XXL ASA

OSE:XXL

Earnings Call Transcript 2020-Q3

[Tolle O. Grøterud]

Good morning, ladies and gentlemen, and welcome to the third quarter results presentation. 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, then followed by a Q&A session. And for media, there will be an opportunity to perform separate interviews after the presentation and then using the 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. It's a pleasure, of course, to present the third quarter results of XXL. The key message today is that we delivered a fantastic quarter. It's not every quarter that you can say that we are doubling the EBITDA in the quarter. So that's a great team effort, great results from everybody. The main drivers are, of course, a very good sales growth. It could have been even better if we had enough products in some of the parts of the quarter, but it was still good. We had 21% growth in Norway, which is -- I think, is impressive despite the situation. Very good margin growth. And then, as I said, a doubling of EBITDA, and that is, of course, something that we are very, very proud of and happy with. I'll take you through the key figures. 14% total growth. E-com grew by 13%, which was actually quite low due to this situation with the products, but 84% growth in gross profit, and that is a fantastic growth. So the underlying metrics and the drivers for e-com is very, very positive. And we see, of course, in a situation like this, but it is fantastic to have an e-com machine like the one we have at XXL.Norway 21% growth, it's the same growth factors that in the second quarter, it's Outdoor and Bike that is a driving force, the driving categories. Obviously, the quarter was very special with the July being the staycation month and then a much more normalization in the August and September when we were at the end of a record-breaking season. Very good strong margins, mainly driven by less seasonal sell down. We just didn't need to sell anything at the end of season sales, but also improved campaign execution. So I'm very sort of proud of the operational excellence and the team that we managed in a very difficult situation to optimize the operations. And as I said, very good improvement in EBITDA. And the inventory levels is at very healthy levels, even Stein is smiling, which gives us a solid balance sheet and much more financial flexibility, which again means that we have the room to do the long-term right things, and this is maybe even more important. As we said, in the market data is sort of somewhat mixed. We -- in this quarter, we actually probably lost market share in -- at least in Finland, roughly kept the market share in Sweden. Of course August. September figures are not here. And then probably slightly below or at market level in Norway when September is included. But I'm not very worried about this. Of course, you have to look at it over a long period of time. On the year-to-date figure shows that we are taking market share in all markets. If you look at in further details, we see a fantastic sort of figures in Norway, very strong growth. But also I mean, top line is one thing, but even more important than top line is that we are able to convert top line to gross margin growth. And in Norway, we had more than 40% growth in gross margin in kroner in quite a demanding market situation. So that I thought was very, very positive. It's the best quarter in the history of XXL Norway. That's also impressive. But also, if you look at the other markets and you look at the gross margin growth, I'm also impressed by Sweden, Finland and Austria and the ability to grow in gross margin in kroner in a situation where we had very little products to sell towards the end of the quarter. Also Sweden had 40% growth in gross margin. Finland, lowest growth, but it was with a very tough comparables last year. That was one of the countries that had a really, really good growth in third quarter last year, tougher market. But of course, as we look at the gross margin, a 41% growth in gross margin in Finland, the best quarter ever on EBITDA in Finland. So we still have today a little bit of work to do to get sales growth up again, but very, very sort of good operational control in Finland. Austria is a different market. I think the COVID situation in Europe is different than in the Nordics. So we see a much more challenging market situation in Austria. We're doing quite well. But it's a much different COVID market than we are experiencing in the Nordics. E-com, we mentioned before, very, very strong gross margin growth for e-com this quarter and in the entire year, growth on all parameters. E-com is one of those most exciting strategic projects that we are working on. Yesterday, we got the Board approval for a very ambitious strategic plan for the e-com part of the business, where we are going to launch a lot of different features to improve the customer journey all the way through in our e-com operations. So very, very happy with the plan and the work being done, and we are now also organized e-com as 1 unit under each country so that we are organized in the way that the consumer expects us to be one XXL towards the consumer. But a lot of exciting things happening in all parts of the customer journey in the year to come at -- in our e-com operations. And we are getting close to NOK 2 billion in e-com sales. So this is not a small shop anymore. It is the biggest player you can call it in the Nordics in the industry. We also launched XXL REWARD, which is our loyalty program, and this is not a short-term action. It's a long-term strategic initiative. Very, very happy with the first results and the conversions and the recruitment to the Reward club. The idea is, of course, to get much better data on our customers so that we can personalize our communication offering to the consumers. And we think that in the long term, this will be strategically very, very important for us. So very, very happy with the team on the launch of Reward. This is just a start for a long-term plan to get closer to our consumers and understanding our consumers in a much more fact-based way. So once again, one of those things that we have a small thing in this quarter, but long term, extremely important for XXL. With that, I think Stein, you will have to talk a little bit about the figures?

