LPP SA

WSE:LPP

Earnings Call Transcript 2020-Q3

[Magdalena Kopaczewska, executive]

Welcome, ladies and gentlemen. Magdalena Kopaczewska, Investor Relations of LPP; and Przemyslaw Lutkiewicz, Vice President of the Management Board of LPP, we would like to welcome you to our video conference devoted to the results and events in the third quarter. We will discuss today the results for this quarter, and we will tell you something about how we adapt to the changing world, the COVID and post-COVID reality. We will also discuss the challenges we are facing in the industry, and the second part will be devoted as usual to a Q&A session. [Operator Instructions]

That's the agenda for today. Now Przemek, you have the floor.

[Przemyslaw Lutkiewicz, executive]

Welcome, ladies and gentlemen. The results for the third quarter of 2020, let me just remind you that it's the shifted fiscal year. The third quarter covers the period from August to October.

Let's move on to the results. At the end of the quarter, at the end of October, we had 1,800 stores in 25 countries. We had plus 13% on floor space. But because of the lockdown, the sales results were worse, over 30% in like-for-like on the minus. The online sales has been developing very well, 110% on the plus side. We are present on the 29 countries with online sale. Despite this dynamic, this online store is still not enough to cover the lost sales in off-line. So overall, we have minus 11.4% in group revenues.

Let me just remind you of this schedule, the 2020 COVID reality and its impacts. Let me just remind you that the first quarter was the most difficult for us because we had the first lockdown in Poland. From the 13th of March, we didn't know what to expect. We didn't know how long it will last and what will be the customer behaviors afterwards. So the most uncertainty was in the springtime. The first lockdowns announced, we didn't know how long they would last, whether a month or 3 months. Now at least, we know that if any government announces lockdown, we already know when it will finish. So this makes it easier for us to manage the stores.

The first quarter was very difficult. We had reported some losses in the operational level and net level as well. Later on in the second quarter was better. We had the stores reopened, and we made the decisions in the spring to lower the stocking for the second part of the year so that the autumn/winter collection was on lower levels because we didn't know what kind of demand we can expect and whether the stores will be open.

So the summer months were quite all right, and the third quarter started very well because these months, August, September, October, are usually very good. But at the end of October, in some countries, a lockdown was again reintroduced. Poland also joined in the red zone. And in the November month was the red zone and lockdown. Now the Lithuania and some more countries already announced the lockdowns. Here in Poland after Christmas, the stores will be closed again. So a lot is going on. This fiscal year finishes in January. So the January sales will be mostly done online, but we believe that the coming year 2021 will be considerably better.

Let's have a look on the map here. Let me just remind you, the green color, we have online and off-line sales there. On the blue color marks the online stores only and gray ones only off-line network. Belarus has changed. We have one more store from the franchise model to own store model. We opened our company there. At the end of the quarter, there is one store. But in the fourth quarter, we have more openings. So we will continue to open stores there. Israel is another change. We have online store there. So the color changed here from gray to green.

On the left, you can see the chart which shows the number of stores, almost 40 on the plus side and in Poland, minus 42, so over 80 stores more abroad. We will discuss the development abroad in the other part of the conference. We had 94% of stores open as of the end of the October.

And let me remind you that we are operating in the shifted fiscal year. For the fourth quarter we are in now covers the month of November, December and January. And the one we are discussing now closed at the end of October.

Like-for-likes now, let's have a look on the chart on the left. Considerable drops in the first and second quarter, minus 57% and 36%. The third quarter wasn't that bad, minus 8.3% only. The chart on the left shows like-for-likes for all stores. If there's a lockdown, of course, we have considerably worse situation. On the right, we show what it looks like in terms of open stores. So we exclude the lockdown store. So as you can see in the summer periods, July and August, we had some pickups and then falls of 11%.

So the shopping model changes, and a lot has been moved to Internet. We see considerable like-for-like drops in London stores. For example, there are no tourists or when we consider the German market. On the Eastern market, the situation is better in Russia. All the months of the third quarter reported positive like-for-likes.

What else we can see here? Bigger and smaller city differences are visible. In bigger cities, people prefer to buy online. And in smaller cities, the trade is going on in the traditional network. So our strategy, I will discuss more in a moment, for the coming years is mostly directed to Eastern Europe and smaller cities.

Let's move on to e-commerce. You can see here the considerable dynamics. On the left, from quarter-to-quarter, we see the pickup in the online sales. And on the right, on the chart, you can see the division in the third quarter in the geographic segment. So green, we have the Poland here, then Europe in yellow without Poland and CIS countries in this dark blue color. So as you can see, all the segments, all the countries reported some increases. Eastern market reports most considerable pickups. Now in Ukraine and Russia are developing dynamically. And what we can see in terms of the population potential, this darker part on the chart should be even more here. So we see considerable potential of development there.

Overall, e-commerce in the third quarter constituted about 18% of the whole group revenues. Poland is below half. So Poland was 47% of online growth. It's worth mentioning definitely that we have been observing the worldwide tendency that most of the shopping, almost 70% of shopping is done via mobile devices, and mobile devices account for 80% of our entries on our websites. When we started to develop our e-commerce, we wanted all the possibilities to present the goods and do shopping. We wanted these to be adapted to mobile devices. This is the overall trend.

