It seems that there is light at the end of the tunnel for XXL ASA, after many quarters stuck in a downward spiral. To turn the business around, the leading Nordic sports retailer has been taking drastic steps such as cutting costs, clearing inventory and searching for new “sustainable” sources of liquidity other than new equity. This has started to bear fruit. The Norwegian-based group posted growth of more than 30 percent for the second quarter of 2020, while its Ebitda reached record highs.
The company attributed this in part to a strong spring/summer season for sports retail in the Nordic markets after months of lockdowns during the pandemic. The group had already reported a sales increase of 7.4 percent for the first quarter, largely helped by a big stock clearance program that began in February.
It seems that Pål Wibe, who was appointed in April as the company’s new chief executive, played a part in the turnaround. Wibe is a Norwegian manager with a strong background in discount retail. He had been the CEO of a low-priced chain of variety stores, Europris, for six years.
He said in a conference call that the company has been working on initiatives to improve operational efficiency such as store upgrades, further refinements to the category offering, changes in marketing, a modernized brand platform geared towardsthe consumers and a reduced cost base. During the quarter, the management also established a new organizational structure to right-size the company and improve efficiency.
Instead of offering the widest range of products from many brands in its big-box stores and over the internet, XXL is now reducing the number SKUs and suppliers to lower inventory costs and cut down on complexities in procurement, production and distribution. It is also aiming to focus on premium brands and products in the medium term to raise margins, while striving to maintain an attractive price/quality ratio through more partnerships with key suppliers.
In the latest quarter, the Altor Fund has been confirmed as the largest investor in XXL, owning 23.82 percent of the retailer’s shares, as a result of an equity increase of 400 million Norwegian kroner (€37.5m-$42.8m), which ended on May 18. Dolphin Management, a company controlled by Øivind Tidemandsen, now holds 14.60 percent of the company.
XXL generated strong cash flow in the period, with a continued build-down of inventory, leading to total liquidity reserves of NOK 987 million (€92.7m-$105.6m), up from NOK 499 million for the year-ago period, and a net interest-bearing debt of NOK 295 million (€27.7m-$31.6m), compared with NOK 2,036 million.
Overall, revenues grew by 31.0 percent to NOK 2,865 million (€269.2m-$306.7m), representing a growth of 31.0 percent. Watersports products proved immensely popular, as did outdoor products, bikes and fitness products.
All Nordic operations experienced strong growth, leading to market share gains, with same-store sales soaring by 28.2 percent, boosted by online sales. E-commerce grew by 61.2 percent and represented 19.6 percent of total operating revenues, as compared to 15.9 percent in the second quarter of 2019.
XXL’s gross margin dropped by 3.1 percentage points to 36.3 percent because of lower bonuses from suppliers related to the continued build-down of inventories, higher sell-down activity for old inventory and negative mix effects from e-commerce. However, the group’s Ebitda soared from NOK 273 million last year to NOK 385 million (€36.2m-$41.2m), driven by revenue growth.
The total number of physical stores reached 89 at the end of the quarter, up from 85 last year.
In Norway, XXL’s revenues rose by 38.6 percent to NOK 1,392 million (€130.8m-$149.0m) in the quarter, with same-store sales jumping by 34.7 percent, thanks to a booming market for sporting goods. The gross margin fell by 3.9 percentage points to 38.6 percent, while the adjusted Ebitda margin increased by 0.8 percent to 25.0 percent.
In Sweden, quarterly revenues of NOK 798 million (€75.0m-$85.4m) were up by 13.6 percent in the local currency, driven by a gain in comparable sales of 11.2 percent and growth from new stores. Travel restrictions linked to Covid-19 had a deep impact on three outlet stores that lie close to the Norwegian border and rely heavily on customers from Norway. They recorded a sales decline of about 90 percent. Excluding these, the growth rate in the local currency was 19.3 percent and same-store sales gained 16.8 percent. Overall, the gross margin decreased by 3.6 percentage points in Sweden to 34.0 percent while the adjusted Ebitda margin expanded by 0.4 percentage points to 10.4 percent.
In Finland, where market conditions proved challenging, XXL’s revenues soared by 11.4 percent in euros to the equivalent of NOK 546 million (€51.3m-$58.5m). Same-store sales grew by 8.5 percent. The gross margin fell by 0.4 percentage points to 35.6 percent, and the adjusted Ebitda margin improved to 16.0 percent from 11.1 percent in the year-ago period.
In Denmark, where the company is still trading only online, sales dropped by 39.5 percent in the local currency, down to the equivalent of NOK 10 million (€0.9m-$1.2m). XXL has made adjustments in Denmark, among other things by moving the operations under the Norwegian e-commerce organization. Marketing spending was reduced in the quarter, which lowered sales volumes but improved the cost base. The gross margin improved by 10.3 percentage points to 27.6 percent. The Ebitda margin remained negative at 0.2 percent of sales, but this was a strong improvement from the negative 24.9 percent margin of the year-ago quarter.
In Austria, stores were closed from mid-March to May 2 because of coronavirus restrictions, and XXL’s overall revenues in the country dropped by 1.8 percent to NOK 119 million (€11.2m-$12.7m). The gross margin declined by 4.6 percentage points to 29.0 percent, and the negative Ebitda margin eased down to 2.6 percent. XXL opened a new store on May 22 in Wiener Neustadt, outside Vienna. To increase profitability in Austria, the company plans to establish a central warehouse for the region, so as to streamline logistics and reduce costs while boosting service levels.
Going forward, XXL will slow down the pace of its store roll-out, with three to five store openings a year, focusing on Austria and Sweden, and on cities where marketing expenses can be shared. At the same time, XXL will be shrinking several existing stores. While the company opened seven new stores in 2019, only four new leases have been signed for 2020 so far, including one in Norway, one in Sweden and two in Austria. XXL opened the new stores in Norway and Sweden in the first quarter and the new store in Austria in the second one. The final opening is planned for the fourth quarter in Austria.