[Stein Alexander Eriksen, Group Chief Financial Officer]

Yes. Thank you. Thank you, Pål, and good morning to everyone. Have to say, it's certainly a good day of being the CFO of XXL. As Pål mentioned, we are very pleased with both results and the balance sheet for the third quarter of 2020, and I will come back to that in more detail. But first, as we showed in the Q2 presentation, it's fair to say that 2020 has been a very eventful year and we have tried to sum up the different focus areas on XXL for the last quarters and moving into Q4. As I said, each quarter has been eventful. Q1, all about securing a healthier balance sheet. Q2, all about securing the health of our employees and the health of XXL through top line and cash focus. Q3, all about operational efficiency and delivering on the ongoing strategic projects and secure both margin improvements and cost reductions. And then our focus on Q4 will be on the seasonal execution. As you know, Q4 has normally been the most profitable quarter, and we need to have in place operational excellence when entering into the Black Friday campaign and extremely important Christmas season. And also with the new COVID wave, we have to stay alert for fast changes in the market that should look here. So let's continue then into the P&L. XXL posted an EBITDA of NOK 413 million, the best Q3 in the company's history. And if you exclude the IFRS 16 effect, it's like Pål said, a doubling of the last year's results. What stands out in the P&L is the top line growth of 14%, together with a strong improvement in gross margins. The sales growth was mainly explained by the staycation effect, especially in Norway, and we had significant growth, especially within the Outdoor and Bike categories. Moving over to the different building blocks of the P&L. Gross margins were up 3.2 percentage points, and the improvement was broad based with all segments having strengthened margins. The improvement was explained by lower seasonal sell-down and improved campaign execution. Also, the supply bonuses was on par with last year. Group OpEx decline was explained by the strong top line growth and improved our marketing efficiency. And I have to say from a CFO perspective, I'm very pleased to see that we have improved our marketing efforts, especially within our digital performance. All segments, except Finland, posting positive developments in OpEx percent of the turnover. Then going over to the HQ cost, that increased with NOK 48 million, related to high bonus accruals, ongoing improvement programs and higher activity at the central warehouses. Also bear in mind that last year's figures was positively affected by a reversal of NOK 18 million related to the old share option program. Moving over to the EBITDA. Overall, as I said, Q3, the best result in the company's history. And of course, we are very happy to see that all segments are posting improvement versus last year's, but with Norway leading the way. Then, as you know, we have had strong focus on working capital and inventory during the last year, and it has really paid off well. If you look at both working capital in percentage of sales and inventory in percentage of sales, I think it's fair to say that we start to reach more acceptable levels. And also, the level -- quality of the inventory is gradually improving. And we have reduced all part of the inventory with NOK 300 million since the beginning of the year. And you can also see this on the net debt and cash flow statements. Key takeaways from this slide, we have reduced the net debt from Q4 from NOK 1.2 billion, down to merely NOK 45 million. A very strong improvement in the operational cash flow, mainly explained by the lower inventory. And of course, then we have had a capital transaction of NOK 500 million. But as I said, a net debt now of NOK 45 million. A fantastic cash flow, NOK 1.4 billion in positive cash flow in the year, NOK 924 million improvement versus last year. We had strong liquidity reserves, NOK 1.2 billion. And as I said, we are barely debt 0 in net interest-bearing debt. So to sum up the financials, strong EBITDA improvement, rock-solid balance sheet. And as maybe you have seen in our Q3 reports, XXL is starting a buyback -- a share buyback of NOK 100 million, starting from the 28th of October until 15th of December, and the reason is to optimize the capital structure and to cover for shares to the long-term investment program. In agreement with the banks, we have also agreed to reduce the RCF corona facility with NOK 100 million. So with that, Pål, I'll leave the floor over to you for some final remarks.

