Lindex Group Oyj (LINDEX) Earnings Call Transcript & Summary

Good morning, and welcome to our Q3 Interim Report session. And today, we are arranging this also so that we have participants here in our new Stockmann Lounge in Helsinki. And as before, together with me, I have our CEO, Susanne Ehnbage; and our Group CFO, Annelie Forsberg. We are really happy to announce our robust revenue growth for the Stockmann Group and Stockmann Division adjusted operating result reached black numbers. So, let's look more closely our numbers. If we look the revenue for the Group, it grew with 2.6%. And if we take into account our local currencies, our growth was 4.2%. Our adjusted operating result decreased by EUR 10.9 million, reaching EUR 22 million. But when looking from the rolling 12 months point of view, it is plus -- almost plus 16%, reaching almost EUR 1 billion. Our adjusted rolling 12 months operating results is up by EUR 47.9 million. And when we look Lindex revenue was minus 1.2% when we look in euros. But if we compare Lindex revenue in local currencies, it grew 1.1%. Our adjusted operating result is down by EUR 8.7 million, and it is important to remember that the key impact here is the currency, the Swedish krone versus U.S. dollar. But also, as we have communicated very clearly, we are investing for the future growth, and Susanne will explain more in detail the plans within Lindex. But it's also a fact that we are now living in a more normal operational status, so also more operational cost has come now after the COVID period. When we look the Stockmann revenue, it is a very strong growth, almost 12% and our adjusted operating result is now, as I said, in black numbers. And if we look at our adjusted rolling 12 months, it is up by EUR 31.3 million, but still in small negative numbers. I also would like to highlight in this slide our cash. It is still strong despite our heavy investments we are currently going through with. Now, let's look more deeply into Stockmann division. So, as I said, our revenue was up almost by 12%, and especially our brick-and-mortar stores grew by 11.8%. And this is due to the higher number of visitors and customers' increased average purchase. Also looking at the current status with the online market, it is a great achievement that we are still growing with our online sales. And overall, Stockmann is taking market share in Finland. Our gross margin increased to 46.3%, and this is, again, a continuation of our strategy focusing on our full price sales. Our operating cost was EUR 45.6 million, and it's up by EUR 17.6 million. And this is due to the cost increase, the provision for prudential reasons of the EUR 15.9 million due to the LahiTapiola arbitration decision. It is recorded as an item affecting comparability with -- but also when we look to operating costs, we have then there higher energy cost and cost related to higher sales. But the key part of this increase in operating cost is coming, the arbitration decision and the prudential reasons for this EUR 15.9 million. If we look then rolling 12-month sales, it is almost EUR 320 million. We are clearly still below 2019. And when looking to 2019 fashion market, it is still 7% below as a whole market. Actions that have improved visitor numbers and our sales, obviously it is working more closely with our customers, school start, autumn newness campaigns and bringing again many new brands. We have now started a very effective program with customer evenings and events. And for example, a great achievement in this period was how we launched the Channel 1 launch within the Stockmann Group. Obviously, this is our celebration year of the 160 years anniversary. So we have many exclusive collaborations with our suppliers, for example, Minna Parikka, again lost a new collection for the Christmas party season. One of our big focus areas is double the men, and male customer focus has enhanced also the sales, and we clearly see that the younger men are finding us more and more every day. We've been focusing very much on MyStockmann Loyalty. And as you might recall, we launched the MyStockmann Loyalty in Baltic markets, and that introduction to this market is ongoing as we speak. But we are also looking new channels, how do we can reach our customers and Wolt delivery services has extended now to new cities where we do not have the department stores. I'm taking Seinajoki, Vaasa, Pori. And this is a new era in terms of customers in those cities to get deliveries from Stockmann. I would say, our systematic focus on strategic initiatives and digital development is proceeding well and at Stockmann. This would not have happened without our team's strong commitment to get black numbers also for Stockmann division. If you look then the future, how do we see it in the coming months? We will continue to focus on customer centricity and sustainability. We will continue executing our customer-centric strategy. This means we are investing to improve customer experiences in online. It is also omnichannel customer journeys, and this includes various training activities with our employees. We will further develop and evolve our customers with the MyStockmann Loyalty program, and we are investing and upgrading currently our Helsinki flagship, and that will be a continuous upgrade process. We are also renovating our Turku department store and Itakeskus as we communicated yesterday. This will be a new concept for Stockmann and that will be visible to our customers the next spring in 2023. So, Itakeskus will continue as it is today until Christmas, but then next year, we will introduce a new concept there. We also have told you about Tampere Relove secondhand store has been a great success here in Helsinki, and now we will open Relove and Tampere before Christmas. And our brand-new Kids toystore will be opened also for our Tampere customers before Christmas. And 160 years anniversary celebrations will be culminating in events and exclusive collaborations during the quarter 4. And obviously, the magical Christmas has already started. Our Christmas shops are open, and it is my pleasure to say that we are well prepared for a great Christmas this year. Systematic work on sustainability continues, and I'm happy to announce that we have been accepted and will be attending to a national Circular Design program, and that was also this week communicated in our press releases. With this, I would like to hand over now to Susanne. So, Susanne, please take forward.

