Earnings Call: Q3 2016

Oct 28, 2016

Welcome to the Stockmann Q3 interim report webcast. I'm Lauri Veijalainen, and I'm the CEO of Stockmann. Together with me here is Nora Malin, our Communications Director. Let's start with the presentation. Overall, as a summary, I can say that we are moving gradually to the right direction. I also want to emphasize that we do have a long way forward. This is although the sixth consecutive quarter with operating result, and for the first time in three years, we have a positive number for Q3, but there is still a lot of work ahead. We have two of the divisions are doing well, Lindex and Real Estate, but the challenges lie still with the Retail. Although I am satisfied that in this quarter, nearly all of the improvement came from Retail, which is a sign for us that we are gradually getting on the right track. As said, we do have significant amount of work ahead of us. The efficiency program is going according to the plan. Also on the group level, we have nominated a new member to our management team. Anna Salmi has been working with us for about a year, and she has been working as part of the management team as an interim chief customer officer already since summer. Now she's made official, and this also is the first time that we have a position of this caliber in Stockmann, and this also reflects the importance that we have been putting to the customer and also going to the future. Anna will also be handling marketing and digital issues in the organization. For Stockmann Retail, both EBIT and gross margin improved, and the major cost savings have been achieved through the efficiency program. This doesn't mean that we are yet satisfied with the cost structure we have. We are constantly looking at new smaller issues where we can be leaner, more efficient, faster and cheaper, and this work continues. In Real Estate, there are new tenants into the department stores in Finland and the Baltics, and Nevsky Centre, I talk about a bit later. Lindex had very tough figures in a positive way from last year as a comparable, but they still managed to increase their profit, also in this quarter compared to last year. The tough was September, which also was a disappointment, we could say, including also for the whole Swedish market, which is the major market for Lindex. I think the market went down there nearly 9% or 8% due to the warm weather. Overall, the gross margin improved from 51.8% to 54.8%, and the operating result, as said, was positive for the first time in three years from EUR 2.9 million from minus EUR 10.6 million. A few more words about the group's financial performance in the third quarter, revenue was down, and in continuing product areas and businesses, revenue was down by 5.5%. We do still have a challenge in Finland, and this is our main focus point now going forward that we must improve the top line, we must increase the footfall, and this has been and will be even stronger focus for us going forward. We have not been doing more or less in the third quarter, any or just a few boostings on the pricing. This is a big change, compared to last year, where we actually had a boosting, you could say, on a weekly basis. This is now visible also as a positive improvement in the gross margin, although it did not compensate fully for the top-line decline. Gross margin has improved both in Retail and in Lindex. The efficiency program is visible in all divisions. We went lower from 157 or 158 to around 141 million in operating costs and depreciation also lower due to the treatment in the books of Nevsky Centre. Operating profit improved by EUR 13.5 million, and EUR 10.9 million came from Stockmann Retail. Some of the key figures on slide four, equity ratio, 45.4. Inventories are lower compared to last year, and also CapEx is lower compared to last year. We will land, I think we announced already in Q2 that we have lowered the CapEx to EUR 40 million to EUR 45 million level. We will land somewhere around EUR 45 million, I believe, in that bracket, also towards the end of the year, at the end of the year. Plans are as informed. For the market environment and outlook, Finland remains a tough market still for us, and there is low consumer purchasing power, and we are fighting for the customer's wallet as everybody else. People are more cautious in how they spend. Situation is better in Sweden and Norway and the Baltic countries, and we also see it in our figures. Although I said September was a tough one for everybody due to the warm weather. New brands coming in. This is a competitive market and we have to be ready for that. Perhaps one thing that has a little bit changed now is the Russian picture. We do start to see some positive signs although the market remains weak in Russia. We do see positive signs in the market due to the appreciation of the ruble. Should that continue also towards the Christmas time, there is a fair chance that, as has happened in the eastern border of Finland already, that the Russian tourists will be returning to