Clas Ohlson AB

STO:CLAS B

Earnings Call Transcript

[Lotta Lyra, President & CEO]

Good morning, and welcome to this presentation of the Q1 2021 Result for Clas Ohlson. My name is Lotta Lyrå, I'm the CEO and President, and I will do this presentation together with our CFO, Pär Christiansen. Today, we report a very strong quarter. This is based on strong organic growth of 7%. The EBIT margin improves to 7.1%. We have a solid financial position with net debt-to-EBITDA being minus 0.5. And during the quarter, we have continued to implement our 5-year strategy. The agenda for this morning is that I will do a business update and then hand over to Pär, who will take us through the financial development and some events following the reporting period. I will summarize, and then we'll have a Q&A. Starting off with the business update. And of course, during this quarter, COVID-19 and its macroeconomic consequences have continued to impact us. The safety of our customers and coworkers remains our top priority. We have seen reduced traffic in the central stores in the larger cities, primarily in Sweden, as well as big effect on the stores that are normally favored by border trade such as Strömstad. During the period, online shopping has increased, although the very high-growth numbers that we saw in the very beginning of the pandemic has flattened out. During this period, we have been balancing short-term layoffs with the high sick leave that has occurred. And still, we only see marginal disruptions in our supply chain. One thing that is very clear to us is that people have been spending more time in their homes, working from home, but also spending holiday at home. If I look at our markets a little bit more in detail, Norway has experienced significant growth during this quarter. Again, this has been driven by people spending a lot of time and attention on their home, many giving their homes a real facelift, and shopping has been along the lines of Christmas shopping. Therefore, we see categories like homeware and cooking and as well as garden driving growth in Norway. Also in Sweden, people have been spending a lot of time in their homes, but doing slightly different things. In Sweden, do-it-yourself projects and attention to the garden has been high on people's agenda. In fact, garden represents 60% of the growth in Sweden. Looking at Q1 more in detail. We grew organically with 7%. Like-for-like increased with 8%. And when translating this growth into Swedish crowns, we achieved a total growth of 1%. This is then impacted by the weak Norwegian crown as well as closures of some stores outside the Nordics. Online sales grew with 63%, and the gross margin improved slightly to 38.7%. All in all, our EBIT margin improved significantly, up to 8% from 3.9% same quarter last year. And excluding IFRS effects, it grew to 7.1% compared to 2.6% last year. Moving on to a business update. Clas Ohlson has a 5-year strategy called 100 More Years. We have now left the 2 first years behind us. These 2 years has been focused on establishing a platform for long-term profitable growth. This includes new ways of growing, but also a more lean cost structure. With this as a base, we now move forward. We will still focus on developing a more unique customer offer, outstanding service for our customers, and all the time make sure that our business is run in a way that is as smart and simple as ever possible. All in all, these are the areas that will make sure that we deliver on our financial goals, which are to deliver an average annual organic growth of 5% and an operating margin of 6% to 8% from this year and onwards. Focusing on smart and simple means that we want to make sure that we remain best-in-class when it comes to efficiency. This includes continuously making sure that we are as efficient as possible as an organization. We do this by, for example, investing in new and more advanced capabilities like, for example, AI and robotics. Maintaining a low-cost position makes global sourcing and the capabilities within that area critical. As a next step here, we are now opening up a purchase office in Eastern Europe. The purpose with this is to enable us to reach new suppliers in a very interesting market. And we continue to make sure that we automate as many processes as possible, for example, in our DC. Outstanding customer service is about making sure that the relationship with our customer is all the time at the right level. This is about, of course, existing customers, but also finding new ones. Availability and convenience is at the heart of what we are as a company, and this goes for both online as well as for our stores. Another important part of this is the way we stay in touch with our customers. And within months, we will launch Club Clas also in Norway. Today, we have Club Clas in Sweden and Finland as a tool for us to communicate to customers, but also offer our most loyal customers good offers. And within months, we will also have this possibility in Norway, which is such an important market for us. Our business model is about the combination of great stores and an online experience, and right now, we have 228 stores in our network. These are not only places for outstanding service, it's also an important part of our logistic network. During the last quarter, and I would say during COVID in general, it's also proven to be an excellent combination for people to be able to order online and pick up in store. And this shows the strength of having both a store network and a strong online presence. During the last quarter, Click & Collect, which means that people order online and pick up in store, grew in Norway with 94% and in Sweden with 195%. So the combination of stores and online is not only appreciated by our customers, but it's also a way for us to improve profitability in our online channel. Another important part of our online presence is the strategic collaborations we have online with, for example, MatHem and Kolonial. Here, we gain a lot of valuable experience that we can make us able to continue to develop these collaborations, but also that we can transfer to our own online business. We also build relations with new customer groups, for example, families with children. During the last quarter, Clas Ohlson's sales on MatHem more than tripled. Finally, developing a unique customer offer remains a top priority for us. Of course, this is the combination of the right product and services. Integrating the thought of helping customers live a more sustainable life at home will become a more and more important topic for us. And just lately, we took one important step on this journey, which was that we -- across our store network and online now have made available a large offer of rental solutions for our customers. We have seen in consumer insight service that we have done that many people, primarily younger, and people living in smaller spaces, appreciate the possibility of renting rather than owning everything they need. Also, enabling people to give some love to what they already have is a key part of our campaign this autumn. And this shows that the large and so important trend of sustainability in society also represents a commercial opportunity for Clas Ohlson. I will now hand over to Pär to take us through the financial development.

