XXL ASA

OSE:XXL

Earnings Call Transcript 2021-Q4

[Tolle O. R. Groterud]

Good morning, ladies and gentlemen, and welcome to the fourth quarter results presentation.My name is Tolle Grøterud, and I have the pleasure of guiding you through today's presentation. And our CEO, Pål Wibe; and our CFO, 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 interviews after the presentation, so please direct your requests to our press contact.So without further introductions, I turn the floor over to you, Pål.

[Pal Wibe, Group Chief Executive Officer]

Thank you, Tolle. First of all, it's a great pleasure to welcome you all to the fourth quarter presentation.As we have always said, the December and Q4 is the Champions League final of the retail season and retail year, and I'm very, very proud of the team and the way we performed during this quarter. It might sound easy to many of you, but during a peak season in the middle of Omicron virus exploding is quite a feat, and the team stepped up and really delivered in all parts of XXL. From buying category, supply and replenishment, they did a fantastic job. Logistics, marketing, store operations, e-com and all supporting functions, everyone really, really delivered during the fourth quarter. And I'm very, very proud of the team.Sweden is not just winning the Handball Championship for men or the sprint for -- and ski for women, they're also winning in the sport industry. So Sweden had done a fantastic job taking market share in the last half year and really, really demonstrating a great performance. Very proud of the team in Sweden.And if you sum up 2021, we did not only improve significantly versus 2020, and that was despite a very tough bike situation, but we actually delivered the best EBITDA in the history of XXL Norway, the best EBITDA in the history of XXL Finland. And keep in mind that, that was despite disappointing top line growth. And then the second best EBITDA in the history of XXL in Sweden. So a lot to be proud of.And I took this picture -- we took this picture yesterday just to show you that we are now the 9th of February. Last -- we are now having 4x as many bikes available this year than we had at the same time last year. And as you can see, the bike season has started. So all the government, of course, the prices are always the lowest in the market.So we try to sum up Q4. It was a solid growth and very good gross margin improvement and with Sweden leading the way. 6% growth versus 2020 on top line and a huge improvement in the gross margin. Gross margins will go up and down from quarter-to-quarter, you remember Q3, but the most important is that long-term trend is positive. EBITDA increased by 23% to more than NOK 400 million in the quarter. And as Stein will come back to, we are in a very healthy financial situation.All in all for 2021, NOK 10 billion was crossed as the landmark and, as I said, the best EBITDA in the history of XXL in Norway and Finland, second best in Sweden.Yes. If you look at the Q4, Q4, some of the main drivers for the improvement was an improved seasonal plan and execution. And this is a huge sort of boost to the team that really delivered during difficult circumstances, of course, also helped by favorable weather conditions in December. E-com grew by 9% and is now representing more than 25% of sales at XXL. So this is a growth engine for XXL. And as we said, we had a good gross margin driven by good price management, disciplined and optimized Black Week campaigns, and all segments are showing improvement in margins.Market share, this is sort of annual figures. As we said, over longer periods of time, we won't need to take market share. In 2021 and especially in the first half, we did not due to the -- mainly due to the bike situation and the comparables with the clearance sales in 2020. If you compare with 2019, we have taken good sort of market share growth in Norway and Sweden. So a healthy development in Norway and Sweden, and in particularly towards the end of 2021, we really take in massive market share in Sweden. Finland is still not satisfactory. But as I said before, we delivered the best EBITDA in the history of XXL in Finland, but we need to get top line speed up.All segments showing a good performance both on like-for-like and EBITDA but, of course, again, Sweden leading the way with a massive 19% growth in the quarter and a huge improvement in EBITDA. As you might have known before, we had a Sweden Full Potential, and we're starting to see the effects of that project in this quarter, too.This is -- yes, let's see. If you look at the Sweden Full Potential, as we said, a little bit more than a year ago, we started the Sweden Full Potential project, looking at basically every aspect of our business in Sweden. We have not been satisfied with the development in Sweden in years before that, both because of the top line -- lack of top line growth but also because we didn't get enough out of each kroner sold.So we have had a project working -- or still have a project working on category development and seasonal assortment. We're working on improving the marketing. We are working on reducing the cost base especially on the sales space, reducing sales space in some of the stores that are too big. And even if it's early days in some parts of this project, we can already now start to see a very, very good growth in Sweden. E-commerce being very good, gross margin positive, increased marketing efficiency, and then, as I said, downsizing and renegotiating a lot of contracts and even more to come. It also involves, unfortunately, closing down some unprofitable stores. But at the same time, we are opening new stores. So we opened a store in Sickla, and I was present in November, December. And then we will open 2 more stores in Borlänge and Sollefteå in Sweden this year.Austria is a challenging situation. During the last 2 years, there have been multiple lockdowns. I think it was the fifth lockdown in Q4, so a very, very tough situation. However, we are not also satisfied with our own performance. We need to do even better, and we're working on a lot of things to improve, both on the category assortment and the product availability. But of course, we are not satisfied with the overall development in Austria, and we have to do something during 2022, and we will.This is an interesting slide. Everyone knows that e-com is where the growth in the market is, and XXL is actually selling for NOK 2.4 billion in e-com sales in 2021 in mainly in the Nordic markets. And I think there are no other players in the sport and outdoor sector in Norway -- or in the Nordics that can sell for NOK 2.4 billion.Last year, we delivered 3.5 million parcels. That's a lot of parcels, and we had 150 million online sessions, 150 million online session, and all of this is organic. So this is not due to acquisitions. This is purely due to organic growth within XXL. And as you know, we just recently announced that we will have a new Head of E-com, Sebastian Blom, who is coming back to XXL. And the most amazing thing is actually when I ask Sebastian whether he is satisfied, he has a long list of improvement ideas. He still think that we need to improve a lot from the NOK 2.4 billion that we are doing today, and that may be the most encouraging of all. So e-com is where the growth is going to come and be in the years to come, too, even after the pandemic.Everyone believes about the supply situation. And I think, of course, no one can be certain about anything. Things are changing. In 2021, we had a severe situation with bikes in all markets. This year, we will definitely have more than enough bikes, so it's just to come and buy it. There are, of course, some disruptions to the supply chain, but overall, I would say that it's under control. Shoes are one of those areas that is most affected, but it is nowhere near what we have seen in bikes. So I would say that we are calm but, call it, a little bit of a [ schizophrenic ] calm regarding the supply situation.As I mentioned in the introduction, I think conducting a peak season like we did and delivering the results we did with the growth, top line and bottom line during a pandemic and with Omicron virus exploding, I think that's a huge effort by the team. And it sounds easy, but it's really a lot of work, so I just want to take the opportunity also to thank the team for a massive effort in very difficult circumstances.And with that, I think I'll give the word to Stein, who will take us through the happy news on the financial side.

