year 2018. The closing is planned at the end of 2017. Of course, this will also bring to the Stockmann Group fresh cash in the form of rent in all the six locations from the S Group. However, all of this is subject to the Finnish Competition and Consumer Authority, or also known as KIVI in Finnish, Kilpailuvirasto, and the application will be handled there in due time, and we expect their conclusion then during the rest or at the end of 2017. Latvia and Estonia, the operations will continue as is. I want to apologize now, not my idea or the company's idea, but we have to report the food operations Finland as an asset for sale and report it as discontinued operations. This obviously causes comparability and interpretation problems for the analysts and media equally, but we are following the IFRS rules with this, and hence we report the food operations like this. We also sent the revised figures to you one week ago so that there was some time to analyze the impact of the food and the comparability would be better when you got the figures today. This is purely a rule issue and accounting issue that we had to follow. Stockmann is becoming more and more a fashion and lifestyle house. You can see that fashion has been already 71% of our total product sales and segmentation. Food has been 15% and cosmetics 9%. What I am very happy also in Q2 is that the cosmetics and fashion are now growing in the department stores also in sales. The leverage is now for the solid cost savings and also the improved margin visible. This will be the core, and fashion will be in the focus more and more going forward. The operating result, the direction is the right one. As I said, we had highs and lows in this quarter. The retail, solid improvement versus the Lindex low performance. These challenges come and these will be solved. So we will be taking actions immediately to make sure that Lindex returns to the sufficient and satisfactory profitability levels that it has been. We will not wait. A bit more in detail on the group level, the revenue down by 4% in comparable business, primarily due to Lindex. Gross margin, lower, but as said in retail up even without the Hobby Hall impact. Operating costs significantly down by EUR 23 million. So the painful cost savings we took a year ago and have been focusing on the cost efficiency are now bearing fruit. Operating profit some EUR 2.9 million below last year, but improvements both in Stockmann and Real Estate. We were able to cover the challenging Lindex quarter almost totally with the good performance from retail and Real Estate, when it was vice versa actually some two years ago, a year ago. This just reflects how quickly situations can change. These things are typical in retail, and these will be handled in due course. Key figures perhaps to point out the inventories that despite the challenging month quarter for Lindex, the inventories are on last year's level. CapEx is lower between 2017 and 2016 for the Q2. There are also some timing issues that you have to consider here. This is the situation right now. We also made a decision with our partner, Reviva, who is handling the department stores in Finland, sorry, in Russia under the brand Stockmann, that they will be allowed to continue to use the Stockmann brand under a license agreement. Earlier they had the right to use it till 2018. Now we extended by five years till the end of 2023. They will pay a license fee. This license income will not have a big impact or is not expected to have a big impact on Stockmann's earnings in 2017 or 2018, but in 2019, the license will be based on revenue under the Stockmann brand. Reviva has some plans to expand. They, for example, bought the Russian chain Podium recently, which will be transferred into the Stockmann brand or rebranded under the Stockmann name in due course. Also, the Nevsky Center department store, which is very established in the city, will be Stockmann also going forward. We keep the guidance for this year unchanged. The guidance was that the turnover will be less than last year, but the EBIT operating profit is expected to improve. This guidance we keep. Okay, a few words then about Lindex when we go on the divisional level. As said, a very challenging month for Lindex. Sales increased in all the markets except the main markets, which of course is a challenge, and Sweden especially, which then ended up in decrease in top line and the bottom line. The main reason behind the markdowns is the markdowns and the price-driven campaigning. We also had a sizable summer sale. Positive was that the e-commerce continued to increase both for sales and traffic, and there were several launches in sustainability initiatives for Lindex. So we have now a solid plan to push the two last quarters forward with Lindex so that we will be also regaining the position as we have done earlier. On the financial performance, revenue was down by 7.7%, and then comparable sales around 5%, and this was the Nordic countries. The impact of the price-driven campaigns is painfully visible in the gross margin. We also have to remember, though, that in the GM, there was a redefined handling of the