Europris ASA
OSE:EPR
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Europris ASA
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Good morning, and welcome to the first quarter presentation of Europris. Today, we are sending live from Nordea head office in Oslo, thank you for inviting us and hosting today's event, and it's a pleasure to see so many bankers in the room. Welcome to all of you. CFO, Stina Byre will present the financial details today, and Trine Englokken will host a Q&A session at the end of the presentation, but you are welcome to sending your questions as we speak.
I know it's a busy day in the markets for both investors and analysts. So let's get started. We are very satisfied with the first quarter results and have got a good start to the new year. We are in a challenging environment, and it's not easy to compare quarter-over-quarter as COVID restrictions affects the quarters differently and also the timing of Easter has an impact on a seasonal concept like Europris.
We are on our way out of the pandemic. But if you look back to pre-pandemic years in 2019, the sales in the first quarter has grown by more than 30% over the past years. I think that demonstrates that we have gained market shares and done something right during this period.
In the first quarter, sales are on par with last year, including acquisitions and excluding acquisitions, it was down by 5.5%. Gross margin remained strong and increased by 1 percent point. EBITDA was NOK 278 million and net profit was NOK 88 million, down by 15.9%.
I think that our competitive edge has driven market outperformance over the past years. Overall, the Norwegian retail market has been very strong, supported by closed borders, staycation and people working from home. But the market has been impacted differently from the COVID restrictions and the pandemic. Shopping centers has been more heavily affected by social distancing and the temporary store closures, and has a stacked 3-year growth of 8.6%. These growth numbers are stacked and not 100% mathematically accurate.
Total retail sales has grown by 19.1%, while groceries, which has not been subject to temporary closures, has grown by 17.3%. As a variety retailer, Europris has grown by 30.1%, which is almost double the sector growth of 15.3%. During the pandemic, we have upgraded several categories, and we have expanded our customer base significantly. I think we have done something right.
Now I will leave the floor to Stina to give more details on the financials.
Thank you, Espen. I will then take you through the highlights of the financial development of the first quarter. Group sales were NOK 1.7 billion. This is almost on par with last year. But if we exclude sales from acquired companies, it is a decline of 5.5%. For the Europris chain, the like-for-like sales declined by 6.7%. This is a quarter where making underlying comparison is challenging. On the positive side, we had all stores opened this year compared to 10% of the stores closed last year.
On the other hand, it was a mild winter, and this affected the seasonal sales negatively compared to a cold winter last year. And as for Easter, the timing of that affected the first quarter negatively this year compared to the opposite effect last year. All COVID-19 restrictions were lifted in the middle of the quarter, and we see that border trade is picking up, but it is still not back to the level it was before the pandemic.
If we look at our 4 stores closest to the Swedish border, we can see that if we compare their development to the overall chain average, they have a higher sales decline when comparing to the first quarter of 2021 but they have a higher sales growth when comparing to the pre-pandemic year 2019.
Total e-commerce sales were NOK 103 million. This is 6.4% of group sales. The online channel is facing tough comparables after several years of very strong growth. In addition, it is a more demanding macroeconomic situation. And as expected, both Lekekassen and Lunehjem had a sales decline in Norway.
The Swedish market is very competitive. And after making some successful adjustments, sales were on par with last year. Denmark is still in an early phase, but they are performing according to plan. E-com sales from Europris were NOK 12 million. This is a decline of NOK 4 million, and this was expected as we had higher sales, click-and-collect sales last year from the stores that were temporarily closed. Changes have been implemented to improve customer satisfaction. The customer interface has been improved, and it is easier for customers to navigate across categories.
We have launched ratings and reviews. This is still in an early phase. And for now, only customers shopping online can rate and review products. We have removed 1 out of 3 delivery options. When customers shop online, they want to have their goods delivered fast. And with this option that we have removed, we consider the delivery time to be too long. Customers could order online and get free of charge delivery to a selected Europris store. But then the delivery had to wait for the next ordinary store -- ordinary delivery to that store. And often that was not a good customer satisfaction waiting many days for that delivery. But as before, customers can get products delivered to their home or to a pickup point by paying for freight.
And we are in a process of slimming the assortment for this option by removing several nonstrategic low-value items. And as before, customers can also order click-and-collect and pick up their goods within 2 business hours at an Europris store. And for this option, we are widening the assortment. And all in all, we believe that these changes will improve customer satisfaction and also improve profitability of online sales.
