Good morning, and welcome to this third quarter presentation of Europris. A big welcome to especially the audience we have in the room today. I'm really pleased to see that we have live audience, and of course, welcome to you who are sitting in the office or at home. We will have a short presentation, and you will see me on the stage together with Stina Byre, the CFO, who will present the financial details.
Trine Engløkken is with us today, and she will manage the Q&A session at the end of the presentation. Please feel free to send in questions as we speak. Let's start with the presentation, and I think Europris delivered a solid performance in the third quarter. Total sales reached NOK 2.05 billion, an increase of 2.8%.
Adjusted for the structural growth, it was a sales decline of 0.8%. The quarter had a rough start in July, especially the physical stores struggled meeting sales from last year as Norwegians went on a well-deserved summer holiday after two years of COVID. It was back to, you know, normal days, and from mid-August, we have seen good growth in the stores across the chain.
I think that the current environment is of course challenging for the consumers, and as I will come back to later on, the discount retail sector is a nice spot in the market to be at the moment. The gross margin ended on 47.6%.
OpEx, the sales ratio was 26.8%, and EBITDA ended almost on par with the historic high, third quarter of last year of NOK 430 million. This year we ended on NOK 425 million. A solid profitability in the quarter with a total profit of NOK 187 million to the parents.
We talked about the historic development of the last period, looking at the three-year stacked growth. Unfortunately we still do that, but we are becoming more and more comparable, and actually the third quarter this year is quite comparable with last year. We have quarter figures for the stores in the shopping centers and we see that the Europris physical stores outperformed the stores in the shopping centers.
For the total retail market, we still have to look at the three years combined growth, and it's important to have this historic view as the pandemic has been quite difficult for the market. Overall, in this period, Europris has delivered a growth of 28%, which is very solid, but it has overall been a very strong retail market in Norway during the pandemic.
I think during the pandemic, we had some sector winners, and among those was the discount variety retail market where Europris is situated. Coming out of the pandemic, I think you will still see some of the winners performing well, but some others will be struggling. I think the current environment actually is quite favorable for the discount segment.
The consumers are becoming more and more price sensitive in the current inflation environment, and Europris is performing well, and I think we'll continue to perform well. Stina, let's have a look at the numbers.
Thank you, Espen. I will then take you through the details of the third quarter. Group sales were NOK 2.05 billion, which is an increase of 2.8%. If we exclude structural growth, it is a decline of 0.8%. The chain had sales decline of 3.7% in the third quarter. As for the overall market, and as Espen said, it was a tough start in July.
Both August and September showed sales growth compared to last year. We had a good development for our campaign sales. After the summer holidays, we changed focus on the front page of our marketing leaflet away from the summer and over to everyday consumables at unbeatable prices, and this affected traffic and sales positively.
Consumers are still continuing to be very cautious when it comes to investment purchases, and this affected the sales of seasonal summer items negatively, and around 2/3 of the sales decline was related to this. If we look at products with a price point above NOK 1000, it was a sales decline of 23%, but this constituted only 3% of total sales.
If we look at the products with a price point below NOK 1000, it was a sales decline of 1.4%. Typical border trade products like soft drinks and tobacco had sales decline. We also saw that the four stores we have closest to the Swedish border had sales decline, performed weaker than the overall chain. Comparing to 2019, it is still a good development.
We have previously said and believe that a normalization of society takes time, and we have data supporting this. If one looks at border traffic, we can see that it's still not at the pre-pandemic levels. We also exchanged data with ÖoB and the two stores they have closest to the Norwegian border, and this also confirms that normalization is taking time.
Total e-commerce sales were NOK 177 million. This constituted 8.6% of group sales. For Europris, e-commerce sales were also affected by the fact that consumers are more cautious when it comes to investment purchases. Lekekassen had a strong quarter, with sales growth in both Norway and Sweden, and we consolidated Strikkemekka as of 1st of July, and they also had sales growth compared to last year. The gross margin was 47.6%.
This is an increase of 1.9%. Over the year, Europris reports a calculated gross margin for the stores. Any calculation difference is adjusted in the annual stock taking. Last year we counted only 18% of the stores due to delays, and that had a total positive effect of NOK 4 million. This year we counted 73% of the stores with a positive effect of NOK 62 million.
