Rusta AB (publ) (RUSTA) Earnings Call Transcript & Summary

Good morning, and welcome to Rusta's Second Quarter Report. Today, we will present the results here as usual. It will be myself, Goran Westerberg, CEO of Rusta, and I'm here together with Sofie Malmunger, our CFO. And we will take you through the second quarter results stretching from August until October. The agenda today will be quite simple. I will go through a business update, what has happened during the quarter, and then we will go more into depth in the financial performance with Sofie. And then I will summarize towards the end. And after that, we will open up for Q&A. Right. Skipping into the business update. First of all, I think it's a good idea to have a look at where we stand in terms of stores. We opened 5 new stores during Q2, and this is what we usually do in the season between the season, so to say. This is one of our smaller quarters, and that's when we try to focus our store opening. So we usually do it during the spring and now during the autumn. After the quarter ended, we also opened up one more store, taking the total new store count up to 219 stores, an increase of 6 stores, 3 stores in Sweden and 3 stores in Norway. And for those who remember, we had a total pipeline last quarter of 35 stores. So we have now opened up 6 of those. Moving over to the results. We had a positive growth of 3.1%, where we experienced quite a heavy exchange rate headwind. Excluding the exchange rate headwind, we would have been up to 5.1%. Like-for-like in local currencies was 0.8%. And we also, on the back of this sales growth, actually had a volume growth. So we continue to sell more articles, which is really, really important for our business model where we want to be strong in the purchase market. I also want to underline that similar to last quarter, we have also price invested to make sure that we have the best possible prices on all of our strategic items. So this is not a price-driven increase. It's actually a price decrease out to our customers. I think it's also worth mentioning that we're now -- or we met during quarter 2, our toughest comparables of last year of 14.4% and with a very strong like-for-like of plus 11% during last quarter. Our gross profit continued to increase as it has done since we went on the stock market. We have said that we wanted to go back to a normalized gross margin level of 44% to 45%, and we are now really, really close to that. The gross margin increased slightly to 43.9% compared to 43.6% last year. And again, this is even though we reduced our prices to our customers. The EBITDA margin dropped a bit to 4.9% compared to last quarter. Again, this is fully explained by currency effects, but you will get the whole waterfall from Sofie in a couple of slides. Looking at the first half, we had an increase of 3.4% and a like-for-like growth in local currencies of 0.9%. We increased our gross profit 5% versus last year, reaching for the first 6 months, a gross margin of 43.8%. We're also strengthening our EBITDA by 10.6%, reaching 8.4% EBITDA margin in the first 6 months of the fiscal year. So some of the key events or highlights of the quarter. We can say that in many ways, what we saw during Q2 was a continuation of the consumer sentiment in Q1. They continue to be financially challenged, let's say, quite careful, much more planned and the behavior that we saw that they were more inclined towards campaigns and also lower price points continued and actually accelerated during Q2. So we definitely continue to see quite a pressured consumer out there. However, we had a continued growth and especially, I would say, in Sweden, we had a solid growth. And in Norway, we had an especially strong growth where they met really, really tough comparables, but still achieved high sales. Likewise, we continue to see the same pattern, the positive flip side of the weak economy, meaning that many more consumers are searching for low-price options, and they seem to really like Rusta in terms of the way that they are coming to us. We reached 6 million fully registered members in Club Rusta. It's an increase of 13.2% in Q2. So that positive momentum of people looking for Rusta, being engaged and applying and registering for the loyalty program, that continues. We also saw an increased footfall to our stores. We saw more receipts, but we also saw on the back of the careful consumer, a slightly lower average receipt, average value of each receipt. So more wallets through the doors, but all the wallets are a little bit thinner in a simplified way. We're also revising the forecast for our store expansion. Another of those, I would say, positive flip sides that we're trying to utilize now during the weak economy. We see that the availability of new locations and also the terms are much more attractive. We have a record pipeline of new stores, and therefore, we also have a more positive view on the expansion potential, and I'll take you through the details of that on this slide. So we had -- last time we met, we had 35 stores in the pipeline. We have opened since then a total of 6 stores, taking it down to 29 but then we have had an inflow of 9 new stores in the last 3 months, taking the total pipeline up to 38. So that's a new all-time high for us in terms of the pipeline. So we see a really positive net increase of the number of locations. And this is both because of the availability of locations are there in -- to a greater abundance than it was just a year ago, but also on terms that are commercially viable for us. And since we have a strong balance sheet, we don't hesitate to sign those attractive locations, and we will continue to do so. So we see the same momentum from last quarter continuing into this one and also up till to date, I would say that it continues. On the back of this, we have taken the opportunity since the last time we presented the Q1 results also to, say, go through all of the white space that's available in the Nordics because this is the area where we have seen that we probably underestimated the potential for us to open stores. And we work both with the total gross list, but we also work with a priority list. And that priority list is locations that if we would get a good agreement on the table today, we would sign them. We have decided to increase the number of locations in the Nordics by 30. So taking the total number in the Nordics to 150 prioritized locations, plus the 30 ones that we have since earlier in Germany. So we're now operating with 180 prioritized locations, which are all so attractive that if we would get them on the table today, we would sign them. So on the back of our strong balance sheet, the inflow into our pipeline, the longer runway that we see ahead of us with more white space to address, we think it's a prudent time to also change our guidance for store openings going forward. Since the IPO, we have operated with a guidance between 40 to 60 stores in total over the coming 3 years. Now when we are looking into next year and the coming 2 after that, we see that we're going to be more in the span of 50 to 80 store openings. So I think we have -- it's a good opportunity for us to take this step, and we continue to see this positive inflow of new locations. Right. With that, I hand over to Sofie to take us through the financial performance.

