Clas Ohlson AB

STO:CLAS B

Earnings Call Transcript

[Lotta Lyrå, President & CEO]

Good morning, and welcome to this presentation of the Q3 results '18, '19 for Clas Ohlson. My name is Lotta Lyrå. I'm the CEO of Clas Ohlson. And I will do this presentation together with Pär Christiansen, our CFO. Before kicking off and going into the agenda, let me just mention 3 key points in this Q3 report. First of all, Clas Ohlson is growing both in stores and online despite a challenging market. This gives an organic growth of 4% for the quarter. Secondly, our underlying EBIT result is increasing compared to last year, amounting this Q3 to SEK 363 million.Finally, our growth, as we see it, is better than the market but not leading up to our internal expectation and is therefore impacting short-term profitability for the full year '18, '19, which we expect will arrive at approximately 3%.The agenda for this morning is that I will start by giving a business update, then go into the financial development, handing over to Pär, who also will take you through the events after the reporting period. I will then summarize and then we will together with Andreas from ABG have a Q&A.So starting off the business update. I think, this Christmas, Christmas 2018, is really evidence that retail is changing. Looking at customer behavior, as one example, all growth in our market segment happened online. Consumption pattern was more peak driven than before, and for the first time in many years, the prognosis of growth in Christmas trade did not happen, instead the Christmas trade was lower than last year.For me and for Clas Ohlson, this just emphasizes the need to push forward with the change program that we have in place in Clas Ohlson 100+. And I think especially emphasizes the need to really challenge the cost structure to have both a lower cost but also a more flexible cost to handle more Christmases like this one.Summarizing Q3. We deliver an organic growth of 4%. We do this by growing 2% in like-for-like stores and 51% online. This growth is better than the market, but we expected more, and this is the reason why it affects the profitability for the current year. We see an improving underlying profit of SEK 363 million. This is very much thanks to also a reasonably stable gross margin.You will see in the report that our inventory turns a little bit faster now, and it leads to a reduced inventory level. During the quarter, apart from the so important Christmas trade, we have also had full focus on continuing to deliver and implement our Clas Ohlson 100+ program. An important part of this is full focus on cost, and we're also on track with our growth initiatives.Christmas is by far, both from a sales and profit perspective, the most important quarter for Clas Ohlson. And with that comes a lot of preparation. We prepared with attractive offerings to our customers, not only in terms of product and campaigns but also in terms of adding new elements to the shopping experience.We invested in increased digital capacity. And that is not only for the people who decide to shop with Clas Ohlson online but also for the big amount of people that use their mobile before going to the store. And finally, we introduced more and better delivery options, such as Click & Collect that I will come back to in a second.All of this resulted in an organic growth of 4%. But as I said before, we expected more. We invested but we also managed to sustain the gross margin at 40.4% during the quarter. All of this leads to an improving underlying EBIT of SEK 363 million compared to SEK 359 million last year.An important focus area for us in Clas Ohlson is online growth and online in general. For the quarter and for the first 9 months of '18, '19, we delivered a growth of 51%. This means that the online business now for the first 9 months amounts to SEK 337 million.So how did we achieve this? The main focus for us online has been to improve mobile conversion. And as you can see here, we improved online sales with 56% from Black Friday until Christmas Eve; 42% came or -- we increased conversion rate with 42%. And that was a very important contributor to this growth and led to, together with a decent traffic increase, transactions increasing with 74%.To amplify then the conversion in terms of improving the mobile experience, we also in the second week of December introduced Click & Collect as the delivery option for our customers. This is important not only from the perspective of offering convenience to our customers. It's also by far the most profitable delivery option that Clas Ohlson has online, meaning that the introduction of Click & Collect is a very important step in further improving the