XXL ASA

OSE:XXL

Earnings Call Transcript 2023-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 CFO and Interim CEO, Stein Eriksen, will take you through the results and the key drivers and then followed 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 to our press contact.So without further introductions, I turn the floor over to you, Stein.

[Stein Eriksen, executive]

Thank you, Tolle. Good morning, everyone. Yes. So then let's look at Q1 and the results. I just wanted to start with this slide.As you know, XXL ended 2022 with NOK 500 million in too high inventory. And in Q1, we did what we said we were going to do. We launched the biggest clearance campaign in 3 years. And this, combined with continued reduction of incoming goods resulted in a significantly reduced inventory, and XXL will probably be the first Nordic sport retailer with -- to have reached normalized inventory levels. So very happy about that.And like I also said in the Q4 presentation, once again, really impressed by the whole XXL organization for making the decision of the clearance campaign in late December to launch it at the end of January is nothing but impressive. And the whole organization has done a tremendous effort in Q1 under difficult market conditions.So as I said, we continued to reduce incoming goods and purchase goods, and this in combination then with the strong clearance and campaign activity program, resulted in an underlying reduction of inventory of NOK 1.1 billion since the peak November 2022, only beaten by Q1 in 2020 where XXL had a reduction from the peak of NOK 1.2 billion. And we expect the inventory to be fully normalized in Q2.Q1 has been a quarter where we have worked with both defensive and offensive moves. As you know, we completed the settlement from the private placement of NOK 500 million, and this was used to pay down debt now in March.Also, XXL has worked with defensive moves, like reduction of purchasing of incoming goods, which together with the clearance activities, has resulted in, as I said, in a significant reduction in inventory.We had capital discipline. In 2022, we have the lowest CapEx levels in 10 years, and this has also continued into Q1 of 2023 with low CapEx levels. And we've done a reorganization of the HQ function in order to work more efficiently and continue to work on structural measures and exit Austria has good progress.We have also worked with offensive moves. As already stated, we had a strong campaign activity program, and this has resulted in top line growth and gain market shares. We changed our marketing mix, launched new DR layout, one sales message across all channels, and I'm very glad to see that XXL now is among the best companies in Norway regarding media attention. Great work from our team and our corporation partners.On e-com, we have improved navigation and the commercial expression of the e-com site. And e-com, in Q1, had an impressive growth of 29% in Q1.So clearly, the market situation for the industry has continued to be challenging with lower demand for sporting goods and high inventory level in the whole industry, both suppliers and retailers.As stated, XXL executed on strong measures and prioritized in cleaning out -- clearing out inventory in order to return to normalized levels in the upcoming season and to start then with in-season products for the spring/summer.This has been successful and inventory, as I said, we will get back to normalized level within short time. And we're ready then for entering spring/summer with healthy inventory levels.The clearance activities have contributed to a growth of 6% in the quarter, but at of course a significant lower gross margin. The lower gross margin also explains the negative EBITDA of NOK 45 million.Going forward, of course, continued strict inventory and liquidity control into the summer season, exit of Austria, increased our private label, like we have stated before, and optimize store footprint and size over time.Just very briefly from financial highlights. Operating revenues then ending at NOK 2 billion. All segments with growth. Also happy with the strong e-com growth, as I mentioned, of 29% then representing 28% of total revenue for the group. And EBITDA, I already commented on.Then moving over to the market. The Nordic markets, as you can see, were challenging in 2022 and continues to be challenging so far in 2023 with weakening consumer sentiment and reduced demand for sporting goods. Under these difficult conditions, I'm happy to see that XXL gained market shares, both in stores and online.Gross margin was, of course, significantly impacted by the strong and extraordinary clearance campaign that we had in Q1. As you can see, XXL had much lower prices in Q1 compared to our main competitors in Norway, as you can see from one of the slides there. But also, we had a very high campaign share than, of course, significantly impacting gross margins in Q1.Our inventory is, as stated, expected to be at normalized level within 4x. And hence, we have no need for extraordinary clearance campaigns going forward.So the financial review, starting with the P&L. For Q1 EBITDA then ending at minus NOK 45 million, impacted, as I said, by the lower gross margins related to the clearance activities. And revenues were up NOK 119 million, with 