The gross margin was 44.3%, an improvement of 1 percentage point. For some parts of the quarter, we still had a beneficial effect from the fixed freight agreements. We had the same rates as last year, but the market prices have -- to end consumers have increased. But as of March this year, we also had higher rates in our numbers, and this will affect the margin going forward.
We had a negative effect from hedging currency of NOK 5 million this year compared to a positive effect of NOK 21 million last year. And we also had a dilutive effect from acquisitions. So all in all, we are very satisfied with the development of our gross margin.
OpEx was NOK 482 million. This is an increase of 6.6%. And if we exclude OpEx from acquired companies, it is an increase of 1.7%. The OpEx to sales ratio increased to 28.1%. EBITDA was NOK 278 million, which is a decline of 4.9% and the EBITDA margin was 16.2%. Negative net change in cash is normal for this season, and it was negative by NOK 576 million. This is somewhat more negative than the first quarter last year, and that is from the development in inventory, where we, this year, have had earlier shipment of goods and also the purchase prices have increased.
Net debt was NOK 3 billion. And excluding lease liabilities, it was NOK 1.1 billion. And as a part of the risk management strategy, when we did the refinancing back in 2020, we also hedged interest rates for 60% of the term loan. And during this quarter, we booked an unrealized profit of NOK 30 million from this compared to NOK 22 million in the first quarter last year. And we exit the quarter with a solid financial position with cash and liquidity reserves of almost NOK 1.4 billion.
And then I hand it back to Espen.
Thank you, Stina. Good numbers. I will talk a little bit about the strategy. But first, I will actually talk some more about the importance of the people and the culture that we actually need to execute on that strategy. Several times over the past years, I stand here and talked about how important the Europris people and the culture has been to the success of the company. And in the first quarter this year, we launched a combined strategy and leadership program for all our managers. This will run over several years, and the aim is to prepare our managers for the market changes we see ahead of us because consumer behavior is changing.
And during the pandemic, several of these changes has been accelerated. I think it's an understatement to say that online sales has gotten a boost, but we also see a faster change towards a circular economy, and that has been the focus in our program in the first quarter. With this program, we will increase the knowledge of these market changes among our managers and link this to our own strategic initiatives in order to boost our implementation power of the strategy. I'm very excited about this program, and I really look forward to see how our managers adapt and how we put ourselves in a position to meet these challenging times ahead.
We have also conducted physical gatherings for all store managers in the quarter finally after a long period of online meetings. And the key focus has been to prepare for the important summer season, as well as sales training and also concept discipline. And Europris is not only a nationwide chain, but we are also 271 local stores in different communities. And we have worked with our store manager to understand the importance of interacting with your local community. I think Europris is in a unique position with its footprint of stores in Norway, and we can really make a difference and start collaborating even more with local communities.
And finally, after a very long period of a heavy workload for our store staff with rising sickness absence following COVID-19, we are focused on how we can avoid sick leave and promote a healthy workplace for all our employees. The strategy itself that remains the same. We will strengthen the price and cost position, we will improve the customer experience, and we will drive customer growth.
And the warehouse expansion is progressing on schedule, and the ramp-up of the shuttle automation continues. We have been granted a construction permit for the warehouse expansion and are progressing according to plan. We have prolonged the lease at the old center warehouse in Fredrikstad until the summer of '24 in order to give us enough capacity to maneuver in the coming summer season, which is volume dependent.
The shuttle system, we see that it's performing well and that we meet the efficiency targets, which brings comfort to the overall savings targets for the investments. There are still some ramp-up in progress but it's moving faster than expected, and we are looking forward to get this system up and running.
On ÖoB, there has been some progress, but the disagreement continues to delay the decision on the option, and we do not expect significant news in the coming quarters. The arbitration process regarding Europris right to challenge the 2019 EBITDA of ÖoB has been initiated. There's no date set yet, and it's expected to take at least 12 months before a ruling is made.
The arbitration is set to decide whether the option period has expired. And if the accounting decision on the 2019 EBITDA from September last year was wrong. Europris position is that the accounting decision is wrong and thus, the option period has not started.
