Kid ASA (KID) Earnings Call Transcript & Summary

[Foreign Language]

[Foreign Language] Thank you. Good morning, everybody, and welcome to this Q3 presentation for Kid ASA. We have delivered what as I would like to say, a good quarter where Kid delivered strong numbers, but Hemtex has a tougher time reaching the 50 year campaign last year. But all in all, we are satisfied and together with Mads Kigen, our CFO, who will give you more insight into key drivers and explanation behind the numbers for the quarter. Q3 was another strong quarter for the Kid Group, and we reached an all-time high revenue of NOK 886.9 million with notable growth in Kid Interior standing out. The revenue decline in Hemtex aligns with our expectations and previous communications, mainly due to the extraordinary Hemtex 50 Years campaign last year, which particularly impacted the driving traffic to physical stores and online. The gross margin was flat compared to last year at 62.1%. One of the strongest margins we have seen for the third quarter ever. The EBITDA decreased by NOK 5 million to NOK 236.4 million, and Mads will give you more flavor on that later in the presentation. The EPS ended at NOK 1.73 compared to NOK 2.3 last year. The cash flow from operations at NOK 110.4 million impacted by Q4 preparations. And then as we will end up a dividend payment of NOK 3 per share. So I will go a bit into the operational focus in the quarter. Categories introduced since 2022 accounted for NOK 29.3 million compared to NOK 19.7 million last year. new categories are an important -- are important for enhancing sales of the already existing assortment and driving customer traffic. The categories that contributed the most in the quarter are sofas, house cleaning and storage products and also office supplies. The Extended concept was successfully launched in Hemtex in the first quarter followed by made-to-measure technical sun screening in April. We are satisfied with the results since the launch and consider them to be an important growth driver, both for Kid and Hemtex going forward. To ensure product availability in a challenging freight market, we chose to bring in the goods for the important Q4 sale somewhat earlier than in previous years. This has ensured us a good access to goods, but also a higher level of activity in the logistics in the quarter as there is a large volume to be handled. We continue to invest in our store portfolio, fueling future growth. The product activity is high. And during the quarter, we have completed 3 store projects in Kid and Hemtex in total. In addition to these projects that opened in the quarter, there were high activity with preparation, construction, et cetera, for store project that had opening dates in October. In September, we opened our seventh Extended store in Kilen outside Tønsberg in Norway. The old store has moved a few hundred meters and significantly expanded close to 3x the size as the previous store though the store has shown a very good development since the opening. And we also have expanded and renovated the store at Farmandstredet in August. And now with these 2 stores, we have significantly strengthened our position in Tønsberg an important market. Our warehouse project in Sweden is progressing according to plan. And we estimate that the operation in the common warehouse for the group will commence mid-2025 also next year. The project includes streamlining processes, combined with large investments in automation and tech solutions that will strengthen our position in the market going forward. So with that, I will introduce Mads who will go a bit deeper into the revenues and so on.

