LPP SA

WSE:LPP

Earnings Call Transcript 2020-Q2

[Magdalena Kopaczewska, executive]

Welcome, ladies and gentlemen. My name is Magda Kopaczewska, and I am the Head of Investor Relations Department in LPP. Przemyslaw Lutkiewicz is also here with me, Vice President of the Management Board of LPP. And we have the pleasure to welcome you to our video conference today devoted to the financial results and corporate events in the second quarter.

During our conference, we will analyze the results for the second quarter, and we will also tell you about how we adapt and how we have been adapting to the changing realities, the COVID realities.

During the conference, we will touch upon the issues of the challenges we are facing now. And in the second part, as usual, we will ask you to -- [Operator Instructions]. This is the agenda for today, and Przemyslaw take the floor, please.

[Przemyslaw Lutkiewicz, executive]

Welcome, ladies and gentlemen. This is the conference devoted to the results of the second quarter and the first half of the 2020/2021. We'll start with the financial results for the last quarter. Talking about LPP business, please bear in mind that we are looking at our online and offline business as a whole, as omni-channel. Almost 1,800 stores throughout Europe and almost 15% increase in the floorspace have been recorded. Sales in traditional stores were lower due to COVID-19 situation and due to less traffic and also due to the fact that in some countries like in Russia, lockdown of the stores was longer than in Western Europe and also because we have been renegotiating rentals. And during that time, our stores in Poland were closed.

So like-for-likes less by 40% year-on-year. But higher increases in online sales, over 100% in the first half of the year. We have been present in 28 markets online. However, this gap in terms of stationary sales have not been filled in by online sales. So the total sales were lower, 20% year-on-year.

Let me remind you about the situation with COVID-19. Of course, now it's the second wave of infections. The pandemic is not over. But taking into account our financial results, I would like to once again remind you what the first half was like for us.

In February, we had some problems with supplies lockdown in China began, and the Chinese ports were not operational. Therefore, transportation problems occurred. Lockdown in India and Pakistan, so all the markets are produced for us started to close off. Fortunately, most of our spring/summer collections were already in our warehouses or on their way. So there was not a big risk for trade here. But later on, lockdown in Europe began. So mid-March, the shops started to be closed, and it lasted until the second part of June in Russia, for example.

So the stationary stores were closed, but the online sales have picked up considerably during that time. Therefore, we had to develop our logistics in order to cater for this demand. We had to adapt in terms of courier services for the increased demand for online sales. And we made it successfully. For 5x growth in demand, we were able to provide online service to our customers smoothly.

Beginning of May, the store starts to reopen, the lockdowns lifted in many countries, and we also started to renegotiate the rental contracts. What we wanted was to renegotiate new terms. So I will touch upon this more during the presentation. At the same time, in Germany, we started restructuring of our business, also taking into consideration the difficult sales situation, decreasing like-for-like. And in general, the business in the realities, the business was not profitable, so that's why we decided to restructure.

So now after 2 difficult quarters, we have the third one and the fourth one that are not expected to be easier. The coming months, the best months for the trade sector, but we can see now that the second wave of the pandemic has already started, and we can -- we get the information from our partners in Slovakia. There is already social distancing and all the changes that will affect our results in the second half.

Let's move on to the mark. You know it very well. Let me remind you, in green, we have marked the countries where we have both online and offline stores. The blue areas are the countries where we are present only online. And the gray areas are the countries with only off-line offer. So our 3 main markets are Russia, Ukraine and Romania. These are the most important foreign markets.

In Poland, we have not been developing as intensely as before. You can see that in the table on the left, we decreased the number of stores by 50, whereas we increased this number in other countries. In the EU, apart from Poland, 40 stores more and the same in the Eastern Europe. So 34 stores more overall.

On the right, in the right column, you can see how many stores were open as at the end of the first half. Not all the stores were opened in Russia and Kazakhstan at that time. We've been renegotiating contracts, so not all the stores at the end of July were open.

Let me also remind you that by talking about the second quarter of this year, we mean the shifted quarter. Let me remind you that the fiscal year has been shifted. It starts in February, and it finishes with the end of January. So the second quarter, we'll be discussing mostly today, covers such months as May, June and July. And the comparable data refer to the same analogous period of the previous year.

Let's start with traditional stores sales or like-for-like dynamics only on traditional stores. You can see it on the left, quite considerable falls in the first quarter and second quarter, 36% as well. It results from the fact that some stores were still closed. If you can see -- have a look at the right-hand side, we can see dramatic losses in April, almost 75% in minus during lockdown. Only in Latvia, the stores were opened at that time also in Finland, but they were not like-for-like at that time. In the following months after lockdown, we see the situation improving. And the stores day after day showed minus 13% in June. It was lower, dropped minus 7.5% and positive 4.9% in July.

It is worth discussing what it looked like in particular regions. We saw that in the Baltic countries performed well. Just after the lockdown was lifted, the increases were mostly visible there. However, the western countries, the situation was worse.

Let's move to the e-commerce. Now you can see record sales in the second quarter so PLN 600 million if we sum up the first and second quarter, we can see that online store for the first half of the year exceeded PLN 1 billion.