Yes. So in Rusta's second quarter that stretches from August to October, we have a total net sales growth of 3.1%, negatively affected of 2% of currency effects. So the total sales growth, excluding currency effects, were 5.1%. Our like-for-like growth, excluding currency effects, were 0.8%. During the quarter, we have continued to reduce our sales prices due to more campaigning. So the sales increase is not at all price driven, it's all volume growth. We have a gross profit that has increased with 3.6% in Q2, very positively affected by improved purchase prices. We have managed to increase our gross margin throughout the year. And for the first half of the financial year, we have an increase of 0.6 percentage points. We have an EBITDA for the quarter of SEK 135 million. That is on a historically high level. It's actually our second highest profitability for this quarter ever, only beaten by last year. This slight decrease compared to last year is all explained by negative currency effects. So excluding the currency effects, we have an even stronger EBITDA than last year's record high. Rusta's second quarter is seasonally smaller as it falls between the summer and the Christmas season. In the past 4 years, it has accounted for an average of 13% of the year's total EBITDA. We see a positive total net sales growth in our 2 largest segments. Sweden, our largest market, continues to grow. We see a shift in the sales mix towards more home decoration, which has had a positive impact in both sales and gross margin. We have a slightly higher OpEx due to more store openings and higher electricity cost compared to last year. Opening more stores is, of course, positive, and we build for future growth. But in the short term, it means slightly higher cost in the quarter of opening. The EBITA margin for Sweden is 15.7% in Q2, and the accumulated EBITA for the first half year is 18.3%, which is an increase of 0.7 percentage points. Our segment for Norway has a sales growth of 13.7% despite meeting high sales increase of 13.8% last year. The EBITA margin for Norway is 8.8% in Q2 and 11.3% for the first half year. We have a slight decrease in profitability due to more store openings and negative currency effects due to a weaker NOK. Our third segment, Other markets, meets really high sales comparables of 18% last year, which is actually 28%, including currency effects. Due to the tough comparables and challenging markets, other markets has a negative sales growth of 0.5%. The EBITA margin for other markets is minus 0.1% in Q2, but the accumulated EBITA for the first half year is 3.1%, which is an increase of 0.8 percentage points. We see some clear profit drivers during the quarter. We have higher sales where volume is the single largest driver to the overall growth. As I mentioned earlier, we have continued to reduce our sales prices during the quarter due to more campaigning. So the sales increase is not at all price or inflation driven. It's all a volume growth. We see a continued shift in our customers' purchases towards lower price points, but we have more customers and more receipts. We also have a positive product mix development in the quarter. We see the largest positive impact coming from our gross margin, which we continue to strengthen due to positive effects of improved purchase prices. We have an increased share of private label, and we also have continued positive development of our inventory with lower obsolescent reserves. OpEx as a share of our sales has decreased with 0.1 percentage points. Last year, we had extra IPO-related costs, which explains some of the development. But this year, we have extra costs for more store openings in the quarter compared to last year. So we have a good cost control and the decrease in OpEx is an example of the scalability in our business model. The negative effects in other in the EBITA bridge is all due to negative currency effects compared to last year, which is found in the operating income and expenses in the P&L. The currency affects you find here is negative with SEK 28 million. So for all parts that are in our hands, we are improving last year's record high profitability. And as you can see, we would have had an even higher profitability compared to last year, excluding the negative currency effects. And then some comments on our balance sheet and cash flow. We have a sound and healthy inventory. The value per item is lower compared to last year, thanks to reduced purchase prices, and this will continue to have positive effects in our gross margin in the coming quarters. The inventory share of last 12 months is in line with last year, and the increased inventory value is a planned inventory buildup to continue to drive sales. We have a net debt, excluding IFRS 16 of SEK 18 million, which is a positive decrease from SEK 41 million last year. Cash flow from operating activities in the quarter is in line with last year. Accumulated, it's lower than last year due to the higher inventory. Cash flow from investment activities for the quarter amounted to minus SEK 180 million compared to minus SEK 49 million last year. The increase is explained by the automatization project in our warehouse and of new stores. And as for the automatization in Rusta's Central warehouse, it's all going well according to plan and budget and is expected to be ready in spring 2026. So all in all, we continue to have a solid balance sheet and a very stable financial position, which will support our store expansion that Goran has just described. We have no need of bank loans, and we will fully finance our growth ourselves, completely in line with our set financial targets. And with that, I hand over to Goran.