Now we have revenues by regions, Poland, Europe, CIS and Middle East. As you can see on the left, Poland, it actually hasn't changed year-on-year, but we see very nice positive developments in the CIS countries. And Europe and Kazakhstan, Belarus, we see the pluses here.

On the right, we see the floorspace by regions corresponding to the particular regions. You can see that in Poland, the pickup is the lowest, it's 3%. And the biggest is in the Europe and CIS regions. We see this difference between very good floorspace development in Eastern Europe and sales results, but this difference results from later reopening of stores. And hryvnia and ruble foreign exchange was lower.

Let's have a look at growth overall. So we have some quite a good result. We have online growth and growth in floorspace. So the result is on the pickup year-on-year, 5%. You can see particular brands. We see that Sinsay has reported some increases, and we have floorspace developments there as well. Reserved, Cropp and House, we see some drops and the most considerable in Mohito brand because Mohito offers very formal collections. Today, people mostly work from home. So the demand of different casual -- more casual type of collections is reported. So Mohito, in this period, reports the biggest drops and the worst sales results. But we are hoping that next year if the situation improves, COVID will go away, hopefully, people will come back to the offices. We are hoping for the development on the positive side here as well.

Let's move on to the profit margin, lower than last year, which is the FX level. The goods purchased in the autumn/winter collections were with higher FX over dollar, and the lower hryvnia and ruble were an obstacle in terms of improving this margin in the third quarter. When it comes to inventory, we don't have quite considerable inventory, I will tell something about it in a moment. We will not need to conduct sell-offs with huge promotions. So we are hoping that in the next quarter, the margins will be quite high as well.

An important thing is this differentiation of pricing policy. When we sell the clothing in the most promotion period, the online and off-line stores are -- prices are different. So in traditional sales, we have more promotions than in online sales. So because of that, we are able to improve our profit margins in the long term.

Let's move on to costs. On the left, you can see cost of own stores per square meters. We have the -- dropped 20% year-on-year. And all the 3 components dropped here: Rental costs per meter, HR costs per square meter and other costs as well. We renegotiated the rents with landlords considerably. That's why we have this effect. And the personnel is adapted to this decreased traffic. And other costs, where we have like bags or third-party services, they are also related to this lower traffic in stores. So all the 3 stores reported loss year-on-year.

If we see them overall, if we add e-commerce and logistics and the HR -- the headquarters, we also report a drop year-on-year by 12%. So the company is trying to control these costs to amortize these drops in sales.

Now the third quarter, on the left, you can see the 5% revenues higher, profit margin minus 2.2%, costs higher almost 2%. This is positive. But because of the lower profit margin, we have lower operating profit by 10% and net profit about PLN 300 million. So the -- overall, the results are quite similar to last year. The third quarter was quite all right. Given the COVID reality, we achieved very similar results to last year's.

Let's have a look at the 9 months. We have 11% drop in revenues, minus 2.7 percentage point drop in gross profit margin. Cost dropped a bit more slowly. Operating profits, only PLN 70 million, so almost a 90% drop. We have PLN 150 million drop in net profit.

Let's move on to trade liabilities. Take a look at the quite interesting chart on the left. The gray points show us the nominal value of inventory, and then the green line shows per square meter. Last year, if we have a look, the second, third, fourth quarter on the first quarter, we see almost PLN 2 billion inventory.

Now in the third quarter, we see the drop in nominal value up to PLN 1.6 billion. So it's lower. But we have the increase in floorspace. The online sales increased over 100%. So we have less inventory. We don't have the overstocking problem. We changed this inventory to cash. So we had lower orders for winter and autumn collections. We can see it perfectly well in this next chart. In the previous periods, we had like PLN 1,500. Now we have PLN 1,200, so 20% lower inventory per square meters than last year.

On the other hand, we can see this working capital. It looks quite strange, as you can see, despite the -- if it were not for the COVID, it would look different. We had lower inventory and high liabilities, over PLN 1 billion higher than inventory. So in cooperation with our business partners, with our suppliers and banks, we were able to extend the payment deadlines, and we had cash, therefore. So our financial position is -- and cash situation is stable and safe.

Take a look at PLN 1 billion of net cash on the balance sheet. As you can see here in the chart, it's a lot. But in these difficult COVID times, we need to have cash to go through these turbulent times safely. CapEx is lower than last year by 27% than last year. We are coming back now to building new stores to some investment outlets on the infrastructure.

So summing up these 9 months, there's floorspace development, 13%. We have picked up in terms of opening and building stores. We are coming back to our initial plan, triple-digit online sales growth. We maintained the cost on stable level. We reduced what we can, and our working capital is negative. So liabilities exceed inventory, and growing net cash is here making the company safe in terms of liquidity.

Let's move on now to key corporate events in this quarter. There was a meeting with journalists, Made in Poland conference, where we show what's been going on in LPP and what kind of initiatives the company has been taking. We also decided to come back to building this logistics center in Brzesc Kujawski. We also opened a store in Dubai. There is a change in terms of ownership. The company confirms that the -- confirms its family business status, and Semper Simul Foundation increases its share in the equity of the company.

Let's move on to discuss all these elements. We talk about being an omnichannel organization. In the 3 areas, product, sales and logistics, we are trying to combine the traditional off-line stores with the online business. What it means for the product? Consistent communication and presentation of the product in our media messages. What customers see online is consistent with what the stores present. We are kind of resigning from this large-format advertisement where the model shows this lifestyle and brand. We are moving towards the product itself to promote the product itself, and we are moving towards only online ad.

