Good morning, everybody, and welcome to this Q2 presentation for Kid ASA. Before we start, if you have any questions, please use the chat function in Teams during the presentation, and we will do our best to answer the question at the end of this session. The group revenue increased in the period with 8.8%, compared to 3.9% last year. It was, yet another quarter with continued top line growth, following an increase in footfall to the physical stores and revenue from new categories. The like-for-like growth, including online sales, ended up at 5.6%, and that comes on top of a strong performance in Q2 during 2021 and 2020.
A reduction in the gross margin compared with a particularly strong Q2 last year is mainly caused by increased freight cost, which now we believe have peaked out and will come down in the coming quarters. Our spring collection was somewhat delayed as expected, and to avoid inventory build-up from seasonal products, we decided to campaign these products specifically more at the end of the quarter. I would also like to point out the OPEX to sales that ended up at 47.4% compared with 49.4% last year, meaning we have good cost control in a challenging market. The EBITDA decreased by NOK 4.9 million to NOK 167.6 million, and the EPS ended up at NOK 1.28 compared to NOK 1.57 last year.
If you go back and look to the period before COVID, looking at the first half of 2019, we have had a yearly growth of around 10%, since 2019, which I'm very proud of the performance of Kid and Hemtex. This ends up at the total growth in the period a bit above 30%. We have focused during Q2 as the former quarters on mitigating the risk of delays. We have had a strong focus on future deliveries. Going into autumn season, I am very happy to say that 90% of the autumn collection are either delivered or on sea, and we also see a very healthy delivery situation for the last quarter of the year, meaning the Christmas season.
This has obviously been a very important work that's been done, and the delivery situation for Q3 and Q4 are strengthened compared to last year. We have assigned a new freight agreement ensuring lower freight costs level for a main portion of the purchased goods, which gradually will give a positive effect from mid-August and going forward throughout the year. This has been important, an important work in the quarter due to the challenging freight situation, which we have seen the last year or two. We continue to see new categories as a key driver. Categories launched since 2017 accounted for NOK 94 million in revenue during the quarter, compared to NOK 66 million in the same quarter last year. We have had a successful launch of a wide range of outdoor products, both in Kid and also in the Hemtex segment.
We have delivered a good spring and summer season, and we are now looking forward to present new and exciting products in the quarters to come. We remain confident that this will inspire both current and new customers as we are headed into an important second half of the year. Eystein, maybe you can update a bit on the revenue.
Revenues were disclosed early in July, showing an increase of 8.8% at the group level following increased footfall to physical stores and increased online traffic in both segments. In the beginning of the quarter, we have probably had some positive effects from Easter, and last year we had on average 44 stores closed in Norway, and we have had all our 5 stores in Estonia closed for about one month. On the positive side, new categories have developed positively, and in particular, our outdoor range with furniture and our homewear collection, including clothing for casual wearing, being inside at your home. We have also increased the number of stores in Kid Interior from 149- 155, whereas the number of stores in Hemtex have remained stable.
All in all, we are happy with the spring season, and we are happy with the start of the summer sales. Gross margin decreased by 3.7 percentage points for four main reasons. First of all, peaking freight costs, higher campaigning volumes of seasonal spring products, increased B2B sales in Hemtex, and also increased cost of raw materials. Freight costs started to increase last summer, but it was from September in which they stabilized at a higher level. Pre-COVID freight costs accounted for approximately 5%-7% of cost of purchased goods, compared to levels of 20%-22% from September last year. With an average inventory turnover of 6 months, Q2 2022 is the first quarter in which a large portion of the products sold during the quarter included these higher freight costs.
Freight costs have remained high in Q2 2022, peaking at approximately 20% of cost of goods sold, compared to 10% in Q2 last year. We now expect freight costs to come down from the current peak levels as the global freight situation seems to be normalizing, with spot rates coming down. Furthermore, Kid has now agreed a freight cost level supporting lower costs for the main parts of purchased volumes. Hence, we expect to see a gradual reduction in freight costs going forward towards levels of 13%-15% of cost of purchased goods. This financial effect will appear gradually as current inventory with peaking freight costs are being replaced with goods purchased at lower freight cost levels in the quarters to come.
