Europris ASA
OSE:EPR
Earnings Call Analysis
Q3-2023 Analysis
Europris ASA
The company has faced margin pressures, with the gross margin falling to 45.3%. This is a noteworthy change from previous levels, as a larger share of consumables and increased campaign sales carry lower margins. Notably, 0.3% of this margin reduction is due to a shift in stocktaking practice. Even though operating expenses have gone up by 3.7%, there has been an improvement in the operating expenses to sales ratio, which stands at 26.5%, an indicator of operational efficiency amid challenging conditions.
EBITDA, standing for earnings before interest, taxes, depreciation, and amortization, has seen a decrement of 4.9%, primarily driven by the aforementioned lower gross margins. Meanwhile, EBIT, or earnings before interest and taxes, has also dipped, falling by 13.8%. In spite of such declines, the company has maintained a strong liquidity position, with NOK 81 million in cash and significant reserves.
The company's strategy was recently outlined in a Capital Markets update, revealing a focus on staying competitive in a price-sensitive market. The company has signalled its intent to follow rather than lead pricing trends in response to market conditions. There's an implicit acknowledgment that the Norwegian Krone's weakness poses additional challenges for imports, which will need to be managed carefully going forward.
Revenues from consumables, which tend to have lower margins, have increased to 54% in the third quarter, illustrating a cautious consumer behavior pattern. Even as costs vary across categories, the company's adaptation to the market's competitive pricing strategies is clear, with transformations in procurement and supplier deals being monitored acutely.
Addressing cost savings, the company is observing full operational effects from new warehouse operations leading to expected cost reductions. Rent costs, another significant outlay, are CPI-adjusted yearly, with November's CPI having the most substantial effect. The company is proactively managing such fixed expenses to buttress its profitability.
Competition remains stiff, but the company, through strategic pricing and a cost-focused operational approach, is navigating these waters with confidence. They have also noted the potential effects of competitor Arista's IPO but stress their differentiated product mix and market position as strengths. Indeed, the cultivation of the customer base, specifically through the Mer club, speaks to a targeted approach to consumer engagement and loyalty.
You don't have any saved screeners yet
Good morning, everyone, and welcome to the third quarter presentation for Europris. My name is Espen Eldal. And joining me today, we have CFO, Stina Byre, who will present the financial details. And Trine Englokken will manage the Q&A at the end of the session today. Feel free to send in your questions as we have the presentation. You can do that on the web, and Trine will manage that at the end or you can raise your questions in the meeting afterwards.
It's great to actually see that we have a live audience today despite the weather. And it's also a time that we are returning to normal after some years of COVID. And of course, we've been through a special period. It's been super sales and super profits for many retailers and most retailers have actually had a very good period. And now it's back to basic. Now it's back to hard work. And now we get a true test of which concepts that actually works in today's markets.
And I guess you all want to hear a little bit about how we see that the consumers are adapting to a new financial situation, and I will come a little bit back to that. But if I look at the history, Europris started the first story in 1992 and has grown ever since. And in the third quarter, that growth journey continued. And the price leadership position we've built, the flexibility we have in the concept and the attractive product range, that increased sales and footfall to stores in the quarter. And we've taken advantage of the flexibility we have in the concept to focus more on consumables, lower price points, and that has given good results.
If I look at the highlights in the quarter, we had the sales growth of 5%. Like-for-like sales growth in the Europris chain was 3.8%. The gross margin was 45.3%, that is a reduction from last year. That was expected as we've been through a period with high margins, but we are still, as we've said before, trading well above the pre-pandemic levels on the margin side.
OpEx to sales ratio ended at 26.5% points. That's a reduction of 0.3% points, which I believe is a strong result in today's environment. We keep a close eye on costs. We managed to keep volume-related costs down in accordance with the volume. And for the first time in my 10-year history at Europris, we are actually operating all our activities out of one single warehouse in Moss. So we are finally seeing now that we get these savings that we have said from efficiencies, from the automization and the new warehouse is now fully operational. And that is, of course, also contributing to lower costs.
EBITDA ended at NOK 404 million, a reduction of 4.9%. EBITDA was NOK 234 million, and not -- net profit ended on NOK 144 million in the quarter. We have a very strong financial position. Cash and liquidity reserves are close to NOK 1.4 billion at the end of the quarter, a significant increase from last year, that is driven by a positive development in working capital. And it's especially the inventory situation that is more positive. I think we've done a great work on the inventory side. It has been difficult in the market. We had too much inventory last year. We managed to sell out the seasonal overlay in this season, so we have a very healthy inventory, and we have also reduced the -- both the value of the inventory and also the volume. That gives us flexibility. We have very good operational flexibility in terms of inventory at the moment and also a strong cash flow. And that is a good start for the important fourth quarter.