When it comes to sales, we have merged online and off-line sales departments. We also merged the teams for online sales and off-line sales. We want the sellers, on the one hand, to serve the customers in a similar and consistent manner. And on the other hand, we want them to have a common goal. We want them to see this one common message so that there no divergences or some fights for promotional actions. We want the message to be consistent. And we have the RFID technology, which has considerably improved the situation in terms of combining the channels. We want the customers to have convenience in terms of accessing the goods.

Logistics. I think the most efforts the company has actually taken here during the lockdown in the logistics, the first lockdown, we were trying to make it as efficient as possible given the 5x increase in the online sales. We wanted the customers to be able to get their goods on time. We wanted to integrate the logistics systems of both channels. So far, their goods for e-commerce were not available for traditional stores and vice versa. So we experienced quite a considerable problem during the first lockdown because of that.

In the stationary stores, we had 40 million pieces were in the stores dedicated -- 40 million in the warehouses, but only 5 million available to online sales. During the lockdowns, we had to make the stationary warehouses goods available for our e-commerce customers. So a lot of efforts on the part of logistics systems. Warehouses were put to have one huge warehouse regardless whether it's for online or off-line purposes. So this flexibility of managing the stocks improved customer care.

RFID, this is a very important element of the whole story. Thanks to RFID system, electronic tag, we improved the availability of the goods on the floorspace. So it's stock accuracy of 99% product availability. Before, some 80% or 90% of the goods were available on the floorspace. Thanks to RFID, we are able to stock the floorspace very quickly. So the things that are best sellers, for example, they are replenished very quickly, thanks to RFID.

On the other hand, there's this psychological aspect. We want the space in the stores to be like friendly for customers, to be airy. Before, we had to bring more items into the floorspace. Today, there's less. And the customer sees, there's one shirt in M size, let me just buy it quickly because it may be the last time. Before, the customer saw a lot of the items displayed. So it was not an incentive in psychological terms for the customer to buy the product.

We have noticed also that increased in the stores with RFID is 3% better in comparison to other stores. So this technology has definitely impacted the increase in sales. There are also some elements like 60% faster receipt of goods or registration of cash register operations. By taking off the tag, the cash register records this bill. So everything at the customer service is faster overall.

What is also important to us, stock accuracy and accounting. The pieces that we have on the floorspace has picked up as well. We have been learning constantly every aspect of this technology, and we want to introduce it in other brands.

The next thing I would like to discuss is the Defrost Project, and we are associate it to, let's say, the goods which are stuck in the stationary stores and the online customer would like to buy. Thanks to this project, the customer has the possibility of doing that. If there is a store in Bialystok where a shirt, let's say, it's stuck in that store, now given this combined inventory, the customer sees it and the Bialystok store can send this shirt to the customer. So thanks to this approach of combining the inventory, the customers have broader choice and we are able to sell all the pieces that were stuck in the stores or warehouses.

So the broadening of e-stock commerce offer. During the lockdown, we came up with this idea where the stationary 40 million items were stuck in the stores. Of course, we -- this project was planned by us. It was like for the months to come, but we considerably improved this and considerably made it faster and started to adopt a very flexible approach. So from the project which was original planned for several months, we decided to make it faster. So COVID has changed our priorities in our pipeline of projects and IT projects, but it's for the best. We need to adapt. In our company, there is a saying, future is now. So according to this, we have been operating recently.

Click and collect service, where you can collect in stationary stores all the goods that you ordered online. Thanks to this Defrost Project, the boxes with the goods for the online customer, they don't have to come from the central warehouse. The store can actually pack up the package, leave it for the customer who comes and picks it up directly from the store.

Another element, what Magda has been saying during the lockdown, the stores can be -- they can serve as warehouses basically. Another element in the sales peaks caused by lockdown or like Black Fridays, the stores can service as logistics facility for us. They take the burden off some logistic centers because some parts to online customers, they come from the stores. In countries where we have quite long distances for -- of distribution centers, so direct supply from the store shortens the delivery time for the customer, especially when it comes to Russia or Great Britain. There is a store in Britain, but there is no distribution center in the United Kingdom. Additionally, it's a cash cost. So investors like it.

Quick innovations that we had to introduce during the pandemic and lockdowns, using the chatbots, for instance, the second-generation chatbots. During the lockdown, the first one, when online sales picked up so much, we would need to basically hire so many people at the call centers. But thanks to the chatbots, we managed to avoid this because the chatbots contact the customers as if these were -- as if live customer service specialists. If the question is too difficult, then, of course, smoothly a person takes over.

Another interesting project, it's our internal project. Because of the pandemic, we have logos system. It's about connecting our warehouses with courier companies. We have 2 tasks here. First of all, thanks to this new solution, this new system, we can very quickly add more courier companies, not only in Poland but also abroad.

So far, when we signed a contract with a courier company, integration of the system of the courier company with our systems happens 4 or 5 months. It was too long. But thanks to this solution, we can integrate with the systems -- logistics systems of our couriers in 3 weeks' time. So a very quick integration of interfaces, which, on the one hand, makes the service faster. The customer gets all the information like delivery tracking or creating labels on demand. These are all very important things. And it allows the company to flexibly choose a given courier company adapted to a given market, given types of operations. So for example, one company is cheaper and only picks up the parcels. So this financial aspect of flexible optimization is very important to us.