Thank you, Anders. Good morning, everyone. For the third quarter, reported revenues increased by NOK 56 million compared to last year. This represents an increase of 6.7%. On a constant currency basis, the total growth was 4.4%, and the like-for-like growth was 3% driven by both physical stores and online in Kid Interior, partly offset by Hemtex. The online revenue share was slightly down compared to last year at 11.4%. I will share some more insights to the segment details shortly. The key overall drivers to the revenue growth are mainly attributed to basket size, increased basket size and number of customers to our physical stores on a group level. In terms of categories, we continue to see a positive development across the major categories. And I would like to point out that we have positive -- especially positive development on the bathroom and furniture categories standing out as important drivers. The positive development in the bathroom category continues from what we reported last quarter, and that is driven by new products and product groups combined with the historical assortments. This initiative is supported by new bathroom display furnishings rolled out in conjunction with the started projects and upgrades. And I'm pleased to comment that we see a positive development for this bathroom category, similar what we did for the kitchen categories going a few years back in time. In addition, I would like to point out that we are satisfied with the furniture category where outdoor garden furniture has been a positive driver this quarter. In terms of our 2 segments. The reported revenue growth for Kid Interior was up by 8.7% compared to the same quarter last year. Please also bear in mind that the strong development this quarter comes on top of a high revenue growth base last year. In Kid Interior, we observed strong development in terms of revenue growth for both online and our physical stores. For Hemtex, we experienced and reported a growth of 3.5% but when you see on a constant currency basis, we have a decline of 2.4% minus measured compared to last year. This is driven down by both -- or in both online and like-for-like stores. The revenue decline in Hemtex, as Anders has mentioned, aligns with our expectations and previous communication. And it's mainly due to the extraordinary Hemtex 50 Years campaign last year, which was particularly impactful driving traffic to both online and physical stores. When we isolate the impact of the Hemtex 50 Years campaign, I would like to point out that we have and we see a positive underlying growth to the categories compared to last year. In addition, the change in campaign plan for July impacted the online revenue growth, especially this quarter. That said, I am pleased and satisfied to present the group revenue growth of 6.7% compared to last year, where Kid Interior performed particularly well this quarter. I would also like to highlight, as you can see on this slide, we have the strong development year-to-date, and we have reported a 10.2% revenue growth compared to last year. Going to the gross margin. We delivered a stable and strong gross margin of 62.1% for group, driven up by Hemtex and down by Kid Interior. This is a robust margin and is very strong in a historical perspective, only beaten by Q3 in 2020 and is flat and unchanged from what we saw last year of 62.1%. The gross margin is -- the development of gross margin is -- are a result of -- mainly a result of changes in the campaign activity plan in both segments. This means that we had slightly more aggressive campaign activities in Kid Interior and somewhat less aggressive in Hemtex following the 50 Years campaign as mentioned. During the quarter, we have seen increased COGS following, among others, higher freight rate levels. But we do not see any need for any change and we stick with our communicated financial objectives given the actions taken. The freight rates are declining this quarter following the unrest observed in the Red Sea and Gulf of Aden in late '23 and in the first half this year. Still, we are constantly monitoring the situation and are prepared to take an action if considered necessary. Overall, I am very pleased to present a strong margin of 62.1% for the third quarter. The reported operating expenses increased by NOK 40 million, representing a 14.6% increase compared to last year. This may seem high, but I will share some insight into some specific key drivers. First of all, the employee benefit expenses increased NOK 26.8 million. And this is explained by the following key elements. The total bonus provision in the quarter was NOK 13 million, and this represents an increase of NOK 5.1 million compared to last year. This bonus provision is a direct consequence of the strong performance we have had year-to-date this year. Next, the increase we've also seen in employee benefit expenses is related to the logistics and is mainly explained by the Q4 and shopping season preparation, we have more goods coming in and going out from the -- our warehouses, which Anders mentioned. So we are prepared for the shopping season coming up. In addition, we also have an increased activity level in regards to the online development in Norway of approximately 18% compared to previous year. We have talked about bonus provision and logistics and then we have what we call future growth initiatives. We invest and are -- among others, in our new stores and our store projects, which is also an explanatory factor for the development in the OpEx base and the employee benefit expenses. Finally, in the expenses, we have a significantly currency effect of NOK 3.8 million to the employee benefit expenses. Then we have the other operating expenses increased by NOK 13.3 million, and the increase is mainly explained by increased marketing costs. According to our ambitions -- ambitious plans, we have last-mile distribution of our larger furniture and shared operating costs to our lease portfolio. Finally, we also have a significant currency effect to the other OpEx of NOK 3.2 million this quarter compared to last year. And to be clear, the OpEx increase we see this quarter is mainly due to higher bonus provision, preparation for Q4 and Christmas shopping season, investments in future growth initiatives, along with a significant currency effect. To summarize, due to development in the third quarter we had increased revenues of NOK 56 million, we had a robust margin of 62.1%, and the OpEx base as explained. This results in an EBITDA of NOK 236.4 million. In terms of cash flow, I would like to comment on the following items this quarter. The cash flow from operations was impacted by a planned inventory buildup impacting the figures, which is related to the preparation we have been presenting here for Q4 and the shopping season, the Christmas shopping season, in addition to new category initiatives. In addition, we have more goods coming in earlier this year due to the unrest we have seen in the Red Sea. The cash flow from investments mainly relates to capital expenditures to our store portfolio 2/3 and then we have the remaining related to the warehouse expansion project in Sweden. Cash flow from Financing is explained by lease payments according to IFRS 16. Net interest expenses and a change -- minor change in debt related to the overdraft facility. This resulting in no change in cash this quarter, and this is a totally normal pattern in our business this time of year. Then we have the cash and credit facilities, and we have NOK 329.4 million at the end of this quarter. Excluding the IFRS 16, we had a net interest-bearing debt of NOK 784.3 million and results in a financial gearing ratio of 1.3 down from 1.72 last year. And all in all, we are satisfied with the financial position for the group. That's it Anders, I give the word to you.

