Tokmanni Group Oyj (TOKMAN) Earnings Call Transcript & Summary

Good morning, and warm welcome to Tokmanni's third quarter result presentation. My name is Mika Rautiainen. And together with me today presenting the result and the report is Tokmanni's CFO, Mr. Markku Pirskanen. First, I'll go through the highlights of the quarter. Then Markku will dig a little bit deeper with the financials. Then a couple of words about the fourth quarter, and then it's time for questions. So let's start. During the third quarter, Tokmanni's sales were very strong. Here, I would like to thank all our customers for the confidence. First of all, the store visits grew, as we'll see soon a little bit later with the presentation. So the store visits grew very, very nicely. And we also conducted a consumer survey during the third quarter. According to the consumer survey, the customer satisfaction is on a much higher level than in the previous survey. And the plans to visit Tokmanni more frequently, the level is much higher than in the previous survey. So thank you very much, and we will work according to the confidence in the coming months. And all of this was, of course, done by Tokmanni employees. So many thanks to all Tokmanni people. Our third quarter was full of actions. The shelf availability, which basically suffered a little bit during the second quarter, the shelf availability in the stores was improved to a record high level. The second thing, a big issue for us was the apparel business, which was -- basically the apparel business suffered most from COVID-19 and the business basically pulled back on track during the third quarter. And also the Christmas season preparations were done earlier than ever before during the third quarter. A couple of words about the apparel business. Basically, apparel business was causing the drop in Tokmanni gross margin during the third quarter. So Tokmanni in Finland, Tokmanni is one of the biggest apparel retailers. Basically, the Finnish apparel market was pretty much similar to European market as well. In March, basically, the business was stocked completely. Now after 9 months, so the first 9 months of 2020, according to the market reports, the drop in apparel has been minus 18.5%. Tokmanni's apparel business, for the first 9 months, is basically on the same level as last year. And this was achieved mainly with very strong sales during the third quarter. This is something we decided to do because of the high inventory level. And basically, we succeeded -- increased the volume, the units with almost 10%. So for us, for Tokmanni, very important, especially with apparel, is the inventory level. At the end of September, the inventory level was basically the same level as last year. So we basically succeeded with -- as mentioned, pulling this apparel business back on track. And with the inventory from the spring/summer time, basically, we were not able to reduce the quantities. But for example, for the coming winter season, we were able to already amend a little bit the volumes. So this was basically the situation with the apparel. Anyway, we're able to improve our comparable EBIT. And as mentioned already, all preparations for the Christmas season are well in place. All imports from our Far East office are basically already in Finland and in the Mantsala warehouse or in our stores. A couple of words about the figures. Revenue grew by 13.1%. And last year, it was 9.9%. So the increase was very, very good. Like-for-like revenue grew by 11.6%. And of course, the -- basically, the biggest problem was this gross margin, which was already mentioned. It was 34% when it was last year's third quarter, 35.4%. Anyway, the comparable EBIT was EUR 24 million with last year's figures, EUR 21.9 million. So representing 9.2% of the revenue. Cash flow from operating activities was EUR 6.1 million. And here's a difference with last year figures, which was EUR 18 million, and that's due to the Christmas preparations. We basically called all the Christmas seasonal products a lot earlier to Finland than ever before due to the uncertainties of the supply chain. And that's why the -- also the cash flow was, during the third quarter, in a lower level than last year. And that's, of course, the same thing goes with inventory level, and Markku will soon tell a little bit more about that. Earnings per share was EUR 0.29. The first 9 months of 2020 were, actually for Tokmanni, very good. Both the revenue and EBIT level increased strongly. Revenue growth has been, for the first 9 months, 13.2% and like-for-like revenue grew by 11.8%. We're still behind with the last year's level when it comes to gross margin. It's, the first 9 months, 33.7%; when it was last year, 34.1%. But anyway, the comparable EBIT is clearly better with EUR 54.9 million compared to last year's EUR 38.4 million. So we're -- with EBIT, it's 7.4% of revenue. Cash flow from the operating activities was EUR 61.5 million and earnings per share, EUR 0.63. And as mentioned in the beginning, of course, we're all the time monitoring like how does the customer behavior change with this current situation of COVID-19. Tokmanni, we've been basically lucky with the customer visits. It's -- the like-for-like customer visits in our stores during the first 9 months is plus 2.8%, meaning that it's more than 30,000 more customer visits every week in our stores. So we're very happy with this level when basically, there is a clear drop with the customer visits in retail in general. But when we're talking about the customer behavior, the next figure, of course, is a remarkable change. So this is the like-for-like average basket, which basically has increased during the first 9 months with 8.7%. So the customers are buying much more at the moment when they come to our stores. But Tokmanni, basically, we have got a lot new customers as well based on the figures that we can today present for the first 9 months. Our online business grew strongly. The growth was 155%. But of course, we have to keep in mind that the online sales is only 1.1% of the total revenue during the third quarter. I think we're very happy with the combination of our online sales and our stores. Basically, the visitors on our website is more than 5x bigger than, for example, last year. So the combination works very well. Customers visit our website to see the assortment, the price levels. And then they also come to our stores to do the shopping because we do have a nationwide store network, which, of course, means that there is a Tokmanni store for everything in 5 minutes reach. Anyway, all the online developments, that action points, what we've done, they've been successful. The main focus at the moment is in expanding the product range, also new products outside the stores assortment and, of course, improving the customer service. And of course, we're basically ready for the most important season for online business, with Black Friday by the end of -- end of November. So we're basically set for that. And when it comes to our store network at the end of September, we had 190 stores where, during the beginning of this year, we've opened a new store in shopping center in Vantaa, Aura and in Pudasjärvi. Couple of stores were enlarged, basically right here in the very center of Helsinki and in Kauhajoki. We closed 4 stores in Tampere, Äänekoski, Raisio and Vantaa. Also, we opened a new store in one of the very new shopping centers in Helsinki called REDI. And there will be also a store opening in Pietarsaari in the end of November. So by the end of this year, we'll have 192 stores open, and the plan is to open 5 new stores next year according to our strategy, basically. Now here's the figures from the non-grocery market based on the Finnish Grocery Trading Association. Based on this, Tokmanni is gaining a nonfood market share from the other players. So Tokmanni is with a red line over here and the -- all the other players with the black line. However, let's keep in mind these figures, they don't include the online sales of nonfood products. But anyway, we're basically happy with the market situation. And well, after this, the next one, Markku, you could actually dig deeper with the financials. So please go ahead.

