Europris ASA
OSE:EPR
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Europris ASA
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Good morning, and welcome to this third quarter presentation of Europris. A big welcome to especially the audience we have in the room today. I'm really pleased to see that we have a live audience. And of course, welcome to you who are sitting in the office or at home.
We will have a short presentation, and you will see me on the stage together with Stina Byre, the CFO, who will present the financial details. Trine Englokken is with us today, and she will manage the Q&A session at the end of the presentation. But please feel free to send in questions as we speak.
Let's start with the presentation. And I think Europris delivered a solid performance in the third quarter. Total sales reached NOK 2.05 billion, an increase of 2.8%. Adjusted for the structural growth, it was a sales decline of 0.8%.
The quarter had a rough start in July, especially the physical stores struggled meeting sales from last year as Norwegians went on a well-deserved summer holiday after 2 years of COVID. But then it was back to normal days. And from mid-August, we have seen good growth in the stores across the chain. And I think that the current environment is, of course, challenging for the consumers. And as I will come back to later on, the discount retail sector is a nice spot in the market to be at the moment.
The gross margin ended on 47.6%. OpEx-to-sales ratio was 26.8%, and EBITDA ended almost on par with the historic high third quarter of last year of NOK 430 million. So this year, we ended on NOK 425 million. Solid profitability in the quarter with a total profit of NOK 187 million to the parent.
We talked about the historic development of the last period, looking at the 3-year-stacked growth. And fortunately, we still do that, but we are becoming more and more comparable. And actually, the third quarter this year is quite comparable with last year. We have quarter figures for the stores in the shopping centers, and we see that we -- the Europris physical stores outperformed the stores in the shopping centers. But for the total retail market, we still have to look at the 3 years combined growth, and it's important to have this historic view as the pandemic has been quite difficult for the market.
Overall, in this period, Europris has delivered a growth of 28%, which is very solid, but it has overall been a very strong retail market in Norway during the pandemic. And I think during the pandemic, we had some sector winners, and among those was the discount variety retail market where Europris is situated.
And coming out of the pandemic, I think you will still see some of the winners performing well, but some others will be struggling. And I think the current environment actually is quite favorable for the discount segment. The consumers are becoming more and more price sensitive in the current inflation environment. And Europris is performing well, and I think we'll continue to perform well.
So Stina, let's have a look at the numbers.
Thank you, Espen. I will then take you through the details of the third quarter.
Group sales were NOK 2.05 billion, which is an increase of 2.8%. If we exclude structural growth, it is a decline of 0.8%. The chain had sales decline of 3.7% in the third quarter. And as for the overall market, and as Espen said, it was a tough start in July. But both August and September showed sales growth compared to last year.
We had a good development for our campaign sales. After the summer holidays, we changed focus on the front page of our marketing leaflet away from the summer and over to everyday consumables at unbeatable prices, and this affected traffic and sales positively. Consumers are still continuing to be very cautious when it comes to investment purchases, and this affected the sales of seasonal summer items negatively, and around 2/3 of the sales decline was related to this.
If we look at products with a price point above NOK 1,000, it was a sales decline of 23%, but this constituted only 3% of total sales. And if we look at the products with a price point below NOK 1,000, it was a sales decline of 1.4%.
Typical border trade products like soft drinks and tobacco had sales decline. And we also saw that the stores -- the 4 stores we have closest to the Swedish border had sales decline -- performed weaker than the overall chain. But comparing to 2019, it is still a good development. And we have previously said and believe that a normalization of society takes time, and we have data supporting this. If one looks at border traffic, we can see that it's still not at the pre-pandemic levels.
And we also exchanged data with ÖoB and the 2 stores they have processed to the Norwegian border. And this also confirms that normalization is taking time.
Total e-commerce sales were NOK 177 million. This constituted 8.6% of group sales. For Europris, e-commerce sales were also affected by the fact that consumers are more cautious when it comes to investment purchases. Lekekassen had a strong quarter with sales growth in both Norway and Sweden. And we consolidated Strikkemekka as of 1st of July, and they also had sales growth compared to last year.
The gross margin was 47.6%. This is an increase of 1.9%. Over the year, Europris reports a calculated gross margin for the stores, and any calculation difference is adjusted in the annual stock taking. And last year, we counted only 18% of the stores due to delays, and that had a total positive effect of NOK 4 million. This year, we counted 73% of the stores with a positive effect of NOK 62 million.
And as you can then see, we have 2 effects impacting the third quarter isolated, both the number of stores counted and also we had a higher positive calculation difference per store this year. And if we mathematically just exclude this effect from the third quarter, the gross margin declined with 0.9 percentage points, impacted by higher costs for inbound freight.
