Clas Ohlson AB (publ) (CLASB) Earnings Call Transcript & Summary

Okay. Good morning. Sorry for that delay. We had some technical issues with the sound, but I really hope that you can hear me now. So a big welcome to the Clas Ohlson Q3 report presentation. My name is Kristofer Tonstrom, and I'm the President and CEO. And with me today is Par Christiansen, our CFO. So we'll do a short presentation before we move into the Q&A. I'll cover the business update and Par will take us through the financial development and the events after the reporting period. And then I'll summarize and look ahead before we move into the Q&A. So looking at the third quarter, which is the most important quarter for us, we're closing a quarter with strong profitability and a very stable overall result with SEK378 million operating profit and an EBIT margin rolling 12 months of 6.9%. We've grown sales in the quarter, 7% and of which 14% is our online business. And very encouraging is also that we have continued to grow our customer base, and we now have actually more than 4 million active Club Class members. We're also reporting our February sales numbers today, where we see total growth of 8%. And obviously, during the quarter, it's been a very -- we have, of course, been influenced by the macro environment, both from a pandemic point of view, with 2 out of 3 months still influenced by restrictions. And as we now look forward, obviously, with the terrible war going on in Ukraine, we're not directly impacted at Clas Ohlson. We don't have any business or organization, either in Ukraine nor Russia. But of course, it -- apart from the emotional impact on everybody in the organization, it's obviously might also have other impact in terms of macro environment. Looking a little bit more into the details of the third quarter. Our organic and like-for-like sales was up 5%. And looking at our total sales number, we have seen lower traffic to our stores. And despite that, been able to grow the totality. And that has been driven by our conversion rate and the fact that we've been very relevant with our offer during the quarter. As said, online sales have grown 14%, and it's also encouraging to see that we have a slight increase on our gross margin despite input costs and other things having gone up. Our EBIT margin is 13.3%, and we continuously -- and we continue to build on the very strong financial position that we have. Looking at our overall focus areas that we have talked about now for this full fiscal year. The first one is about strengthening in our key product categories. And here, we do see encouraging results on the categories that we have been focusing disproportionately on. A category like cleaning, we've been growing actually 50%. And if you look at food prep storage, it's been growing 20%. So we see high growth on the categories that we overinvest in and focus on. We're also putting in the next level in terms of more emphasis also on attracting the best A brands to Clas Ohlson. We already have approximately half of our sales in products that we -- our own brands and no name brands. And we also see a big value of closing new upgraded agreements with the leading A brands to ensure we have an optimal mix for our customers. And obviously, having the right A brands is also a way to sell more private label. Looking at the second focus area, which is all about capturing traffic. The -- as said before, we have grown our total Club Class membership to now about 4 million. And I'll come back with a couple of numbers on that. Second, we've also now for the third year in a row, being awarded the best customer service in Sweden by Brilliant, our service provider on customer care. And this is obviously by real numbers from millions of customer interactions throughout the year. And it shows that we really have the ability to give the customers to service that demand from us. We've also seen higher conversion rates, both in our stores and also online in the third quarter. And another encouraging fact is that we have been much become better and better in terms of our last mile delivery from our e-com. Still almost half of the business goes via the physical stores, and our customers still choose Click & Collect. And half of the customers that pick up products via Click & Collect also actually pick up other products while they come to the store. So that's also encouraging. And then the third focus area is about growing e-com. And here, we are working even more in terms of differentiating between channels. So we have introduced both online exclusive campaigns, but we're also looking at a broader assortment online to ensure that we really give the customers what they're looking for in an online context. We've also built out our feeder store capacity in Finland because with our central distribution center in Sweden, we want to have a strong local logistics network in Finland and Norway. So we've also done that during the quarter. Looking a little bit more into the Club Class development. We do see active member growth across all the 3 markets. And we know that the most active members, the ones that are most loyal to Clas Ohlson, they actually spend 4x as much as an average member. So seeing the active member growth going up and seeing the amount of high-value customers going up is encouraging. And as you can see at the bottom here at the slide, we have done a lot of activities to increase the relevance and attractiveness of the Club Class offer. So we have both launched everyday membership prices on consumable items that our customers come back to a lot, but we're also starting to become more sophisticated when it comes to more personalized offers and the more triggered offers based on customer behavior. And on our customer service and customer satisfaction, we continue to have a very solid NPS, great NPS numbers across all the physical stores, which is really building our brand, great customer NPS also in our customer care, and we have seen an increasing NPS also in our own line, and that is also becoming strong now, which means we are above retail industry average in terms of overall NPS levels. Also encouraging is the product reviews, which we track on a going basis. And here, we're both above target, and we are improving when it comes to the customer satisfaction with the products that we're selling. And then on our sustainability priorities. We have accelerated a lot of work during the last quarter when it comes to our product sustainability assessment model, where we look through every new product that we launch through a certain set of criteria to ensure that we do everything to drive longevity of the product, ensuring the right choice of the material, the right choice of manufacturing, et cetera. So since Jan 1, we're now analyzing every single product across our private label assortment. We have also put in extra effort in terms of sales of spare parts. We see that our customers are looking more and more for spare parts to products they bought so they can actually fix products rather than buying new. And we have seen more than 30% growth during the last 6 months. And you'll see on our website that we're upping the assortment of on spare parts. When we come to our suppliers, 99% of our suppliers are free from critical findings in relation to our Code of Conduct, and we continue to monitor this on a going basis. And we also now have conducted environmental audits for more than 71% of our purchases volumes. And then, of course, we continue to build capability and knowledge and insights across the company with our Sustainability Ambassador program across all 7 countries. So with that short intro, I'll hand over to Par to talk a little bit more about the financial development.