Thank you. Right. A few words on what we see after the quarter. And I'm sure all of you are interested in Christmas sales that's going on. And I can say that we have had a good start of the Christmas sales. November being one of the most important sales months during the year has performed well and according to plan. This year, we had both first of Advent that is actually our most important day during the year, plus Black Friday that has also had, I would say, a growing importance for us. So we like what we have seen during November, but I also want to say then that December is equally important. The 2 biggest and most important months during the whole year is November and December. But so far, we haven't seen anything else than the momentum that we have had during November. One of the interesting things that I would like to point out is Sweden. And when we look at the macro development across our markets, it's debatable where all the different countries are except in one sense, and that is Sweden seems to be clearly in the lead in terms of the return to a stronger economy. And one of the things that we noted for the first time in quite some time since before the inflation hit us is that we had a combination of both higher visitation in Sweden combined with an average ticket that increased. That is not price driven. So more people flowed to our stores in Sweden, and they also shopped more. They basically put more items in their basket to a higher value in spite of us having reduced the prices. And we like that, obviously. So we hope that, that might be a start of something new, maybe an early sign of recovery. So that's something to be noted. The other thing, of course, we have to utilize whatever advantages are there with a weak economy. And here, I would like to point out 2 things. One is the attractive rental market. The very reason that we have improved our guidance going forward. We continue to see that even after the close of the quarter, both the inflow of new locations and also the interest and the commercial terms continue to be the same as we have seen during Q1 and Q2. The other thing that we want to utilize as a positive flip side of the weak economy is, of course, to attract new customers to continue to make sure that we have as many customers coming to our stores and starting their journey together with Rusta. So the new member inflow continues. And the interesting thing is that we see that same thing in Sweden as well that the member inflow and also the ticket visitation also continues over there. So we will make use of that. And as Sofie has underlined here, we have a strong balance sheet. So we will continue to invest in our own growth. And taking in new customers, opening new stores, we believe is really, really important at the same time as we're investing in price leadership, delivering on our most important customer promise. All of these things are things that we're doing to make sure that we support our future growth. All right. So with that, I think it is time to open up for Q&A.