On the right, you can see in the chart the online by region sales. So Poland, then the EU, without Poland and the CIS countries, Russia, Ukraine and Kazakhstan -- without Kazakhstan here, only Russia and Ukraine with online presence here. You can see plus 125%. All the regions have been recording increases. We are very pleased. Starting Poland, the increase has been double during this quarter.

The share of Poland in the online overall revenues is below 50% because other markets have been recording increases. Overall, the online sales constitutes almost 1/3 of our total revenues. Over 80% of visits in online store is via smart phone devices, mobile devices, and 62% of purchases are made through those mobile devices.

Let's have a look at the slide with foreign revenues. It's hard to make any conclusions here because the closures of stores in Poland and reopenings of stores when we renegotiated new rentals, longer long term in Russia. All these factors show that the data in the chart in comparables. So we see the loss of -- in Poland, increase in the Europe without Poland and minus 25% in the CIS countries.

What we're pleased about, this is the overall omnichannel revenues. We are pleased that in the Western Europe countries, the falls recorded in the traditional stores, have been covered de facto by good online revenues results. In Great Britain or Germany, it was similar year-on-year in the online sales, thanks to the online increases.

Very dynamic increases have been also recorded in the countries where we opened our logistics center, fulfillment centers for online stores. So in Romania, Slovakia, the Czech Republic in those regions, we are able to very quickly, even next business day delivery, we are able to deliver the goods to our customers. And this, in turn, has great effects on online revenues.

Let's have a look at the overall sales. We can see the dramatic drop in the first quarter. The second quarter has picked up, but it's still lower year-on-year. You can see this yellow mark here. This part from online sales, 33% online sales in the first quarter in total and 25% in the second quarter, significant increases here. The omnichannel sales is shown in the chart on the right. You can see that Sinsay has been picking up in sales the most. House is the only brand has most sales in Poland, but other brands, the biggest share is from abroad.

Let's move on to profit margin. Of course, because it was hit by COVID in the second quarter, the difference in the gross profit margin was almost 2 percentage points in comparison to the previous year. The drop resulted from the unfavorable foreign exchange. You can see this in this chart on the right. Last year, we were buying the spring/summer collections, and we paid PLN 3.80 per dollar on average. This year, the FX for the spring/summer collection was PLN 3.94, so 4% more year-on-year, which resulted in turn in the drop in gross profit margins.

The second element, not as significant for our profit margins, were these promotionals and reductions despite the fact that we entered the period of sales with some worries whether we can actually sell the spring collections and summer collections. It turned out that demand was higher than we initially planned. The company was successful in placing the new collections on the market. And interestingly, for the first time, we applied a different pricing policy for online and offline channels for the promotional period.

In regular sales, the prices are the same. And then, when we have the sales offers in the June and July sales, we decided to differentiate that between online and off-line. So not as many promotions in online channel in comparison to traditional stores. There, we have more favorable offers for the customers that we can more effectively manage the collection and have a control on profitability of the online channel.

Before we move on to the costs, this is a complicated slide that I wanted nevertheless to show you about rentals. Rental is the biggest cost item in our OpEx. And the renegotiations I mentioned that we have been taking part and the act of the Polish government that during lockdown the lessors don't have to pay rents caused significant changes in the profit and loss accounts on the cost side.

Let me just briefly comment on that. It's not an easy issue. Our rentals, in our case, LPP, half of them are the rentals under IFRS 16, and the other half are not under this. As a percent from the turnover, some of them, we do not pay if we don't have any turnover. This is the simple situation. In this case where there is a rental which is not under IFRS 16. If there is a discount or as in the case of Polish government, there is an act saying that we do not have to pay rent. The rent is lower or none. In this case, on the OpEx side, we have lower costs. Simple as that.

The situation becomes complicated when it comes to the rentals under IFRS 16. It's similar to financial leasing. If we sign a contract, which provides, for example, that every month, we need to pay EUR 20 per meter, it is a 5-year contract, we have to calculate how much we will be paying in a given period. During the 5-year period, if we have, in total, let me give you an example, EUR 2 million, we need to calculate these EUR 2 million discounts to the worth of money today and the assets and the liability is worth EUR 1.9 million.

The same on the asset side, if we have this kind of liability, we need to create the asset, which is called right-of-use asset, right-of-use of the floorspace and it's worth the same as liability, EUR 1.9 million.

What happens over time? When we pay what we need to pay. On the other part, we have amortization of the assets, and some of the liabilities appear on the part of the cost as interest. So similar or the same as in financial leasing. There is amortization, right-of-use of the premises. And then on the other side, we have interest on this financial liability.

When should the asset be decreased? When there is legal basis for that. This legal basis is an annex which gives us the rights, on the one hand, to decrease the liabilities in the future and on the other hand, to balance the decrease in the value of asset.