In terms of logistics, we are coming back now to Poland. So Brzesc Kujawski, we are returning now to our initial idea of building the distribution center in Brzesc Kujawski. We want to start in the first quarter of the coming year and release it in 2022. It's a bit different project. However, it will be simpler, smaller logistics center but with the possibility of development, quite a different automation system than we planned initially. And it will be devoted to our young brands. So Reserved stays in Pruszcz, and the younger brands will be in Brzesc Kujawski. We are planning to spend about PLN 200 million and employ ultimately 1,000 people.

Another store in the Middle East in Dubai, in the biggest shopping mall, Dubai Mall, has been opened quite recently before Black Friday. Our flagship Reserved opened there with a store's area of 1,430 square meters.

A few sentences now about the recent changes in the shareholding structure. If you remember, in the first part of 2018, co-owners and founders of the company, Marek Piechocki and Jerzy Lubianiec, gave their shares to family foundations. Marek Piechocki transferred his shares to Semper Simul Foundation and Jerzy Lubianiec to Sky Foundation.

Gentlemen, especially Marek Piechocki, wanted to be a family business of Piechocki family for generations to come. And here we have another consistent step in this strategy. Jerzy Lubianiec and his foundation, Sky, decided to decrease its involvement and be a passive investor de facto. And the Piechocki family has been sustaining now its strategic goal to be the active investor in LPP. So both foundations exchanged their shares. So 40% in equity is in Semper Simul's hands and 65.9% in votes.

So for the company, this is for the best. It's a positive information because the strategy we have been continuing for several years will be continued in the years to come. We have a stable, long-term investor, which will stay with us for generations to come.

When it comes to plans, let's just discuss a little bit what we're expecting in the next months, what we are preparing for, what we will be doing in the coming months. Let's start with the fashion part, eco-fashion, and Magda here will discuss this aspect.

[Magdalena Kopaczewska, executive]

Ladies and gentlemen, nobody has doubt that sustainable fashion is the fashion that is expected. The question is how fast this will happen. Research shows that non-ethical, non-sustainable fashion is not desired by customers. We want responsible fashion, especially this is visible among young generations, the Y and Z gen, a little bit younger than me and Przemek. Therefore, our Eco Aware concept, you know that we have been developing it for several years. This is not a new thing. But recently, it has picked up. And today, in LPP, it means much more than a few years ago because T-shirts made from organic cotton is not enough to fulfill the requirements of sustainable fashion.

Let me just tell you what we mean by Eco Aware. It's a whole line with some standards to adhere to. First of all, it's using more ecological materials like Tencel from cellulose or Modal and some synthetic materials from recycling. It's also care for fibers for very well-thought-out cuts because the clothes will be sustainable and will not wear out so much. It's, of course, verification in terms of presence of chemical substances. That's on the one hand.

But on the other hand, it's the production standard used and adhered to by the factories we cooperate with. We select the factories which limit their emissions of pollutants. They use renewable sources that have their water treatment facilities. This is a very important factor when it comes to dyeing the fabrics. Eco Aware models have been introduced in all our brands. But the biggest share is, of course, in Reserved. Very often, we combine Eco Aware collections with premium collections because we are aware that the customer -- sustainable customer, maybe it sounds a bit strange, is more prudent and takes care of the quality more.

Eco Aware collection has played a big role in our sustainable development strategy. You know we planned it for 2020, 2025. And despite the pandemic, we are not backing down, and we are keeping our commitments here. Let me remind you about these commitments.

Let me just mention in terms of Eco Aware, by the end of 2021, 25% of our clothes will meet the ecological standards, and 30% of factories from Southern Asia will be covered by the Eco Aware production program. By 2023, we want 100% of factories producing denim to be covered by the program.

Let me just explain why denim is so crucial here because the product that we -- that the customers love so much, it's one of the most negatively impacting the environment. Because when you produce 2 pairs of jeans, you use thousands of liters of water. And dyeing with indigo, dye is another contributing factor, this negative factor. We want to limit our environmental impact by this, in terms of suppliers. By the end of 2025, we want 50% of Reserved clothing to be Eco Aware collections.

Let me just give you some more detailed information from the inside, let's say, how the Eco Aware has been operating in our company. There is a sustainable development department in LPP, which is responsible for the product in the Eco Aware collection. There have been special procedures introduced, requirements for the collections, and they need to be met so that the Eco Aware label is adjusted. You see this green label on the slide. So the procedures are like minimal -- the minimum percentage of organic cotton, the use of materials like Tencel, Modal, I mentioned before. Also, each product with Eco Aware label must be ordered from certified sources, and the producers need to provide documents confirming the certification.

So, for example, with organic cotton used in our collections in LPP, this yarn factory, to be given a certificate, the factory needs to report to the organization, for example, Control Union, for a list of particular conditions to be met. If the factory decides it's ready to meet these requirements, the representatives of Control Union go to that factory and to conduct a comprehensive audit. If it's a positive result of the audit, the factory gets the right to certify its yarn. But this is not the end actually because the control is the basis of trust, and our buyers need to check the certificates regularly. We see which particular fabrics were chosen for Eco Aware collections. We verify whether the certification has been issued for that.

