XXL ASA

OSE:XXL

Earnings Call Transcript 2022-Q1

[Tolle Groterud, executive]

Good morning, ladies and gentlemen, and welcome to the first quarter results presentation. My name is Tolle Groterud, and I have the pleasure of guiding you through today's presentation. And our CEO, Pal Wibe; and our CFO, Stein Eriksen, will take you through the results and key drivers, followed then by a Q&A session. And for media, there will be an opportunity to perform separate interviews after the presentation. So please direct your request through the press contact. So without further introductions, I turn the floor over to you, Pal.

[Pål Wibe, executive]

Thank you, Tolle. So to try to summarize Q1 in a few words. I think that if you look upon Q1 in isolation, it was a challenging quarter, obviously. But if you look a little bit broader on it, you might remember that Q4 was quite good with favorable winter conditions. So if you look at the winter as a total from end of October to early March, it was actually quite close in terms of sales to last year and above previous year. So -- but in -- I mean, Q1 in isolation, it was a challenging quarter sales-wise. The good thing in times like that is that we are taking market share in all markets. That's very, very positive because that's one of those things that we can influence ourselves. And even better, as you can see when you look outside, spring has come. And of course, we have plentiful of bikes, and we are very well prepared for the spring season. So that's on the positive side. So I'll take you through the presentation, and Stein will go through the financials. I always ask the team -- whenever we start a new season, we should always ask ourselves, are we better than we were 12 months ago? Because if we are better in all we do than we were 12 months ago, then at some point, we will get -- we will see it also in the results. And football being one of my favorite sports are -- one of those where we are better than we were 12 months ago. This is a picture from the training session we had, I think, last week where we are introducing an extended sort of football doors in 23 stores, and we've been training together with our partners. So that's also a category that is growing well even after the pandemic. Another favorite of mine is -- it's the running section and the fit stations. As you might remember, we launched fit stations 1, 1.5 year ago, and we are continuously adding features to the fit stations. So if you go now to xxl.no and you go into My Page, you will actually see that if you had done the foot scanning, that you can actually see your foot scanning on your My Page. And there will be more features so that you can -- to help you find the perfect running shoe. So there are no excuses for not exercising and running. And then, of course, going into spring. Spring is all about bikes. Bike is a key category during spring/summer. And this year, we cannot blame it on the lack of bikes because definitely, we have enough bikes to start the season. So that's very, very positive, and the team is doing a fantastic effort in assembling those bikes and being prepared for the sort of start, kickoff of the spring/summer season. But if you go back to Q1 and look at Q1 in isolation, it was challenging winter conditions in Q1, remember winter was in December, for the entire market. We gained market share in all markets. Sales ending at NOK 2 billion, which is 8% below last year. Last year was the best Q1 in the history of XXL. Gross margins slightly down. 1 percentage point of that reduction was due to the increased freight costs, which is still hurting us and everyone else. But EBITDA ended at NOK 75 million, which is, of course, down from last year in Q1. But as I said, we are well prepared for the spring and summer season. In terms of outlook, I would like to emphasize that if you look historically, XXL has been a winning concept in sort of troubled times. So in times when there's a lot of uncertainty -- and of course, there are a lot of uncertainty in the world right now with supply chain disruptions, Ukraine, prices going up and down, mostly up. So there is, of course, a lot of macro uncertainty. And in times like this, a concept like XXL usually stands out very well. This is the market share development in all -- in the 3 Nordic market. We don't have the Austrian figures. Norway and Sweden is at the end of February because that's not -- we haven't got the March figures, but Finland is actually also including March. And the very positive thing is that Norway, all markets we are gaining market share. Norway is very, very positive. But also Finland, as you might remember that we have been losing market share for quite a long time. Now we have for 3 months been gaining market share every month. So very, very sort of positive that we have been able to turn the tide in Finland. And over time, we should always -- our long-term ambition is that we should always gain market share. So the market might go up and down, but in general, the sport market has been increasing by 3%, 4% per year historically, we should always gain market share. That's our long-term ambition. These are the figures. Revenue down 8.4%. Gross margin down and then also then EBITDA, obviously also being hurt by the reduction in sales and margin. E-commerce was 23.2% of revenue this year. Last year, it was a little bit artificially boosted by the fact that we closed -- we had to close many stores in Norway and Austria, and of course, then e-com bloomed. This year is more normalizing and the store sales are increasing, of course. This was my perspective from the introduction where we said that the seasons are not following the quarters, they are following the seasons. And the winter season is typically in our industry from sort of end of October to early March. If you look at that period, the fall/winter '21, '22 was sort of close to the previous year and actually slightly above historic figures. So it wasn't necessarily a bad winter season in sales sort of in total, but it was a bad winter season in Q1. Gross margins, as I said, 1 percentage point. Sort of can be explained by the fact that we had the increased freight costs. What we are doing, of course, is that XXL is all about having the lowest prices on everything always. And we follow and monitor that very, very closely on the many thousands of products sort of every minute. And as you can see from this graph, we have been following the prices. So our relative position to the market price level has actually been slightly improved. So we are following the market prices, but the market prices in this quarter has been going down. And it's quite natural. When you have a lack of winter conditions in January and February, everyone needs to trim a little bit the inventory. Nothing dramatic last year, and nobody had any inventory to trim because it was a fantastic January, February. So we're also comparing it with a period that had unusually low seasonal clearance. Now we have sort of more normal, normal plus, but nothing dramatic. This is the segments. As I said, all segments, of course, going down when we have figures like this, but market share being positive in all markets, which is something that we can influence. We also talked about Austria, also has been something we've been talking about several times and got a lot of questions. We have been losing quite a lot of money, more than NOK 300 million over the last -- since introduction in Austria. We're also losing money in Q1. So we have been asked by the Board to conduct a strategic review to look at all options. We brought that all options, and we will do that in Q2 and come back to have done the completed strategic review. With that, Stein, I think I'll give the word to you to give a bit more details on the financials, and I'll come back on the outlook.

