XXL ASA

OSE:XXL

Earnings Call Transcript 2020-Q2

[Tolle O. R. Groterud, Chief of Staff]

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

[Pål Wibe, Group Chief Executive Officer]

Thank you, Tolle. Welcome, everybody, to the Q2 results of XXL. It's, of course, quite a difference to the first quarter. Very happy to be here. Very, very proud of the team and the performance in this quarter. It has been an extraordinary circumstances and market demand, but what makes me extremely proud is the way the team has adapted to the circumstances and the fact that we have taken market share in all markets throughout the quarter. So very, very happy, very, very proud, but emphasizing that it's still a start of a journey, and we have some exciting things ahead of us, too. So with that, I will think we'll go -- start with the presentation. Let's see. Operating revenue, as we have announced, increased by 31%; like-for-like, 28% growth, which is, of course, fantastic; e-com growth more than 60%, and once again, that just emphasizes the role of XXL as a true omnichannel player. And we have benefited obviously from that in this quarter. Certain categories are growing very well. And as we said, it is extraordinary market conditions, but as always, you have to adapt to the conditions. And the fact that we are taking market share in all markets is sort of something that we're very proud of. The EBITDA of NOK 385 million is, as much as I can recall, the best quarter ever in -- second quarter ever in the history of XXL. So that is good. But we always learn that cash is king. And of course, even better is the cash flow that has been very, very good throughout the quarter. So good performance. And of course, with a good cash flow, that means that the net debt is at a record low level. And once again, we would like to emphasize the fact that it has been an extraordinary quarter. It has required an extraordinary effort from all employees. We are very happy that everyone has been safe throughout the quarter, and we are very grateful for the efforts of all the entire -- all 5,500 XXLers during these very challenging times. Here, you see the market data for Norway, Sweden and Finland. We don't have the June figures for Norway and Sweden yet. But I think I can guarantee you that we have taken market share in all markets, and on a scale, at least for me. I've been in retail for 22 years, and this kind of market share growth is -- I've never seen before. So it's a good performance by the team. We have -- as you can see, we have a strong growth, and it's broad-based. It's basically in all markets. Austria was obviously closed for a month so that influences those figures, but otherwise, very, very strong quarter both on the top line and the bottom line in all markets. E-comm is growing. It's almost 20% now in this quarter, which is also extremely good. And as you can see, there are certain categories that we talked about before too that is growing strongly in this quarter. Outdoor and bikes, water sports, which is a new category to us or an extended category to us this year, has had some tremendous growth. But we've seen growth across the board in most categories, but these are some of the highlights. I would also like to use the opportunity to thank all our supplier partners because we have basically been turning 180 degrees around from full stop to full throttle. And that is not possible if we don't have good partners. And in this quarter, our partners has really done their best to scour the world and try to find products for us, and we are very grateful for that partnership. So with that, I think I will -- yes, and even more important is the fact that we have been working on some strategic initiatives. If you remember from last time, we talked about the fact that the focus right now is on the defense of the football field. So we have been working on strengthening the balance sheet, refinancing, organizing ourselves in a better way, more efficient way, but also to reduce cost and align sort of the cost base with the top line and the bottom line. We have reduced marketing costs in this quarter but been able to improve the marketing efficiency, which is, I think -- a huge credit to the people being involved in that kind of turnaround. And that has given us a very, very positive cash flow generation through the top line growth and increased market share in all markets. But I'd like to emphasize once again that this is just the start of a journey, so it's not like we're done. We have almost only started. We have a lot of things we need to improve, and we still have a lot of work ahead of us. We'll come back to that in a minute. But before that, I think I'll hand over to Stein, who will give us the juicy figures for this quarter. It's sometimes a good job to be a CFO in a quarter like this.

