Clas Ohlson AB

STO:CLAS B

Earnings Call Transcript

[Operator]

Hello, and welcome to the Clas Ohlson Q2 2020 Report. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO, Lotta Lyrå. Please go ahead with your meeting.

[Lotta Lyra, President & CEO]

Thank you very much. Good morning, everyone, and welcome to this presentation of the second quarter results 2020 for Clas Ohlson. My name is Lotta Lyrå, and I'm the President and CEO, and I will do this presentation together with Pär Christiansen, our CFO. Pär will also be acting CEO as of Saturday, as I leave the company to take on another job in another industry. And Pär will be acting CEO until February 8, 2021, when Kristofer Tonström joins Clas Ohlson as the new CEO and President.Next slide, please. In this report, we see an improved result in an uncertain world. We see positive impact of the effects -- how -- we see positive impact of the actions we have taken to handle the effects of the ongoing pandemic. Organic sales are down 1%, and we also see negative impact from a weaker Norwegian krone, which impacts the total sales. The EBIT margin amounts to 6.4%. And our financial position is very solid, where net to EBITDA is minus 0.3.We continue to execute on our strategy to increase competitiveness. As part of the report today, we also announced the sales numbers for November, including the so important Black Week or gift week as we call it in Clas Ohlson. In November, we saw organic sales increasing with 2% and strong online sales.Next slide, please. So summarizing Q2 '20/'21 in brief. Organic sales and like-for-like were down 1%, and we will come back with some more details around this. As a consequence of the weak Norwegian krone, total sales were down 6%. Online sales increased 25%, impacted by changes in our inventory management systems in early autumn. Gross margin was improved, growing from 41.1% to 41.8%. And our EBIT margin improved from 6.1% to 7.3%, and it's excluding the IFRS 16 effect from 4.9% to 6.4%.Next slide, please. Of course, again, the COVID-19 effects have impacted society and Clas Ohlson during this quarter. After a somewhat safer summer, we have, again, during autumn, seen the spread of the virus increase. And we have, during both actually summer and autumn, have taken extraordinary measures to safeguard the safety of our coworkers and customers, and that is our top priority. We also, especially now during autumn, have been balancing high sick leave, both in stores but also in our distribution central. We still see only marginal disruptions in the supply chain, but we have seen some more impact in specific product categories. And of course, we have, again, during autumn seen rapidly changing customer behavior, driven by both the restrictions that have been imposed, but also the fact that people are again spending more time in their homes, both working and for leisure.Next slide, please. And taking a moment to reflect a little bit more on the changing customer behaviors. Basically, all Clas Ohlson stores are affected by restrictions right now, and approximately 40% of our stores are affected by explicit authority advice not to visit stores. This is especially apparent in Sweden, where we see severely reduced traffic in city locations in Sweden but also in Finland. And again, stores that usually benefit from cross-border sales see heavily reduced traffic pattern.And we have spent a lot of time and energy on ensuring a safe shopping experience in our stores to safeguard both coworkers and customers. At the same time, we see online shopping increasing significantly. This is both coming from people that usually shop online, that shop more online, but also new customer segments shopping more online. And as an example, people with an age above 65 have increased their shopping online with 82%.The current situation has also created an increased need for more flexible delivery options, including Click & Collect, pick up outside stores and more home delivery options as well as delivery to, for example, Instabox to further reduce the physical interaction between people. And again, people spending more time at home increases the focus on the home environment, both for work, leisure, but also at right now preparing for Christmas. We see that in the light of this, the new platform that we have created for growth has been very useful and an important part of being able to continue to develop the business also during this pandemic. This includes the steps we have taken in our stores. And of course, moving the role of the store from being only a shopping outlet and the point for personal service to also being part of the logistics network and hub for e-commerce, which enables short lead times and home delivery, is extremely important in light of the pandemic.We also see that the improvement we have made in our online channel, which includes both the customer experience and shopping online as such, moving from 14 clicks just a couple of years ago to 4 clicks now as well as the improved logistics in terms of having more delivery options, have been crucial in being able to serve customers during this pandemic. Since 2, 2.5 years ago, we are also present on MatHem and Kolonial, and the sales on these platforms have been booming during the pandemic, and this continues. And again, it's an important part for us to be able to serve customers in this situation.We continue to develop our delivery options to being even more convenient. And of course, the core of who we are, are our products and services that simplify life at home. And many of the assortments that we carry, everything from things that enable us to work better from home to how we maybe cook together or now right now spent Christmas, are very relevant. So in the light of a changing customer behavior, we believe that the new platform that we have built for growth have been very relevant.Next slide, please. To give some more details on how we see traffic pattern evolving in this very special situation, we have here 3 concrete examples of 3 stores in different sorts of locations. The green line shows a store in a large city in the middle of the city center. The blue line shows a store in just the outskirts of a larger city. And the yellow orange line shows a store in a large city outside the city center but with convenient parking, meaning that the parking is close to where the Clas Ohlson store is. And this graph then shows the traffic development in these 3 different stores. And what you can see here is that during the year, when the pandemic started to hit in week 8, 9 or so, the traffic to the store that is in the very city center on here dropped immediately and have been constantly on a lower level since and very recently dropping further.Then looking at the blue line and the orange line together, we can see that when the pandemic was very intense during spring and again now since week 41 or so, we see that it has meant a lot for the traffic to the store, whether the parking is close or not. And this shows how concrete it becomes, where you are located and how people really want to be sort of as lifted time as possible in the big crowds.Next slide, please. And then along with it, we have seen traffic development online increasing drastically. This line shows the traffic development clasohlson.se, .no, .fi, and you can see that when the first wave hit in March, April, we had an increase leading to a new level, traffic-wise. Then, as I mentioned before, in September, we consciously reduced our commercial level, because we wanted -- we changed our inventory system, so it went down slightly. But then again, as we resumed the normal commercial level and at the same time the second wave hit, we saw a very steep increase again in traffic.So I hope that this gives you a good picture of the traffic development that we are seeing, varying traffic impact in stores depending on location and the closeness to parking as well as how online traffic is increasing as part of the new customer shopping patterns we see as a consequence of the pandemic.With this introduction, I would like to hand over to Pär for the business update.