Thank you, Mads. I will move on with a few comments on the store portfolio activity in the quarter. We are experiencing a large influx of opportunity for new establishment, expansions and relocating in our stores. And I would especially like to highlight the good sales development we have seen in Hemtex over a long period now, means that we now have more opportunities than ever. And we expect to sign several exciting contracts both for Hemtex and Kid in the upcoming months. By the end of the year, we opened a total of 7 new stores in addition to many new renovation, expansion and/or relocation store projects. Regarding to the Extended stores, as we announced, we have -- we announced today that we have signed a new contract for opening an Extended store at Alna Center in Oslo. Finally, an Extended store in Oslo. It will be our first Extended store in one of the most important shopping areas in Oslo, and I would like to say probably one of the most shopping -- important shopping areas for furnitures and home interior in Norway. We are working towards an opening at the end of the quarter next year, end of the first quarter, March. And together with the previous opened Extended stores at Kid -- sorry, at Kilen and Grini, we finally now from the end of March, cover Oslo and the surrounding markets. This means that we now have 9 Extended stores in operation and 4 signed contracts for the Norwegian market. We had a good discussion for at least -- for the last 2 Extended stores that we are targeting to open in Norway. And we also now we have concrete opportunities in Sweden and I hope that we will sign also our first Extended store for the Swedish market in the upcoming months. And as previously communicated, our target for Sweden is in this phase to open 3 Extended stores. In Q4, we have a total of 5 store projects in Kid and 3 in Hemtex. Among this, I would like to highlight the 2 Extended stores at Tiller in Trondheim and Moa, Ålesund. These stores opened in October and have shown very good results from day 1. With this, we once again have expanded and renovated our stores to the Extended format in some of the larger shopping areas or larger shopping malls in Norway. We have also opened a brand-new store at Værste in Fredrikstad, a brand-new shopping center that opened on the 31st of October. There are also exciting news for Hemtex, we look forward to the establishment of 2 new important stores. During the first week of December, we will open a new store in Åbo, Finland at Hansa Shopping Center. And this Thursday, we will open our largest store in Sweden at 1,000 square meters, which is not an Extended format but still a very large store in one of the best locations in, Nordstan Downtown in Göteborg. The store in Nordstan is also a new establishment and will be one of the most important stores in Hemtex. The process for the sale of the Swedish warehouse property is progressing as planned as we have communicated earlier. We are well prepared, as we had touched into earlier in this presentation for the most important season in retail. In the coming weeks, we will go through Black Week and Christmas shopping. We have good control due to the initiatives that we have mentioned today over the logistics, and we look forward to the retail industry's Champions League. As in previous years, Santa Claus has contacted us to assure that we can deliver as Kid and Hemtex products are regulars on the wish list for both young and old. As informed on the 1st of November, I have decided to accept the job as CEO of Sports Holding, where I will continue together with Mads and the rest of the team as CEO in Kid until the end of April. So to sum it up with a dividend slide, in line with our financial targets, we are paying out an advanced dividend for the 2024 results after the third quarter. The Board of Directors has decided to pay out a half year dividend of NOK 3 [Foreign Language] [ per share ] compared to NOK 2.75 last year as a prepayment for the fiscal year 2024. Following the Q4 results, the Board of Directors will propose the next half year dividend to the Annual General Meeting in May. So with that said, we are finished with this presentation for today. And as Petter mentioned in the beginning, if you have any questions, please feel free to either send a text message or a mail to Petter, and we will do our best to answer from the stage.

Yes. Perfect. Thank you, Anders and Mads. We have received some questions. First from Ole Martin in DNB. He asked a couple of questions, so I'll take one at a time. The first one is related to the cost. Your cost looks high in the quarter. How should we think about the cost development going into Q4?

So I can start. We have explained the cost development, I guess, with the significant currency effect this quarter. We have the bonus provision, and we have logistic increase in addition to the growth initiatives. But when it comes to talk about future costs, we do not guide on any figures, but we refer to our financial objectives communicated to the market with OpEx to sales ratio at current levels on an annual basis.

And just to underline that some of these costs are investments in future growth but also some are, I would say, especially the bonus provision, as Mads has touched on earlier today, it's kind of to say, timing issue compared to last year where the bonus was at a level, repeat that, it was 5 point...

Yes, we have NOK 5.1 million more.

More than last -- compared to last year.

Yes.

But when you look into Q4 now, will the bonus provisions in the Q4 be higher or lower than what you had in Q4 last year based on what you see?

What we can say that is we have done this higher bonus provision books in the figures for Q3. But still, the total level of bonus compared to last year has not changed. There's no changes in the bonus system within the company, meaning -- so yes, you can do the math.

Yes, perfect. Yes, and Ole Martin also asked about is there any OpEx related to delivery of goods, timing of store openings and those sort of things that also affects the Q3 numbers?