[Pär Christiansen, Chief Financial Officer]

Thank you, Lotta, and good morning. Looking at the sales development, we saw a strong organic sales up 7% and like-for-like up 8%. And due to a weaker Norwegian krone, that translates to a total sales of 1%. The sales development was driven by e-com and strong sales in Norway. Online sales was up 63% and now represents 9% of our total sales, and we have reduced our store network with 4 stores compared to last year. The gross margin was slightly up to 38.7%, and we have 4 factors impacting us positively: The currency hedges on the NOK, we had a better product mix and we have lower campaign intensity as well as lower sourcing costs coming from the CO100+ program. On the negative side, we saw a weakening sales currency in the NOK and also a stronger purchasing currency in the U.S. dollar. To mitigate and improve our margin over time, we are constantly renewing and reducing purchasing prices as part of our daily work. And as well, we are reviewing our product offerings as well and -- as well as the pricing on the products. Looking at the share of selling expenses. It declined by 3.3%, down to 28.1%. And this was, of course, due to quite good sales as well as lower cost, mainly related to the store network operating it to lower traffic, and we no longer have the cost for operating the CO100+ program as well as the lower cost of closing down the U.K. and Germany store operations. We also saw a decline in the administrative expenses in the quarter. This is in line with the plans we had for the CO100+ program to come down to lower levels. And we have objective to maintain this and continuously improve it over time to get to better cost position. Our operating profit improved to SEK 166 million compared to SEK 79 million last year. Excluding IFRS, we saw an improvement to SEK 147 million compared to SEK 52 million. The EBIT margin is now 8% in the quarter. If you take out the IFRS 16 effects, it was 7.1%. We had SEK 65 million investments in the quarter, mainly related to store network, IT system and also continuously improving the distribution system. We saw a quite big decrease in the inventory levels down to SEK 1.7 billion at the end of the period, and that is almost a reduction of SEK 250 million. And we increased the turnover rate also in the DC compared to the previous quarters. We have a very strong financial position. We had a positive cash flow of SEK 414 million from operating activities compared to SEK 187 million same quarter last year. We now have a net cash position, so the net debt-to-EBITDA ratio is minus 0.5, and we have approved credit facilities of SEK 1.1 billion. Moving on to events after reporting period. We, today, also released the August sales which was a little bit softer than the Q1. And we saw a sales that was down 7%, organic sales was down 2% and like-for-like sales down 1%. We saw a growth in the Norwegian market and also in e-com, but the store network in Sweden and Finland saw a decrease. In the month, we also had a negative calendar effect of 2%. We opened up a new store in Trondheim, Norway, this month and reduced 3 stores compared to last year. Also want to mention the current situation that has been quite volatile during the last month, and we mainly look at the NOK/SEK and the USD/SEK. The NOK/SEK has now flattened out at the level of 98, 97 [ per krona ]. And the U.S. dollar has been increasing until the recent weeks. So this can have a quite huge impact on Clas Ohlson, both in translation effects, also on our hedging and also on our pricing. To counteract any measures on this, we work with our pricing constantly. We work with our sourcing cost, and we try to optimize our sales mix, private label, product and category mix to get the best situation from this macro development. Handing back to Lotta.