Thank you, Jari, and good morning, everyone. So, let's dig into Lindex then. And we will start with the sales, and revenue was EUR 166.9 million, and this was then a decrease of minus 1.2%. But if we look at it in local currencies, the sales increased by 1.1%. And also if we compare this to 2019, the sales increase was 13.8%. This means that we had the highest sales ever for the third quarter, and that we also continued to increase our market share in the Nordics. We can also see that our sales in our stores and also online continued to improve, and that our share of digital sales was 17.8%. The share of digital sales was -- sorry, was 17.8%. If we then continue to the gross margin, it decreased to 61.7%. And this is due to the less favorable U.S. dollar versus the Swedish krona. And if we compare the dollar today, it is 30% more expensive than it was a year ago. And we have increased the prices toward the end consumer, but we have not fully compensated for the currency impact because we believe it's critical for us to continue to have a strong price value so that we can continue our growth and also to improve our market share in the way that we have done for the last couple of years. If we then continue to the operating costs, it increased by EUR 1.7 million to EUR 61.1 million, and this is driven by strategic investments for growth, but also that we now have a more normal operations that is not related and affected by the pandemic. And we are not also receiving any pandemic support in the way that we did last year. The adjusted operating result was EUR 22.5 million and the operating result EUR 22.9 million. This is a really high profit level if we compare this profit for the last couple of years. But if we compare it to 2021, we have decreased our profit. And that year, we had an extremely good profit level. And the reason for this is mainly caused by the currency effect. We continue to the CapEx, and the CapEx was EUR 28.5 million, and this is due to that we are now investing in our new omnichannel DC. And this is a critical enabler for our future growth, and this is planned to be ready in 2024. So, looking at the highlights then for the third quarter. We are, of course, really happy that we continue to increase our sales in all sales channels and also that we reached an all-time high for the third quarter. Also, something that is really strong is that we have our offering and also our customer-centric approach, and that has strengthened our customer base. And we have so far this year attracted 775,000 new customers, and this means that we now have 5.4 million registered customers that we can continue to build long-term relationships with. During the quarter, we also had a big launch and a very successful launch with our new brand, Female Engineering. We are now live on our website. And also, we have these products available in 256 stores in 9 markets. We will continue the development with new products, and we are planning to have new innovation ahead. And related to the Female Engineering and also sustainability, if you look into our web page now or Female Engineering's web page, you can actually see now that we are showing these products with the climate impact and also with the full traceability. And that is something that has been very well received by our customers and also something that the media has written quite a lot about. Also regarding the circular transformation, we have now taken the secondhand shop also online. We have done this as a pilot that was also successful because we have sold out all the items that we had available. So now we're looking into how we can scale this further. And last but not least, during this quarter, we also had a campaign, The art of comfort, where we try to explain to the audience how important we think that it is to let the kids be kids and let them play, and also that we know comfort like no one else. Then if we look at Lindex division and the way forward, according to the market outlook, uncertainty in the global economy is expected to persist, and the retail market is expected to remain challenging. We have already started to take actions regarding this. For example, we have been negotiating with our suppliers and also our landlords. Other activities is regarding automation and digitalizations. And here, we have today 18 RPA processes running. We are also implementing a new PLM system. And the PLM system is sort of the heart in a fashion company. It's where you have the fashion and the product, the design process, and this is something that will make it easier and more efficient for us going forward. We are also implementing RFID tags during next year. Regarding our long-term targets, they are ambitious, and they are focusing on significant growth that we will have high profitability at the same time as we shall reduce our climate impact. So we are focusing and putting all our efforts into these 3 areas. We are now in the end of the October month. And for Lindex, this means also the pink month. And we have been supporting the Pink Ribbon campaign for cancer research for 19 years. And since 2003 until this year, we have donated EUR 17.7 million. And this year, we have decided to donate 10% of all the bra sales to cancer research. And I'm really happy to say that we have reached an all-time high already yesterday, and we still have a few days left. Sorry, just one more thing. So, we are really in an ever-changing industry that we are living in. And at the same time, we are also in the middle of a major transformation. But our strong development in recent years is a fine proof of our ability to meet our customers' needs and to be adaptable, flexible and fast to meet the uncertain future. And this would not have been possible without the hard work and great contribution from all the Lindex employees. So, I'd like to say thank you. And here, we will together also continue on this journey to create long-term resilience also going forward. Now, I would like to hand over to Annelie.

