Good morning, welcome to this presentation of the Q1 result, 2018-2019 for Clas Ohlson. My name is Lotta Lyrå, and I am the President and CEO of Clas Ohlson. Today I will present together with Pär Christiansen, who is new CFO in Clas Ohlson since July 1st. It's actually been one year for me now. I would like to start by saying that I am extremely proud to lead this fantastic company. I'm very confident that we have a good plan to meet the future, and that we have a solid team to execute the plan. It doesn't make me satisfied. We have just started to roll up our sleeves, and that's a little bit the mindset of this quarter, I think.
Let me just briefly take you through the agenda. I will start with a business update, and then Per will take you through the financial development. We will comment on a couple of events after the reporting period, and then we will go into a short summary, and then a Q&A facilitated by Magnus Roman. Going in then to the business update. I would like to start by saying that Q1 is according to our own plan, both in terms of the sales we deliver and the underlying earnings we deliver. We see a solid sales growth of 6% sales increase organically, 10% in total, and 3% like for like. Online sales during the quarter grew 60%.
We see this as the proof or a sign of the relevance that our offer has a little bit independent of the weather. Again, the market conditions continue to be quite challenging. Still we manage to deliver according to our plan. The underlying earnings amount to 62 million SEK. I think this reflects quite well the market conditions that we have right now. We have costs in the quarter totaling 30 million SEK that is non-reoccurring or relating to the action program, Clas Ohlson 100 Plus, the strategy implementation that I will come back to in a minute, and sCORE. All in all, solid performance in our underlying operation and according to plan.
If I then take a step back, I think it's fair to say that we continue to see a retail landscape in change. Just the other day, the Swedish retail research institute, Hui, released a report where they signaled that the transition from physical retailing to online retailing goes faster than they expected. Of course, what's driving this is the underlying customer behavior that is changing. What we also see in all of our market is that the competition for the consumer's wallet is more fierce than ever, and it's a lot about competing on price. Exactly for these reasons, we believe that the work we have ongoing when it comes to making our offer even more unique and even further developing our customer service is really what's right to focus on.
What I also would like to mention is that I think that all of these movements in the market also leads to that challenging the cost structure in each retailer is more important than ever. There is really no other way to grow in a profitable way. This is the reason why we decided to make smartness and simplicity, one of 3 building blocks in our strategy. We will today communicate a little bit more details around this area and where our target is, and I will come back to that in a minute. Of course, all of this we are doing to create both short-term but also real long-term shareholder value.
I then comment a little bit on the approach that we have chosen. We have decided to, in parallel, expand our customer base and drive growth and challenge our operational model and our cost structure. During spring, we inter- for internal purposes, put all of these actions into a program and with a roadmap to go to it, go with it. It consists basically of growth initiatives and cost initiatives. Today we will also inform a little bit more in detail around this. We call this then an action program, and what do we mean by that? It's basically that we have taken the strategy. This program contains exactly the same focus area and content that the strategy did.
We would like to be a little bit more clear on exactly what we are doing, the effect of it, and when the effect will come. In essence, we have already communicated a financial goal of 5% organic growth. That together with a cost structure, a cost reduction of SEK 200 million-SEK 250 million, will lead to an operating margin of 6%-8%. We are working both to drive growth and to reduce our costs. To make all of this happen, we are investing 1%-2% of the operating margin in 2018 and 2019. Of course, we have spent now almost five years implementing the sCORE platform, and that's also the base that we build all of these components on. You have seen in today's report that we also now start to use the word underlying result.
What we are doing with that is that we are becoming more transparent on how the 1%-2% that we are investing is distributed per quarter. Going in to the growth initiatives to comment a little bit on that. First 2 points that really aim at increasing convenience for our customers. We have during summer implemented Click & Collect in all of our markets. We believe that this is an important step in order to make sure that we can be convenient, but at a very low cost for the customer. The second part is that we just a week ago increased the assortment that we have at MatHem.se from 800 to 2,000 products.