OpEx was NOK 550 million, an increase of 14.2%. If we exclude structural growth, it is an increase of 9%. Performance for sales and margins has been better than the budget, and this has impacted the performance-based pay for store managers, and an additional accrual was made for this during the third quarter. If we exclude this effect, the increase in OpEx would have been 5.3%. And considering the fact that we have 3% more directly operated stores this year and that we also are impacted by inflation overall, we are satisfied with the cost control.
Europris hedges electricity costs 12 to 21 months ahead in time. And this will lead to higher costs for electricity next year of NOK 20 million in total. But if we compare to spot prices, we have avoided costs for the full year this year of around NOK 80 million, and we estimate to avoid around NOK 60 million in OpEx next year due to this.
EBITDA was NOK 425 million. This is almost on par with the record year last year. And the margin was 20.7%, which is a decline of 0.8 percentage points. For the first 9 months, EBITDA exceeded last year's record levels, and the EBITDA margin was 21.6%, almost on par with last year.
Negative net change in cash is normal for this season. And this year, it was negative by NOK 694 million. And it was more negative this year than last year, and this was due to the development in inventory and also accounts payable and accrued expenses. The development in inventory is affected by higher purchase prices, by higher costs for inbound freight and also from higher volumes of seasonal items. But if we compare to the same period last year, the base assortment has lower volumes than last year. And we also have a healthy inventory with well above 90% less than 1 year of age.
We also finalized the acquisition of Strikkemekka and had a payment of NOK 88 million. Financial debt was NOK 3.4 billion, up from NOK 3.1 billion last year. Excluding lease liabilities, it was NOK 1.5 billion. And Europris has a solid financial position with almost NOK 1 billion of cash and liquidity reserves.
Thank you. Back to you, Espen.
Thank you, Stina. Looking at the strategy, we have made some progress during the quarter, and I'll take you through a couple of the highlights. The strategy of Europris has been to strengthen the price and cost position, improve the customer experience and to drive customer growth.
And on the cost side, we have talked a lot about the new warehouse in Moss and how we have completed automation of the picking solutions over the past couple of quarters. And I'm really pleased to say that the warehouse is now it's getting bigger and better and it's according to plan, and that is great.
When we look at the expansion we have initiated due to the high growth we've seen over the last couple of years, we are on track both in terms of time and cost for the expansion of the new warehouse. We're taking over the building in first quarter next year, as expected, and we will start installing the high-bay storage units. And we take over the full facility to use it from the first quarter of '24, as planned.
We also made good progress for the shuttle automation. In the third quarter, we finalized the replacement of some hardware parts to fix the last bugs we had in the system. And I'm really pleased to see that we are now improving the picking quality and the efficiency of the solution. And we are reaching the goals we had for the total investments. So the savings are intact, and they are actually now being materialized.
On the distribution side, we are now testing more sustainable distribution of goods to the stores. Over the last couple of years, we have been cooperating with ASKO by NorgesGruppen on distributing goods across the Oslo Fjord with electric ferries. And we are also now testing electric trucks in the Oslo and the eastern part of Norway for deliveries to the stores.
And I think this partnership is a very good example that we joined forces with other companies to solve the sustainability issues we have. And of course, if we should reach our goals on sustainability, we have to do work together with other retailers. We cannot find all solutions by ourselves. So a good partnership for sustainable distribution of goods.
On the customer experience side, I've talked a lot about category upgrades over the last couple of quarters. And in the current environment, what we see is that the price awareness among consumers are rising. And in the quarter, we have put more focus on our campaign. We've been sharper on the front page of the marketing leaflets, pushing more on low sales prices in order to drive traffic.
And this is one of the retail tools we have in order to maneuver in the quite difficult landscape we've seen during the quarter. Actually, we took the decision to end summer sales a little bit earlier in order to start to focus on everyday consumables as soon as the summer holiday was over. And that has been successful. And as Stina said, since mid-August, we have been delivering good growth in the stores.
And we have also upgraded categories. We completed the upgrade of the handyman, the DIY category in the quarter. That was quite extensive change in the stores, but very well received by the customers. And this is one of the examples that we talked about. We do improvements on categories with above-average gross margin, and this will support the uplift we have seen in the gross margin from pre-pandemic levels.
We've done a successful takeover of distribution of carpets. Previously, it was done by middlemen. Now we do the distribution over our own warehouse, and that is also an activity that will lift gross margin. We have also increased the assortment, and we have seen a very strong sales development on carpets after we did this upgrade.
