Marimekko Oyj

OMXH:MEKKO

Earnings Call Transcript 2020-Q1

[Anna Tuominen, Communications Director]

Good afternoon, ladies and gentlemen, and welcome to Marimekko's Q1 webcast. Today, we will first hear a presentation by our President and CEO, Tiina Alahuhta-Kasko. And after that, we'll have a Q&A session. For the Q&A session, we also have our CFO, Elina Anckar, here at a safe distance, of course. Due to the circumstances, we have no audience here, but you can type in your questions during the presentation or after that. After the event, both the webcast as well as the materials will be available on our website on demand. Tiina Alahuhta-Kasko, please.

[Tiina Alahuhta-Kasko]

Okay. Thank you, Anna, and good afternoon, ladies and gentlemen. It is now time again to have a deeper look into Marimekko's first quarter interim report and results. So in a nutshell, in Q1, overall, the year got off at Marimekko to a very good and promising start. But unfortunately, then in March, when the coronavirus started to spread around the world and across also all Marimekko's key markets, it led to a significant impact on our Q1 sales and profitability. So to safeguard the health and personnel -- health of personnel and customers, we needed to then make the decision and temporarily close our own company-owned retail stores in March. And unfortunately, we needed to also take measures to adjust the number of personnel to the amount of work available in our retail store chain and retail support function. As many of you might know, for already many years, Marimekko has been building our competitiveness in digital commerce. And due to that, we were able to swiftly move our promotions and campaigns online in March. And therefore, at the end of March, it has been our own online store in our company-owned retail markets that has been safely serving our customers as a distribution channel. The demand for Marimekko products in March when we moved our retail to online really exceeded our expectations clearly. Obviously, this very special circumstance requires very dynamic mitigation efforts. And once we saw the pandemic spreading, we right away initiated very strong mitigation measures across the value chain of our company to minimize the negative impact of pandemic to our business. We will have a closer look into these measures in a moment. But we rapidly implemented measures to, for example, save fixed costs. We reassessed our investment and initiated a lot of other actions to minimize the negative impact. We withdrew our guidance for 2020 at the end of March due to [ solely ] the estimated impacts of the coronavirus pandemic. And we say that the coronavirus pandemic will have a significant negative impact on our net sales and profitability in 2020. As the situation is changing rapidly, it is not possible at the moment to give any precise estimate of the impacts of the pandemic on our business. We will define our guidance for 2020 once a more reliable estimate of the impacts can be made. So then looking more deeply into the development of our net sales. So our net sales declined 8% to EUR 24.9 million. And as I mentioned, the year had got off to a good start for Marimekko, but unfortunately, then when the customers and traffic declined very steeply once the pandemic started to spread in March, it did indeed have a significant impact the Q1 net sales for the whole company. What was positive was that despite of this situation, the net sales in Finland grew by 6%. However, the decline in net sales came especially from the Asia-Pacific and EMEA wholesale sales. There were also quite a few timing aspects here. So in the -- in Q1 in 2019, we had exceptionally strong benchmark figures because of the fact that some of the deliveries from 2018 were moved to early 2019. And this special delivery aspect was one of the key reasons for the decline of the Asia-Pacific wholesale sales compared to previous comparison period. Then due to the -- then in addition, due to the coronavirus pandemic, some replenishment or reorders that we had been expecting from the Asia-Pacific regions were not eventually made. In addition, in the comparison term, there were -- there was licensing income especially from North America that did not occur this year. Something to be furthermore noted when it comes to the net sales in Q1 was that once we moved the retail sales to online as we needed to start temporarily closing our company-owned stores due to the pandemic, the demand for the Marimekko products in our online store clearly exceeded our expectations. And that paired with the problems caused -- logistic problems caused by the pandemic with some wholesale deliveries meant that part of the Q1 sales -- or deliveries were postponed to Q2, which meant that, in total, around EUR 1 million worth of retail and wholesale sales were not recognized as revenue for the first quarter, when they had initially been placed. So also in the Q1, home market Finland has been representing about half of our net sales, as has been traditionally the case. And so Asia Pacific has remained the second biggest market area, as also has been traditionally the case. There are no, let's say, notable changes in the slates between the product lines' share of the total sales. In terms of the global footprint, around 57% of the Marimekko stores and shop-in-shops are located already outside of our home market, Finland. And today, we have a total of some 150 stores in 15 countries and e-commerce reaching customers in 32 countries. So in total, at the end of Q1, around 149 Marimekko stores served our customers also when it comes to physical company-owned retail and partner and retailer-owned retail in total. Our brand sales grew in the Q1 period to EUR 73.7 million, especially supported by brand sales from the Asia-Pacific region. And then when we look at the operating profit, so it is evident that because the net sales declined in the Q1 period, that had a weakening impact on the comparable operating profit. And in addition to that, also a decline in relative sales margin pushed down the profitability. So what are the reasons behind the decline in the relative sales margin? So there are basically 2 reasons, and the common denominator is logistics costs. So first of all, on one side, when the retail -- company-owned retail sales were moved to online, that