This is the highest level of convenience that we have right now in the online channel, where you can actually have products delivered same day or next day. Thirdly, a very important effort that is ongoing is that we are working with our assortment. During summer, we have addressed approximately 50% of our assortment. What we are doing is that we have basically analyzed the performance, and then we have put together an action plan to address what we need to address. This can entail changes in the actual product mix. It can have to do with the pricing, sales solution, or what may it be to increase sales per square meter. That is the purpose of this activity.
We will now during autumn do some tests on this 50% and then move on to the coming 50%. We are also working with our store optimization program, where we are testing some new formats. We are doing tests with compact stores in more rural areas, and we are also testing pop-up and lab store formats. Naturally, given what I started with, online sales development is really important for us. What we see during the quarter is that we achieve a growth of 60%. We still come from very low levels, and this is one of the reasons why we need to accelerate fast. During the quarter, we managed to get a 5% share online of our total sales.
Let me come to the cost savings initiative, where, as I mentioned before, we have decided to be a little bit more clear and transparent, compared to what we talked about in May. It's the same focus areas, but we want to be clear that we see a savings potential here of SEK 200 million-SEK 250 million that will be realized during the coming eight quarters and with full effect from financial year 2021. To give you some more information on the most important three areas here, and I will start with a more efficient organization. We have a headquarter with approximately 470 full-time employees.
I believe this is one of the potential that we have, in order to actually become more efficient, to work with the head count, especially in the headquarter, and that is something that we have started. As I mentioned before, we are optimizing the assortment, and that can lead to growth, but it's also the base for a more efficient sourcing setup. The reason is that as the product mix becomes more efficient, it also gives preconditions to actually consolidate volumes and get a better starting point for our sourcing. The sourcing in itself is then a big potential that we see. Today I would like to mention indirect purchasing. We purchase, things we don't sell, products and services for approximately SEK 1 billion in Clas Ohlson.
Here we see big potential in reducing that spend to contribute to the SEK 200 million-SEK 250 million total cost saving that we are aiming at for the coming years. With that, I would like to conclude the business update and hand over to you, Pär.
Thank you, Lotta. Moving on to the financial development. First part, sales. Q1 sales grew healthily by 10% to SEK 1,958 million, and especially online was up 60%, a focus area for us. Looking at the organic sales, where we have the target of 5% annually, we were at 6%, like for like 3%. We have added 14 additional stores net compared to Q1 last year. Looking at sales per market, we had healthy growth in all our markets. Sweden grew 6%, Norway grew 7%, Finland 4%, and outside Nordic countries by 13%. Looking at the gross margin, we had a gross margin of 38.5% in the quarter.
The increased commercial activities in the quarter, especially celebrating Clas Ohlson's 100 years, with our customers, had a effect on the margin. That said, all of the sales were contributed to gross profit. Looking at the currency and the foreign exchange, in the quarter compared to last year, we had a neutral FX. The different legs were of course contributing in different ways. We had a strong NOK contributing to sales, and we had a weaker US dollar contributing to a lower purchase price. On the other hand, we had our FX hedges and the currency effects going through our inventory that are lagging a little bit, and you can see that in the quarter report under our hedges.
Looking at the share of selling expenses, it was at 33.7%, up 1.6 percentage points. Especially here is one of the areas where we invest the 1-2% that we have told about before. That is one of the main reasons that is an increase. The admin expenses were up around SEK 10 million as previously communicated in Q4. We expect that to continue in Q2 as well as previously guided. Our profit landed at SEK 32 million with an operating margin of 1.6%. The earnings per share were SEK 0.47. Looking at the underlying EBIT that we started to communicate now, the underlying EBIT was SEK 62 million, and the underlying EBIT margin was 3.2%.
