XXL ASA

OSE:XXL

Earnings Call Transcript 2023-Q4

[Tolle Groterud, executive]

Good morning, ladies and gentlemen, and welcome to the fourth quarter results presentation. My name is Tolle Groterud, and I have the pleasure of guiding you through today's presentation. And our CEO, Freddy Sobin; and our CFO, Stein Eriksen, will take you through the presentation, 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 request to the press contact person.So without further introductions, I turn the floor over to you, Freddy.

[Freddy Sobin, executive]

All right. Thank you, Tolle. Good morning, everyone. Great to be here. As the presentation says, we're here today to present the fourth quarter results, but we have to admit that we are concluding a difficult year, maybe the most difficult year in XXL's history, with disappointing results in the fourth quarter. However, we remain optimistic, as we believe in our Reset & Rethink plan, and we are seeing, actually, that our turnaround actions are starting to materialize, and that is something that we will present further today.If we skip the disclaimer slide, you've seen it before, this is the agenda that I want to walk you through, the progress of our Reset & Rethink plan, how we have continued to strengthen both senior management and the broader team within XXL, and then the results for the fourth quarter.But let's start here. Let's start with 2023, just a year-end review. And once again, we have to admit, this was a challenging year. We saw revenues going down, decreasing. We also saw a negative EBITDA, is how we concluded the year, after a somewhat difficult and mainly disappointing fourth quarter. However, that being said, I want to really take the time to send a great and big thank you to all of our 5,000 employees, because this was a year of great change, and everyone has really been dedicated, worked hard, and really, I think, invested their heart and soul into the company to help us through these difficult times. So a very big thank you to the entire XXL team for your dedication and your efforts.However, it was not only a difficult year, it was also a great year of change, a year where we started to reshape XXL for the future. Some of these changes you have in front of you, they include a new management team. I joined in May, but we also have several new members of senior management. We also have several new members in the Board and a new Chairman, Hakan Lundstedt. So the leadership of the company has been renewed, rejuvenated.We also set a new plan in motion. Summer of 2023, we started with the Reset & Rethink strategy, a new direction for the company to take it back to profitability and to a winning position in the market once again. As part of the Reset, we have our 5 must win battles, which we'll walk you through today, and the underlying indicators that they are actually progressing in a good manner.Inventory was, of course, a big focus for 2023. We've talked about it a lot in many quarterly reports now, and I'm very happy to say that our efforts have been successful. We're not only down to normalized levels, we're actually down to very healthy levels when we look at the entire inventory.We also said that we would exit at Austria, and we successfully did. We also said that we will launch a new, modernized and more competitive customer club, and we did in the fourth quarter. We also said that we would do more on the private label front, which we did when both leading a minority investment into Stormberg launching a strategic partnership, and we already see that the first products coming in has a very strong margin and a very strong turnover pace, even stronger than many of our other brands. So a very promising start to our new private label strategy, or rather own and controlled brands, as we want to call them, because we now want to build these as proper brands in the market.We also initiated, except for the Reset strategy, several restructuring and cost out measures, mainly in Q3 and Q4. The rights issue to enable us to continue on our turnaround journey was included in the third quarter, but we have also throughout the year right-sized the overhead organization. We have launched a full cost out program of NOK 300 million, which I will come back to in a minute. And we've also started with a downscaling of some of our stores to right-size our store footprint. So very much a year of change, where we're reshaping XXL for the future, for a more profitable future, for a stronger future.The journey, as I said, is Reset, Rethink, we launched it last summer, 2023, and we said that it will take 12 to 24 months to materialize. We're only 6 months into that journey yet, but we are seeing good indications, some of which I will share with you today.The Reset part is built up of 5 must win battles. These are the 5. We've talked about them before, and let's go through them one by one. But also, other key initiatives that are on the top of our agenda has been Reward in Austria. Those are now done. But we still very much are focused on cash and liquidity, cost out, but also strengthening our ways of working, being even more data-driven and fact-based, working more in a cross-functional manner throughout the entire company, and securing that we are even more centralized than before, working as one XXL throughout the Nordics.But let's go in some of the indicators of the must win battles. Let's start with category reset assortment, because I think everything starts with the product, right. We need to have the right products to the right prices. That's what it's all about. We saw, this is the Q4 numbers, that in Q4, but also actually in the previous quarters, we had a positive sales growth in the low-price points in our assortment. Also actually in the high price points, we have somewhat of a growth, but what is really holding us back and what is driving the reduction of sales is mid and especially actually mid to high price points. Therefore, already this summer, we started to reset our buying budgets and looking into how can we rebalance the assortment more towards what the customers actually are demanding and wanting to buy from us. That's why we have already started, since quite many months back, started to more steer towards more lower price points within the assortments, going down somewhat in the middle and going down also in the mid to high and high price points. So very much adapting our assortment, our category strategies, if you will, to what actually demand in the market is telling us. So here very much listening to our customers, going for what is strong in the market. This is maybe a bit of going back to what XXL once upon a time was strong in, meaning low price points. We are definitely rebalancing towards that again, but we will not leave mid to high. We think it's crucial to have a full assortment and still have as many categories as today.That being said, when we now are increasing more towards both buying budget and assortment towards lower price points, that means that we will actually get more pieces per buying krona. So this is very much also a strategy to increase availability in stores to have more products available because availability in the low price points has held us back in the fourth