As you can then see, we have two effects impacting the third quarter isolated, both the number of stores counted and also we had a higher positive calculation difference per store this year. If we mathematically just exclude this effect from the third quarter, the gross margin declined with 0.9 percentage points impacted by higher costs for inbound freight.
OpEx was NOK 550 million, an increase of 14.2%. If we exclude structural growth, it is an increase of 9%. Performance for sales and margins has been better than the budget, and this has impacted the performance-based pay for store managers. An additional accrual was made for this during the third quarter.
If we exclude this effect, the increase in OpEx would have been 5.3%. Considering the fact that we have 3% more directly operated stores this year, and that we also are impacted by inflation overall, we are satisfied with the cost control. Europris hedges electricity costs 12-21 months ahead in time, and this will lead to higher costs for electricity next year of NOK 20 million in total.
If we compare to spot prices, we have avoided costs for the full year this year of around NOK 80 million, and we estimate to avoid around NOK 60 million in OpEx next year due to this. EBITDA was NOK 425 million. This is almost on a par with the record year last year. The margin was 20.7%, which is a decline of 0.8 percentage points.
For the first nine months, EBITDA exceeded last year's record levels, and the EBITDA margin was 21.6%, almost on a par with last year. Negative net change in cash is normal for this season, and this year it was negative by NOK 694 million. It was more negative this year than last year, and this was due to the development in inventory and also accounts payable and accrued expenses.
The development in inventory is affected by higher purchase prices, by higher costs for inbound freight, and also from higher volumes of seasonal items. If we compare to the same period last year, the base assortment has lower volumes than last year, and we also have a healthy inventory with well above 90% less than one year of age.
We also finalized the acquisition of Strikkemekka and had a payment of NOK 88 million. Financial depth was NOK 3.4 billion, up from NOK 3.1 billion last year. Excluding lease liabilities, it was NOK 1.5 billion. Europris has a solid financial position with almost NOK 1 billion of cash and liquidity reserves. Thank you. Back to you, Espen.
Thank you, Stina. Looking at the strategy, we have made some progress during the quarter, and I'll take you through a couple of the highlights. The strategy of Europris has been to strengthen the price and cost position, improve the customer experience, and to drive customer growth.
On the cost side, we have talked a lot about the new warehouse in Moss and how we have completed automation of the picking solutions over the past couple of quarters. I'm really pleased to say that, you know, the warehouse is now it's getting bigger and better, and it's according to plan, and that is great.
When we look at the expansion we have initiated due to the high growth we've seen over the last couple of years, we are on track both in terms of time and cost for the expansion of the new warehouse.
We're taking over the building in first quarter next year as expected, and we will start installing the high bay storage units, and we take over the full facility to use it from the first quarter of 2024 as planned. We also make good progress for the shuttle automation. In the third quarter, we finalized the replacement of some hardware parts to fix the last bugs we had in the system.
I'm really pleased to see that we are now improving the picking quality and the efficiency of the solution, and we are reaching the goals we had for the total investments. The savings are intact, and they are actually now being materialized.
On the distribution side, we are now testing more sustainable distribution of goods to the stores. Over the last couple of years we have been cooperating with ASKO, owned by NorgesGruppen, on distributing goods across the Oslo fjord with electric ferries. We are also now testing electric trucks in the Oslo and the eastern part of Norway for deliveries to the stores. I think this partnership is a very good example that, you know, we join forces with other companies to solve the sustainability issues we have.
Of course, if we should reach our goals on sustainability, we have to do work together with other retailers. We cannot, you know, find all solutions by ourselves, so a good partnership for sustainable distribution of goods. On the customer experience side, I've talked a lot about category upgrades over the last couple of quarters, and in the current environment, what we see is that the price awareness among consumers are rising.
In the quarter, we have put more focus on our campaign. We've been sharper on the front page of the marketing leaflet, pushing more on low sales prices in order to drive traffic. This is one of the retail tools we have in order to maneuver in the quite difficult landscape we've seen during the quarter.
Actually, we took the decision to end summer sales a little bit earlier, in order to start focus on everyday consumables as soon as the summer holiday was over, and that has been successful. As Stina said, since mid-August we have been delivering good growth in the stores. We have also upgraded categories. We completed a upgrade of the handyman, the DIY category in the quarter.