[Lotta Lyra, President & CEO]

Thank you Pär. So all in all, I'm very proud to present this strong quarter today. At the same time, I'm very humble for the future development. And this is, of course, due to the insecurity around the development of the COVID-19 virus, the macroeconomic effects it will have as well as the fluctuations on the currency market that Pär just mentioned. And then of course, the year for Clas Ohlson will be impacted of -- will have impact on our development during the year. We will continue to focus on what we have in our own hands and what we can impact, just the way we have done during the last 6 months. And I believe that we have a valuable platform in the transformation journey that we have made during the last 2 years, both when it comes to the cost level itself, but also becoming used to actually adapting both to new customer needs as well as on the cost side when changes occur. And we do all of this from a very strong financial position and we have financial preparedness. Before going to the Q&A, it has been announced today that Kristofer Tonström will become CEO and President of Clas Ohlson. And I would like to extend my congratulations to you, Kristofer, and wish you warm welcome to a company with a rich history and lots of fantastic colleagues. Thank you for listening and then we will go to Q&A.

[Unknown Executive]

Thank you, Lotta, and thank you for the presentation. It's now time to open up for questions from the telephone conference. Operator, do we have any questions in line?

[Operator]

[Operator Instructions] Our first question comes from the line of Niklas Ekman of Carnegie.

[Niklas Ekman]

Yes, a couple of questions. Firstly, if we can start with the current trading. Is there any more flavor you can add to what happened in August? You mentioned the calendar effect, but is there anything else? Were there any temporary reasons for the slowdown? Because we've had a couple of months now with very strong sales growth, so just interesting to see if you think that the past few months were temporary or if it's more a temporary blip in August. Just your thoughts on this would be very interesting.

[Lotta Lyra, President & CEO]

Of course, Niklas. What we saw in August was a heavily reduced traffic very much in the beginning of the month. And in total, August as a month came -- arrived at 90, index 90 when it comes to traffic, which is the same level we had in May. And I think this is a little bit how we need to look at this year in total, actually. That -- there -- it's a little bit unpredictable, and there can be different things impacting. But there is insecurity in people's shopping behaviors and so on. And I think that's how to look at it. And what we have gotten used to is, of course, to closely monitor this and adapt both from a consumer and from a cost perspective. But it's -- the reason is traffic, and we have actually partly -- traffic has not fully impacted the result or the sales result. We have countermeasures in ATV that lifts it a little bit. So the traffic decline has not completely sort of take -- hit sales, if I say like that.

[Niklas Ekman]

Okay. That's very useful information. Secondly, the gross margin hedges. Can you quantify the impact that this had? And are these something that will go away in coming quarters?

[Pär Christiansen, Chief Financial Officer]

Niklas, yes, we have disclosed a little bit of the information about the amounts from the hedges, and I guess you will expect, with this current development, that mainly the NOK/SEK hedges will flatten out after Q2 and then a little bit disappear. So we have a little bit of a positive effect of that. On the other side, we have the positive development now on the U.S. dollar. But that will take some quarters before it will actually hit the P&L since most of it will go through the inventory. So a little bit dependent on how these 2 meets each other. There will be some quarters with positive effects and then the dollar, hopefully, picking it up.