3% like-for-like growth.Weak in gross margin, I already mentioned it. But I'll just give you some more explanation regarding the gross margin. Down from 38.2% in Q1 last year to 31.4% in Q1 2023 and margins negatively affected by the high campaign shares and have a discounting in the market.Also, the margins were positively affected by a reversal of NOK 217 million in Q1 of the total loss accrual that we did at 31st of December of NOK 301 million.OpEx. Group OpEx down -- percentage points down with 0.1% to 33.6%, mainly explained then by the higher revenue yielding scale and operations.Operating expenses increased by NOK 31 million, whereof NOK 20 million is related to currency translation effects. And the NOK 10 million in underlying increase is related to new store openings, KPI adjustments, increased marketing spend during the clearance campaign.Yes. We already mentioned EBITDA of minus NOK 45 million, all segments then posting negative development versus last year.Looking at the net debt development from NOK 1.1 billion in net debt by the end of 2022 to NOK 900 million at the end of Q1 '23. The main drivers were a capital increase of NOK 500 million, but partly then contracted by the negative EBITDA. CapEx of NOK 31 million as well as payments recognized as lease contracts of NOK 169 million, also interest payments of NOK 30 million.So liquidity reserves for the group ending up at NOK 438 million and net interest-bearing debt at NOK 889 million. And of course, we will continue to have strict inventory and liquidity control during the upcoming months.But I also would share some outlook with you. These are the focus areas that we have shown before, and these are the actions we are currently working on. Like I said, continued strong balance sheet. Focus -- and focus, of course, on liquidity and covenants, capital discipline and a reduction of inventory.I'm very happy to see strong progress on category. XXL has recently in April launched a new self-developed stock forecasting model that will give us significantly improved inventory control and transparency.We have also reorganized the supply department that going forward would be a part of category, and we believe this will improve internal processes and increased product availability going forward. Our private label initiatives are progressing well, and we pursue several options.On e-com, I'm pleased, as I said, to see the 29% growth in the quarter. We have improved the customer journey and more commercial expression, though we have a lot more to -- yet a lot more to come.Marketing, significant improvements, very happy to see that. And we will continue, of course, with strong campaigns in sales activities, but of course, adapted for more normalized inventory level. And when it comes to costs, we continue to seek efficiency in all parts of the value chain.Turning over to Austria. As you know, we had a decision late last year to exit Austria in 2023. We continue to work with several solutions, including sale of the Austrian entities. The project has a good progress. We closed down one store in January 2023, and we closed down 2 more stores in Q2. The ambition is still to have no negative cash effects from the Austrian operations in 2023.I want to show you this slide because XXL has, during the last year, worked hard to reduce the volume commitments. And as you can see from this slide, the commitments versus previous years has been significantly reduced. And this means 2 things. First of all, we should have the flexibility to handle a weak market development in second half of 2023, if that's the case.Second of all, if the market stabilizes, XXL will need to buy more goods in second half. And here, we have the possibility and explore if we can have -- to contact some selected suppliers and see if we can have common interest in helping them out to reduce their inventory.Then to sum it all up, like I said, Q1, lower demand in the industry and high inventory. We executed on strong and immediate actions in order to adapt to the market situation. High share of sales campaigns contributed then to the negative gross margins, but with improved market shares all across Nordics. And of course, we did a settlement of the NOK 500 million in private placement.Priorities, going forward. As I said, we do respect the inventories to be fully normalized in Q2. And we continue to work with our 6 clear priorities: category strategies, exit Austria, private label, e-com, campaigns, marketing and reducing costs.Also, we are very happy that our new CEO, Freddy Sobin will start on Tuesday next week, and we really look forward to have him on board.So, Tolle, I think that was it.

[Tolle Groterud, executive]

Okay. Thank you, Stein. Then we open up for questions. And first from the audience present at Alnabru. So please wait for a microphone, and we can't ask you to introduce yourself. So please go ahead.All right. There are no questions from Alnabru. So then we open up for questions from the conference call, and we call upon the conference host for further introductions.

[Operator]

[Operator Instructions] It appears no further question. Thank you.

[Tolle Groterud, executive]

No question. Okay. So that ends our session then. So thank you all, and have a nice day.

[Operator]

Thank you for joining. You may now disconnect.