The investments in the quarter amounted to SEK 49 million. We had around SEK 7 million on stores and refurbishment, and SEK 33 million on IT systems. Also to mention, as Lotta said before, that the sCORE platform is now implemented, which will of course affect the investments going further. We have a strong financial position. We have the cash flow from operating activities SEK -28 million. Inventory amounted to SEK 1,937 million. Worth mentioning it was down SEK 100 million from Q4. If you look at the historical numbers, we usually grew between this quarter. I think last year we grew SEK 65 million between Q4 and Q1, and now we were down SEK 100 million. This was part of our plan to reduce the inventory from the sCORE implementation.
The turnover rate for the inventory was 6.2, and, yeah, then concluded that. Cash flow after investing and financing activities was -SEK 70 million, net cash of SEK 37 million, and we have right now approved credit facilities of SEK 650 million, so we have a strong position right now. The proposed dividend is SEK 6.25 per share, equivalent to 115% of net profit for the full year 2017-2018, and it's in line with the dividend policy. Good. Today, we also reported the August sales. The sales amounted to SEK 725 million, up 8%. We had growth in all our countries, Sweden up 2%, Norway 13%, Finland 14%, outside Nordic 11%.
Looking at the organic sales, it was up 4%, like for like 1%, and online grew 31%. We have added 13 additional stores compared to August last year. Handing back to Lotta.
Thank you, Pär. To summarize this quarter, first of all, Q1 is according to plan, both when it comes to the sales development and underlying profits, as well as reported profits. We are confident in delivering the 4%-6% EBIT margin for the full year 2018-2019 and 2019 and 2020, as we have previously set out. We have really full speed ahead on implementing the initiatives that I mentioned before. The reason for that is, of course, that the quicker we get the growth, the quicker we get the cost saving, the better the result will be. But it means that we are front-loaded cost-wise in this quarter, and it will most likely also affect the next quarter. What are we doing then?
Well, we have a number of initiatives when it comes to driving growth related to convenience, but also to optimize sales per square meter. That is important parts to take us to the 5% target. We are working with a number of cost saving initiatives within headcount, within sourcing, within product mix to achieve SEK 200 million-SEK 250 million of cost saving. Of course, all in all, this is about after 8 quarters delivering 6%-8% profit, and this will be done in the year 2021. I think with that, we are ready for Q&A. Over to you, Magnus.
Thank you, Lotta and Per for the presentation. I can start off perhaps by asking a little bit about the sales progression. I mean, over H1, if we look calendar-wise, you clearly saw an improvement sales trend with positive like for like sales. Coming into the last 3 months or so in the summer, I guess June sales was clearly boosted by your 100-year celebrations. In July, you reported negative like for like sales, and in August here, you reported slightly positive like for like, but it was based on a very easy comp, I'd say, since like for like sales was negative 3% in August last year.
Just putting this sales progression into perspective of what you mentioned in the presentation, Lotta, about the shift in the retail industry, would you say that this is due to an acceleration of this trend, or is it only weather related, what we've seen in the recent months?
I think this summer, it would be naive not to say it's a mix, actually. I think also we see pure online players indicating that they have been impacted by the weather, so to say. So I think that's a sort of an industry impact. I think it's a little bit both/and.
On the cost savings that you give us a bit more detail around in this presentation, you mentioned sourcing as an important part there. At the same time in this report, you mentioned increasing sourcing cost as a driver to the weaker results in Q1.
Should we see that as a temporary effect, or are you seeing a pressure upwards in the sourcing in general?
I think what we need to address is much more structurally how we work with sourcing, both in terms of how we actually work with suppliers very practically to achieve a more efficient value chain, but also to actually broaden our sourcing markets. The ups and downs that you see in this report is more a consequence of raw material moving and so on. What we will address in the cost saving initiative is much more structurally, because I think it's about having another platform for our sourcing that will make us long-term successful in this area.
Broadening to even further sourcing markets, there is no risk that that will require more from the organization that you were seeking to reduce headcount in the central organization?