inventory obsolescence, which takes part of the explanation of the lower. This obsolescence treatment did not happen this year. So this is not all natural. There is also a one-time impact here. Costs have been under control, but the operating profit was far from last year. We have also said that now in our guidance that Lindex will not be reaching the record levels that it had last year. But as said, actions are and will be taken to improve the situation and regain the profitability level for Lindex going forward. International expansion is here, 478 stores. In Q2, four stores opened and two closed. What will happen in 2017, around 50 new stores will open, and the net increase of stores, however, is lower because we are closing stores in some markets. There will be new franchise setups in the Balkans as well in Northern Africa, Tunisia and in the Middle East, primarily Qatar. So there are intensified actions to improve the sales and profitability in Lindex. Launch of the new assortment concepts will be launched in all the business areas and pant solution, new marketing setup. Digitalization will be very much in the focus. There are two new members in the management team. One external recruitment, Sanna Lindgren, who will take care of the HR and communications, and Ulrika, who is already a Lindex employee and will take over the finance position in Lindex. Then a few words about the department stores retail. As said, I'm particularly glad that we have been able to continue the good trend of the recovery of the department store business. The results are here and what I'm also satisfied is that the improvement is not only coming from the savings, it's also coming from the improved margin and the increase in top line for fashion and cosmetics. This complemented by the cost savings we have done and also will focus on, has now leveraged to a EUR 9.2 million improved results. This has been the pain point for us earlier, but now the pressure is gradually coming off on the department store and the direction is the right one. Revenue has stabilized. Best growth have been in the Baltic still, but also Itis has been doing very well. Campaigns were successful both in the Crazy Days as well as in cosmetics. What we have particularly seen, especially in the flagship, is that the tourist amounts have significantly increased double digits during this summer. So the tax-free sales are visibly up. We have been active also outside of the properties, participating in different kinds of campaigns. We also were awarded a Design from Finland Mark for our own brands, which we have been using in the summer actively in our marketing and advertising. Revenue for the financial performance was down, but important is that the comparable business were on par and for some parts improved compared to the previous year. Gross margin was up, costs were down, and operating result, as said, improved by EUR 9.2 million from a year ago at -EUR 2.6 million. The minus is also due to the seasonality. The result of the department store business, as perhaps I have stipulated earlier, will be decided during the Q4 with the Crazy Days, Christmas, and New Year sales consecutively. The fact that we are going to sell the food business to S Group does not mean that we will not have food in the future. S Group has an excellent opportunity to deliver the best food concept in Europe. They have the machinery, they have the infrastructure to deliver solid supply chain with better prices. I can't see a better win-win situation primarily for our customers, but also for our shareholders so that we can get the footfall up as well. So food will be part of our operations going forward. It just will be handled by an external operator from the 1st of January, subject to the competition authority. We will be working on getting more exciting, interesting restaurants, cafes into our premises, in our assets also. That's also part of food. It's the food experience. A good example, for example, is the renewal of our buffet section by Fazer, which just opened some days ago in the eighth floor in the Helsinki flagship. Autumn campaign will focus on inspiring fashion and lifestyle content. We are taking more and more an omni-channel approach. We have been already rather active in the digital channels, but we will be more active now in September. We are working closely with John Brown Media, the same content marketing operator that handles John Lewis in the U.K. We will be coming out with a rather different look on our advertising, both in print, in digital, but also in media such as TV. That will launch middle of September already. Here you can see some of the first indications how the pictures and how the layouts will look like. These are some of the experts, and you also see the cover for the upcoming magazine on the left-hand side in the middle. This also will be seen in the visual merchandising in the stores. Customers will clearly see the changed approach. A few words about the third division Real Estate that Stockmann has. Real Estate has been performing solidly as it has been for quite some time. Increased revenue and operating profit. Nevsky has been picking