Puuilo Oyj

OMXH:PUUILO

Earnings Call Analysis

Strong Q1 Performance and Growth Outlook for Puuilo

Puuilo's Q1 saw a solid performance with net sales growing over 16% year-on-year to EUR 75.4 million. This growth was supported by a 19% increase in customer traffic. Despite strikes affecting logistics, the gross margin increased slightly to 36.6% due to reduced logistics expenses and a favorable sales mix shift. The adjusted EBITA reached EUR 8.3 million, a modest improvement from last year. The company maintained its revenue guidance for the year, expecting net sales between EUR 380 million to EUR 410 million and adjusted EBITA between EUR 60 million to EUR 70 million. Puuilo continues to expand, aiming for over 70 stores in Finland by 2028.

Strong Revenue Growth and Performance Overview

In the first quarter, which spanned from February to April, Puuilo reported net sales of EUR 75.4 million. This reflects a robust growth of over 16% compared to the same period last year, with a like-for-like (LFL) growth nearly 5%. The increase in customer traffic was a significant factor driving this growth, with total customer traffic up by 19% across the company. Interestingly, cheaper product sales gained popularity, influencing both the average basket size and the overall sales mix.

Stable Profit Margins Amid Challenges

Despite a slightly decreased adjusted EBITA margin at 11% of sales, the company's gross margin increased to 36.6%, indicating efficient cost management. This improvement in margins was attributed to reduced logistics expenses and a favorable shift towards lower-priced product sales. While the first quarter showed a minor decline in profitability compared to last year, it is essential to note that it is typically the smallest quarter for both sales and EBITA, and the decrease is not seen as alarming.

Store Expansion and Operational Developments

During this quarter, Puuilo successfully opened two new stores in Nokia and Ylojarvi, with operations proceeding as expected after converting former Hurrikaani stores. The total store count rose to 44 by the end of April, with another store in Forssa opening in early May. The company plans to continue its aggressive expansion strategy, projecting to elevate the store count to over 70 by the end of its strategic period in January 2029.

Impact of External Factors and Future Outlook

The quarter faced logistical challenges due to strikes impacting harbor operations, affecting product arrivals and thereby increasing logistics costs. Nevertheless, these disruptions did not significantly impair overall sales performance. Looking ahead, the company maintains its guidance for net sales to fall between EUR 380 million to EUR 410 million for the financial year, with adjusted EBITA expected to range from EUR 60 million to EUR 70 million. These figures reflect the uncertainties linked to inflation and geopolitical tensions, such as the ongoing war in Ukraine.

Strategic Goals and Long-term Projections

Puuilo’s long-term strategic objectives include enhancing its store network and ensuring consistent LFL sales growth. By implementing a more efficient operational approach and fostering a favorable shopping experience, the firm aims to increase overall profitability. By 2028, the company has set ambitious targets to surpass EUR 600 million in net sales and achieve adjusted EBITA exceeding 17%. Furthermore, there are plans to distribute at least 80% of net results to shareholders, reflecting a strong commitment to shareholder value.

Focus on Cost Management and Brand Development

Despite a slight rise in personnel costs due to recent store openings, management is confident that ongoing measures will lead to efficiency improvements over time. The establishment of a higher proportion of private label products is underway, which is projected to increase the share of these products in total sales, contributing positively to profit margins moving forward.

Earnings Call Transcript 2025-Q1

[Juha Saarela, executive]

Hello, and welcome to join Puuilo's Q1 Results Conference Call. I am Juha Saarela, the CEO of Puuilo. And like before, our CFO, Ville Ranta is here with me.

[Ville Ranta, executive]

Hello.

[Juha Saarela, executive]

In today's presentation, we will take a look how was the performance during the first quarter. After the presentation, we will be happy to answer any questions.

Here is the agenda of the presentation. It is a little bit shorter than last time, as it now only includes the first quarter. First, I will go through the key figures and events of the first quarter, then Ville will tell us more detail about the financial development. After that, we will take a look at the outlook for the current financial year. Lastly, I go through our current strategy very briefly and the key drivers, how we achieve our targets. And at the end of the presentation, we will have time for the Q&A.

Here, you can see the key figures and events for the first quarter, which was from February to April. Net sales grew strongly and were EUR 75.4 million. Total growth was over 16%, with LFL growth being almost 5%. Growth came from the increase in number of customers, which has been a trend we have seen for a while. The number of customers drove in both old and new stores.