Finland for shopping. This remains to be seen when we approach the festive season, Christmas and New Year. Therefore, after the Q3, we will keep our guidance as is, no changes. The revenue is expected to decrease from last year. But we expect to land a slightly positive result on adjusted operating result for this year. We had a board meeting yesterday, and the board in the meeting made a decision to investigate a possible divestment of the Nevsky Centre. We have had it for about six years, and it is in very good shape. So this question will be investigated now going forward. Okay. A few words about retail in more detail. For Q3, revenue was lower. This was a disappointment for us, I must admit. We have to pick this up going forward. The approaching Christmas season will be very important for us also for going forward with the 2016 result, but also for the next year as well. Gross margin improved due to the reasons mentioned earlier, and costs EUR 15 million, EUR 16 million down from last year. Hence, the operating results was still negative, but improved by over EUR 10 million, of which part is Hobby Hall. CapEx, we have been working on the Helsinki flagship and Turku Delicatessen, a few words about those a bit later. Crazy Days campaign took place mid-October. After the third quarter, we have traditionally said a few words about the campaign, as it has a visible impact on our figures. We are rather or cautiously satisfied with the outcome. Definitely above the track we have been having on the top line, but still, I believe that we have a lot to improve with the campaign, especially the first day, Wednesday, in my view, has a lot of potential being the main trading day of the campaign. Finland was down by 2%, Baltic was roughly on par. If we want to comment a few words about the product areas, we could point out that Finland in cosmetics did well and food in the Baltics. I also want to say that the online store was a success in our view, and it was a new platform also for Crazy Days. We had over 1 million visitors and online orders increased significantly. So there was really good positive track on that, and that will continue now. Also for the next, we will look into the improvement points also in e-commerce. On page 10, we have been talking a lot about the new tenants that we are bringing into our department stores. But we have not really opened up earlier about what brands we bring in as new brands ourselves in retail. Here you can see some of the brands that are already in the building or are coming in the very near future to the building. This is over 30 to 40 new exciting brands. In the big area, you have fashion, then in the upper right-hand corner, you have cosmetics and the last one, in the lower right-hand bottom is home. So a lot of new brands, exciting brands, and this proves that we are really working hard on the product mix and bringing in the most exciting new brands to the buildings we have. Slide 11 shows some of the pictures we have done, the fit outs and the repairs and renovations. Efva Attling, NYX, a home picture of a home, and then the last one is the new food in Turku. This work is now more or less finalized in Helsinki flagship. We will have some minor things, but we will be ready by end of November with this extensive repair that we have done. Now it's then time to make the renovations sweat and see that ASAP in the increased footfall and of course, top line. But the major things have now been completed after this last push. Okay. A few words then about the second division, which is the Real Estate. Fair value of the properties was EUR 904 million at the end of September. Nevsky Centre, again, treated as an investment property and not depreciated. We are very proud about the occupancy rate. I have to say, we have been able to keep it up nearly to 100%, which is quite unusual in this situation where there's a lot of extra space in all the markets. Also are working on the existing premises. The new Tallinn renovated fifth floor will open. I think we have the event on November 10. Nevsky Centre also is up, mainly because we have managed to lease out the remaining office premises on the top floors 8 and 9. The gross leasable area in own properties is 52%, and the decline is because obviously we have sold the Russian business in St. Petersburg. The net operating income is slightly lower. There are some timing issues and temporary rent adjustments in Nevsky Centre. Due to this, the average month rent is also slightly lower. CapEx is slightly more than a year ago. Operating profit has improved since a year ago. I already mentioned the fifth floor in Tallinn. We took it here as a special topic a little bit to share what has been done there. A picture of the restaurant there coming up and the floor plan, how it looks, and some of the brands also below. Occupancy rate nearly 100, and we use 80% by ourselves there. Then we have Riga as well, a little bit smaller unit compared to Tallinn, but there also occupancy rate 100 and a picture of a brand in