Stockmann Group's Half year financial report 1 January - 30

Operating result continued to improve and was positive in Q2 STOCKMANN plc, Half year financial report 12.8.2016 at 8:00 EET April-June 2016: - Consolidated revenue was EUR 352.7 million (EUR 351.0 million). - Revenue in continuing product areas and businesses was up by 6.8 per cent. - Gross margin was up, to 54.5 per cent (52.7 per cent). - Operating result was EUR 11.1 million (EUR -4.1 million). January-June 2016: - Consolidated revenue was EUR 625.9 million (EUR 696.8 million). - Revenue in continuing product areas and businesses was down by 1.8 per cent. - Gross margin was up, to 52.6 per cent (49.8 per cent). - Operating result was EUR -19.2 million (EUR -46.2 million). - Result for the period was EUR -33.3 million (EUR -59.3 million). - Earnings per share were EUR -0.50 (EUR -0.82). - Lindex achieved its all-time high second quarter revenue and result: operating profit up EUR 9.5 million, to EUR 28.1 million (EUR 18.6 million). - Efficiency programme speeding up: a leaner organisation with a reduced headcount to be introduced, targeting EUR 20 million further savings in 2017. A provision of EUR 5.8 million booked for Q2 due to the organisational restructuring measures. - Department store operations in Russia have been classified as discontinued operations. The comparison figures in the income statement and related items have been restated accordingly. The comments in the half year report refer only to continuing operations. Outlook for 2016 remains unchanged: Stockmann expects the Group’s revenue for 2016 to be down on 2015 due to ongoing strategic actions in order to improve profitability. The adjusted operating result is expected to be slightly positive in 2016. - The term “adjusted operating result” has replaced the previously used term “operating result excluding non-recurring items”, due to the new guidelines of the European Securities and Market Authority ESMA for Alternative Performance Measures. Interim CEO Lauri Veijalainen: Stockmann is continuing its persistent actions to implement the comprehensive turnaround of its retail business. The operating result for the second quarter was back to profit and improved by EUR 15.3 million compared to the previous year. Especially pleasing is that Lindex reached its best ever second quarter result by improving its operating profit by EUR 9.5 million. Lindex’s performance, together with the earlier divestments of non-core businesses resulted in a good improvement in the Group’s earnings. In fact, this was the fifth consecutive quarter when the Stockmann Group's operating result improved. Our strategy work focusing on core strengths is proceeding well and Stockmann signed an agreement in April to sell the Hobby Hall business to the SGN Group. The business will be transferred to the new owner at the beginning of 2017. All major structural changes in the non-core units have been made, and we will concentrate fully on our core businesses, Stockmann Retail, Real Estate and Lindex. Stockmann continued to implement cost savings in line with the efficiency programme which will enable savings of EUR 50 million for 2016. As the sales performance of our department stores has fallen short of expectations, we need to further speed up the turnaround by applying additional cost savings. Stockmann has therefore conducted codetermination negotiations during the summer to bring the cost level more into line with the scope of current operations. Personnel reductions are unfortunately a necessary step to ensure that Stockmann Retail achieves a positive EBIT in 2018. We are slowly, but surely, moving towards better performance. After streamlining our organisation and operational model, all the conditions are now in place to fully and further develop our selected focus areas (fashion, beauty, food and home products), invest in the renewal of our stores, develop online and digital tools, and fully utilize our new distribution centre – just to mention some of the on-going actions to improve the customer experience and increase sales. Key figures Continuing operations 4-6/ 4-6/ 1-6/ 1-6/ 1-12/ 2016 2015 2016 2015 2015 Revenue, EUR mill. 352.7 351.0 625.9 696.8 1 434.8 Gross margin, per cent 54.5 52.7 52.6 49.8 50.6 Operating result, EUR mill. 11.1 -4.1 -19.2 -46.2 -52.5 Adjustments to operating 0.0 6.6 0.0 6.6 24.0 result*, EUR mill. Adjusted operating result 11.1 2.5 -19.2 -39.6 -28.5 (EBIT), EUR mill. Adjusted operating result before 26.1 