[Stein Alexander Eriksen, Group Chief Financial Officer]

Absolutely, Pål. Thank you. Good morning, everyone. Going through the financial results for Q1 2020 -- no, Q2 2020, it's pretty obvious that both Q2 but also the year, so far, has been extremely eventful also for XXL. We have tried to sum up the different areas that we have been working on in XXL for the last quarters, and also moving into Q3 and beyond. As I said, each quarter has been very eventful. Q1 was all about securing a healthier balance sheet. As you already know, we had a big clearance campaign in Q1. And this, together with significant lower purchases, resulted in a solid cash flow in Q1. In combination with this, we also announced a capital raise of NOK 400 million, and we agreed on new long-term facilities, both of the later ones executed in Q2. That was Q1. Entering into Q2, a heavy COVID-19 situations with stores closed in Austria, turnover wiped out in the outlet store next to the Swedish borders. We had focus on, of course, securing the health of our employees, but also securing the health of XXL by maintaining the cash flow in the company. By securing cash flow, we focused on keeping steady state of cash-in by pushing income and capturing market shares, but also cutting costs, both rental, marketing and by layoff of personnel. As you know, the market conditions started to improve in some markets already in April, and therefore, we called back the laid-off personnel in correspondence with the increased turnover. Then going into Q3, focus will be on operational efficiency and delivering on the ongoing projects related to both margins and cost improvements in the shorter run, but also on category development, in-store experience and enhance the omnichannel experience. But of course, also stay alert if needed, if there should be rapid changes in the markets, and then especially related to the COVID-19 situation. Okay. Let's continue to the P&L. As Pål said, XXL posted an EBITDA of NOK 385 million, and that's the best Q2 in the company's history. Of course, what stands out in the P&L is the very strong top line growth of 31%, driven by the like-for-like growth of 28%, explained by the extraordinary sales situation, and of course, also XXL capturing market shares. Gross margins are down from last year, explained by lower supplier bonuses in percentage of sales, higher sell-down of inventory compared to last year and negative mix effects within the segments from higher e-comm sales. Good development in OpEx percentage was driven by the like-for-like growth and scale in operations. Moving over to the different building blocks of the P&L. Gross margin, down 2.9 percentage points, and all markets except Denmark had a decline in margins. The comp -- and here, we see the strong effect from strong sales growth, combined with inventory build-down that resulted in supplier bonuses in percentage of turnover being 1.9 percentage points lower than last year. Also, as I stated, the strong growth within e-comm gave some negative mix effects in all segments. I also want to emphasize, at the beginning of the quarter, we had focused on cash flow and selling out goods at somewhat lower margins than at the end of the quarter. So the margins improved during the period. OpEx. Group OpEx percentage was down due to a strong top line growth and the short-term cost reductions related to the COVID-19 situation. All segments posting positive development in OpEx percent of turnover. HQ increased with NOK 60 million, primarily related to 3 things: the improvement programs and refinance activities; the higher activity at the central warehouses, remember, we have 60% turnover growth on e-comm and 31% for the whole group, that means higher activity at the central warehouses; and a higher bonus accruals this year compared to last year. Moving over to the EBITDA. Overall, Q2 proved to be the best Q2 in the company's history. And it's quite a change from Q1, which was the worst Q1 in the company's history and which also shows how fast things develops in retail. And of course, once again, this quarter is positively impacted by the extraordinary sales conditions explained partly by the COVID-19. We are happy that all segments posted positive EBITDA growth, and especially the strong EBITDA growth in Norway and Finland. So then moving over to the most funny part of this presentation, if you ask me, and that's the balance sheet and the cash flow development in XXL. Last year, in Q2 2019, XXL launched an ambition that we wanted to reduce the inventory with NOK 900 million, ending up at an inventory per store at NOK 25 million. And then I'm happy to announce that we reached this ambition in Q2 2020. Inventory landed at NOK 2.2 billion and inventory per store at NOK 23.7 million, the lowest inventory registered in the company's history. Keeping these inventory levels and a healthy income level going forward, we believe we will reach the inventory in percentage of turnover to be below the 25% at the end of the year. And that's, of course, a significant improvement versus last year. It's also fair to say that reduction in inventory has resulted in higher operational efficiency in both our central warehouses and in our stores. As you can see, the reduction is a number of several actions and improvements in XXL. But the work is not finished. However, I will say that we have improved during the last year. And as Pål also stated, during this special quarter, we would like to thank all of our suppliers for showing a great deal of flexibility regarding supply of goods. And like Pål said, we turned around 180% (sic) [ 180 degrees ] from the end of March until the end of June. And that's also the reason why we can't tick off the reduction in number of SKUs because basically, during the last -- especially in June, we have tried to get -- we've taken in alternative products. I think this slide sums it up in a pretty good way. I have to believe -- no, I have to admit, when the controller team told me the net interest-bearing debt by the end of June, we had to check it out because it was strong by the end of April -- no, end of May, but it was even stronger at the end of the quarter ending at NOK 295 million. And that's down from NOK 2 billion last year. The reduction in debt is a consequence of several measures. But on the left-hand side, you see the reduction in inventory from NOK 3.3 billion down to NOK 2.2 billion. And of course, the reduction in inventory has given us a strong operational cash flow of NOK 900 million, and it's an improvement versus last year of NOK 700 million. This, in combination with 2 equity transactions in 2019 and 2020 of more than NOK 900 million, have resulted in a lower net debt, and of course, higher liquidity reserves. And I think the next slide sums it up in quite a good way. XXL now has a strong balance sheet. If you compare to previous years, XXL has today very little debt and high liquidity reserves. Actually, you can see, this is the strongest Q2 in at least newer history. So XXL has a very solid financial fundament going forward. Then I leave the floor over to you, Pål, for some final remarks.