What happens if the annex has not been provided in time, and we -- the situation actually occurred to us. The renegotiations with landlords with only of shopping malls were prolonged. So not all the annex were received on the balance sheet date. We do not have the legal basis to decrease the asset. So the amortization is the same as before, but the market realities tell us that we either give -- get this discount because we have renegotiated that or as in the case of our country, there is this rental decrease following from the act. Because we cannot decrease the assets, the discount or the lack of rentals have been put on the revenue side in the balance sheet. Because we're talking about financial leasing de facto. We did not decrease the amortization. We did not decrease -- we did not increase the operating profit, but the discounts were recorded as a profit on revenues.

That happened in our situation. The prolonged renegotiations caused that the annex -- annexes have not been received in time. About 300 of them are still underway or still being drafted by lawyers. So we were not able to properly value the assets in terms of on IFRS 16 in the new conditions.

Ernst & Young, our auditing company decided to include the disclaimer that the opinion in the half year is without correcting and adjusting the assets in terms of rental because we didn't receive the annexes in time. Of course, we're doing what we can to obtain the annexes. We believe that in the second half, everything will be made right, but we haven't done it in the first half. Therefore, we haven't estimated in the proper way.

On the right-hand side, you can see the note that the estimated lacking amount of the right-of-use asset comes at circa PLN 110 million. We think in this way, the company renegotiated lower rents. So if the rents are lower, it means lower liabilities and lower assets.

Why are we writing about the assets that should be higher? Common sense tells us about this situation -- tells us that the asset will be lower, but the negotiations, ladies and gentlemen, meant that we had to give something in return. In many cases, when we decreased the rental for the lockdown period or COVID period, we returned, gave the landlord the possibility to prolong the period, the term of the contract. So on the one hand side, we have the decrease in the price of rentals and then prolonging contracts on the other hand side.

So overall, some of the -- in some of the contracts, the asset increases. We also had a situation that some of the contracts, which were not under IFRS 16 started to be included in that. That was in a situation where we had, for example, turnover rentals, and we wanted to negotiate lower turnover rental. Landlord said, "Yes. Okay. But in return, I need minimum rate. Will be percent on turnover, but not less than EUR 5 per meter.", for instance. So when you have that fixed rental clause in the contract, automatically, this contract is under IFRS 16. So we had several contracts like that.

So far, it had not been IFRS 16, but now they are under this. So several new contracts appeared as the one that we have to evaluate and the asset appears. So in our case, the renegotiations led to the situation that there will be higher assets in IFRS 16.

Was it necessary for us to do this in recognition of this asset? Yes, it was necessary to maintain the market commercial realities. We know that we have been negotiating successfully. We cannot say that nothing has been happening. So let's include this in the accounting when we get the annexes. That's why we decided in order to maintain adequacy what we gain in trading in this reality, so we had to simply recognize its revenues, as I explained.

Let's move on now to costs. On the left-hand side, you can see cost of own stores. The last quarters, first and second quarter of this year, a significant decrease in the cost from the 200 square meters in 2019 to about 100 -- almost 150 in the first quarter. It's in rental in personnel cost decrease and also other costs.

Rental, we explained this because of the renegotiation and abolition of rentals in Poland. Also lower turnover, so the rents were lower.

Personnel, HR costs. During the lockdown, our employees had to start working for some time and salary reductions appear. They also got subsidies for their salaries, and we recognize this in other operating revenues. Other, electricity usage materials in stores during the lockdown or the turnover was lower, it was also as a result, lower.

On the right-hand side, you can see the SG&A costs, so logistics, e-commerce and headquarter costs and they also are lower year-on-year by 11%. On the one hand, the lower cost of the stores and the increasing cost of online. So overall, the cost per square meter decreases.

Let's have a look at what we see in the second quarter, May, June and July, let me remind you. So the revenues less by 9%, margin by almost 2 percentage points. SG&A costs similar level to the previous year. Amortization of this part of cost of rentals under IFRS 16 is quite high. Without that, the rentals would be lower. So as I said, these discounts and that we have not received annexes yet. They have been recognized as profits on the financial side. Operating profit, PLN 32 million per second quarter, significantly lower than we observed last year, 80% lower.

Before I move on lower, let me just remind you 2 important elements. In other operating profit, we have subsidies for salaries, almost PLN 50 million but also writes for German stores, almost PLN 40 million. These are the other operating costs. So therefore, the operating profit is PLN 32 million.

We also had a positive FX differences because of the positive differences gains from IFRS 16. There is an additional element, a reversal of the tax assets in Germany. We don't know if we can use these tax reliefs in the future. Therefore, we are rising the we're including the write-offs, so higher taxes, paper not cash, PLN 30 million loss here and the last year, it was actually PLN 31.9 million plus.

Results for the first half, heavily impacted by the loss of the first quarter. So 20% loss in revenues, but the operating loss is PLN 228 million in the minus.

Let me give you a few words about inventory. Last quarter's conference, we mentioned that we were worried that we will have a lot of items unsold. It didn't happen fortunately. Inventory are at lower level, if you can take a look, PLN 1,600,000,000. Per square meter, it's PLN 1,200. So in last -- in previous quarters, the inventory per square meters was PLN 1,500, PLN 1,600. And that was because great online sales results. We had better-than-expected sales after the lockdown was lifted. So in traditional stores, we also recorded good sales. We moved some orders from the spring collection to autumn. Some elements of the spring collections were moved to autumn. We had better inventory management. So there is no risk of a lot of goods unsold remaining.