[Stein Eriksen, executive]

Thank you, Pal. Okay. Let me then take you through the main financial items for the first quarter of 2021 -- no, sorry, 2022, of course. If we start with the P&L. EBITDA ended at NOK 75 million. And like Pal already mentioned, it's a decrease of NOK 131 million versus last year. And the main drivers are 2 things. It's the negative revenue development and it's weaker gross margins compared to a record high level last year. Revenue was down NOK 182 million, mainly then explained by the negative like-for-like growth of 8.5%. Although XXL gained market shares in all markets, the sports industry, as Pal has already mentioned, had a challenging winter conditions during the quarter. Also worth mentioning, e-com had a negative growth of 19%, then representing 23.2% of total revenue versus 25% last year. Of course, part of the decline on e-com was partly explained then by the many store closures last year. Gross margin, down with 2.4 percentage points, impacted by both increased competitive pricing as well as increased freight costs. OpEx ended at above last year, both in percent and kroners, and I will come back to that in one of the later slides. And then net income ending at NOK 151 million in the first quarter versus minus NOK 39 million last year. So moving then over to the gross margin development, and Pal has already mentioned quite a bit. But worth mentioning is that first quarter is normally quite a seasonal, dependent quarter related to margins because we are very dependent on either a good winter season or we can experience worse winter conditions. This year was a little bit more challenging winter conditions in the first quarter. And obviously, the more clearance activities all over the Nordics negatively then impacting the gross margin. Also, we had higher freight costs as previous quarters that hampered the gross margin with around 1 percentage points. So as you can see from this graph, all segments, except Austria, posted a decline in the gross margins. That being said, I still want to highlight that XXL still targets a long-term, sustainable gross margin of about 39% going forward. Group OpEx, we had an increase of 3.3 percentage points to 34.2% in Q1, explained mainly by the lower revenue, negatively affecting scale in operations. In kroners, we had an increase of NOK 10 million, and that's -- everything of that increase is related to new store openings. In addition, I want to highlight that XXL experienced significant increase of sick leave in stores and central warehouse due to the spread of Omicron in the first quarter. And we had 80% increase in sick leave hours versus last year. That was around NOK 15 million in increased costs for XXL in the first quarter. EBITDA ending then at NOK 75 million, with all segments posting negative development versus last year, except Austria. Austria had improved results versus last year, but it was partly then explained by a recognized income of NOK 0.8 million due to governmental contributions related to the pandemic. EBITDA margin ended at 3.8% versus 9.5% last year. Then moving over to the net debt development from NOK 707 million in net debt by the end of 2021 to NOK 980 million by the end of Q1 2022. And as you can see from the slide, the main drivers were, first, a positive EBITDA of NOK 75 million, counteracted by increased working capital, which is mainly related to buildup of inventory, especially front-loading of important volume products in order to secure goods in these uncertain times. I just want to highlight still that the inventory is still very healthy versus the previous years. CapEx was NOK 42 million. A bigger part of it was linked to the implementation of the...

[Operator]

Unfortunately, we seem to be experiencing technical difficulties with the host's line. So we're going to have to cancel you. [Technical Difficulty]

[Stein Eriksen, executive]

As well as some maintenance investments. Payments recognized lease contracts were negative of NOK 154 million and interest payments then of NOK 29 million, then leading to net debt ending at NOK 980 million. So moving over to the financial position of the group. Liquidity reserves ending at NOK 800 million and net debt at NOK 1 billion. Leverage ratio ending up at 1.6, which gives significant headroom versus the covenants. So then to sum up the financials. EBITDA, as I said, ending at NOK 75 million, a decline of NOK 131 million, mainly then explained by the decrease in revenue and lower gross margin. Inventory continues to be healthy levels, and XXL has front-loaded volumes in order to secure deliveries under uncertain value chain condition. And net interest-bearing debt ending at NOK 1 billion and liquidity reserves at NOK 820 million. Those are the financials. Pal, over to you. Thanks.