Looking a little bit at the market. As I said, we've done well in the third quarter. I'm very satisfied with the results, and we see that our concept is very relevant in today's market. But of course, the market is mixed. In the third quarter, this is year-to-date figures. Year-to-date, we see that total retail has increased sales by 1.9% points, which is, of course, significantly below the inflation we've seen this year, which means that in the market, there is a volume decline for retail.
The winners in the market are of course, those who sell essential goods. So groceries are performing well with a growth of 7.9%, variety retail are growing 3.8%, while Europris is taking market share in this good part of the market with 5.3% growth. So we see that there are some significant changes. There are winners and losers in today's market. And of course, investment purchases, consumers are holding back while consumables they need, but if we should try to give some flavor on the changes we see and how the consumers are adapting in the environment we see now with high inflation and also increasing interest rates, we see much more often in the stores that the customers are [ working ] with the sales leaflets. They are hunting for the low prices and looking for the bargains.
We also see a lot in the stores that they are working with their phones, checking prices with competitors to make sure that they get the best price possible. So they are very price conscious and we see that they are very careful before they put products in the basket. So more price conscious consumers, and we see actually the high sales growth we see on the front page of the marketing leaflets. So doing the campaigns remains very important and is an important driver for sales in Europris at the moment.
We see that private labels are taking an increasing share of sales, so customers are seeking value for money. They are willing to test the private label products because they see that, that increase is value and lowers their costs. We also see that high-ticket items continues to decline in sales, and we see that consumables are taking a larger share of the total sales.
So there are some significant changes that we see in the market, and many of those are actually in favor of a concept like Europris. We have a strong concept with low prices. We are doing good campaigns. And we also carry a large assortment of consumables. And we are willing to adapt our concept, and we will continue to do that and focus more on consumables at low price points.
So I think it's time to look at the financials, and Stina will share some more details on the financial results in the quarter.
Thank you, Espen. I will then take you through the financials for the third quarter. Group sales were NOK 2.152 billion, up by 5%. And if we look at the Europris chain, the total growth was 5.4% and the like-for-like growth was 3.8%. The chain had sales growth for most categories, but it was highest for consumables. And this was not unexpected as people are more cautious and focus their spending towards what is most essential. Also, as expected, the appetite for investment purchases continue to be low and affected sales of higher valued seasonal items negatively.
As customers are adapting to higher cost of living, we see that they are seeking good deals and low prices. And the Europris concept is flexible and the organization has actively taken measures to be as relevant as possible under prevailing market conditions. And this was underlined by the higher sales growth from especially in the front page of the marketing leaflet and the sales growth for our private labels and also increase in footfall to our stores.
Total e-commerce sales were NOK 153 million, down by 12%. Lekekassen had lower sales in all markets. And after a good first half in Sweden and Denmark, the third quarter was characterized by intense price competition, and Lekekassen decided to focus on profitability rather than loss-making volumes. Strikkemekka had lower sales of yarn in Norway. And although volumes are lower than last year, they are still above the level before the pandemic.
The gross margin was 45.3%, down 2.3 percentage points. A higher share of consumables and growth for campaign sales had a dilutive effect, but we are pleased to see that the margin is still above the level it was before the pandemic. Europris has its annual stock taking in the second half of the year. And as of this year, any calculation differences are booked in the quarter in which they occur and not time to when stock taking takes place as was the case previously. Positive calculation differences booked in the third quarter were NOK 59 million compared to NOK 62 million last year, meaning that the impact on the margin change was negative with 0.3 percentage points, and gain from unrealized currency was NOK 2 million this year compared to NOK 11 million last year, meaning that the margin change was negatively impacted by 0.4 percentage points.
OpEx was NOK 571 million, up by 3.7%. The OpEx change was positively impacted by lower accruals for performance-based pay to store managers and lower cost for transportation stores this year as fuel prices have come down. On the other hand, there were costs related to the arbitration, of course, inflation and there were a higher number of directly operated stores. And we are -- we were pleased to see that the OpEx to sales ratio declined to 26.5%.