Yes. We have in the figures reported, we have NOK 1.2 million related to the last mile distribution of our larger furniture in addition we have, like Anders has mentioned, high project activity and new stores opening in the beginning of October, which impacts the OpEx in Q3, the preparation for this project activity.

And what we will say is investment in future growth that hits the cost base in this quarter.

Yes, okay. Perfect. We then go to another question from Ole Martin, which relates to your inventory. Your inventory looks high, 27% up year-over-year. You state that this is according to plan. Can you quantify how much of the inventory buildup that is related to early delivery of goods and how much is related to new categories?

Yes. We have an increase in the inventory of NOK 200 million. You can see that some of it is related to higher freight rate levels. In addition, we have some currency effects. In addition, we have more goods coming in, in the sea, which is -- we'll say it's approximately 50% of the NOK 130 million, which is related to seasonal products and the remaining is related to what we call the whole year assortment, the full year assortment.

There is a slight increase in the stock levels due to introducing, for instance, the Extended categories in Hemtex. But it's to sum it up, the majority of the increase is due to that we chose to have early deliveries for the upcoming important Q4 season.

Perfect. Final question then from Ole Martin. What was the like-for-like in Hemtex adjusted for the campaign in Hemtex last year?

We do not have that figures.

We don't share that figure, but as Mads said, if we isolate out the effect of the Hemtex anniversary campaign last year, we are positive. We see positive figures and growth, but we have to isolate out that, but we do not share these figures.

Perfect. I can just add a question there on Hemtex. Can you share some light on the development in the Swedish markets, what you're seeing there in terms of competition, campaign activity and those sort of things?

Yes, we have seen -- we would like to say that in Q4 and also for the last quarters, it has been a tough situation within the Swedish market. We do experience that we take market shares. We have had lots of -- many quarters with strong growth. So we are quite confident that we are strengthening our position in the Swedish market. And as said, we have lots of more new lease negotiation, both in shopping malls, where we previously haven't had any dialogue and also on terms now that are interesting. So I take that as a sign that Hemtex is both an important and interesting tenant that performs well in a rather rough market. We have seen figures from larger competitors that have had a drop in revenues, but we primarily focus on what we can and what we do in Hemtex, and we are very pleased with the performance in Hemtex even if we saw the drop in the revenues that we have explained in this quarter.

Perfect. We're receiving some more questions now from Hakon in SEB. So 3 questions from him, I'll take one at a time. Can you comment on footfall and price and volume mix in the quarter?

We often get that question. Like I said, we have increased traffic to our stores in terms of number of customers, but we do not share the price volume externally, but we follow them, of course, but we do not share the price volume effects.

I could just add a question there. I mean, are you seeing any differences between the Norwegian and the Swedish market in terms of how challenging it is to list prices? Or are those 2 markets fairly comparable when it comes to setting the price for the different products?

I would say they're fairly comparable.

Then we have a question from Hakon. Yes, how should we think about the net gain on potential sale of the warehouse in Lier?

As communicated, it's progressing as planned. We are -- it's in the market. And we'll come back with further details on a later stage.

Sorry, was the question about Lier or Viared?

It must be Viared because in the year that's not...

Yes, that facility is exciting. Yes.

Yes.

Yes, perfect. Then as always, we get some questions regarding how the start has been through the quarter. So a core shopping index for October seems uplifting these numbers, how has October been for the Kid Group?

As always, we will give insight in that when we disclose our revenues in the beginning of January and our Q4 report. But I would like to highlight that the start of the October is important, but the most important period is from week 47 and out. Week 47 will compare to Black Week last year, whilst Black Week is week 48 this year. So you can have a good start to the quarter. You can have a poor start to the quarter, but still it is from week 47 out that determines the result of the quarter, the most important quarter of the year.

I could just add to that question there. I mean, we're already seeing some quite aggressive campaign activity for, call it, Christmas products. Are you seeing any material difference when you look at Q4 this year versus what you have seen in the previous fourth quarters?

It's normal that you see that some players, some retailers in the market with all industries, they tend to kick start Black Week or aggressive Christmas campaign. Why? Only speculation from my side, some might struggle, some might do that as a planned early campaign activity. But I wouldn't say that there's lots of differences in terms of aggressive marketing in the retail industry today compared to previous year because every now and that there's one -- there's a few players that are extra aggressive or early out on the market. So it's quite similar to what I've seen for many years, I would say.

Perfect. I think that wraps up the questions we have received. So thank you.

Thank you very much.

Thank you very much.

Yes. Have a nice day.