quarter. We have not had enough of the products in the lower price points. That is something we're now correcting. We'll see improvements starting in the second quarter and go beyond. So good indications here, both on category reset and availability, that we are moving in the right direction.Looking a bit further into the category reset, last quarter we showed you a bit about the inventory composition. I'm very glad to say that during the last 3 months, we have very much continued to make our entire inventory composition even more healthy than before. So slow-moving products, so the 3 staples to your right, are going down quite heavily, as you see. So old products, we've been able to move them out of the inventory, we've been able to sell them, and instead getting more fresh products in. And I think this is crucial for us because everything is about, once again, the right product at the right price. We are strengthening the assortment, so even though inventory levels are at very low levels, record low I would say, they are healthier than before.Our other 3 must win battles are store operations, pricing, and e-commerce profitability. Let's go through them one by one. Starting with store operations, we have had many projects to increase efficiency in stores, both with regards to operational efficiency, but also sales efficiency. One KPI for that, that we measure every day, is what we call revenue per worked hour. So meaning the efficiency of both operations and sales together. And I'm very pleased to say that both in the third quarter and the fourth quarter, we saw improvements. And in the fourth quarter alone, separate, we saw 1.5% increase in revenue per worked hour. So our stores are increasing in efficiency, and it's something that I'm most confident that we'll continue to see throughout 2024 as well. Strengthening stores, and it's not one thing, it's many things behind this. Maybe a little number, maybe a limited increase right now, but I'm hoping to see that increase month-by-month, quarter-by-quarter moving forward.Moving on to pricing, of course, XXL has always been quite aggressive on price. But we have taken an even stronger control over pricing and even clearer strategy. And as you see, that has led to quarter-by-quarter during the last year, strengthening the underlying gross margin. And that is, of course, very important for us. We are, as you see, also moving now towards the historic target of 40%. And that's something that very much remains in our focus and our aim to continue to strengthen the underlying gross margin. It's just a must for us. And we are on the right journey, as you can see right now.The last one, e-commerce profitability. We have worked hard with both adapting to what I would call best practices in the market and many other improvements on the site. And as you can see, this is the Q4 numbers. Conversion rate is now up in all 3 core markets. So conversion rate in Norway is up by 0.5 percentage points. It's up by 0.4 percentage points in Sweden, and 0.3 percentage points in Finland. So it's an increase across the board in all markets. Meaning that the improvements that we've done are moving us forward.So I hope by showing you just a few of the underlying indicators that the strategy is very much one that we still believe in. We still believe that this will take us forward, take us back to profitability and to a winning position once again. But it's not only about commercial development because the must win battles are very commercially focused. We have also, due to being in a tough financial situation, I think that is clear for everyone, also been very active with looking into how we can restructure the company, how we can take out cost.These are 4 very clear initiatives that we've been taking to consolidate and optimize both markets and sales channels and to get both, I would say, cost down, but also actually complexity down. Because the more we can focus, the better we are. If we start in the far left, we have started to optimize our store footprint, our entire store network. The latest 3 stores that we opened, which was Lillehammer, Skelleftea and Alta, have all been around the 2,000 square meter area level. Meaning quite a bit smaller than the normal XXL stores historically, which has been at 3,000 and above in square meters. But we have in these new stores been seeing that we can keep up the same sales efficiency but getting even greater, of course, the rent cost down and also getting a greater customer experience in a smaller store that's tighter and we can work better with the assortment.So therefore, we have decided now also to take this as a broader downsizing strategy to review the entire store portfolio and where relevant and where possible to actually downsize sales area. Already now in 2024, we have signed contracts to reduce our store footprint with 15,000 square meters. This will, of course, take rent cost down and rent cost has been very much on the rise due to the inflation and the index clauses, which we are not in agreement with. But this is a way to get both the rent down but also the efficiency up. And we see that it won't materially hurt sales at all actually. So we are very positive that this is the future for XXL. Not all stores will be reduced, but many will definitely go down in size.And that being said, we still believe in our stores. We still believe that an omnichannel strategy is the winning strategy in the market. But we definitely need to increase efficiency and be more profitable in all sales channels.Moving over geographically, we have left Austria already. We are now also leaving Denmark. Denmark has been an online only market for us for quite some years. It has not been of material or strategic value for quite some time. Therefore, we're now choosing to leave Denmark already in Q1. We're closing it down. And that is now meaning that we have 3 core markets that we will solely focus on. That will also bring complexity down and cost down.So from after Q1, when Denmark is closed, XXL will fully be focusing on Norway, Sweden and Finland. And they're believing fully in our omnichannel strategy as the winning formula moving forward. We have also chosen to close our app. That is already done. Once again, fewer actually sales channels means less complexity. We have seen quite limited usage and downloads of the app, but it has cost us in both development cost and in focus. We're now taking that out to focus even more on the regular e-commerce site. And as you see, when we do that, conversion rate goes up. So we think this, once again, is a move that will continue to strengthen the core of XXL.And lastly, the cost out program already in when reporting Q2, the first quarter that I reported, we launched an ambition of taking out cost of NOK 100 million to 200 million. The quarter thereafter, we raised the bar to Nok 200 million to NOK 300 million. We have now concluded the program. We have identified savings of NOK 300 million. And that is what we're now committed to take out of the company. We have already started. This is a gross amount. The full effect will come in 2025 as we're doing this throughout 2024. But a big amount will definitely hit us already this year in a positive way. So we're also restructuring, taking cost out. That is just a must to turn around the development of our financial situation.However, this is, of course, all done by people. We have 5,000 amazing employees in the company. Since joining, I had said that I wanted to do 4 strategic recruitments in senior management. 