Lindex Group Oyj (LINDEX) Earnings Call Transcript & Summary

Good morning, everyone. I am Susanne Ehnbage, and I'm the CEO of the Stockmann Group. And I would like to welcome you to this Press and Analyst Webcast related to Stockmann Group's Half Year Financial Report. With me, I have Annelie Forsberg, she's the CFO of the Stockmann Group. And if we then continue on the next page, where we have today's agenda. So please switch page. So today, we will together give you a short introduction to the performance of the group. Then we will take a look into a business update for both divisions, followed by the financial development and our way forward. We will end with a Q&A session, where we will answer your questions. And we can go to the next page, please. So May 12, I was appointed CEO of the Stockmann Group. Prior to that, I've been the CEO of Lindex for almost 5 years. And I am honored by the trust to now also lead Stockmann Group's continued development. The journey continues now to secure improved profitability and to seek growth. Since my appointment, I have focused to deep dive further into the Stockmann division with a great support from my competent colleagues. The group management team consist of me; Annelie, our CFO; Tove Westermarck, COO for the Stockmann division; and Jukka Naulapaa, CLO for the Stockmann Group. I would also like to thank all the fantastic team members at Lindex and Stockmann for their excellent collaboration and valuable support during my first weeks as the Group CEO. On the next page, let's have a glance on the group's step-up. This gives you a brief overview of the group and how the division's presence look like. Lindex stands for 67% of the group's revenue and Stockmann division for 33%. Looking into our market, we can see that Sweden, Lindex' biggest market, stands for the biggest share of the group, closely followed by Finland where we both have Lindex and Stockmann stores. In total, the group has 438 stores in 18 countries, 8 department stores, owned e-commerce in 34 markets and added to that, several partnerships. For the first 6 months, we increased our store network with 2 stores. We also have 5 production offices. And by these offices, we source almost all Lindex products and approximately 10% of the Stockmann products. Our biggest product group is fashion, that stands for as much as 80% of the total sales. If we then continue to the next page, where we will now focus on the business update with highlights for the group and the Lindex and Stockmann division. And for the group, on the next page. The second quarter was characterized by a business environment of rising interest rates and continued high inflation that unfortunately weakened the consumers' purchasing power. The quarter started slow due to cold weather and also challenges deriving from the operating environment, which had a negative impact on fashion demand in several markets. As the warmer temperatures arrived, sales picked up significantly. And in local currencies, the quarterly revenue was at the previous year's level for the group, but decreased in euro by 6.3% due to the weak SEK and NOK. The sales on these 2 markets stands for approximately 50% of the group's total revenue and 70% of the Lindex revenue. So when converting to euro, it impacts total sales significantly. Lindex division revenue, the revenue for the Lindex division increased in local currencies by 2%, where Lindex succeeded in increasing sales in all the main markets and also in all sales channels, especially driven by the digital sales. We have been successful in customer recruitment, which is good as it is clear to us that the customers overall have less money to spend. The pace of the recruitment compensates the clearly subdued market. The revenue of the Stockmann division decreased by 6.4% during the second quarter, which is mainly explained by the timing of the Stockmann's Crazy Days campaign that contributed more to the first than the second quarter sales compared to the previous year. Additionally, the reduction in size of the Itis store in Helsinki had a negative impact on revenue. There was a continued strong increase in the new loyalty program members in both divisions. I am very pleased that Lindex again succeeded in improving the adjusted operating result in local currencies for the second quarter. This was driven by increased revenue, together with increased gross margin. At the same time, the Stockmann division increased the share of clearance and promotion sales, which affected the result negatively. Both divisions were successful with cost savings to mitigate the overall inflation. The group's adjusted operating result in local currencies was on par with previous year for the second quarter and even increased for the first half year, although the result decreased in euro, mainly explained again by the adverse currency impact on the Lindex result, together with the decreased sales for the Stockmann division. In the second quarter, the group's financial situation has further improved, and the group showed positive cash flow despite the significant ongoing investments and the payments of undisputed debt. Inventories are on a balanced level and have decreased compared to both the previous year and the end of the first quarter. During the latest days, we have also signed our revolving credit facility agreement of EUR 40 million that will improve our financial situation even further. As we have earlier communicated, Stockmann Group have decided to commit to Science Based Targets initiative. During the reporting period, Stockmann's Board of