[Pål Wibe, Group Chief Executive Officer]

Thank you, Stein. So that's how an exciting -- excited CFO looks like. It's good. Yes. I've been with this company now for, I thought it was actually 106 days, so -- and as I said last time, I think I've landed a dream job. And I thought I'd recap a little bit the reasons why. The first thing you see on this slide here is the fact that sport is fun, is engaging and inspiring. And I think the XXL assortment, I think that in all markets, I think most consumers find something within an XXL store that they find fun, engaging and inspiring. And you can see that in the interest surrounding XXL as a concept, that this is really something that the consumers find engaging. And that's always fun to work with things that people think is engaging and inspiring. Another reason why it's fun to work in sports, not just XXL, but in sports in general is, of course, that it's good for the customers. We have a 31% sales increase this quarter, and that is good for our customers. The more running shoes, the more football shoes, the more tents and outdoor equipment you buy, it's never negative. The worst thing that happens is that you'd only use that tent a few times. But that never hurts. And the best thing that happen is that you'd get active, and you -- and people started throughout this crisis to see that an active lifestyle is really rewarding and good for your health and for the well-being of the people. So it's good to be in an industry where we are selling something that is good for people. And then, of course, I spent a lot of time talking with different people about XXL, not just the investors and the media, but of course, a lot of supplier partners and internally. One of the interesting thing is that I -- very often, I find that people find it a little bit challenging to put XXL in a box. So I get the question, what is XXL? Is XXL a brick-and-mortar player? Or is XXL a pure player, an online player? And my answer is that we are both. We are the biggest brick-and-mortar player in the Nordic market, but we're also the biggest pure player in the Nordic markets. So we have both. Then people ask me the question, are XXL a specialist? Or do you focus on the lowest prices? And I said that we are doing both. We have the lowest prices as a basis, but within each department, we have the size and the opportunity to be a specialist. We are not there in all the departments and all sectors today, but that is one of those things that we are working on and which will be very interesting in the years to come. And we see a very, very good traction with many of the suppliers. We're getting more and more access to the right kind of assortment because we have that unique opportunity to be both a specialist and have always the lowest prices. So I think that XXL is not easy to put in a category, and I think that's one of the benefits of the concept. And this is also one of the reasons why we've been able to be so solid during a quarter which has been the most dramatic in sports retail history, I think. So we are quite unique. We are All Sports United and Sports Unites All, and you can actually -- with XXL, you can actually spend -- you can be active in your sport no matter what the size of your wallet or your gender or your race or what other characteristics. We give everybody the opportunity to do the sport they love. We talked about the strategy going forward. And the fact that most of what you have seen in this quarter is more operational tuning than the long-term work. The results of the long-term work is, of course, things that you will see ahead of us. These are the 5 pillars that we are working on. And I'm actually even more proud of the progress we have made on the strategic initiatives that -- of our performance in this quarter. I think it has been a tremendous effort by the team and the whole organization to, yes, keep the momentum and capture the opportunities and the market share in this quarter, but even more important, to work really, really hard and smart on the long-term initiatives that will secure XXL's success also going forward. And it's these 5 areas: reposition ourselves as a sports specialist, providing unique value for money; on the marketing, enhance our marketing approach and build the XXL brand, we will come back to that; truly establish ourselves as an omnichannel champion, we are good today, but we can be much better; improve the in-store experience, it's also make the stores fun again, that's something that is really exciting but will take some time; and strengthen operational efficiency and be even more customer-oriented. And I think that over the next few years, you will see that we -- hopefully, you will see that we gradually tick off on all these 5 boxes. But the work has started, and I'm very, very happy with the progress of team so far. I -- my dream job is, of course, to be the CEO of XXL, but