Regarding the 2020 dispute, Europris won the arbitration that was arranged in the first quarter regarding the legal right to challenge the 2020 EBITDA. The 2019 process does not affect the strategy of the operational development of Europris and not for ÖoB. And we continue our joint thing and we'll update the market when we have any significant news, but this is not expected within the next couple of quarters.
Europris celebrates 30 years this year, and we are a campaign-driven discounter. And in 2022, we are celebrating more than 30 years with campaigns. And we will celebrate this with our customers and have prepared some special campaigns with unbeatable offers throughout the year. I'm one of the big fans of these campaigns and how we work with the front page to attract customers and drive growth in our stores. And the first campaign for the anniversary was launched in the first quarter, and we are very pleased with the response we got from the customers.
It is a more challenging economic environment for our customers, and it was really pleased to see that our model, the discount model, that it actually works very well, the backbone of the business with campaigns. It attracts customers, they are responding and they are flocking to the stores when our offers are good enough. So work [indiscernible] campaigns, which has been the backbone for 30 years, that still works and that gives us confidence going forward.
Besides category upgrades continues. And this quarter, we have upgraded the pattern accessories category. This is a category that has performed very well over time, many years and especially during the pandemic when many people got new pets, this is a growing category also going forward. So it has been upgraded with the shop-in-shop. We have introduced some new sales promoting elements and also a few new products. But it's not only categories and campaigns that drives traffic to the stores, it's also room for more Europris stores.
And in the first quarter, we opened one new store that was at Frøya in Trøndelag, and we have done store relocations. For 2022 and beyond, we have 9 new stores in the pipeline and 2 of those are subject to planning permissions. It's a healthy pipeline for the new stores.
Let's summarize and have a look at the future. Europris has a resilient concept and we are well prepared for more challenging times ahead. For our customers, the micro and macroeconomic conditions has become harder, and we expect inflation and hike interest rates to affect consumer spending. And as I said, Europris has been the market winner over time with 30 years of consecutive growth and success. And in more turbulent times, Europris' concept has proven resilient and performed well.
During the past year, we have upgraded several categories. We have significantly expanded our customer base through the customer loyalty club, MER. And we are well prepared with all goods delivered for the coming season, and we keep a close eye on the source situation with respect to deliveries for the second half of 2022.
Year-to-date, as of 26th of April, we had the sales growth compared to last year of 4.6%. And then the timing effect of Easter has been neutralized. But the COVID effects has another impact as 13% of our stores were closed in the same period last year. We are well prepared for the important summer season ahead of us, and we have got a very good start.
With that final remark, I will invite Stina back to the stage, and we will open up for questions. And Trine, I think we should start with questions from the audience in the room before we take the web questions, right?
Yes. Are there any questions?
Kristoffer Pedersen, Nordea. Do you see any challenges related to the supply chain now with lockdowns in China related to COVID?
Yes. I think everybody sees that, and this is something that is very much not in our control. I believe that our people are doing whatever they can in order to make sure that we get the goods we need and they have been successful since the pandemic started back in March 2020. So we have received all the goods we need. We have sufficient goods for the important summer season. But of course, if you have a lockdown in China, they also lockdown the ports, which say at least until now, has avoided the lockdown in, then it would be difficult to -- with deliveries also for us for the second half of the year.
On the good side, we have some Christmas goods left from last year, and I expect Christmas to be read also this year. So I think it's manageable. We just have to focus on what we can impact ourselves and make sure that we sell the goods we have.
Maybe also a question on what do you expect for Lekekassen this year? Do you expect the decline now in Q1? Do you expect that also for the full year? Or do you see an improvement during the year?
Lekekassen is obviously meeting challenging comparables like all other online retailers. They have had a significant boost over the last couple of years. And of course, at one point, they will also meet tough comps. And I think for us, Lekekassen is a long-term investment. We are not into this for next quarter or the quarter after, we are looking at the longer picture. And if you look back to what pre-pandemic numbers, the growth has been really impressive and they are professionalizing the company, increasing profitability, lifting margins. So I think this is a long-term question, and I'm sure that this investment is going to prove to be a very good one.
Joachim Huse, Pareto Securities. Is it possible to share any more details on the gross margins and EBITDA margins for Lekekassen and Lunehjem? And how they compare to the overall group margins?
We disclosed the full year figures. But to give you an answer on the quarter on the gross margin, the dilutive effect was 0.7% negative.
