XXL ASA

OSE:XXL

Earnings Call Transcript 2017-Q4

[Tolle O. R. Groterud]

Good morning and welcome to the XXL ASA's Fourth Quarter and Full Year 2017 Results Presentation. My name is Tolle Groterud and I have the pleasure of guiding you through today's presentation. Our CEO, Fredrik Steenbuch and our CFO, Krister Pedersen will take you through the results and key drivers followed by a Q&A session. For media, there will also be an opportunity to perform separate interviews after that. So without further introductions, I turn the floor over to you, Fredrik.

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

Thank you, Tolle, and good morning to all. Highlights Q4 2017; we reached a revenue growth of 17%, a like-for-like growth of 6.5%, e-commerce grew 40% and we had a normal season and strong Black Friday activities and we opened 5 new stores. E-commerce is now 16% of group sales compared to 13.4% in Q4 '16. That is up 2.6 points. We launched new shipping and return features. We further improved security and performance on the site. We strengthened the organization with more technical architects and I will reveal some great news later in this presentation. We had good cost control despite establishment in Austria. Improvement in OpEx 28.9% compared to 29.1% in Q4 last year and this improved OpEx includes the cost of Austria. An EBITDA of NOK 332 million, up 16%. And Norway is standing out with strong results. And a solid start in 2018 with good winter conditions.The revenue increased by 26% in January 2018 with significantly better gross margin. In January 2017, we literally gave products away. There were no winter conditions and we created volume at the cost of the gross margin. This year the gross margin is higher. Growth drivers in the quarter; like-for-like represents 35% overall growth and new stores represent 65%. Growth split by markets. Growth by segments; Norway up 7%, Sweden up 9%, Finland up 30% and Denmark up 41%; and e-com has an increased pace up 40% giving a group growth of 17%. Like-for-like growth; Norway up 5.2%, Sweden is outperforming in the market also when comparing the like-for-like up 1.4%, Finland up 5% giving a group growth influenced by currency of 6.5%. Share of growth by geography; Norway, 23%; Sweden 24%; Finland, 32% and Denmark 2% and Austria already 19% so go Austria.Gross margin development; group from 42.4% to 42% mostly explained by the start-up in Austria. Norway is stable, Sweden is somewhat up and Finland is somewhat down. Denmark is more than somewhat up from 10.9% to 18.7% and Austria starting up at high 33.6%. OpEx development in an important page. The group OpEx is down by 0.2 points to 28.9% year-on-year despite the cost of establishing Austria. Giving an OpEx of 28.3% excluding Austria equals 0.8 points improvement and that's well done. Significant improvements in Norway, Finland and Denmark and Sweden is impacted by costs related to introduction of digital price tags in all stores, corresponding marketing campaigns. HQ and Logistics are showing stable OpEx. Concluding the EBITDA development. An EBITDA growth of 16% despite establishing Austria. 19% growth excluding Austria and an EBITDA margin of 13.9% versus last year of 13.3%.We had high margin in both Norway and Finland and Sweden with stable margins. Giving an overall EBITDA of NOK 332 million on top of, as you remember, we did a quite good Q4 last year. And as you remember, I certainly do, it was the January 2017 that you did not like. Norway, solid operational performance. 7% revenue growth year-on-year, a like-for-like growth of 5.2%. And we had overall good conditions, some snow and cold with positive effects on December sales. Black Friday once again a success with solid growth. We opened 1 new store, Jessheim, in October 2017 and we had stable gross margin. The OpEx improved by 1.3 points to 20.5% explained by we opened only 1 store compared to 3 in Q4 2016, we had better daily operations and e-commerce sales had a larger portion of the sales at a lower cost. The EBITDA margin improved by 1.4 points to 25.3%. It's an achievement to improve on already strong figures and I think that's well done in Norway.Sweden, still a volatile market. Revenue growth of 9% year-on-year, like-for-like growth of 1.4%. The overall retail market continues to be volatile and volumes in the quarter were impacted by a slow market. We opened 1 new store outside -- Lenna outside Stockholm on 5th of December. The gross margin improved from 39.3% to 40.2% year-on-year, that's well done. We introduced digital price tags in all stores and with associated marketing campaigns and costs. Giving an EBITDA