Earnings Call: Q1 2017

Apr 28, 2017

Hello. This is Lauri Veijalainen, I'm the CEO of Stockmann from Helsinki. Welcome and good morning. I will go through now the interim report for the first quarter of 2017. Overall, we have continued on the right track. Our operating result was up EUR 2.5 million, and our gross margin improved by some 0.9%. The improved results came from retail and real estate, but we could have done better with Lindex. In Lindex, the comparable revenue increased in all the markets except Sweden and Norway, and as you are most likely aware, Sweden is our main market with the most stores. The operating result was down in the main markets. What I'm happy about, and what probably has been mostly debated, is the Stockmann Retail. I'm satisfied that we have continued exactly on track with the turnaround of our department store business, and our operating result improved by EUR 6.4 million during the first quarter, excluding Hobby Hall. What I'm happy also about that we are now starting to see stabilization of the top line. Operating costs were significantly down due to the efficiency program, and the efficiency will continue to be on my agenda very thoroughly also for this year. Real estates continued its stable path. The revenue increased as well as the operating profit. We have been able to collect higher rent levels, especially in Nevsky Center, due to the stabilization of the ruble. Nevsky Center, we have now reclassified as an asset for sale. The turnaround continues, hence as planned. We have improved our EBIT by EUR 39 million. If you look at the rolling 12 months reports on the screen during the last year. Of course, this gives us comfort on the retail side that we are on the right track because the main improvement has come from retail. For the total Stockmann Group financial performance during the first three months, revenue was down, but this was anticipated due to the closures, as well as Hobby Hall being divested. In comparable businesses, the top line was down by 2.9%, so we are getting close. We are now getting close to the level that we have stabilized the business, and I have high expectations definitely for the second quarter that this shall take place. Gross margin was up, but for the sake of transparency, this was primarily due to the divestment of Hobby Hall, where the gross margin has been lower. Operating costs were lower by nearly EUR 17 million. We have taken rather heavy actions on the personnel cost, as you recall, last year, and these are now clearly visible. Depreciation was roughly on the same level as last year, and operating profit was, or improved by the EUR 2.5 million. Improvements came from, you could say, the main focus of retail and real estate. But we also have to make sure that Lindex gets back on track with the first quarter that did not go according to our plans. For the key figures, equity ratio is up to 46.1%. Perhaps from here I could also take up the inventories, EUR 205.6 million compared to EUR 203.4 million from a year ago. CapEx was a little bit up. This was primarily due to the opening of Tapiola Department Store. We expect to land in the corridor, as earlier informed, between 45 and 50. As for the future and the market outlook environment, in Finland, we do see some positive signs in the GDP. The figures are saying that, or forecasts are saying that the retail market is expected to grow slightly. We do not see any dramatic improvements yet. But we expect that this will be an improvement going forward, and the consumer confidence will be returning. One thing, however, what we are seeing, that the purchasing behavior is changing. This was very visible, especially in the Crazy Days campaign. I will share a few details just in a second. In Sweden, situation macroeconomically is better than in Finland. But one note, which is of course one of the reasons and background of Lindex performance, is that the steady growth, with fashion market has stagnated last year, at the end of last year. Market is expected to decline further in 2017. This is of course an issue for us, but also for our competitors. In the Baltics, GDP steady growth. The outlook in general is better than in the other markets. In Russia, economy is expected to recover gradually, but the purchasing power is still rather low. However, we are seeing now more and more Russian tourists in Helsinki, which is of course a positive thing for the Finnish sales. Our guidance remains the same. We expect our revenue to decline. Did not land where we expected. In other markets, the sales increased, but the importance of Sweden is really visible because we have 300 stores out of the 475 stores in those two countries. Positive was the online increase of the online customers, and we have been working on the brand-building launch of redesign, which have been, of course, positive things going forward. We have also released the sustainability report of 2016, showing very good progress as such. Employee survey people obviously being the key, both as a customer, but especially also for us, our employees and colleagues. We had a very good feedback on