Thank you very much, Susanne, and good morning, everyone. Yes, looking into the financial figures then as well. During the third quarter, Stockmann Group sales improved, and that is due to higher visitor numbers and also increased average purchase. The revenue ended up at EUR 244.0 million, and that is an increase with 2.6% in euro, and in local currencies, it's an increase with 4.2%. And compared to 2019, which was before the pandemic, the growth is 8.3%. The gross margin has decreased, and the main reason for that is what Susanne explained, the unfavorable U.S. dollar compared to SEK. The gross profit has slightly decreased then as a reason for that to EUR 138.7 million, although partly compensated by higher sales. The operating cost has increased to EUR 107.1 million. And a big item in here is the provision as a matter of prudence made for the LahiTapiola arbitration decision, EUR 15.9 million. Other OpEx that has increased is also the strategic growth expenses and also that we have a more normal business operations now than we had last year due to the pandemic. This means that the adjusted operating result, excluding the LahiTapiola provision made of prudence reasons, then the adjusted operating result has decreased with EUR 10.9 million compared to 2021, but an increase with EUR 14.3 million compared to 2019, before the pandemic. And the operating result then ended up at EUR 6.0 million. If we look into the revenue and the adjusted operating result on the longer run, we can see that we have reached new levels. The rolling 12 revenue now is EUR 986.7 million, and that's an increase with 15.6% compared to September last year. And compared to 2019, the increase is 2.7%. The adjusted operating results, which is excluding all the capital gains in real estate -- of selling the real estates and also restructuring costs, then the adjusted operating result ended up at EUR 83.3 million. And as seen here in the graph, there is a significant improvement during the latest quarters. So compared to 2019 is an increase with EUR 43.5 million. If we look into both divisions here, we can see that Lindex profitability remains on a high level, and that Stockmann improved steadily. Compared to 2019, the Lindex adjusted operating result has more than doubled, and Stockmann division was hit quite hard during the pandemic, but now it's almost on a rolling 12 [ basis ] on positive figures. The cash flow continues on a good level. And these graphs illustrates both the cash flow for quarter 3 and also the cash flow for rolling 12 months. And as seen here, during the quarter 3, the cash flow decreased. And the main reason for that is that we have a higher working capital compared to quarter 2. And the reason for that is that we are preparing for Christmas sales, and we also have longer lead times. So it's a seasonality reason there as well. We also have high investments for the Lindex new omnichannel warehouse, and that's amount of EUR 24 million this -- during quarter 3. And the cash flow on the rolling 12 months, there we can see that the cash flow from the operations is on a high level. The working capital stays quite intact, while the investments are high and EUR 25 million of these investments of EUR 50 million is the new warehouse for Lindex. And we have also done repayment of governmental loans of EUR 40 million during these rolling 12 months -- latest 12 months. So that is the reason. Going forward, there will still be investments in Lindex omnichannel distribution center. And as I said before, the provision -- the amount is EUR 110 million, so we will have coming -- CapEx during the coming years here. Looking into the interest-bearing debt, we can see here that except the bond of EUR 67.5 million, the group is debt-free. So, if we compare to the beginning of 2018, the interest-bearing debt has decreased, and now the group is having a positive cash situation after selling the real estates as well. So the balance sheet is in a much better shape now. We have lease liabilities in the balance sheet, and the lease liabilities are coming rental payments due to the contract that we have. The amount is EUR 559.1 million. And the main part here is the coming the future payments for Lindex stores, it's EUR 271.4 million. But we also have the Stockmann Helsinki City Center of the sale leaseback here as well, EUR 189.7 million, together with other premises and the rental agreements we have here. The group shows a strong equity ratio, and it has a good cash position. And as seen here in the graph, after selling the real estate, the equity ratio has increased significantly. So, excluding the future rental payment, according to the IFRS 16 accounting, then the equity ratio is 53% now compared to 1 year ago, where it was 22.9%. And despite more shares, because the shares has more than doubled compared to 2021, the adjusted earnings per share is stable anyway, so -- which is also illustrated in this graph. So, the guidance then. We have not changed the guidance. Stockmann expects an increase in the group's revenue and that the adjusted operating result improved compares to previous years. 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. So it's the same guidance as we have given before. And the market outlook is the same as well, where uncertainty in the global economy is expected to persist during throughout '22. The geopolitical instability will affect the supply chains and international logistics, and the COVID-19 pandemic will continue to have an impact on the economy across the world until the coronavirus situation is under better control. Additionally, the accelerating inflation has an impact on households and consumptions and will also lead to increased operating costs. So, the retail market is expected to remain challenging due to changes in consumer behaviors and confidence. So, the Stockmann division will continue to execute the restructuring program and Lindex to explore new growth opportunities. So with that, I end up the financial presentation as well and welcome Jari and Susanne for Q&As here as well.

