Lindex Group Oyj (LINDEX) Earnings Call Transcript & Summary

Good morning, everybody. I think we are ready to start. Welcome to this event. I have with me here Jari Latvanen, the CEO of Stockmann; and Pekka Vähähyyppä, the CFO of Stockmann. Susanne Ehnbage, who has been with us is currently skiing, as the Southern Sweden has their winter holiday at the moment. So I will cover. We have agreed with Jari that I will cover the Lindex part today. So very shortly, our strategic transformation has continued as planned. As you remember, we started the rejuvenation program in the spring, and it has continued throughout the year. The cost savings measures started to be visible towards the end of this year, Pekka will elaborate that a little bit more. And they will be clearly visible in 2020 results, so in other words, this year. And I'm glad to announce that roughly 1/3 of the savings target was actually achieved during 2019. As you may remember, also we renewed strategies for both Stockmann and Lindex, and these are being implemented with the concrete investment plan, as we speak. The new management is in place since August, both gentlemen who sit here on right-hand side and others. And we are continuing the investigations concerning the strategic alternatives for Lindex, including the possible ownership change. We did renegotiate long-term facilities. Pekka will talk more about that as well. And we had a successful consent solicitation concerning the hybrid bond. And as you may remember, the 3 of the largest shareholders subscribed additional hybrid bond securities worth EUR 21 million. Very briefly on Stockmann Group 2019. The revenue was EUR 960 million, down by 4.5% comparable currency rates, which was pretty much as expected. The adjusted operating profit was EUR 29 million compared to EUR 10.4 million, excluding the Nevsky Center last year. Stockmann retail and real estate divisions merged, as you may recall, July 1. What we were particularly pleased was that our merchandise gross margin in the group increased from 53.6% to 54.1%. In Lindex, the good development continued. The sales was down as expected a little bit, 2.4%, but we were particularly pleased with the online store growth of 24.3%. Gross margin improved. Operating costs were down by EUR 5.7 million. And the adjusted operating result improved by EUR 4.4 million. A little bit more about Lindex shortly after Jari. Stockmann revenue was EUR 386.8 million, down mostly due to the divestment of properties. But at the same time, the online store grew as we expected. Jari will cover more of that in a few seconds. Operating costs were down by EUR 19.6 million. Adjusted operating result was below 2018, mostly due to the divestment of Nevsky Center. So that very briefly covers the Stockmann Group. And now I hand over to Jari. So Jari, please.

All right. Good morning from my side as well. If we look at the full year results, as Lauri said, the revenue declined. But when you take away the Nevsky impact, so we are roughly there. Online has been our focus, and it grew almost 11% last year, and the operating result was still very much negative. If we take the Nevsky away, the comparable number is EUR 11.5 million versus the minus EUR 20.4 million. And adjusted operating result was minus EUR 17.8 million, and again, there is the Nevsky impact. As Lauri is saying, the rejuvenation strategy implementation has been in full speed, all autumn. And we have been very persistent in reducing our cost base. And this will continue this year as planned and as agreed before. We also realized that the online platform needs to be renewed. So in October, we took a decision that we will launch a new platform mid this year during summer months. And this work is ongoing. And we have had very much focused on our working capital, and we can clearly see stock levels much lower than previous years. If we look at the full year, all in all, we also launched the crazydays.com for Baltics in October. We renewed last summer, our food court in Tallinn, which has been really upgraded and is performing well. And then a part of our cultural -- or part of our strategy rejuvenation, we have also renewed our cultural identity. I will come back to that a bit later. If we look at the quarter 4, all in all, I would say, quarter 4 went better than expected. Revenues, you have here, gross margin improved when we look the -- take away the divested businesses, we have had a focus all autumn on full price sales, and we've been really changing our boosting strategy. And this, we kept throughout the quarter 4 as well. Operating costs were down EUR 9 million and personal and support function costs declined clearly, but rents were somewhat up. And then the operating result increased in Q4 to EUR 8.2 million. Also in Q4, we renewed our loyalty system. MyStockmann loyalty program was launched, and now as we speak, we have roughly 200,000 MyStockmann app users already using our new platform. And Crazy Days went better than expected. We clearly saw growth in this area. Part of our strategy, we have also looked into our vision, and we say our vision is the marketplace for a good life, [Foreign Language]. Our mission is we make a new impression every day, [Foreign Language]. And what we promise to our customers is a feeling that lasts, [Foreign Language]. And as I said, our cultural rejuvenation is also going on. We have renewed our values, focus on customer, act with courage and we work together. [Foreign Language] is part of our everyday operational newness as we speak. And we have renewed our customer and category orientated organization, and it was in place this February -- beginning of this February. We have several improvements ongoing. We will improve our store experience. We are going to redesign our Jumbo department store completely this year. We are renewing in this flagship our women's fashion on third floor. End of this month, you will see a new premium handbag area in first floor. So we're coming with more luxury goods. And then in that area, you will also see a new watches & jewelry, accessories, which will bring our offering to new level. We will, this year, also renew totally our cosmetics department in this building and everything is done before the Christmas sales this year. End of March, we will open MyStockmann Lounge, which is also a place where we will have a closer contact with our customers, with focus groups, and this will be the inspirational platform going forward. We are renewing our offer in all our core categories within fashion, beauty and home. You could say newness is coming every week. Quality and sustainability are the key focus areas in everything we do. You will see more pop up’s inspiration spots at every store, but also online. And we're launching this year over 50 new brands, which means that every week a new brand is entering to Stockmann. As said, we started already in October, upgrading a new platform for stockmann.com. And in our new way of thinking, both department store and online retailing will be as 1 team. So we will combine our online offer and the department store into one team, and this will be visible for our customers mid-summer this year. And we will continue developing our MyStockmann class-leading loyalty system. And we are expanding that after the second half this year to our Baltic customers. Part of the strategy rejuvenation is that also our marketing efforts are going to be renewed in a focused way. And here, you have a picture of our beauty catalog for March. With these last slides, you get the first feeling of our women's department. So this is part of our denim and trend area. So you will see a new way of offering styles and products to our customers, but we will come back to this later on. And now I would hand over back to Lauri with Lindex.

