XXL ASA

OSE:XXL

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to the XXL ASA Q2 2023 Call. My name is Laura and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]

[Tolle Groterud, executive]

Good morning, ladies and gentlemen, and welcome to the second quarter results presentation. My name is Tolle Groterud, and I have the pleasure on guiding you through today's presentation. And our CEO, Freddy Sobin; and our CFO, Stein Eriksen, will take you through the presentation, 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, Freddy.

[Freddy Sobin, executive]

All right. Thank you very much, Tolle, and good morning to everyone. Welcome to the second quarter presentation of XXL's results. And I think we'll skip the disclaimer slides and jump right through it. My name is Freddy Sobin. I have the pleasure and humbleness to have joined the company 2.5 months ago in the first of May. It's been a busy and hectic period, but also a really interesting and fun one. And I have literally hit the ground running. Moving ahead, where I'm coming from. I'm coming from 19 years of experience within e-commerce and retail. That's what I'm bringing to the table. If you look at what I've done previously, I have 13 years of experience as a CEO with 3 previous assignments before this one. I also have 18 years of experience in the various board assignments, both as member and Chairman. From a geographical perspective, my primary experience is from the full Nordic region, meaning Sweden, Norway, Finland and Denmark, but also secondarily, I've also been active in companies that have been in the Baltic region and also the Central and Eastern European region. From a category perspective, I've -- from an operational standpoint, only been active in consumer discretionary categories. Some examples being whitegoods and home appliances, fashion and lifestyle, beauty and self care but also actually for 5 years in the outdoor product and apparel category. So being here is not fully new, which is a good thing. Furthermore, the companies that I have been having the pleasure to join has been everything from start-up scale-ups, but my 2 most recent assignments has been in transformations where we also had to work with turnarounds and restructuring the companies. So joining XXL, I wouldn't say that it's a new territory, it's quite familiar, both coming in into a challenging situation, but also upfront company. Since joining, many people have asked me, what is your assessment? What is your diagnosis of the company? So I thought I would share some of the high-level thoughts with you today and let me start with saying that I still believe that XXL has a strong and unique concept in the market that hasn't changed.

However, looking at recent years, I think it's insufficient execution that has led to performance being at unsatisfactory levels. Also, recent years have really seen the market changing, consumer behavior is changing even more rapidly and I don't think the company has really been resilient enough and dynamic enough to follow neither the customer nor the market in a good enough way. We haven't fully been adapting to new market trends or new best practices, neither when it comes to retail, omni or e-com. Furthermore, the macro environment, of course, has been challenging for quite some years. The pandemic was a difficult time for the company, but also what happened directly after the pandemic has been challenging. We know the market has been down for quite some time. That being said, with all of those challenges, I'm even more optimistic now since before joining the company because the company that I have now had the pleasure to see from within and to be joining is one that has a very highly engaged, highly motivated and a committed organization. And this is in the end of the day, always a people business. We are almost 6,000 employees. If everyone is highly committed, this will be a great journey ahead. Also, I truly believe that we have a leading and fundamentally strong position in the market. We are still the biggest player in the Nordics within sports and outdoor that hasn't changed.