profitability of our e-com business.On top of this, as you can see here, the people who shop Click & Collect with Clas Ohlson compared to entering the store spend 82% more. So the average ticket value is 82% higher on a Click & Collect order compared to a receipt in the store.Then going from Q3 into a little bit of an update on the Clas Ohlson 100+ action program that we have. You will not see some any new initiative here today. We are fully focused on implementation and really achieving the results we have set out.Before commenting a little bit on the implementation, let me just recap what this program is about. It is about enabling Clas Ohlson to deliver our 2 financial goals: to achieve an average annual organic growth of 5%; and from 2021, deliver an operating margin of 6% to 8%. To do this, we do cost-saving initiatives that shall deliver SEK 200 million to SEK 250 million, and we also invest in a number of growth initiatives.We finance this by investing 1% to 2% of the underlying operating margin during '18, '19 and '19, '20.Starting with the cost initiatives. We work within 3 areas here: a more efficient organization, a more optimized assortment and to be more systematic in several areas. Two areas that I would like to mention today more specifically where we have taken steps are on the organizational parts and when it comes to our purchase prices. Starting with a more optimal organization. During February, we announced that 150 to 200 Clas Ohlson coworkers will be affected by the organizational review that we are pursuing.Yesterday, we informed about that we are now doing the first formal notice that concerns 80 coworkers. And this is for the first 6 months of this calendar year. And this is the first step in our moving forward in being more concrete of what this organization review entails.The second area where we have focused a lot during Q3 is on the purchase price side. We have addressed a significant part of the spend that we have in EU, and that is mostly known brands. And we're now also increasing the focus on the Asian side, where it's more about our own brands.Then commenting a little bit on the implementation of our growth initiatives. We have 3 focus areas as well here: increased sales per square meter, increased sales per customer and doubling sales online every other year.The first area I would like to comment on where a lot has happened during the quarter is in the optimization of the assortment. We are, as we speak, rolling out a new setup for a number of product categories in all our stores in Clas Ohlson. This is very much focused on the multimedia product categories. Basically, what we have done is that we have taken out a big part of the tale in this product categories not profitable for us today and instead given more space to the product that gives a better sales per square meter.This work will continue throughout all product categories and all stores. And the second thing, the main event during the quarter has been the introduction of Click & Collect. And apart from giving a better convenience for our customers and improving the profitability of our e-com channel, I would also say that it's a prominent example of what we mean with combining a strong store network close to the customer and a good digital experience.The final part that has been important in Q3 has been to implement the decision of a new strategy for our markets outside the Nordics. This is progressing according to plan. We will by the end of April have closed all our stores in Germany. And we will over the late spring and summer close the stores in U.K., where the final store in the U.K. will be closed in September.We will stay within the frame of SEK 210 million that was communicated when this decision was announced in the previous quarter. And we expect the SEK 75 million to come up in the profit and loss statement as the last store is closed.Then summarizing all of these actions that we are taking from an EBIT perspective. First of all, the Clas Ohlson 100+ program. We are on track with both our cost-saving initiatives and our growth initiatives. We are investing 1% to 2% in our underlying margin to pursue this initiatives. We will stay within that frame of 1% to 2% for '18, '19.As I mentioned before, we have grown better than the market but not fully up to our own expectations, and this impacts the operating margin for the year. And we expect to arrive at approximately 3% for '18, '19 and 4% to 6% for '19, '20. On top of this, we are taking the steps to close down the store network in U.K. and Germany, and this impacts the Q3 results on EBIT level with SEK 210 million.That finalizes the business update. And I would now hand over to Pär.