Directors approved our science-based climate targets, which means that we aim to reduce our CO2 emissions by 42% until 2030 with the base year of 2022. If we then continue to Lindex division on the next page. Looking at the highlights for the Lindex division for the second quarter. Sales increased in all sales channels, and we improved profitability in local currencies. The result improvement was both, thanks to higher sales, improved gross margin and good cost control. The gross margin has increased despite the historical high U.S. dollar and increased raw material prices. There has been a strong focus and a lot of actions to protect the gross margin by both improving sourcing and to seek where we can increase our prices where it is possible without risking the good price value to our -- towards our customers. At the same time, there has been an overall cost focus to mitigate the inflation impact. In total, we gained over 300,000 new customers only during the second quarter. We now have 5.6 million identified customers. During the quarter, we also increased our brand awareness, especially in our new markets and within our new growth area femtech, we have also increased our brand awareness for Female Engineering. We can see how our customers really appreciate our assortment. Lingerie was the best-performing category and increased by 6.6% versus previous year. We have also proceeded our femtech journey and circular transformation, exploring new services and circular business models. Regarding our progress within the femtech industry, Lindex first patent for an innovative washable protective garment for women will be published August 1. This is a milestone for Lindex as it offers a competitive advantage by establishing exclusivity and also strengthens our brand reputation. Concerning our circular transformation and exploring new services, we are testing -- we are in a testing phase, where we are having several ongoing pilots. One example is that, we have expanded our secondhand, also to Finland. We now have 8 stores with secondhand in the Nordics and plan to expand further during the year. In addition to broaden our offer, it provides also valuable insights into our continued work to prolong the life of our garments. We have continued to increase also our circular materials where we, this year, produce over 1 million garments based on post-consumer recycled textile waste through our partnership with Sodra. Next year, we will scale it up further to 1.5 million pieces, which means that 35% of our viscose will be OnceMore. Through our partnership, we are also looking into how we can increase their [ circularity ] of our own Lindex garments. And we have now formed a partnership and pilot with the company [indiscernible]. We have high activity within our digital transformation and also our ongoing investments. To mention a few of those and the construction of our new OCDC is in full progress. And as part of our digital store program, we have, for example, initiated the implementation of the -- of a new novel point-of-sales system and also RFID technology to further improve the customer experience. We are also testing and further developing a unique AI tool, Lindex Copilot, designed to support our store employees in their daily work. And we are also up and running with our new product life cycle management system, and we are now also scaling it. All these actions will drive increased profitability, either through increased customer satisfaction and improved sales or by efficiency. And for the Stockmann division on the next page, please. Stockmann division had a good revenue development, especially during the first quarter and also for the first half year. For the first 6 months, the revenue increased by 3.2%. However, as I explained in the beginning, the Q2 revenue decreased mainly due to the timing of the Crazy Days campaign, which contributed more to the first quarter sales and the reduction in size of the store area of the Itis department store in Helsinki. Despite the lower sales in the second quarter, the Stockmann division reported a continued strong increase in the number of new loyalty program members by 20,000 and the customer satisfaction improved during the second quarter. The customer service shows us that the transformation of our department stores towards inspiring destination has proceeded during the quarter. To mention a few of those projects. In Helsinki flagship store, we, in April, opened the biggest toy store in the Nordics as part of the children's world. In June, the exclusive cooperation between Stockmann and Fotografiska Tallinn museum resulted in an art installation at the Helsinki flagship. During Q2, we strengthened our position in luxury and affordable luxury, which is an important step in Stockmann's offering development. In April, Louis Vuitton opened a store in the Helsinki flagship, and we launched several new affordable luxury brands to the Stockmann offering, such as Max Mara Studio and [ Lardini ] in fashion. During the quarter, Stockmann continued to add new sustainable choices to its selection and services. As an example, Stockmann is partnering with several secondhand stores in all its locations, as well as with partners within recycling end-of-life textiles. Stockmann continues supporting and celebrating diversity, equality and inclusion topics, and did so by being one of the main official support partners of the Helsinki Pride, gaining great visibility and publicity for this important theme. And by that, I would like to hand over to Annelie, who will walk us through the financial development.