the next best job is to be the manager of a football team. And of course, just to put this into perspective, what we have been focusing on, as Stein said, is to start with strengthening the defense. If you want to win championships, you need to strengthen your defense. And in retail, the defense is all the things that makes Stein excited, which is the balance sheet and the inventory and the cost. So we have started on this during this quarter. We will still continue. We still have work ahead of us. We are 80% there on inventory. We are not 80% yet on the cost and efficiency. Then we will gradually focus more on the midfield, which is the -- how to capture -- improve the daily operations and capture more of the margins. So that's sort of a focus going forward. And then a little bit longer term, we will apply what we call high-pressure attacking, which was new to me. But high-pressure attacking is to improve the customer perception and experience at XXL, both on the concept, on the category and on the marketing and realize both sales and market share growth. And that is things that will take longer time to establish. But of course, to build a championship team, you really need to focus on that, too. But focus now has been on the defense. We also talked about Austria. As you know, we opened the store #6 in Austria in May, a little bit postponed because of the COVID crisis. Last year, we had quite a negative result in Austria with more than NOK 55 million in negative EBITDA, almost more than 11% of sales. Of course, that is not satisfactory. So we have devised a plan for how we can improve in Austria. And I have to be frank and fair and say that I think we can do much better. We have not done a good enough job of adapting the marketing costs and the marketing approach to the local circumstances. We are not giving our Austrian team the opportunity with respect to the assortment and the campaigns and adapted to the local market conditions. And this, obviously, we will do now going forward. And we will also continue to open stores in selected areas where we are not represented today. The fourth one is coming -- and the next one is coming in Q4 in the Greater Vienna District, but there are still many open spots in Austria, obviously. We have also decided to establish a central warehouse in Austria, and the key reason is basically that it's a very good business case serving Austria from a local central warehouse. Today, we have a very, very costly and expensive setup, serving Austria from Sweden. So we know that, that will reduce logistics costs quite dramatically, but it will also improve the service level so that we can give our Austrian consumers an even better offering. And we think that the combination of all we do here will improve the results in Austria significantly. This quarter has shown, as Stein said, that it was an extraordinary quarter. Nobody really knew what we went into when we started the quarter. I think in times like this, strategy is important, but even more important is culture. And I think it's a huge credit to the XXL culture that we have been able to turn 180 degrees around from full stop to full throttle and really, really done more -- almost the impossible during the quarter. I think that's a big credit to the culture of the XXL. This will also be a focus going forward, to build a distinct -- or develop a distinct and positive XXL culture. One of my most important jobs is to continue to build on the leadership team and develop the leadership capabilities at XXL. And we are also focusing now on strengthening some critical functions on HR, communication and compliance, where we will have new people onboard starting in August. So we really have -- there's a lot of exciting things going on, but it's all about building on the culture we have and the leadership team that we have now in place. And I think in times like this, this is most important. And as we said initially, one thing is for sure. We don't know how the market will play out in the future. So I think that more than ever, it's important to stay agile and adapt to market conditions faster and better than the other players in the market. So just to summarize, a special quarter, the best quarter ever in terms of performance. Fortunately, we have been able to keep employees safe and healthy. So that's important in a time like this. We've been able to adapt to market circumstances that none of us thought was coming when we started the quarter. And we've been taking market share in all quarters, and that's good. But more important than just what happens in this quarter is the fact that we have positioned ourselves and been working on a lot of strategic initiatives that is going to be critical for our success in the future. So I would say it's a start. The fun is starting, but we only started on the journey. So with that, Tolle, I think we will open up for questions.