[Pär Christiansen, Chief Financial Officer]

Thank you, Lotta. Moving on to Q3 sales. We saw an increase of 6% in the quarter. If you look at the organic part, it was 4% and the like-for-like up 2%. I think, as Lotta said before, it's very important that we grew both online and in the stores.We have added 14 additional stores compared to last year. Looking at the sales per market, we saw growth in all our markets, except for Finland. And as we announced in Q2, when we discussed closing U.K. and Germany, we also announced that we need to look closely into the Finnish market since it's not delivering the margins we expect. And we also have since beginning of this calendar year, a new management in Finland that will take on that task.Looking at the first 9 months, we had the sales up by 8%, online up by 51% following our target, like-for-like up 2% and organic sales up 5%, also in line with our targets.Looking at the gross margin. We maintained the gross margin at 40.4% compared to 40.8% the previous year. We had positive FX from the strong NOK, also the FX hedges and somewhat weaker purchasing currency the U.S. dollar. We negatively impact from the commercial activities in the quarter and also some increase sourcing costs.The selling expenses as a percentage of sales increased 1.7% units. According to our plan, the cost we had, as Lotta said, expected little bit more sales in the quarter, but we are, as Lotta said also, better than the market. The main component here was the program -- the Clas Ohlson 100+ program and the commercial activities.Looking at the administrative expenses in the quarter, we had a decrease compared to last year, and that will be the following trend also in the future here when we see more and more effects of our Clas Ohlson 100+ program.The profit for the quarter. The operating profit amounted to SEK 105 million, operating margin of 3.6%. If we take out the nonrecurring items, the cost for the action program and closing of the stores in U.K. and Germany of SEK 260 million, we end up with the underlying results of SEK 363 million, which is slightly better than last year. And the underlying margin is 12.4%. Looking at the profits for the first 9 months. We had an operating profit of SEK 171 million and operating margin of 2.4%. The cost of that SEK 380 million connected through the nonrecurring costs, action program, the sCORE and also closing the stores. If we take out that, we have underlying profit of SEK 549 million, slightly below the previous year of SEK 599 million and having underlying EBIT margin of 7.8%.The investments in the quarter amounted to SEK 174 million compared to SEK 422 million the previous year, where we had the MatHem investment. The main part is new stores and refurbishments and IT systems.We have still a strong financial position. We had a positive cash flow from operating activities of SEK 728 million. We have an inventory of SEK 1,983 million. And looking at the picture here, you can see that we reduced the inventory of SEK 362 million between the Q2 and Q3. And if you compare that to the previous year where we reduced it by season of SEK 1,880 million, this means that we have now reduced down the inventory from the buildup we had previously to be prepared for this core implementation.So now we're back on normal levels. The cash flow after investing in financing activities amounted to SEK 70 million, and we had a net cash position of SEK 185 million.Then looking at the events after reporting period. The February sales that was announced today that was SEK 542 million, up 5%. We had organic sales up 2%, and like-for-like was flat. Online sales is up 47%. We have added 13 additional stores.Back to Lotta.

[Lotta Lyrå, President & CEO]

Thank you. So summarizing a little bit the quarter. We've said it a number of times, but so important for us, growing both in stores and online, growing better than the market but not fully according to our own expectations. And this impacts the profitability for the current year. I think it was important in this context to taking the consumption pattern of being increasingly peak driven because this also impacts the margin, and this is what we have seen during Christmas.All in all, it means that the operating margin for '18, '19 is expected to arrive at approximately 3%. We see an improving underlying operating profit and a stable gross margin.We are on track with our Clas Ohlson 100+ program. We will stay within the frame of 1% to 2% investment. The cost-saving initiatives of SEK 200 million to SEK 250 million are according to plan and so are the growth initiatives.Finally, I would like to say a couple of words about going forward. A little bit, as I started, the market is really changing. And we have seen during Christmas that this is now going faster than expected. The change is very much in line with what we have foreseen and designed our strategy to meet.And we believe that by developing a more unique customer offer, doing the combination of growing the online business and optimizing the store network as well as challenging the cost structure, we have the right pieces to meet this development. And we are taking actions to meet what is happening now. And what I would like to emphasize is that we will also take additional steps within these areas as we see needed to deliver long-term profitable growth for Clas Ohlson according to the financial goals that we have set out. So that's all from the 2 of us. So I guess, Andreas?

[Andreas Lundberg, Research Analyst]

Hi, everyone. My name is Andreas Lundberg. I work with ABG. Maybe I'll start off with retail, general retail questions. You mentioned the industry in a quick change. And then given that the [ path ] purchase is dramatically changing, I mean, in the past, you had traditional media, the industry had at least TV and stuff that [ they're taking ] in consumer stores, while today you don't have defined or predictable [ path ] purchase. I mean, with -- given that how is Clas Ohlson changing through this landscape? And how are you working to say get increased new customer? You [ only work ] extremely hard-driven markets. What you do?

[Lotta Lyrå, President & CEO]

I think, first of all, we are investing quite a lot in the inside sale to really get to know our customers and the different habits that you're talking about. More in detail, for example, there is a big part of the customer base today that have this no commercial please sign on their doors and they don't watch TV. So how do you reach them? But you also have a big portion that don't have that sign and that still watch TV. And the trick right now for us is to be more granular in our understanding of the customer and also our capabilities we are investing in. Then I think based on that, I believe that a big advantage that we have is that we have a combination of a store network, which is easily accessible. And then we are investing in our online capability. And it's about making sure that those who are connected and can provide them the shopping experience the way you like it, whether you like to start mobile and then continue in the store, only do mobile or start in the store and then shop. So that is a little bit how we're trying both to sort of address the situation but also use the benefit we have of a very strong store network.