of NOK 69 million and a margin of 9.9%, which is stable and well done in a volatile market. Finland, driving volumes and like-for-like. 30% revenue growth year-on-year, a like-for-like growth of 5%. We had normal seasonal changes and now the macro situation in Finland is improving. We opened 2 new stores and the gross margin declined from 31% -- 37.1% to 36.2% because of more aggressive campaigns giving positive like-for-like growth leading to an OpEx down 2.7 points year-on-year to 26.8%. That's well done.Providing an EBITDA of NOK 42 million and a margin of 9.4%. Denmark, you don't need the highest volume to be beautiful. Denmark had a revenue growth of 41% year-on-year. We chose to be aggressive and Black Friday and Christmas sales responded well. However, Denmark also managed the gross margin, improved it from 10.9% in Q4 '16 to 18.7% in Q4 '17 giving a negative EBITDA of NOK 3 million. We now have a strong and an enthusiastic team understanding the Danish market and XXL will evaluate to open stores over time and time is when the price is right. Austria, close to NOK 100 million in 4 months. We reached revenues of NOK 69 million after a first full quarter of operation. That equals 19% of the growth contributing to the group this quarter. We opened the second store in October in Donau Zentrum outside Vienna. We are investing through campaigns and high marketing spend.We reached a high gross margin of 33.6%, positively impacted by the Christmas sales and negative EBITDA of just NOK 9 million and OpEx of NOK 33 million. E-commerce represented more than 20% of sales. XXL has high ambitions in Austria and are delivering according to plan and we just love our new Austrian colleagues. HQ and Logistics, focus on technology. An OpEx of NOK 94 million to 3.7% of group sales explained by expansion of the central warehouse in Norway. We had infrastructure investments of NOK 56 million and several new recruitment to central functions including; purchasers, technical system architects and IT resources. We are still evaluating a new central warehouse capacity in the Heart of Europe and it will be stupid to use it for Austria alone. The XXL mantra is all about people, people, people and technology.I promised you some great news, here it is. We are launching a new omni-channel stock solution. All stock in the group will be available for all customers at all platforms at all times. In-store stock will be available for sale online and vice-versa. In-store stock will be available for other stores, cross border, cross countries. It will optimize the value chain over time using data and machine learning, some call it AI. We are live piloting in Norway in a selection of stores, online on 1 selected category. When we turn it on, online stock level increased with thousands of SKUs overnight. There will be further roll-outs of stores, categories and countries later this year. 75 physical stores are serving as warehouses in prime locations where people live making all stock available in all channels. Look at the above picture, that is at 10 hours. Look at the picture below, that is 1 second later.As you can see for this shoe, the available stock for the consumer increased 5x in a split second just by turning the system on. A simple retail logic; the more you offer, the more you sell. Highlights 2017 full year, we reached a revenue growth of 12% to NOK 8.7 billion. We opened 11 new stores. E-commerce equaled to 12.9% of group sales versus 10.9% last year. We strengthened the organization. We improved mobile loading speed and performance. We launched retargeting solutions and new analytical tools. We opened new front-end website in Russian and we implemented a new customer service system. We also established operation in Austria proving uniqueness of the XXL omni-channel model. The XXL concept fit part of Europe. An EBITDA margin of 9.5%, 10.5% last year includes start-up costs in Austria. Adjusted for this, the margin was 10%.We are gaining market shares in all markets. We had a really, really challenging first half, but I do think we caught up well. And based on the strong cash flow generation, the Board of Directors will propose a dividend of NOK 2 per share for 2017. Priorities going forward. We will continue to improve the omni-channel experience. We will continue to drive like-for-like growth and we will open new stores; not as many stores as we can, but as many stores as we have to. We will improve the e-commerce user experience and utilize new technologies, new opportunities. And as always, focus on cost improvements and launch XXL in new markets and much more.That's it. Over to you CFO, Krister.