I think the net effect of this headcount work will be that in some parts, we will have to increase competencies, and it might be right, given what you are saying. In other parts, we have a big need to streamline where it's much more about, you know, transactional efficiency-based work. It will be both/and, but the net is that we will be fewer.
Can you help us with any lead there to. More examples of what central cost you were thinking about?
No, I think we have identified a number of different areas and, it's no, I don't want to go into the details of exactly which department they will do what. I think if you look at central resources, you normally have a mix of transactional work, making sure that, you know, things are paid and, all of these things. You have more core and more non-core activities that you can also work with. You have the development activities, where I think it's also important to say that if you look at, for example, marketing, right now, it's quite a drastic shift toward digital marketing. Of course, we come from another background with more, paper-based marketing. That also means something.
There are different components that will enable us to achieve a headcount reduction.
The final from me before I leave over to the audience here, on the Amazon trial or actually the commercial launch on Amazon in U.K. that you plan for the autumn, can you give us any lead to the selection you plan to enroll or list here? Is it comparable to the MatHem cooperation or are there any differences?
We see this as a test to understand a little bit about the potential, but also actually to learn how it is to work with an actor like Amazon. I mean, it's no big magic here. Of course, it's our own brands that we will prioritize and then see what else. That's really the focus.
Okay. Any questions in the audience? One back here, perhaps from Andreas.
Thank you. Andreas Lundberg with ABG. On the cost savings, you talk about SEK 250 million, which is sounds like a very high number given your EBIT last year was short of SEK 500 million. Is that the first, a clean number or do you need to take any cost to achieve those savings?
If I start with the last question, the 1%-2% that we have already guided on, what we need to sort of invest to achieve the SEK 200 million-SEK 250 million is included in those 1%-2%. There is no extra cost in order to achieve that. I understand that it can sound like a high number, and that's one of the reasons why I also mentioned that we have, we purchase goods not for resale for SEK 1 billion today. We have just below 500 headcounts in our headquarters. I think we have done this work very thoroughly, otherwise we wouldn't be releasing the numbers.
The SEK 200 million-SEK 250 million we are very confident about.
Maybe I'm being stupid, but could you clarify this sourcing, you know, SEK 1 billion you talked about more in detail?
Yes.
What does it mean?
It's basically services and products that we don't sell. It could be everything from toilet paper to IT consultants, or marketing agencies, or coffee in our offices. Everything we buy to run the business that we don't sell.
Got it. What savings comes first now? I think you said it will come gradually from now.
Yeah, I mean, some of these effects, per definition have a little bit of lead time. For example, on the cog side, it needs to go through the inventory, and therefore there is a lag. It will come gradually. What we are saying is that it will happen during these eight quarters. As of financial year 2021, there's a full effect. That's, that's the information we released today.
Thank you.
Perhaps a question in the front here from Nicklas.
Thank you. Thank you, Magnus. It's Nicklas Fhärm with SEB Equities. Good morning. I would like to ask you, thanks for clarifying the full year guidance. Offers a lot of comfort, of course. As I interpret it, at the same time, a bit of a warning on profits for the next quarter or Q2. Is that reflecting the need to get really ready ahead of fiscal Q3, which in your case is abnormally important every year? Is that how we should interpret the perhaps slightly higher need to continue to invest in this current trading period? Should we expect a similar margin decline in Q2, i.e., 4 percentage points year-on-year?
If I take the first one, and then you can follow up. No, I think the primary effect is actually that we are investing in these cost initiatives to get going on that as quickly as possible. It has more to do with the Action Program than the actual seasonal effect. You're absolutely right. That's always, and also for this quarter, where we believe that it's more important than ever to be prepared for Christmas, given the competitive climate. A little bit both/and, but mostly related to the Program. The gross margin.
Yeah. The gross margin.
The EBIT margin.
EBIT margin.
The EBIT margin.
O kay.
