XXL ASA

OSE:XXL

Earnings Call Transcript 2018-Q1

[Tolle O. R. Grøterud]

Good morning, and welcome to the XXL ASA's First Quarter 2018 Results Presentation. My name is Tolle Groterud, and I have the pleasure of guiding you through today's presentation. Our CEO, Fredrik Steenbuch; and our CFO, Krister Pedersen, will take you through the results and key drivers followed by a Q&A session. For media, there will also be an opportunity to perform separate interviews after that. So without further introductions, I turn the floor over to you, Fredrik.

[Fredrik Steenbuch, Former CEO & MD]

Thank you, Tolle. Here we go again.Highlights Q1 2018. We reached a revenue growth of 21%, a like-for-like growth of 7.8% and e-commerce growth of 42%. We had a good and long winter season. E-commerce are now 14.4% of group sales compared to 12.3% in Q1 '17. We have implemented personalization features on the sites. We continue the collection of consumer data. And very important, we have invested in new photo studios. It's a state-of-art machinery based in both central warehouses. We have also introduced new omni-channel solutions. And now, all stores are WiFi and beacon ready. Our stock solution, making all stock in the group available for all customers at all platforms at all times, is working better than expected. 10 of 77 stores are connected to the system. And online sales are showing an increase of 20% in the categories tested. 60% of the sold goods are clear-out products, of which we now get a better margin. This is very promising. We are testing a real omni-channel solution by offering free gift cards when the consumer pick up at store. We see a good increase in pickup rates, and the increase is approximately 5 points for the group and significantly higher in the capital cities. And consumers tend to spend more than the value of the gift card at pickup. Our gross margin improved by 1.4 points to 37.9%. This is despite lower gross margin in Austria and a higher share of e-commerce on lower gross margins. But the OpEx increased by 0.9 points due to: We had costs of establishing operations in Austria of NOK 37 million; heavy marketing campaigns in Sweden related to digital price tags. We will, of course, expect positive effects longer-term; and cost of opening new stores. In short, January was really good. February was good. March was awful. January, February, great winter conditions with good sales of winter goods. March, last year, we sold a lot of spring-related goods like bikes, also, running, running shoes. This is a huge category. This year, we did not. March 2017 was a spring month. This year, March was a winter month. March 2017, we made NOK 25 million, and March 2018, we lost money. Even if the market moved the sales between quarters, some costs are fixed. But there will be a spring this year too, and spring actually started in most places the 15th of April.As the market expectations and our Q1 results differs, we need to highlight the differences. The lost investments in Austria is NOK 8 million higher than you expected, and we are addressing it. The key word is marketing cost efficiency. The not-immediate sales figure in marketing in Sweden costed NOK 15 million more than you expected. This is money to tell the market by profile marketing that we have Internet prices in stores directly connected to the revenue. Showing a female robot that we -- is known as the price terminator. This is longer-term marketing that do not create immediate sales. This marketing ended in March. And you are right to question if this money well spent. And you expected more sales in Sweden in Q1. That's another NOK 50 million up. The Swedish market has been silencing. Then again, if you look at the HUI, this is Swedish statistics that our Swedes have taken market shares in January, February like never before. We are, of course, not satisfied with the increased costs or the lower cost efficiency this quarter. Last full year, we have an EBITDA on NOK 828 million, of which only NOK 34 million came in Q1.On a more positive note, the improved inventory situation drives a stronger cash flow generation.Growth drivers in the quarter. The growth is driven by like-for-like growth and new stores. New stores equals 63% of the growth and like-for-like equals 37% of the growth. Growth split by markets. Growth by segments. Norway is up 11%, Sweden is up 14%, Finland is up 26%, and Denmark is up 47%, and e-com is up 42%, giving a group growth of 21%. Like-for-like growth. Norway, 7.5% like-for-like growth; Sweden, 3.7% like-for-like growth; and Finland, 2.7% like-for-like growth; giving a group growth of 7.8% in the quarter, including all the 3 months. Gross margin development. Group gross margin increased by 1.4 points year-on-year. And this is despite the costs on startup in Austria and e-commerce with lower margins. And all countries improved their gross margin. And we had better winter season, which gave less discounting.OpEx development. The group OpEx is up by 0.9 points to 35.4% year-on-year. The elements are as mentioned: the cost established in Austria, heavy profile marketing in Sweden and also new store openings in Norway. If we exclude Austria, the OpEx is 34.7% and that equals Q1 last year. HQ and Logistics are showing an improved OpEx. EBITDA development. An EBITDA growth of NOK 51 million despite establishing Austria. When excluding Austria, the EBITDA is NOK 69 million on a margin of 3.5%. We had higher margin in all markets, driven by improved gross margin and better winter seasons. Norway, solid winter season. 