[Stein Alexander Eriksen, Group Chief Financial Officer]

Yes. Thank you, Pål, and good morning, everyone. Q4 has been another eventful quarter. So let's go through the main financial items for the period. Let's start with the key figures for the quarter. Revenue was up with NOK 161 million versus last year. And Pål already mentioned it, but we were satisfied with the improved campaign execution in the quarter, resulting in a like-for-like growth of 9.4% and all segments, except Denmark, posting positive growth in the quarter. And the e-com operation continued to grow with 8.5% and representing 25% of total revenue for the group. Very happy about that.We are also very happy about the gross margins that ended at a strong 42.1%, up from 40.8% last year. OpEx in percentage points is 0.4 percentage points lower than last year, driven mainly by the higher top line growth giving scale in operations. And EBITDA ending at NOK 403 million versus last year's level of NOK 327 million. And for the year as a whole, XXL ended EBITDA at NOK 1.3 billion, or if you exclude the IFRS 16 effects at NOK 737 million.As stated in the report and as Pål already mentioned, due to the operational development and situation in Austria, it is prudent according to IFRS 16 and IAS 39 to impair and write down the right-of-use asset in Austria. And this had a negative effect on EBIT and net income of NOK 123 million. Also, XXL has performed a write-down of assets related to the 2 outlet stores in Sweden that is expected to close -- be closed down soon of NOK 13 million. So in total, then NOK 136 million in write-down. Please note that this had no cash effect. So the net income adjusted for these write-downs ended at NOK 139 million in Q4 2021.And I already mentioned, we were happy with the gross margin. Also, Pål said, the gross margin will vary between the quarters. But in Q4, it ended at a strong 42.1%. We have successfully improved the campaign execution and planning in the quarter, especially balancing the important Black Week campaign and the Christmas sales period. Every day, XXL is monitoring more than 15,000 products or SKUs versus our competitors in order to always secure correct price levels. And all markets posted gross margins improvement when Norway and Austria also had positive effects related to release of obsolete accruals due to healthier inventory. Yes, as I said, going forward, there will be fluctuations in the gross margin between quarters and seasons, but XXL targets a long-term sustainable gross margins above 39% for the group.Moving over to OpEx. Group OpEx was down with 0.4 percentage points, down to 27.3% in Q4, explained by the higher revenue positively affecting scale and operation. We had an increase in kroners of NOK 34 million versus last year partly explained by new store openings, late arrival of goods to the central warehouses, which trigger higher activity levels. And also, XXL had increased sick leaves in both stores and the central warehouses due to the pandemic. The increase was somewhat contracted by lower bonuses and reduced consultancy costs in Q4.We were pleased to see a positive EBITDA growth in the quarter, up NOK 76 million, explained by both the increased revenues and the improved gross margins. We are also pleased to see that all segments posted positive EBITDA growth versus last year with Sweden being the main driver in the quarter. Also, of course, we are happy with the fact that both Sweden, Finland and Austria posted record-high EBITDA levels in Q4.As you are already aware of, XXL has, during the last couple of years, done a tremendous job in order to reduce inventory. And we believe now that we are at more optimal levels going forward. A number of initiatives, like you see on the right-hand side, have been implemented, which has resulted in stronger surveillance and control of the inventory. And as you can see, the good work has really paid off, and the reduction in old inventory is significantly reduced from 2019 to 2021, which also explains why we have reduced our obsolete provisions somewhat in Q4.Moving over then to the balance sheet and change in net debt from NOK 71 million at the beginning of the year to NOK 700 million at the end of the year. XXL had a positive contribution from EBITDA, but a buildup of the inventory of approximately NOK 400 million contributed negatively to the cash flow. Also, we have had a number of strategic improvements programs which has resulted in a CapEx of NOK 261 million in 2021. Also, we have had dividend payouts and purchase of own shares that contributed to increased net debt up to NOK 707 million.That being said, we are still very happy with the balance sheet. We ended liquidity reserves at NOK 1.1 billion and net debt, as I said, at NOK 700 million. Leverage ratio ended up right below 1, which gives significant headroom versus the covenants. So therefore, looking at XXL's financial position, I will define it as strong. And as you -- illustrated here, compared to both previous years, XXL has today a healthy debt level and strong liquidity reserves.So to sum up the financials. EBITDA of NOK 403 million, broad-based improvements with all segments posting growth, especially stronger in Sweden. And the EBITDA mainly driven then by the top line and gross margin improvements. We have performed an impairment of the Austrian stores of the right-of-use assets and fixed assets in the 2 Swedish outlet stores with NOK 136 million. I just want to say once again, it has no cash effect.The balance sheet continues to be strong and healthy with inventory levels now at healthy levels and also the stock age at healthy levels. The Board of Directors proposed a dividend payment for 2021 of NOK 0.6 per share.Yes. That was the financials, Pål.