increased logistics costs as the customer numbers in our online store increased a lot. And then in addition to that, in the Q1 period, we also did a main warehouse partner change and move. The move went well. But as we had expected and planned, the move incurred some nonrecurring costs. So those were the main reasons for the weaker relative sales margin. In addition to those, also the lower licensing income had a weakening impact on the sales margin. But on the other hand, what was very positive was that due to good portfolio -- product portfolio optimization work, the product level margins were strong. And that's, again, supported and the margin development. But as said, the operating profit as well as the comparable operating profit amounted to EUR 1.2 million in the period under review. So then when we look at the key events in the first quarter. So let's maybe first have a deeper look into these crisis management actions that we're continuously taking in a very dynamic manner. So first and foremost, obviously, the health and well-being of our personnel and customers is our top priority. As mentioned already earlier, once we saw the epidemic and then the pandemic starting to spread and become stronger and stronger, we immediately initiated an ambitious cost -- fixed cost savings program. And in addition to that, we reassessed and cut planned investments to secure our cash flow. When the stores of -- our company-owned stores have been now temporarily closed, e-commerce has been serving as our responsible distribution channel to support cash flow. And luckily, as I mentioned earlier, on the demand for our products in online -- in the online store has been clearly exceeding our expectations. We've been also very strongly supporting the operations and post-crisis recovery of the Marimekko store open in Asia. So then we talk about the Marimekko partner-owned stores. And at the same time, we've been working very hard on preparing for the safe reopening of our own retail stores as soon as possible. We are and have been negotiating on rent reductions and payment schedules with the landlords of the company-owned retail stores now that they have been temporary closed. And at the same time, we have been working very actively on purchases, product flow and inventory management. That is very critical also in the view of this external shock created in the value chain. At the same time, we'll be working on contingency plans in our supply chain to ensure continuous production and logistics. Then especially in the view that should this pandemic prolong, we've also been able to secure financing. As decided in the AGM last month, the dividend payout for 2019 has also been postponed. And then at the same time, while we act and action these crisis management efforts in this fast-evolving situation, at the same time, we keep our view also in the future. And in the building of the future that for Marimekko, we see that still, in the long-term view, looks very bright. And last but not least, obviously, we want to take care of all our stakeholders just in line with our values. It's very important for us at Marimekko, being a very value-driven company. Then what else happened in the Q1 period? So obviously, there were some exciting positive news as well. So in Q1, we also announced a new steer spearhead collaboration collection with UNIQLO, a major Japanese apparel retailer. This is the third limited edition collection that Marimekko and UNIQLO have initiated together. It's been designed for women and children, and it has been available since April. And obviously, these brand collaborations offer Marimekko an opportunity to share our design philosophy with a very wide global audience while, at the same time, strengthening our core business through increased brand awareness. And obviously, the brand awareness -- global brand awareness is a key aspect for us to build as we internationalize our company and business. Then in Q1, in February, Marimekko and the Finnish fiber technology company Spinnova presented the first-ever printed clothes made of Spinnova’s wood-based fiber containing no harmful chemicals, so really a groundbreaking, new, sustainable fabric. Marimekko designed, printed and manufactured the demo outfits in the Marimekko House in Helsinki. And this initiative is a great example of the opportunities that the Marimekko Helsinki printing factory offers to us in terms of being able to actively participate in the development projects and, thus, take the textile industry towards a more sustainable future. As said, we, as a company, are very strongly committed to continuously increasing the share of more sustainable materials in our products and packaging. So then if we look into the outlook for 2020. So firstly, it's evident that the coronavirus that spread rapidly all over the world during the first quarter in 2020 has taken uncertainty over the global economy to a completely new level. And due to that, obviously, consumer confidence and consumer demand forecasts have significantly weakened in all the Marimekko market areas. This very special exceptional circumstance and the resulting changes in consumers' and partners' purchasing behavior have an impact on Marimekko sales, profitability and cash flow. And the crisis may affect also the operational reliability of our company's value chain. It is a very strong external shock, the pandemic. It goes without saying that the duration of the pandemic and the way that the crisis is handled by different countries affects the pace of economic recovery. And at the moment, there is no clear view or outlook on how things will develop in the different markets. So then if we have a closer look to Finland, that being an important home base and home market for us, traditionally representing about half of the company's net sales. So as mentioned earlier on, to safeguard the health and personnel of our customers (sic) [ health of our personnel and customers ], we decided in March to temporary close our own retail store in Finland. And then our online store has since served as our company-owned responsible distribution channel in Finland. The demand for our product, as mentioned earlier, has in the web store clearly exceeded expectations. Something that will support Marimekko's business in Finland but also overall in 2020 will be the nonrecurring