EBITDA was NOK 404 million, down 4.9%. This development mainly reflected the lower gross margin and the EBITDA margin was 18.8%. EBIT was NOK 234 million, down 13.8%. And this development reflected higher lease depreciations following the CPI adjustments. The EBIT margin was 10.9%.
Cash flow from operating activities was NOK 734 million at 30th of September this year compared to NOK 189 million last year. Last year, the inventory development was negatively impacted by higher purchase prices and also higher volumes of seasonal overlayers. The inventory level is now healthy and normalized and both value and volumes are lower than at the same time last year. The net change in cash was negative at NOK 383 million, which is an improvement from last year when it was negative with NOK 694 million. Net debt was NOK 3.85 billion. And excluding lease liabilities, it was NOK 1.26 billion, down from NOK 1.5 billion last year. And the financial position is solid with cash and liquidity reserves of almost NOK 1.4 billion.
And with that, I hand it back to Espen.
Thanks, Stina. We presented the strategy at the Capital Markets update in December last year, and we have done a lot of great work since then. And especially on the topic of category upgrades, we have performed well and very happy to see that the categories we have upgraded are actually those who delivers the strongest results. And we upgraded the Washing and Cleaning category in the first quarter of this year, and that is where we see the highest growth in the third quarter. We also see very good growth for Toys, which we upgraded towards the end of last year. So I think that the strategy works.
And if you look back during the pandemic, we upgraded a lot of the nonfood categories, and that has helped to build a strong margin position. So that is supportive of the gross margin we deliver this period. While this year, our focus has been on upgrading more of the Consumables category. So we have started with Washing and Cleaning in the first quarter. And now in the third quarter, we upgraded the Personal Care category. So really focusing on what people need, the Consumables, what will drive people to the stores in these days. So I think we've done good historically, building up the categories with good margins. And now we're focusing on those who will drive footfall to our stores.
And as I said, the campaigns are still important. We still are extremely dedicated on delivering on these campaigns, delivering on the front page products. And of course, that is also building our price position and also driving sales as -- at this stage. And we see it's more and more important and the high sales growth, as I said, is what we see on the front page of the marketing leaflets.
And of course, the customer club has continued to grow. It has grown by 20% since a year ago, so we have now reached 1.4 million members. And the good thing is, of course, that we are creating this communication channel with the customers. But of course, I'm sure that many of you are members in lots of customer clubs and see that your mailbox is spammed with a lot of things. So staying relevant is the topic and how do you do that. We're starting to do more personal -- personalized communications, so segmented communication to the customers. We see that, that increases the opening rate, so we are staying relevant. We also did some test during the summer with a summer campaign where the -- a little bit gamification where the customers were encouraged to visit more stores, that also had the very positive effects. They were rewarded by the number of stores they visited.
So starting working on the -- with the customer club, starting to engage them. We're still testing and we still get a lot of fun results, and we also get some results showing that we should stop doing this, but we are continuing and continue to work and we see that we have a lot of good material and initiatives of the customer club, which will be important to drive traffic in the future.
Also to drive traffic is, of course, opening new stores. In this quarter, we opened one new store that was at Triaden in Lørenskog. Good start to that opening. I visit the stores myself a couple of weeks ago and a very positive staff there and also a very good and attractive location in the shopping center. So a good start. We also had to close one store, unfortunately, and that was at Melhus, where we had an accident and the shopping center will be demolished. We're looking for a new location and all the employees are transferred to other stores that was done already right after the accident. But of course, we are looking for a new location at Melhus as well.
We have 6 stores in the pipeline, 3 are subject to planning permissions. And we're also working with relocations in order to drive more traffic. And relocations has historically proved to be a very successful way of increasing sales and also driving more traffic to Europris. And actually, in the third quarter, I was so lucky that my local Europris store at Orebekk in Fredrikstad was relocated, very successful and very good to see that getting a better location, even a good store can increase sales significantly. So location is everything and being co-located with a grocery store, also with a training center has helped to drive traffic from a store that was already performing very well.
We also work on sustainability, and we're actually very pleased that our work are being recognized. We received an A score in Position Green's annual evaluation of the 100 largest companies at Oslo Stock Exchange. It's great to see that our work on how we report on our actions are being recognized, but of course, we also focus on the actions. And this quarter, we have installed solar panels on the central warehouse in Moss to support some of the energy need we have at that building.