And the pet food category continued to perform well. We upgraded that earlier on, and it's still performing very well both on sales, but also on the gross margin. So it's a lot of activities, and it's also appreciated by the customers.
On driving customer growth, we see, of course, like all other retailers, that the digital space is becoming more and more important. And we have a data-driven approach to address the MER customer club, which now consists of 1.2 million members. We see that the customer club members, they have a higher shopping frequency and also a higher basket than the other customers.
And we are now testing customized digital newsletters to some MER members. We see that the newsletters, they have the same opening rate as the non-customized, but they have a higher click rate and we actually see a higher average basket size for those who go to the stores.
We will combine digital newsletters with social media campaigns in order to drive traffic. And I think it's quite important to use the online space to drive traffic to the physical stores. And that is, of course, the preparation for, at one point, the physical direct marketing leaflet will disappear. And then we have built a good base to continue to spread our marketing on the digital space.
We are also working to improve the content on higher-value items at Europris.no. We have implemented the use of text, video and augmented reality. So the consumers actually can take the web page, look at the products and see how they actually fit at your own home. And that is actually driving and converting more sales online than what we saw in the past.
But still online is becoming more and more important, but physical stores are the most important part still for Europris, and it will remain for quite some years. And we are expanding the store network. We opened 1 new store in the quarter, and that was at Ensjø in Oslo. And that is a quite important area for us where we see that we are underrepresented in the highly dense populated area around Oslo.
And the store had a very good start. And the 2 neighbors of the store, that is Kiwi and REMA, so it's a lot of shopping in the area and it's a new part of Oslo that is growing. And we see more and more consumers living there, and it's been a fantastic start actually for that store. So it's very positive, and I'm actually a little bit surprised even though we were positive at the start.
And the pipeline of new stores is 9 for the rest of 2022 and beyond, and I think that is true only for like 15 minutes more as we are opening 1 store in Nittedal at 9:00 today. So that is another store coming in the area just outside of Oslo. And one of the stores that we have in the pipeline is subject to planning permissions.
Okay, looking at the outlook and the summary. As I said a couple of times already, I think that low price is a good position to be at the moment. It's a tougher market for the consumers. Inflation, interest rate hikes, that is actually hitting the household's disposable income. We see from the media, we also see from the stores that the focus on price is becoming more and more important for the consumers.
And the Europris concept is well suited for those kinds of market environment with low prices and strong campaigns. We are a low-priced company driven by campaigns. We have strengthened the campaign element over the last couple of months, really trying to reinforce the price position on some of the traffic drivers on the front page of the marketing leaflets. And we also see that our private label products are performing well in this environment.
We have a strong focus on daily consumables and low price points in the stores. And we are ready for the important fourth quarter, the Christmas season. The biggest season is still ahead of us, and we're looking forward to that. We expect that it could be difficult for some of the higher-value items, but that constitutes for around 1% point of total sales in the fourth quarter. And we are prepared to put more focus on consumables. So well prepared, all products on stock and a good marketing plan, and the stores are actually ready from 9:00 today with the Christmas stores all across Norway.
With that, I think we will soon open for questions. And we will give you a quick reminder that the next event from Europris will be a Capital Market Update on the 8th of December at Hotel Continental here in Oslo.
So any questions from the audience?
So I will start with 2 questions. So Markus from Kepler Cheuvreux. So on your gross margin, so you see other retailers are struggling with more essentials and lesser of high-margin products. Do you expect the similar impact also for Europris? Of course, you have very good gross margins now, but could we see some changes in that? That's my first question.
Well, as we have communicated previously, we don't expect to meet the record levels that we have had. We have harvested some margin. But we have also done a lot of good work with the category mix and so forth. So we still believe that we will have a lift in the margin compared to pre-pandemic levels when we talk about the Europris chain.
Okay. So a follow-up there. So you don't expect sort of a higher share of potentially higher grocery in your mix to impact the margins?
It could be. If there's a significant shift, that could, of course, impact that. But we also juggle the product mix that we sell. So of course, if the future shows that is a significant change, then that could impact as we have lower margins on those consumables.
And then lastly for me, it's on the cost development because underlying, you're talking about 9% cost increases. Maybe half of that can be explained by more stores and bonuses. But could you also shed some light on the other cost drivers that you are seeing? And should we expect this to continue?
We are impacted, of course, by overall inflation in some areas. For instance, paper is more expensive, costing for marketing leaflets, et cetera, et cetera. And we have distribution costs that impact us negatively. But we also have focus on tightening wherever we can, and we also see effects from the efficiency of the warehouse that Espen also talked about. So all in all, we believe that we have good control over the cost base.