[Niklas Ekman]

Okay. Excellent. A general question on store expansion. Can you say anything more about your view on store expansion? And in particular, considering the COVID-19 development now having kind of sped up the online migration. Is there any change in the view on store openings or even more so, store closures? Do you think that 2, 3 years from now, you will have significantly fewer stores than you have today? Or any thoughts on that would be interesting.

[Lotta Lyra, President & CEO]

We will keep on working with the same mindset and approach that we have worked for some time now with the mindset that every store needs to contribute to our P&L. And it's all stores together with e-com, that is actually Clas Ohlson, nothing else; meaning, that we need contribution from everyone. And of course, some of the consumer trends that I talked about before, like, for example, what will be the new normal when it comes to what time people will spend in the office versus at home and how much of that will cement into sort of a new normal, we don't know that yet. But that's an example of, of course, something that could impact our view on individual stores and sort of how long term we would be in those locations versus if people would start working more from home. And then there might -- the traffic patterns might go elsewhere, so to say. So I think it all depends on, actually, if these -- the trends we have seen, if they sort of cement into a new normal or if it is sort of a blip in the curve. So it's -- I think it's a little bit too early to say. But the mindset remains the same, that every store needs to contribute to our profitability target. I can also say, as another example that there are quite a few examples coming now where we have had in midsized cities, if I say like that, 2 equally big stores, where we're now moving to keeping 1 bigger and actually shrinking the other one. And I think that you will see in a number of cities. Meaning, that the number of stores might not decrease, but the number of square meters will decrease.

[Niklas Ekman]

Okay. Very interesting. And just as a follow-up there, do you at the moment -- I mean in the last couple of months here during COVID-19, have you seen a large number of stores that have been loss-making?

[Lotta Lyra, President & CEO]

No. I think in general, no. I mean we -- as I mentioned before, it's a very particular impact. If you take Central Stockholm, the very Central Gothenburg and then part of the West Coast in Sweden where you have a lot of border trade, there, of course, we have had a big hit connected to that. Traffic more or less halved, right? And again, it remains to be seen how much of that effect that remains. And otherwise, I would say, no, there is no other general trend in that direction.

[Niklas Ekman]

Okay. That's very clear. And also, just curious on your view on Amazon entering Sweden. This has been confirmed now about a month ago. They are looking to launch very shortly. Just curious if you could give your take on this. You've many times been highlighted in media as one of the companies that could be severely impacted by Amazon's launch. So what is your view? And how prepared is Clas Ohlson today for a -- for increased competition from a major player like Amazon?

[Lotta Lyra, President & CEO]

No. Sure. I think if I go back 3 years when we started the work with the strategy that we are now operating under, the increased competition and global players like Amazon showing sort of more interest in Sweden and eventually coming here was part of sort of the analysis that we made, and we said we have to prepare for this. And I think on one hand, we have a lot of strengths. We have a strong brand. We have a strong financial position and lots of relationships with Nordic consumers. So we operate from a position of strength. Having said that, I would say that there are a couple of things that we have made as part of the transformation plan that has very much been in response to this. One was that we -- more or less exactly 3 years ago soon, entered into the collaboration with MatHem. That was a way for us to have access to a new sort of logistic network to have quick deliveries and being able to compete online in a new way. And in the same manner, we have improved our online experience significantly during the 2 years to be able to meet this type of competition and, at the same time, develop our logistics system. So the whole development of the digital presence of Clas Ohlson has been very much to respond to consumers acting differently, but also competition increasing. So that is one part. The second part is that we set out a goal to reduce our costs with SEK 200 million to SEK 250 million, 2.5 years ago. And the reason behind this was that we expected these new competitors to have price as one of their main competitive tools. And in order to be able to compete, we needed a different cost structure, and that I feel that we have delivered now. And this gives us a position to both work with our pricing to meet competition but also safeguard profitability.

[Operator]

And we have one further question in the queue so far. It's from the line of Andreas Lundberg of SEB.

[Andreas Lundberg, Analyst]

I'll start with the inventory. You talked about that was down to SEK 250 million or so. First one, why did it come down? And what do you think of the current inventory levels?