3 of them I've already communicated and announced. And today I'm very glad to announce that we have now also concluded the recruitment of our new COO, Dawid Gosciniak. Dawid comes from more than 20 years of retail experience, mainly in the fashion and lifestyle space. The main part of those more than 20 years he has spent in the H&M Group, internationally in various markets. Currently he is globally responsible for store experience and commercial within H&M. But has also worked a lot with, for example, construction, global leasing, store development. He was also the sales manager of China, for example, when expanding there. So Dawid will come in with a wealth of experience and competence that can both strengthen senior management and XXL as a whole. And I'm very glad that he chose to join us. He will come in with a lot of energy, a lot of drive and be a crucial part of our journey ahead.That also means that we are somewhat consolidating the SMT team down to 7 members. I think that a more lean and agile team also is crucial for us as we will need to move with great speed ahead. However, it's not only senior management that we are strengthening. We have also done, and this is just a few of the more strategic [ strengthenings ] that we've done of the organization during 2023.We have both launched a few new roles and responsibilities and also a few strengthening replacements of key roles. And we're very much sure that this will not only be self-funded, but it will also mean that we're step changing in efficiency, quality and control in general. We are moving to more of a professionalized way of working and we're bringing in new competence to strengthen that journey as well.So we're seeing the underlying indicators moving in the right direction. We're seeing a stronger team piece by piece coming into place. However, what we're not seeing is a turnaround in the market. Q4 2023 was the eighth consecutive negative quarter for the Nordic sporting goods market. And as you can see, before that, the market grew with a CAGR of 5% up until 2021. But for the last 2 years, we've had a negative development of minus 4% in CAGR. So definitely a very challenging market to be active in.If we focus in on 2023 Q4, for example, I think you've all read several of the media articles and also reports coming out saying that Christmas sales in December were a disappointment. Consumer discretionary spending was actually down in all 3 core markets. So here's just a few examples. But both in Norway, Sweden and Finland, consumers were holding on tight to their wallets.One trend that is more and more being talked about and reported is that funflation is taking some share of wallet from consumer spending. But in any case, we did see a demanding December. That together with low availability of lower price points meant that we were not at all happy with our performance. We underperformed.Now, with a market that has been this tough for this long, of course, also looking into, for example, bankruptcies. This is the retail numbers for Norway and Sweden, and this is coming from CreditSafe. So in 2023 as a whole retail in Norway, the bankruptcies increased by 42%, in Sweden by 30%. So of course, we are seeing a very strained retail market out there. But hopefully, actually, we are seeing many distressed players and the market has been oversaturated for quite some years. So maybe this will lead to a healthier market afterwards. Let's see. But definitely a difficult market that we are acting in.Now, lastly, the summary of Q4, sales down by 9.5%. So once again, very disappointing to see. And this is actually what's driving also the underperformance of bottom line. But availability has been an issue. Also, consumer demand being down. Just factors that play in, of course. That being said, gross profit, though, is greatly up versus last year. So 13.7 percentage points. So that is definitely very positive to see. On the cost side, in percentage of sales, yes, it is up. But in absolute numbers, we are actually keeping the same level as previous year. So meaning we are able to fight off inflation, which is hitting us in quite many cost lines throughout the P&L. So I still see that the cost out actions, they are working. They are giving an effect already.Now all put together, that means that, yes, we did have a negative EBITDA in the quarter. Maybe not as negative as 2022, but still nothing that we're proud of, nothing that we're satisfied with. We need to do a lot better, especially in this crucial quarter.Inventory, though, as we've already been through on a much healthier level. So year-over-year, a great change, and that is important for us. And of course, as we've been successful in taking inventory out, that means that liquidity is actually somewhat stronger. So NOK 760 million in liquidity. So yes, a demanding quarter. But taking action, we are still on a quite okay place, I would say, moving forward.However, looking at also the EBITDA, there are some underlying factors that we would like to point out. These are the more materially adverse effects that you can kind of take out of the Q4 results. Number one, Rewards. Q4 was the first quarter that we have the new Rewards program in place with bonus points, with etcetera. This was also a quarter where we invested heavily and took a lot of cost to really launch the program out in the market to gain a lot of new members into the program. And we are seeing positive indications of new members coming in. Definitely, we got a lot of them in during Q4, but it did come at a cost. So in Q4 alone, this cost us NOK 70 million, of course, which is a new cost that we didn't have the year before. But from January and onwards, this cost will be lowered as we took extra costing investments in this launching quarter to really set the club to relaunch it in the market. And this is to strengthen our competitiveness in the market. And as I said, this, I think, is a strategic game changer for us, both mid and long-term for the company.Moving on, we did take have some cost for restructuring that we started to do. Not that material, but a bigger number is, of course, the write-down of technical goodwill. This is related to IFRS audit principles. So we did write-down NOK 522 million in goodwill. That, however, and I think that is really crucial to point out, does not have an effect on cash or liquidity. It is solely in the P&L and in the balance sheet.Something that did have a toll on liquidity, on the other hand, was the payment to Norwegian tax authorities for the ongoing tax case regarding transfer prices. That was something that hit the result in Q3, but liquidity wise hit us in Q4 with NOK 90 million. That case, however, we have opposed it. It's not concluded and finalized. So let's see how that ends up. But still quite big effects in the quarter as well, also affecting bottom line, of course.With that, a quick run through. I'll leave it over to our CFO. Stein?

