XXL ASA

OSE:XXL

Earnings Call Transcript 2022-Q3

[Tolle Groterud, executive]

Good morning, ladies and gentlemen, and welcome to the third 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 into you after the presentation, so please then 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. Thank you. So thank you for showing up today for the presentation of the Q3 results for XXL.

Before going through the results, I just wanted to express gratitude towards the whole XXL organization. During very tough macro conditions, the organization has done a great job cutting both purchasing volumes and costs. And I know it has been not a very motivating task, but during this time, it's a very important task, so thank you to the whole XXL organization.

So moving over to Q3. As stated, the market is challenging and will be challenging for a while going forward. When electricity, food and mortgage becomes more expensive, it means that the customers have less money left for everything else. This affects the whole retail sector, and sport is no exception. We saw that the market for sport retail dropped in the middle of Q2, and it has continued into Q3. We have used campaign to get some inventory out, and this is reflected in low gross margin for the quarter. Sales ended at NOK 2.3 billion, which was 14% below last year on the weak retail conditions.

XXL has during the quarter prioritized strict liquidity management with sales and inventory actions over gross margin. EBITDA ended then at NOK 186 million compared to NOK 336 million last year. Liquidity reserves ended at NOK 817 million and net interest-bearing debt at NOK 983 million. And XXL is compliant with the defined covenants in the loan agreements.

Although the macro conditions are very challenging right now, I just want to remind you that the historic growth for Nordic sports retail during the last 20 years has been around 4% yearly growth. And during the finance crisis back in 2019, the sports market in Norway had 15% growth and 9% growth in Sweden. But that being said, XXL is preparing for a tougher market going forward by scaling down both purchasing volumes and costs.

Yes, so as mentioned, top line ending at NOK 2.3 billion. E-com experienced more normalization and decreased by 6.7%, representing then 19% of total turnover versus 18% last year. And EBITDA, as I said, ended at NOK 186 million, whereof NOK 14 million is cost related to the ongoing strategic review in Austria.

Yes, so back to the markets. The Nordic sport market, as you can see, has been very challenging. All markets so far this year has had strong negative growth with weakening consumer sentiment and reduced demand for sporting goods. Our market share relative to other sporting goods stores are stable, but we are losing shares especially to the outlet segments. And of course, we're not happy with the market share developments.

If you look at the gross margin, the sudden reduction in demand in the market for sporting goods result in higher inventories both on the supplier side and on the retail side. And this creates incentives to sell out products at lower prices both for XXL and our competitors. As I said, we had strict liquidity control during Q3. This, in combination then with increased input costs and freight, put pressure on the gross margin.

The current market demands strict focus on inventory levels and liquidity control, which will lead to fluctuations in gross margin between quarters and season. Moving into Q4, we will protect the gross margin, but campaign activity will depend on both winter and market conditions.

Moving over to the different segments, and I will go briefly through this one. Total EBITDA for the group ended NOK 150 million below last year driven by lower revenues and lower gross margin, only partly contracted by lower OpEx. All segments, as you can see, had double-digit like-for-like decline. And the EBITDA profile for all the Nordic countries was similar, lower revenues, lower gross margin but also reduced OpEx. So once again, great work done by the different country organization. Austria somewhat managed higher gross margins and also reduced its cost levels versus last year.

Before moving over to the financials, I thought we could also show some of the great work that has been done at XXL. And in this energy terms, I think it's good that we can also be a little proud of what we're doing at the central warehouse outside Gardermoen. We are currently covering the entire 22,000 square meter roof with solar panels producing up to 2.2 million kilowatt-hours a year. Since we only will use 500,000 kilowatt-hours ourselves, we will sell the rest of the energy to the market. And XXL will reduce the CO2 commission -- emission, sorry, with 540 tons as well as it will give us energy cost savings. Great for the environment, great for the finances of XXL and great work with -- by the team who is putting this up together with the landlord.

Then moving over to the finances. So here is the P&L for the quarter. I've already commented on a lot of the items, but I think OpEx deserves a comment, which, as you can see, was up with 0.6 percentage points compared to last year, then driven by the negative like-for-like growth hampering scale and operations.

Once again, the organization has done a great job in reducing OpEx, which actually was reduced in the quarter with NOK 85 million mainly explained by lower personnel costs as well as lower bonus accruals of NOK 38 million. Net income ended at NOK 42 million.

Looking at the net debt development, from NOK 707 million in Q4 up to NOK 1 billion at the end of Q3. And as you can see, the main drivers was, first, the positive EBITDA of NOK 453 million. We have a positive change in working capital explained by the fact that XXL chose not to use discounts -- cash discounts during the quarter, which explains the positive deviation in working capital. We have quite low CapEx compared to previous years of NOK 112 million, saving CapEx as well. And payment recognized as the lease contract was NOK 455 million, interest payments of NOK 92 million, then leading to the net debt of NOK 1 billion. And as already mentioned, liquidity reserves then ending at NOK 800 million and net interest-bearing debt of NOK 1 billion. And XXL was compliant with the loan -- defined covenants in the loan agreements.

So then moving over to the outlook sections. XXL has 6 clear priorities in the upcoming quarters. Number one, category strategies, we need to improve our brand portfolio, and we are slowly making progress. Priority number two, private label or controlled brands, we think we have a potential of reaching up to 30%. Number three, full-fletch omnichannel player create a frictionless shopping experience between online and stores. Priority number four, improve campaigns and marketing. Priority number five, Austria strategic review. And we need to adapt cost of sales, OpEx 30%.