[Pal Wibe, Group Chief Executive Officer]

Thank you, Stein. Thank you. So a happy CFO, that's always good.Going to the outlook. As we have talked to you about before, we have made a strategic plan that we are executing on. We are in the middle of what I would call a massive retail transformation. I would say that based on my experience that in the beginning, we work much more under the hood than what you can see out in the market and towards the consumers. There's a lot of sort of positive things in the strategic program taking place. We are on track on all major initiatives, but we are not there yet, so we still, fortunately, have a lot to improve. So it's -- but it's, of course, encouraging in the peak season and the Champions League final to be able to deliver a performance like we did in the fourth quarter of 2021.This is the long-term guiding that we have told you and that we are committed to. We are going to take market share in all markets over longer periods of time, both in the stores but, of course, obviously, also in the e-com area. We want to improve gross margin from the stabilized 2020 levels. It will go up and down from quarter-to-quarter, but look at the long-term trend, this is a long-term business. And over time, the cost ratio has to go down to make us even more sort of ready to meet the future.A couple of changes to the teams that I wanted to inform you about, too. I already talked about Sebastian, who has been with XXL before, come back to head up our main growth area, the e-com and digital commerce area. Very, very happy to have Sebastian on board with his ambition and his experience. He will report directly to me and be part of the executive group as part of strengthening the focus on e-com in XXL. And then we've given even more responsibility to André Sjåsæt, who has been with us for a couple of years, took over the category area a year ago and is doing a great job and are now also taking over marketing and category in order to make those 2 areas work even more seamlessly together. So that's -- and we are now started a process of recruiting a new EVP for Strategy, Sustainability and Business Development.So to close up. Champions League final delivered great results, proud of the team. Strong growth versus 2020, which is not obvious. Good margins this quarter and a very strong EBITDA and, as Stein says, a financial position that is rock solid also based on a very, very healthy inventory.Still, we have some must-win battles. We need to work on our category strategies and seasonal execution. Keep in mind that all we do has a 12- to 18-month lag, so a lot to come. In this quarter, we saw a lot of categories performing very well. Like hockey was a main driver in Sweden and Finland for the growth we have there, really, really good. Padel is exploding, a lot of great category work. We still need to keep that up.On the marketing and the campaign process, we have our work cut out for us. It's not at the level we want. E-commerce, huge opportunity. Huge opportunities that Sebastian and the team are working on. And then we are also working on optimizing inventory and cost base and optimizing the replenishment into the central warehouse and from the central warehouses to the stores.So going forward, we are going to focus on this strategic program, gain market share, stabilize gross margin. We are going to open a couple of new stores this year, 1 in Norway and 2 in Sweden. And as I said, as part of always optimizing the portfolio, if we cannot get conditions that makes us profitable, we will close down some stores. And Töcksfors is confirmed, and it looks also like Nordby will be closed in sort of 2022.In January, as you might see when you look out of the window, winter conditions was not as optimal as they have been in December, so we had a decrease in sales in January versus 2021. That was the best January ever, but still a growth versus 2020 that was a poor January. So the sport business will go up and down, and it's important to have an industrial long-term view on the seasons and the development.So with that, I think we will open up for questions, Tolle?