What makes us easier is the QR codes on the certificates, which confirm the original status. The document also confirms that the given good -- piece of goods was produced in a particular factory from a certified yarn, and it specifies the meters and kilograms. So the supplier must confirm that its -- the clothes that we ordered were made from this certified material.

To sum up, let me just tell you that the sustainable fashion is a must-have for us -- both for us, LPP and for the whole fashion industry. Research shows that 15% of customers now declare the ecological motives and the life-after-plastic trend, and the generation Y and Z account for 57% of the market. This trend, I would say, will be on the increase. On the other hand, there are more and more fashion players pushing the suppliers to expand the environmentally friendly offers. The requirements set are higher. So the suppliers need to adapt to this situation.

As an example, several years ago, when we started working with Eco Aware line, the prices of organic cotton were 30% higher than conventional cotton. And other sustainable materials were practically not available. Today, it's -- the situation is completely different. And we are sure that this trend will stay strong and will be more widespread and for the best.

Let me just give Przemek the floor now.

[Przemyslaw Lutkiewicz, executive]

Now the plans for floor space growth in traditional stores. This year, our plan is the increase in floor space of 16%. When I was looking at materials from our previous conferences, especially the one from the beginning of February before the pandemic, what we could see there, our initial goal for 2020 was increase of floorspace by 16%. Later on after the first COVID wave, we verified the plans, 8%, then 11%. And here at the end of the year, we can see that our initial plan 16% is done, since they have been developing the fastest than we reported, Cropp and House, and 2%, 3% growth in Reserved and Mohito with the most of online sales. Generally, in Poland, we have the lowest increase here. And in Europe and other countries, it's higher.

PLN 580 million will be planned for store investments. When it comes to online sales growth, we want to exceed PLN 2 billion in sales. Looking at our results, after 11 months, we are now in the 11th month, in December, we can see that this goal has been achieved. So January will give us something more here in terms of realizing this goal.

Investments in future development, PLN 760 million, over PLN 1 billion next year, when it comes to also in Brzesc Kujawski logistics center. And in the coming year, another PLN 900 million on investment outlays, also office infrastructure here.

Summing up our targets for this year. We maintain what we talked about a quarter before. So revenue fall not exceeding 15% year-on-year. Maybe it seemed not very ambitious, but given the lockdowns and store closures in January, this target is quite ambitious. We are increasing the gross margin target between 50%, 51%, thanks to better stock management and thanks to the demand on the market, and that we don't need to make so much sell-offs.

Then EBIT above 0 is now the target for us. Some may say, not very ambitious. Yes, that's true, but we are facing the fourth quarter and January, which usually reports losses, this year, it may be even more because of the planned lockdown. So EBIT above 0 is still an ambitious goal for us. And safe liquidity position is important to us still, to be brave and optimistic in looking into the future in the post-COVID reality to saturate the market with our products.

Let me just briefly tell you something about the year to come. It's the end of December, so let me just discuss plans for 2021. We are planning the floor -- 15% continuation of floorspace growth. Is it worth developing floorspace growth? Traditional stores are passé, some may say. When shops are open, they are 80% of the overall growth. The Internet is 20% still, despite the quite considerable pickup. So the stores are important.

Looking geographically, in the Western Europe, there we see that considerably large share is actually in the online stores. But in the Eastern Europe stores, for the 3 or 5 years to come, will be the prevailing methods of purchasing, especially in smaller cities, especially where the trust to online sales and online shopping is not very big. We opened the stores in retail parks by the street, not only in shopping malls. With our stores, I think, and online, it's like home office and office work. Some people prefer this, some people prefer the other. And what we like most is that they like both channels.

We've been developing the value-for-money segment the fastest. And since the Cropp and House brands, the most important thing is the omnichannel strategy, I believe. In omnichannel strategy, stores are given considerable importance. They are very well equipped with high-tech automation. So the cooperation between off-line and online is going to be on the increase. So we need to have both channels available. That's why we decided to continue floorspace growth development entry into Northern Macedonia. Over PLN 1 billion, we will spend on CapEx in the next year.

Let me discuss other targets for 2021. Apart from the floorspace growth, dynamic online sales growth. It seems that in the countries where -- apart from Poland, where there is a lot of potential, we will expand RFID also at other brands. And thanks to online and omnichannel, we will try to improve our operating margin versus 2019. This is our benchmark, and we will continue to strive to be -- to have a safe balance sheet and to have a net cash available.

Some, I think, important information when we are thinking how to -- what assumptions to take, how much products to buy. The COVID year is not a good benchmark. We were looking at 2019, and we're thinking whether we need less goods or more goods. In the end, we decided not to speculate. We assume that 2019 and stocking from that year per square meter will be the benchmark for 2021. So we decided that the value of clothes per square meter, we see how many stores will be open, and this gives us the budget for shopping.

We skipped 2020. That will be best, to skip it. If it proves otherwise or our assumptions are too optimistic or too pessimistic, we will react flexibly just like we did in 2020. As a flexible company, we are able to shift it -- to shift orders, move it in time. So we showed that we can do it this year.

What about the targets for upcoming years? For the next 2 or 3 years, first of all, the product is at the center of our attention, product development. From formal clothing to casual clothing, this transition was visible in 2020. We have the possibilities, and we are prepared and used to developing our products by following our customers' needs. So this will be our focus.

