XXL issued a profit warning last week, citing particularly weak trading conditions in December and at Christmas. It said poor winter conditions in the big cities where it operates, combined with large price cuts from competitors, contributed to a sales drop of 12 percent on a comparable basis in the quarter.
The company estimates that total operating revenues in 2019 will be below expectations at around 9.0 billion Norwegian kroner (€912.2m-$1.0bn), down 5.3 percent from the previous year.
The management said it has continued to focus on reducing the level of the group’s inventories. Combined with lower sales, XXL has substantially reduced its purchases, but this negatively affected the bonuses received from suppliers. In turn, this affected Ebitda, which are expected to have been in the range of NOK 870 to NOK 900 million (€88.2m to €91.2m-$98.6m to $102.0m) for the year. They cannot be compared with the previous year’s Ebitda due to the implementation of IFRS 16 accounting guidelines.
It was yet another weak quarter for the company after months of difficulties that started in 2018, when XXL admitted that the group ended up losing money because of poor execution with overly aggressive price discounts, especially in the domestic Norwegian market.
Meanwhile, several analysts have released damning reports about XXL lately. Oliver Schüler Pisani from Nordea Markets believes that XXL needs to raise new equity on the stock market. Petter Nystrøm, an analyst for ABG Sundal Colliers, estimates that earnings per share fell by 30 percent last year as compared to 2018.
At the end of the third quarter, the company’s net debt was estimated to have reached around NOK 1,870 million (€189.5m-$211.8m), placing the company in danger of breaking the covenants that it had agreed with a bank consortium last June. The covenant called for the debt/Ebitda ratio to decline from 4.5 times in the second quarter to 4.25 times in the third and fourth quarters, and to 3.5 times going forward.
The bank consortium has now agreed to a debt ratio of 4 times Ebitda for the new financial year, after being presented with a new refinancing program that included a private placement of new shares worth around NOK 400 million (€40.5m-$44.8m) from its largest shareholders.
XXL said it has initiated actions to improve the company’s financial situation in the near term. The focus is now on improving the balance between sales growth and the gross margins, while at the same time reducing inventories. In addition, it is implementing several cost initiatives.
XXL will present its final figures for fourth quarter and the last financial year on Feb. 7, 2020.