[Tolle O. R. Groterud, Chief of Staff]

Yes. Thank you, Pål and Stein. So then we open up for questions. And I then call upon the conference host for further introductions.

[Operator]

[Operator Instructions] We've got a couple of questions coming through. And the first one is from Ole Martin Westgaard from DNB.

[Ole Martin Westgaard, Analyst]

Congratulations with a very great quarterly results. First of all, a question about gross margins going forward. With this massive positive sales trend, when should we expect that you should be back in a position to get supplier bonuses again? And how -- what's your view on gross margin for the second half?

[Stein Alexander Eriksen, Group Chief Financial Officer]

I can answer that one. Right now -- I mean, like I said, in April, we focus mostly on cash in. So April was a month where we had lower margins than last year, but we saw a gradual improvement during the quarter. Going forward, I think it's fair to say we are now happy with the inventory levels. We are not working to get the inventory levels further down. So if the sales trends continue, then we expect a more normalized margins going forward, and that means also higher supplier bonuses, yes, going forward. But of course, dependent on the sales.

[Ole Martin Westgaard, Analyst]

But can you get that already from Q3? Or is it in Q4? Or is this a 2021 moment?

[Stein Alexander Eriksen, Group Chief Financial Officer]

If you look at our cash flow statement, you will see that our payables went up in the quarter. That was mainly because we started to buy more products in June. So to be honest with you, yes, I expect a more positive trend in Q3 and going forward.

[Ole Martin Westgaard, Analyst]

On the Austrian warehouse, can you be any more specific on the CapEx associated with this warehouse and potential timing of when this will be operational? And what do you expect in terms of savings from this?

[Pål Wibe, Group Chief Executive Officer]

A little bit early to say. I think first -- we first have to find the exact location, but it's in the sort of early 2021 is the plan, as I said. And it's sort of a very solid business case just from the savings in the first few years. So let me come back to that once we know the exact location and the timing.

[Ole Martin Westgaard, Analyst]

But how many stores should that warehouse sort of support?

[Pål Wibe, Group Chief Executive Officer]

It can support many more stores than we have today. Obviously, you are a little bit ahead of where you are today when you scale the dimension on the warehouse. And with the outdoor store concept, it's also very flexible. So we will build flexibility and growth into it, obviously.

[Stein Alexander Eriksen, Group Chief Financial Officer]

Just not to scare you off, I mean, we're not talking about CapEx in the hundreds of millions. We are talking about CapEx, NOK 15 million to NOK 20 million, to start with.

[Pål Wibe, Group Chief Executive Officer]

No, no, no. Yes, yes. So it's a very small CapEx. We will [ rent ] the premise and then put in some outdoor store box or so.

[Operator]

[Operator Instructions] The next question comes from Gard Aarvik from Pareto.

[Gard Aarvik, Analyst]

Also from me, congratulations with a good result in Q2. But could you give some more color on the start of Q3? One should assume that, particularly in Norway, maybe the consumers have sort of completed its purchases, so to speak. And the weather hasn't been really optimal, either. What -- how is the start of this quarter been for you?

[Pål Wibe, Group Chief Executive Officer]

Yes. We are only in July, early July, so it's a little bit early to conclude on the quarter. But it has -- we've seen a very positive development in July, too.

[Gard Aarvik, Analyst]

Okay. And can you -- I mean, as everyone can understand, this will take time to implement. But you said that you will improve customer experience and perception in the years to come. I mean, can you be a bit more specific on how you are going to achieve that and what kind of strategic implementations you -- and initiatives you will actually take? Because, I mean, it's, of course, easy to just state that. But what can we expect in specifics?