promotional deliveries, wholesale deliveries, the total value of which will be substantially higher than last year. And a vast majority of these deliveries will take place in the second half of the year. So when we look at the outlook for Marimekko's domestic home market and, because its important also, the company's consolidated net sales and earnings, this outlook essentially depends on when the stores can be safely reopened and the trend in the customer numbers thereafter. And at the moment, our plan is to start opening the first of Marimekko's owned stores in Finland starting from next week, obviously, with strong, elevated safety measures in place. And then when we have a closer look into the Asia-Pacific region, which is our second largest market area, playing a significant part in our company's internationalization. So obviously, Japan is clearly the most important country in this region for Marimekko. The other markets are still at earlier stages in their development as Japan. Well, in Japan, we have already a very comprehensive network of stores. Then when we look at the pandemic influence in this area, so first of all, in China and Hong Kong, the stores that were -- during the course of Q1, they were partly closed or operated with restricted opening hours. The operations have now returned to normal opening hours. The stores in Japan are still temporary closed. They started to close in a phased manner in April. It is evident that the temporary closure of these partner-owned Marimekko stores in Asia and the impacts of -- or like overall of the pandemic on the consumer sentiment affect Marimekko's outlook for wholesale sales for the remainder of the year. However, even in spite of this and in spite of the pandemic, at Marimekko, we continue to see increasing demand for our products in the Asia-Pacific region in the longer term. Then there are some other matters in terms of our outlook and growth targets that we have wanted to highlight. So as we have informed last year, it has come to our [ attention ] some cases of grey imports have come to our attention, and we have taken due action to control them. And these actions will have a clear weakening impact on sales and earnings in 2020. Also the licensing income in 2020 is estimated to be markedly lower than the previous year. Then when it comes to e-commerce, so obviously, we have even earlier discussed of the e-commerce growing importance as part of the Marimekko's business and strategy. And we can see that the importance of e-commerce in business has further continued to grow in 2020. In addition, we are focusing very much on the safe reopening of our retail stores as soon as possible and on recovering from these exceptional circumstances. And naturally, we will be supporting our partners in their similar efforts. The temporary closure of the company-owned retail stores in Finland, Scandinavia, Germany, the U.S. and Australia will have a significant impact on Marimekko's net sales and profitability in the second quarter of the year. The outlook for the full year depends on the duration -- essentially on the duration of the Marimekko stores' temporary closure and the return of the customer flows in each market after the stores have been reopened. And what I would also add is that the company's wholesale partners and customers recovering from the crisis impact, not only there are orders for winter 2020 and especially the spring 2021 but also the replenishment orders and, therefore, has impact also on Marimekko's current full year outlook as well. And as mentioned, the wholesale sales -- wholesale sale promotional deliveries in Finland will substantially support the full year sales for 2020 for Marimekko. We continue to have the initially, originally crafted intention to open approximately 10 new Marimekko stores and shop-in-shops in 2020. And the main thrust in these openings will be on retailer-owned Marimekko stores. When it comes to the impact of the pandemic on the supply chain, to date, the pandemic has, so far, had only very -- let's say, a minor impact on the supply chain. However, due to the higher-than-expected demand for our products in the online store and the wholesale delivery problems caused by the pandemic, those have posed challenges to our logistics. And therefore, Marimekko does expect an increase in the logistics in the second quarter of the year. As I mentioned earlier, once we started to see the pandemic spur, we immediately initiated this ambitious fixed cost savings program. And the impacts of this program will be significantly stronger in the second quarter of the year, as well as the impacts of the personnel expenses of the temporary layers in the company's retail organizations will be evident in the second quarter as well. We have, as mentioned, reevaluated our earlier investment plans, and we today expect our total investments to be lower than the year before. And finally, the estimated effects of the long-term bonus system targeted at the company's management will depend on the trend of the price of the company's share during the course of the year. So quite a lot of information from different aspects of our business that is -- that we see impacting the full year outlook. As mentioned, once a more reliable estimate on the impact of the coronavirus on our business is -- once it's possible to do that, we will be defining then our guidance for 2020. So at the moment, as I said, the situation is changing rapidly. So at the moment, it's not possible to give this precise estimate on the impacts, but we can say that the coronavirus pandemic will have a significant negative impact on the Marimekko net sales and profitability in 2020. So before we go into the Q&A, I want to say that obviously, within the past years, the competitiveness that we have been able to build as a company, that has been visible in the past year's results, I believe that, that, paired with the strong balance sheet and solvency, will give us a very strong point to counter this crisis. And I feel very confident that with all the multiple actions that we're taking to mitigate this situation in an agile, dynamic and determined manner, that we will come out as a strong company from the pandemic. But with these words, I would like to open the floor for questions. And I would like to invite here also our CFO, Elina Anckar.