And I see that in the whole value chain, the focus on sustainability is increasing. I was in China last week, together with [indiscernible], we celebrated the 10-year anniversary for the sourcing partnership with our team down there. And we also went to the Canton Fair to look at products and meet suppliers and we have the supplier summit. And it was amazing to see the focus that Chinese suppliers puts on sustainability these days. All booths I visited with supplier have focused on sustainability, to talk about the material they used in the products, how it's recyclable, how they use recycled material, how they focus on ESG in their own value chain. So I think it's a big shift coming, and we see even for private labels from Far East that sustainability is rising on the agenda, and that is very positive.
We are coming towards the end of the presentation, and let's have a look at our outlook. As I said in the beginning, Europris is an attractive concept and we are really demonstrating our relevance these days. Household finances are under pressure. Inflation has been high for a longer period. The interest rates, hopefully, it's close to its peak. But that is, of course, demanding for the consumers. And in these days, we are relevant with the price leadership position we have with the broad selection of products, every day necessities, consumables at low price points, we are an important destination for consumers. And of course, these market conditions are supportive for Europris.
But of course, we will focus more on consumers. We will focus on the lower price points. We will focus on the campaigns, and we have the flexibility and the retail culture to do that because we are used to doing new season. All the time, we're doing campaigns, new campaigns every week. So I think we have the flexible concept, and we have the right culture to benefit from the current market conditions.
And at the end, we have a very solid financial position. We have a healthy inventory and we have a solid cash flow and also available liquidity. So I think we are in a good position and all set for the important fourth quarter, which is starting next week. It's Monday -- on Monday. It's Christmas in all Europris stores. All employees are certified in Christmas sales, myself included, and we are all going out in the stores to work in the coming days. I think Stina, you're going out already tomorrow. I have [ my idea ] a little bit later in November. But we are looking forward for the fourth quarter, and we are well set.
With that, I think we'll open up for some questions, Trine.
Yes, there's a lot of questions. The first one out is [indiscernible]. He has three questions. Can you give us the sales growth split between volume and price?
We had a slight growth in the basket, and that was all priced while volume is down. And I think that's what -- you see all over the market that prices are going up in this high inflation environment and volumes are going down as people are adapting.
What is the share of private labels of total sales?
Well, people are more price conscious. So this share increased. It is now slightly -- it is above 40%. And we welcome people to come to our stores and buy these products with good price points.
Status on ÖoB. If I remember correctly, Europris won the last round in arbitration, but the new round was scheduled for the third quarter of this year. Any follow-up on this?
We will update the market when we have the news. We're actually waiting for the decision from the arbitration panel these days. The arbitration was held in the first week of September. And we are expecting to get a decision by mid-November. So it's not far away. And when we have that decision, we will update the market.
And the next question comes from Ole Martin Westgaard. What are your expectations going forward regarding the mix on organic growth from volumes and price?
I think people will continue to be cautious as they are now. So I don't think there will be any major changes to the trends we are seeing.
I think what we've seen in the third quarter, we expect this to also continue into the fourth quarter. We don't expect any significant changes.
Can you provide some color on the latest development with regard to a potential ÖoB transaction? Why should Europris be successful in Sweden?
I think, first of all, reflecting back on my answer a couple of minutes ago. We are awaiting a decision from the arbitration. And on the operational part, I think the Europris concept is well suited in also for the Swedish market. I think what ÖoB needs is to get the margins up and I think that the nonfood concept of Europris is something that could contribute on that. So I think we have a retail culture, we have a retail competence that could support the development of ÖoB in the Swedish market.
And the last one from Ole Martin is how has sales been in October?
We are satisfied with the start of October. It's the smallest month of the fourth quarter, the final is still ahead of us. So we will come back with detailed sales when we have done the full quarter.
Håkon Fuglu, thanks for the presentation and have some questions. What's the product mix impact on the gross margin this quarter?
Well, as we said, we have some negative effects from higher share of consumables and also sales from campaigns. But on the other hand, we have also sold more private labels, which offset some of this. And we're very satisfied with the margin being above the pre-pandemic level. We knew it was coming down. We have had couple of years with super margins. So all in all, very satisfied.
What is the share of revenues from consumables year-to-date?
Well, it has increased as consumers are more cautious and focused more on consumables. The share will also vary a little bit between quarters depending on seasonality. For the third quarter, it was 54%, increased by a little bit more than 1.5 percentage points. And this development was also evident in the first half of the year.