That was quite extensive change in the stores, but very well received by the customers. This is one of the examples that we talk about. We do improvements on categories with above average gross margin, and this will support the uplift we have seen in the gross margin from pre-pandemic levels. We've done a successful takeover of distribution of carpets. Previously it was done by middlemen.
Now we do the distribution over our own warehouse, and that is also an activity that will lift gross margin. We have also increased the assortment, and we have seen a very strong sales development on carpets after we did this upgrade. The pet food category continued to perform well. We upgraded that earlier on, and it's still performing very well, both on sales, but also on the gross margin. It's a lot of activities, and it's also appreciated by the customers.
On driving customer growth, we see of course like all other retailers that the digital space is becoming more and more important. We have a data-driven approach to address the Mer Customer Club, which now consists of 1.2 million members.
We see that the customer club members, they have a higher shopping frequency and also a higher basket than the other customers. We are now testing customized digital newsletters to some members.
We see that the newsletters, they have the same opening rate as the non-customized, but they have high click rate, and we actually see a higher average basket size for those who go to the stores. We will combine digital newsletters with social media campaigns in order to drive traffic, and I think it's quite important to use the online space to drive traffic to the physical stores.
That is of course a preparation for at one point, the physical direct marketing leaflet will disappear, and then we have built a good base to continue to spread our marketing on the digital space. We are also working to improve the content on the high-value items at europris.no.
We have implemented the use of text, video, and augmented reality, so the consumers actually can take the webpage, look at the products, and see how they actually fit at your own home. That is actually driving and converting more sales online than what we saw in the past. Still, online is becoming more and more important. Physical stores are the most important part still for Europris, and it will remain for quite some years.
We are expanding the store network. We opened one new store in the quarter, and that was at Ensjø in Oslo, and that is a quite important area for us where we see that we are under represented in the high density populated area around Oslo.
The store had a very good start. The two neighbors of the stores, that is Kiwi and Rema 1000, it's a lot of shopping in the area, and it's a new part of Oslo that is growing. We see more and more consumers living there, and it's been a fantastic start actually for that store. Very positive, and I'm actually a little bit surprised even though we were positive at the start for...
The pipeline on new stores is nine for the rest of 2022 and beyond. I think that is true only for, like, 50 minutes more as we are opening one store in Nittedal at 9:00 A.M. today. That is another store coming in the area just outside of Oslo. One of the stores that we have in the pipeline is subject to planning permissions.
Looking at the outlook and the summary, as I said a couple of times already, I think that low price is a good position to be at the moment. It's a tougher market for the consumers. Inflation, interest rate hikes, that is actually hitting the households' disposable income.
We see from the media, and we also see from the stores that the focus on price is becoming more and more important for the consumers. The Europris concept is well suited for those kinds of a market environment with low prices and strong campaigns. We are a low price company driven by campaigns.
We have strengthened the campaign element over the last couple of months, really trying to reinforce the price position on some of the traffic drivers on the front page of the marketing leaflet. We also see that our private label products are performing well in this environment. We have a strong focus on daily consumables and low price points in the stores.
We are ready for the important fourth quarter, the Christmas season, the biggest season is still ahead of us. We're looking forward to that. We expect that it could be difficult for some of the higher value items, but that constitutes for around 1 percentage point of total sales in the fourth quarter. We are prepared to put more focus on consumables.
Well prepared, all products in stock and a good marketing plan, and the stores are actually ready from 9:00 A.M. today with the Christmas stores all across Norway. With that, I think we will soon open for questions, and we will give you a quick reminder that the next event from Europris will be a capital market update on the 8th of December at Hotel Continental here in Oslo. Any questions from the audience?
Thank you. I will start with two questions. Markus from Kepler Cheuvreux. On your gross margin, so you see other retailers are struggling with more essentials and less sort of high margin products. Do you expect a similar impact also for Europris? Of course, you have very good gross margins now, but could we see some changes in that? That's my first question.
Well, as we have communicated previously, we don't expect to meet the record levels that we have had. We have harvested some margin, but we have also done a lot of good work with the category mix and so forth. We still believe that we will have a lift in the margin compared to pre-pandemic levels when we talk about the Europris chain.
Okay. Follow up there. You don't expect sort of a higher share or potentially higher grocery in your mix to impact the margins?
It could be. If there's a significant shift, that could of course impact but we also juggle the product mix that we sell. Of course, if the future shows that is a significant change, then that could impact as we have lower margins on those consumables.