On the right, you can see in the chart, the working capital. Before the quarter, I told you during the conference that it will probably the situation now we will see the positive working capital. So the inventory will be maintained on a higher level. We were worried that we would not sell it and the liabilities would be lower than inventory.

Actually, the reverse happened, we are very pleased with that. On the one hand, we managed the inventory better. But on the other hand, we also made agreement with 2 banks, which finance our -- HSBC and Santander banks. And because of this good cooperation, we could prolong the liabilities for another half year. Therefore, we can see that trade liabilities are high and negative working capital. So we have financial security, and we generated cash on this working capital. And that, in turn, allowed us to shorten the cash cycle to minus 25 days.

On the next slide, you can see the left-hand side chart, the net debt over PLN 700 million is very similar to what we experienced before COVID. So the company has cash securities. We have been maintaining the safe balance sheet, and we need to -- we want to maintain the safety in the following quarters, showing that we are prepared for the second wave of the pandemic and there is cash on the balance sheet. On the other hand, after the lockdown, when we noticed that the sales results were better than we estimated when the online increases have been recorded, we decided we need to pick up in terms of development, more investment in the second quarter, more planned investment in the second half. So CapEx for this year will be higher. I will mention that in a moment. For the first half, we have invested PLN 350 million in stores and infrastructure.

Summing up, on the second quarter, we can say that there is better rebound in revenues, consumer demand after lockdown. We are very pleased with those results after the reopening of traditional stores. Despite the reopenings of traditional stores, online has been performing well, 3 triple-digit growth in e-commerce. The costs are under control. They are low level. We have been generating cash from the working capital, and it's safe on the balance sheet to ensure financial security.

Let us move on to the second part of our presentation, key corporate events. So finalization of negotiations with landlords. The restructuring of the German company, more action in terms of sustainability and generally understood CSR, and some decisions that were taken during the AGM.

Renegotiations of rentals, it was very long, very hard rental negotiations from May until August. And right now, the annexes have been actually -- have been received by us. It's been success because we managed lower the rentals. We are bound by trade secrecy. I cannot give you the exact number, but our main goal, changing base rentals to turnover rentals was half done. What we actually managed to achieve is like the changing in terms of term of contracts for the COVID period. Thanks to these discounts, our profitability is safer, and we can adopt a more positive outlook for the future and development of our company. Of course, there was some cost from 800 -- from 680 contracts renegotiated, only, in Poland, 14 stores were lost. So that was the cost of the negotiations.

The second important area of restructuring or changes in the company related to COVID-19 is the restructuring in Germany. From June to September, we were renegotiating with German landlords. It's been successful of -- success of our German head who renegotiated with 11 landlords, owners of the stores in Germany. During the 3 months, we managed to renegotiate and achieve better terms of rentals. On the one hand, the lower, much lower rental prices. On the other hand, we had to make our contracts more flexible if the landlords find somebody interested to take over the premises that we have and someone who offers better financial terms, we would have to, of course, leave the premises. At the moment, we've been operating in the 9 -- 19 stores that were operational before the pandemic.

Taking into account considerable losses, PLN 80 million in terms of losses in German company, we believe that well, not this year, but the coming year, if the situation becomes under control, we will be able to reach breakeven. So we would ask if we are close to breakeven, why are we making the write-offs of the German company? The reason is that we are not sure. We are uncertain whether this would be breakeven for the stores. The profitability of the German company will be achieved, thanks to online business. So profitability of the German business will mean off-line and online together. In our case, we believe that the stores will report small losses, but the breakeven can be achieved, thanks to online sales. That's why we believe that this can be profitable, but at the same time, we are making the write-offs for the stores and the tax assets.

At the same time, as we announced before, the initial financial results for the second quarter. We were talking about a PLN 135 million write-offs. The reality was milder, so PLN 38 million write-offs. If we close the German company, we would have to pay for bank guarantees and the mother company, LPP, Poland, had some guaranteed issues for German landlords to high amounts. So the liquidation of the German company would generate higher costs.

Fortunately, we have been successful in terms of negotiations in Germany. The German business have been back to operational state. Of course, maybe there will be some COVID restrictions, but in the long term, this business, we hope, will be even profitable for us.

Let me give you some actions here in terms of CSR. First and foremost, we have been -- become signatory to Zero Discharge of Hazardous Chemicals Initiative. We joined this huge worldwide initiative, gathering companies from our industry, factories and producers of chemicals and producers of textile dyes. What we want here, by being the signatory, we need to learn what types of chemicals to use in the textile industry to have the least possible burden on the environment and to ensure healthy environment to the workers.

Another significant element is joining the Polish Plastic Pact. Last year, we joined the Global Association which under the auspices of the UN has been operating towards decreasing the amount of plastics in the economy. In terms of the Polish association, the companies, which -- and they're good in the market using plastic packaging, the companies which utilize these plastic packaging. They need to make -- come into an agreement and create a circular economy of sorts. We only need to use plastics, which is recyclable. The packaging should be recyclable, and the recycling companies should be able to deal with the waste management properly. So as to have the least possible burden on the planet.