Has the share of revenues from front-page items changed compared to last year?
It has been a good development for the products on the front page. So it has been an increase and compared to last year, yes.
Have you started to see deflation in sourcing from suppliers?
Yes, we are impacted by higher costs. But of course, in -- there are differences in different categories and in different places. Some places, we see higher costs. Other places, we actually have cost reductions, but we have a weaker NOK that is challenging for what we source from overseas.
Joachim Huse. Congratulations with a strong quarter. Can you elaborate a bit on the trend throughout the quarter, have sales been evenly distributed?
We saw that when it comes to the seasonal items, the July is a month where this has a higher share of sales than the two other months, that impacted July negatively. But other than that, it has been a good quarter for consumables throughout.
And the next one comes from Peter Nystrom. Can you explain the NOK 59 million in calculation differences? Is this effect positively affected by the high inflation?
Yes, when you have positive calculation differences, it is because the prices have increased. And as of next year, there is no need to think about these effects because then you will have the real margin each quarter. And the reason why we give more information on it this year is also because we have changed the timing. So it was actually a little bit too high in the third quarter last year because we didn't book any effects in the first half. And this year, it has been correct throughout the quarters.
And I think you have answered part of the next question. Is it possible to say anything about the normalized level for this effect coming years given a more normal inflation?
Yes, I think you should not think about it because that's a technical effect that we now kind of take away every quarter as we go forward.
[ Nutra Nielsen ], the most warehouse is now operating fully. How do you see the ramp-up of cost savings in the new 12 months?
Yes, I think actually, we are seeing full operational effects these days. We still have the old warehouse in Fredrikstad that was kept as a precaution in case we needed the space, but we don't need it. We will have that premises until the end of the first half next year. But we are seeing operational efficiencies and the cost effect we're actually seeing now in Moss. Very satisfied with the investment, and we see now that the automation is working fully. We are running 3 shift these days with full volumes for the Christmas stores and everything works okay.
Mer customers contributing positive to margin or are they shopping more campaign items?
There is not one answer. There's a variation also between the Mer customers, but they, in general, have a higher frequency and a higher basket. And we have had very good recruitment that we're happy with, and we will continue working with increasing the number of customers into this club.
And the last question comes from [indiscernible] Please give split on cash and liquidity reserves.
I think we had NOK 81 million in cash, isn't that right, Trine? And the rest is then the reserves.
Oh, here's coming more questions. So all consumer prices have rised and will keep increasing?
That's not up till decided. When we look at our prices, we look at the market. We are living from low prices, and we have to stay competitive. So we are not the first one to move the prices. We are following the market. And let's see how inflation will be. I think overall inflation is now coming down. But of course, the Norwegian Krone currency might have a negative effect and will lead to more inflation in the year to come, but that is up to see.
And Nicklas Skogman, how big was the impact from lower performance-based pay year-on-year?
In the quarter, it was around NOK 10 million in difference.
And the last question from Skogman. I think we have touched up on it, but how is the pricing pressure developing in the market? Is it easing, unchanged or getting worse?
I think it's quite stable. It's a high competition out there. And I think if everybody that is looking for seasonal products, they've seen a lot of stores opening their Christmas sales these days with 50% discount of everything, but that doesn't necessarily mean that it's lower price than us. So I think it's -- you have to look through that. And the consumers are -- they know what is a good price. They know what is a good bargain. And they are more checking the prices in stores. I think -- the competition is there. It will be hard, but the consumers are the ones who will decide who's the winners and losers in the end.
And here is the last question. Is the cost of tenancy also increasing?
Is the cost of?
Tenancy.
Of leases or....
I suppose so.
We have -- we CPI adjust the leases first of January every year. And for us, the CPI month that counts the most is November.
I should not say the last question because here is the last question. Any thoughts on the competitive environment with Arista now having IPO-ed? Do you expect them to step up in Norway going forward? What do you consider to be your strengths relative to Arista?
I'm actually quite happy with -- they IPO-ed, because now we get some more insights in the numbers. So I think it's good to have some more market intelligence, but I think we will never comment on the competitors. I think they are doing a good job on many thing. We will let us be inspired on a lot of things they're doing. Of course, we have a slightly different product mix. They have their strengths, we have ours, and I think we have been competing well in the market for several years. They have grown. We have outperformed variety retail in that period. So I think that we will continue to grow both companies.
Thank you.
By that, we end the presentation.