Thank you, Kristofer, and Good morning, everyone. Looking at the sales development in the third quarter, we saw total sales go up with 7% and organic sales up 5%, like-for-like sales up 5%. Moving on and looking at the sales per market then, a little bit understanding how we have rebounded since the pandemic. We now have a 10% increase in Sweden compared to last year, but still a decline compared to 2 years ago. Looking at Norway, we have a 7% increase compared to last year and also increased compared to 2 years ago. In Finland, we have a decline with 2% compared to last year, but still 17% compared to 2 years ago. Looking at online sales in the third quarter, it grew 14% and now corresponds to 12% of total sales. If you look back 2 years, we have then grown 82%. Looking at the first 9 months, Q1 to Q3, total sales was up 4% and organic sales up 2% and like-for-like sales up 2%. Online sales is up 21%, and we have added 1 store compared to the previous period. The gross margin in the third quarter grew somewhat to 41.5%, and it was positively impacted by the weaker purchasing currency, the dollar and also positively impacted by the sales currency NOK. On the negative side, we saw a little bit weaker product mix and a little bit higher campaign intensity and also a little bit of a rebound of the hedging effect from NOK and also the currency forward exchange rate effects related to the inventory delays. The share of selling expenses grew somewhat to 26.3% of sales, a little bit higher than previous year. That was 25.9%. Administrative expense was SEK 51 million. It was somewhat higher than previous year, but lower than 2 years ago. And we still have a continued cost focus in the company. Then looking at the operating profit in the third quarter, it amounted to SEK 378 million, and the EBIT margin increased to 13.3%. We have earnings per share amounted to SEK 4.53. Looking at operating profit for the first 9 months, it's now SEK 729 million. The EBIT margin is 10.4%, and we have earnings per share amounted to SEK 8.49. The investments for the first 9 months amounted to SEK 116 million, which is a little bit lower than previous years. And the main area source into the stores, IT systems and also into the distribution systems. The inventory level in Q3 amounted to SEK1 950 million. And we see it as a well-balanced inventory. So that means that we are well equipped for the fourth quarter coming and also Q1 soon. It was, of course, impacted by external factor as input costs and transport cost, but we see it as a very well-balanced inventory given the situation. Cash flow for the first 9 months was SEK 923 million. If you look at cash flow from investment and financial activities, it was minus SEK 889 million, and we have a net cash position in the company. Then looking at the events after the reporting period, we today also reported the February sales. It was up 8% to SEK 534 million, which means also organic sales was up 4%, and like-for-like was up 4%. Online sales was down 9%, but it should be seen over 2 years, it increased by 93% compared to February 2020. We have increased by 2 stores compared to the end of February last year. And as Kristofer mentioned before, we're still quite impacted by macro trends in the world, and we see big changes now in both the NOK and U.S. dollar. And of course, there could be other changes of input cost. We, as a company, do what we can to work with pricing, looking at sourcing and different sourcing markets. Of course, also working with the sales mix and the products and packaging to mitigate everything to continue to defend a decent gross margin. Handing back to Kristofer.