Another important element will be further digitalization of the business. Today, without IT, without digitization, no industry can operate. So we would strive to have our online stores and off-line stores, make them use the highest technology. And omnichannel is supporting this. And we've -- we want to develop the value-for-money segment in the off-line stores. So the overarching target for our organization is continuation of our growth in sales and improvement in margin. We want the double-digit increases.

That's all from us. Thank you very much, ladies and gentlemen. Now let's move on to Q&A session.

[Magdalena Kopaczewska, executive]

Yes. I can see there are a lot of questions. The first question, could you comment on the Ukrainian market? What's the situation there in terms of competition? What's your position? What's your share in online market there?

[Przemyslaw Lutkiewicz, executive]

The Ukrainian market is a good market for us. There is less competition in comparison to other Central and Eastern European markets. So our brands are well recognized and positioned in the traditional stores and online. At the end of last year when we opened the online store, it started to sell very well because of the recognition of our brands. I'm not sure about the overall share and what are the -- I don't know this percentage number now, but it's considerable, and it's on the increase. And you can see a nice development there. The problem in Ukraine is that we need to send the goods from Poland. It's not possible from Ukraine directly, but we are working on it.

[Magdalena Kopaczewska, executive]

So the next question, what was the reason for negative like in September in open stores, where we were before the second wave of the pandemic?

[Przemyslaw Lutkiewicz, executive]

I would say that the customer behavior. We had the goods ready, the stores open. Everything was in place, but the customer behavior changed. In bigger cities, the customer behaves in a different way. In Prague, Warsaw, Budapest, the customers prefer now to buy online. And the transition -- even when the customer has this possibility, the transition is in favor of the online stores. So possibly for fear of the pandemic, of infection, there are sales losses here because the customer transitioned online. In bigger cities, also, we see that when the customer comes to the store, the customer is like very task-oriented, just simply comes in, buys what was intended, less impulse shopping.

[Magdalena Kopaczewska, executive]

Could you please comment on the December online traffic conversion when stores reopened?

[Przemyslaw Lutkiewicz, executive]

It looks so-so, I would say. It's not crazy positive. We see in traditional stores 15% drops in like-for-likes in December, but we see a considerable improvement increase in online. The first 2 weeks in December, there were increases of 80% online. Now in the last week that ended, it picked up to 170%. Just before Christmas, the customers, they are, I would say, impulsive because we do very quick shopping before Christmas, before lockdown. And the customers have picked up in terms of their shopping, both in online and off-line. Generally, comparing to last year, it's not very good.

When it comes to rents in November and January, so you're asking what about rents when it's lockdown? Previously negotiating with shopping malls, the new rent terms, we also included annexes or provisions in the annexes saying that proportionally to the sales, we will pay the rent. So if the sales drop, the rent will be lower. So in November, these annexes were operational. Now we are negotiating. The negotiations were considered 2020, and we will have to renegotiate for the next year.

[Magdalena Kopaczewska, executive]

Next question is returns level online. And what is the level of logistics costs in terms of revenues in online sector?

[Przemyslaw Lutkiewicz, executive]

So the share of returns is about 17%, 18% and the logistics costs, 22%. Before, it used to be over 20%.

[Magdalena Kopaczewska, executive]

Could you please comment on justifying the decision on reopening the stores? Is like the market situation favorable for this kind of decision?

[Przemyslaw Lutkiewicz, executive]

Yes, very much. If you want to open the stores, you have a lot of possibilities. We approach it in this way. We look at the markets where we can get nice positive rent terms and also the markets where the traditional stores are strong like Russia, the Balkans. These are the markets we will try to saturate, and we see great results in the stores opened there. So it's a sound policy of developing our traditional network there.

The traditional stores, let me remind you, they support omnichannel. And we opened the brands which have the value-for-money strategy. In the smaller cities, we see still some possibilities to saturate these markets, especially when it's a retail park and by the street location. So far, the majority of our stores were in shopping malls. So basically, different locations than before, much cheaper locations in comparison to what we opened last -- in previous years.

[Magdalena Kopaczewska, executive]

What's the current situation and plans as to dividend?

[Przemyslaw Lutkiewicz, executive]

The current situation is volatile and very dynamic. And as you can see, when the stores are open, it's nice result with 5% increase in sales. When the stores are closed, and this decision is not up to us, we need to react by promoting more online. Now with Germany, Lithuania, Bulgaria in lockdown, we have information about some upcoming lockdowns, so the company can't control it. It's the governments of particular countries that introduce or lift the lockdowns. The situation is so dynamic, and we only can react. We are trying to sell online as much as possible, and sending the goods from the off-line stores to online -- for the purpose of online goods, this is a very good option. Will there be dividends? We would like that next year if it's, let's say, a normal year, and we come back to the normal store.

[Magdalena Kopaczewska, executive]

Is the company planning buyback given the net levels?

[Przemyslaw Lutkiewicz, executive]

Not -- no, we are not planning that.

[Magdalena Kopaczewska, executive]

What about like-for-likes and springtime?

[Przemyslaw Lutkiewicz, executive]

Plus 2% and plus 3% like-for-likes.

[Magdalena Kopaczewska, executive]

If you sell directly from stores, do you need more employees in the stores?

[Przemyslaw Lutkiewicz, executive]

I would say no because we use the peaks -- the sales peaks in online stores where there is lockdowns. So like in the second lockdown, the third one will look similar probably. When the store is closed and the employees come to work, basically, they are in the store, but the store is not servicing customers. So the customers are busy packing the parcels for online customers. So I think it's a nice way of transitioning the job duties in closure. And RFID is helping the customers a lot. The work is simply better quality. It's more accurate.