[Pål Wibe, executive]

Very good. [indiscernible] Keep in mind in the quarter like this that we are on a transformational journey that we have just started on. Even though XXL has sort of made big strides forward over the last 2, 3 years in many areas, we still, fortunately, have a lot do in order to improve. In some areas, we have progressed far, and in other areas, we are still a lot ahead of us. So even though we say we are well prepared for a great spring/summer season, even better is that we have a long list of improvement ideas. Keeping in mind that this is actually the first season in at least my time at XXL that we can actually physically prepare for a season. We can meet, physically train, we can visit the stores, we can talk also in physical. So of course, we still have, luckily, a long list of things that we should do better, and that's really good. So we are, I would sort of say in this -- look upon it as a summit climb. I will say that we are somewhere in between stage 1 and 2. There are some guys chasing up to the top and putting up a forward post. So I don't know if anyone of you sort of saw that. Last week, we launched the sale of used products, and we can actually go down in the store and see that. We're doing a lot of circular, sustainable services that we're launching this lately. So some people are up there at Camp 8 and sort of putting up a tent, but the main focus is still sort of in the early phases of the journey. And as I said, luckily, we have a lot to continue to improve. We believe that in times like this, what makes XXL unique is that we have this combination of great brands, great prices, great selection, expertise and accessibility and the combination of it in one concept. That is what makes XXL quite unique. And as I said before, historically, we have seen that in uncertain times, concept like XXL stands out very well versus the competition on the alternatives. So we are -- sort of even if there are macro uncertainty, we feel very confident that we are well prepared for that uncertainty. The sort of overall targets and goals remain the same. We have said that the sports market might go up and down. In general, it has been increasing by 3, 4 percentage points historically. We shall take market share over longer periods of time. That's the kind of priority #1. The other thing, as Stein mentioned, over time, we should have a sustainable gross margin, above 39%. That's the second target. And then we want to continue to invest in operational efficiencies so that over time, we decrease the cost ratio. Of course, in Q1, we didn't because sales was fluctuating quite widely. But over time, we will and shall improve operational efficiency and decrease the cost ratio. So that's our targets that we are committed to as a company. And as I said, this is good or bad. I think in general, it's quite good because if you compare with 12 months ago, we had far too few products going into the spring/summer season, especially on bikes. Here, you can see the index inventory on important spring/summer categories versus last year. So as I said, this spring/summer, it will not be a lack of products to sell. Of course, we will always be sold out of something, but we have more than enough of products to sell. Yes, there are the supply disruptions and some things are coming later than they ideally should, but we have a lot also on inventory we can say that we can sell. So we believe that -- and especially bikes is maybe the one biggest sort of change versus the same period last year. And as I said, the team is doing a fantastic effort these days to assemble all these bikes to be ready for the spring kickoff that is really -- every year hits us like a big bang in April. So I'm very sort of satisfied with the preparations. We are peak ready. Our supply and replenishment systems and procedures are better than ever before. The assortment changes are on the positive side, and the stores and e-com are ready for the season. So to close up, I will say that we are capturing market share during challenging times. If we look at the Q1 in isolation, the winter as a total wasn't that bad, but Q1 was more challenging winter conditions. Sales at NOK 2 billion, gross margin at 38% and an EBITDA of NOK 75 million this year. But we are well prepared for the spring/summer season. The focus is the same as we said last time. Retail is all about improving category strategies and seasonal execution. This is what we are spending most of our efforts on, to continuously improve the category offering. I gave you some highlights today, but that's a never-ending battle. We are working a lot on improving marketing and the campaign process, sort of a big improvement potential for us. We are not there yet. E-commerce, we have gotten a lot of boost over the last few years. We can still do a lot better. And we think that once the market now normalizes, that will be even more important. And we have optimized inventory, but we also need to optimize the cost base, and we are working on that, too. So with that, we are -- we believe that we're going to take market share also in uncertain times that we have done historically. We have 3 new stores signed for 2022, 1 in Norway, that's Alta; and then 2 in Sweden, which is, I think I can say, it's in [indiscernible], which is opening in a few months' time, and then [ Celestio ], who's opening early next year. And we have closed 2 stores, Töcksfors and Nordby, as outlet stores. And we will, at any point in time, close stores that we are not getting profitable conditions. I mean we cannot, over long periods of time, operate stores where we don't see a basis for profitable operations. And then Töcksfors and Nordby, we didn't see that, so then we had to close it. But net-net, we still believe that there are white spots in the Nordics and in all markets where we can grow. And as I said, we have announced to initiate a strategic review of Austria to look at broadly at all options, and we'll come back to that in the Q2 presentation. So with that, I think we'll open up, Stein and Tolle, for questions.

[Tolle Groterud, executive]

Perfect. So then we open up for questions, first, from the audience present at Alnabru. So please wait for a microphone, and we ask you to kindly introduce yourself. So please go ahead. A quiet audience. So no questions at Alnabru. And unfortunately, we also have some technical issues with the conference call just now. So we are not able to transfer into a Q&A session. So a replay of this event will very soon be available on our corporate website. And also, please direct all your questions to the Investor Relations or the Communications Department. We are ready to answer all your questions immediately and throughout the day. And we apologize for the inconvenience. So that ends our session. And thank you all, and have a good day.

[Pål Wibe, executive]

Thank you.