[Operator Instructions] The next question comes from Simen Aas from DNB Markets.

So I have a few questions, Goran and Sofie. So you stated that Christmas sales have started according to plan and that you noted good sales in November. Should we read this as that you are above or in line with your revenue guidance of 8% per year so far in Q3?

So we have a positive -- of course, we had ambitions there. We're not communicating any numbers, Simen here. But if your question is if we maintain our guidance around our financial target, the answer is yes. And we believe that we will be at or very close to our financial target. We have guided that to get close to that in the medium term. Medium term means 2 to 5 years. We're right now in the second year, and we will take steps towards those financial targets.

I can just add that as for the like-for-like growth, we believe -- I mean, we met 2 really tough quarters. We believe that the second half of this financial year will be somewhat easier is probably not the right word, but a bit not so tough. So we believe we will meet around 3% in like-for-like growth for this financial year. And as for the gross margin, as we guided on before, we believe we will be at the lower part of the range of 44% to 45% and that it will be stabilized somewhere around there in the lower part of that range. And also for the midterm financial targets of total sales growth and the EBITDA growth, we believe we will meet our midterm targets, which is then next financial year of the 8%.

Okay. That's clear. You answered my second question there. So I'll just jump to my third. So on this updated new store growth target, obviously, you state that there is new store potential in the Nordic region. And you also gave us sort of a ballpark estimate of how much you can increase your footprint in each of these 3 Nordic markets. But can you just also give us an update on the German market? How are you thinking about that? And you're not updating the outlook there?

Right. So we're doing exactly the same thing as we speak in Germany. That's not yet ready. That's something that we're going to return to in the near future. And what we can say is that the same way that we have said that Sweden is kind of in the lead, and I think the Nordic countries are also following Sweden. We're starting to see the same development in Germany, a softening of the rental market, more locations opening up. And as I'm sure you're all aware, the German economy is really, really tough right now. And I'm not sure if they have touched bottom. I think it's actually continuing downwards. So on the back of that, we're also seeing movement in the rental market and that is one of the reasons why we are reviewing both the total potential, also the prioritized locations and exactly what we're looking for. Also, based on the learnings that we right now have. So I think that there's quite a lot of things ongoing there now. But at this point, we're ready with the Nordics and the work is continuing with Germany.

Okay. And then just on that, my final question is sort of, can you just give us some color on the development in Finland and Germany? How was sort of the -- which was the best and which was the worst performer there in terms of like-for-like, for instance, or profitability?

Well, I think overall level, I have to say that Germany has been the most challenging market without putting any numbers to it. I think it's also in line with what you see in macro development if you look at the different countries. Germany is by far right now the toughest market. So on a total level, of course, that doesn't have so much of an impact for us as a company. However, there are also opportunities for us there and I would say the prime thing there now is exactly what we're seeing in the real estate market, and that's something that we intend to utilize.

The performance correlates very well on the different markets depending on the consumer sentiment, I would say, on each market.

And then on online, any changes there? Or is that still tough. I know it's a small part.

Yes, exactly. No, I wouldn't say that it's a significant deviation.

The next question comes from Niklas Ekman from Carnegie.

Yes. Can I just ask about -- when you talk about the consumer here, on the one hand here, you're talking about increased campaigning in the quarter, even smaller wallets, more campaigns. On the other hand, you're talking about signs of pickup in Sweden and higher ticket items. I'm just trying to understand how to read these 2. Is one a reflection on Q2 and the other is more forward-looking? Or is one purely Sweden and the other reflects the other markets? Or how should we view these 2 slightly conflicting comments?

Yes. So the comments regarding the campaign items, the careful consumer and can I say, the downwards ticket items movement, that pertains to Q2. And the comment regarding Sweden pertains to events after the quarter, meaning in the November sales. That's sort of where we're seeing that. And that is not something that we saw during Q2.