[Krister Andreas Fiksdal-Pedersen]

Thank you, Fredrik. Yes, we followed up the third quarter performance with having 17% growth in the fourth quarter. Like-for-like growth of 7% driven by new stores and e-commerce. Like-for-like was 7% and very strong like-for-like in Norway and Sweden and also some currency effects. Despite opening costs in Austria, we managed to reduce operating expenses in percentage of sales by 0.2 percentage points. Both Norway and Finland with very solid improvements here as well. Net financial expenses was NOK 5 million, including positive currency effects of NOK 9 million, which is equal to last year. For full-year 2017, we delivered 12% growth driven by new stores and e-commerce. First half of the year was weak with bad winter and a cold spring. Second half of the year was much better and XXL delivered solid figures.The establishment of Austria has been according to plan, but contributing to a loss of NOK 33 million EBITDA. Net financial expenses was NOK 42 million including positive currency effects of NOK 11 million whereof NOK 9 million was from Q4. Estimated tax rate was 20%. And ending at a net profit at NOK 502 million. We are happy to deliver NOK 386 million on cash flow from operations compared to NOK 4 million last year. Improved working capital is the most important reason behind this. Inventory is still high and we have a target of mid-NOK 30s million per store. However, in the end of the year, we decided to increase our purchase of winter-related products. We had prognosis for a good winter and chose to secure product in front of it. The increase in winter inventory also increased accounts payable so the effect on working capital is limited.Investments ended at NOK 304 million, including Austria, a new store concept, new stores, refurbishment and infrastructure. The liquidity is good with close to NOK 800 million available by year-end compared to NOK 151 million last year. Net interest-bearing debt was NOK 1.7 billion and equaling 2x EBITDA. The board will propose a dividend of NOK 2 per share, which is the same as last year. The dividend equals 56% of net income. The policy is still between 40% and 50%, but the board wanted to maintain the same level per share as previous years. On current trading, we had a growth of 26% in January compared to January 2017. We had been fortunate by good winter conditions in most part of Norway and in northern part of Sweden and northern part of Finland. Rest of Finland and Sweden was not that good. And with better winter conditions, we can deliver better margins as well.Further, January is the most important month for Q1. The other outlook elements are unchanged. We have signed 6 new stores for 2018 and aim for 7 to 10 stores in total. e-commerce growth is clearly taking business from the stores. XXL will be more strict opening new stores going forward. Smaller cities are for e-commerce only. Investments in infrastructure will be in the same range as last year. We invest more in automation to reduce costs in e-commerce and omni-channel functionality to lead for future growth. Long-term objectives, like-for-like growth of mid-single digits over time including e-commerce. Gross margin for Norway at low 40%s, high 30%s in Sweden and between mid and high 30%s in Finland. EBITDA margin in Norway at low 20%s, low-double-digit in Sweden and high-single digit in Finland. Mark that new market entries will affect group margins.There are no changes in the Austrian outlook. Summary, revenue growth of 17% driven by new stores and like-for-like growth. Both stores and e-commerce driving like-for-like growth, but e-commerce is the most important or most significant growth factor. Strong figures in Norway, but also in Finland. We delivered cost reduction in percentage of sales despite opening in Austria and Austria is going according to plan. Cash flow from operations showed solid improvements. Dividend per share will be proposed of NOK 2. Important going forward, we are investing in omni-channel functionality and we increase our in-house capacity of technical personnel. It is important for XXL to be in front of the winning model, which is not to be stuck with stores, but having the perfect combination between stores and e-commerce. Thank you.

[Tolle O. R. Groterud]

Thank you, Krister. Then we open up for questions and we have already received a couple of questions so I think we start with them. Could you please elaborate a bit on the new omni stock solution? What [ picking ] related to this with taking goods from the stores?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

Clearly it's more costly to pick products from the store and send it. Then again, the system is very smart. First, it will look at the central warehouse if the goods sold is there and if it's volume goods, it should be there and then again if it's not there, it will look in the store that is not so busy. So, the system will ask a store which have low sales that day to pick it. And if the store confirms, yes, I will do that; within 1 hour it will get the order. If not, the order will go to the next store. So, it's a smart system that takes this higher cost of picking the stores down. So, that is not a challenge because you have to have this system, you need to pick in the stores, you just have to do it cheaper than anyone else and more efficient. Happy with the answer?

[Tolle O. R. Groterud]

Then the next one, digital price tags, further roll-out plans to other countries?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

We are still testing in Sweden and we will test, I think, throughout this year to find the conclusion; the effect on the P&L and the effect on everything actually. So no decision taken, but it's more possible it will happen than not.