[Tolle O. R. Groterud]

Yes. So thank you, Pål. Then we open up for questions, and I call upon the conference host for further introductions.

[Operator]

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

[Markus Borge Heiberg, Equity Research Analyst]

Congratulations on a very strong quarter. So I have 3 questions here. I can take them one at a time, I guess. So on January, can you please elaborate on how the different categories and geographies have performed? Is it mainly related to the snow conditions that you're alluding to? Or do you see other changes in consumer behavior? That's my first question.

[Pal Wibe, Group Chief Executive Officer]

No. I think it's broad-based, also, all geographies except Austria, and it's the lack of winter conditions. We can see it very clearly that it's the lack of winter condition that is the main driver.

[Markus Borge Heiberg, Equity Research Analyst]

Okay. Very clear. So on Sweden, can you elaborate on what you are doing different this quarter? Because I think previous quarters, you have been losing market shares, and now you're taking significant market share. So it would be helpful to get some flavor or examples on what you see as the key differences in these quarters compared with previous quarters.

[Pal Wibe, Group Chief Executive Officer]

Yes. Keep in mind that, first of all, we have lost market share in Q2 and Q1. Keep in mind that, that was also a little bit with the circumstances in 2020 with the clearance sale that was artificially high and the bike situation that was the main driver. Since August, we have taken market share in Sweden and quite significantly.I think the main driver is -- there's a lot of things that we're doing in the Sweden Full Potential. One thing is category development that we have started on. It has a 12- to 18-month lag, so the sort of things that we have started on in 2020 that you now see the effect of in 2021. I talked about hockey. In hockey, we have increased the assortment quite significantly. I would say that we are a hockey destination comparable to everyone in the market now in Sweden and Finland, for that sake, Norway, but it's a bigger market in Sweden and Finland. So that is very positive. We have new sports, like padel, exploding. Of course, also there, winter conditions being positive in this quarter. But I -- as I said, I would encourage you to also look at the kind of a little bit longer-term development.On the marketing side, we have succeeded in sort of focusing a lot on the digital market in the big cities with good effect. And that's also -- the store operations and the execution and focus on customer satisfaction in the stores has been positive. That's kind of a long-term thing. That doesn't change from quarter-to-quarter. And we still have a lot of work cut out for us in terms of reducing, downsizing some of the stores because, as you know, the stores in Sweden has been too big for the sales potential, so we are reducing a lot of stores. This has taken a little bit of time because of the COVID situation, that some of the projects has been postponed, but they are coming in 2022 to 2024.

[Markus Borge Heiberg, Equity Research Analyst]

That's good to hear. And my last question then is on the competitive environment and the pricing environment in the different markets. Have you seen any impact of the consolidation that you've seen? And also finally, maybe a word on Amazon, which has had a year in Sweden now.

[Pal Wibe, Group Chief Executive Officer]

Yes. I think as Stein says, we are really monitoring prices to an extent that they have never done before, 15,000 prices that we are monitoring, updating multiple times a day and doing more and more sophisticated monitoring. So really great work done there in this area. No big change in the kind of competitive situation from quarter-to-quarter. The market is, as you say, much more consolidated in the Nordics. We will take a 2-year perspective, so much more sort of healthy competition in all markets in the Nordics than it was 2 years ago.Amazon, I would say, you can never underestimate Amazon. They are a great company, and they're a great offering, and they're going to improve by the quarter. We do not see any sort of significant effect on our performance in Sweden, as you can see, but we are not taking it lightly. And we are really focusing a lot on the customer journey and the customer experience online. And Sweden is one of the test markets. So it's -- we're not taking it lightly but not seeing any big effect in our sector. It might be different in other retail sectors.

[Operator]

We currently have no questions in the queue. [Operator Instructions] We have no further questions coming through, so I'll hand the call back to your host to close today's call.

[Tolle O. R. Groterud]

Okay. That ends our session then. So thank you all, and have a good day.

[Pal Wibe, Group Chief Executive Officer]

Thank you.