Okay. Thank you. So Mika already mentioned -- sorry, good day or it's still good morning for some of you, so from my side also. So Mika already started with the figures and explained a bit backgrounds to figures, but let's go a bit deeper there. And then starting, traditionally, I could say from a little bit longer view looking the quarter 3 from year 2018 and 2019 and then, of course, 2020. If you look first, the revenue development, we can see that last year -- with last year, we got a nice step, 10% increase in our revenue and this year achieved with 13.1% increase. Q3 2018 were -- EBIT was at the level of EUR 15 million. We got the jump to EUR 21.9 million, and we were able also during this year, improved EBIT and ended up to EUR 24 million. Of course, it could have been a little bit bigger, but the main reason behind -- perhaps only EUR 2 million development was, but the gross profit percentage was during the Q3 2020 on a lower level compared the previous year. Let's look a bit with gross profit development. It's natural when your revenue is increasing. The gross profit in euros are also on a higher level. But looking for gross profit percentage, Q3, we ended up 34%. And last year, it was 35.4%. So it was decreased by 1.4 percentage units. And why so? So basically, there were 2 main reasons. Mika already mentioned with apparel, and we really decided during the summertime that we are going to sell our apparel away because we didn't want to keep it on our warehouse. Because if you have a higher level of value in apparel in your inventory, it will be a challenge in the future. So we started to make the discount sales and, of course, that meant that the actual gross margin percents that we got from apparel was on a lower level if we compare to last year's figure. The other thing is the sales structure, what we had during Q3. And naturally, apparel was also one part of a reason where because, as Mika mentioned, the sales of apparel was about the same level in euros what it was during 2019. And of course, if the total sales increased by 13%, it means that the share of apparel is lower from the total sales. And we all know what the gross margin percentages on apparel are on a good level. Other things, which affected to our sales -- structural sales mix was that we had a good sales on yard and garden furniture and sports and leisure products. These products are -- we can say that they are good products from a margin point of view. But on the other hand, we also managed to sell well our grocery stuff, and as we also all know that the margins in groceries are on a lower level. So this sales structure affected also to our gross margin percentage. But all in all, after 9 months, we are at the level of 33.7% compared to last year, 34.1%. So over only 0.4% decrease on a cumulative figure. And the good thing is that our apparel inventory are now on healthy level. We have said on our long-term targets that we are aiming to increase our gross margin percentage. And the 2 actions or 2 means to do it is to increase our private label share and also increase the direct import share. Now first, looking at the private label share. As we see that during this year, we have not managed to increase the private label share. After 9 months, it's 30.7% compared to last year, 30.9%. And if you look at the Q3 number here, it's 31.2% compared to last year's 31.8%. So they are on a lower level, and the main reason behind that is our sales structure. On apparel sales, which are a bit lower level, on percentage-wise, if you look at our sales structure, it includes the good private labels. And of course, if you have a lower share in your apparel, it affects to our private labels also. But as said, the target is to increase the share of private labels, and we are working on that. And during Q3, we have brought 2 new categories -- or not categories, 2 new products into the market or we can say 1 new product and 1 enlargement is Pisara. We have made an enlargement to these products, and brought new lines for hair and face care and then cleaning. And the new one is for pet food, Natur premium food. And then I can say that we have in these both 2 products, good price and quality ratio there. Hopefully, consumers are taking them well. Even we had a small decrease in private labels, on direct import share, we managed to increase a bit. During Q3, it was 26.3% compared to last year's 25.9%. And cumulatively also, the increase, 25.2% against 24.3%. That's good development. Operating expenses, revenue increased well. Of course, if you look at Q3, the actual euros increased by roughly EUR 3.8 million. But at the same time, when we look in the ratio, what is the share of operating expenses against the revenue, we ended up to 18.9% compared to last year's 19.7%. So good development on that side also. And also on cumulative figure, 20.2% against 21.8%. So good development there also. EBIT already mentioned this Q3 improving by EUR 2 million. But looking the cumulative figure, very good development now ending up EUR 54.9 million, which is 7.4% against last year, EUR 38.4 million, which was 5.8%. So good development in euros, but also on relatively -- relative-wise, very good development. Balance sheet issues. Inventory level, we ended up to EUR 157 million, which is EUR 20 million more compared to last year. But at the same time, our revenue increased much, which, of course, effective to the inventory level. But the main reason behind the increase was that we took the Christmas products earlier into our inventory compared to last year. And then we really wanted to be sure that we have products to sell for Christmas season. And then of course, as we all know, that COVID-19 gives some kind of uncertainty at this time. And then we made a decision, but it's better to have products earlier in our inventory. Cash flow, even it was a bit lower level during Q3, but on cumulative wise, nice development, EUR 61.5 million cash flow compared to last year's EUR 27.5 million. And good thing, ratio, net debt-to-EBITDA and now at the level of 2.6 compared to last year's 3.4. And if you remember, our long-term target is 3.2. So we are well there below that target. And about investments or net capital expenditure. Now after 9 months, a level of EUR 8.3 million compared to last year's EUR 12 million, which is clearly lower level now. And the main reason is that we have postponed or transferred some investments to next year, due to the COVID-19. And earlier, we said that the investments during 2020 will be at the level of EUR 15 million. And due to this transforms or postponement, we are now expecting to be level of EUR 12 million to EUR 13 million during this year, which, of course, might affect to the next year's investments that the next year would probably level be a bit higher level due to this region. But this about the numbers. And I still give the speech to Mika, and Mika will have a couple of words still more.