We got sales growth for every month of the quarter, and we are satisfied with the sales growth, as last year's Q1 was also really strong. Gross margin slightly increased and was 36.6%, which is a good result in this environment. Gross margin was increased by a decrease in total logistics expenses comparing last year's same quarter and the slight shift in sales mix to products in lower price points.

Adjusted EBITA was 11% of sales, which is slightly below last year. However, the first quarter is our smallest quarter in terms of sales and EBITA, so a slight decrease here is not dramatical.

We opened new stores in February in Nokia and in March in Ylojarvi. These were the 2 former Hurrikaani stores. The conversion and opening of these stores went very smoothly, and they have started operating exactly as expected. At the end of April, we had 44 stores open. And Forssa store, which is the third Hurrikaani store, was opened on 2nd of May, and its sales are, therefore, not included in this Q1 report.

Q1 was also affected by the strikes against our government, which stopped the harbors and those caused the delays in the arrival of goods intended for spring and summer season, resulting in increased logistics costs. Additionally, the strikes also caused other headaches and additional costs for Puuilo, but not very significantly, and in such a way that they would have had a dramatic effect on the Q1 performance.

Good and then Ville go through the financials, please.

[Ville Ranta, executive]

Thank you, Juha. The net sales for the first quarter was EUR 75.4 million, and it grew by handsome 16.1% compared to the previous year. At the same time, like-for-like net sales grew by 4.8%. The driver of the growth was again traffic, which grew by as much as 19% at the level of the entire company and by 7% on a like-for-like basis. As you can see from the numbers, the average basket decreased during Q1, which is due to the sales mix. The same story continues to repeat itself. Cheaper price point products sells better than expensive products.

During the first quarter, Puuilo opened 2 new stores. These were Nokia and Ylojarvi stores, which were acquired from Hurrikaani in a business transaction last fall. The stores were opened under Puuilo concept, and the start-up of both stores has been very good, if not even explosive. There were all kind of events in the operating environment of the first quarter, mainly the political strikes and the changing spring weather in April.

We ourselves have estimated that especially due to the changing weather, April sales were around EUR 1 million lower than they would have been in an ideal situation. But at this point of the year, however, we can state that the EUR 1 million lost in April came back already in May. Either way, we are satisfied with the development of the first quarter's net sales. The train moved steadily forward, and we can only be satisfied with the growth figures.

Then we move on to the gross margin. In Q1, Puuilo's gross margin was 36.6% of net sales, and it grew slightly compared to the previous year. The increase in gross margin level was affected by the sales mix and the cost of warehousing and logistics, which decreased. The gross margin was also supported by the change in the sales mix to the products with the lower price point. As we have already said before, the cheaper products are relatively more profitable for us than the more expensive products.

We believe that the good gross margin development will continue in the future as well. In accordance with our strategy, we will continue to invest in increased share of our own private label products, and we are in the pipeline for the end of the year and some kind of interesting products are coming into our assortment.

Then let's move on to profitability. The adjusted EBITA for Q1 was EUR 8.3 million, and it grew by exactly EUR 1 million compared to the comparison period. Relative profitability was slightly weaker than the comparison period, but still at a good level. The profitability of Q1 was particularly affected by the still high personnel costs, which were caused by new store openings compared to the comparison period, as well as the fact that expenses of the Forssa store, which opened in May were booked in the accounts already in April, but the net sales was only from May onwards. Measures to balance personnel costs are underway, and their effects should start to be seen from now on during the rest of the year.

In terms of other fixed costs, other than personnel expenses, there was nothing worth mentioning, except that the expense ratios decreased, meaning they improved compared to the last year. Things are going completely according to the plan. When we look at the 3 quarter time series shown in that picture, it could notice that profitability was relatively still a better level than in year '22. So the progress has been made.

And here, you can see the development of Puuilo's inventory levels over the past 3 quarters. The decrease in inventory turnover has continued steadily even though the absolute value of the inventory has increased. When looking at the absolute value of the inventories, it's good to note that compared to the corresponding figure of the previous year, the inventories of no less than 7 new stores are included in the figures. The absolute value of the inventory has been increased by the aforementioned new stores, but also by the increased import volume of own or private label brands. However, it is more important to look at turnover rate because as the company grows, the absolute value naturally increases.

In Q1, Puuilo's cash flow was EUR 2.3 million. The cash flow was particularly affected by the increase in the value of the inventory described on the previous slide, which was therefore due to the new store openings and the increase in the import of our own private level brands. In addition, in Q1, the cash flow was affected by the purchase of Hurrikaani stores, the impact of which accounting is reflected in our investments.