11% revenue year -- growth year-on-year. A like-for-like growth of 7.5%. We have good and long winter season, and the gross margin improved by 1.5 points to 40.5%. We opened a new store Arendal on 15 March 2018. And the costs was also impacted by another store opening in the beginning of April [indiscernible]. The EBITDA margin in Norway improved by 1.4 points to 15.2%. Solid winter, solid results. Sweden, gaining market share. This is both impressive and depressing at the same time. Revenue growth of 14% year-on-year in local currency, like-for-like growth of 3.7% in local currency, and it's still a volatile and quite slow market. We had a good winter season with cold, but later arrival of snow than in Norway. The sporting goods industry in Sweden is up 7% in January and up 8.7% in February, according to HUI Research. And I will soon show you the market compared to XXL. We had higher gross margins, up 2.1 points to 36.9% year-on-year and introduced digital price tags in all stores in December 2017. The extraordinary marketing campaign gave significant increase in costs. And the depressing part is the OpEx, up from 33.7% to 35.4%, all to be explained by this marketing giving an EBITDA of NOK 9 million and a margin of 1.5%.Finland, driving in the market. 26% revenue growth year-on-year. A good winter season but slow start to spring season. A like-for-like growth of 2.7% is less than we are used to from Finland. But considered together with the gross margin that improved by 2.5 points to 35.1%, all in all, this is well done. We had better seasons and less clearance sales activities. The OpEx is up 0.3 year-on-year to 32.8%. Somewhat lower like-for-like growth impacts the scale of benefits of the operation giving an EBITDA of NOK 9 million and a margin of 2.3%.Now market data. Norway, SSB versus XXL. The market up in January, 12.3% up; XXL up in January 18.5%. In February, the market is up 7.8%, and XXL is up 21.2%. In Sweden, HUI versus XXL. In January, the market is up 7%, and XXL is up 15.1%. In February, the market is up 8.7% and XXL is up 27.8%. For Norway, Sweden, March figures are not public or available yet. But in Finland, the TMA has the total quarter report inclusive March. This gives the market is up 2.8%, and XXL is up 25.5%, meaning that the Finnish market is still in decline, if you exclude XXL. And in market shares is in Norway around 30% and 17%, 18% in Sweden. It seems like we do not leave much growth to the competitors. Our like-for-like growth are outperforming in the market in all markets. And we expect March to be very tough for the market due to the late seasonal shift. Concluding, XXL is gaining good market share in all markets.Denmark, increased volumes and order flow. A revenue growth of 47% year-on-year in local currency. We are creating volume with more aggressive campaigns. And the gross margin still improved from 14.2% to 15.8% year on year. High marketing spends gives a negative EBITDA of NOK 3 million. And we will evaluate to open stores over time, and we will get there with or without stores.Austria, look at that picture from that shopping mall. We reached revenues of NOK 68 million in Q1 '18, equals 19% of the growth contributing to the group this quarter. We had good selling conditions, impacted by late cold period in the heart of Europe. We opened a third store on 20 March in the shopping mall PlusCity in Linz. It was a well-received opening, with sales around NOK 5 million first day. And as always, we invest through campaigns and high marketing spends. The gross margin is 28.8%, giving a negative EBITDA of NOK 18 million and an OpEx of NOK 37 million. E-commerce represented around 20% of sales. XXL has high ambitions in Austria, and we are delivering according to plan.HQ and Logistics, showing scale. An OpEx of NOK 98 million to 4.7% of group sales compared to NOK 93 million and 5.4% of group sales in Q1 '17. The machine is spinning and improving, with even better flow of goods at the central warehouse. We have now done several new recruitments to central functions, including purchases, technical system of architects and IT resources. The infrastructure investments are as NOK 14 million. And we have good progress in the project of establishing a new central warehouse capacity in heart of Europe. Okay. Organizational changes. We have now established an omni-channel structure for the value chain. These changes has been difficult to achieve. Now we are making a true omni-channel organization. This is difficult and is painful. But there is no way around it. In short, the analog and traditional part of XXL will no longer dominate the new digital part of XXL. The digital part of XXL is our frontrunner, but this part will no longer runaway by itself. This has been the right recipe up to now, and it will be for some time longer. But this is not the right recipe long-term when returning into omni-channel. The new organizational setup secures that everything we do will be based on omni-channel thinking. All the top managers of XXL must think and act omni-channel. All the people of XXL must think and act omni-channel. This year, we have completed the new omni-channel organization. And we have achieved this without asking anyone to leave. The changes in the organization has made us able to run much faster, decide faster and, most important, move in the right direction as one omni-channel group. The new CFO is in progress and will be announced soon. Mrs. Karoline Gjerde, that successfully has led our Norwegian e-commerce xxl.no is our new group E-commerce Director. [indiscernible] is now the new Group Retail Director. Up to now, he has led the Norwegian division with great results. And now over to something quite advanced but less complicated than people. We have invested in a new photo studio, one at each of the central warehouses. This is state-of-the-art. These machines will produce all the photos that is needed for professional presentations on the web and elsewhere. Our centrally placed photo studios are an important step in the digital development. Priorities going forward. We will improve the omni-channel experience. We will drive like-for-like growth. We will open new stores. And we will improve e-commerce. And we will utilize new opportunities. And we must step up our focus on cost improvements and demand better returns on these investments to avoid cost increases like in this quarter. And we are already on to it. That is all. Over to you, Mr. Krister.