Yes. Thank you, Susanne, and good morning, everyone. So then we can turn to next slide. And in this slide, we want to illustrate the macro trends that have big impact on the financials and also business operation for the group. The euro has increased versus SEK with 16% during the past 2 years and with 12% during the latest years, where also the Norwegian NOK has had approximately the same development. 70% of Lindex sales are made in SEK and NOK, and when converting the sales into euro, the group's financials are significantly impacted. Also the U.S. dollar versus SEK has increased substantially, 27% during the latest 2 years. Since Lindex buys 80% of all products in U.S. dollar, that has a heavy business impact. And the expected full year effect on buying costs compared to 2021 is approximately EUR 40 million and compared to 2022, it's approximately EUR 25 million. And these are effects that need to be mitigated. Also, the prices for raw material have a substantial impact on buying costs where the cotton, as well as other raw material prices have been extremely volatile in latest years. The container freight prices have been high after the pandemic and impacted the business but are now more stable again. Both divisions are also impacted by inflation since it affects both customers' purchasing power, as well as the group's own costs. And then we can turn to next slide, where I will start to show the Lindex financial performance and the Lindex division's revenue increased by 2% in local currencies like Susanne said, but decreased in euro by 6.3%. The late spring impacted the sales at the beginning of the quarter, but from mid-May onwards, Lindex increased sales again. Both physical stores and digital sales grew and sales increased on 7 out of 9 owned markets. It's seen that customers have less money in the wallet and buys less frequent, but that was compensating by recruiting more than 300,000 new customers during the quarter. The adjusted operating results improved in local currencies but decreased in euro. The improvement in local currency is explained by increased sales together with stronger gross margin and good cost control. And Lindex succeeded to strengthen the gross margin despite the more expensive U.S. dollar, and this was, thanks to improved sourcing combined with lower freight prices. Lindex also made price increases but with very high carefulness to not [ risk ] the good price value. On the cost side, there were focused actions for cost savings, which partly mitigated the inflation and converted to euro, the cost side decreased by the currency effect. So summarizing the first 6 months, the Lindex division's revenue increased by 1.4% in local currencies, but decreased by 6% in euro. In local currencies, both the physical and digital sales improved and Lindex grew in almost all markets. The adjusted operating result stayed strong and increased in local currencies explained by higher sales, improved gross margin and cost control here as well, although when converted to euro, it decreased. So in summary, a good quarterly and half year result for Lindex with both increased sales and results, but the division was impacted by currency conversion to euro. So then we can continue with Stockmann division on next page, and Stockmann division decreased revenue during the second quarter by 6.4%, where timing of the Crazy Days had a main impact to that decrease. This year, Crazy Days generated more sales during quarter 1 compared to last year. Also, the reduction of Itis store impacted this. And together with slow spring start and lower purchasing power of consumers, the revenue decreased. Both physical stores and digital sales had lower revenue, where Crazy Days impacted the digital sales significantly. The adjusted operating result fell with EUR 2 million to minus EUR 3.5 million during the quarter. This was an effect of lower sales and the drop in gross margin due to a higher share of price-driven campaigns in clearance sales this quarter. The cost decreased, thanks to a very tight cost discipline that partly could mitigate the drop in gross profit. Summarizing the first 6 months, Stockmann division increased the revenue by 3.2%, where physical stores increased their revenue, but where the digital sales decreased, explained mainly by the sales drop in the home category. The adjusted operating result decreased with EUR 1.7 million to minus EUR 10.5 million. The revenue increased, like earlier said, but the gross profit fell due to the drop in gross margin. The effect could be partly mitigated by cost savings, but not fully due to also higher depreciations this year and governmental pandemic support in last year. So then we can go to the next slide. So when the divisions are combined and also group costs are included, we have the following financials for the Stockmann Group for the second quarter and first 6 months. For the second quarter, the revenue decreased by 6.3% in euro. Although, in local currencies, the revenue was almost on par with a slight decrease by 0.5%, and that decrease was mainly explained by timing of Crazy Days for the Stockmann division. The adjusted operating result decreased to EUR 31.6 million in euro, but in local currencies, the result was on par with previous year's second quarter. In local currencies, the Lindex improvement, together with lower group costs mitigated the decreased result from Stockmann division, although when converted to euro, there was a drop. The operating result for the group was EUR 30.2 million in the second quarter, where last year included a capital gain of selling the real estate of Helsinki flagship. Summarizing the first 6 months, the revenue decreased by 3.2% in euro, although in local currencies, the revenue increased with 2%, with the revenue increased for both divisions, but mostly for the Stockmann division. The adjusted operating result decreased to EUR 29.2 million in euro, but in local currencies, the results improved. As well as for the second quarter, Lindex improvement in local currencies, together with lower group costs could mitigate the decreased result for Stockmann division. But when converted to euro, there was a drop in the adjusted operating profit. The operating result for the group was EUR 27.3 million in the second quarter, where the last year included the capital gains from both Helsinki and Riga when selling the real estate. So then turning to next page. As shown here in the graph, the profitability for Lindex continues on a high level. The adjusted operating result has more than doubled compared to pre-pandemic, although in these figures, the weaker SEK currency versus euro impact Lindex figures negatively. As shown before in the presentation, during the 2 latest years, the SEK has weakened versus the euro with 16%, which has a heavy impact. The profitability for the Stockmann division has dramatically improved compared to 2020 and 2021, but the Stockmann division still has negative numbers, which, of course, will be in focus to improve. So then we can go to the next page, please. The cash position for the group continues to be strong, and second quarter had a positive cash flow as well. The opening cash for the period was EUR 103 million and ended at EUR 133 million. Compared to last year's cash flow, which can be seen on the green lines, the cash flow decreased with the explanation that then we had cash left over from the sales of the Helsinki real estate sales after repaying the restructuring debt. We also had lower investments at that time. For the year-to-date cash flow, we decreased cash mainly explained by tax payment in beginning of the year together with OCDC investments. Inventories are on a balance level and have decreased from last year. Lindex has reduced inventory, thanks to lower freight days and improved supply chain, while Stockmann increased it explained by higher purchase prices and a higher intake. Investments to strengthen the digital development have been done in both divisions. In addition to this, there is also the ongoing construction of the new warehouse for Lindex, which is the biggest in Lindex history with a total investment of EUR 110 million. The construction is proceeding well, and the warehouse is planned to be taken into operation in autumn 2024. Until end of June 2023, EUR 57 million of the total investment sum had been used for the project, which has been fully financed from own cash flow. Going forward, another EUR 40 million in OCDC investment is planned during the autumn. Then next page, please. The group's financial position has significantly improved during the latest years. There is now a positive net debt and net cash position of EUR 61 million. That is coming from cash deducted with interest-bearing liability, which consists of the EUR 72 million bond. The group also has lease liabilities according to IFRS 16, but these are excluded from net cash position to only show the really interesting part. Like Susanne mentioned, we have signed a revolving credit facility of EUR 40 million in July. That will improve the financial strength even further. As a retail company, there is a high seasonality in the cash flow, so RCF will be very favorable for us in the future. The next page, please then. The improved financial situation can also be seen in this slide, where it's illustrated how equity ratio has improved in latest years and now reached 58.4%, excluding IFRS 16 leases. This is, thanks to more profitable business operations, as well as the progress in fulfilling the restructuring program. If we turn to the next slide then, we can also look into the earnings per share. And during the latest years, the number of shares has increased, which is explained by new share issues according to the restructuring program. Now, the group has 156,000 shares. The earning per share is EUR 0.21 for the first 6 months, which is a decrease from last year when it was EUR 0.54 per share, but that amount also included sales of the real estate in Helsinki and in Riga, which had a heavy impact on the net result. When excluding these adjustments, together with actual tax and also used deferred taxes from those, the adjusted earnings per share was EUR 0.03. This year, the positive tax decision from SSAB was adjusted as well and adjusted EPS then ends up at EUR 0.04. The change from before is that, we have included the use of deferred taxes in all calculations where we stated also last year's figures to make it more comparable. So that was the financial information. So then I hand over to you again, Susanne.