In addition, in accordance with the strategy, we are increasing the share of our own brands in our sales, which is reflected in Q1 cash flow with an emphasis priority. The strong cash flow in the comparison period is explained by the sales of excess inventory products at the time and the resulting sharp drop in inventories then. At the moment, we are in a more normal situation with the inventories in overall.

The ratio of the company's net debt to adjusted EBITDA remained at the same level compared to the comparison period. The current ratio of net debt to adjusted EBITDA is in line with our long-term goals. On this page, we also included the effect of IFRS 16 in the middle graph of the adjusted net debt and EBITDA ratio, which helps to visualize the situation in a more traditional sense. At the end of April, the ratio was 0.5x, which is a quite good level.

At the end of the Q1 period, Puuilo's cash and cash equivalents were approximately EUR 22 million, and the company's financial position is stable. The level of cash at the end of the quarter is at good level. And I would like to remind here when looking at the levels that the company voluntarily repaid bank loans worth EUR 20 million last fall. The company's financial position is on a stable basis. That's what we could say about the situation at the moment.

And here are the figures, as a summary, which we already comprehensively went through. Steady performance and the business as usual.

Then Juha will next talk about the company's outlook for the financial year '24. Please, Juha.

[Juha Saarela, executive]

Thanks, Ville. Next, the outlook for current financial year. We keep our previous outlook unchanged. We forecast that net sales will grow and will be EUR 380 million to EUR 410 million, and adjusted EBITA will be between EUR 60 million to EUR 70 million. The forecast includes elements of uncertainty arising from change in purchase power and customer behavior, driven by inflation and interest rate levels. However, good signals regarding these can already be seen at least in the short term.

In addition, the ongoing war in Ukraine and also other possible geopolitical crisis may have an impact either directly or indirectly, especially on the availability of goods and the price of goods. The current year has started off well as planned. However, without the strike and the challenges of sea freight in the Red Sea and the higher price of the sea freights, the performance could have been a little better. As for the summer and the end of the year, we remain confident, as our outlook shows.

Good. Next, a good -- quick look at our strategy and long-term targets. We updated the former strategy, and it is for the period for '24, '28, which ends in January '29. The 5 key objectives in our strategy are the first one, opening new stores and continuing our expansion in Finland. For this period, our target is to reach over 70 stores in Finland with the current concept. Second, the continuation of LFL sales growth in a market, where we have a lot of room to growth and lots of untapped potential.

Third, maintaining and further improving our current position, as one of the most cost-efficient operator in the sector. And then, an omnichannel customer experience. An easy and fast shopping experience is an important factor for our current and potential customers. And the last one, sustainability work and developing of it. It is as one part of our strategy. This is done under the theme of responsible retailer. Under this, we include the key elements in our sustainability works. Working towards these 5 objectives will allow us to reach our new long-term financial targets, which are presented on the bottom half of the page.

By the end of the strategy period, we aim to reach net sales above EUR 600 million. Regarding profitability, our goal is to reach adjusted EBITA above 17%. We target to reach absolute adjusted EBITA above EUR 105 million by the end of financial year '28. And we aim to distribute at least 80% of company's net results to shareholders. Here is a slight change to the previous target. This includes also other possible ways than dividends. The way of distributing profits to shareholders is dictated by the AGM. And regarding the net debt, we keep the same goal as before. Net debt to adjusted EBITDA below 2x.

Next, a closer look into the further expansion of our store network. We will continue our expansion in Finland with the current concept. Our target is to grow the chain to over 70 stores. Currently, we have 45 stores open. And if all goes according to plan, at the end of this year, the store count will be 48. We will open 5 to 6 new stores annually during the strategy period, and we will reach our goal of approximately 70 stores by end of the '28.

Over the past years, we have underestimated our market and the functionality of our concept. Now that we have done more research and gained more experience with our expansion and the competitive situation, we see that there is still room for new stores, and we can continue our growth. This is a very good thing for our shareholders as well as this very likely also means continued profitable growth for years to come.

Then next, let's look at the future potential for LFL growth. Currently, we have 45 stores open and more than half of them are younger than 5 years. This is a significant point when we consider our LFL potential, new and young store naturally grow faster than old stores. We have a large share of these young stores in the entire network. So it can be expected that this is also why our total sales will grow faster than the market average. LFL growth is further supported by other growth drivers, such as increase in Puuilo's brand awareness, improving the commerciality of the stores and improving the ease of shopping, better availability and so on.