[Andreas Lundberg, Research Analyst]

And on a similar topic. I mean, it seems successful retailer of today is working a lot with innovation, investment in human capital, investment in technology. I mean, people today probably don't go to stores for products; they go there for [ expert ] people. How do you think Clas Ohlson at least in the past, correct me if I'm wrong, where consumers have to gone to the store for products fit into this new environment?

[Lotta Lyrå, President & CEO]

I think -- when we ask our customers what is the reason they shop at Clas Ohlson, actually apart from the product, an important part is also being that you can actually get advice on the problem that you come with. So I think, the third reason, the knowledge that we have among all the Clas Ohlson colleagues is a very big advantage. Then I think there are more steps to taking this area exactly for the reason you point out, that, that will be one of the reasons you decide to go to the store versus shopping online. Then a lot of advice can also be given online in digital matters, and they will be a part of the customer base that want to do it that way. So we have to provide both, I think.

[Andreas Lundberg, Research Analyst]

And given that many companies are working on this changes, so to say, how do you think you will stand out versus competition?

[Lotta Lyrå, President & CEO]

I think an important asset that we have is that we have been around for 100 years, and there is a trust connected to that. And now it's about safeguarding that trust and building on that, adding all the new capabilities but with a very solid core of who we are and who we are [ within ]. If you look at other markets or maybe players like Amazon and so on have stepped in, there is almost always a couple of players that have remained very strong because they are trusted by people and have been around. So I think it's a combination of safeguarding where we come from and the uniqueness in that and at the same time adding new capabilities to be competitive.

[Andreas Lundberg, Research Analyst]

You mentioned a lot about your changes on the commercial investments you've taken or is taking. I mean, what have you learned so far? What has worked well? And what has not worked well?

[Lotta Lyrå, President & CEO]

I think it's a good point because we are really on a learning journey when it comes to finding the right balance between brand tactical campaign versus other things. And I think one learning is, of course, if you look at Christmas then, if I take the example of Sweden, there was a prognosis of growth of 3%, and we ended up with the decline of 1% in the market in general. And of course, knowing that -- had we known that before, we might have trimmed the investment into the market a little bit. But on the other hand, had we not invested, I'm not so sure we'd have even the 4%. So I think the learning [ sits ] in the details to really understand what is the way to be effective in the commercial part. And what we see is that the more we segment and the more personal we are in the offers, the better it comes. And that is really then what we believe is the way forward, more focus on loyalty and personalization when it comes to the offers.

[Andreas Lundberg, Research Analyst]

And on the cost-saving program, you touched on that. Do you feel more confident today that you will reach those targets? Or I mean has anything changed now? I guess, you have talked to suppliers, et cetera?

[Lotta Lyrå, President & CEO]

No, we are still very confident when it comes to SEK 200 million to SEK 250 million. And then on top of that, we're doing the restructuring of U.K., which is sort of additional money you can say. So -- and that's one of the main focuses that we have as management and together with moving the performance of Finland specifically also I think it's big step changes that we can make.

[Andreas Lundberg, Research Analyst]

All stores in U.K., Germany will not be closed as of end of this fiscal year or how is the status?

[Lotta Lyrå, President & CEO]

The stores in Germany will be closed by the end of this fiscal year. And in the U.K., there are a number of stores that will be closed also during the spring, then the final one will be closed in September.

[Andreas Lundberg, Research Analyst]

Okay. I think I'll let the audience take some questions.

[Niklas Ekman]

Niklas Ekman here from Carnegie. A couple of questions. First on the guidance that you provided today with the 3% or 5% margin. I think that seems to suggest a fairly sharp further deterioration in Q4, basically losses doubling in Q4 on relatively easy comparison. So first of all, is that calculation correct? And what exactly do you see as the main drivers behind that besides weaker-than-expected sales?

[Lotta Lyrå, President & CEO]

I thought -- I think actually the main reason behind that is -- we mentioned, I think, in the Q2 that September was weaker than expected. And then the other driver is mainly actually that Christmas trade is below our expectations. So it's -- that is the majority of the reasoning behind the guidance.

[Pär Christiansen, Chief Financial Officer]

Yes, and you should not really [ intimate ] that we expect the fourth quarter to be really bad, as you say. It's more what we come into, and we don't expect the fourth quarter to pick up what we have lost rather.

