Lindex Group Oyj (LINDEX) Earnings Call Transcript & Summary

Good morning, and welcome to our webcast regarding our half year results for 2022. Today with me I have our CEO for Lindex, Susanne Ehnbage; and our Group CFO, Annelie Forsberg. Now, if we look at our results for Q2. So the revenue was almost EUR 270 million, up by 18%. Our operating result increased clearly both in Lindex and Stockmann. When we look at our rolling 12-months revenue, it increased with 19.1% reaching almost EUR 1 billion. Adjusted rolling 12-months result improved by EUR 75 million to EUR 94.1 million. When we look Lindex more closely, the revenue was up by 16.1% and reaching EUR 188 million. And if we compare this with comparable currencies, it was up by 18.2%. Our operating result improved by EUR 6.7 million, reaching EUR 39 million. And our adjusted rolling 12-months result improved by almost EUR 38 million, reaching EUR 100 million. When we look at the Stockmann division, our revenue was up by 22.6%, reaching EUR 81 million. Operating result improved by EUR 82.3 million and was EUR 78.4 million. Our adjusted rolling 12-months result improved by EUR 36 million, still being negative slightly, minus EUR 2.5 million. And as before, our strong cash, we reached to EUR 185 million compared with last year EUR 156 million. Now if we look more closely Stockmann division. Stockmann revenue, as said, was EUR 81 million and was up by 22.6%. But when we look more closely, our brick-and-mortar stores grew almost by 30% due to higher visitor volumes and customers' larger average purchases. Our share on online sales was 14.6% for the quarter compared with last year's 18.5% and 2019 8.3%. Stockmann division was able to increase the gross margin, thanks to a full-price sales and assortment being attractive to our customers. Our operating cost increased slightly. There are differences when we compare with last year and COVID restrictions, but operating cost less than EUR 32 million. [indiscernible] operating result was EUR 78.4 million compared with last year's minus EUR 4 million. When we look Stockmann's adjusted operating result, it was minus EUR 1.5 million for the quarter 2 compared with last year's minus EUR 4 million. And rolling 12-month sales was EUR 312 million versus EUR 277 million last year. And the rolling adjusted result was -- for the 12 months was minus EUR 2.5 million compared with last year's almost minus EUR 40 million. So Stockmann is now almost on a breakeven level on a rolling 12-months basis. And this is due to increased customer traffic in our stores and webstore, it is due to the improved margins, and it is due to the improved cost structure. When looking at the highlights of Q2 this year, the revenue was very positive. And as I said, the gross margin improved. We also told you before that we will increase our loyalty program coverage to cover also Estonia and Latvia. And we opened our online store in Estonia and Latvia. This has boosted our loyal customer base within Latvia by 10,000 new members in June only and in other countries in June only we got 21 (sic) [ 21,000 ] new customers during the Q2. As we've been telling you also, our focus is growth, and now we've been looking how can we collaborate with Wolt in order to be faster with our deliveries in the capital region of Finland. And this has been very successful in this quarter. And also, our systematic work with the environmental field for the Stockmann division is continuing as planned. Sorry, it's now going there, but it's not changing here. So the customer -- the division way forward, the customer-centric roadmap, full focus on value creation and growth and sustainable growth. We will build a seamless omnichannel experience, better services, faster last-mile deliveries, and collaboration with our partners. This year is our 160th celebration year with all kinds of activities, and this will continue throughout the year, and we will be celebrating together with our customers, partners, and employees, this achievement of 160 years of Stockmann division. We also came out that we will open the largest toy store in Nordics in Helsinki and Tampere, and the secondhand fashion, as you know, we opened a Relove store one year ago here in Helsinki. Now we want to expand this great story, and we will open Relove in Tampere department store. There is a full focus online store developments in Baltics and also now as the sale and leaseback agreement with the Helsinki flagship is clear, we have our commercial development for Helsinki flagship ongoing. And systematic sustainability work will continue to reduce our CO2 footprint and the textile recycling pilot continues with the very promising results. And this year, also the cooperation to save the Baltic Sea continues with John Nurminen foundation. As a group, our quarter results has improved for the 6 consecutive quarters, and for the last 12 months, our results has more than doubled compared to the level of 2019. And now I'd like to hand over to Susanne.