[Stein Eriksen, executive]

Thank you, Freddy. And good morning, everyone. We'll then have a walkthrough of the financial results. I think Freddy did a good job already, so no point in repeating already the message. But as Freddy mentioned, we have done a technical write-down of goodwill of NOK 522 millions. The write-down is a reflection of continued weak market development as well as increased capital costs. Like Freddy says, this write-down has no cash effect. Then also, due to the operational development and situation for some of the stores, it's prudent, according to IFRS-16, to impair and write-down some of the Swedish and Finnish stores. And this write-down also has no cash effect.And Freddy already mentioned the Reward program that triggered an accrual of approximately NOK 70 million in Q4, and then negatively affecting revenues with 3% and gross margin of approximately 2 percentage points.Moving over then to the P&L, the group posted a negative EBITDA of NOK 13 million in the quarter, and the main drivers for the negative EBITDA was lower revenue and a weak gross margin. All markets had declined versus last year.Gross margins ended at 33.5%, and that's up from 19.8% last year, but please then bear in mind that we had an additional write-down last year over the inventory of NOK 301 million.OpEx, 4 percentage points higher than last year, but mainly then explained by the negative like for like growth. And if you look at the bottom line, net income of minus NOK 1 billion or NOK 441 million adjusted for the mentioned write-down of goodwill and right of use assets.Just have a brief look at the gross margin. Like I said, improved with 14 percentage points from last year, but please then bear in mind the additional write-down of NOK 301 million. And also -- so we are not happy still with the gross margin level, but that being said, it's being more normalized, especially towards the end of the quarter. Also, like I said, the bonus points than hitting the margins with 2 percentage points in the quarter.OpEx, Freddy already mentioned that OpEx is up by 4 percentage points in the percent of turnover, but if you look at the underlying absolute numbers, they increased with NOK 15 million, but whereof NOK 29 million were negative currency translation effects. So we start to see some effects of the cost out program and restructuring.Yes, EBITDA, as I said, minus NOK 13 million and all segments with growth, but then versus very weak last year, explained by the additional write-down.If you look a little bit more on the balance sheet, inventory in absolute numbers are at the lowest levels in the last 10 years. And also, as you can see on the right-hand side, it's at fairly low historic levels in percentage of sales. And our main focus is to allocate and prioritize capital towards the more fast-moving products. And like Freddy already said, we are happy to see that this has given quite good effects since October.But that being said, the level of inventory is okay, but an important step for XXL is that XXL needs to allocate more capital towards the lower price point to increase the stock turnover, to increase availability, and to increase conversion. As you can see on the left-hand side, we are strictly allocating more purchasing power towards the lower price points and will continue to do so during all of 2024 and beyond. And this will increase the number of pieces in our inventory with around 40% versus today's level.Moving over to the cash flow from a net interest-bearing debt of NOK 1.1 billion last year to around NOK 900 million this year. And as you can see, the positive triggers are the reduction of inventory, the 2 capital raises we have done during the year, and somewhat then reduced with, of course, negative EBITDA. The capital, the payment recognizes lease contracts and the CapEx. I just want also to highlight the CapEx of NOK 129 million is at the lowest levels for more than 10 years, so really strict on usage of capital.Then, like I said, or like Freddy said, liquidity reserves ending at NOK 760 million. That's more or less at the same level as last year.So Freddy already said, but to sum up the full year of 2023, it has been a very challenging year with the weakest results in the company's history, driven by both the reduced turnover of revenue and also the low gross margins. We are happy with the inventory level, but still has work to do regarding mix and composition and will prioritize the liquidity thereafter.So that was a brief walkthrough, Freddy. Leaving the floor over to you.