[Niklas Ekman]

And I noticed in this quarter also the SEK 50 million in additional one-offs related to Clas Ohlson 100+. What exactly were those investments? And then how much more can we expect in terms of one-off costs in the year ahead?

[Pär Christiansen, Chief Financial Officer]

As we had said, we are invested 1% to 2% in the Clas Ohlson 100 program, so we will still remain in that frame for this year, being on the top of that percentage. And as we said on top of that in what we see is the one-off is, of course, the cost led to this sCORE implementation that was previously and some other one-offs, mainly connected to the 100-year celebration that amounts to what we will have. So there will be some remaining costs in the fourth quarter for this program.

[Niklas Ekman]

And you're still sticking to your margin guidance of 6% to 8%? And obviously, now you're saying that the sales have disappointed. Does that mean that you require much stronger sales in order to get to the 6% to 8%? Or can that be achievable in a challenging environment with the -- kind of the current growth rates?

[Lotta Lyrå, President & CEO]

I think a little bit where I am did the presentation, I think the 6% and 8% we are very firm that we -- that is the ambition we stick with. We have identified, we believe, the important areas to achieve that. Then you can always put in more fuel to those areas. And I think that's also the way to look at the current situation and Christmas that it's a sign of what will be required going forward to make money in retail. So there has to be a strong focus on the cost side. And I think that's where we are, not changing the target but rather looking at do we need to do more.

[Niklas Ekman]

Yes. And finally from my end, you talked about 150 to 200 employees that will be let go as part of this program. What areas, where are you seeing the biggest reductions?

[Lotta Lyrå, President & CEO]

We made a formal notice yesterday of 80 people that are impacted during the first 6 months of this calendar year, and that is white collar, and it's focused on our headquarter functions. And we are not sort of further into the formal process than -- yes, I cannot say more today than that.

[Niklas Ekman]

But does that headcount reduction, does that include consultants as well?

[Lotta Lyrå, President & CEO]

No. It's only our own employees.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Good morning. My name is Nicklas Fhärm with SEB Equities. I need to understand the guidance. So if you translate the 3% operating margin into reported EBIT, what would that number be, please?

[Pär Christiansen, Chief Financial Officer]

If you take 3% of the turnover, that would be the number, except the SEK 210 million from U.K. and Germany. Then the underlying, as we say, the underlying profit will be 5%, which is a 2% difference from the program. So that is the simple math if I put it so.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay. So 5% is the underlying EBIT guidance?

[Pär Christiansen, Chief Financial Officer]

Yes.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Then you would take the strategic initiative cost and you would end up at 3%. Okay.

[Pär Christiansen, Chief Financial Officer]

Yes.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Can I also ask you, 4% to 6% for next year is kind of wide range? And as we have discussed already, it's getting a bit complicated in the market. But nevertheless, I mean, you're 1 year into the program pretty much. So don't you think it could make sense to make it slightly tighter that margin range? Or do you just feel that uncertain and you don't know whether it's going to be 6% or 4%?

[Lotta Lyrå, President & CEO]

I wouldn't call it that we are uncertain. I think it's more a matter of also reading more signs of what will happen and then have a better projection. We will not give more specific guidance today than 4% to 6%. And what we have said is that as we go into 2020 we move up the range. And of course, that means that part of what we are doing need to materialize during the year as well as it's not sort of an off and on situation that we are in.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Final question for now. [ Indotex ] also reported this morning, and one of the key takes is that their store expansion has basically ceased. It's been that way for a few quarters back. What are your plans for this upcoming fiscal year, please, in terms of store growth net?

[Lotta Lyrå, President & CEO]

Yes, I think, first of all, I think it was December last year when we announced that message. So that has already sort of been embraced for a long time in Clas Ohlson. That is not our main way of growing. Then what we do see is that there is synergies between having the store network and an online presence. And that is what we're building the business model on. We're closing our most unprofitable stores in the U.K. and Germany and those were bottom of the list. And then it's the same approach, as I have mentioned this before, that we take it -- I take it store by store. And then, of course, should market conditions evolve in one direction or another, then you have to review that list. And that's what I mean, that I think the approach will remain, but the bar will move, so to say, a little bit depending where the market goes. But I'm very confident in the approach we have taken. We started early. We're not opening. We're very, very selective, I would say, in the stores that we even consider today.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

But you're not closing in the Nordics either. So is what you're saying today your best estimate for the coming year will be the same-store network that you operate today basically?