[Tolle O. R. Groterud]

Then we open up for questions and then the first from the audience present here at [indiscernible]. So, please wait for a microphone and we kindly ask you to introduce yourself and limit the question to 1 question at a time. Preben, go ahead.

[Preben Rasch-Olsen]

Preben Rasch-Olsen, Carnegie. One technical question on the price tag. Could you be a bit more specific on what was the effect on the Swedish margin this quarter or last quarter due to the introduction of the price tag?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

I don't think it's possible to measure that exactly, but there is an effect on the margin and we want to know what that is. So, we need more time. The question is good, I'm looking for the answer. On the other side, it has a cost effect also because we do not have to change price tags anymore and that took a lot of human power resources to do. So concluding, if it doesn't hurt the margin more than sum, we will have it in the rest of the companies.

[Preben Rasch-Olsen]

And also on Austria, which seems very good so far, a few thoughts on what you experience now versus what you thought you would experience a year ago and also on the competitive situation among the guys you are approaching down there?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

I would say it's going according to plan. We are very happy with Austria. It is a bit high margin than expected, but we will -- we have experience to fix that; if it's too high, we take it down. Now we will launch new stores and that will affect the margin. But we are really happy and we can see that the concept fits hard here so no surprises actually. There are some irrational behavior from some competitor, but we have seen that before and that was expected.

[Tolle O. R. Groterud]

More questions? Then there are no more from the audience and we are ready to take questions from those of you listening in on the phone. We kindly ask you to introduce yourself and limit the number of questions to 1 at a time. And I then call upon the conference host for further introductions.

[Operator]

[Operator Instructions] And the first question comes from Simon Irwin from Credit Suisse.

[Simon William George Irwin, Director]

Could you -- just a couple of things, but will start firstly with the omni stock or however you're describing it. How do you actually achieve that? Have you had to introduce RFID into stores or any kind of tagging solution to stock or this is a question of kind of having confidence in the records of stock going in and out of the stores and being able to control shrink?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

No, there's no RFID. RFID would improve the system, but it's not needed because we have -- it needs to have a certain amount before the system offer the product. But yes, it might happen that there is some wrong in the stock figures and then it will be fixed. And the system is a software actually that has been developed during the last years together with a third party.

[Simon William George Irwin, Director]

Okay. And in terms of Austria, can you give us an indication of how many stores that you'll be planning to open this year?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

We have said we will open 2 stores -- 1 or 2 stores. Aren't we?

[Krister Andreas Fiksdal-Pedersen]

2 or 3.

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

Yes. So, we are negotiating at all times and when we sign anything, we will tell you.

[Simon William George Irwin, Director]

And obviously given your inventory position and I suppose it's reasonable to assume some of your peers also have high inventory positions, can you talk a little bit about the competitive situation in Sweden and Finland at the moment?

[Krister Andreas Fiksdal-Pedersen]

Well, we saw in Sweden in special that some competitors had -- starting the clearance sales before Christmas. The biggest competitor started 20% off and also Intersport has been very aggressive in their price campaign. So, it is clearly indications that especially in Sweden that it's a lot of inventory among the competitors. I don't know anything for Norway and Finland on this topic.

[Simon William George Irwin, Director]

And now that you've appointed a new external COO, can you just talk a little bit more about how the kind of various roles will evolve at the senior management level?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

I didn't get that, how the...

[Simon William George Irwin, Director]

How the kind of balance of responsibilities will be distributed around the senior management now that you have more capacity issues say at that senior level is responsible for what and what changes you think you could expect to see as a result?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

I have to say that you will see no changes that you should worry about. So I'm not actually ready to discuss that on open microphone, but Ulf Bjerknes, he is here to support me and that's it.

[Simon William George Irwin, Director]

And 1 final one, you've obviously been kind of hinting towards store openings in Denmark for some time. Could we assume that that will happen in 2018?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

If you have ever negotiated with a Dane, you should know you need 1 thing, you need time. So as I tell you -- as I say, if the price is right, we will sign and only that and if we don't get the right price, we will never sign. That's how we do negotiations in Denmark.

[Krister Andreas Fiksdal-Pedersen]

But no stores for 2018 in Denmark.