Okay. That's very clear. And I noticed when I look at the accelerated store openings here, Finland looks like it has seen a significant increase with 9 new stores that you plan. How confident are you about the Finnish market given the rather weak development you've seen in the other segment in recent quarters? And also your comments about weak macro?

Well, I think you have to take the bad with the good. I think, of course, we would have wished for a stronger macro, stronger economy and so on. That's not what we're seeing or what we haven't seen, especially in those markets and in Finland. But then you have to utilize the opportunities that lies in a weak economy, and that is to open up stores because we believe it's only a question of time before each market starts to pick up. Sweden seems to be ahead of the curve, but we believe the rest of the Nordic countries will follow. When? Very hard to predict. Many of us hope that, that would happen during '24. Now I think most of us believe that, that will open, start to happen during 2025. But until then, I think the game for us is to attract new customers and open up stores in locations on good commercial terms where we know we have a fast payback time. And as you know, we have very strong track record and also a lot of data and history in the Nordic markets. And we're in a very good position to judge whether or not a location is good and if it will deliver wish commercial results. And that's what we're seeing. So that's what we picked up here.

Very clear. And speaking of locations, you have earlier indicated an interest in metropolitan areas and you had a test pilot here for a short time in Central Stockholm. Have you seen any progress in that area? Are there any locations that are opening up? Or is this still a very difficult market?

I would say it's easier, but it has still not materialized in a location and I think it's good that you ask that the list of prioritized location does not include, for example, locations in Central Stockholm. That would, in that case, be over and above what we are calculating with. But we're still very much interested in testing a number of more central locations, especially in the capital regions. I would say also that the interest and the discussions and so on are much more positive today as compared to 1 or 2 years ago. But I would say we still haven't been able to bridge the commercial gap fully yet. But I would say the trend is moving closer and closer to it. But it's very hard to predict, and that's also the reason why we're not bringing in central locations or cities, say, big city locations in our priority list.

Very clear. And just a final question, input costs. And I noticed, for instance, we've seen a strong increase in freight that has recently reversed. But since there's a lag, is that something that could have a significant or measurable impact on the coming quarters? Or any other big movements here that we should be aware of that could impact the coming quarterly results?

My short answer is no. When it comes to freight, I'm not sure if you're asking about the sea freight but a short comment on sea freight is that we have landed a new agreement from October where we have very positive prices compared to spot market. The prices is however, higher compared to last year but this is something that we have already calculated into the guidance that we have given today. So positive agreement, 1-year agreement for the sea freight. And as for the freight cost from the DC to our store, yes, it's lower, but that is more of a scalability -- positive side from the scalability and also some of the sort of fuel cost and extra cost that has gone down. So I don't see a periodization negative effect going forward from that.

The next question comes from Arttu Heikura from Inderes.

It's Arttu Heikura from Inderes. I have a couple of questions. Firstly, regarding the improved outlook of new stores, you said that potential relies mainly on the profitability potential. Do you see that the sales performance is on par with existing average store?

The new stores, I'm assuming that you're asking. Yes, absolutely. We have a very detailed financial model for how we're evaluating new store locations. We're looking into cannibalize. We're looking at rent levels. We're looking at the community, the number of customers and so on. Here, we know, especially in the Nordics, we have a fast payback time, and we're always aiming for a minimum profitability level that is not diluting the profitability of the company. If you look across the market, you would see that Rusta as a low-price retailer is probably the most conservative player in terms of number of locations, in terms of number of stores. Even though we are significantly increasing our outlook here, I still believe that we are probably one of the players that are quite conservative in how we're looking at profitability. My clear answer is absolutely yes, we're looking for profitability at the same or better level than what we have in the company today.

Okay. Then about market dynamics, given that Tokmanni has taken over Dollarstore and EuroPris has taken over too. So do you have seen any changes in that market dynamics?