[Pär Christiansen, Chief Financial Officer]

Well, this has been a work that we've been on to quite for a long time. We've been working both with the stores with all the automation and [ systemation ] around how to supply to the stores as well as working with outgoing products and markdowns. So this is the sum of a lot of activities as well as a strong sales in the quarter. So this has been a plan that we've been working on quite along, and we expect that you can see further development on the inventory. And of course, you need to balance this between the risk of losing sales versus having too big of an inventory. But I think we now have quite a lot of analytics and other tools to try to optimize this equation to not sit also with over inventory, which could have been effect right now having a COVID situation. So we think this is where the big strengths for us, to have these types of capabilities.

[Andreas Lundberg, Analyst]

So you don't think it's an unreasonable low level? You don't think this is an unreasonably low level, right?

[Pär Christiansen, Chief Financial Officer]

No, no.

[Lotta Lyra, President & CEO]

No.

[Pär Christiansen, Chief Financial Officer]

Not at all. We will always continue to optimize it even further.

[Andreas Lundberg, Analyst]

Okay. And on the cost savings, I think you reiterated these SEK 150 million plus that remains to be realized in this full year 2021. How much did you realize during the first quarter?

[Pär Christiansen, Chief Financial Officer]

We have not communicated any quarterly distribution of it. But I guess you can divide it by 4 and have some sort of a feeling of the quantities of this. On top of this, we, of course, have had short-term effects of reduced traffic, reducing man hours in the stores and other short-term effects that might -- the cost might go up in the coming quarters, if also sales goes up. So I guess in this quarter, you have a mix of the more permanent cost effects as well as some short-term cost effects that we try to optimize to keep profitability up even in a COVID situation so.

[Lotta Lyra, President & CEO]

And that is, I would say, also on a specific store level because, as I mentioned before, we have individual stores that have been hit by traffic patterns changing drastically. And of course, there, we have done everything in our power to also handle it from a cost perspective, and that is what you see in the result as well.

[Andreas Lundberg, Analyst]

Also status now ahead of the coming big holidays, including Black Friday. I think last year, you talked about that you lacked maybe some Christmas gifts in November. How are you prepared for this coming season?

[Lotta Lyra, President & CEO]

I think we have prepared a lot. And we expect online to be super strong this Christmas, starting, of course, with Black Friday. And we've already talked that the competitive climate might change and so on. So I think the -- one of the things we don't talk about that much, but is actually a key part and maybe what we, Pär and myself, other colleagues, spend a lot of time on is to do the forecasting on how much volumes to purchase and to all the time balance being able to meet demand, which is, as we have seen, quite unpredictable this year. And at the same time, safeguarding our inventory and our cash position. And we are doing our utmost to have the right balance between these 2. And we have spent a lot of time and, I would say, intelligence across the company to land on volumes that we believe are the right ones for the Christmas to come.

[Andreas Lundberg, Analyst]

And lastly, on your cash position that grew further here. You talk a lot about safeguarding and so forth. What else can your -- will you do with your cash position?

[Pär Christiansen, Chief Financial Officer]

I don't think I have any comments on that. I guess right now we don't have any other plans. The Board has given their view on the dividend, and we don't have anything else to disclose or what to do with the cash. I think it feels good to have that position in the COVID situation. So that will give us some sort of strength. Obviously making the right decisions, not being pressured by cash restrictions. If we need to buy more products or do other investments, we can do that.

[Operator]

Okay and we have 2 further questions in the queue. The next is a follow-up from Niklas Ekman at Carnegie.

[Niklas Ekman]

Yes, just 2 quick questions. Firstly, you mentioned in the call here that you're setting up a purchasing office in Eastern Europe. Are you seeing a dramatic shift in your buying from Asia to more proximity? Or is there any other reason behind this decision?