The reduction in gross margin was also caused by higher campaign volumes of seasonal products due to late arrivals of the spring collection, and especially when comparing to Q2 last year with unusually low campaign volumes. In conclusion, we remain confident in our financial objectives with a full-year gross margin in line with the last 10 years. EBITDA decreased by NOK 4.9 million to NOK 167.6 million. Operating expenses-to-sales ratio decreased by 2 percentage points to 47.4%. In nominal values, operating expenses increased by NOK 15.6 million, excluding IFRS 16 effects. Last year's COVID reduction effects accounted for NOK 4 million, and opening of new stores accounted for NOK 6.6 million.
Two-thirds of the nominal increase of NOK 15.6 million is due to last year's cost reduction effects and growth costs. The remainng increase of NOK 5 million was due to a mixture of increased costs, increased logistical costs following higher volumes, but also increased cost in general, of which electricity represents the single most important cost increase. In 2022, electricity costs increased by approximately NOK 2 million per quarter, compared to last year and reached a total of NOK 10 million for the first six months of 2022. Inventory reached a level of NOK 779 million, an increase of NOK 225 million from Q2 last year. The two single most important factors explaining the increase is higher freight costs, as already commented upon, and changes to inventory recognition for goods in transit.
Previously, we recognized inventory when goods were paid for, while we now book all goods as inventory once the shipment reached pier and are placed on the ships. We are comfortable with the level of the inventory. We also expect to see a more normalized level at year-end, keeping in mind that we have more stores, expanded store sizes, as well as expanded product and category assortment. We are also comfortable now with the delivery schedules and the precision for the seasonal autumn products. Cash flow, the cash flow in the period is NOK 13 million lower than same quarter last year, mainly caused by an increase in inventory. Cash flow from investment reflects CapEx in stores and our new online e-commerce platform. Therefore, due to the inventory build-up, the utilization of bank overdraft facility has also been slightly higher than usual.
Still, with a gearing ratio of comfortable 1.35. The group has sufficient cash and available credit facilities with no issues on liquidity. Briefly summarizing our financial objectives, we are in a normalized market, aiming at a like-for-like growth of 3%-4%. We have an ambition to deliver stable gross margins in line with the past 10 years on a full-year basis. With the OPEX, operating expenses relative to sales of below 45% on a full-year basis. No changes to dividend policy, and we still aim for having a balance sheet with moderate leverage.
Before we move on to the next slide, I would like to highlight the store portfolio ambitions. We would like to optimize the store portfolio and targeting 320 fully owned stores within all markets, in total, across markets. According to our strategy, we continue with the new openings, refurbishments, and expansion of stores. Kid is now presented in the important shopping area in Skøyen that opened this quarter, and also Kolbotn just outside Oslo. In Sweden, we have expanded two stores in Uppsala and refurbished two stores in Kalmar, as well as one in Malmö. We see high activity in the lease market and expect to sign new lease contracts in all markets in the coming quarters.
As mentioned during the Q1 presentation, we have strengthened our focus on enlarging our stores, targeting now average stores at around 600 sq m in all market. This is to support our category expansion plan. That was our slides for today, so now we will move on to the Q&A session. I see we already have a couple of questions, so if you can start by reading them off, Eystein. Meanwhile, if you have question, please use the chat function in Teams.
I will be happy to do that. Congrats on the solid quarter with good sales growth and cost control. Do you have the split between change in basket price and number of articles in the quarter? That was the first one. The second one, has there been any changes in product mix year-over-year and quarter-over-quarter? First, split between price and then number of items in the basket size. Are we gonna do that answer?
We normally do not give details on that split, but like I've said before, there are no major changes in this quarter either. I think it's fair to say that both there is an increase both in price and in the average price per article and also in the number of articles in the basket size. When it comes to the change in product mix, I don't think there's ever any quarter without any changes in product mix, depending on what is being promoted or could be even weather. It could be for many reasons, so there will always be mixes.
In this quarter, we have had some positive mixes in one segment and some other mixes in the other segment, maybe taking the margin a little bit down, but all in all, they're balancing each other out.
I'd just like to highlight that what we said there during the presentation, that the outdoor product.
Yeah
That's not only outdoor range, but also other products for the outdoor environment, like urns, pots, and outdoor cushions and so on, has strengthened during the quarter.
Next question from, this is also anonymous. How was the development in gross margin adjusted for the freight costs? And second, do you expect increased campaign activity going forward? We do not disclose. I will answer that if that's fine with you.