Thank you. Then lastly from me, it's on the cost development, because underlying, you're talking about 9% cost increases. Maybe half of that can be explained by more stores and bonuses. Could you also shed some light on the other cost drivers that you are seeing? Should we expect this to continue?
We are impacted, of course, by overall inflation in some areas. For instance, paper is more expensive, costs for marketing leaflets, et cetera. We have distribution costs that impact us negatively. We also have focus on tightening wherever we can, and we also see effects from the efficiency of the warehouse that Espen also talked about. All in all, we believe that we have good control over the cost base.
Thank you.
Hello. Joakim from Pareto here. Thank you for the presentation. I was wondering if you could elaborate a bit more on the split between increased or changed volumes and increased prices. Is that possible?
The basket was a little bit above last year, as price increases offset the volume decline. It's almost the same, but slightly higher impact from price than volume decline.
Thank you.
We have an increase in inventory, and it is driven by price. Total volumes are down. Summer and Christmas items, if you look at seasonal items, they explain around half of the increase in value. They also, of course, have volume increase, but overall base assortment has lower volumes, even though they do increase in value. As I mentioned in the presentation, we believe it is a very healthy inventory. We also made sure to sell out all goods for the summer season that is not to be continued next year.
Question is from Robert Anderson. Could you break down your exposure to higher electricity prices?
Well, we have around 50 GW a year in electricity usage, and we hedge almost all of this with our purchases. We will have an increase in our OpEx next year of around NOK 20 million, but we have avoided a significant cost both this year and next year.
One question from Ole Martin Westgaard, touching upon the inventory again, but can you comment on the quality of the inventory? When should we expect more normalized levels?
Well, it will take some time as we have to wait for next summer to start selling our summer products, and also the prices are going up. We see some normalization now of input prices, but I doubt we are done. It is still a tough negotiations with our suppliers on this matter. We will probably still also see. I don't think you should expect that prices are going down just yet.
I think, you know, I would like to add on the inventory side that in this current environment, of course, the currency hits inventory immediately and also the higher prices, and that is just something that hits all retailers at the moment. Everybody is expecting, you know, to see that inventory is coming up, and if it's seasonal items, it will take, you know, until next season before you clear it out.
I think it's very important for retailers now that you maneuver this landscape correctly. If you know, we see that now a lot of retailers start sales activities on Christmas seasonal items early. If you drive those kind of decisions based on, you know, covenant leverage from the banks, that is not positive.
You should try to, you know, have flexibility like we have on the liquidity side. You should work on your inventory and make sure that you manage this the right way because you have to take, you know, the right business decisions. I think many, you know, some retailers will take decisions now based on their inventory levels and their cash flow.
Eirik Røftel, Kepler Cheuvreux again, touching up on the OpEx, but I'll read the question. Your cost control again seems very solid. The underlying cost inflation seems pretty low if one excludes the performance-based salary and increased number of directly operated stores. You mentioned your measures on the electricity bill, but are there other reasons for the below inflation cost growth? F or instance, warehouse savings contributing in the quarter? If yes, how much versus last year?
Well, as has been said, we are seeing efficiency from the warehouse. Difficult to give an exact number on that, but that is impacting positively with a higher picking efficiency.
Another here on the inventory. Inventory per store is increasing. Will the high inventory affect your campaign activity in Q4 and beyond?
Well, it is a price driven inventory, and as Espen said, we are not in a position where we need to make commercial decisions based on the inventory levels. We will continue to run strong campaigns, as we see commercially fit and not driven by the inventory.
Joachim Sannes from CPP has a question to the CFO: Once again, given rising interest rates across the globe, we wonder very much why you feel comfortable in running on negative cash, which we perceive as very risky in a potential banking crisis. Can you please elaborate the components of your liquidity position? What portion is a credit line? What are the conditions of it, and how much cash is left on balance sheet?
Well, we are, of course, in this season, we have a normal situation when it comes to cash, and we have decided that we would rather have the liquidity that we can pull upon instead of having big amounts of cash piled up in our balance sheet. We are very comfortable with our liquidity situation.
We have a term loan of NOK 1 billion, and we have credit facilities of NOK 1.2 billion, and we also have, forget the English word, Norwegian kassekreditt of a couple of hundred million. We are not at all worried.