Also, I see many omnichannel and tech investments already being in place and having been made. And with all of those fundamentals in place, I actually see great potential in this company. So I'm even more optimistic now since before joining. The potential is just fantastic and there are many improvement areas that we are attacking, both short term but also long term that will definitely in my belief turn the company around. To achieve this turnaround, I have focused these first 2 months on recruiting a strong and partly new Nordic management team. 2 out of 4 recruitments are now finalized. You see 2 of them before you in the presentation. I have the pleasure to announce that our new EVP Brand and Marketing is Emily Fritz, who has accepted the role. She will be joining us already on the 22nd of August. Emily comes from Sweden. She has more than 25 years of experience from different marketing roles, both from FMCG and strong consumer brands, but also coming from 2 different retail companies just recently. I also have the pleasure to inform you that we have a new permanent EVP category in buying, joining us later this year, whose name we will announce later after summer, but also coming in with more than 20 years of relevant experience. And once again, why I'm stressing experience because I think that is what's sorely needed in the company. We need the strength and competence and experience to really see to it that we increase the change momentum in the company. We see to it that we actually materialize the improvements that we have identified and we grasp the full potential that is here. We have 2 outstanding recruitments that will be finalized hopefully after summer. One is the -- well, let's call it reinstated COO role. We've had it since before, but it has been lacking for the last few years. The COO will be responsible for both store operations and store sales all through the Nordics, an important role. The fourth one that we are also recruiting for is EVP IT and Development, Espen Terland, who has been in the role for 15 years, have chosen to resign and join a new company. Now as you see, 3 of these 4 roles are commercial roles. We're talking about buying, marketing and sales. So we're strengthening the commercial trio of the company. And the last role, IT and tech is the one who will enable all of these 3 to succeed in their roles. So this is a great way to really strengthen the company. However, it's not only strengthening management that we have been focusing on for the first few months. I have also been focusing on really kickstarting a new operating model for the company, which is governed by new ways of working, new forms, new teams that will secure stronger execution than what we've had in the past. We are also resetting functional strategies to secure that every function delivers on what they are supposed to do. Now execution in combination with the strong plan will deliver strong results of that, I'm certain. So we have also spent the first 2.5 months on both developing a new short-term turnaround plan with 5 must-win battles that are quick wins, and we will present them later in the presentation. But we have also started to draft and develop a new long-term strategy together with our Board, and we hope to finalize this early fall, and we can present that more in the months to come. However, there was a plan in place already when joining the company, of course. This was the plan already communicated by Stein since before and we have continued along this plan also in the second quarter and we now changed to the new plan in the third quarter and moving forward. I think 2 highlights in the current plan is both private label and also Austria private label. As we announced late May, we entered into a strategic partnership with Stormberg and also did a minority investment in the company. We are already initially seeing good results and good improvements coming from that partnership but we see the potential being great and big, and we will scale it in both the months and the years to come. Looking at number five, the Austria exit. We are still fully committed to exit Austria in full before year-end. And I'm glad to say that we have very good progress on the plan with most stores now being closed or signed to be closed. A few more remains, but not many. So good progress on the current plan, but we're now switching modes into the new plans. Looking more into the current market. We can, of course, everybody can see the macro environment that we are acting in currently. It is the difficult one to navigate for sure but looking more specifically into the sports and outdoor markets, we can see that the sports and outdoor market has been in decline for the last 6 consecutive quarters. So both throughout the full year of 2022 and also year-to-date May 2023, the sports market is declining and in construction. And in looking more deeply into the second quarter, why this still remains, this development. We think that our strong campaign activities during the first quarter had somewhat of a backlash effect going into the second quarter. We had emptied the customers' wallets, so to say, already and our customers met us in the second quarter with high campaign pressures. However, that being said, we have, of course, been continuing to be active in the market and will continue to be so. We also see the capital goods category being slightly more affected by the current macro. We also see a lingering bunkering effects from the pandemic, meaning that the artificially high demand during the 2 pandemic years of 2020 and 2021, made customers may be buying more than what they usually did and fill up all of their closets, garages, et cetera, with categories and products that you don't buy every year. That effect will, I mean, turn eventually and linger off, and we hope to see that happen already during early next year. However, even seeing that this is a challenging market here and now and behind us, we still believe that the sports and outdoor market is a resilient market and the one that will be growing long term over time. Looking at the last 22 years and these are the Norwegian numbers and the Swedish ones are very similar, we can see that it's less than a handful of years during the last 22 years that the market was in decline. All other years, the market was growing and with a CAGR of plus 5%. We believe this is something we will come back to. This is underlying driven by at least 2 megatrends as we see it with health and wellness being after the pandemic even stronger in society and this will push sports and outdoor even more in the years to come. Of course, with a challenging market, our results have been challenging as well. We gave a trading update already early June and I'm at least even though not being proud of these numbers, I'm glad to say that we did land within the range that we communicated in the trading update. So starting to look just briefly at operating revenues. We were about NOK 1.9 billion as communicated, but it's still a decline of 6.9%, unfortunately. Gross profit and gross margins are down with more than 10 percentage points. However, Stein will guide you through this in more detail. We have done an extraordinary provision of NOK 67 million, of our capital goods categories as we saw that being necessary with the current market. Also, going over to cost and OpEx, we see that in absolute numbers, we are actually on par with prior year. However, with the lower top line, of course, percentage-wise, OpEx goes up. Being on par with last year is actually a good thing. Because looking at the current inflation in the market heading basically all cost lines and KPI adjustments, we have still been able to take out costs from the company, so basically compensating for the inflation in the market. Now with a lower top line, a challenged margin and stable OpEx, of course, it's easy to see that our bottom line here measured as EBITDA is down but out of the negative NOK 57 million, once again, NOK 67 million is a one-time provision.