We do not disclose gross margin with or without increased freight costs. As previously mentioned, the main reason for a reduction in the gross margin this quarter was caused by increased freight costs, but also keeping in mind that we're comparing with the quarter last year that was unusually high from an historical perspective, at least.
We were, how to say, proactive when it came to adjust the prices last year. That's also one of the explanation for the higher margin in Q2 2021.
The second question was, do you expect increased campaigning activity going forward? First of all, I think we should remind that the comment made by myself earlier on the gross margin was due to late arrivals of spring products. Instead of keeping those seasonal spring products in store, we decided to campaign them rather heavily, which is not usual, and which was not, definitely not the case last year. On the contrary, actually.
The last year, we didn't have to do any campaigning basically at all. Campaigning will follow an agreed-upon schedule. We will campaign what we find is appropriate, and the reason for campaigning, keeping in mind also that 80% of our sales are full-year products, which doesn't normally have to be campaigned, we will campaign as if it.
We can sum it up quite easily. We see no reason for an increased campaign level going forward. We will have normalized campaign level compared to previous years.
There are quite a few more questions there actually. What is the development in terms of inflationary pressure we have been seeing in later periods on CapEx for new stores? I'll leave that one to you.
When it comes to CapEx to new stores, I'm not sure if we how to say will see a pressure on the CapEx side. We are happy with what we see. So far we haven't seen any dramatically increased CapEx due to inflationary pressure on new stores.
Next question. Can you share any details regarding the volume and the duration of the new freight agreement?
We can share a few details, and then you can add some more as needed if there's something I forget. It's a fixed contract for parts of the volume, the most important part that is three years, but it will be negotiated after one year. It's you can look upon it as a one-year fixed price for the main portion of the volume at favorable term, favorable terms, I would say.
Yeah, compared to current spot rates, definitely favorable.
Yes. We are very happy with this new contract, which has been negotiated throughout the first half of the year.
It will come into effect for shipments being sent first July, so then arriving in the middle of August, and that's why it will have a gradual impact on the quarters going forward.
Yes.
Another question, how will higher inflation impact operating expenses and lease payments?
I'm not sure if we will comment on expenses going forward. We see the same as you see, that there's pressure on the cost side. We are focused on renegotiating deals, talking to if it's landlords or other sides of that will impact the cost. We're also focusing on having a normalized business, not how to say stop all investments, still investing in our operation in the company. We will be able to develop positively revenue and all the effects for the quarters to come.
Now questions about electricity. Congrats on another solid quarter. Is it possible to provide some additional information on the electricity costs? What was the total cost in 2021? How are the rent contracts with regard to electricity? Are you paying electricity costs yourself, spot, or are they included as a variable part of the rent shopping centers, et cetera? I'll give some financial details, and you can do the rental contracts.
I mentioned in my part of the presentation that electricity costs in first half of 2022 amounted to approximately NOK 10 million compared to NOK 6 million last year. On average, our electricity costs are increasing by approximately or have been increasing by approximately NOK 2 million per quarter. As to type of contracts, we have a kind of a fixed contract in Sweden. We buy electricity in a sort of a portfolio approach. But in Norway we do spot rates, and it will depend. For some stores, we will have our own electricity for a smaller number of stores. Normally the electricity cost will be included in the invoicing from the shopping malls.
Our stores are a large share of our stores are located in shopping malls across the Nordics. When it comes to electricity in these stores, they are in general almost all of them invoiced from the landlord. We do not handle electricity costs ourselves or buy them spot. We are dependent on how the landlord does that. In general, I will say that most of the shopping malls are controlled by large companies, so they have much larger volume than we have and good purchasing power. I know that they also have a high focus on maintaining low electricity costs for themselves and also for us as tenants.
We have a really curious audience this morning.
We're far from finished. You're gonna love this question, Anders. Will there be a new location openings planned in Estonia? What about other Baltic countries? Any plans?
Other countries, no. That's not in the plan now. We have ambitions, plans for Estonia and Finland and also on the Swedish market when it comes to white spots. As I said earlier, we are negotiating leases in all these market. We have shown that Kid and also Hemtex in Sweden, Finland and the Estonian market is an important player in the shopping mall. So there's high activity on the lease negotiation side, and I think we can bring some more good news in the quarters to come.