[Krister Andreas Fiksdal-Pedersen]

Thank you, Fredrik. Yes, we are happy about the development in sales and our performance in the market; however, March was not easy. And we are happy about improvement in gross margin in all markets. We are not happy about the development in cost, and I think Fredrik has already been through that. Net financial cost ended at NOK 17 million compared to NOK 9 million last year. We had a negative currency effect of NOK 4 million this quarter compared to positive effects of NOK 3 million last year. That explains most of the costs. Looking at tax costs. There are no big changes in the first quarter this year compared to last year. However, the final tax calculation for 2017 ended 7 -- sorry, NOK 12 million lower than estimated in the Q4 report. Effective tax cost is down at 18.2%.We are also happy about the positive development in cash flow generating NOK 35 million compared to minus NOK 153 million last year. The main reason behind this is the improvement in inventory, where inventory per store has been reduced from NOK 39.2 million to NOK 37.3 million this year. The improvement is a result of several initiatives, and there are more initiatives to come. By the end of first half this year, we should be closer to the target of NOK 35 million per store. Investments equaled NOK 53 million and is related to new stores and infrastructure. In February, we had an increase in share capital due to vesting of stock options to employees and had a positive cash effect of NOK 41 million for the quarter. Liquidity reserve was NOK 740 million, and net interest-bearing debt was NOK 1.7 billion by the end of the quarter. And leverage ratio 2.1x compared to 2.3x last year same quarter. There are no changes in the outlook terms. And in the long-term, we have signed 6 new stores for 2018. We have 4 in Norway, 1 in Sweden and 1 in Austria. We aim for 7 to 10 stores in total. E-commerce is growing fast, and XXL is in lead of this growth. We will always evaluate e-commerce growth when opening new stores. Investments in infrastructure will be in the same range as last year between NOK 70 million and NOK 90 million. On long-term objectives; like-for-like growth of mid-single digit, including e-commerce. Gross margin. Norway, low 40s; high 30s in Sweden; between mid- and high 30s in Finland. EBITDA margin in Norway low 20s, low double-digit in Sweden and high single-digit in Finland. Mark that new market entries will affect group margins, and there are no changes in the outlook for Austria.To sum it up, revenue growth of 21%, like-for-like growth of 7.8%, and we have a leading position in e-commerce growth by 42%. The winter season was good and lasted until the start of April, impacting negative March. We're happy about the improvement in gross margin, but we're not happy about the cost. Austria is going according to plan even with the EBITDA impact as you see. The initiatives to bring down inventory has gained momentum, and that generated an improved cash flow as well. XXL is gaining market shares, and I don't think that should be understated. We are growing fastest online and off-line. And it's not easy to be a competitor of XXL. Finally, there has been some changes in XXL management team. I have been here for 7 years. But in reality, it have been much more. On March 5, the company has grown 5x, and that's a long distance to grow. This is a choice of lifestyle being CFO in XXL. You have to live it 24/7. And it's fun. And what a journey to be a part of. Now we have made a platform for a company and a concept to succeed in the whole Europe and transforming from a store concept to an omnichannel concept. I believe that the next shift will be twice fun, and I guess I will regret my choice. Thank you.

[Tolle O. R. Grøterud]

Thank you, Krister. Then we open up for questions. First from the audience. [Operator Instructions] Okay, then there are no questions from the audience. And we are ready to take questions from those of you listening in on the phone. [Operator Instructions] And I then call upon the conference hosts for further instructions.

[Operator]

[Operator Instructions] We do have one question already from [indiscernible] from Handelsbanken.