[Anna Tuominen, Communications Director]

We have quite a few detailed questions about the costs as well as many questions related to e-commerce. Shall we start with the e-commerce?

[Tiina Alahuhta-Kasko]

Sure.

[Anna Tuominen, Communications Director]

There are several people asking how much of our sales are currently generated online and how did it grow now in Q1.

[Tiina Alahuhta-Kasko]

Yes. So as we have mentioned before, due to the fact that with the -- kind of with the increase of digital services and omnichannel services, the physical retail and digital retail, meaning e-commerce, is becoming more and more integrated and intertwined. And therefore, we have made the decision already some years ago that we will not announce the e-commerce sales separately, but we report it under the retail sales. What we have also said is that if we look at the 2019 results, already in 2019, we saw our digital sales to continue vigorous growth. And as mentioned, we can still see that the weighting, the importance of e-commerce will be just becoming even more stronger in 2020. And I think what we could also say is that we believe that this pandemic will sort of further accelerate the conception and adoption of digital services. And I believe that Marimekko is in a strong point amidst this change as we have already for multiple years been investing in the long-term development of digital commerce and creating a seamless customer experience spanning from online to physical and vice versa.

[Anna Tuominen, Communications Director]

That actually almost answers the follow-up question, how do you see e-commerce developing in the future?

[Tiina Alahuhta-Kasko]

Yes. So as I mentioned in my previous answer, from Marimekko's point of view, we can see that the role of digital commerce is only becoming even stronger. And I think that we're in a good position from a competitive point of view from the fact that we've started this long-term development of our digital commerce capabilities already some years ago. And I think that, that is really a competitive advantage amidst this pandemic and understanding that for some time, the online store was our only own retail channel servicing the customers. And as mentioned, we believe that the pandemic will only accelerate the digitalization megatrend in our industry. And we feel that the key really is the -- looking at the business from an omnichannel point of view and creating these integration points between the physical retail and digital retail. So to give a very concrete answer, for example, now when we start to safely reopen stores, we will be also providing new kind of services that, for example, allow customers to shop from the -- do shopping in the physical store but actually from the safety of his or her own home. So this is our -- this is how we believe that the digital commerce will even become further important.