Moving over from the P&L perspective, more to the balance sheet perspective. Here, the numbers are more positive, more on the green side, very pleasing to see that inventory has continued to be reduced and we are on, I would say, healthy and normalized levels. And this will give us a lot more maneuverability in the quarters to come. Furthermore, liquidity is actually up year-over-year by NOK 31 million, landing at NOK 722 million in liquidity. And this also makes us by par, getting over our bank covenants with quite good headroom. Talking about covenants, we have been in quite close in negotiations and discussions with the banks as we see that we needed the strength in our financial runway to be able to deliver on our improvement program and the turnaround plan. So today at 8:00, we communicated that we have renegotiated the current bank agreement, getting a new covenant package in place. And also that we have launched a fully underwritten rights issue of NOK 500 million that we will then land after summer fully. And these 2 together considerably strengthens our financial position and gives us the runway necessary to perform the current plans that have been drafted and to turn the company around once overall. And by doing that, we also see see that we're moving forward when the market turns and starts growing again, we will be well positioned to capitalize on future growth. And with that, I will leave the word to -- the floor to Stein, our CFO, and our much appreciated colleague.

[Stein Eriksen, executive]

Thank you. Thank you, Freddy. Good morning, everyone. Q2 2023 has definitely been another eventful quarter in the history of XXL. So I thought I will go through the main elements from a financial perspective. As Freddy said, we announced at 8:00 today that we will do a right issue of NOK 500 million and that we have negotiated a new agreement with the banks. XXL will have a liquidity covenant of NOK 200 million from September 2023 to May 2024 and thereafter, a liquidity covenant of NOK 300 million until November 2024. Also, a new covenant is introduced the maximum outstanding gross loan facilities can be up to 50% of inventory book value, excluding the value of supplier bonuses. And from Q4 2024, XXL will have a leverage covenant, net interest-bearing debt over EBITDA of 4x.

The bank facilities are extended to 25th of June, 2026. And as we said, there will be a right issue of NOK 500 million -- a capital raise of NOK 500 million that is going to be fully underwritten and this will be used to strengthen the financial situation of the company. And for further information, please look at this slide that I won't go through in detail. Freddy already mentioned it, but we believe that this financing secures a runway to realize then effects from the ongoing improvement initiatives. The sporting goods industry and the market has been attractive over long term, but post effects from COVID and weaker consumer sentiment have triggered a need for stronger financial position while undertaking then the improvement plan. The size of the fully underwritten right issue is based on then the current business plan, which assumes gradually improvement in market conditions and positive effects on -- of the ongoing improvement program. As previously announced, XXL has 2 ongoing tax cases. I will not go into detail regarding these 2 cases, but you can find more detail on this slide. So with that in mind, let's move over to the key financials for Q2. I think Fred has already summed it up fairly good. But like I said, the Nordic sports market has been challenging for quite a long time now, 6 consecutive quarters with negative growth. This has also then affected XXL with revenue down with NOK 144 million, a reported decline of 6.9% and negative like-for-like growth of almost 13%. EBITDA ended at a negative of NOK 57 million and net income of minus NOK 246 million, and then the EBITDA decline driven then by the negative revenue and the decline in gross margin. So then moving over to gross margin. We ended at weak 27.6%, down from 37.8% in Q2 2022. And the current market has been characterized by high inventory levels all over the industry and then resulting in aggressive pricing excessive campaigns and consequently reduced margins. We see that capital goods is showing stock rotation that is decreasing. It means that the number of stock days on capital goods is increasing. And therefore, we find it prudent to make an additional write-down within a negative net effect of NOK 67 million in the quarter, affecting the gross margin negatively with 3.4 percentage points. Moving over to OpEx. Like Freddy said, we see in percentage points, it's increasing with 2.5%, but it's impacted then by the negative like-for-like growth, hampering scale in operations. While in absolute kroner, we are actually down on OpEx because the increase of NOK 26 million is explained by negative currency translation effects.