that. There is really a strong action plan to go forward so that Lindex will get on track and keep the very good performance it has been performing during the last few years. I also want to remind you that the figures that Lindex is facing from last year are very good, which is, of course, a positive issue. I believe Lindex had the best first half of the year or second quarter last year, but we are working very hard to do the necessary actions so that the profitability level is on the level we want it to be. On the numbers side, Lindex, for the first 3 months, the top line was down by 5.4%. If you take out the Russian stores, 4.8%. If you take the exchange rate and comparable stores, then it is down 1.5%, and womenswear was, you could say, the best performing product group for Lindex. Gross margin was lower, particularly due to the fact that we had higher markdowns and the sales period was larger than a year ago. We have been working also diligently on the cost, and they were down by 0.8%, but the operating profit did not land where we wanted it to land, and it was lower by over EUR 6 million. For the international expansion, just to recap, I believe we went through this last time when we were talking about the 2016 figures. There is now 476 stores in 16 countries. The plan for this year is to open 15 new own stores. We are also looking at some new franchise stores, and there are new franchising markets planned, and a couple of them are listed here, Qatar and Tunisia. I believe those were already mentioned in 2016 when we looked at the annual full-year report in February. Future Lindex going forward, the company is still very much profitable. We will have a very strong summer and autumn campaigns ahead of us, and there are now clear actions to improve the operating profit. We will be looking at the cost structures and also efficiency very hard now for the second quarter and for the full year and going forward. We have increased also investments in the digital business. There have been very encouraging results for Lindex. We are launching the Lindex mobile app, and there will be a release of a new responsive website. Customer sales are very much in focus. Top line is the key. A few words about Stockmann Retail. As I said in the beginning, I am satisfied that we have been able to improve the result, excluding Hobby Hall, by EUR 6.4 million. You can see now that the updates to our selection, the service level improving, the renovations we have done, and the marketing actions that we have taken are now starting to bear fruit. We start to see this now also on the figures. Particularly, I'm happy about that the non-food sales, we have been already able to stabilize, if compared to last year for the same period. So we were at par for non-food sales. Tapiola Stockmann opened successfully on the 16th of March, and during the first period after the opening happened, we had a significant increase in the visitors by 65%, and also the sales have been very good in Tapiola in March after we opened. So we have good faith and good trust that Tapiola will be a solid location going forward for the capital area customers. A few pictures here are visible. On the numbers side, revenue was down from EUR 135 million to EUR 109 million, but this was due to the closures and divestments. Comparable business were down by 2.9%. We had some timing issues for the Easter, especially for the food, and also the revenue was better in Baltics than in Finland. The gross margin was slightly better, but for the sake of transparency, it was up due to the absence of Hobby Hall numbers. It was close to 2016 level in department store operations. As I have said earlier that we expect the gross margin to be on this year's level for 2017. Costs have been in focus, and they were down by EUR 9.4 million. As said, the savings in the personnel costs due to the efficiency program are really starting to be more and more visible, including also the secondary cost savings. The operating result was better by EUR 6.4 million. As stated several times, the first quarter is more or less always negative in our line of business. A few words, a little bit of trivia perhaps on the Crazy Days. We landed for the Crazy Days at minus 1. We had some logistics issues in downtown Helsinki due to the state visits, but those things happen once in a while. The Chinese president was in town, and our customers didn't get into the Helsinki flagship during the day, so that had a small dent on the sales, but we were able to recover. Finland was at minus 1 and Baltics were at plus 2. What's particularly good is that the online store grew again by double digits and actually was now the second largest unit for the Crazy Days campaign after the Helsinki flagship. Here are a few nice to know numbers about the campaign, about store orders, and Bric à Brac transactions, and number of SKUs we have in our markets. The third division, we have real estate doing very well. Increased revenue and operating profits. New tenants coming in, listed here. Occupancy rate very high in all the locations. Book House is fully leased. We are continuing