[Pär Christiansen, Chief Financial Officer]

Thank you, Lotta. If you change the slide, please. Looking at the business update, and if you change slides once more, we will take a step back a little bit reflecting on the first 2 years that we ended in Q4 2019/2020. We ended the strategy implementation first phase with a platform, including cost savings that we have mentioned before of around SEK 225 million to SEK 250 million. We also started a lot of growth initiatives, being able to increase sales per customer, being able to increase sales per square meter as well as online sales. And this platform is now delivered and support us going into this current year.So if you take the next slide. If you look at one of the perspectives here, smartness and simplicity, we are continuously striving for best-class efficiency, meaning that we are continuously streamlining and creating an efficient organization to be able to deliver cost savings over time. We have also looked further into our global sourcing strategy, establishing a new purchasing office in Europe. And we are expecting to be able to double that procurement in Europe in the coming 3 years.We have also, in the quarter and long term, improved the logistics to create a more competitive and scalable foundation for long-term growth. What we can see is that we see more and more synergies between the physical stores and the online channels, the omni-experience. We are establishing feeder stores closer to where people live, so we can have even faster deliveries. And we are increasing the automation in our DC. And just to mention, we set up a new feeder stores just before that gift week here, being able to support even further growth.If you take the next slide, please. Looking at the customer offer, we are trying to seize every business opportunity for continued growth. And we were awarded here in Sweden for the best omni-experience as well as the Retail chain of the year, which was a really nice reward for us.Looking at the shopping experience and smart products. We have now launched online Click & Collect, which means that we can deliver within 30 minutes, which is a super offer. We saw that now during the gift week that, that was a really strong offer. We have also launched Instabox, smooth and fossil free deliveries as well as a contactless delivery options for those who don't want to meet any person. We have now sustainability as the business opportunity, offering more and more sustainable products to our customers. And as we mentioned before, we now have rental offerings available in all our stores.If you take the next slide, please. Looking at our customer service, we have launched Club Clas in [indiscernible] Norway. We had 200,000 members the first 2 weeks, and now we're soon reaching 400,000. So it's a really steady growth. In total, we have 3 million Club Clas members in Sweden, Finland and Norway. And what we can see is that there is increased customer spend for members compared to nonmembers, which is a strength going forward.Look at customer service that can simplify everyday life for our customers, as I mentioned before, we have Click & Collect, but we're also now, during the pandemic, have Click & Collect also available outside the stores. We have also opened the stores a little bit longer, with special opening hours for risk groups. And we have launched a Clas Video Assistance on the mobile phone for those who don't want to or who can't visit the store can get product advice. And right now, we are helping our customers to find the right gift. We're having a Klapptipsaren on the web page.Next slide, please. As a big part of our strategy, we're looking at sustainability. We launched very, very ambitious sustainable goals not long ago. And the strategy is now built on the impact on our planet, and we're aiming to be fully circular by 2045. And around people, we want to be a sustainable long-term employer with happy coworkers, reflecting all kinds of homes. And society, we want to contribute to a fair and prosperous society for future generations. We want to be a child ambassador. So this sustainable growth is part of our strategy. We see that sustainable business goes hand-in-hand with our overall business goals, so we can reduce cost, increase profit and grow even further.Next slide, please. Then a little bit summarizing. We believe that the continued clear direction is more important than ever. We have a platform so we can capitalize on to be even stronger competitiveness, and we also have customer insights from our Club Clas program to evaluate -- elevate, sorry, customer and shareholder value to achieve our financial targets of 5% organic growth as well as a 6% to 8% operating margin.Next slide, please. So going into the financial development. Next slide, please. Looking at Q2 sales. Sales was down 6%. Organic sales was down 1%, and like-for-like sales was down 1%. We saw positive momentum in Norway with 8% organic growth. Online sales was up 25%, and we have