up. The increase has accumulated from the higher rental income in Russia. Primarily also due to the fact that the RUB has been, during Q2, developing positively for us. It was appreciating. Now it has been a little bit depreciating in the third, at least for the first month. Then the partner offer, and I am especially happy we have been in the summer terraces in Helsinki and Tallinn, which have had a visible increase in the footfall, especially in Tallinn where the clients have to go into the terrace through the department store. You can see here a picture of the new terrace in Tallinn in the picture. Nevsky Center, the rotation change of tenants has been continuing, and as said, the divestment of Nevsky is moving forward according to plan. For the financial performance of Real Estate, the value of properties was at EUR 940 million. It has been depreciating a little bit since the EUR 950 million. We will have another round of revaluation of the assets at the end of the year, beginning of next year from the 1st of January. Full house occupancy rate at 99.6%, extremely good. Then net operating income improved from EUR 10.2 million to EUR 12.9 million. Average monthly rent improved from EUR 33.26 to EUR 37, and net rental yield also in January, June. Overall, a solid performance from Björn Teir and his Real Estate team. Revenue was up and operating profit was up. The direction is definitely a good one for Real Estate. As a reminder, the portfolio of the assets, fair value EUR 950 million, five buildings, five properties, gross leasable area 142, occupancy rate I mentioned. Perhaps the usage of properties is interesting. The external tenants 48% and retail 52%. If we exclude the Nevsky Center, then retail will have 69% after the transaction of the food or delicatessen is completed subject to Finnish Competition and Consumer Authority decision during the fall this year. Summa summarum, solid performance for retail, Real Estate, challenges for Lindex. We are gearing up for the third quarter, already one month passed. Then, of course, the very, very important quarter four beginning from October. Thank you. I am ready now to answer any questions you may have. Ladies and gentlemen, as a reminder, to ask a question at this time, please press star one. Ladies and gentlemen, as a reminder, to ask a question at this time, please press star one. Please ensure the mute function on your phone is switched off. Tommy Ilmoni, Carnegie, please go ahead. Yeah. Hi, good morning. A question regarding Lindex. What should we expect now for the second half? I assume that the comparables become easier in the second half, but considering the fairly weak first half of the year, is that the trend we should expect going forward or have the actions that you have taken or are taking, should we expect some Hi, Tommy. Of course, this development requires firmer actions now from the management as well. But I want to also remind you about the gross margin that it will remain lower than in 2016 if we comment the GM, due to the fact that we had this obsolescence booking last year at this time and also in Q3 and then the season sale. But I also want to remind you that the figures in first half of the year in 2016 were record high. They were record high. So they are very tough. Of course, it doesn't explain the big drop, but this is something that will ease up towards the second half, that the comparable figures are not record level anymore on the second half. But this I can comment on the gross margin that the obsolescence will still play a role in Q3, quite a bit lower, less role than in Q4. Regarding the actions that you are taking, can you walk us through what are these? I will. If you don't mind, I'll come back to those a bit later. We have already started to look at the cost. When you are in a situation where the sales are not perhaps performing, you are, of course, looking at the cost structure. Those actions have already been taken. There is a marketing launch happening in September, which is going to support the situation. Of course, the main issue is the fashion, the collections, and the assortment concepts that we are reviewing very closely. But the main issue is really the price-driven campaigns that are going on in Sweden, and those we have to get better control over because the gross margin is impacted also on those. So we have to get the footfall without jeopardizing the gross margin as it happened in Q2. This is an issue also for totally, so it's market-driven partly as well. Some of the other operators have also reported certain situations in Sweden, but it's not an excuse. We have to work ourselves on this, and we have to just outlive the market situation now in Sweden. Okay, thanks. Thank you. Ladies and gentlemen, as a reminder, to ask a question at this time, please press star one. It is star or asterisk key followed by the digit one to ask a question. Just a moment to allow everyone to signal. There are currently no further questions in the queue. Okay. In that case, I really would like to thank you for your participation and wish you a good rest of the working week to all of you. Thank you from Helsinki. Bye-bye.