So, we are ready for the questions. And as we have participants in the room as well, do you have any questions? Yes, go ahead.

[indiscernible]. I was wondering, do you have to raise the prices because the inflation is so hard now? Lindex, you already said that you have raised the prices. What about Stockmann Group, do you think that will affect your customers that you should raise some prices, because the inflation is so high?

We have been increasing the prices constantly. And obviously, we look category by category. But as you can see in the results as well, this is thanks to increasing prices and being really focused on the right price level as the inflation is high. But it is -- I think it is important to remember that there are different kind of customers, there are different kind of price levels in Stockmann division. If I take Stockmann private labels, they are affordable, good quality, value for money. But then, we clearly see that premium luxury is holding very well globally, but also in our sales. So, it is a combination. We need to be very careful. We need to follow all the time the customer behavior. But so far, we've seen it's working well.

Yes, regarding the inflation for Lindex, I would say, it has not really affected our prices or the intake prices. It has mainly been the U.S. dollar, because we have been able to mitigate sort of price increases in the way we're doing the garments and the products. So, the impact of cost has been due to the U.S. dollar and SEK. And as I said, we have, to some part, increase the prices toward the end consumer, but we are also a little bit careful here because it is important that we have the right price value. So, it's affordable and the consumers can actually buy the Lindex clothes, and I think that's also a strength onwards.

And then, about the customers here in Stockmann, you used to have a lot of tourists from Asia and from Russia, those both are now away, so they are not here. So, you have more Finnish customers. So, Stockmann is now tempting Finnish people also?

Yes. We have -- the loyal customer share is above 70%, so identifying us Stockmann -- MyStockmann Loyalty customers. But that we call tax-free tourists from Russia or Asia, they disappeared already before COVID. So when COVID hit, we had to adjust our operations that we cannot be basing our business on tax-free customers. So we have strong -- we've been improving our position with the domestic customers, but it's also Helsinki and Finland as an attractive destination for Europeans. This summer, we saw already that Southern Europeans came clearly back to Helsinki and Finland. We are not yet recording the same level as 2019 in terms of tourists. But if I remember correctly, so Helsinki was announcing, we were roughly 80% versus 2019 in terms of tourists. So, yes, we have Europeans, Americans to some extent, but also domestic, and we are a destination also for those who live in Oulu.

Yes. [ Samuel Williamson ] from Nordea Markets Credit Research. Just going through the communication here that you said that this -- if you exclude the bond and the leasing liabilities, your net cash, but also your net cash, including the bond. So, what is your overall feeling when continuing the restructuring process with outstanding bond? I know that you cannot say directly, but just an overall feeling because the coupon is very low. But on the other hand, it contracts [ possible ] for dividend payouts out of financial restructuring. So even though it's a cheap bond, but trying to just figure out your communication, you try to exclude it and so forth, like what is your overall feeling, are you, for example, looking for early redemption or just going through comfortable with the bond going forward?