Thank you, Annelie. We will continue with our way forward. So let's take a look at the next page. And looking ahead for the Lindex division, we are focusing on to continue growth on both new and existing markets to offer a customer-oriented sustainable assortment were designed longevity and circularity is a key focus ahead and an important enabler for our continued circular business transformation. We also continue to explore and pilot new sales channels. And during the autumn, we will launch on marketplaces. We will also launch with kids wear on johnlewis.com, in partnership with Refined Networks and together with Manor in Switzerland. Already after the summer, we will launch new innovative femtech products from our brand Female Engineering. So we have an exciting autumn ahead of us. Another important focus ahead is to continue to stay resilient and to transform the business. We continue to develop our e-commerce sites and through our new OCDC, combined with RFID, we will be able to increase our delivery capacity and stock accuracy to offer a smooth omnichannel experience to our customers. We continue to have high focus on automation and digital solutions throughout the business. Exploring new circular business model is an important part of our transformation and our growth, and we have high set goals to grow, both in a sustainable and profitable way. We are building a strong foundation for innovation, efficiency and flexibility, where our investments ahead are central. Going forward and focusing on the Stockmann division on the next page. The target is to further strengthen their customer centricity to deliver growth and improve profitability. The focus is to be relevant and add value to our customers to improve sales and profitability. Customer-centric growth will be delivered by furthering, strengthening the luxury and affordable luxury offering by continuing bringing in relevant partners and brands. It also means developing the Helsinki flagship store into a more inspiring destination based on customer insights. The loyalty relationship will be further improved and strengthened by building strong capabilities for personalized customer experience. And to improve the omnichannel customer experience, we will continue to invest into digitalization, which include e-com development, MyStockmann app development, et cetera. Besides growth, improving profitability is the other important focus area for us. We will continue investing in digital solutions and automation. In June, it was decided to invest into an automation in the distribution center to nearly fully automate the e-com fulfillment process. This will lead to a faster order processing and improved customer satisfaction. We have also started RFID pilot in our Helsinki department store, and this has a potential to have significant positive impact on merchandising efficiency and will improve overall customer satisfaction as well. In all markets, we will invest in marketing automation. We also see potential in increasing the non-merchandise income, where we will develop and increase the role of different business models. Tenant and concession models will complement Stockmann's own offering. And we're also looking into increasing Stockmann's media sales by utilizing own channels and process. We will continue the cost efficiency measures by investing in the digitalization. By that, I would like to continue to the market outlook and give the floor to Annelie again.