to bring in new tenants in all the locations as well. Nevsky has picked up. The ruble has stabilized. The progress to sell Nevsky is progressing according to plan. We have now reclassified the asset in our balance sheet as an asset for sale as the sale process has progressed. Number-wise, real estate for the first three months, occupancy rate at 99.1%. Fair value after depreciation at EUR 944 million. If you remember, we started at EUR 950.1 million. Operating income was up. Revenue was up. Operating profit was up. The trend is really good in real estate. Of course, this is the backbone of our operations and our balance sheet, especially the latter one. We are doing some new things in Helsinki, both for our loyal customers, but also for the tourists, which we are really focusing on this summer. We have a very good track record on tourist sales and tax-free sales. Recently, we have been not doing so well on that, so we are really focusing on tourists. One of the things what we are launching now for this summer is actually the new rooftop terrace in the core of Helsinki on the eighth floor, which will open mid-May. It's operated by Royal Ravintolat, a very well established reputable restaurant operator in Finland. Couple of pictures here. We expect this to be a true destination for, as I said, our customers and loyal customers, but also tourists and shoppers alike. Opening will be middle of May. Couple of pictures here of the Helsinki skyline. I believe these were not taken yesterday because it was snowing yesterday in Helsinki. This was in a nutshell our first quarter. I am ready now to take your questions. Thank you. As a reminder, please press star one to ask a question. We will take our first question from Fredrik Ivarsson from Kepler Cheuvreux. Please go ahead. Your line is open. Thank you. Hi, guys. Couple of questions on Lindex from my side. First on the markdowns, if you are able to quantify or at least give a ballpark figure on the margin effect. The second one also regarding Lindex, just curious about the inventory level for Lindex in particular, and if there is any risk for high markdowns also in Q2. Yeah. If I take the first one, the inventories were lower than a year ago by 2% at the end of March 2017. Thank you. On the markdowns? The markdowns, yeah, we had higher markdowns. The sales period was longer. I also want to remind you that we did have last year a one-time impact due to the inventory obsolescence, which improved the figures by 0.6%. If you compare the gross margin from a year ago, it was last year 59.4%, and this year it's 57.2%. This one-time impact was one of the reasons why we also went down. It's a comparability issue. Markdowns were roughly -1.5%. Okay. Thanks. That's all. Clear enough. That's the ballpark where we are moving at the moment on that issue. Okay, thanks. Thank you. Again, please press star one to ask a question. We will take our next question from Rauli Juva from Nordea. Please go ahead. Yes. Hi, Rauli here. Also on Lindex, I understood from the previous answer that the gross margin shouldn't be a major problem going forward, but then how about these digitalization parts you mentioned, which will burden this year? How much of those were visible already now in Q1, and will they be increasingly weighing the results later on in the year? I have discussed this also, Rauli, with you personally earlier, and yes, there will be, this year, digitalization developments that will burden both CapEx and OpEx sides, so both on the balance sheet side and investments, but also on the profit and loss side. I don't have the percentage, to be honest, how much has been taken this first quarter, but the work has started. So some of the costs are there. But to be honest, I don't have the figure with me. I would have to check that with Lindex. But there are some already for the first quarter. How about these kind of cost saving plans which you have on Lindex, what kind of actions are you talking about there? There is already a plan made. It is more or less going through every single country operations to see if we can work on the main cost lines, such as, for example, rent is one, as well as looking into certain, let us say, actions that could be taken a bit later, which are nice to do, not must to do, and similar things. They are done on country levels on very detailed level. These actions are really targeted not only on the cost side, but also on the gross margin side. As I have said earlier, retail is detail, so these costs really come from small flaws, and these small flaws become big flaws at the end. It is really about efficiency now. Yeah. Okay. Good. Thank you. Thank you, Rauli. As a reminder, please press star one to ask a question. There are no questions at the moment. Please press star one to ask a question. Okay, it seems that there are no more questions. I would like to thank you for participating in this webcast, and also use the opportunity to wish a very good 1st of May weekend to everybody. It's a big holiday in most of Europe, and in Finland as well. Monday will be a day off here. Thank you, and have a good weekend.