No, not that I would bring up here. I think the main market dynamic that we're having right now is the overall economy, the consumer outlook, the consumer sentiment. That is what affects us the most. I mean Dollarstore and [indiscernible] was there yesterday, and they will be there tomorrow. I think we have all been in the same marketplace for a very, very long time. So I don't see a significant shift due to change of ownership. We as always, continue to monitor all of our different direct competitors and adjacent competitors and so on. But I would say the big thing happening right now is really the consumer sentiment. That's the main thing affecting us. And I mind you I think also all my colleagues in the industry will agree with me on this, and that is that the market for low price continues to grow. I think that's a clear trend. And so I believe that, that underlying factor together with hopefully a more positive consumer sentiment going forward is the most important factors going forward.

All right. Then my last question is about customer sentiment in Norway and Finland. And do you see that there is notable differences between these 2 countries?

I've been many years in retail, and I've been many years in this company. This year has been particularly difficult to interpret what is happening. I think one month, you believe you see something, the next month, you believe you see something different. So I think the more certain conclusions that you can make is that of Sweden, Norway, Finland and Germany. Sweden is clearly ahead, both from a macro point of view with interest rate decreases and also certain financial decisions that have been made by the government and so on, I think it's improving the situation. I believe it is starting to have an effect on consumer sentiment. A little bit more unclear of what is happening in Finland and Norway. There's a mixed picture. As you know, there was an increase of VAT in Finland. That doesn't seem to have had a big impact on our operations over there yet, but maybe it's still a bit too early to call. I would say both Finland and Norway, behind Sweden, but very difficult to say exactly where they are. My guess would be Norway a little bit ahead of Finland.

The next question comes from Fredrik from HandelsWatch.

I thought you said something before that you were underestimated the Nordics. Can you say something more about that? What do you mean that you underestimated the Nordics, having in mind that you see now more potential for new stores?

Right. What we have underestimated is the white space. Basically, the potential for store openings in the Nordics. We believe that we had come closer perhaps particularly in Sweden, where we've been since 1986. It's our home market. It's our biggest market. It's the market where we have been the longest. We thought that we had come closer to the maximum possible stores. But what we're seeing now with the inflow of new customers, very much supported by the weak economy where people have been looking for low price. The inflow into our loyalty program, we see that we can carry stores on, I should say, smaller community sizes and also to have a more dense network in Sweden and in the Nordics in general. Combined with that, we're also seeing, I would say, a bounce back after the inflation where rents were skyrocketing and so on. We're seeing and that is now rapidly falling back and that we also can get those locations on terms that are commercially interesting for us.

Perfect. I continue with some questions about the revised forecast for opening new stores. Can you say something more about Norway where these will be located? Or is that something that is clear for now? Or what can you say about it?

No, I think we're not disclosing the exact locations. But of course, we have a very detailed list of both the cities, the communities and so on and also, our wished locations within those cities and communities. But it's not something that we're communicating outwards like this. But I think it's a combination of a more dense network in larger cities and also an increase of potential in smaller communities across Norway. We also know from experience that in Norway, it's easier to open up with much smaller populations. I think our smallest city that we're in now or village, if you like, is down to about 5,000 people, which that wouldn't be possible in Sweden, not yet at least. But with increased penetration, the more people that are shopping at Rusta. Coming to Rusta and shopping more things there, I would say a smaller and smaller population base is possible for us to open stores in. So it's both a denser network in bigger cities, but then also more communities.

Someone else asked something interesting about central locations, for example, in Stockholm. Having in mind Norway and Oslo, do you see that you have potential for a store in Central Oslo as well?

Yes, I think it's exactly the same dynamic here as well. I think not only the capitals in all of our countries and all of our markets, but also some of the other bigger cities are, of course, very interesting for us. But it's the same challenge here. It's both about finding a store size that is big enough to carry our concept, which is not always super easy. The second hurdle is rent levels because they tend to be too high, of course, in AAA locations in city centers. So we're trying different ways how to get around that. There are multiple discussions going on, both here in Stockholm, but also in other cities. And sooner or later I believe that some of those will materialize. But so far we don't have anything to report.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

So thank you very much for listening on the second quarter results. Now what remains for us is to get back to work and work really, really hard in pushing the Christmas sales. These are really important sales months for us. Until next time we meet, I would like to wish all of you a Merry Christmas and a Happy New Year. So thank you very much for listening, and goodbye.