decreased our store network with 4 stores compared to the same period last year.Next slide, please. Looking at the 6 months period. Total sales is down 2%. Organic sales is up 3%, and like-for-like sales is up 4%. And we can see a very positive growth in Norway with 15%, and online sales is up 43% according to our targets. And the number of stores was unchanged compared to previous year's 6 months period.Next slide, please. Looking at gross margin. Gross margin was up to 41.8%. We saw a positive impact by improved product mix. We have a lower campaign intensity. We have positive effects from currency hedging in the NOK and also currency forwards and change rate effects related to inventory delays. On the negative side, we had a weaker sales currency in the NOK and also still a stronger purchasing currency in the U.S. dollar and somewhat higher sourcing cost. We are continuously reviewing and reducing purchasing prices as part of our strategy and, of course, also continuously reviewing product offerings and pricing on products.Next slide, please. Looking at the share of selling expenses. The share of selling expenses decreased by 0.3 percentage points in the quarter. And it also was impacted by a lower cost operating the store network as well as lower costs in the U.K. and Germany connected to the store closures.Next slide, please. Administrative expenses in the quarter was down to SEK 50 million, a decrease of 14%. This is in the trend with our expectations, and objective is to maintain and continue to improve this cost over time.Next slide, please. The operating profit in the second quarter was improved to SEK 148 million. We had positive effects of IFRS 16 of SEK 17 million. The EBIT margin improved to 7.3%, and earnings per share was SEK 1.65.Next slide, please. Looking at the 6 months period. Operating profit was improved to SEK 314 million. We had a positive effect of IFRS 16 of SEK 37 million, and the EBIT margin improved to 7.6%. Earnings per share was SEK 3.49.Next slide, please. Total investments in the 6-month period was SEK 115 million. We had investments in the store network in IT systems and also into the distribution system.Next slide, please. The inventory level decreased to SEK 1,898 million. We had increased inventory turnover rate to 5.9 compared to 5.7 the previous year, and we believe that we have a well-balanced inventory at the moment.Next slide, please. The cash flow for the first 6 months and financial position. Cash flow from operating activities, excluding IFRS 16, was SEK 368 million. We had a net cash position in the period, and we right now have approved credit facilities of SEK 1.1 billion, so a very strong financial position.Next slide, please. Looking at the events after reporting period. Next slide, please. We've, today, also released the sales for November. Total sales was down 4% to SEK 960 million. We saw 2% growth in organic sales and 2% growth in like-for-like sales. We had a negative calendar effect of 2%. Online sales were strong and up 64%. We had the reduction of 2 stores compared to the end of November last year.Next slide, please. We have seen a steady online growth in line with our target to double online every second year. We have upgraded our platform going from 4 clicks -- now from 14 clicks to 4 clicks, and the speed of the site has improved significantly. And also supporting this growth, we have a better omni-experience, as we mentioned before, with, for example, Click & Collect in 30 minutes, delivery to Instabox and other options, so improving going forward.Next slide, please. As I've mentioned before, we're mentioning the currency situation in this quarter, and we have done before. We see still a tough situation in the NOK/SEK relation. It has continued to be on a low level, at least, compared to historical levels. And we have seen a little bit of a trend change in the U.S. dollar/SEK, but then, it's a little bit bounced back. So to mitigate that, we, of course, work with delays with hedging and also looking at pricing effects. We're looking at sourcing as part of this to improve our cost and, of course, improving the sales mix. But as we said, it has a quite heavy impact on the NOK/SEK relationship in the quarter.Summary and outlook. Next slide, please, and next slide again. Summarizing this quarter. We have a clear strategy for profitable growth and an improved result for the second quarter. We are monitoring the development and we -- and evaluate the adaption to the COVID-19 situation. The impact going forward will depend on the macro development, on currency and, of course, with the customer behavior. We are doing everything we can and focusing on what we can impact ourselves. And we continue to be capitalized on the transformation we have made, which has a significantly lower cost level but also options for continuous growth. We have, as a base, a very strong financial position and a financial preparedness for the future.Next slide, please. Handing over to the Q&A.