I guess it's also related to the gross margin itself. I say, if you look at Q4, we had 3 components affecting the gross margin with currency, with one-time costs, and also promos and marketing. In this quarter, we more talk about the marketing and promo parts. Currency will be less affecting us going forward, given everything will be at this stage and the one-time cost is no longer there. I understand that it's hard to do a quarterly, you know, assumption from your side. Therefore, we, I mean, we guide the 1%-2%, so I guess that one you got pretty well, all of you.
Then each quarter have a little bit of a more strong or weaker in terms of the sales, which will then affect the absolute term. I guess into Q2, we will have the normal seasonal effects building up for Christmas, as you say, both in terms of capacity, but also capabilities. We had, you know, the sales for the hundredth birthday. We, I think we sold 3 times as much as we thought in terms of, you know, visitors on a webpage. We have now introduced Click & Collect, so we are preparing for that sales period, and that will affect the Q2.
Same with some of the marketing costs that we take, you know, in Q2 that will then be launched in Q3. There's a combination of this.
What does that mean? Does that mean that margins are gonna be down by 1-2 percentage points or by 2-4 percentage points as in this quarter?
We don't guide. I mean, we have communicated an underlying result today, exactly how much we have invested, the SEK 30 million. We have guided on the 1%-2% on full year. We also say that we are confident when it comes to the 4%-6%. In addition, we are saying that it's slightly front-loaded for this quarter and the Q2. I think that's as far as we go today.
Fair enough. Thank you. My next question would be, when we look at working capital development, so obviously inventories grew by about 14% year-on-year, sales 10-ish. I was just wondering, sorry if I missed this in your presentation, but are there any particular reasons for why inventory to sales will come down and improve working capital developments throughout this fiscal year? Should we expect a little bit along the same lines in terms of an underlying trend.
Yeah.
For cash flow?
I understand. We build up the inventory a little bit for the release of the sCORE program in May, and that we have seen that we're taking it down. We're not fully done with that. There's underlying trend going down. For the quarter, we added some 14 stores.
Times 4 million, SEK 60 million up in just volume. I guess we believe that we will have our underlying trend a little bit going down, then also meeting the build-up for the Christmas. When you look at it, what is what, I guess it will be difficult, but comparing apples and apples, we will have a little bit of a decrease in the inventory because of the sCORE release that we will see. We also see that right now we have a pretty good inventory for the normal products for the Christmas, so we have already started that build-up. I think no big surprise on the inventory levels.
Any further questions here in the audience? Do we have any questions from the telephone conference?
Ladies and gentlemen, if you do wish to ask a question and you've dialed into the telephone conference, please press zero and then one on your telephone keypad now. No questions registered on the cell phone lines.
Firstly I could just then tie into the question from Nicklas on your guidance here, your 1 to 2 percentage point guidance. You related a little bit to the Q4 quarter, where you had around 5.5% year-on-year decrease in your EBIT margin, and there you were quite specific saying those 3 different drivers were sort of equally waiting on results. Now you're saying that the one-offs are gone and then the FX will neutralize. Implicitly, if you're not gonna be increasingly aggressive on promotional activity in the coming quarters than what you were in Q4, it implies that you would be on a quarterly basis in the range of 1 to 2 percentage points. Is that reasoning fair?
It's not unfair.
Okay. Okay. Yeah, I'll hand over to. I think it was a follow-up question from Nicklas as well here.
Thank you, Magnus. Can I just ask, obviously I understand and appreciate that sales per customer is very important rather than like for like going forward-
For obvious reasons. Still, sales efficiency rates are gonna be, I think instrumental to the investment case.
My question is, could you at this stage give us some kind of feeling for the number of stores, say, year-end fiscal 2018, 2019, and perhaps some more information on the number of square meter developments? Because so far you're continuing to expand, of course, in, on both metrics. Please.