[Pål Wibe, Group Chief Executive Officer]

Yes. Of course, it's easy to say. But it's all about what you -- we talked about it last time, too. It's all that you meet as a consumer when you get into an XXL store or online. So it's that. So it will be the concept, the [ stop-and-shops ], it will be the categories, the assortment in each of the categories with a special focus on the main prioritized focus areas. It will be a better, more inspirational marketing and even better sort of cooperation with our supplier partners on certain things in the stores. So I think you will see -- you will gradually see, of course, some already in 2020. You will see that we are trying to take leadership in certain categories in a more distinct way than we have done historically. But the full transformation with all the stores and all the things will take a few years, but you will also see some things already this fall and winter.

[Operator]

The next question comes from Markus Heiberg from Kepler Cheuvreux.

[Markus Borge Heiberg, Equity Research Analyst]

Congrats on a good quarter. So my first question is a bit following up on Gard here because -- are you afraid of market saturation, that when we look into 2021, consumers have bought what they need? And you will see the same effects that we probably saw to some extent in 2019, where sort of the market growth really was weak? Do you have that as a base case? Or how do you consider the more medium-term market outlook?

[Pål Wibe, Group Chief Executive Officer]

We are not giving a guiding on the market outlook. But I think you have some very valid points. Next year, we will hopefully not have a COVID situation. I think that's -- obviously will normalize the market. In some categories, you might have a situation like you said, that people have sort of bought the products they need. And that is counteracted by the fact that some of the people, we see a lot of new customers now in the segments, some of them get more engaged in the sports activities they see, and then they might upgrade a little bit on the type of products they want to buy. And of course, also the general improvement program at XXL. But I think it's fair to say that, of course, a huge boost in this quarter has been the extraordinary market circumstances that hopefully will not take place next year.

[Markus Borge Heiberg, Equity Research Analyst]

Okay. A bit on the market shares here because you're capturing this year, but last year, you've probably lost some shares. And if you look at the competitive landscape when we went into 2020, we all thought that it would improve because competitors are going bust and XXL could be this company standing out and be the last man standing. What's your thoughts on the competition now that you see that probably the whole market is getting this boost on inventory and these positive effects that you also are experiencing? Have you considered that? Any comments on that?

[Pål Wibe, Group Chief Executive Officer]

I think, first of all, I think it's good. I think that -- we think that the entire sports market needs a boost. And so it's positive for the entire market, and I think it's good for everyone. I think that's -- the market needs that, and that's positive. Obviously, we are taking market share. So we are taking more than the fair share of that growth, which is positive. Beyond that, I think that our key focus in the years to come should not be so much on others but on ourselves. I think if we can improve our offering in all the things that meets the consumers, hopefully, the consumers will be back and cheer on us and buy more with us, I think. So we have spent most of the time on improving our business and less time on looking at the other players in the market. But I think it's good for the entire industry that things are going a little bit positive.

[Markus Borge Heiberg, Equity Research Analyst]

Yes. That do makes sense. So the last question I have actually is about the specialist, the positioning that you're aiming for in certain categories. So I'm curious to see, do you have any examples of where you -- you mentioned that you get closer to the brands and your suppliers and that you feel that you get more access to brands than those top models that you need to become a specialist. Do you have any examples of it?

[Pål Wibe, Group Chief Executive Officer]

It's too early to announce and say, but I think that it's -- first of all, it's a long-term ambition. In certain areas, we are already closer today than we -- to the ideal state, like in the outdoor and hunting section. In other areas, we have a longer way to go. I think this is a long-term process. Some of the supplier partners are very quick to see what we're doing and we have a very good dialogue with them, and others are a little bit more wait and see and giving us more gradual kind of improvements. So I think you just have to keep watching. And hopefully, you will see that as an engaged customer, that we are improving. But it's not a sprint. It's a marathon.

[Operator]

[Operator Instructions] There is no further questions coming through, so I will hand the call back to you again. Thank you.

[Tolle O. R. Groterud, Chief of Staff]

Thank you. So that ends our session. So I thank you all, and happy summer holidays.