[Operator]

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

[Niklas Ekman]

Just a couple of questions. Firstly, on earnings here, you talked about improved earnings. But obviously, last year, you had transformational cost of SEK 45 million, which is quite significant, and then these costs were 0 in this quarter. So I'm curious here, if you adjust for this, of course, you're seeing a fairly significant decrease in underlying earnings. I'm just curious if you could elaborate on this because the gross margin was quite solid. So what happened on the cost side? If you could just elaborate on the underlying trend rather than the year-over-year trend.

[Pär Christiansen, Chief Financial Officer]

Yes. Of course. I mean, we saw a drop in the sales, of course. But if you look at that into detail, it's not a linear development. Underlying that, you have very different and very unbalanced sales.For example, if you look at the stores that Lotta described, you have a -- you can have a Norwegian store with a lot of traffic and a lot of sales maybe where you have to have even more people in the store. And then you have a, as a worst case maybe, a store in Sweden with very low traffic and very low sales where we cannot reduce the demanding or the opening hours because we don't -- might don't want to, but also we can't.So looking at the average is a little bit confusing because of this pandemic. So I think underlying, we still have the cost savings that we have mentioned before. And I think also in addition, changing the warehouse management system in the quarter increased the logistic costs somewhat. When we closed the system and started up the system, it was not effective from the start as you could expect. But now it's running on, so to say, a normal level.

[Niklas Ekman]

Okay. And these -- this new inventory management system, is that something that had tangible extra costs specific to this quarter? Is that a number you would care to share with us?

[Pär Christiansen, Chief Financial Officer]

Yes, it has some sort of a tangible limited cost from starting up and then getting the system up and running, doing a little bit more during a more limited time. We're not sharing that cost, but it has somewhat bigger cost than normal.

[Niklas Ekman]

Okay. Okay. Fair enough. And in November, you saw very strong online sales. Is this mainly result of a favorable Black Week sales? And if so, does that mean it's been done at a lower gross margin?

[Pär Christiansen, Chief Financial Officer]

We saw a very good November during the full month, and of course, the Black Week was part of that. This year, we had what we call the gift week where we had offers trying to offer Christmas gift and not a flat discount. So I think we wanted to spread out the sales during the month but also have a good control of the gross margin.

[Niklas Ekman]

Okay. Very good. And you talked about the second wave here. I'm trying to see whether this is a positive or negative in terms of your sales and earnings. In Q1, you clearly saw a positive impact with a significant increase in sales. Is there any reason to believe that the second wave would be very different? Have consumer patterns changed? Is there less pent-up demand for kind of stay-at-home products? Or could the second wave be almost equally positive from your end, financial end, as the first wave?