With the risk of making a joke, are you experiencing any challenges related to increased turnover? That was not a joke, sorry. No, sorry, I misunderstood the question. Are you experiencing any challenges related to increased turnover or recruitment of personnel?
There is a challenging market. It's harder now for everybody to recruit personnel. We see we have recruited quite a few, both on the store side and also on the headquarters side lately. Kid has a good brand out there. We experience that people will join our team, our winning team. Although it's tougher than earlier, we managed to, how to say, help me out, Eystein, solve the problem. It's more challenging now than it's been if you go back before COVID.
There is a Marcus here being really active, and I suspect I know his second name.
A lot of good questions. What is your view on the apparent strong category performance despite current consumer budget headwinds? Any view on the replacement cycle of your core categories?
Historically, Kid has made good progress both with the tailwind and strong headwinds. We are positive in the years to come. We see now, going out of COVID, that the style has changed. People are buying different styles when it comes to bed linen, curtains, and homewear, which is a good position for us. They would like to either refurbish their home or redecorate the living rooms. Bear in mind that Kid is not about selling.
Expensive products
Expensive products. It's more about affordable products that all consumers can buy. That's a good position.
I think also reminding about our business model, which gives flexibility in what type of products to present. Even though gross margin might differ between different categories, we will present maybe products with lower prices. Or we could, depending on how customer traffics are developing, present products with higher prices.
We have bed linen from NOK 99 until NOK 1,600-NOK 1,700, so there's bed linens for all.
Uh, can you-
Yeah, sure.
Can you elaborate on differences in consumer behavior in Sweden, Norway, Finland, Estonia, in light of macro environment?
I don't think we're any macro experts. Maybe start with saying that.
Yeah, as you can see in the figure for Q2, I think we will leave it with that. We will follow the situation in the markets closely.
What is the average customer price increase versus-
Sorry.
This is about pricing in general. I'm gonna read just out loud word by word. What is the average customer price increase versus last year? Do you still increase prices towards customers? How is the current dynamics regarding price increases versus volumes? Think we'll do it as a general.
I think we do not disclose the price increase. It's actually hard to find the exact figure. We do have increased some prices, but not much. I'm not sure if you can fill me in, Eystein. Anything more to say?
Sorry, I'm trying to read all these questions at the same time. Sorry, what did you say?
No, if you help me out about the question. We haven't, we're not disco-
Do you still increase prices towards customers? I would say that we adjust prices on a running basis.
That's right.
We try and find the right price, and we have produts at affordable prices.
which I think we have proved during Q2. When compared with 2019, is it fair to assume that the summer trading has been aligned with the development in H1? That's a current trading question, basically. We do not disclose current trading. We realize that we're two-thirds of the way through this quarter, which means that the current trading in terms of revenue will only be about one month away, so we're looking forward to presenting those numbers as well. Following the successful launch of your outdoor range or summer products, are you planning any new product categories for the upoming winter season? That's a good question, Anders.
As I said during the presentation , there's been a high focus on developing both new categories and new products, meaning that, yes, you will see both new products within existing categories and new product categories that we will launch in the time to come. I think we will be happy to come back to that on when they are launched, not prior to launching due to the competitive landscape. There's been a high focus on that in Kid for the last 12 months, so we're pretty anxious to show you some new products in the quarters to come.
Have you seen a negative sales trend throughout the quarter, or was the growth evenly distributed? So far into Q3, is it more of the same, or do you notice any change in consumer behavior? In terms of Q3, I will just refer to my previous answer. Have you seen any negative sales trends throughout the Q2 quarter? I think it's fair to say that, perhaps retail in general are experiencing quite volatile situations, and we see also that sales can change from day to day. We do not normally comment upon the weather, but we have to admit that, once the weather turns to be 25 degrees and plus, maybe, less customers will visit the store. Apparently they are, at least on average, they're back the day after.
It might be variations from day to day and week to week, but in general, we are, as already said, really happy about traffic, both to physical stores and to our e-commerce platforms in Q2.
Yeah, we're happy about the sales, that's important to underline. We have, as normal, seen variation in the month and in the different market, but we see that in all quarters, and that's normal.
That finalizes my job as reading our questions. That was quite a lot in my opinion.
Okay. I would like to say thank you for listening to this TV show here at Arctic.
Make sure to visit a Kid store, or a Hemtex store in,
Yeah
in the months to come. It's gonna be exciting.
That's it. Have a nice day.
Thank you.