This can also be viewed from another perspective. Puuilo's sales growth would continue even if we stopped opening new stores. This growth would be highly profitable because the profitability level of stores increase with their age. Older stores sell more with the same resources. For example, the same rent, the same marketing expense and so on. Naturally, we will not stop opening new store. We will continue to see growth through opening new stores and improving sales in the LFL stores.

Here is current LFL potential from a different point of view. In our more than 10-year-old stores, the sales per square meter is quite high, and it is approximately EUR 4,300 per square meter. As you can see on the graph, the sales per square meter of the stores approach this average, as the stores age. Based on this, we can estimate that the current store network will bring approximately EUR 130 million in more sales if all stores reach that average of EUR 4,300 per square meter. Our stores average on the same size, but there are also smaller and larger ones, but the number is not significant.

Good. And then a few words more about our expansion. We opened 5 new stores in the last fiscal year, which was a record year for us. All of these openings have been successful and confirm our understanding of the strong demand for our concept. This year, we have opened stores in Nokia, Ylojarvi, Forssa and tomorrow is the opening in Tampere Lahdesjarvi. Then in autumn, there are openings in Oulu and Aanekoski. Currently, we have a good pace going on. If the other ongoing projects intended for this year are on schedule, we will open at least 6 new stores this year. So at the end of this year, we would have 48 stores.

Good. Thank you. And now we have time for the questions. So moderator, please open the line.

[Operator]

[Operator Instructions] The next question comes from Calle Loikkanen from Danske Bank.

[Calle Loikkanen, analyst]

Juha and Ville, I have a few questions, maybe we'll take them one by one and starting with the like-for-like growth. You mentioned that like-for-like growth was strong in February and March, but then slowed down in April or towards the end of April. And you also mentioned that about EUR 1 million of sales moved from April to May. But kind of besides that EUR 1 million of moved sales, how has May and early June performed and developed? Has it been more like the growth in April or more like growth in February, March?

[Ville Ranta, executive]

Thanks, Calle. Yes, it's true that changing weather affected our sales in April. The back winter was unexpectedly high or bad. And yes, we have estimated that EUR 1 million was lost. Like we said, we get it already back in May. And well, I'm bit carefully here commenting on May, but let's say that May was very good in terms of sales. But it's good to remember that it's first month of second quarter. So let's see how the progress or sales goes during the rest of the quarter, but the start has been good.

[Calle Loikkanen, analyst]

Okay. Okay. That's good to hear. And then perhaps a few questions on the personnel costs. You mentioned that you have started taking measures to impact the personnel costs. But can you elaborate a bit more on what sort of actions you are taking? And then, I guess, of course, increasing sales drives down the personnel to sales ratio, but I was more thinking about the actual personnel costs, that what sort of actions can you take on that side?

[Juha Saarela, executive]

Yes. Thanks. If I start, as you know, we have opened a huge amount of new stores in our case, and if you see our history, so it means that we have the bigger number of younger stores than before, and it is naturally that the -- there are -- efficiency is not so high compared to the older stores. And what is so important to understand that we decided to open all Hurrikaani stores a little bit, let's say, with the shorter project time or schedule than typically.

And that means that we decided to resource those projects a little bit more than normally and it affected, let's say, 1.3 percentage points, 1.5 percentage points higher personnel costs in start of this year. And we are waiting for the situation will normalize during this and the next quarter. And this is not a big problem in that case. And -- but yes, we have some actions ongoing. We checked very strictly and where we have over resources and so on, and we will normalize all the stores personnel amount during this and the next quarter.

[Calle Loikkanen, analyst]

Okay. That makes very much sense. But just to double check, so should we expect the personnel cost to sales to start decreasing already in Q2, of course, assuming that sales is at a good level, so to say.

[Juha Saarela, executive]

Yes. Yes. That's right. That's -- we can await that.

[Calle Loikkanen, analyst]

Okay. Okay. Good. Good. And then perhaps lastly, on the personnel costs. Just kind of generally, has this development in the costs being in line with the plans that you had? Or has there been any kind of surprises on the cost side?

[Juha Saarela, executive]

Yes, both of -- let's say that half of this extra costs are new for our own [ decides ]. And as I mentioned that we opened last 3 stores a little bit faster than typically. But of course, there are some effect there about the last year's 5 new stores openings and the lower efficiencies, those [ certain ] stores.

[Operator]

The next question comes from [ Svante from Krokfors ] (sic) [ Svante Krokfors from Nordea ].