[Magdalena Kopaczewska, executive]

Are you expecting any write-offs for stocks, given the January closeout of stores?

[Przemyslaw Lutkiewicz, executive]

No. Given the low level of inventory, I would say, it's the standard write-off levels. Promotional actions that we will start soon after Christmas connected with online stores will help us to get rid of the inventory of the autumn and winter collection. We have like 2, 3 months of sales coming up.

[Magdalena Kopaczewska, executive]

There are a lot of questions from [indiscernible], so I will keep reading them. What was the spread of gross margin in online and off-line in the third quarter?

[Przemyslaw Lutkiewicz, executive]

Very precise questions. From what I remember in the third quarter, where there was regular prices, it was August, September, October, not a lot of promotional offers. The spread results from the fact that e-commerce customers selected the most attractive products. So the spread was about 2%.

[Magdalena Kopaczewska, executive]

What was the drop of the margin year-on-year in Russia and Ukraine?

[Przemyslaw Lutkiewicz, executive]

I don't remember the data, sorry. I can't recall now. We will maybe send them by e-mail.

[Magdalena Kopaczewska, executive]

In the fourth quarter, is it possible for you to keep up the pace of inventory drop?

[Przemyslaw Lutkiewicz, executive]

Yes. We see that it's even not enough, but it's a good situation. Where you have lockdowns coming up, it's better to have less inventory than the other way around. Now the goods are selling well. We even launched -- as most of the companies, when we found out about lockdown post-Christmas, we introduced promotions even over the last weekend.

[Magdalena Kopaczewska, executive]

Next question of Mr. [indiscernible], what are the fixed costs of the new Dubai store? When will it become profitable?

[Przemyslaw Lutkiewicz, executive]

We don't know, and we'll say that it's a franchise model, and it's our franchise partner's store. So it's his, let's say, trouble. We sell the goods to the store. We have the margin insured so that it's adding to our EBIT margin of the whole group. So it has just launched, and we need to wait a little bit a few weeks, maybe a few months to see whether it will prove profitable for our partner.

For us, it's a very important store because it builds brand recognition. But we are not focusing so much on the economic aspect. Of course, the partner shares the results with us. But it was opened at the end of November, so it's a bit too early. And of course, coming back off tourism in the region, maybe let's hope after the COVID.

[Magdalena Kopaczewska, executive]

Is the level of cost of rent per square meter in the third quarter referential to 2001? Is the level of cost of rent now in the third quarter referential to 2001?

[Przemyslaw Lutkiewicz, executive]

I don't think so. If the year was normal, if like-for-likes were on the smaller plus side, they will be lower by 10%, 15% than last year.

[Magdalena Kopaczewska, executive]

Is the change of marketing channels and strategy affecting the revenues next year?

[Przemyslaw Lutkiewicz, executive]

I'm sure yes, but we are able to regulate this ourselves. If financial results are worse, we can cut or limit the budget for promotions and Internet promotions. On the other hand, if we see in some markets start spending the money on marketing gives the positive rate of return and it's very easily measurable, we can increase the budgets here. So we will be continuing our policy on these budgets, and we are flexible in this respect. Let me just remind you that depending on the situation, the promotional -- the ads budget is like 7% to 10%, depending -- 7% to 10% of the value of sales online for a given brand.

[Magdalena Kopaczewska, executive]

To what extent the communicated increase in the operating margin will be the result of the first margin and the lower operating costs?

[Przemyslaw Lutkiewicz, executive]

It will be lower operating costs. The margins here -- if the dollar stays on the low level as today, it will help us definitely to improve the margin. But the majority of the improvement will be the best -- better management of cost.

[Magdalena Kopaczewska, executive]

What is the SKU number in Sinsay? How has it evolved over the last 2 years? What it will look like next year?

[Przemyslaw Lutkiewicz, executive]

Mr. [indiscernible], even more detailed questions here. Let me put it this way. How many items per square meters, I wouldn't like to disclose this information. But generally speaking, so as to give Mr. [indiscernible] some idea of that, this is for the last year and for this and coming year, in normal or older brands like Reserved or Cropp and House, it's 20 pieces per square meter, up to 30 pieces like in House brand. Sinsay, it's even 100 per square meter.

[Magdalena Kopaczewska, executive]

Now it's not from Mr. [indiscernible]. How do you assess the current competition? Are the biggest players organizing some promotions? Can you increase prices that you planned?

[Przemyslaw Lutkiewicz, executive]

It's an interesting question. We were thinking what it would look like in the COVID situation, how difficult will the stock management be for us and for our competitors. But it seems that everybody adopted a similar approach. They cut orders for the winter -- for the autumn and winter collections, and we see that there's not a lot of promotional offers in stores. It seems that the competition is not so strong because nobody has to make so much promotional offers. So we don't see a strong competition, and we don't see some competitors going out of the markets. It's like a stabilization, but on further markets that we operate.

In the Eastern markets, it's a bit different. We see some bankruptcy, of course, situations. Here, we don't really see this problem. It's good that the market is staying strong, but there is no price war. Everybody is trying to stay with their lower stocks and waiting for better times. If some company has like only formal clothing, that is definitely less demanded now. We can observe more sales offers. That's true. But if you have casual offer, I think everybody is doing good.