Another issue, another important issue, the Annual General Meeting decisions. 2 important decisions were made. On the one hand, there is the agreement of the AGM for buyback. It was a controversial issue. On the one hand, this date when we published the resolution, how can you buy -- do the buyback during COVID times?

Let's take a different perspective on that. On the one hand, it's a good opportunity to approve such a resolution. Another opportunity will be the coming year. On the other hand, we asked for a 5-year plan. That gives us a lot of flexibility as a Management Board, how to reward our shareholders. Usually, we have dividend option. Now we want a second option of buyback. We are not sure if we will use it, when and how it will be used, but we want to have it open for the next 5 years.

The second decision is about dividend. This year, because of the cover situation and financial security and the willingness to maintain the high liquidity of the company, we announced that the Management Board will ask the Supervisory Board, and the Supervisory Board consented to no dividend payout this year, but we are planning to return to paying dividends from 2021 year. This form of rewarding shareholders is very much valued by us. We want to continue on that.

Let's move on, ladies and gentlemen, to the third stage of our presentation, the plans for this 2020 and the next plans for the 2021. Before we -- before I start to talk about numbers, Magda will give you a few words about the latest trends in fashion.

[Magdalena Kopaczewska, executive]

In our business, trends are very important. And what is more important is to adapt to these changing trends. As Przemyslaw mentioned, the pandemic change the way in which we buy clothing. Also the pandemic changed the items that the customers actually buy. Fashion does not exist separately from what happens within the society or from macroeconomic realities. Therefore, importantly, there is no one trend right now. This trend is multilayered. We can observe that this comfort, ethics ecology and classics. And fourth, we observe that on the one hand, the premium models are very much valued by the customers. But on the other hand, the lower-priced items.

When it comes to comfort, the trend, which is particularly successful now is the homewear -- Home hub clothing, and knits are very popular, it's quite a strong trend. Jersey has been recording good results. Since the beginning of the season saw the sweat shirts, sweat pants and niche sets so well, all the jackets, the knit jackets, which before the COVID pandemic had not enjoyed the popularity.

Today, it is helpful. The athleisure trend that combines the clothing of the sporting nature with everyday casual pieces. The omnipresence sneakerization is also visible. We attempt to choose casual sports footwear for our everyday situations because of the comfort, and nobody is surprised today if you have the dress and sneaker outfit.

We also observe and we confirm that shirt and formal clothing have not been very much popular today, and this results from the fact that there are less formal occasions because of the situation. We tend to work remotely. Formal outings and formal meetings are on the decrease, even family meetings are on the decrease, so the dress code in the office has also changed. It's not like in the '80s where Wall Street fashion were uncomfortable has sets and suits were omnipresent. We can say that it's not only casual Friday, but all days are casual. We confirm that, and we observed that this sells well.

When it comes to eco and premium trends, we observed that the premium collections and sustainable fashion at the same time. We observed that the customers reach for this elegance in this more expensive better version. And there are more and more very conscious customers. 15% of customers declare that they are motivated by ecological factors when they select clothes to buy. So life after plastic era and the generations -- the Gen Z that pay a lot of attention to ecology.

Also, there's classics trend, which results from the fact that the biggest fashion houses in the world like Gucci, Burberry. They did not divide the fashion calendar into 4 parts. They introduced 2 parts, which will -- which have and will truly affect the future collections, which will be more ordered, well-thought-out. And I believe that this -- that retailers will follow on this trend.

Another important thing is the trend resulting from the fact that the seasons are blurred, and there is no seasonality visible. This will translate into fashion and the pieces designed will be more of universal nature.

As I mentioned before, in our business, it's important to adapt to the trends emerging because then you have the financial success and our designers, buyers, they have been observing the trends regularly. Of course, they do not have so many trips to the fashion capitals. Everything has moved online and the fashion weeks, everything has moved online, and it's easier to follow the trends and to adapt to them. That's all from me. Thank you.

[Przemyslaw Lutkiewicz, executive]

Ladies and gentlemen, as you heard, we noticed the trends we adapt to these trends. And therefore, our collections have been gaining more and more popularity with customers.

Let's move on to the next slide. We have some numbers here and plans of growth acceleration in 2020. Let me remind you that initially, we planned 8% increase in floorspace this year. We have been speeding up to 11%. We are encouraged by the good sales post-lockdown. And the investment in store -- stationary stores, still good sales results in smaller cities, especially outside Poland, I think of Russia and Romania here and Ukraine. These are still good markets to develop these traditional stores. Of course, e-commerce has been developed. But thinking of the future, we are undoubtedly thinking of omnichannel development, so off-line and online taken together.

This year, 11% increase in floorspace. The planned CapEx for this year will be increased to PLN 730 million and PLN 500 million will be for the stores. The development will come from outside Poland. What would be online sales? As you heard, billion sales in the first half, we are hoping to repeat that result in the second half. So the target is over PLN 2 billion in online sales.