[Anna Tuominen, Communications Director]

You mentioned the delivery times in online stores. What kind of actions have you taken to sort of attack the issue of longer delivery times?

[Tiina Alahuhta-Kasko]

Do you want, Elina, to answer? Or...

[Elina Anckar, Chief Financial Officer]

Maybe I could explain that a little bit further. So of course, like taking into consideration that we actually did change the warehousing partner during the Q1, of course, already that change as itself is quite a big operation as such. And the warehouse move itself went well. But then, of course, like phasing immediately this totally different emphasis in our sales channels that we are totally moving, moving to e-commerce, being our only own sales channel at the end of the March and moving our campaigns there, so it's absolutely not possible to adjust the operations immediately to the new situation. So we are definitely working our uttermost with our logistic partner and with our own teams to mitigate this situation and trying to make it better and also serve our customers better because the situation is, of course, not the way that we would see it's being at its best at the moment. So we're, of course, very happy to see demand and higher-than-expected demand for our products in the online store, but we are doing our utmost best to solve the situation together with our partner.

[Tiina Alahuhta-Kasko]

Against the past?

[Elina Anckar, Chief Financial Officer]

The normal, exactly, yes.

[Anna Tuominen, Communications Director]

There were also a question -- there was also a question related to supply chain. Have there been any issues with supplies chain during the pandemic?

[Tiina Alahuhta-Kasko]

So as mentioned, so obviously, when you follow overall our industry, not Marimekko specifically but overall, our industry has been -- the supply chains have been affected by this crisis. But luckily, at this point in time, the impact in Marimekko's supply chain have been quite minor. Even if that has been the case, our teams have been working extremely hard to create contingency plans to ensure the continuity of production and logistics and so forth. So at this moment, we have not been greatly impacted, but we are very prepared should there be any issues going forward.

[Anna Tuominen, Communications Director]

Thank you. There were 2 questions about the logistic costs. Is it possible to disclose the magnitude of costs related to partner change? And if so, were all the costs booked in Q1?

[Tiina Alahuhta-Kasko]

I can comment on that one that all the costs are booked in Q1, but we don't disclose more detailed cost levels.

[Anna Tuominen, Communications Director]

And then at this -- then a question about the higher credit loss provisions. Would you be able to give a size of these provisions and from which market area do they come from?

[Tiina Alahuhta-Kasko]

Here, again, I would say that, of course, as we have mentioned it here in our Q1 report, it has some substantial effect to the fixed cost in Q1, so I could open that much about it. But unfortunately, I'm not going to be able to tell from which market it is, but it's just to tell that we are taking actions and looking very, very closely into our wholesale customers. We have done a really detailed game plan with our sales team and with our credit controller and with the finance team to secure our finances from that point of view and monitoring the deliveries and payments more than ever before. So...

[Anna Tuominen, Communications Director]

What about the fixed cost savings, could you provide an estimate of the savings?

[Tiina Alahuhta-Kasko]

Actually, we haven't disclosed the specific savings target for 2020 but, of course, working on that one in a very proactive manner as well. And we were very alert already at the start of 2020 that we started to look into costs that we recognize that we froze immediately. And then when the pandemic hit harder, then we decided to cut most of those already frozen cost per good. And also, we're looking into the CapEx side as well as we speak.

[Elina Anckar, Chief Financial Officer]

But I think what we can say is that it is a very ambitious fixed cost savings plan. And obviously, we work with multiple scenarios amidst this uncertainty that we are in. And then we always sort of update our plans accordingly the more we -- the more clarity that we get of the future or the outlook. So -- but I would say that it is an ambitious fixed cost savings plan. And the impact will become significantly more visible in Q2.