19.9 10.0 -4.6 43.4 depreciation (EBITDA), EUR mill. Net financial costs, EUR mill. 4.7 5.0 8.9 9.1 21.2 Result before tax, EUR mill. 6.5 -9.1 -28.1 -55.3 -73.7 Result for the period, EUR mill. -1.7 -12.1 -33.3 -59.3 -88.9 Earnings per share, undiluted, -0.04 -0.17 -0.50 -0.82 -1.24 EUR Personnel, average 9 158 10 417 9 229 11 066 10 763 Continuing and discontinued 4-6/ 4-6/ 1-6/ 1-6/ 1-12/ operations 2016 2015 2016 2015 2015 Net earnings per share, -0.04 -0.16 -0.35 -0.94 -2.43 undiluted, EUR Cash flow from operating 54.4 17.2 -20.9 -48.0 17.2 activities, EUR mill. Capital expenditure, EUR mill. 13.6 9.7 19.5 26.2 53.4 Equity per share, EUR 14.19 14.42 14.53 Net gearing, per cent 76.2 85.3 72.1 Equity ratio, per cent 46.0 44.6 46.1 Number of shares, undiluted, 72 049 72 049 72 049 weighted average, 1 000 pc Return on capital employed, -4.6 -5.2 -7.6 rolling 12 months, per cent *Adjustments in 2015 were related to Academic Bookstore, Oulu store, Seppälä and other Group’s restructuring costs. Stockmann has revised the terminology used in its reporting due to the new guidelines of the European Securities and Market Authority (ESMA). Alternative Performance Measures are used to better reflect the operational business performance and to facilitate comparisons between financial periods. Starting from the second quarter of 2016, the previously used term “excluding non -recurring items” has been replaced by the term “adjusted”, and, as a consequence, “operating profit (EBIT) excluding non-recurring items” has been replaced by the term “adjusted operating profit (EBIT)”. Correspondingly, “adjusted EBITDA” is calculated from adjusted operating profit excluding depreciation. Stockmann uses the term “continuing product areas and businesses” which refers to operations excluding Russian retail operations (Stockmann and Lindex), Seppälä, Hobby Hall, Stockmann Beauty, the airport store and the product areas the company has withdrawn from in department stores (electronics, books, sports equipment, toys and pet supplies). Gross profit and gross margin are also used as alternative performance measures. Gross profit is calculated by deducting the costs of goods sold from the revenue, and gross margin is calculated by dividing gross profit by the revenue as a percentage. Events after the reporting period Stockmann’s target is to considerably flatten its organisational structure, eliminate overlaps and simplify its processes. A new lean organisation, that will adjust the number of Stockmann’s employees in line with the scope of current operations, was discussed with the personnel during the codetermination negotiations which started in June and were concluded at the beginning of August. As a result, approximately 300 positions will be ended, most of them through lay -offs. In addition, around 80 people from the support functions will be offered a new position as a sales assistant and around 60 people are offered a position in the support functions with new employment conditions. The number of department store sales assistants will not be reduced to ensure excellent customer service. The final number of reductions will be confirmed when all the personal discussions have been carried out. At the start of the negotiations, which concerned around 3 000 persons, the reduction need was estimated to be about 380 employees. The goal is annual cost savings of approximately EUR 20 million, which will be achieved during 2017. A provision of EUR 5.8 million related to these organisational restructuring measures was booked in the second quarter. Risk factors Stockmann is exposed to risks that arise from the operating environment, risks related to the company’s own operations and financial risks. The general economic situation is affecting consumers’ purchasing behaviour and purchasing power in all of the Group’s market areas. Consumers’ purchasing behaviour is also influenced by digitalisation, increasing competition and changing purchasing trends. Rapid and unexpected movements in markets may influence the behaviour of both the financial markets and consumers. A weak operating environment may also affect the operations of Stockmann’s tenants and consequently may have a negative impact on rental income and the occupancy rate of Stockmann’s properties. These may have an effect on the fair value of the real estate. Uncertainties related to the general economic situation, and particularly those related to consumers’ purchasing power are considered to be the principal