Joachim from Pareto here. I was wondering if you could elaborate a bit more on the split between increase -- or changed volumes and increased prices? Is that possible?
The basket was a little bit above last year as price increases offset the volume decline. So it's almost the same, but slightly higher impact from price than volume decline.
[ Olsen Dratrad ]. You mentioned that the summer had been pretty tough for you, and it started to look much better in the mid of August. Could you just tell us how October has developed so far? Is the good steam you have seen continued? Or is it -- has it not?
We're satisfied with the start of the fourth quarter, but the biggest sales phases are still ahead of us. And it's too early to say the total for the fourth quarter, but we are satisfied with the start. And we see basically the same trend as we saw towards the end of the third quarter.
I think some of the questions from the member already covered, so I'll try to pick up the one that is new.
Eirik Rafdal, Carnegie. Inventory is up quite a bit, both year-on-year and quarter-on-quarter. Could you talk a bit about the health of the inventory? Is the volume and/or higher COGS driving the nominal increase? What does the inflation/volume mix look like?
We have an increase in inventory, and it is driven by price. Total volumes are down. Summer and Christmas items, if you look at seasonal items, they explain around half of the increase in value. And they also, of course, have volume increase, but overall base assortment has lower volumes even though they do increase in value. And as I mentioned in the presentation, we believe it is a very healthy inventory. We also made sure to sell out all the goods for the summer season that is not to be continued next year.
And the question is from [ Robert Anderson ]. Could you break down your exposure to higher electricity prices?
Well, we have around 50 gigawatts a year in electricity usage, and we hedge almost all of this with our purchases. So we will have an increase in our OpEx next year of around NOK 20 million, but we have avoided significant costs both this year and next year.
And one question from Ole Martin Westgaard, touching upon the inventory again. But can you comment on the quality of the inventory? When should we expect more normalized levels?
Well, it will take some time as we have to wait for next summer to start selling our summer products, and also the prices are going up. We see some normalization now of input prices, but I doubt we are done. It is still tough negotiations with our suppliers on this matter. So we will probably still also see -- I don't think you should expect that prices are going down just yet.
I think I would like to add on the inventory side that in this current environment, of course, the currency hits inventory immediately and also the higher prices, and that is just something that hits all retailers at the moment. So everybody is expecting to see that inventory is coming up. And if it's seasonal items, it will take until next season before you clear it out. And I think it's very important for retailers now that you maneuver this landscape correct.
And if you -- we see that now a lot of retailers start sales activities on Christmas seasonal items early. And if you drive those kind of decisions based on covenant and leverage from the banks, that is not positive. So you should try to have flexibility like we have on the liquidity side. You should work on your inventory and make sure that you manage this the right way because you have to take the business right decisions. And -- but many, I think, we will -- some of the retailers will take decisions now based on their inventory levels and their cash flow.
And Eirik Rafdal, Carnegie, again, touching upon the OpEx, but I'll read the question. Your cost control, again, seems very solid. The underlying cost inflation seems pretty low if one excludes the performance-based salary and increased number of directly operated stores. You mentioned your measures on the electricity bill, but are there other reasons for the below inflation cost growth? Is, for instance, warehouse savings contributing in the quarter? If yes, how much versus last year?
Well, as Espen said, we are seeing efficiency from the warehouse. Difficult to give an exact number on that, but that is impacting positively with the higher picking efficiency.
And another here on the inventory. Inventory per store is increasing. Will the high inventory affect your campaign activity in Q4 and beyond?
Well, it is price-driven inventory. And as Espen said, we are not in a position where we need to make commercial decisions based on the inventory level. So we will continue to run strong campaigns as we see commercially fit and not driven by the inventory.
And Joachim Harms from CPP has a question to the CFO. Once again, given rising interest rates across the globe, we wonder very much why you feel comfortable in running on negative cash, which we perceive as very risky in a potential banking crisis. Can you please elaborate the components of your liquidity position? What portion is the credit line? What are the condition of it? And how much cash is left on balance sheet?
Well, we are, of course, in seasonal -- in this season, we have a normal situation when it comes to cash. And we have decided that we would rather have to liquidity that we can pull upon instead of having big amounts of cash piled up in our balance sheet. And we are very comfortable with our liquidity situation. We have a term loan of NOK 1 billion, and we have credit facilities of NOK 1.2 billion. And we also have, I forget the English word, Norwegian [ cost requisite ] of a couple of hundred million. So we are not at all worried.
Thank you.
Thank you.