[Pål Wibe, Group Chief Executive Officer]

Thank you, Stein. So a happy CFO, that's always good. Closing remarks, I think most importantly, as we talked about last time, we launched a strategic program early this year. Both teams spent most of the time on is actually working on the different elements of this strategic program. And below these 5 pillars, there's a number of initiatives that we're doing that is going to transform and improve XXL long-term. So this is what we try to spend most of the time on. Of course, we also have to optimize the running business, the quarters, the seasons, the campaigns, but never lose off-sight and insight, the long-term things that is going to make XXL in the eye of the consumer be much better once we get out of the -- hopefully, get out of the COVID situation in 2021, '22.So this is what we spent a lot of time, a very exciting program, a lot of things taking place. I think that in my career, I have probably never been doing such an ambitious program. It is a lot of things happening, but it's very exciting. And the feedback we get is very, very positive, not just internally but also from our supplier partners and external partners. So very, very positive in this. This is what we spend most of the time on. This is what's going to make a difference for our long-term vision. And also, we are interested in football, of course, you know that Everton is still holding on at top of the premier league, but what I'll still keep this one. In the first -- the second quarter, we talked about that if you want to win championships you have to secure the defense. And the defense is what Stein is loving, which is the inventory, the financial situation, the cost. And we have done some really painful actions, both on the cost side and on the inventory side. But that was necessary if we wanted to win championship. And then in the second -- in the third quarter and now going forward, we have shifted focus toward the midfield, where we are trying to focus much more on the efficient processes in the company, these daily operations, the campaign execution. As Stein mentioned, we're going into the biggest and most important season of the year, the Christmas season, what we call the Champions League Final of the retail year. So of course, we have to be at our best, but also to work even better across function. Because fairly sort of football team, we only succeed if we are better between different departments of XXL. So we're having a lot of focus and very good progress of being better at working together. And I think that the season is a catalyst for those kind of improvements. And then eventually, of course, we will, at some point, also go further on to the attacking side and do a lot of changes that you will also notice as a consumer. And some of them, you're also starting to notice, but there will be much more in the years to come. So with that, to sum up, I think very, very happy with the results. Obviously, doubling of EBITDA is not something that happens every quarter. The market situation has been good for us, obviously. So we are busy working under the hood to improve everything in our company so that we come out of the COVID crisis, a much better company and a much better format in the eye of the consumer. So that's what we spend most of the time on. We're having a lot of fun. And of course, now we're entering into the high season, where everything is going to be decided. So we are all pepped up and ready for Christmas. With that, I think we will open up for questions, Tolle?

[Tolle O. Grøterud]

Yes.

[Operator]

Are we ready to take the question over the phone?

[Tolle O. Grøterud]

Yes. Go ahead. Thank you.

[Operator]

[Operator Instructions] And the first question comes from Markus Heiberg from Kepler Cheuvreux.

[Markus Borge Heiberg, Equity Research Analyst]

Congrats on a very strong quarter. So I just want some more flavor on the sales performance versus market and maybe also monthly sales because of course we know that July was exceptional, but can we also -- can you say something about September and how we should be looking into Q4? Is the sales trend normalizing already? Or how do you see that?

[Pål Wibe, Group Chief Executive Officer]

I'll comment a little bit on it. Of course, especially in Norway, the staycation effect was very remarkable this year, as you have seen in the press. This was, of course, beneficial to us, too, but I think even more beneficial to the many small sports stores throughout Norway as people were vacationing throughout the country. After that, I think we're holding up very well on the market share side in Norway. So as I said, I'm very calm about market share development in this quarter. I think we are trending -- the market is normalizing. It's not like the staycation in July, obviously, but we are holding up well. We have a little bit of work to do in Finland versus very tough comparables last year. But I'm very confident that we will, as we have said, gain market share long-term, if you look at on a little bit longer period of time.