Thank you. So summarizing and wrapping up before we move into the Q&A. So as we talked about the previous quarters, we will always continue to build on our strengths. We are playing in a very attractive SEK 90 billion home improvement market. We have a strong financial position. We are becoming more and more of a leader in terms of sustainability and our brand and market position is incredibly strong. We have 200 million customer visits every year and very high customer satisfaction. So we do see a lot of compelling growth opportunities, and we are very much equipped with the team that is agile, has the right capabilities, and I think has proven over the last couple of quarters that we can very much adapt and focus on the things that we can influence even in very uncertain macro environments. We have our Blue Heart strategy to drive happy co-workers that drives happy customers and that drives shareholder value over time. That's our focus. And our financial targets remain unchanged, delivering 5% growth and 6% to 8% margin -- operating margin. The focus areas obviously remains the same for this year with a big focus on the product categories with a 90% household penetration, 200 million customer visits, it's all about what we are actually offering to our customers. So we're looking more and more on the relevance of the assortment and ensuring that we expand on the right areas and have the right balance and mix between private labels and external brands. Same thing when it comes to capturing traffic, we do have high traffic, and we need to continue to drive increased conversion, increased average ticket value. And here, the Club Class focus is an incredibly important area, focusing on the core customers that represents a big part of our profit and sales. And then when it comes to e-com, we have done a really good job when it comes to fulfillment, and we are now delivering strong customer service and the last-mile delivery options that our customers are looking for. So it's all about integrating online even more in our fiscal store offer. And also here, it's a lot about the right assortment and offer to drive continued growth. So looking forward, as said, we have a strong financial position. We're financially prepared for all eventualities coming our way. Again, as Par said, we also have a strong inventory with the right products, we believe, for the spring and summer period. And we are more and more prioritizing initiatives to drive revenue growth. Also, we'll send out an invite as we then do the Q4 report on June 8. We'll also in combination with that, do a Capital Markets Day, where we'll talk a little bit more about the year that we're now starting on May 1 and a little bit more looking ahead. So with that, we'll move into the Q&A. So we have Jelena here moderating.

Thank you, Kristofer. So we will open up now for the Q&A session, and we can start off by asking the operator if we have some questions from the teleconference.

We do. [Operator Instructions]. And the first questions already come in from Carl Deijenberg at Carnegie.

Okay. Perfect. Sorry for that. I think I was muted. I got my first question is on the -- on your purchasing exposure in the US dollar. If you could maybe remind us sort of your direct and indirect purchasing exposure in US dollars? And maybe also a bit on what you've seen here in the recent month. Have you seen sort of suppliers of A brands in particular already starting to raising prices given that the interest costs have risen significantly recently? Or what's your take on that so far?

But I think if you look at the direct exposure to the dollar, our main purchasing market is China, where we're mainly purchasing in dollar. And of course, even if we purchase A-brands from a Swedish or European distributor, there will be a transfer of currency costs also in that relationship. So I guess, overall, it's a quite big exposure of dollar over time. We -- as we mentioned in the report, we hedge our purchasing in dollar also to a little bit balance these effects over time so we can adjust selling prices in relation to that, if necessary. If you talk about the -- the purchase price per se. They have been a little bit coming from a situation where we have been able to lower cost over time until recent months where it's a more balanced situation where the most suppliers want to increase the cost either because of raw materials. But of course, there are also other input cost as labor, and you probably can expect also energy costs now be transferred to the product price as well with electricity and other costs for producing the products. But so far, I guess, it has been a balancing thing. And going forward, we've probably shown in the projects we sell since we have a little bit of a delay of the inventory. And one way of working is, of course, working with the suppliers to change the product design as well as looking at other sourcing markets. And I guess, at the end, there will be a discussion whether we can transfer this cost to the end consumer or if that will not be the case dependent on what kind of product and price elasticity of course.

Let me just add one thing is, as I talked about, we are looking at renewing and closing even more strategic longer-term relationships with the best A-brands. And we also believe that -- and we see that we are a very attractive retail destination for 200 million customer visits. So we also see a big willingness from our branded suppliers to work on growth plans together. So we need to manage price, we need to manage costs, but also we want to have better partnerships so they also invest in growth together with us.

Okay, very well. And a follow-up on the topic. I mean, now we discussed mostly input cost, but could you say that also what you're seeing on the shipping side, maybe from Asia, in particular, has sort of container prices started to flatten out or come down a bit? Or what's your near-term feeling there?