Thank you, Jari. We were obviously also very pleased with the performance of Lindex. The operating result amounted to EUR 32.1 million and increased by EUR 3.2 million. Adjusted operating result amounted to EUR 34.8 million, increased of EUR 4.4 million. What was particularly pleasing was that we increased the profitability in all markets, sales channels and business areas. We also improved our gross margin, which was very important in this connection. And I would underline that our cost efficiency was quite good. Our sales in 2019 in local currencies was on par with the previous year. But with the comparable sales, it increased a little bit, 1.2%. All in all, revenue was down 2.4%. This is related to relation between euro and Swedish krone. As I already said, our online sales increased 24.3%. And as in Stockmann, we also are launching our new e-com platform in the Nordic region as we speak. It has been introduced in other markets already earlier this year. Some highlights, I would like to mention here. We launched a new sustainable baby assortment. We also had a launch of our long-term concept, Your Smart Wardrobe. And we also underlined our sustainability promise for the future generations, meaning that we want to cut our CO2 footprint by 10% during the next 5 years. Lindex financial performance. Last quarter was also quite strong. The adjusted operating result was EUR 16.7 million. And as I already mentioned earlier, increased -- we increased profitability in all markets, sales channels and business areas. Going forward, I would like to mention a few things here, which we feel are important and are part of our rejuvenation program, which we also have in Lindex. We obviously have a plan to grow our current business. We want to drive efficiencies and also explore the new growth opportunities. We continue strengthening our omnichannel setup. And we optimize our inspiring customer offer based on the customer insights and needs. We will launch later this year also online sales for baby assortment in China. And we will continue our global online expansion. I'm pleased to say that we just recently signed a contract with Zalando. And we recently introduced Lindex Baby Home, which you have seen even here in Finland in our stores. And we are an investor in Closely, a company which is creating a new Swedish underwear brand for women. This is an exercise on online-only with 2 Swedish entrepreneurs. Here are a couple of slides from very successful openings of new stores in Copenhagen and Tunis. And we also celebrated a campaign on ladies underwear. And we got very much positive attention to this because this shows the essence of Lindex being real, personal and inclusive. There's a couple of pictures on our launch of Lindex Baby Home. And now I hand over to Pekka. Pekka, please.