[Anna Tuominen, Communications Director]

Regarding the relative sales margin, were there effects from discount sales in Q1?

[Tiina Alahuhta-Kasko]

Actually, the discount sales didn't play very big roll at all during Q1. So we have listed the main reasons which were impacting the relative sales margin. And I would also like to emphasize that the product margin itself has stayed healthy as it has been, so we don't see any problems there as such.

[Anna Tuominen, Communications Director]

You mentioned that there were temporary layoffs. How many people were affected by these?

[Tiina Alahuhta-Kasko]

So basically, the people that the temporary layoffs affected were people in our retail chain and retail support function. So then we talk about people in all of our company-owned retail markets, meaning Finland, Sweden, Denmark, Norway, Australia, the U.S. and Germany.

[Anna Tuominen, Communications Director]

Regarding the newest UNIQLO collaboration, should we expect further licensing income from this collaboration? Or were those included in the licensing income recognized earlier?

[Elina Anckar, Chief Financial Officer]

So naturally, we do not disclose the specifics of individual licensing agreements. And at the moment, we have basically guided that we expect the licensing income for 2020 to be at a significantly -- or be markedly lower than in the previous year.

[Anna Tuominen, Communications Director]

The brand sales developed quite nicely. What's included in that figure in Q1?

[Elina Anckar, Chief Financial Officer]

As you can see from the report that it is coming from the Asia-Pacific region. And in the brands, we actually try to visualize and also report the -- how much actually currently Marimekko sales have been happening in the consumer value gyro, so meaning that our products are sold somewhere during this period for that amount of money. So that's as much as I can explain about it. So yes.

[Anna Tuominen, Communications Director]

You mentioned in the report that you will be opening new stores this year as well, approximately 10 new Marimekko stores or shop-in-shops. Where are you opening these? And do you have an estimate of how many stores will be closed during the year? And there's a follow-up on this. Is this is the right time to be opening more brick-and-mortar stores?

[Tiina Alahuhta-Kasko]

So yes, so our intention is very much still to open about 10 Marimekko stores or shop-in-shops. And the main thrust in the openings will be on retailer-owned Marimekko stores and shop-in-shops. So for example, in Q1, 2 Marimekko stores opened in Thailand. It is also a very -- a kind of very natural part and characteristic part of our business that the store network is constantly being updated. For example, when a lease is expiring or if traffic flows in a city change during the lease time to be different, so sometimes, we then also close down some of the stores. And maybe some of these closed stores might open then in a new location. So we haven't specified where geographically some 10 new stores to be opened this year will be located. But as mentioned, the main thrust in them will be on retailer or retailer-led Marimekko stores, which means that they will not require CapEx from Marimekko. And at the same time, as I mentioned earlier, while this coronavirus crisis is a very strong external shock, at the same time, in the long-term view, we believe that our future still looks bright. So now we're focusing very hard and in a determined manner actioning the crisis situation to minimize the negative impacts. And at the same time, we do work to build the future for our company that we believe that will look bright in the long term.

[Anna Tuominen, Communications Director]

There's one more question related to the sort of future product portfolio. What about men's fashion, would that be at some point something that Marimekko would be interested in?

[Tiina Alahuhta-Kasko]

Yes. Thank you for that question as well. So within the last, I would say, 2 years, we have received increasingly inquiries also with regards to our willingness or our thinking with regards to the men's line. And last year, in the fall, we announced our first-ever streetwear collection called Marimekko Kioski, which is a unisex collection. So it also does serve the male audience. And we have been very, very happy to have seen a lot of new male customers finding Marimekko. So definitely, this sort of -- definitely, the men are part of our audience as well. And at the moment, we feel that in terms of the ready-to-wear, the Marimekko Kioski serves the male segment. And then obviously, we need to constantly evaluate the situation.

[Anna Tuominen, Communications Director]

Thank you. That was the final question. So with that, I would like to thank our audience. And we hope to see you all also in August when we come up with our half year results.

[Tiina Alahuhta-Kasko]

Thank you very much.

[Elina Anckar, Chief Financial Officer]

Thank you.