What is the most important omnichannel? We see the future of trades in this. You can see that 160 stores already send the goods to the online store customers, thanks to RFiD technology. We want to spread the technology, include other brands in that. On the other hand, it will -- German markets showed us the fact that stationary store chain supports the online network and vice versa. In Germany, we saw that the online sale has -- was increasing in the cities where there was -- where there were some stationary stores. The customer who sees the stores, the logo is more willing to buy online.

In another situation, if the customer sees something online, comes to the stationary store, and there, makes this purchase decision. Even item is missing from the store offer, we are able to order the item from the store with the delivery to the customer's home. So both channels intertwine, and we have been investing a lot in these omnichannel solutions.

Let me tell you a bit about investments. Here in the slide, you can see the plans, investment plans for the coming 2 years. They are, of course, burdened with uncertainty because we are not sure what the second wave of COVID-19 pandemic will look like, what the world will be functioning, but you -- still, you have to make some plans, and we want them to be as flexible as possible. It will be difficult to slow down this year's investments because we have already agreed on some terms and contracts have been signed. But over the next years, we have a lot of flexibility.

Looking from today's perspective, we would like to increase investment outlays for the stationary stores for the coming 2 years. In the region, I mentioned in Russia, Ukraine and Romania, at the same time, investing in headquarters in Gdansk. You probably will say, "Hey, in COVID times where most people work remotely, is this an exaggeration?" We believe, ladies and gentlemen, that when people are in one single fashion lab, as we call it, in one place. Therefore, we decided to construct more buildings in Gdansk. In 5 locations in Gdansk, now, the communication is not so easy, so we want to optimize the cost and resign from leases in Gdansk.

Our industry requires close work we need to see, touch the fact -- the fabrics. Not everything can be done online. Therefore, we are thinking about developing the office infrastructure.

Another important element, logistics. Here and some investments are planned, not as huge, as we mentioned last time. In Brzesc Kujawski, there was supposed to be PLN 800 million, then PLN 600 million. We revised our investment plans here, mainly because COVID pandemic came, and it of course, changed our estimates. Initially, we wanted to build automated center in Brzesc Kujawski for reserve. Now we know that we have to change the plan. It will be mainly for Sinsay brand. And different types of machinery and solutions, logistics solutions will be introduced there. Therefore, the budget for that logistics center will close in PLN 200 million.

Overall, over PLN 1 billion of CapEx for the coming year and almost EUR 1 billion for the next year. And please note that these plans may be verified if the situation with COVID-19 pandemic will change unfavorably.

Summing up the goals for 2020/2021. We are planning to have a fall -- revenue fall not exceeding 15%. And gross margin to stay within 47%, 49%. We want EBIT above 0, and we will be maintaining a safe liquidity position.

The challenges, of course, are related to the COVID-19 and restrictions on trade. We are not sure what the second wave of infections will bring, so there is huge uncertainty. We don't know how the customers' behavior will look like, and some foreign exchange fluctuations, weak rubles and strong U.S. dollar and euro. Our opportunities are, of course, the successful collections and further development of e-commerce and omnichannel and using the latest technologies like the RFiD or electronic tag for this omnichannel growth.

The key targets for us as a company for the coming year. First and foremost, we want to continue double-digit floorspace growth in the countries I mentioned. Further dynamic online sales growth is another goal, RFiD implementation at other brands and further investments in logistics and technology. At the same time, we want to have a conservative management of our finances, maintaining good liquidity. Of course, we are -- we don't know how the consumer will behave, what the market realities will be like, what the government official will decide in terms of covered situation. So we need to keep some flexibility. We are a flexible company, and we adapt to the market changes fast.

That's all on our part, ladies and gentlemen. Thank you for your attention. It was a long, almost 1-hour presentation. So if you want to ask us some questions you want.

[Magdalena Kopaczewska, executive]

Some questions already here. What was the EBIT online channel profitability in the second quarter?

[Przemyslaw Lutkiewicz, executive]

It was several percent. I cannot give you precise numbers.

[Magdalena Kopaczewska, executive]

What rate of increase in floorspace further after 2020, which directions will increase?

[Przemyslaw Lutkiewicz, executive]

As we announced, we are thinking of the double-digit increase in 2021, maybe 2022, so 11%, 12% of increase in floorspace, especially on the markets which have not been saturated yet with our stores. And the results are promising. So the youngest brands are able to build their stores in Russia and Ukraine in Romania and also in the Southern Balkan countries, Croatia, Serbia, Bosnia and Herzegovina.

[Magdalena Kopaczewska, executive]

What about the weather conditions? How they affect the autumn/winter collection sales? Is the traffic stationary stores in September lower year-on-year because of COVID?

[Przemyslaw Lutkiewicz, executive]

It depends which regions of Europe you're asking about, we observe that the weather does affect the sales results. On the basis of the recent data, we see that the beginning of September was a good month. There was positive sales dynamic year-on-year. The second part of September, we had negative dynamics. It was warm, the customers decided to simply spend their time going for walks rather than shopping. Beginning of October is good, but now we are entering significant COVID situation.

[Magdalena Kopaczewska, executive]

Because of the finalized negotiations on the German markets, do you believe that this market will be profitable in terms of EBIT in 2021?