Good morning on my behalf as well. To begin with our revenue. In this slide, first highlight on the revenue by division. So Lindex contributes 60% of our total revenue and Stockmann, 40%. And then when we look by market, Finland is 38%. And as you see, in Lindex, main markets, Sweden and Norway, they are 46%. And then the other, that is mainly Baltics and European countries where Lindex is present, is 16%. Then by product category, we are clearly a fashion company. 80% of our revenue comes from fashion. And cosmetics, 10%. Home, which we have in department stores, 6%. And food, we have food operations, like Jari said in his presentation, we have food operations in Baltics, both in Riga and Tallinn. That represents all in all, 4% of our revenue. This slide consists of a lot of information. Talking about revenue that for the fourth quarter was EUR 286 million. This is not comparable because we sold, as I think everyone remembers, the Nevsky Center in the beginning of 2019. So that has -- that increases the comparability. And then considering the currencies, like I said in the previous slide, Sweden and Norway, they contribute 46% of our top line and Swedish and Norwegian currencies against euro, they declined roughly 3% during 2019. So that had a negative currency impact on our top line. Then looking at the graphs. The bottom right-hand side, here, you can clearly see how our bottom line fluctuate during the year. So first quarter, typically in our business is challenging, and we have make negative result. And then second quarter is positive due to a Crazy Days campaign and due to also seasonality as we have started selling summer and spring merchandise. And then most of our profit is made in Q4. And considering this year or actually 2019, during last quarter, we made most of our full year results. I think most of the other comments were already mentioned in Lauri's and Jari's presentation. So moving on. This is a nice picture to show. We have been decreasing our interest-bearing debt over the years quite sizably. End of last year, we had interest-bearing debt, net debt less than EUR 400 million. And when we started -- this picture starts in Q1 2017, we had twice as much. So we have been very much focusing on paying the debt back. What is also visible here when you look at the quarters in 2019 that the debt level fluctuates very much during the quarters. End of the year, net debt always is at the minimum. And then depending on the quarters, as discussed also on the revenue and bottom line, it fluctuates, so seasonality is impacting. Then like Lauri said, we did renegotiate our long-term bank financing facilities during Q4 and also the hybrid bond was reagreed and increased. So that has also impact on the net debt. Then I think on the big picture, you see that we have had ups and downs, started with the negative figures. And now we are on a positive profit level. Then some key figures, starting from the right-hand bottom, which is the balance sheet total in 2018. At that time, the balance sheet consisted of EUR 1.8 billion assets. And in 2019, we sold the Nevsky, which had a value of EUR 175 million. And during 2019, we started to report our figures according to IFRS 16. So therefore, the total balance sheet amount has increased up to EUR 2.1 billion. Despite of the fact that we sold Nevsky, we added the so-called right-of-use assets worth EUR 500 million and equal size of debt in our balance sheet. So this is not a comparable, but still I wanted to discuss this with you. The incomparability is visible in many other lines as well. So the depreciation grew from EUR 80 million to EUR 140 million due to the fact that the IFRS 16 reporting, say, motivates us to have reported in this way. Some other comments we did invest EUR 34 million into our business during last year, a slight increase from the previous year. Worth highlighting, though, is that inventories are -- out of that EUR 3.1 billion, they represent EUR 146 million, and they grew mainly due to Lindex, as Stockmann inventories went down, like Jari has said. Our cash flow was EUR 102 million, up from a previous year. Earnings per share are negative. And net result for the period was also negative. Net financial items, you may wonder that how come the big difference there. And that is very much dependent on the IFRS 16 reporting. Because part of the previous lease payments are now presented as the net financial items. So out of this EUR 53 million net financial items, roughly half is this lease-related costs. So the decline in the bank debt, which we showed in the previous slide mean that the true or traditional financing costs went down nearly EUR 10 million during -- or between 2019 and 2018. Our balance sheet is strong. Our equity ratio, excluding IFRS 16 reporting, is more than 50%, up from previous year's figures by 5% and that is due to the fact that we have divested Nevsky Center and paid back debt. Net gearing was also improved comparably was '18, 64%, and now it's below 50%. Moving on, maybe the most important and most interesting thing that how do we see the future. We do expect that the uncertainties in the global economy will remain this year. And the main markets where Stockmann Group operates, that is Finland, Sweden and Norway and Baltics, we believe that the markets will continue to have a moderate growth. On the other hand, we do see that the retail market will remain challenging due to some changes in consumer behavior and competition is continuing to increase. Like Jari and Lauri said, we expect that -- not expect, but the rejuvenation program will continue throughout this year and Lindex will continue to drive efficiencies and explore in -- new growth opportunities as last year. We continue to invest in our business and current view on our capital expenditure will be some EUR 45 million. And the guidance for this year is that we expect that group operating profit will improve clearly from previous year's figures. That was the guidance. And I think we are all happy to answer any questions you have.

Any questions from the audience or from the web?

[indiscernible] from Nordea. A question on the potential divestment of Lindex. You said it's proceeding as planned, but since we don't know what the plan is, can you say anything more that when we could expect something tangible perhaps?

Well, I have said earlier and I just repeat what I have said earlier that these types of processes typically takes 6 to 9 months. So once we are ready to inform something new, we will do that.

[indiscernible] from [indiscernible]. Could you tell a little bit more about Christmas sales? It was very bad for many retail companies, but how was it for Stockmann?

Well, Christmas, the quarter 4 for us, like I said, the Crazy Days was better than expected. We grew roughly 2%. Black Friday went well. December, as we look, the total market was almost 11% down. So we have managed that better than in general the market. Obviously, the climate has impacted, especially the winter gear sales. Our portfolio is very much, like Pekka said, in fashion, and we changed our boosting strategy this year. So more focusing on the traditional Christmas products. So all in all, yes, we saw as well a decline but managed better than we expected.

What about the Jumbo department store? What's happening there now?

Jumbo has been -- the food court has been already closed. So the renovation has kicked off. We renegotiated the lease agreement with the shopping mall, and we are downsizing the size of Jumbo and the food court area will be now, as we speak, is under the reconstruction. And the new looks of Jumbo will be then throughout the year. This will be challenging for the customers as we need to go department by department, but we are already showing our customers the visibility of the new layout of the new Jumbo Stockmann. So I think it's moving quite nicely.