[Pär Christiansen, Chief Financial Officer]

Well, I think the second wave, it was very hard to predict when it should actually come. And when it came, we saw a restriction first in Norway in -- around Oslo and then Bergen. And then it started in Skåne and going up to Uppsala, and then it covered almost full Sweden. And what we saw when this restriction comes, there's a first type of reaction from customer behavior, trying to understand how to behave and maybe visiting stores less. And then after a while, as people are adopting and understanding the delivery options we have, so of course, there's an initial effect when the restrictions come, and then people learn how to shop. So I guess, going forward, it will be dependent on how the restriction will be and also how people behave for us to be able to capture sales.We have done everything in our hands to have a sales store experience but also Click & Collect in the store, outside the store, delivering to parcel lockers, to shop with MatHem and Kolonial. So I think we are trying to offer a wide delivery options as possible to be able to capture all customer needs during Christmas.Having said that, we also expected that November should be at least focusing on gifts because people would probably shop earlier being afraid of not getting the gifts they want. So we expect the December to be more focused on being at home, spending time with family and friends, doing things together, lighting and everything around that. So that's what we're putting our offerings around. So if that will be what people want, I think we're in good shape for that.

[Niklas Ekman]

Very good. And the cost savings program you talked about here, the SEK 225 million to SEK 250 million, can you update us on where you are on this? Have you fully delivered on this? Or how much is potentially left in additional cost savings?

[Pär Christiansen, Chief Financial Officer]

I think the run rate is delivered, and the activities have been implemented. So of course, some of the costs are volume related. So you see in absolute term a higher cost saving in the big quarters compared to the smaller quarters. But of course, on some costs, you have a more flattish over the year. So we don't have, from the cost-saving program, any more activities to deliver. But of course, given the situation, we're very careful about cost, and we are doing everything we can to balance the sales and the cost to be able to deliver decent profit.

[Operator]

[Operator Instructions] Our next question comes from the line of Nicklas Skogman from Handelsbanken.

[Nicklas Skogman, Research Analyst]

Looking at your Swedish website, there's been a message now for a few weeks saying that delivery times, if you order home delivery, is between 5 to 10 working days, i.e., up to 2 weeks. What is the reason for this? And are you doing any picking in store? Because as you showed many stores, especially in Sweden, I would presume, have seen a pretty sharp reduction in traffic, which should free up some staff time to do picking. That's the first question.

[Pär Christiansen, Chief Financial Officer]

Yes. I mean, it's correct that we have seen longer lead times for certain type of orders. And to be fair to our customers, we have been very transparent on the lead times that you could expect longer lead times. So it's a little bit dependent on what type of products you ordered. Some are picked in one day, and some could take a little bit longer depending on complexity.We have, as I said before, pick in store using the store network and the store delivery options where you can get it within 30 minutes. And for some days, during the gift week, we had 50% pick in store, meaning that 50% of the online customers got order within 30 minutes. So I think it is quite a broad range.The reason for the longer lead times is that we have seen for certain days very, very big volumes. And it's not easy to adopt minute by minute to that. So we want to be very transparent to the customers, giving them an experience that -- so they understand what's happening when they order their products. But we always have options where they can get their products quite quick, with pick in store or to store to parcel lockers, for example.

[Nicklas Skogman, Research Analyst]

Yes. I mean, maybe the 50% pick in store rate is driven by the 2-week potential home delivery type. But my question of picking in store is more perhaps related to, do you do any store picking which is then home delivered?

[Pär Christiansen, Chief Financial Officer]

Yes, yes. And we have 6 -- right now, we have 6 feeder stores, meaning that they have the full assortment. And if you order that, you can now get home delivery for the full range. So if you go, for example, with Budbee Sweden, you can get the products delivered to your home same day.

[Nicklas Skogman, Research Analyst]

Okay. And what has been sort of the average delivery time in the last couple of weeks?

[Pär Christiansen, Chief Financial Officer]

Now I think it's been varying between maybe a couple of days to somewhat longer directly after the change of the warehouse management system. So...