There come several questions on the web. The first one is Markus Heiberg, Kepler Cheuvreux. Strong growth in April. Is it possible to strip out the Easter effect?
It is impossible at least by the rule of thumb. And as we have communicated in our analytic info with the presentation, as in previous quarter, the Easter effect is estimated on the top line to be NOK 60 million to NOK 75 million. But this varies a little bit from year-to-year. This year, it was the late Easter, and I read from the press, I shouldn't blame anything, but I can assure everybody, it will be Easter every year, it just shifts between the quarters. And the Easter effect when you have a late Easter, you also get a kick start to the spring/summer season. So your late Easter in sales-wise always positive.
How did sales develop in cross-border exposed Europris stores? Are there still any meaningful difference in performance versus 2019 of these stores compared with the average portfolio in March, April?
I think into those details, we are not gone. But if we look at a little bit bigger picture in the first quarter, we see that the stores closest to the border, they are still performing compared to 2019 above chain average. So they have gotten a boost. And of course, border traffic is picking up. Border trade will come. People will go to Sweden and do shopping and let's see how it normalizes. We are still on the way out of the pandemic. But I think personally that border trade, it will pick up, but I'm not sure if they will actually hit the 2019 levels in the short period. I think it might take some time.
Looking at gross margin for Q2 and your inventory composition, should we expect phasing effect on COGS? Or should you proportionally allocate the full increase in freight costs?
You should expect that it has a negative effect for the second quarter and the remainder of the year. It has gotten into inventory and is part of the products we sell as of March this year.
How did sales develop in ÖoB?
I think based on the fact that this transaction and the dispute regarding the option is dragging out and it will take some time. And we do not expect any decision before at least 12 months. So I think we have stopped actually communicating the results of ÖoB, and I will leave that to the will be a management and we will act as a minority shareholder until these disputes are settled.
And then it's Petter Nyström, ABG. Is it possible to give a rough estimate of the gross margin effect from the old freight agreement in Q1?
We do not set an exact number on that, but it had an impact from March. So 2/3 of the quarter did not have that impact.
And on costs, what should we assume for cost inflation in 2022?
As the market overall, you should expect that inflation is higher than it was last year and it will impact us the same way as other businesses. We have a lot of our employees on tariff agreements, so it will have the same effect as comparable businesses and also rent is allocated through the KPI methodology.
The next one is from Ole Westgaard, DNB. What was the impact like-for-like from basket and price in the quarter?
We had higher price, and we had a lower number of articles in the basket.
I think just to add 1 thing on that. One of the things we have seen during the pandemic and not only us, but all retailers have seen a lift in the basket, while the traffic has not grown that much. And that is, of course, a natural impact that people have stayed more at home, not moving so much around. And when we now go towards a more open society, we will experience a higher traffic and a lower basket just because you get the convenience shoppers back. The students that go comfort chewing gum and coke, they actually go to universe now. They will go bust the stores and buy some goods. So this has an impact on the traffic numbers. They will go up and the basket will go down just naturally.
You comment that Europris has changed sales growth year-to-date, 26th April of 4.6%. What is the implied growth for April year-on-year?
If you do the math on that, you will come to around 40%.
Have you secured all key summer spring items? Are you confident on delivery of goods for the second half?
We are very happy with the deliveries we've had for the spring/summer season. We have everything on stock. For the second half of the year, we have started to get deliveries. We know that things are produced for the season in August and September, which is more on small furniture articles and home and decoration. So that are produced but not yet shipped. We are confident that we'll get that on stock. But when it comes to the Christmas season, it's still too early. All goods are not yet produced and it's not shipped. But we are following this situation very closely. We have more than 30 people on ground in China working for us, and we have a very good collaboration on more than 30 years of experience working with the freight. And I think the only way to answer is, we are watching this as we have done over the past 2 years. And so far, we have managed quite well.
And then the last question is from Eirik Rafdal, Carnegie. We might have touched upon it before, but just reading it out. Your cost control is, again, very impressive. Could you talk us through your expectations for wage inflation and potential rental increase due to inflation for 2022?
A lot of our rent agreements are adjusted from 1st of January every year, saw some differences. And then we usually look at the market where the tariff negotiations, and that's also in the range where we will end.
Thank you.
Well, thank you, and see you for the next quarterly presentation in July.