[Magdalena Kopaczewska, executive]

Which logistics companies operate your shipments to Ukraine? Are they local companies or international corporations?

[Przemyslaw Lutkiewicz, executive]

I don't know. I don't remember. I don't know these names, to be honest. I even wouldn't like to disclose them because this information is too detailed. But as part of the local system, there are 20 courier systems cooperating with us. We prefer to cooperate with local companies rather than the international ones. The local companies are cheaper.

[Magdalena Kopaczewska, executive]

From Ms. [ Sylwia ], we have a lot of questions. What's the difference in profitability -- operational profitability between Sinsay and other brands?

[Przemyslaw Lutkiewicz, executive]

I can't answer, and I don't want to answer this question now. This concept of new Sinsay has been developed by us. We are learning this concept. This is a different type of goods and mass approach to logistics. In the first phase of profitability of Sinsay, they are a bit lower than our other brands. But we are able, in the next year, to learn to manage the brands to have their margins -- I'm not sure if the same as other brands because the first margin is lower and determines the further ones. But it will not be so much different from older brands.

[Magdalena Kopaczewska, executive]

What's the difference in profitability between off-line and online?

[Przemyslaw Lutkiewicz, executive]

It shrinks because of better logistics and management of e-commerce, and this difference is not considerable. I wouldn't like to disclose that, but it's several percentage points.

[Magdalena Kopaczewska, executive]

What percent of rents is revenue-related? Will this be maintained in the coming years?

[Przemyslaw Lutkiewicz, executive]

It's little or too little parts, depends on turnover. It's about 1/3 that is turnover-based, and 2/3 are still a fixed rental cost. We are trying to have the turnover-based rental agreements for the coming years.

[Magdalena Kopaczewska, executive]

Is shifting towards online and the projects in this respect going to cause the lower stocks in general?

[Przemyslaw Lutkiewicz, executive]

We are hoping that -- we are hoping to maintain -- or our main task is to have like stock rotation improved. So the changes in logistics and the Defrost system makes us -- makes it possible to better rotate the goods. And we believe that the levels, the target levels for the stocks are below what we used to see over the past 2 or 3 years.

[Magdalena Kopaczewska, executive]

What are the revenue targets and profitability targets in the coming years?

[Przemyslaw Lutkiewicz, executive]

We wouldn't like to disclose that yet.

[Magdalena Kopaczewska, executive]

Because of the lockdown after Christmas, will you start the sales offers before Christmas? Can you get rid of the stocks before that time?

[Przemyslaw Lutkiewicz, executive]

Yes. Our competitors and we as well already on Thursday, Friday, Saturday, started their sales offers just to get rid of the most of the goods before Christmas because later, it will not be possible in traditional stores. Of course, some goods from the autumn and winter collections will be sold, but it is not possible over such a short period. But we are hoping that we will not be left with this.

[Magdalena Kopaczewska, executive]

Is the online sales target not too conservative in your opinion, PLN 2 billion?

[Przemyslaw Lutkiewicz, executive]

PLN 2 billion, yes. It seems a bit conservative, but we were not aware of the lockdowns coming up. So it was kind of safe. We should exceed with some plus over PLN 2 billion. I was hesitant a little bit whether maybe the next year's target of plus 50%, it is ambitious in our -- it will be hard, of course, if it's -- we hope it will not be any lockdown next year.

[Magdalena Kopaczewska, executive]

Do you have any plans, investment plans for 2021, apart from, of course, Brzesc Kujawski logistics center?

[Przemyslaw Lutkiewicz, executive]

The first half of the next year, we know already where we want to open the stores, and we are certain that the money will be invested in Brzesc Kujawski, of course. Generally, most of the plans is already after sign-up phase.

[Magdalena Kopaczewska, executive]

But if you think, okay, what if the lockdown or COVID come, can you stop these developments?

[Przemyslaw Lutkiewicz, executive]

Yes, of course, we can stop them. We can move them to different times. We decrease the CapEx and adapt it to a given situation.

[Magdalena Kopaczewska, executive]

What is the relation between marketing spending and online sales? Is it different on the market?

[Przemyslaw Lutkiewicz, executive]

7% to 10% of sales is the promotional budget. It's very much different on different markets. Our e-commerce people -- and we have tools for that, you can count profitability for all of the marketing budget and the money spent, how much return you have in terms of these e-commerce strategies.

On the Western markets, not so much investment because the same type of budget on the Polish or other Eastern countries has better rate of return. So this is what we are focusing on. You can see in our pan-European store, we don't really invest in advertisement because there is a lot to do on the Eastern markets. You can see that there's a lot to be done, so we focus where we can earn most.

[Magdalena Kopaczewska, executive]

I think the last question, when will online be reported as segment, I mean, its operating results?

[Przemyslaw Lutkiewicz, executive]

It's very difficult for me to answer this question now. We are not planning on that.

[Magdalena Kopaczewska, executive]

All right. I guess that was the last question for today. Ladies and gentlemen, great, thank you for joining us. And because we are just before Christmas, we would like to wish you a very healthy, calm Christmas. May the next year be better, more normal, so that we can meet with you in person, live conferences not only via teleconference. Thank you very much.

[Przemyslaw Lutkiewicz, executive]

Of course, I also would like to wish you the same. And -- well, especially healthy Christmas. See you next time. Thank you very much.