Sure. Thank you, Markku. Yes. A few words about the fourth quarter. Basically, we are very confident about the fourth quarter for Tokmanni. Basically, the biggest problems caused by COVID-19 thus far are basically solved. According to all the reports, the Finns won't be traveling during the Christmas season. So we are in a very lucky position to have, basically, more customers in Finland. The stores and our online business, basically, it's -- they're all ready for the season, for the most important Christmas season. So everything looks at the moment, very good. We're basically -- we are ready. The last couple of weeks, they've been -- basically acceleration of COVID-19 all over in Europe as well as in Finland. Luckily enough, we haven't seen any drops with the customer visits in our store -- in our stores. So that's -- basically, we're very happy about it. And of course, online is all prepared for Black Friday and so on. Obviously, many thanks to -- one more time to all Tokmanni employees. It's -- we have more than 3,000 people working in Tokmanni stores. And it's -- basically in this kind of environment, it's a heavy task to, every day, go to basically serve our customers. But thank you very much for doing a great job. The outlook for 2020, Tokmanni forecasts strong growth in revenue and like-for-like revenue for 2020. And we also expect the profitability to improve compared to previous year. So this was basically the report for the third quarter. And the next report will be for the year of 2020, and it will be published on the 12th of February. So thank you very much. And now it's -- operator, it's time for questions. Please, go ahead.

[Operator Instructions] Our first question comes from the line of Nicklas Skogman from Handelsbanken.

Sorry, we couldn't hear you.

It's Nicklas Skogman with Handelsbanken here. Can you hear me?

Yes. Now we can hear well.

Good. So I buy your comments on the gross margin there on the discounting of the apparel. You said that the apparel inventory was at the same level as last year. But is the composition as such that you don't require more discounting there?