I mean not talking about the most exact recent situations now dependent on what will happen to cost related to the crisis. I guess, before we saw a lowering price for contracts that are longer and longer. And I guess also, if we fix the prices, we will get a better price. And that, I think the price is a little bit peaked a couple of months ago. And I guess if you go out and buy shipping on the spot market, it will still be quite expensive. So I guess, for us, it's to have a more planned situation where we have fixed price and we have containers going out in a very structured way, then we will have lower prices over time. Of course, this recent situation could affect both the container as well as the freight itself. There was an article yesterday about how many people coming from Ukraine and Russia working on the transportation ships and other costs, of course, but that has not been seen. We had a quite good situation coming out with goods before the Chinese New Year. So we were quite confident on that. Now it will be a little bit of a calmer period for us before we start the new buildup for next Christmas, I guess. So it's still too early to say what will be the new trend, but we have seen lower prices over time since it peaked.

Okay, very well. And I think my final question is on the current trading year and the sales development in February that you reported this morning as well. I'm just curious of maybe your own thoughts here, what you've seen in February. I mean, given that all restrictions have now been dropped, has the sort of reaction or the return in footfall in physical retail sort of been in line with your expectations? Or how did you expect sort of a quicker recovery here in February? Or do you see it more as a sort of a gradual return?

Yes. I mean we do see a gradual return. So looking at February, Norway, obviously, lifted restrictions, Sweden in the middle of the month and then Finland was delayed to the end of February and are really opening up fully now. And there was not a big effect from one day to the other. It was very much a gradual return. And obviously, we've seen both in our company, but also from a customer point of view that a lot of people have stayed home based on restrictions, no restrictions. But if you look at sick-level et cetera, we have seen a lot of people actually during this time having to stay at home. So gradual increase. And obviously, with our high-traffic areas in terms of store locations, we also expect that the more customers and people come back to their workplaces that obviously will have an impact. But looking isolated at February as a month, we still saw a lower footfall to the physical stores. We saw a 8% growth, but gradual and not big from one day to the other effect which was a bit similar to as we talked last fall where we looked at the reopening, we really started to see the effect in November, and we saw more of a gradual return in September, October, and that's been our hypothesis as we look towards the spring and the summer now with a gradual return while, of course, without restrictions, that's a net positive for us.

And you can also add to that, that February is usually quite a neutral month for us with both a lot of winter holidays as well as not any big changes in the assortment. We will change the assortment now in March, which hopefully will then go into more spring-related feeling. And also now people are back from schools and everything. So I guess there's probably a more natural way to return in terms of traffic towards to our stores.

The next question is coming from Magnus Raman at Kepler Cheuvreux.

Thank you. I will follow up on similar topics here. If we start with the end here at the current trading, February sales was, I guess, quite soft, considering the very unchallenging COVID streak in comparison that you met here. And you mentioned a gradual customer traffic recovery here. But have you seen any behavior shifts among consumer here? Any trading down behavior? Have your average ticket prices or average order values changed in February. Did you see any mix shift in favor of your private labels? Any such pattern you noticed?

I mean I think we always need to be a bit careful when we look at an isolated month of looking at the overall trends. But looking across now both the quarter but also the Jan and Feb, we have seen obviously that our ability to increase the conversion has been there, which means that we've had a very relevant offer. Also looking at ending the Christmas period, looking at our inventory situation now, we have very relevant products out there. So we don't sit with a lot of redundant stock from Christmas, for example. And we haven't seen any big behavior changes across Jan and Feb when it comes to product mix, et cetera. But a little bit as [indiscernible]. It's also a little bit of an in-between period before we come into spring. Then obviously, more recently, over the last 1.5 weeks, especially in Sweden, we have seen some behavioral change with products that customers buy in more kind of prepping for more prepping reasons after the government communication and information, especially in Sweden. So we have seen a little bit of that product mix shift. But apart from that, no other big trends that are worth discussing for Jan-Feb at this stage.

All right. That's helpful. And then also an FX-related question for the gross margin here. You mentioned, of course, with regards to the weak Swedish Krona versus the dollar that you have hedged contracts that mitigates this effect to some extent during a period and whereby afterwards, you might have an opportunity to alter your pricing versus end consumer. But in terms of the strength of the Norwegian Krone, can you help us here with the hedge contracts will that sort of beneficial translation come through straight away or with that be mitigated by hedge contract?