[Markus Borge Heiberg, Equity Research Analyst]

So final question for me is then on e-commerce and the gross margin and the dynamics there because, of course, you have, I would say, 13% e-commerce growth. You didn't grow much last year either in Q3. Is it only the campaign level? Or is it the pricing? Or how do you -- how do you manage the e-commerce? And can you give us any KPIs that are showing higher growth than the 13%?

[Pål Wibe, Group Chief Executive Officer]

See the main reason for 13% sales growth and 84% growth in margin, the main reason for 13% just in this quarter in isolation, it's just that we have too little products in inventory compared to last year. We had -- we have the sell-down before the COVID and then we had a record breaking Q2. And of course, even if we work really well with our supplier partners to get hold of a lot of products throughout Europe, there was a limit of what we could do. And of course, that was felt towards the end of the quarter. But that is also typically a part of the year, quarter or the season, when we sell products at a low margin. So it wasn't really like a crisis. I'm very confident about the e-com operations. As we said, we're launching a very ambitious strategic program. E-com is going to grow. And e-com is, of course, the future. And we having the biggest e-com operations in the Nordic sporting industry is very beneficial in this period of time.

[Operator]

[Operator Instructions] And we have the next question from Petter Nyström from ABG SC.

[Petter Nyström, Lead Analyst]

Yes. First of all, congratulations with very strong earnings. I had 1 question on your product offering. How would you see the development here from your suppliers regarding your product offering, meaning securing high-end brands or more top-end products of your existing brands?

[Pål Wibe, Group Chief Executive Officer]

Yes. I can comment on that. Of course, historically, we have had this -- we have access to some high-end products but not all we wanted to. What we see now in this quarter and also going forward is a very, very positive dialogue with the brands. So the assortment is improving, but this is not short-term fixes because in this industry, we are talking about spring/summer next year or fall/winter next year. So it's a long lead time. We have a very, very positive dialogue with the supplier partners, where we are talking about the plans we are doing for improving the concept and the category plans and everything. That is very well received by the major high-end brands. And we see a positive improvement in assortment in the long term. So -- but the pace of it and what will come next year, what will come in, in 2022, that is to be seen. But I'm more positive today than I could be a quarter ago because of the dialogue with the suppliers. It's very, very fruitful discussion.

[Operator]

The next question comes from Markus Heiberg again from Kepler Cheuvreux.

[Markus Borge Heiberg, Equity Research Analyst]

So a follow-up on the suppliers, and there's been a lot of talk on supplier bonuses and purchasing volumes and those effects on the gross margin. Can you comment anything on how the supplier bonuses hits Q3 this year versus both '18 and '19 because it was very negative in the last year but is it more normal now?

[Pål Wibe, Group Chief Executive Officer]

Yes. As I said in the presentation, the supplier bonuses was on par with last year.

[Markus Borge Heiberg, Equity Research Analyst]

Okay. So no positive effect?

[Pål Wibe, Group Chief Executive Officer]

No effect in Q3, neither positive nor negative.

[Markus Borge Heiberg, Equity Research Analyst]

Okay. Okay. Yes. And a follow-up on the inventory level and going into Q4. I think you never had so low inventory going into Q4 before. Is it -- are you comfortable on the inventory level now? Or how should we be thinking on that?

[Stein Alexander Eriksen, Group Chief Financial Officer]

To be honest with you, we were not comfortable after Q3 because it's like Pål said, we started to run out for some goods, but then it's also the seasonal change when entering into Q4. And not to say too much, but we have used the last weeks to start to build up the inventory of seasonal products to be secure -- to have secured volumes before the important Christmas season. So, yes.

[Pål Wibe, Group Chief Executive Officer]

So the short story is that we are comfortable now.

[Stein Alexander Eriksen, Group Chief Financial Officer]

We are comfortable now. Yes.

[Markus Borge Heiberg, Equity Research Analyst]

Okay. That's reassuring.

[Operator]

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

[Tolle O. Grøterud]

Okay. Thank you. So that ends our session. So thank you all, and have a good day.

[Pål Wibe, Group Chief Executive Officer]

Thank you.

[Stein Alexander Eriksen, Group Chief Financial Officer]

Thank you.

[Operator]

Thank you for joining today's conference. You may now replace your handset to end this call. Thank you.