[Unknown Analyst]

This is [indiscernible], Handelsbanken. I hope you can hear me. There's quite a bad line here. My first question relates to current trading. We are almost through April now. I think you mentioned that spring season weather started somewhere mid-April. Can you give us some clues into how you see current trading playing out in April in relation to the very weak sales performance that you mentioned in March?

[Fredrik Steenbuch, Former CEO & MD]

Yes, April is a spring month, started 15th, as I said, and it's, of course, much better trading, because we're selling a lot of bikes and running shoes and spring stuff. So April is turning very well. You're asking, I guess, can we get everything back? We worked extremely that we lost in March. We are working extremely hard to handle the flow. And our aim is to get most of it back, yes. But I don't think we can get it back. We will know this by end of May how did we well.

[Unknown Analyst]

Okay. That's helpful. Then on the marketing cost in Sweden. You mentioned here, of course, the roll out of price -- digital price tags and marketing campaigns related to that. Can you give us some more sense of how much this was? Can you quantify in some way to what extent this temporary campaign drove marketing costs higher? And what could also be continued marketing investments in the coming quarters relating to this roll out?

[Fredrik Steenbuch, Former CEO & MD]

Okay. We spent approximately NOK 15 million extraordinary to get this message out. Because it's a unique message that the prices in store are electronically attached to the web, and they are live. So we have secured web prices in store. We spent a lot of money just telling that. And if you don't have a certain ad or a product and that ad, you don't get immediate sales. Maybe we should have combined it, but then message could drown. I think the message is out, and in the future, we will combine the message with sales marketing. So do not expect more extraordinary cost after 13th of March for this campaign.

[Unknown Analyst]

That's very clear and helpful. Then you also lowered your store expansion -- your long-term store expansion target or maybe mature store stated in Austria from previously 15 to 20 stores to now saying to 15 stores. Can you elaborate a little bit about the thinking here?

[Fredrik Steenbuch, Former CEO & MD]

We will know -- the thinking is -- the conclusion of the thinking. And all days, we opened as many stores as we could. In the new omni-channel world, we'll only open as many stores as we have to. And that has to be destination stores in big cities and great places. So if we said that we will have more store in Austria, then we are now saying, if we said that before, I think that's a sign of good reflections. Because you will have much more sales on the web, and every store has to be cost efficient.

[Unknown Analyst]

All right. A final one from me on -- you mentioned here in your presentation and, of course, that is known that you have lower gross margin in the e-commerce side of business, which now, of course, is growing rapidly. But can you give us some clues on those differences that you see in gross margin in stores compared to sales online? And also perhaps help us further down in the P&L here on one single order, how it differs when you come down to operating margin, please?

[Fredrik Steenbuch, Former CEO & MD]

Well, first things first, when you are a shopper on the e-com, on the online, you're a destination shopper, most often you go for the product and the price. And we are not there like we are in the store to be a good salesman for you. I think, in the future, technology will make the difference smaller. Then again, if you walk around in the store, you are more inspired to pick more goods. And that's often more goods that we have a high margin on. But I think that technology in the future also will compensate for that. But the destination shopping on the web takes the margin down. And if you don't have the best price on the web or are on the front page of Google, you're off. That's why the one with the lowest OpEx will win. And the next question was?

[Unknown Analyst]

And the next question was that, with this -- with in regards to OpEx, I mean, if you compare one single order in a store, you have a high gross margin, but you have perhaps a different OpEx profile there. And if you compare that to an online order, where you have a lower gross margin but then also different OpEx profile, how do you see the bottom line of the operating profits on one order differ between the 2 channels?

[Fredrik Steenbuch, Former CEO & MD]

We have mostly the same EBITDA on web sales/online sales as on the group in general. But now, we try to make omni-channel, and then we have to measure everything differently. But the business model of online for XXL is as good as the business model in total, if that's what you asked for, yes.

[Operator]

The next question comes from Simon Irwin from Crédit Suisse.

[Simon William George Irwin, Director]

If I could just start with the inventory position. You've obviously given us the overall numbers. Can you talk a little bit about the composition of the inventory in terms of winter versus spring and the overall age of the inventory position?

[Krister Andreas Fiksdal-Pedersen]

Well, the long winter has given us an opportunity to sell a lot of winter-related products. So there's not much left of winter-related products. So most of the goods now in the inventory is for the spring and summer season.

[Simon William George Irwin, Director]

So does that explain your confidence in getting overall inventory numbers back to normal by -- I didn't hear it clearly, was that the end of 2Q?

[Krister Andreas Fiksdal-Pedersen]

Yes, that NOK 25 million in the end of second quarter, yes.