Yes. Our view on the market environment remains unchanged as geopolitical tensions and high inflation have continued. The inflation, together with high interest rates is forecasted to have a negative impact on consumer spending. And this, combined with increased purchasing prices and operating costs, will challenge the retail market. So if you go to the next page, we can look -- so look into the guidance. So on the 17th of July, we revised our guidance. We lowered the revenue range and increased the adjusted operating result range. The lowered revenue is related to the fluctuations of exchange rates that have a significant impact on Stockmann's performance, especially the weak Swedish krona and Norwegian krone. The change in adjusted operating result is due to stronger-than-expected gross margins and the successful execution of cost saving measures. And thereby, we can change slide and open up for a question from you.

Question regarding group capital expenditure. So what is the annual group CapEx level for 2023 and 2024?

Well, if you look at the OCDC, we know that we have approximately EUR 58 million for the full year of 2023. Then we have roughly -- usually, the CapEx level is approximately EUR 30 million, EUR 35 million yearly. So that is the frame.

And then an exciting question. When will the Lindex spin off a separate company take place?

Well, we are looking into strategic options and that is what we have stated, but we have not said anything about selling any of the divisions. So I don't have any further comments at this time.

For the moment, we actually don't have more questions. Let's see, I think we had about 70 visitors online. For the moment, these were the only questions that we have got. Yes. Then regarding taxes. Your tax rate was fairly high in Q2. Was there something special in there? And what kind of tax rate you see as normal with the current earnings breakdown?