[Lotta Lyra, President & CEO]

Just to add, it's Lotta here. I think it's important to sort of to divide this question up because as Pär said, approximately 50% is Click & Collect. And that means that it's all picked in stores and delivered to the customer.Then, on top of that, we have a flow from feeder stores to home delivery through Budbee, Porterbuddy, Instabox and so on, that is also picked in stores. Then on top of that, you have a flow coming from DC that you can divide in 2 parts. Part of that goes through our new automation. And there, the lead time is very short, which is approximately half; and the rest of the -- rest goes through a more manual flow in our DC, and that is where we have the longer lead time.

[Pär Christiansen, Chief Financial Officer]

Yes.

[Lotta Lyra, President & CEO]

So it's very -- it's not -- I don't think it's useful to make -- to give an average. I think it's to divide it in these different parts. And both the Click & Collect flow as well as the flow that goes directly to people's homes through Budbee, Porterbuddy or to Instabox go to our stores and is picked there.

[Pär Christiansen, Chief Financial Officer]

Yes. And I can also say that this type of automation that Lotta has mentioned is going to be improved step by step, where we get more and more of the picks automated in the DC, bringing down the average lead time even further during the spring here. But I think then that every growth on online, the longer-term investments had already determined the project time, which means that it's very hard to leapfrog into that. But during the spring, we will implement even more automation in DC bringing down the lead times.

[Nicklas Skogman, Research Analyst]

Okay. Great. And then I've been wondering, have you carried out any surveys of some sort among your new online customers that indicate how likely they are to use online as their primary channel or shopping at -- with Clas Ohlson also going forward?

[Pär Christiansen, Chief Financial Officer]

I'm not 100% sure of your question, but I guess during our Club Clas, which is now 3 million members, we follow our customer behaviors. And what we see is that more and more customers are getting into what we call omni, meaning that they both shop online and in the stores, and that they are the biggest growing group but also the most profitable for us as a company. So I think that is comforting going forward.

[Nicklas Skogman, Research Analyst]

Okay. And my last question on the gross margin, as things stand now with FX, what do you expect to be the net effect from FX in Q3? I presume the NOK hedges are starting to expire.

[Pär Christiansen, Chief Financial Officer]

Yes. I mean, I'm looking at the report right now, so I mean, we have the current positions in the report. So you can look at them, and I will give you the latest on Page 16, we have it. Looking at the 31st of October, we had some positive effects still remaining on the NOK/SEK relation of SEK 4.1 million and NOK/U.S. dollar of SEK 3 million, and SEK/U.S. dollar was flat. So at that point, it was 7 point million (sic) [ SEK 7.1 million ] in the -- on the positive side remaining on the hedge position on the 31st of October.

[Operator]

And as there are no further questions, I'll hand it back to the speakers for closing remarks.

[Niklas Carlsson, Group Head of Communications]

Thank you. We have 2 questions from the webcast to begin with. It's from -- the first question here is from Stefan Stjernholm, Nordea.He asked, "Is it fair to assume less campaign activities year-on-year also in the second half of the current fiscal year?"

[Pär Christiansen, Chief Financial Officer]

Well, I guess, it's a climate here where we don't want to drive unnecessary traffic due to the restrictions and the pandemic. And I guess you can expect that probably going forward, dependent on the pandemic development. But we're not pushing sales unnecessarily right now, which means that the gross margin is protected.

[Niklas Carlsson, Group Head of Communications]

And also, have you made any price increases to offset negative FX in Norway?

[Pär Christiansen, Chief Financial Officer]

I mean, just looking at Norway, it's a market where you have to look at Norway isolated, and I guess it's more dependent on the Norway to U.S. dollar situation. And we have, like most of the competition, increased prices somewhat given the high cost for purchasing goods. But of course, we're not changing prices because of the translation effect to the SEK. I mean, that is not due to the market in Norway, so you cannot compensate for that.

[Niklas Carlsson, Group Head of Communications]

Thank you. There were no further questions from the webcast, so I'll hand back to Lotta.

[Lotta Lyra, President & CEO]

Thank you very much, Niklas. And before ending the call, I would just like from my side to say a big thank you to all of you for a constructive dialogue and questions during my time as CEO for Clas Ohlson, and I wish Pär best of luck in his job as acting CEO, and a warm welcome to Kristofer Tonström as he joins in February.So with that, thank you. Merry Christmas, and goodbye.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.