Well, the bond is until 2026. So, we're having time left there. Of course, we are looking into how to get out of the restructuring program as soon as possible, of course. So that is what we aim for. And then also, we will look into more financing options after that as well.

But basically, the key challenges with the District Courts and the disputed claims as we are reporting, when do we get the decisions from the Courts. And that is the key mover in terms of getting away from the whole restructuring process. So, it is more how do we finance the growth we are doing currently, but it's also how do we get the decisions from the Court in order to get out of this.

Okay. So just a conclusion, does that mean that the dispute that you have to EUR 45 million, that's something that you will solve first before looking at the [ other option ].

Well, we have to basically, or then we have to come to an agreement with these who are claiming that we get out of the restructuring process, but these claims will continue in the District Courts. So there are different alternatives, and we are looking this together with the administrator how can we get out of the restructuring claim. I can clearly say that our suppliers trust us already, there is no issue in that sense. So, we want to get as soon as possible out so that we are openly working with the finance market so that we can invest for the future growth. But the disputed claims is now needs to be solved first.

And then, the online questions. [indiscernible] asking, how is the remaining Itakeskus lease contract?

Meaning -- so, if I put it this way, when we filed for the restructuring, that gave us the opportunity, why partially we are with the disputed claims to negotiate new terms with every landlord. And in the case of Itakeskus, we agreed that -- I don't want to reveal the agreement, but there is a possibility for the landlord to take the second floor for other use. And that is in our agreement, and this gives us a great opportunity to pilot new kinds of concepts within Itakeskus, but not in the mind of Itakeskus but more in the mind of future growth.

And then, [ Mika Karppinen ] asking, how do you consider Lindex gross margin going forward? Could we expect it to normalize when currencies stabilizes?

Yes, as I said, the currency impact is huge in the intake price and the dollar has become much more expensive than just a year ago. So, if we have a more positive exchange rate between the SIK and the U.S. dollar, that will have an impact for us. If we look at the fourth quarter, we have already bought the items for those months.

And then, [indiscernible] asking, the price of the cotton is down by 50% from the peak. How soon should this have a large positive impact on the gross margin?

We are buying mainly sustainable cotton. So there's a slightly different price level there. But again, we have been able to mitigate some of the currency impact also when we have negotiated purchasing prices for our products. So, I agree there's an opportunity also going onwards. But to some extent, this is already done.

Then [indiscernible] asking, are there any plans to change the company name to Lindex to better reflect the main business of Stockmann Corporation?

I think this question comes every time, and there is no plans to change the company name.

And then, 2 questions from [ David Gandla ]. The first one being, of the still unresolved restructuring claims against Stockmann, which one is estimated to take the longest?

It's difficult to say, because they are all proceeding in the Court handlings. And we cannot -- we don't have the visibility where in the Court processes each case is. So, we cannot really give any estimate. We obviously hope as soon as possible, but we are not managing that from our side.

And the second one being, what is the time schedule for the Supreme Court granted Pirkanmaan Osuuskauppa's appeal arising from the termination of the sublease agreement? And will that appeal have to be resolved before the restructuring can end?

Well, as I said already, if I start with the last question there. Obviously, we want to solve the claims or the disputed claims with the District Court. But there is a technical possibility to agree that restructuring ended, but there are the disputes continuing in the courts. When it comes to the Pirkanmaan, it's in the highest court and/or Supreme Court. We could expect that it comes before end of this year, but we have no control where the process is as a whole.

Then [indiscernible] asking, are Lindex costs associated with the new products and brands expected to continue in the following quarters? If so, in what scale?

Okay. Regarding the cost increase that we saw for the third quarter, it is due to some extent to our investments in future growth. But I would say, mainly the cost increase is due to the new more normal operational sales since we don't have any pandemic effect, and we now have been able to have more staffs in our stores, for example. But yes, we will see that also in the Q4 that we are investing for future growth.

And then, [indiscernible] asking, freight rates are down by more than 50% from the peak. How large positive for a tailwind should this bring to your gross margin? And how fast do you expect this to happen?

I couldn't really hear.

So, the freight rates are down by...

Yes. All right. Regarding the freight, yes, we are negotiating that as we do with all the suppliers right now. And we expect quite a huge decrease in costs. This is part of, what we call, the estimated landed cost. That is the cost that we have on our products. So, the decrease in cost that we get now will then affect maybe 4 to 6 months later. But yes, we see that as an opportunity, and we have negotiated the prices.