[Simon William George Irwin, Director]

And just the final question would be thinking about currencies. Lots of moving parts given that you -- a lot of the product you buy is ultimately sourced in dollars, but I assume that quite a bit of it you functionally source in euros. Can you just talk a little bit about how you see kind of input costs in local currency terms changing over the next 12 months or so?

[Krister Andreas Fiksdal-Pedersen]

Well, euro is not a problem since we have income already in euros so we have no issues with euros. But -- and dollars, of course, there have been some variations in dollars, but we don't see any significant effect on that as we speak.

[Operator]

[Operator Instructions] Our next question which is coming in from Martin Stenshall from Danske Bank.

[Martin Stenshall, Senior Analyst]

This is Martin Stenshall from Danske. One quick question relating to the approach versus Russian consumers out of Finland. Could you please comment on how that is progressing? Thank you.

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

This is a very, very small business made to help the Lappeenranta store in Finland. But it's progressing well; we have a database, we have Russian consumers shopping in Lappeenranta and tax-free sales in Lappeenranta is increasing in the Russian sales. It's also affecting sales in Kluuvi in Helsinki. So as a small business, it's kind of funny to work in, but it's not a big business.

[Martin Stenshall, Senior Analyst]

And on Slide 17 today, you also state that priorities going forward include launching XXL in new markets. This is not a new topic, but could you please comment on your thinking of new markets currently?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

New markets is still Switzerland and Germany and we are looking into that markets. And haven't signed anything, haven't decided anything, but we are working on that development. And we are also working on a new central warehouse south of Germany. So, it's all going according to plan. And in between here, it could be a launch of stores in Denmark.

[Martin Stenshall, Senior Analyst]

And then on to planning of the summer season, could you please comment on any factors that have influenced your purchasing of goods for the rest of 2018?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

I don't understand where you're heading.

[Martin Stenshall, Senior Analyst]

Just basically are there any factors, anything in the marketplace that we should be aware of when it comes to purchasing of goods for Q2, Q3 and Q4 of 2018?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

Yes, we're looking into the currency situation, but that's just a part of the negotiations. I think we are doing quite well on that matter. And in general, when you ask on where we will grow, do not forget that we intend to grow our online sales, our online capacity at all times. That's actually most important.

[Martin Stenshall, Senior Analyst]

And I also got one question relating to the outlet segment, you had an initiative with a couple stores some time back with an outlet saying that and I've also seen here in the Norwegian market that another player is experimenting with an outlet offering. Could you please comment on your view on the outlets offering of XXL?

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

In general outlets will have a part of the market, that's for sure. Our outlets are border stores. They support [indiscernible] Norwegian customers shopping in Sweden. And our outlets is working well and we have strengthened the buying part on the outlet just now to be more interesting for our consumers. So we're happy with that concept, but we will not grow it. It's a border store concept.

[Operator]

And the next question comes from [indiscernible].

[Unknown Analyst]

My questions are around events. I wanted to ask you about the World Cup this summer and if you're planning any kind of special marketing or special merchandising around that event and also if you're seeing any kind of special activity around the Winter Olympics this month.

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

In general, we use all the elements we can in marketing to sell more and of course we will use any opportunity. And the Winter Olympics, yes, I guess that people are more into winter sport when they look at that and then they come and shop at us. So yes, we -- and we are using it.

[Krister Andreas Fiksdal-Pedersen]

And for the World Cup, Sweden and Denmark, they are both qualified so that's a good thing.

[Operator]

And the next question is coming from Petter Nystrom from ABG.

[Petter Nyström, Lead Analyst]

I have questions on availability on brands and products from the brand owners. We see some trends that the brand owners increased sales directly to consumers. How is your brand availability developing? Thank you.

[Fredrik Steenbuch, Chief Executive Officer and Managing Director]

I think it's actually improving and we are very satisfied with the situation. Then again, of course all the brands would like to sell directly to consumers. I do not think there's many brands in the world that can do that and none in sports. So the brands need retail to reach their goals, but they do not need as many retailers as they did before. So -- but we are happy with the situation.

[Operator]

[Operator Instructions] At the moment, there is no questions in the queue. [Operator Instructions] There is no questions coming through over the phone so I will hand the call back to you in the room. Thank you.

[Tolle O. R. Groterud]

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

[Operator]

Thank you for joining today's conference. To end the call, you may now replace your handset. Thank you.