[Przemyslaw Lutkiewicz, executive]

Yes, we are hoping that the business will prove profitable. Even given delicate drop in sales in the coming years, so with negative like-for-like, we can be on the plus side. This year will COVID cause considerable losses in the first half, but we are hoping for 2021 and further years.

[Magdalena Kopaczewska, executive]

Like-for-like is supposed to be very careful, as follows from the guidance. What about the latest sales trend?

[Przemyslaw Lutkiewicz, executive]

As we've seen in the recent interim sounded quite positive. Yes, we have enjoyed some positive like-for-likes in August, in September, there were slight drops in October. We don't know what [October] the will bring. On the one hand, we will -- we hope for the retail trade harvest as such. We are worried about the COVID and restrictions. So it's very difficult to say. We are prepared for increases of our online sales.

From the logistics side, we are correctly scaled. And it's -- the biggest problem might be with the stationary stores, whether the customers will come, what they will buy. These are the major issues that we are thinking about. Future will show its high fluctuation on the market. Optimistically, we started the year with positive hopes then we experienced the lockdown. This year started bad, and it probably will end bad. Given the COVID infections, we're not so optimistic in terms of 2020, but we're hoping for more normality in the coming years.

[Magdalena Kopaczewska, executive]

CapEx. CapEx is returning to the pandemic levels. How much you can adapt it if the COVID situation turns bad?

[Przemyslaw Lutkiewicz, executive]

This year, this is not possible. PLN 730 million will be spent according to the plan I showed you. In the coming years, we are flexible in terms of building office offices, new warehouse or also in terms of stores, we are not committed yet, we can change it downwards.

[Magdalena Kopaczewska, executive]

The second question about CapEx. Still, you have been focusing on investments in store. This is against global trends because the global trends provide for closing stationary stores. Can you comment on your decisions?

[Przemyslaw Lutkiewicz, executive]

These decisions result from very good results of sales in smaller cities. And in the Eastern Europe countries, we see that the demand for traditional store chains is high. People in smaller cities, they are more willing to buy in traditional stores rather than online.

So knowing that, of course, we see the trends in the Western Europe that it migrates to online. But in our part of Europe, still we are -- we believe that 3 to 5 more years, we believe to have like very good traditional sales results to invest in this industry.

We're talking about omnichannel all the time. We see that even huge omnichannel chains, they start to either open stationary stores or they take over the stationary store chains. So a proper approach to stationary stores and investment in proper technology or investment in the store setup. What they actually do, they have to work as a kind of help for the online channel. Of course, we will treat it selectively. We will focus on good rental terms. And in this way, these stationary stores in combination with online stores may be profitable still.

[Magdalena Kopaczewska, executive]

German markets question. Are you expecting good rental terms in the newly opened stores? Is development expected in Germany?

[Przemyslaw Lutkiewicz, executive]

No, we're not thinking about that. We have to wait for the next year, we can we have to see if we reach breakeven. If we do, if everything develops according to plan, we will then think about development on the German market. But to be honest, we prefer to focus on Eastern Europe. The decisions about German market are ahead, but we are not planning here.

[Magdalena Kopaczewska, executive]

What are the cost of transport of goods for LPP in e-commerce compared with the standard model? Are there any differences?

[Przemyslaw Lutkiewicz, executive]

Of course, there are differences, and it depends on the distance and the scale of business. When we transport clothes to stationary stores, there is the effect of scale we have been doing it for many years, and we have very good transportation terms negotiated, but this is why we are building logistics centers or fulfillment centers in Romania, in Slovakia. The reason is to be closer to the customer to decrease the cost of transport. At the same time, to use local transport companies, which are cheaper than the international ones. So we are fighting for lower rentals in the last mile of delivery to the final customer.

Still, the deliveries to online customers are more expensive. But recently, we have been introducing so many changes in the logistics that the cost dropped by several percent. So they are lower and lower.

[Magdalena Kopaczewska, executive]

Another question, it's about CapEx again. Shouldn't it be mainly focused on building the fulfillment center to go towards 1, 2 days delivery online. If this affects the increase in online sales?

[Przemyslaw Lutkiewicz, executive]

Yes, we will be investing in fulfillment centers. But ladies and gentlemen, we are not putting CapEx. We rent the building and the operator which services the shipments and everything. There is no CapEx here, but we are planning to develop the fulfillment centers. It's a natural good and strategy of development. So we will be continuing that, but the costs are on OpEx rather than CapEx side.

[Magdalena Kopaczewska, executive]

How are you assessing the risks for courier companies in the peak in the fourth quarter?

[Przemyslaw Lutkiewicz, executive]

The rates for couriers are -- we haven't noticed any increase in costs yet. We have this effect of scale, and so this helped us to keep the cost at lower level. Are we afraid of late shipments and so on? Yes, we are afraid that given the development of e-commerce. It might -- and it will occur. By choosing the courier companies, we pay attention to how -- to what capacities they offer. We want our customer to be able to get the goods quickly. With fulfillment centers in local markets, this allows us to ensure fast deliveries and also in the coming quarters, we believe this will remain so.