And we see also good savings, especially on personnel costs. EBITDA, like I said, ended at minus NOK 57 million, all segments except HQ posting negative developments and once again driven by lower revenue and lower gross margin. Looking at the net debt development from NOK 1.1 billion in Q4 2022 to NOK 923 million in Q2 2023. And the main drivers here, as you can see, the negative EBITDA over minus 100, then contracted by positive change in working capital, mainly the inventory reduction. Our CapEx levels of NOK 44 million is actually the lowest CapEx in the last 10 years. So holding back CapEx where we can.

And then, of course, net debt positively influenced by the capital raise that we did earlier this year, while payments recognized in these contracts is driving it down with NOK 338 million and the interest payments with another NOK 56 million, then leading us to NOK 923 million in net interest-bearing debt by the end of Q2. Freddy touched upon it. But we have, during the last year, worked hard to reduce inventory. And during the 6 last months, we have cut NOK 600 million in purchased goods, which has resulted, as you can see, in reduced inventory of NOK 700 million and the inventory levels are now normalized. Also, as you can see on the right-hand side, the volume commitments for second half of 2023 continues to be at significant lower levels than last year, and this provides us more flexibility if the market continues to be challenging going forward. Yes. Liquidity reserves ended at NOK 722 million positively affected by temporarily repayment of Swedish tax of NOK 342 million . Before leaving the floor back to Freddy, I thought I would share with you some thoughts -- that we've shared -- Freddy will share more thoughts about the plans going forward. I think it's a good idea. Just to remind you that XXL in the years 2015 to 2021 had the yearly EBITDA before IFRS 16 effects of between NOK 450 million to NOK 850 million, and we believe that this is fully achievable to return to these profit levels. And this is why Freddy will present to you what we call the reset and rethink plan. We have an ambition during the next 12 to 24 months to have an EBITDA uplift of between NOK 500 million to NOK 750 million to 5 must-win battles, namely: reduced purchasing prices, working with product availability, sales steering, pricing and e-com, in addition to start cost reductions in several areas. So Freddy will present the must-win battles more in detail. So leaving Freddy the floor back to you.

[Freddy Sobin, executive]