[Simon William George Irwin, Director]

Okay. Can you just talk a bit about the store rollout? You've talked obviously increasingly cautious about the store rollout and not overexpanding the store footprint given e-com. And yet, your opening 4 stores in Norway this year, which is your densest market. Can you just talk about the -- what is it about these 4 stores that you absolutely need to open them?

[Fredrik Steenbuch, Former CEO & MD]

Good question. First, Simon, I have to excuse you for your great question last time that I misunderstood. Now it's done. Hope you take it. We will have a tail or maybe 2 or 3 stores that we shouldn't have signed. I don't know where the stores are and which they are. But I have a guess. Or we won't. We will know that when the contract expires because nobody knows the development. We have signed some stores that we are evaluating just now, and we have also canceled some stores that we might have opened. So I think we are finding a very, very good balance. And we are running very fast in our new markets to find exactly what we look for. Because we need to expand, and we will. That is our job to find this perfect balance. And I don't think we have done any mistakes yet. But the key figures are not as easy to achieve with smaller stores compared to bigger stores.

[Simon William George Irwin, Director]

I'm assuming it's too early to know how much sales transfer you'd get if you did close a store?

[Fredrik Steenbuch, Former CEO & MD]

No, it's absolutely too early. But I think we are the only one in the sporting business that has a footprint on each store we open. And we can measure the footprint digital, online sales. We can measure the sales for the store where the customers comes from. So we can measure these things, and we are doing just that.

[Simon William George Irwin, Director]

Okay. And I've probably asked this before. But what percentage of online sales touch a store at some stage of the journey in terms of collect at store, return to store, et cetera?

[Fredrik Steenbuch, Former CEO & MD]

I didn't get that. Did you?

[Tolle O. R. Grøterud]

And now we have actually seen a good increase in the pickup rate. So it's -- for the group, it's closer to 25%. Used to be 20% a year ago. And we see in the big cities actually pickup rates up to 50%. So, yes.

[Simon William George Irwin, Director]

At what percentage of returns go to store?

[Krister Andreas Fiksdal-Pedersen]

We don't have a figure for that. Sorry.

[Simon William George Irwin, Director]

A couple of quarters ago, you talked about the team sport initiative. Can you just update us on where we are on that?

[Fredrik Steenbuch, Former CEO & MD]

Yes. It's working well. Now in the team sport division we have 3 persons, 1 Finnish, 1 Swedish and 1 Norwegian. These are all very competent people within team sales. And we are signing up new teams as we go. So this is something we know will work very well. And the new platform we've made, that we called the game changer, is well received in the market. So yes, the full year operation for team sales is next year. So let's see where we're heading there.

[Operator]

[Operator Instructions] And the next question comes from Tushar Jain from Goldman Sachs.

[Tushar Jain, Research Analyst]

Tushar Jain from Goldman Sachs. Just first question. Is it -- can you just explain me if there's possibility to manage your inventory better in store? Given the change in weather pattern has been impacting for last 4 or 5 quarters, is that something that you are looking to manage the change in seasons slightly better than what you have done historically?

[Krister Andreas Fiksdal-Pedersen]

Well, we have several initiatives to improve the flow of goods in the stores. And we have several initiatives to improve that. And -- but also the high inventory we had last year was also related to that we bought too much in the second -- in the last part of 2016. So it's a mixed picture of that.

[Tolle O. R. Grøterud]

It's a lot on this field. We will be on technology and optimization of processes and things like that, which we, of course, are digging into. We have seen one that we presented last quarter with the stock solution for all stores available for all destinations and also online. And there are much more to do in this field. So this is high priority.

[Tushar Jain, Research Analyst]

Got it. And, second, in terms of marketing cost. I mean, Sweden is one you are not expecting it to continue. Is there any other regions you need to do this kind of one-off marketing to improve whatever the consumer perception is? And do you require to do more price investment in Sweden or some other markets?

[Fredrik Steenbuch, Former CEO & MD]

We do not plan to more -- we do not need this profile marketing more in Sweden. And I don't think we need it at -- in near future in any other country. But when you're asking, of course, we have learning process in Austria. Vienna is a huge city, and it's 2 million people. And to reach them in a cost-efficient way is extremely difficult. So that's where we will try to be more cost efficient. And Sweden is solved. And Norway, Denmark is okay. So Austria we will work harder on this one.

[Operator]

[Operator Instructions] There are no questions. So I will hand the call back to you. Thank you.

[Tolle O. R. Grøterud]

So that ends our session. So I thank you all for your participation. And have a good day.

[Fredrik Steenbuch, Former CEO & MD]

Thank you.