[Lotta Lyra, President & CEO]

I would say that it's a couple of reasons behind this. One is that we do see Eastern Europe as a very interesting sourcing market to improve the sort of the competitiveness of our total supplier base. So we believe that it's interesting from a cost perspective to be present in Eastern Europe and to increase the supplier base there. The other part is, of course, that -- and we have seen that during COVID now that we have quite long lead times with the supply we have from Asia into Clas Ohlson. And the European suppliers that we work with, those lead times are significantly shorter. And that gives us another level of flexibility and also adds to the picture that I talked about before, balancing all the time, being able to satisfy demand and not taking unnecessary risk when it comes to inventory and cash. So it also helps us in that aspect. So there are many reasons why we believe that this is a good step to take.

[Niklas Ekman]

Okay. Excellent. And the second question, just on the recruitment of Kristofer Tonström as new CEO. Could you provide any reason for -- kind of the background to why they -- you chose him? Or why the Board has selected him to be the new CEO. Just interesting, what were the key criteria?

[Lotta Lyra, President & CEO]

Well, as you know, it's the role of the Board and -- to recruit the CEO. So that is not something that I can comment on. I only want to congratulate Kristofer today to his new job.

[Operator]

And we have one further question in the queue. That's from the line of Nicklas Skogman at Handelsbanken.

[Nicklas Skogman, Research Analyst]

I was wondering if you would want to comment on the media coverage of you setting up an online center, as they call it, in Malmö where you are looking to hire 50 people. Will this be followed by more aggressive move or stance towards e-commerce?

[Lotta Lyra, President & CEO]

This is sort of the outcome of a process where we have clearly defined digital competence in the customer meeting as core competence in retail going forward. So that is the basis of it. We have previously operated this part of our business with a lot of consultants. But we believe that this is so business-critical and at the core of what we do that we need to have this competence in-house. That is the starting point. And it is sort of an enabler to the strategy we have already set out, which is, as I mentioned before, making the most out of the combination of our store network, our online business and the presence we have on external platforms, and that remains our ambition. And then as we have talked about many, many times before, we see customer demands increasing all the time in this area. And we see it as sort of a necessity to all the time be on par with those demands, of course. And this gives us the ability to have this more in our own hands rather than relying on consultancy agreements. And the reason we have chosen Malmö is that we believe that there is access to this type of talent in that area in a cost-efficient way.

[Operator]

And there are no further questions from the phones at this time.

[Unknown Executive]

Thank you. And we also have a couple of questions from the webcast. Some of them we have slightly touched upon earlier. This is from Stefan Stjernholm, Nordea. How much of the targeted SEK 150 million to SEK 160 million in cost savings for fiscal 2021 was achieved in Q1?

[Pär Christiansen, Chief Financial Officer]

Yes. And as I said before, we are not commenting quarter-by-quarter, but you can look at the magnitude by looking at the year having 4 quarters.

[Unknown Executive]

I'll move on to the next question with -- which is also from Stefan Stjernholm. Is the lower inventory level sustainable?

[Pär Christiansen, Chief Financial Officer]

And I say there, as I said, I think we have now the ability to balance this much better and balance sales versus inventory levels. So we believe that this level is sustainable and can improve and optimize even further, dependent on sales levels, of course.

[Unknown Executive]

And finally, then, can you give some more flavor to what's behind the clearly lower sales in August versus in fiscal Q1?

[Lotta Lyra, President & CEO]

And as I said before, it's traffic-driven. So traffic is index 90 in August, same level as in May. And we -- that has not completely hit our sales. We have counter measured that with an increased ATV during the month. But I think again, as I said in the end of the presentation, it's a strong quarter, and I'm very humble for the future development. And I think one has to be in this -- the business climate and the climate in society that I think we will see throughout this year. And we're constantly close to what's happening and adapting both how we meet the customer, but also our cost base.

[Unknown Executive]

Thank you. And since there are no further questions from the webcast, we're closing the Q&A session. I would like to hand back to you, Lotta.

[Lotta Lyra, President & CEO]

Yes. Again, thank you for being with us during this presentation of Q1 for 2021, and I wish you all a great day.