Good morning, again, everyone. So it's time to present Lindex development for the second quarter of 2022. And I'm happy to say that we reached new record levels and report a greatly improved result and also strong increase in sales, both for the second quarter and also for the first half year. Our revenue for the second quarter was EUR 188 million, which is an increase by 26% or 18.2% in comparable currency rates versus 2021. Sales in our brick-and-mortar stores continued to increase by 23.1%, and our digital sales remain on a high level. And we see this as a proof that our customers appreciate our offer and that we are available [Technical Difficulty]. Our digital share amounted for 15.9% of our total sales, as we have continued to increase our brick-and-mortar sales [Technical Difficulty]. Gross margin decreased to 65.4% due to less favorable U.S. dollar versus the Swedish krona compared to last year. Operating costs increased by EUR 9.2 million, and the cost increase compared to the previous year is due to higher sales through higher employment costs in the stores when the COVID-19 restrictions were lifted and also continued investments for growth. Our operating results for the second quarter improved by EUR 6.7 million to EUR 39 million. And our continued strong sales growth in stores together with maintained good margins and a good cost control contributed to our greatly improved result. On a rolling 12 base, we can therefore see that we have been able to increase it further, and we have now reached EUR 668.7 million in sales, which is a sales increase of 22% compared to 2019. And compared to 2019 [Technical Difficulty] we have increased the sales with 16%. And our adjustment result has now turned into EUR 100 million, which is an increase with 61% versus previous year and 144% versus 2019. [Technical Difficulty] for the quarter, we have had many exciting things happening for the Lindex Group. And in the end of May, we had a soft launch of our first femtech products, Female Engineerings period-proof underwear. It was very well received by our customers, and we are now preparing for our big launch in the autumn. We continued our important journey, and as part of our work to test and explore new business models and [Technical Difficulty], we have opened up a pop-up store with secondhand baby clothes. We see a great demand for secondhand among our customers and are happy to be able to meet them in new ways. It has been a successful concept and it gives valuable insights into how the business model can be developed and scaled up to meet our customers' needs. Another important step in our transformation to be more sustainable and circular -- is to have a more sustainable and secure assortment [Technical Difficulty] on OnceMore, which is an innovative process for large-scale textile recycling of blended materials. At present, 78% of our garments are made from recycled or more sustainable materials, and we will continue to work to reach 100% by 2025. I also want to highlight that we have increased the number of new identified customers during the first half of the year with 530,000, which we see as a great opportunity to continue to build long-term relationships with our customers. So another important highlight from the second quarter is that we have, in the end of May, announced that we will build and start to invest in our new highly-automated omnichannel warehouse. This investment is approximately EUR 110 million. Our new warehouse will replace the current one that we have in both Partille and the e-commerce warehouse that we have in Boras. The new warehouse will be located just outside Gothenburg in Alingsas. This warehouse will supply all our sales channels and ensure an efficient distribution and stock management in line with our continued global digital and sustainable growth. The new logistic platforms will also enable continued growth in more channels as well as for new growth opportunities. We initially will be able to quadruple the capacity for our e-commerce and ensure scalable and sustainable logistics solution. We also have really high sustainability ambitions with the new warehouse, where our goal is to achieve the environmental certification BREEAM Excellent, and the facility will also be powered by electricity from solar panels, which we'll be able to use ourselves and also we'll be able to hand electricity to also other operations as well. The new highly-automated and climate-smart facility will be approximately 40,000 square meters in size and is planned to be brought into operations in 2024. On our way forward, on the next page, our plans are -- proceeding according to our plan, where our business strategy stands strong and we continue our journey as a global brand-led digital-first and sustainable fashion company. We are in a transformation, and we know that the business will not look the same as it has done before. We will grow in new ways where the transition into circular business models and investment in femtechs are part of our growth strategy. The transition in our supply chain to renewable energy also plays a major role as innovation in materials. And there are some examples that will be crucial for us to succeed in both for our transformation and also for our growth plan. It is a challenging time with everything happening in the world, and it is more important than ever that we are responsive to our customers' needs and wishes and that we continue to act fast and agile, something that I believe that we have proven that we can do during the last couple of years. [Technical Difficulty] with all the Lindex employees' fantastic engagement and efforts [Technical Difficulty] we need to stand strong. We have, during the quarter, strengthened our employee Net Promoter Score further from 66% to 68%, which places us in the top 5% amongst [Technical Difficulty] companies within the consumer industry [Technical Difficulty], a very strong result a key for us. And with our strategy and important investments ahead, we will continue to create a long-term resilience in our ever-changing industry and where we will continue to be fast and flexible and well positioned for the future. I now hope that you hear me, and I'd like to hand over to our CFO, that will present the financial highlights.