Thank you, Stein. Right. So as Stein mentioned, we have launched what we call the reset and rethink strategy. And why I think these 2 words are important for XXL is because XXL had basically 16 years of great success in the market of unparalleled success in the Nordic region coming from 0 to taking market leadership and also going from 0 to almost NOK 10 billion in turnover. Many of the things done during these years were actually very smart and worked very well in the market. Some of the things that have built our success historically, we've actually ended up not doing anymore. I can't really say why. It just stopped happening, stopped working. We are now resetting many of those kind of things that led to the original success and that's what we mean by reset. Going back to what was working and what led to the initial success. However, we can't only look backwards. You can't go backwards into the future. We also need to rethink. We also need to acknowledge that 2023 looks drastically different than what, for example, 2016 look like. We have new consumer behavior. We have a much more dynamic market with new trends, new best practice, et cetera, and that is the rethink part. So we need to reset, we need to rethink. We need to do both in order to succeed. If we start with reset, that is very much the focus of 2023. It will continue and also the years to come but moving over in 2024, we will start with rethink in a much higher degree and then transform in 2025. But let's start with the reset plan. In the reset plan, we have identified and chosen 5 must-win battles. And must-win battles is quite a normally used term in the English dictionary but just to clarify exactly what we mean. A must-win battle is the thing that is not allowed to fail. It's the topic on your agenda that is always with the highest priority. So when our colleagues needs to choose because we always have a lot of things to do right, this is always on the top of the agenda. This is the top priority. This is the thing that we cannot be allowed to fail on. Going through them and I will do it one by one, slide by slide, we will go through the category reset, the strengthening of availability, sales steering and store operations, pricing and e-commerce. However, we are still continuing with already communicated initiatives regarding updating our customer club, XXL Rewards and what we now call XXL Rewards 2.0 and strengthening CRM. We also will continue, although strengthening the financial position, we will continue with a very strict cash and liquidity governance. And also the exit of Austria, we are fully committed to finalizing by end of the year. Going into one by one, these 5 must-win battles. Let's start with reducing purchase prices. It's quite a big one in the financial bridge that Stein presented just a few minutes ago. Why we are quite bullish on this one is because we see a quite big and drastic reduction in the input costs, both with regards to raw materials as well as production cost when it comes to sporting and outdoor goods. This will, in the quarters to come as we see it, lead to lower COGS and better margins. Furthermore, we see that having a healthy inventory in normalized levels, will allow us to an even greater extent, do win-win deals together with our suppliers because we still experience the supplier side of the value chain being quite full of goods in inventory. And this is something that where we can help suppliers and create a win-win situation that can also strengthen our P&L. Moving to the second must-win battle, it's availability. I think all of you when visiting stores or online, I think you've all been actually seeing literally the holes in the shelves, where we have been lacking products, lacking sizes, et cetera. Of course, this is not something that we have been happy with but given the need to both reduce inventory and to keep liquidity under strict surveillance, this is something that we have been forced into. Strengthening the financial position once again will allow us to work with product availability. And this will, without a doubt, both increased top line and increased margins. And this will ultimately lead to greater customer satisfaction and that is in the end of the day, what is most important. Number three: sales, steering and store operations. When going into any of our 85 department stores throughout the Nordics, of course, we want to give every customer the best possible experience, the best possible guiding to the best possible product of his or her choice. And we need to keep our stores as efficient as possible. So number three is very much a reset must-win battle. This is all about our stores and achieving greater sales, greater efficiency in all of them. Moving over to number four. Here, we're talking about pricing. Pricing is not an easy topic in XXL as we are quite broad in our assortment. I would say we are even uniquely broad in our number of categories that we are selling and offering to the market. We have more than 1,200 subcategories and actually managing pricing in all of these is not an easy task. We have now, since late May, early June, set a new task force in place that are responsible for pricing. We're not doing this in a fully data-driven way and that is something that we will utilize in the full company, working a lot more with data and data analytics. So we are now able to increase frequency, meaning how often do we change prices.

We are now also active in pricing the full assortment every day in the best and most competitive way. We are improving the entire process and the role responsibilities within this. And eventually, this will be fully automated during the quarters to come. Here, we see a great potential not only to uplift margins, but also to be even more competitive in the market. And we are seeing effects already in June from the task force.