Yes. I mean if you look at both currencies, I guess, as you said, the Norwegian Krone will give a positive impact given these levels. We haven't seen them since the last crisis 2014 with the [ grim ] situation. So they're quite high. And given if everything stays at this level, it will be, first, a very positive effect from the Norwegian Krone and then I guess, the effects from the high dollar will come later. So the coming quarter, if everything is the same. I mean given that it will be a positive effect in the coming quarters from all currency, including hedges. And then I guess it depends how this will level out.

Great. That's really helpful. And just finally on the gross margin. I guess that you're not fully satisfied with the top line you have generated recently. And of course, as you mentioned, you've had new restrictions and so on, and you hope for those to ease or they will be lifted or are lifted from now. But in terms of price investments to support your top line growth, how is your thinking strategically there going forward?

No. So I mean, obviously, we do work a lot with prices every single day, and we need to always be very aware of the customer reaction on different categories. We track our pricing competitiveness on all the categories versus key competition. And obviously, we know that some categories are more elastic than others and impact volumes more than others. Others build the brand if you are competitive. So it's really about finding the balance here. And obviously, the good starting point for us is that we have more or less 50-50 in terms of external brands and then private labels. On the external brands, in a fully transparent online world, obviously, you need to be competitive, and we work a lot with being competitive there. Whereas on our private labels, where we play within certain categories, product groups in a fairly unique way we have a bit more flexibility. So our job is, of course, to balance that mix ensure that we can maintain a strong gross margin, while, of course, as you say, ensure that we invest also in pricing in a way to drive volumes to really get the revenue growth. So that is the constant balancing act. But longer term, we always need to look at the customers' value perception of us and also the competitiveness and price elasticity. So that's an ongoing work.

And do you have a strong opinion also the net of these factors if that will be somewhat an increase in price investment or if it could be rather flat?

I mean as Per said, of course, there are a lot of different input factors impacting our gross margin. And if we stay on that, our job and focus is to maintain a solid gross margin. And I think we've proven that over the last quarters, despite input costs going up. So of course, mix will always be a driver, but we're not preparing for bigger gross margin impacting price investments. It's really about the balance.

[Operator Instructions] There seem to be no further questions for closing remarks. I go back to the speakers.

Yes. And we have some questions from the webcast from Stefan Stjernholm from Nordea. And he is asking what share of sales do private labels stand for today? What's the potential that we see? And is there a targeted level?

Yes. So looking at private label in terms of plus also some branded products, it's 35% of sales approximately. And then if you add on other no-name products, as I said, it's more 50-50 between products we influence and then the external brands. And our aim is to grow the totality. And we believe that this 50-50 balance is very healthy. We also think comparing us to other retailers, that is a very strong base level. So we very much want to continuously be strong on private label can keep growing that. But we also, as I said, see opportunity of adding on more strong external A-brands to ensure we have a complete customer offer. So staying a little bit where we are or at the balance, I would say, is the focus and not exploding the one or the other but finding the balance there.

Yes. And there is another question which we have already touched upon. And it regards price inflation when it comes to sourcing and if we are expecting to set this off with price increases and whether it will be a delayed effect.

Yes. I think we have answered that more or less.

Yes. I mean Kristofer said it's a balancing act between hiring and lower prices because, I mean, you need to make sure that you're relevant. And I guess, if it's possible, and everybody accepts price increases, it will come through all markets right now because of input inflation, but I guess there will be a balance, so you are relevant.

Yes. And then the final question from Stefan is that inventory has gone up during the past year from the last Q3 by 24%. And he's wondering how much of the growth is foreign exchange transaction costs related with regards to inflation.

I mean I will not go into the composition of the inventory value. But of course, there's price inflation, there's currency effect and transportation effect affecting these prices. But actually, the main message we want to give is that everything in the inventory is in as relevant products, which means that they will be sold probably at a relevant price given the situation. So I guess that's the main thing that we focus on.

Yes. And with that, we have no further questions from the webcast either. So I hand it back to you, Kristofer, for some closing remarks.

Okay. So thank you very much for dialing in today, and thanks for the questions. And sorry for the slight delay at the beginning with the technicalities. So -- but with that, thank you very much. We'll see each other again in the -- as we report Q4 on June 8, and we'll also send out an invite for the Capital Markets Day related to that date. So thank you very much.