Thank you, Susanne. Yes, and good morning, everyone, and I hope you can hear me well. So if we go to the next picture then. The restructuring program proceeds well according to plan. And during Q2, also the Helsinki real estate has been sold. This means that all secured and unsecured restructuring debt has been paid and the Stockmann Group now has moved into a new phase with a different balance sheet structure. The interest-bearing debt, excluding IFRS 16 leases, is now 0, except for the bond of EUR 66 million that Stockmann will have until 2025. Although Stockholm still has disputed claims of EUR 89 million regarding mainly termination of long-term leases where the landlords have required full payment for all outstanding years and the administrator of the restructuring program has disputed these claims and consider it justified to pay 18 months of the leases instead of all outstanding years. Stockmann has made provisions for 18 months, and now most of the claims will be settled by arbitration proceedings. Stockmann will be under restructuring process until all the disputes have been solved. Turning into next slide and comparing quarter 2 sales with last year. Total sales has increased with 18%, where Lindex sales has increased with 16% and Stockmann sales with 22%. For both divisions, the increase is related to sales in physical stores and where digital sales remains on almost the same level. We can clearly see that the physical visitors are coming back to both Lindex and Stockmann and finds the assortment attractive. Compared to Q2 in 2019, which was before the pandemic, sales has increased with 11%. Gross margin has slightly decreased from last year. That is due to somewhat decreased [indiscernible] margins for Lindex where the U.S. dollar has been less favorable versus the Swedish krona. Operating costs are naturally higher due to higher sales and that no stores have had restrictions during the quarter, which has impacted both staff costs and other store costs. Selling the real estate of Helsinki flagship gives a capital gain for the quarter, which is included in the operating result of EUR 114.5 million. When excluding the capital gain and some restructuring costs, the adjusted operating result is plus EUR 35.4 million, which is an improvement with EUR 8.5 million, or 32%, compared to last year. And compared to 2019, the improvement is EUR 16 million, which is a 82 percentage increase. And like seen here in the graph, both divisions have increased profitability for comparable quarters. Lindex division, illustrated in the green stable, has a strong positive result for this Q2. Also, Stockmann division in black has improved running business significantly and delivered almost plus for the quarter. The next page then shows the trend on a rolling 12 base. Let's see if the slide changed, maybe some delay here. So compared to the latest 12 months in Q2 in 2021, the revenue has increased with 19.1%. And comparing to full year 2019, the revenue has increased with 2.1%. The adjusted operating result, which is excluding all capital gains of selling real estate and restructuring costs, is on a rolling 12 base EUR 94.1 million, which is a significant improvement compared to rolling 12 in 2021, which was EUR 19.1 million. That means EUR 75 million better result than last year. And compared to full year 2019 when the operating result was EUR 39 million, the result now has more than doubled. Looking into the next page, we illustrate the divisions on a rolling 12 base to see the trends. So this graph shows the division's development in adjusted operating results during the years. Lindex has improved the business profitability and has now reached EUR 100 million, which is more than a double result compared to 2019, while Stockmann division was hit hard during the pandemic, but are now almost back on black figures again. Still a negative result with minus EUR 2.5 million, but has improved in a good way. The interest-bearing net debt, seen here on the next slide, have been paid during the quarter, and the situation for the balance sheet has thereby changed. This graph shows the development in interest-bearing net debt since 2018. It excludes IFRS 16 leases as well as a bond of EUR 66 million. As seen in this slide, the cash are exceeding the debt after selling the real estate. So the group is now in a net cash situation. Next slide illustrates some key figures and the net result. Like seen in the graph, the net result has been positive during the latest quarters. During Q4 2020, Stockmann Group made an impairment test of Lindex and did a write-down of goodwill with EUR 250 million that affected net result and equity. Latest quarters, the group have shown positive net result, where this quarter is especially strong and also improves equity. So looking at the next slide and the equity ratio, we now see a different picture compared to 2021. In total, the equity ratio has been affected by the restructuring process and write-down of Lindex goodwill. The light green line shows this development excluding IFRS 16 adjustments where the equity ratio strongly has improved to 53% from 19.4% 12 months ago. The darker line shows the equity when all IFRS 16 leases are included and the equity ratio then is 25.6%, with an improvement from 14.1% one year ago. The next page shows the lease liabilities. And due to IFRS 16 accounting, all leases are booked as both assets and liabilities in the balance sheet. In total, Stockmann Group has lease liabilities of EUR 573.4 million after the sales leaseback of the Helsinki real estate. As shown here, the lease liability for the Helsinki lease has the biggest impact with NOK 191.1 million, while the other Stockmann division leases has approximately EUR 94 million and Lindex stores EUR 282 million. So the guidance then. On this Tuesday, the 19th of July, the Stockmann Group has changed the guidance. We now say Stockmann expects an increase in the group's revenue and that the adjusted operating results improves compared to previous year. Guidance is based on the assumption that there will be no major changes in consumer spending during the latter part of the year. Geopolitical instability in the world with high inflation and challenges in the supply chain and international logistics as well as the challenges of COVID-19 restrictions require that both divisions have to be adaptive and flexible to meet the future. And the market outlook then for 2022, there is an uncertainty in the global economy, and it's expected to persist throughout 2022. It will affect the supply chains and international logistics and also the COVID-19 pandemic might have an impact on the economy across the world. Additionally, we have accelerating inflation that has an impact on households and consumptions and also will lead to increased operating costs. So the retail market is expected to remain challenging due to the changes in consumer behavior and confidence. The Stockmann Division will continue to execute the restructuring program and Lindex to explore new growth opportunities. So that was all regarding the financials, and we now open up for Q&As.