Yes. Well, basically, we don't need to do any more of this kind of discount at the moment. Basically, the winter season or fall/winter season has started. Everything looks good. For spring and summer season inventory, we were not able to reduce the amount or reduce the quantities of the apparel orders. But of course, for fall and winter assortment, we were able to reduce that, the level of inventory. Actually, we do have all inventory already for the -- almost all for the full 4 season. And we're, at the moment, we're very happy with the inventory level. It's very healthy when it comes to apparel.

Okay. Very good. Then I'm looking at the -- your costs. So employee costs are up 6% year-on-year; cost per employee, up 4.5%. Do you see that continuing in Q4?

Sorry, what was the percentage did you say?

Total employee costs were up 6%, I think. And then cost per employee was up 4.5% in Q3. Do you see it sort of the cost per employee being higher also in Q4?

Yes. It's somewhat, of course, affecting, if you look at what we have to do, and then most probably still have to do is to make some special arrangements for taking care of this COVID-19, which, of course, increased the employee costs. And most probably, this kind of a development will be also on Q4.

Okay. Because I couldn't really see any of that in your Q2 reports, which, obviously, COVID was an issue already then.

Yes, yes. But the other thing which also affect -- affects to the salary employees is that, basically, we have more expenses on our supply chain because we have, as Mika mentioned, improved shelf availability. And also, we have started to make our stores for -- ready for Christmas earlier compared to the previous year. And that has caused certain supply chain salary costs also.

More compared to...

Compared to, for example, Q2, if you look at the issue.

Yes. Okay. Great. And then your -- the biggest surprise to me was the other operating expenses, they're up almost 12%. But I didn't hear any comments regarding those.

Yes, there are -- certain is also related to supply chain issues. Certain is -- some issue -- or sorry, related to COVID-19. We have arranged different kind of issues in our stores for safety. And then that, of course, costs. And then one thing is also that part of operating expenses are in relation to revenue development in volume -- related to volumes. So that, of course, affects. If you have a higher volume, it's, for example, some transactions, we have more if we have a higher revenue. And that also affect to our operating expenses.

Yes. Okay, but in Q2...

Sorry, Nicklas, but nothing basically special, clearly, except for this.

Okay. Because I mean, looking at in Q2, they were up 2%, and you grew even more in Q2. And this quarter, you're up 12% almost, and you're growing less. So...

Yes.

Is there anything like on marketing that you held back on in Q2?

No, no, no. Basically, no. Basically, no. No.

And the next question comes from the line of Armel Coville from ODDO.

Could you give us some color about the gross margin decline? Could you spread the 1.4 decline between the 3 issues you had mentioned during the call, please?

If I comment that, if I understood right, it's about gross profit percentages, which is, as you mentioned, 1.4% -- percentage unit, lower level. And as mentioned earlier, we have this apparel issue, what we decided to clean. So basically, we sold our apparel with higher discounts so that we got the healthy inventory level at the end of September. That was clear decision because when we make the orders much earlier time, we, of course, assume that we will sell higher amounts for apparel. And of course, due to the COVID-19 issue, we all know that apparel sales has suffered as a whole, as a business. And then on euro-wise, we managed with these discount sales achieve about the same level in euros compared to last year's apparel sales. Other thing, of course, is that our sales structure was different due to the reason that if the apparel sales was about the same level compared to last year and then the whole revenue development was 13% increase that, of course, means that the share of apparel is on a lower level. And as everyone knows where margins in apparel are on good level. Other -- sorry. Other thing, which affect, of course, is that, as mentioned, that the grocery sales was good. And then everyone knows also that the margin levels on grocery is lower. And if that increases as in sales mix, that affects to the gross margin as decreased component. So Mika?

What I was trying to understand is among the 1.4 decline, how much of this 1.4 is related to apparel discount? Is it 1% in the 1.4%? Is it less? Is it more?

It's -- the bigger part is from apparel sales.

Yes, absolutely. The biggest reason for the drop with the gross margin has been the apparel business in total, basically, the lower level of the sales and plus then the discounts. And as -- the second biggest reason, basically, as Markku mentioned, was that the customers were buying a lot more groceries. And that's on a -- we're basically, mainly a nonfood retailer. But at this point of time, this environment, the customers were very happy to buy groceries as well in Tokmanni stores. And the groceries -- gross margin level is lower. These are the 2 main reasons. The bigger one goes for the apparel and the smaller one for groceries. But basically, that's it.

[Operator Instructions] And as there are no further questions, I will hand it back to the speakers for closing remarks.

Okay. Thank you very much. We wish everyone a very successful fourth quarter and Christmas season. Talk to you next time, latest on the 12th of February next year. Thank you very much.

Thank you.