[Lotta Lyrå, President & CEO]

I mean, we have mentioned that, for example, in Finland we see that there needs to be a step change profitability-wise. And of course, there we are looking at different ways of achieving that. And that also goes for Sweden and Norway. So we have a store-by-store approach. And I feel very confident that, that is the right way for us.

[Pär Christiansen, Chief Financial Officer]

Yes, should we see, operator, if there are any questions on the phone -- from the webcast.

[Operator]

[Operator Instructions] And our first question comes from the line of Stellan Hellström from Nordea.

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

First I'd like to come back to the cost for the action program. If you just seem to do the math on 3% and 5% from the guided EBIT margin for the full year, it seems that maybe there is a big drop-off in the costs in Q4. And is this something we should expect going forward also into next fiscal year?

[Pär Christiansen, Chief Financial Officer]

Maybe you can give me a little bit more flavor to what do you mean by the drop-off of cost?

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

Well, I think the -- it seems that you are guiding for very limited cost on the action program in Q4, implicitly. It seems like there's a SEK 10 million difference only between the -- yes.

[Pär Christiansen, Chief Financial Officer]

I mean, as we said, we started the program, and a lot of costs comes early because we want to start lot of activities. And this cost will then go down. And going into next year, this cost will be lower than this year. And of course, then the cost will go away completely coming into 2021. And of course, then we will also get this effect of SEK 200 million to SEK 250 million, which is the goal with that, in addition to the growth that we're expecting from these activities. So gradually this cost will decrease quarter-by-quarter.

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

From [indiscernible]. Yes. Okay, good. Then a question also on U.K. and Germany. Given that you have taken this provision of SEK 210 million, what should we expect in terms of contribution to earnings from these stores in the coming quarters? Will it be 0? Or will it be -- the sort of run rate of results contribution from these stores?

[Pär Christiansen, Chief Financial Officer]

I think the fourth quarter will probably be the most complicated one to look at from your side because it will be a mix of stores that are opened and closed. But, I guess, we will report the like-for-like sales when the stores are normal. And then I guess, 1 month from close will go into a closer period, and then it will not be as normal sales. And going into then the first quarter next year, it will be very -- a few stores that probably won't affect any significant numbers on sales. And it will be the same way we did for the closures of stores, yes, a couple of years ago. So yes.

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

Okay. Finally, I just also wanted to ask about the store network in the Norway -- or maybe Sweden and Norway where I think previously you said that closing stores would not be an option, this was a year ago because then you would lose out -- they're all giving a contribution to earnings. Is this still the case given that we have seen a relatively weak market this year?

[Lotta Lyrå, President & CEO]

I think you're pointing at exactly the point that I was trying to make, that I think that as the change now happens the bar for which stores that are contributing and not is moving. And that is where we, of course, also then need to make new assessment of that. For now on, as of today, we don't have any store closures to announce. But we will continue to build on the same model that is the store network and the online presence that together give us a lot of benefit. And then it's more about looking at the individual store and if the contribution is strong enough. And that we do continuously and in the light of the market conditions here and now and going forward.

[Pär Christiansen, Chief Financial Officer]

And I think you can mention in addition to that, that, as Lotta said before, we are looking through all categories right now, which means that the sales per square meter will go up, giving some sort of a change in this. Of course, there could be categories that we will take away. And in addition to this, we will negotiate all the rental costs. So, of course, the first step will not to be close the store. The first step will be to increase sales per square meter and also to negotiate the rent cost that's changing what we can control. And if the market is that severe, of course, the last step will be closing the store.

[Lotta Lyrå, President & CEO]

Let me hear from the webcast.

[Operator]

[Operator Instructions] And after seeing to be no further questions, I will hand back to the speakers.

[Lotta Lyrå, President & CEO]

Okay. So we take one question from the webcast from Markus Heiberg from Kepler Cheuvreux: Can you give us a number on the expected effect on the FX hedge effect for this quarter compared to last year?

[Pär Christiansen, Chief Financial Officer]

I will not guide on that. [ Sure ] continue.

[Andreas Lundberg, Research Analyst]

[ Shall I continue ]. If I go back to the question on the U.K., Germany closure, I think you mentioned some sales effect. At what cost will you see cost savings [ order ] in the fourth quarter? Or when will we see the first initial effects from lower costs?