[Freddy Sobin, executive]

All right. Thank you, Stein. So as per usual, but being the first time for me, we'll move over to the end of the presentation. But as per usual in the Q4 presentation, we'll give you a brief flavor of current trading and the outlook for the year.Current trading, January sales ended up at NOK 550 million. On the positive side, we did see that favorable winter conditions really helped us out. So in seasonal products and main categories like cross-country, etcetera. But seasonal products had a strong double-digit growth, so very pleasing to see. However, availability did hold us back. If we would have even more inventory in the right price points and the right products, we would have been able to see a lot bigger growth than that.Gross margin underlying also has materially strengthened, so the trend that we were seeing last year, quarter-by-quarter, was extended to January as well. However, we need to remember that last year we did launch Prisskred, which was the biggest and most aggressive campaign ever in the company. And those comparables are just hard to meet, right? Because we did not have any such aggressive campaigns this year in January.Nonseasonal products, however, and mainly capital-intensive products have been definitely down in January sales-wise, holding us back. And as already mentioned, limited availability, mainly in the lower price points, also has been a challenge. So January, NOK 550 million, but at least I would say gross margin, gross profit really moving us ahead.The outlook for the year, here we just want to repeat the Reset Rethink plan, which we said when launching it within 12 to 24 months will lead to an EBITDA uplift of NOK 500 million to 750 million. We still remain positive towards that plan. We've also added the cost out program of now NOK 300 million. We're committed to that and also committed to continue with the record low CapEx levels within the company. With currently no new store opening signed, and as already presented, a lot of downscaling and relocations to be happening throughout 2024 and beyond. So many things still to be done, but I thoroughly believe we are moving in the right direction. And I believe that Reset & Rethink will take us there. It will take us all the way.So just a quick summary, we have a clear plan. We believe in the plan, and I very much believe that the entire company buys into it. That's what I hear every day. We have also been able to strengthen senior management and the broader team to really deliver on this plan. And we are now seeing the first indicators of the must win battles actually progressing and starting to deliver. So while definitely delivering a quarter and a year, that's very disappointing. I have to say that I remain very optimistic that we are on the right path. We are now reshaping the company for a brighter future.And with that, ladies and gentlemen, I thank you for your time.

[Tolle Groterud, executive]

Right. So thank you, Freddy. Then we open up for questions, first from the audience present here at Alnabru. So please wait for a microphone, and we kindly ask you to introduce yourself. So please go ahead.So no questions from the audience, so then I think we call upon the conference hosts for further introductions.

[Operator]

[Operator Instructions] There are currently no telephone questions. [Operator Instructions] We currently have no telephone questions.

[Tolle Groterud, executive]

Okay. Thank you so much. So that ends our session. Thank you all, and have a nice day.