the men's section in the department store there. Then one of the things that we are heavily focusing or have been focusing is the food and beverage experience as an offering to our customers. We already have quite a few of interesting brands, but perhaps to point out here, we have discussed a lot about the Joe & the Juice, which opens next month. As a new thing, we will open, I believe it's the first downtown Moomin cafeteria. It will open on the fifth floor in the Helsinki flagship. With this, we target really the families with kids, young parents with kids, as well as tourists visiting the department store. These are also two of the segments we will be paying more attention to going forward when we look at our visitors and guests who visit our department stores. Then Lindex. Just to remind everybody that Lindex has had a fantastic ride so far, and they are therefore facing rather challenging figures also comparable from last year. But regardless of this, they still managed to improve their operating profit by 0.2. As you can see, the comparables are now hitting us in a positive way. But regardless of this, an improvement. We had good track with sales during the summer, but September was a disappointment in Lindex and especially in Sweden. Kids wear, we had strong sales increase in August, and the Holly & Whyte collection was well received. Then we are also launching a reuse, recycle possibility in all the Nordic markets. The sustainability is very high on the agenda and continues to be high on the agenda. Around 50% of the Lindex range is made of more sustainable clothing and materials. Lindex in Q3, a bit more in detail. Revenue top line was down 6.2%. We do have an impact from the Swedish krona effects on comparable exchange rates is about 5.0 or 4.3 when you look at the comparable stores. Again, the September disappointment is visible here. Gross margin, however, improved primarily due to the higher start prices, and then we also had one-time adjustment affected. I think it was one-third of the impact is this one-time adjustment, because I believe this would be a question after I have stopped this monologue. Operating costs down by 4.5 EUR million, and part of this is the closing of the stores in Russia. Hence the operating profit better the 0.2 EUR million, and CapEx is a bit above or 1 EUR million above compared to last year at 3.9. For the international network for Lindex, 476 stores in 16 countries, 37 franchising stores. Just to emphasize the importance of the Nordic countries, majority of the stores are located there. You can also see here the 209 stores when the weather is warm in Sweden has a really strong impact, unfortunately. As retailers say, never blame the weather. New stores and markets, we are looking into new franchising stores in the Balkan area, and also some other new franchising markets are on the agenda, and those will be informed once they are confirmed. Campaigns for full Lindex for rest of the year. The Pink Ribbon for the breast cancer is on its 14th year. Better denim styles, post-consumer recycling. Again, the CSR is coming here very visibly, sustainability. New store concept will be launched in Finland. Strong assortment. Then as also Stockmann, we are looking into the digital development and customer insight in more detail and strength and resources. Customer being in focus. A few pictures of Lindex Christmas campaign. I think these are the first time we show them to the public. Pictures actually have been taken in Chamonix, France, because that was the closest place to find snow. We believe that we will have a strong Christmas also in Lindex as well as in Stockmann. Lastly, but not least, we are organizing on the 23rd of November, a site visit to our new distribution center outside of Helsinki. It is around 10 kilometers further from the Helsinki Airport. It will be from 1:00 to 5:00. You can see the details of the schedule frame, and presentations will be given by myself, then Tove Westermarck, the Director of Supply Chain will be present to share her insight, and then also our new Chief Customer Officer, Anna Salmi, will be representing her part there on marketing and digital. We have our photo studio actually located in the DC, so there will also be a tour of the premises that you will be able to see that part too. That was my introduction and presentation on Q3, which we feel that is now gradually on the right track, but we have a lot of work ahead. This gives us a good base to push forward towards the Christmas sales and which are very important to us for this year and, of course, then for 2017 and beyond. I am ready now to take your questions. Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Press star one to ask a question today. We will pause for just a moment to allow everyone to signal. As a reminder to ask a question today, please press star one on your telephone keypad. If there are no questions, then I thank you for your attention. I wish everybody a good Friday working day and a pleasant weekend ahead. Thank you.