Number five, e-commerce. Even though e-commerce has been under decline since after the pandemic when it was artificially boosted, we still believe that e-commerce over time will continue to structurally grow in the market and take market shares from fiscal retail. Therefore, we need to secure that we have an efficient e-commerce channel, both with regards to profitability, but also with regards to capturing our market fair share. We are not fully there today. So we have identified a few different topics, which we will attack with very much focus to improve profitability, but I would actually highlight the last one, improved conversion rates. We see that XXL's online conversion rates are subpar in the industry. We see a great potential in lifting these and if we get the full leverage here, we will see great effects on top line and on profitability. Therefore, we have fully dedicated the Q3 development road map to front-end improvements online, meaning new features, new functionality and more user-friendly customer journey in general. And we are convinced that this will give us quick wins already during fall and winter. However, these 5 are all, as you see, quite commercially focused and we believe that only cutting cost is not the way to success. We believe that we need to both work with top line and margins and cost lines. Here you see the cost base in XXL. This is 2022 numbers and these are the big cost lines, big cost items in our P&L. If I am to highlight any of these, I would like to highlight actually the second largest one, which is our rental costs. If we look at our -- once again, our 84 or 85 department stores throughout the Nordics, we have in 2023, been hit by inflation as KPI adjustments have been at unprecedented levels, but even more so on unacceptable levels. We are -- when looking forward into 2024, we are afraid that we will see unacceptable levels again in these KPI adjustments. And this is something now that we directly after summer, we'll focus our time on to initiate discussions and dialogues with all our landlords to see how we can move forward. We see that this is an equation that is unsustainable over time. We're looking at the entire value chain. Right now, retail is not doing well and rents are going up. That equation in itself is not sustainable. And that is something where we actually expect landlords to take a bigger responsibility to now secure that we create a long-term partnership together. So cost out, we definitely need to be more efficient. We also need to acknowledge we are no longer a NOK 10 billion company in sales and then we also need to rightsize our costs thereafter. That is the reset part of the plan and we will be very much focused on reset during the next at least 2 to 3 quarters, but realistically, will also continue in 2024. Moving over to rethink and transform, we have together with our Board, identified these 4 long-term strategic pillars that we will work with during the years to come. We are aiming at restructuring our physical stores, meaning that we will both relocate and resize stores as necessary. We will rethink our store concept and we will localize our assortment to a much higher degree than what we are doing today. All in all, and there are many more actions below this pillar, we are aiming to strengthening store EBIT. Number two, as I said before, we believe in the long-term structural growth of e-commerce in the market. Therefore, we also need to strengthen e-commerce. We need to scale personalization. We need to develop a leading customer journey and we need to expand the online assortment, which is too limited today, if you ask me. This, all in all, will increase our e-commerce share of sales, which we believe is maybe a bit too low today. That being said, we believe in both stores and e-commerce. It's not either or it's both. It's omnichannel but we need to focus on each to strengthen each channel as much as possible.

Number three, and this is one that we have been talking about for quite many years in the company already. We are doubling down on private label and I think the good thing here is that we have been saying this for quite some time, now we're actually doing this. And I think Stormberg is the best received and the best evidence that we are now actually acting aggressively on private label. So here, we are aiming at increasing our private label share. We will do this through strategic partnerships with Stormberg being the first one. And we are right in the midst of developing a new private label strategy to be launched later this year. And of course, the aim here is to improve our gross margin. The last one, number four, leverage the service offering. When joining the company, I was actually a bit surprised because I found out that in every department store throughout the Nordics, we have a fantastic workshop. Each workshop can service bikes, it can service your tennis racket if it needs to be restrung, it can take care of your skis it can take care of your skates, et cetera, et cetera. Here, we see a great backbone and the entire company to actually do more of a circular business model and expand on our service offering, also tapping very much into the biggest challenge maybe of our time, which is sustainability. And as a company, we of course need to take our responsibility and be active. So expanding our service offering is also a way to secure that XXL takes its responsibility within sustainability. These 4 together, we are determined to deliver on. We are now detailing all of these together with our Board to secure a long-term strategy of how these will continue to improve, ultimately, bottom line on the results of the company, and we are confident that these will take us all the way. That being said, once again, I am both humbled and thrilled to have joined XXL. I'm more optimistic now that since before joining because the potential and the improvement opportunities in the companies are just great. By now securing a financial runway together with banks and shareholders of actually being able to deliver on our improvement program on our turnaround strategy, we are more than convinced that we will get XXL not only back on track but also back to the historic success that the company saw for many, many years. That's at least why I'm here and I hope to be able to report on this in the coming quarters that we are taking steps forward. Thank you very much.

[Tolle Groterud, executive]

Thank you, Freddy. So then we open up for questions. So first from the audience present here [indiscernible]. So please wait for a microphone, and we kindly ask you to introduce yourself. So please go ahead.

[Operator]

[Operator Instructions] There are no questions in the audio. Handing it over to you, Tolle, for the room questions. Thank you.

[Tolle Groterud, executive]

There are no questions from the audience either. So do you have any from the call?

[Operator]

There are no questions from the audio. Tolle?

[Tolle Groterud, executive]

So that ends our session then. So thank you all for coming and enjoy your summer holidays.