[Pär Christiansen, Chief Financial Officer]

I think as Lotta said, since we're closing the store, most of them by end of fourth quarter, I guess the fourth quarter will not have any big savings in them. It will be coming into Q1 where we will see the savings. And as we said, the second quarter of next year we'll see the full effect, which means then we have closed everything and see that -- I mean, the cost part is the staff cost, it's the store cost and, of course, there will be also a lot of one-offs in depreciation and other things that is noncash related to this.

[Andreas Lundberg, Research Analyst]

Okay. And also -- a question on the one-off costs or the CO100+ program. I mean, if you're not concrete, what are those costs that you can now take away for next year?

[Pär Christiansen, Chief Financial Officer]

I mean, taking the part that we discussed now is, of course, if you look at the indirect purchasing, we have had the project for a long time, which has gone through with a full cost structure with this being a direct part negotiating like laptops and everything, which have been a task force that had additional cost of those people to go out. And the cost will go down, and then we will have then the reduced cost. We will have done the same with, for example, freight, lot of incoming freight and also freight like the e-com where we have an extensive negotiation program to reduce that costs. And then the cost will go away, and the new contracts will be effective. That is a different part. And the other part is, of course, related to looking at the organization, also redundancy costs and other cost like that will appear. And then we will have a lower cost structure. So we're very certain that this cost will disappear because it's not building to our normal business. It's a separate cost, and therefore, we're pretty certain that this is helping to accelerate the change, and then it will be removed.

[Andreas Lundberg, Research Analyst]

But does that also include the commercial costs so to drive sales as a campaign activities and stuff like that?

[Pär Christiansen, Chief Financial Officer]

I guess, the main part is building the -- we have put a lot of effort building up like the Click & Collect thing. And some of these costs could not be taken as CapEx because we're doing so many changes at the same time, which means that we will have a new version of this next Christmas. So we have been quite aggressive in building capabilities that we needed to build sales. And then we know that this will not be the final version of it. And therefore, we need to put it as a cost in the P&L. We could have been very conservative in this and put a lot of CapEx, but then we would expect that with this rapid change in the markets to have a lot of write-downs, and we don't think that is the right way to do it.

[Andreas Lundberg, Research Analyst]

Any question on the dividend? I think you promised the same dividend for 2 years. Is that same the case?

[Lotta Lyrå, President & CEO]

Yes, we don't have any change regarding that to communicate today.

[Pär Christiansen, Chief Financial Officer]

Okay. Any more questions from the floor here? Nicklas?

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

It's Nicklas Fhärm with SEB again. A few questions. I was just wondering there are indeed a few market surveys with some macro data suggesting perhaps slightly weaker consumer demand. I would say, I think it's fair to say. Could you share some thoughts, just from your end. I realized it's certainly complicated because you're in a transformation, separate the pieces from the pieces, but do you have anything to add? Maybe even, if you would like, if you would care to give us some update on trading so far in March?

[Lotta Lyrå, President & CEO]

Like I said before, I think what we have seen during Christmas and the unexpected drop in all of that, I think what we have to do is more to see that as the new normal. And then it's our responsibility to make sure that we have a cost structure that can handle that, and that means also handling an economic downturn. So again, I think we have the strategic pieces in place to address also a downturn in consumption. But then there might be need for new ambition levels in new -- in some areas in order to handle then a potential downturn. And that we are, of course, also prepared for. But I don't think it's about doing different things. It's maybe more about doing more in some areas. But I think it's a good point that -- I mean that is what we saw during Christmas. Not only were sort of a redistribution between November and December, but if you put November and December in the market together, it was lower than last year. And that, of course, we have embraced in the planning going forward.

[Pär Christiansen, Chief Financial Officer]

And then I guess, we can also, in addition to that, mention, I guess we believe that both the service and the assortment we have is pretty good fit for a wallet that is under pressure, which means that we still believe that we can attract a lot of consumers even if we have higher electricity cost or interest or other things affecting their overall wallet. I think they will still come to Clas Ohlson because we are not just a high-end store network.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Any comments on current trading?

[Lotta Lyrå, President & CEO]

No.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay. I think maybe final question. I understand you will implement IFRS 16, which is about capitalizing off balance sheet [ leases ] as of May first quarter, next fiscal year. Do you have any idea so far in terms of the magnitude of [ leases ] that will go within the line in the balance sheet, please?