[Svante Krokfors, analyst]

Juha and Ville, a couple of questions left. Perhaps firstly, we start with private label and you mentioned that inventories were partly up also due to private label, and you also mentioned that you will have some new interesting private label products coming up later this year. Should we expect the private label share of sales to accelerate during '24?

[Ville Ranta, executive]

Yes. Thanks, Svante. Yes. Yes, you can. And yes, we can. So we are -- as you know, we are working hard to push up the share of private labels in our assortment. And we have now well, -- during Q1, we received a big amount of products came into the country, and that's partly preparing for the spring and summer season for the new products also.

But yes, there is a new product in the pipeline or new product categories in the pipeline, which effect can be seen during the rest of the year. And yes, of course, we expect that the share of the private labels out of the total net sales will grow this year. But we give you exact percentage in connection with the financial -- full financial year figures next March. But we can comment at this point that we are progressing with the private levels.

[Svante Krokfors, analyst]

Okay. And regarding the Q1, did you have any availability issues? Do you have -- were you out of any goods? Or did you get everything you needed?

[Juha Saarela, executive]

Yes. We faced a difficult situation for the strikes and the Red Sea situation, but we don't face the significant availability issues. Of course, there is some minor problems, but we think and know that the availability issues didn't affect to our sales.

[Svante Krokfors, analyst]

And then regarding -- good that you presented the different stores with different maturities what their potential is, but could you give some color on what the like-for-like development has been in older and newer stores? I mean, the newer stores, many have been opened in more densely populated areas. So could we even expect more from those?

[Ville Ranta, executive]

Yes. Thanks. Well, officially, we are reporting one like-for-like figure. But I think that you are trying to understand that how the stores differed inside the current like-for-like store group. I can say that, of course, there is a variation between the stores, and currently, I can say that even the older stores are growing their sales still. So when we are talking about over 10-years-old stores, we see the like-for-like sales is still growing. But of course, the fact is that we have expanded our store network heavily last year, also this year.

And we have set up new stores, for example, 2 new stores in Vantaa. So it's natural that there is some cannibalization effect in the older stores, which were already located in the same area. And as an example, for example, here, I use Vantaa. So there is that kind of variance between the store. But in big picture, -- we believe that we can continue this same like-for-like development in the future. We are talking about around 5% development will continue.

[Svante Krokfors, analyst]

That's helpful. And then last question regarding the competitive landscape. I mean, your peers are growing also. What has your reflection been on the competitive landscape in the last quarter or 2?

[Juha Saarela, executive]

Thanks. Yes, our competitors are improving their business also. Some of them are expanding. Some are not expanding, but all of those concepts are very familiar for us, and we understand and know how they affect to our business when they opened a new store, how it affects and how long it affects to our sales if our store locating in the same city.

I know that I repeat myself. In our Investor Day, we tried to explain our competitors' effect to our business. We know that, of course, they effect in some extent, maybe our growth rate could be higher or faster on those cities, where we have store already and competitor opened a new one there. But anyway, in big picture, we don't see the dramatical effect because -- and why we know that or what is the base of that is that our concept, our assortment and price level is different than our competitors, and we are very confident about the future within this [ competition ] situation.

[Operator]

The next question comes from Elias Luhtaniemi from SEB.

[Elias Luhtaniemi, analyst]

I've got one question regarding the Hurrikaani investment. Did Hurrikaani investment come with inventories? And did this have any impact on your margin, that as -- if you sold this with lower or no margin?

[Ville Ranta, executive]

Yes. Thank you. It's an easy question. No, we didn't acquire any inventory from Hurrikaani. We acquired only their store sites.

[Operator]

The next question comes from Arttu Heikura from Inderes.

[Arttu Heikura, analyst]

It's Arttu Heikura from Inderes. I also have only one question, which is regarding the Hurrikaani store. So as those stores start as the -- as the start of those stores being better compared to a new, brand new Puuilo stores, as Hurrikaani stores already should have an existing customer base.

[Ville Ranta, executive]

Yes. Thanks for the question. As I stated in my presentation, the start of those Hurrikaani stores has been very good. Actually, I remember that we made a new opening day sales record in one of those acquired stores from Hurrikaani. They are going fully as we planned. So the existing customer base works in those locations, where the acquired stores are and the, well, ramp-up of those new stores under the Puuilo concept has been very good.

[Operator]

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

[Juha Saarela, executive]

Good. Thank you for the questions and joining us today. I want to thank all our customers for trusting us. Special thanks to all coworkers in Puuilo for the hard work. We had a really, really good quarter and near future seems very good. I wish you all a great summertime.