Kid ASA (KID) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to this Q2 presentation for Kid ASA. Before you 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 costs, which now have -- 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 buildup 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 much very proud of the performance of Kid and Hemtex. So 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. And 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 delivering situation for the last quarter of the year, meaning the Christmas season. So 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 signed 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 an important work in the quarter due to the challenging freight situation, which we have seen the last year or 2. 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 add 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 closed for about 1 month. On the positive side, new categories have developed positively and in particular, our outdoor range with furnitures and our Homewear collection, including closing for casual wearing being inside at your home. We have also increased the number of stores in Kid Interior from 149 to 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 4 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 was -- but it was from September in which they stabilized at a higher level. Pre-COVID freight costs accounted for approximately 5% to 7% of cost of purchased goods compared to levels of 20% to 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. And 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 to freight cost level supporting global costs for the main parts of purchase volumes. Hence, we expect to see a gradual reduction in freight cost going forward towards levels of 13% to 15% of cost of purchased goods. And the 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 gross margin was also -- the reduction in gross margin was also caused by higher campaigning volumes of seasonal products due to late arrivals of the spring collection. And especially when comparing to Q2 last year with unusual low campaigning 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. And 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. So 2/3 of the nominal increase of NOK 15.6 million is due to last year's cost reduction effects and growth costs. The remaining NOK 5 million -- the remaining increase of NOK 5 million was due to a mixture of increased cost -- increased logistical cost following higher volumes but also increased costs 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 6 months of 2022. Inventory reached a level of NOK 779 million, an increase of NOK 225 million from Q2 last year. The 2 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 reach peer 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 the same quarter last year, mainly caused by an increase in inventory. Cash flow from investment reflects CapEx in stores and new online and our new online e-commerce platform. And therefore, due to the inventory buildup, the utilization of bank overdraft facility has also been slightly higher than usual, still with the gearing ratio of comfortable 1.35x. And 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% to 4%. We have an ambition to deliver stable gross margins in line with the past 10 years on a full year basis. And 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. So according to our strategy, we continue with new openings, refurbishments and expansion of stores. Kid is now presented in the important shopping area in Skoyen had opened this quarter and also Kolbotn just outside Oslo. In Sweden, we have expanded 2 stores in Uppsala and refurbished 2 stores in Kalmar as well as 1 in Malmo. 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 square meters in all markets. 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 at first then. And meanwhile, if you have questions, 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. And the second one, has there been any changes in product mix year-on-year and quarter-on-quarter? First, split between price and number of items in the basket size. I'm going to 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. So 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. That goes -- when it comes to the change in product mix, there is 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 many reasons. But there will always be mixes. And in this quarter, we have had some positive mixes in one segment and some other mixes in the other segments, maybe taking the margin EBITDA. But all in all, they're balancing each other out.

I'd just like to highlight that what we said during the presentation that the outdoor product, that's not only outdoor furniture, but also other products for the outdoor environment like earns, spots and outdoor cushions and so on has strengthened during the quarter.

Next question from -- this is also unanimous. 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. We do not disclose gross margin with or without increased freight cost. But 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 at least on a historical perspective.

We were, how to say, proactive when they came to adjust the prices last year. That's also one of the explanation for the high margin in Q2 2021.

And the second question was do you expect increased campaigning activity going forward? First of all, I think we should remind that the comments made by myself earlier on the gross margin was due late arrivals of spring products. So 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, last year, we didn't have to do any campaigning basically at all. But campaigning will follow a 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 equal.

But we can submit it quite easy. We see no reason to an increased campaign level going forward. We will have a normalized campaign level compared to previous years.

There are quite a few more questions here 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, we'll see a pressure on the CapEx side, we are happy with what we see. So, so far, we haven't seen any dramatically increased CapEx due to inflation 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 Eystein if something I forget. But it's a fixed contract for parts of the volume, the most important part that is 3 years, but it will be negotiated after 1 year. So it's -- you can look upon it as a 1-year fixed price for the main portion of the price at favorable terms, I would say.

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.

And it will come into effect for shipments being sent 1st July, so then arriving in the middle of August, and that's why we'll have a gradual impact on the quarters going forward. 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 sites 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. So we will be able to develop positively revenue and of 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 cost 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. So 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. So -- and 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. But normally, the electricity cost will be included in the invoicing from the shopping malls.

Our store, our large share stores are located in shopping malls across the Nordics. So when it comes to electricity in these store, they are, in general, almost all of them invoiced from the landlord. So we did not handle electricity cost ourselves or by the spot. We are dependent on how the landlord do that. And -- 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. And I know that they are 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 Finnish. And you're going to 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 in the Swedish market when it comes to white spots. As I said earlier, we are negotiating leases in all these markets. We have shown that Kid and also Hemtex and in Sweden, Finnish and the Estonia market, it's an important player in the shopping mall. So there's high activity on the lease negotiation side. And I'm -- I think we can bring some more good news in the quarters to come.