[Magdalena Kopaczewska, executive]

What was the share of returns in online stores in the second quarter in comparison to previous quarters and the proportion of returns in stationary stores in the previous months?

[Przemyslaw Lutkiewicz, executive]

We have good news here because along with the increase in online sales, we do not notice any increase in the share of returns. It is maintained on the similar 25% level. Volumes are increasing because the sales volume increased. So of course, the returns as well, but the percentage share remains at a similar level.

Stores also help us. They accept the returns from online purchases, 1/3 of the returns are handled by the stores.

[Magdalena Kopaczewska, executive]

How much of the -- how many of the 460 renegotiated contract will end in agreement, and how many in breaking the contracts?

[Przemyslaw Lutkiewicz, executive]

Negotiations are over. 14 contracts were terminated out of almost 700 overall. It's a big success of negotiations.

[Magdalena Kopaczewska, executive]

What's your strategy for coming back to negotiations with landlords in terms of next year's rents? The evolution of the pandemic rather indicates that the traffic in the first half of the coming year will be under pressure.

[Przemyslaw Lutkiewicz, executive]

Ladies and gentlemen, our approach was that because the traffic will be lower, the sales will be lower. We need to sit and negotiate -- renegotiate our contracts so that they are more flexible for us.

This flexibility still exists. If the situation, the epidemiological situation is worse and the traffic is much less, we can come back to the negotiation table and resume the talks.

We have learned a lot. Both parties have learned a lot during the first part of the COVID epidemic. I wouldn't say it's a huge flexibility, but both parties understand the situations, and we are still able to talk.

[Magdalena Kopaczewska, executive]

About margin. Please comment on the estimated in the 2020 gross profit margin after the data for the first half. Maintaining this margin implicates on the drop of the margin in the further quarters. After 3 quarters, do you take it into account given the good sales?

[Przemyslaw Lutkiewicz, executive]

The collections for autumn and winter were purchased at a similar foreign exchange dollar rate, PLN 3.85. So it's comparable foreign exchange rate. So the margins should be comparable. But given that the e-commerce share is increasing with lower margins. And the development of younger, cheaper brands, which do take into account that year-on-year in the second half, they can -- the margins can be lower by 1% or 2%.

[Magdalena Kopaczewska, executive]

Where do you observe more impulse purchases in online or off-line channel?

Let me comment maybe. Right now, we see in the stationary stores less impulse shopping. Of course, this depends on where the stores are located, whether we talk about large cities or smaller cities. In smaller cities, there are more impulse shopping, but the trend is observed in off-line channel to be on the decrease. The customer comes to the stores rather well prepared, often with a particular item in mind and makes the purchase.

When it comes to online channel, we see that it's a trend already today that like in the past, where you went to the shopping mall, here you do kind of the same thing by visiting your online store. So the customer needs to be encouraged to purchase online. But whether they are impulse shopping, it's very hard to say.

Another question please update on the market environment. For Sinsay, apart from Pepco formats, who is the direct competitor for Sinsay?

[Przemyslaw Lutkiewicz, executive]

In this value for money format, the cheapest brand, of course, we see a huge competition on the part of German brands like [indiscernible]. They also enter the market very aggressively.

[Magdalena Kopaczewska, executive]

Is it possible to get profitability in U.K. with only one stationary store and e-commerce?

[Przemyslaw Lutkiewicz, executive]

At the moment, I believe that profitability on the U.K. market is not possible. We have recorded considerable drops in stationary stores. In online, it has not reached this critical mass to give us good delivery costs. So it will not be profitable as of today.

[Magdalena Kopaczewska, executive]

You mentioned you did a lot in terms of logistics costs. Can you elaborate on it?

[Przemyslaw Lutkiewicz, executive]

Logistics is further automation. So we have been automating the stationary store services. The fact that we have been developing the logistics network for fulfillment centers, it decreases the cost.

On the one hand, delivering the goods from the warehouses for e-commerce, it's not cheap, creating several local or placing fulfillment centers in several countries considerably decreases the cost. I remember that the very transfer of fulfillment center to Romania gave us 15%, 20% of decrease in logistics costs on deliveries to the customers in that region.

[Magdalena Kopaczewska, executive]

What will be your policy in terms of stocking the stores for the SS collection? Are you expecting a reduction of orders?

[Przemyslaw Lutkiewicz, executive]

Making orders right now for the SS collection 2021, we are trying for the stores to be as stocked as in the previous year in 2019. In general, we are planning to go back to the normal indicators in this respect. Will the situation will actually be and whether we will have to cut the orders, it's hard to say now. It has been 2 or 3 days of such a huge increase in infections. So for the time being, we are hoping that after the second wave of infections, will like slow down and the deliveries and all the indicators will be reflected from last year.

[Magdalena Kopaczewska, executive]

It seems that it was the last question for today. Please remember that if you do have any additional questions, you can contact us and send them via e-mail. Thank you very much for attending our conference.

[Przemyslaw Lutkiewicz, executive]

Thank you, ladies and gentlemen, stay healthy, and we will meet again online or offline in December. We encourage you to take part in the conference. All the best. Thank you very much for your attention, ladies and gentlemen.