If we start with number one, category development and buying. When working with category development and buying, we need to cover product ranges from novice to expert level. I think the beauty of sports is that you can be an expert in one category and then novice in another sport. You can be an excellent runner but a lousy fisher or skier. And probably, you have different needs depending on each sport. As a complete destination for sport, XXL wants to cover all of these needs. We will differentiate products from good, better, best and assign clear product roles. And each and every product needs a defined role in our assortment.

Our efforts on increasing private label and controlled brands is making progress. We have mapped each and every category and are confident that we can reach 30% on label. And we are now fast-forwarding alternatives and is currently exploring different paths to 30%. And as earlier stated, we believe the potential should be around NOK 200 million in extra margin.

When it comes to prices, we need to regain our price leader position, great brands and great assortment at great prices. XXL is the largest purchaser of sporting goods in the Nordic, which gives us a competitive advantage and that we can use in offering everyday low price. You should always feel that you do a good deal at XXL. And of course, when it comes to buying and buying contracts, we need flexibility in our purchasing agreements, which we have and which is important during this troubled water.

Looking at the omnichannel part and the online part. A significant part of the customers are doing research online before they do the actual purchase. 30% always check online before buying sports, and up to 80% of all customers always or sometimes do research before they buy in store. XXL has more than 350,000 daily visitors to our platform, and hence, many of the purchases start online before buying in the stores.

We have implemented already several tools and devices in order to create or to become a true omnichannel retailer. Like RFID to improve and control inventory, that makes it easier, for example, to do click and collect. And when picking up package -- and then picking up a package, you can do it in one of our pickup lockers. We have installed electronic price tags that secures equal prices online and in stores. And we have launched internally what we call retail solution that helps our stores, for example, with return handling.

That being said, we still have some potential left, like I said, 350,000 daily visitors to our online platform. Then we need to be really sharp on how the web page look like, so we still need to improve the commercial expression on the web page. The customer journey online, that's from search, filter possibilities, picture, videos and so on. And we are also working to introduce endless aisles in the stores. We have done a pilot in a couple of the stores.

So as I said, XXL, we -- is the biggest Nordic sports retailer, and we are the biggest purchaser of sporting goods, branded sporting goods in the Nordics. And we have the lowest prices on branded goods. And then we should not be afraid of talking about it.

We need to improve our campaigns and marketing. First of all, strengthen internal planning, processes and execution, define clear tasks and responsibilities, that's extremely important. Also, we are rolling out a new campaign tool during Q4 2022 to make it go away from the Excel sheet and make it more easy for the organization to plan the campaigns.

But we also need to reinvent ourselves. We will, going forward, use fewer media channels in order to increase return on our media investments. And we need to use more tactical marketing, sales marketing, a little bit back to basic. I'm also very glad that we have signed up Jarle Bråten, former EVP Marketing at XXL and a crucial resort when XXL was at its best. And he will support us for a period of time in the ongoing changes.

Austria. The strategic review continues into Q4 but with good progress. I'm very pleased with the project team that has come up with multiple options to be evaluated for XXL in the near future. And our ambition is to have no negative cash effect from the Austrian operation in 2023.

And then OpEx, the race to 30%. As a Nordic sports retailer with the lowest prices, we need efficient operations, and this means in all parts of the organization. We are working towards a more flexible cost base both in store and at HQ. We have implemented some tools that should help the stores in becoming more efficient, and we have also new tools coming up ahead in order to make them even more efficient.

In HQ, we have increased focus in all departments. We will, as I stated, in Q2 exit the Austrian central warehouse, and we have started scaling down some of the HQ functions. Also here, we need to make the cost base more scalable and flexible.

So the aspiration for a well-run XXL concept is an EBITDA margin of at least 10%. And to reach this, we have set up a longer-term target of what we call the 40-10 -- 40-30-10 on gross margin, OpEx and EBITDA, respectively, and then excluding for the IFRS 16 effects. We believe it's a very achievable goal looking at both the historic numbers like 2016. But as I said, it demands some strict prioritization and control going forward.

So to sum it all up, Q3 takeaways: reduced demand; not satisfactory results, but we are adapting cost and purchasing volumes to the new reality. And 6 priorities, as I said, going forward, categories, strategies, private label, improved campaigns and marketing, full-fletch omnichannel, Austria strategic review and adapting cost of sales. Delivering on these 6 priorities should get us then to 40-30-10.

[Tolle Groterud, executive]

Okay. Thank you, Stein. So then we open up for questions. And then first from the audience present here at Alnabru, so please go ahead if you have a question. So I don't think there are any questions in the audience, so I then call upon the conference host for further introductions. Sorry, do you have a question, yes?

[Unknown Analyst]

Yes. I'll take it in Norwegian. There's no English people here. Yes. [Foreign Language]

[Stein Eriksen, executive]

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[Foreign Language] entry-level price points [Foreign Language]

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[Tolle Groterud, executive]

[Foreign Language] Okay. I think we should go over to English again. So I then call upon the conference host for further introductions. Okay. Then there are no more questions in the audience, so I then call upon the conference host for further introductions. We are working out some technical issues maybe. Okay. Thank you. Could you please give some introductions, please?

[Operator]

All right. It looks like the microphone connection on your audio quality is breaking. [Operator Instructions] It appears there is no further questions at this time. I'd like to turn the conference back to you for any additional or closing remark.

[Tolle Groterud, executive]

Okay. Thank you so much. So if you have any questions during the day, so please contact the Investor Relations department or the press department. So that ends our session. And thank you all, and have a nice day.