[Pär Christiansen, Chief Financial Officer]

I think we will wait and communicate that as a part of the package. And I guess, the first companies that will implement this will now start to report their Q1. So I guess, we will also a little bit wait how things are communicated in the right way to really be perceived in the correct way. But I mean, we have, of course, done our homework now and know pretty much how it will affect both the balance sheet and the EBIT. But I think we'll communicate that as part of the package in due time before they report this -- communicated it.

[Lotta Lyrå, President & CEO]

And as part of that also the impact on our financial goals.

[Pär Christiansen, Chief Financial Officer]

Yes.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay. So that's very important. So we should expect some communication from you on financial target implications before Q1 is being released?

[Lotta Lyrå, President & CEO]

Yes.

[Pär Christiansen, Chief Financial Officer]

Yes.

[Andreas Lundberg, Research Analyst]

Let's continue on topic, you did mention, or at least or maybe I missed it. The MatHem Corporation, your ownership there. What's your take so far? And can you give an update on the number of SKUs and the plans going forward? And lastly, I mean, given the last [ mile ] is getting more and more important, how do you think you can capitalize on the fact that you own or part own the last [ mile ] company?

[Lotta Lyrå, President & CEO]

The reason we invested in MatHem as part of that corporation was to really have a position in [ last mile ] in Sweden that is unique. I don't think there is a competitor that can actually deliver with the same short lead time as we can today, thanks to the cooperation with MatHem. So I think it's given us a unique position in Sweden, and we are also investigating similar setups for our other markets because we believe [ we'll obtain ] that, not necessarily the investing but sort of -- the collaboration as such. So we believe that, that plays an important part together with Click & Collect and everything else. And then when it comes to MatHem and the number of SKUs, what we are seeing is that during season, so, for example, Christmas, we had an enormous sales uplift. So season and product and everything connected to what you're doing at home at specific point in time, there, there is a lot of commercial potential. So what we have done now is done a technical solution that enables us to scale the assortments very quickly and change the assortments very quickly in order to harvest that potential. So we're probably going for a base assortment and then adding relevant pieces as the calendar year progresses. So we have a common business plan for pursuing this collaboration going forward, and we're very positive in general around this.

[Andreas Lundberg, Research Analyst]

The demographic side, I mean, it obviously has changed a lot if you go back 10, 20, 30, 40 years. And in the past, it was very easy for a retailer to make money because everyone wanted the same products. Today is quite different. How do you think that has affected Clas Ohlson and how do you work with it?

[Lotta Lyrå, President & CEO]

As I said before, we are investing a lot in consumer insight and understanding the diversity of the customer base. And I think the main impact is, of course, doing exactly that and understanding what it is that makes a difference for the customer. And then we absolutely have a potential to attract more people in the younger segment, that we know for a fact. Gender-wise, we're more or less 50-50. But when it comes to age, we have a skew toward elderly people like myself and you and so on, but we have a potential when it comes to the youngsters.

[Andreas Lundberg, Research Analyst]

And one for you maybe, Pär, on the gross margin. And given the dollar strength of late, how do you see that going forward?

[Pär Christiansen, Chief Financial Officer]

I think -- I mean, we are as part of the question from -- this will be, I guess, one of the reasons we have a 4% to 6% and 6% to 8% is, of course, there's a lot of macroeconomics to our business. And the purchasing currency right now is heavily burdened by the U.S. dollar and the weak kronor, I guess. In addition, we are, as Lotta said, are working on reducing the underlying costs to mitigate that. And of course, if this weak Swedish currency will remain, we need to look at the pricing in the market like everybody else.

[Andreas Lundberg, Research Analyst]

And now, the saving program, is it tilted toward cost of goods sold? Or it split between OpEx and CapEx?

[Pär Christiansen, Chief Financial Officer]

I mean, if you look at what we have, I mean, we have around 500 people in our head office. We have, as Lotta said before, about SEK 1 billion in indirect cost, and we have SEK 4 billion in COGS. I guess, if you want to save a lot of money, you go for the SEK 4 billion. So it's -- I guess, we will attack where we get the most impact.Any more questions out there? Anywhere? Somewhere? I think I'll stop at my side at least.

[Lotta Lyrå, President & CEO]

Thank you very much.

[Pär Christiansen, Chief Financial Officer]

Thank you.