risks that will continue to affect Stockmann during 2016. Fashion accounts for over two thirds of the Group’s revenue. An inherent feature of the fashion trade is the short lifecycle of products and their dependence on trends, the seasonality of sales and the susceptibility to abnormal changes in weather conditions. Responsible management of the supply chain is important for the Group’s brands in order to retain customer confidence in Stockmann. The Group addresses these factors as part of its day-to-day management of operations. The Group’s operations are based on flexible logistics and efficient flows of goods. Delays and disturbances in the flow of goods and information can have a temporary adverse effect on operations. Every effort is made to manage these operational risks by developing appropriate back-up systems and alternative ways of operating, and by seeking to minimise disturbances to information systems. Operational risks are also met by taking out insurance cover. The Group’s revenue, earnings and balance sheet are affected by changes in exchange rates between the Group’s reporting currency, which is the euro, and the Swedish krona, the Norwegian krone, the US dollar, the Russian rouble and certain other currencies. Currency fluctuations may have an effect on the Group’s business operations. Financial risks, mainly risks arising from interest rate fluctuations due to the Group’s high level of debt may have an effect on the financial costs and the financial position. Financial risks are managed in accordance with the risk policy confirmed by the Board of Directors. Outlook for 2016 In the Stockmann Group’s main operating country, Finland, the general economic situation remains uncertain and only slow GDP growth is estimated. Consumers’ purchasing power is expected to remain low, and the development of the non-food retail market is likely to continue being weak. At the same time, competition is increasing. The GDP growths for Sweden, Norway and the Baltic countries are estimated to be somewhat higher than in Finland. The affordable fashion market in Sweden is expected to remain relatively stable. In the Baltic countries, more competition is expected in the retail market. Stockmann will continue to operate its shopping centre in St Petersburg. Economic development in Russia is expected to remain weak in 2016. This will have a negative impact on the rental income from tenants in Stockmann’s real estate business. Stockmann’s strategy aims at improving the Group’s long-term competitiveness and profitability through a comprehensive turnaround of its business. An efficiency programme was launched in February 2015 with an annual cost savings target of EUR 50 million. The programme is progressing according to plan, and its main effects will be reflected in Stockmann’s performance from 2016 onwards. The new organisational model which is currently being taken into use, will reduce costs by approximately EUR 20 million during 2017. Capital expenditure for 2016 is re-estimated to be approximately EUR 40-45 million which is approximately EUR 20 million less than the estimated depreciation for 2016. Stockmann expects the Group’s revenue for 2016 to be down on 2015 due to on -going strategic actions in order to improve profitability. The adjusted operating result is expected to be slightly positive in 2016. Press and analyst briefing A press and analyst briefing will be held today, on 12 August 2016 at 9:15 a.m. EET in Fazer's premises on the 8th floor of Stockmann’s Helsinki city centre department store, Aleksanterinkatu 52 B. Webcast Interim CEO Lauri Veijalainen will host a webcast in English today, on 12 August 2016, at 14:15 a.m. EET presenting the Half year finacial report. To participate in the webcast, please dial one of the numbers below 5–10 minutes before the webcast begins. The presentation can be followed by this link (https://stockmann.videosync.fi/2016-08-12-q2) or on the address stockmanngroup.com. (http://www.stockmanngroup.com) The recording and presentation material are available on the company's website after the event. Finland: +358 9 2310 1619 Sweden: +46 8 5065 3932 United Kingdom: +44 20 3427 1929 United States of America: +1646 254 3375 Confirmation code: 4470496 Further information: Lauri Veijalainen, Interim CEO, tel. +358 9 121 5062 Nora Malin, Director, Corporate Communications, tel. +358 9 121 3558 www.stockmanngroup.com STOCKMANN plc Lauri Veijalainen Interim CEO Distribution: Nasdaq Helsinki Principal media