Yeah. You can say that we are, as we informed about already by Christmas, we are following through with what was contracted. That is what you see coming in right now. We have implemented a much more strict process to actually approving new stores, are extremely restrictive to that, I would say. The approach we have taken, I think I said in the capital markets day, we have gone through every single store, what we conclude is that we have a handful of stores, or even a little bit less, that are actually bleeding, meaning they don't contribute result-wise. The other ones are actually contributing result-wise. Therefore, we have decided not to launch a store closure program.
Instead, we are using the normal break options and the normal possibilities for renegotiation that we have to decide do we step out or do we continue to run. Approximately 50% of our stores are up for this consideration during the coming 2 years. That is the approach we have chosen. It's actually a case-by-case exercise, because at the end of the day, it's about if you have a certain amount of sales relating to a store, it's about ensuring that you can serve those customers in another channel or through another store. One of the things we have done, for example, in Finland, was that we decided to close 1 store and relocate it because that was more favorable.
This is the way we work with it, and right now we don't release any specific numbers regarding the square meters or the number of stores, but this is the approach we've chosen.
Just a quick follow-up anyway. Do you think that the average floor space will have shrunk at the end of this fiscal year? I mean, you should have some possibilities.
Absolutely.
Even within breaks
Yes.
To sort of reallocate space.
I say like this: We are working a lot to increase sales per square meter, because I think it's also about when you sit with a certain portfolio of contracts, what we can always do is increase the sales per square meter. That I think is the quickest way, in a way, to actually get the efficiency up, and that is our main focus.
All right. Perhaps final question. Last famous words. I was just wondering, in August, as I think you said it yourself, it's been a complicated summer trading.
Yeah. Yeah.
Nevertheless, my question is, you produced a percentage point of like-for-like.
That's good. probably better than most. I was wondering, did you have the same promotional activity, I mean, deliberate promotional activity in this month as you did in fiscal Q1, please?
No, I would say that we actually decided to be a little bit more conservative. The reason for that was that we could actually see the impact of the weather conditions. Also, if I connect to what Pär mentioned before, we had a fantastic online Q1, right? That also put pressure on the different parts of our value chain. We decided to hold back a little bit on promotions in e-com in August in order for the logistics to catch up. I, you know, and in that context, again, I think 1% like for like and 30% online is a number I'm quite happy with.
Thank you.
All right. Are there any further questions in the audience? Maybe I can round off with one or two. When it comes to the logistics and deliveries.
Yes.
Improvements, can you give us an update on the status of the refitting of the Insjön logistics center to better handle single parcel deliveries as a number one? Perhaps also help us with an update on the status of utilizing feeder stores.
For quicker deliveries in the periphery.
Absolutely. We have installed a new packaging machine in the D.C. in Insjön in order to remove one of the bottlenecks that we have in the eCom flow, which is a lot less automated than the normal logistics setup we have there. Then we have done a lot of continuous improvement work. Still, as I just said, it's really one of the most important things going forward to look into how to really make that efficient. The feeder store setup, we are working hard to get in place for Christmas, and that is still the plan.
The purpose with that is, of course, that it gives us the possibility to, together with the last-mile providers, allow customers to shop with us online, almost to the day before Christmas Eve. There's a big commercial potential in that, apart from the convenience that it will give.
On the first reply here on the central capacity for single parcel delivery, would you say that if you saw online sales penetration come up to 10% in the near-term future, are you rigged with the technology you have today to meet those volumes without delay?
It's a good point. What we are actually doing right now is that we're looking at our eCom business. If it's SEK 1.5 billion, which is actually what it would be, if our targets are fulfilled, how would we then work with that fulfillment? Because we believe that's a little bit how we need to work now, right now. Make sure that every customer is happy, release bottlenecks, continuous improvements, but then also take a step change. We are in the middle of that investigation.
Okay. Perhaps also just the final one on the Clas Fixare service, the rollout plan here.
If you can help us with that as well.
Yes. We are still planning for a pilot beta test before New Year's in Sweden, Stockholm, to be more specific.
Okay. If no further questions, I think we'll round off there.
Thank you.
Thank you.