Yes. And from [ Jukka Parkkinen ] the first question. Are Lindex shares used as collateral in Stockmann department store's long-term lease contracts?

No, they are not.

And [ Espen Lindstrom ], can you explain the difference between reported and adjusted net results, EPS?

Annelie?

EPS?

Both between reported and adjusted net results.

Yes. In the adjusted net result, we include the selling -- we exclude the selling of the real estates. So that's the difference and also the restructuring costs. So that's the difference. And if we look at the earnings per share, it has decreased also due to that we have more shares than we had before. It's calculated on the average number of shares, and we have more now.

Yes. Then [ Miko ] asking, when do you anticipate the arbitrations and the claims in the Helsinki District Court result?

It's difficult for us to estimate. We are hoping as fast as possible, but we don't know.

And then [ Espen Lindstrom ] asking, when is Stockmann Oyj going to change its name to Lindex Oyj? Any plans to co-list in Stockholm?

We continue as the strategy is today.

And then nickname [indiscernible], what resulted the adjusted EPS to drop so much from the adjusted EBIT? And why aren't the tax expenses adjusted?

Like I said before, we have more number of shares than we had 1 year ago since we have issued many shares during the later -- the last year. That's the reason.

Yes. Then [indiscernible] asking, has spinning Lindex, after debt restructuring, been on the table and any talks with the Board? And does Stockmann Group understand the value of spinning Lindex would give to the shareholders?

As I said, we continue with the current strategy.

Then [indiscernible] asking, is the newly -- this is for Susanne and Annelie for you, is the newly announced OnceMore material going to impact Lindex gross margin?

I can try to answer that. This is new for us. But the idea is that it shall not impact the gross margin. It is a mix of, of course, the price of buying the material together with transportation and you also have the currency effect and bringing that all together, then we will handle that and also make sure that we have a satisfying gross margin and therefore also a good price for our customers.

And then from [indiscernible], again, regarding Stockmann retail online shop, which has had problems with wrong number of products and slow shipping for a while. I have still recently seen complaints about the same issues. Why has this not been fixed already?

Well, many improvements – I'd like to remind that we opened the new platform end of 2021, and we have had some challenges. We need to also improve our ERP systems, the product information systems. And now as the restructuring phase is behind us, we are focusing on fixing issues, but it is continuing, and we improve every day as we speak. And looking at the customer feedback, it is improving also from the online customers, so we're getting better results every day.

And then [indiscernible] asking about -- during Q1 2022 webcast, you mentioned the latest sales trends in April. Could you say anything about July '22 so far?

Susanne, would you like to say something from Lindex first?

Yes, I can do that. We can see that July has started pretty well. We are meeting really good numbers from previous year, also that we started to do already in May and in June. As you can all remember, in April 2021, there was a lot of lockdowns. And then we can see that the sales increased previous year. But it's good to see that we are in a good level also in July.

And for Stockmann division, I can say that there is a clear increase versus previous year. We're happy to see also that the tourists are back, especially European tourists. We have more Americans visiting us today. Russians not visible, but some Asians. So tourist indexes are increasing as well. So good start for the month.

And then [indiscernible] question to Susanne and Annelie. Lindex is currently operating at record-high EBIT margin. Is this a margin that you expect going forward as well? And is digital sales channel more profitable than brick-and-mortar?

Would you like to start, Susanne?

Yes, I can try to start. Looking at the guidance for long term, I don't think we have clarified that. But, of course, our goal is to have a strong profit margin also in the future, but it is really high at the moment. Regarding the e-commerce channel, we have a very high profitability, and it is actually the most profitable channel contributor that we have today. So if that continues to grow, it's good for our business as well.

And [indiscernible] asking, why is there such a big difference between disputed cases and provisions number?

Yes, I can answer that. The disputed cases are all the long-term leases. And here we have -- some of them are 10 years. And we have made provisions for 18 months, which the administrator of the restructuring program think is reasonable. So that's the reason why.

And I'd like to highlight also that the majority of our landlords have already approved the administrator's program. So we believe this is valid for the future also those disputed cases.

Now so far the last question from today from [indiscernible]. Could you explain how the audit -- I'm sorry, how the adjusted EPS is only EUR 0.01 versus reported EUR 0.52.

I would like to dig into that a bit more to be able to answer that more correctly if that's okay.

Yes. Let's wait for a couple of moments if we have any new questions, but so far all covered. And please ask if you have anything in your mind.

Well, if not, then we wish you all a very nice and warm summer. Summer has been great so far. And now we wish you to enjoy the sun, enjoy the family, and of course, we are open every day, so you are welcome to do shopping with us, and we want to inspire you every day. Thank you.

Thank you. Bye-bye.