XXL ASA posted mixed results for the second quarter, with lower revenues but higher profit margins. As previously reported, the leading sports retailer in the Nordic countries is going through difficult times, admitting that it ended up losing money at the end of 2018 because of poor execution and overly aggressive price discounts, especially in the domestic Norwegian market. This led the company to let go of its brand-new chief executive, Ulf Bjerknes. The company's chairman and founder, Øivind Tidemandsen, has taken up an operational role in XXL since the start of 2019. Tolle Grøterud, strategy and investor relations director, is still acting as interim CEO, pending the recruitment of Bjerknes' successor.
In discussing the quarterly results, the management said the key focus has been on reducing the inventory levels, which has contributed to a positive development in cash flow. It has implemented several short-term initiatives to improve the gross profit, but at the expense of growth.
The company's total revenues for the three months ended on June 30 declined by 6.2 percent from the same period a year earlier to 2,187 million Norwegian kroner (€225.1m-$250.9m). On a comparable store basis, sales were down 11.1 percent. However, the gross margin went up by 0.7 percentage points to 39.2 percent, led by the Norwegian market. While the operating profit before amortization (Ebit) declined by 29.4 percent to NOK 98 million (€10.1m-$11.2m), operating earnings before amortization (Ebitda) jumped by 47.5 percent to NOK 273 million (€28.1m-$31.3m). The driver behind the higher Ebitda growth was a lower level of supplier bonuses. After posting a loss in the first quarter of 2019, XXL returned to profits with a net income of NOK 46 million (€4.7m-$5.3m), still down by 52.1 percent from the year-ago quarter.
The group's lower revenues were partly offset by the opening of seven new stores in the course of 2018. In addition, it opened two new stores during the second quarter, one in Vienna and one in Helsinki, Finland. It also opened one store in June in Malmö, Sweden.
The total number of physical stores reached 85 at the end of the quarter, or five more than a year earlier. E-commerce accounted for 15.9 percent of the group's total revenues, up from 15.0 percent in the second quarter of 2018. The company believes that e-commerce will continue to be the most important driver for comparable sales growth. It has rolled out personalized landing pages in all the countries, working on several new features including add-on sales at the check-out point, new sorting filters and enhanced picture and video quality. XXL recently launched a new omni-channel stock solution that makes all the inventories within the group available to all platforms at all times. It has also started to collect customer data online and in the stores to further strengthen the use of personalization and segmentation activities.
In Norway, XXL's revenues declined by 11.4 percent to NOK 1,005 million (€103.4m-$115.3m), and they were down by 14.8 percent on a comparable store basis. According to the retailer, the Norwegian market experienced some negative effects from Easter moving from March last year to April this year, and the month of June proved challenging.
In a way to improve “sold-out” situations and broadening the available assortment, XXL launched a new stock solution in the quarter making all products in the footwear and sportswear categories in Norway available for sales in all the stores. At the same time, XXL is now testing out its first AI-based system on the supply chain by replacing a min/max replenishment system with a new data-driven and algorithm-based system, which it expects will significantly lower distribution of goods to the stores and bring more predictability for central warehouses. Due to the change of focus to gross profits rather than just sales volumes, XXL was able to improve the gross margin in Norway by 2.1 percentage points to 42.5 percent. The Ebitda margin jumped by 5.5 percentage points to 24.2 percent.
In Sweden, XXL's quarterly revenues of NOK 612 million (€63.0m-$70.2m) were down by 6.2 percent in the local currency, weighed down by a drop in comparable sales of 8.8 percent. The management said that the Swedish market continued to be volatile and price-focused with many discounts during the quarter. Here also, XXL decided to shift the focus to margins, raising prices, which affected sales volumes but was beneficial to the gross margin. However, because supplier bonuses received decreased by around NOK 13 million (€1.3m-$1.5m), the gross margin ended 0.3 percentage points lower at 37.6 percent, but the Ebitda margin improved by 1.6 percentage points to 10.0 percent.
In Finland, revenues inched up by 0.8 percent in euros to the equivalent of NOK 434 million (€44.7m-$49.8m). The changed focus in XXL toward gross profits and lower inventories also abated sales in Finland, which were down by 4.0 percent on a comparable basis. The gross margin declined by 0.7 percentage points to 36.0 percent, while the Ebitda margin climbed by 3.5 percentage point to 11.1 percent.
In Denmark, where the company is still only trading online, sales dropped by 18.9 percent in the local currency, down to the equivalent of NOK 15 million (€1.5m-$1.7m). The company reduced aggressive campaigns to gain volume. As a result, the gross margin in Denmark improved by 0.8 percentage points to 17.3 percent, while Ebitda remained negative at 24.9 percent of sales, compared with a negative level of 9.9 percent in the year-ago period.
Austria – where the company started operating in August 2017 – stood out. Same-store sales improved by 2.1 percent in the country, and overall revenues jumped by 64.1 percent to NOK 121 million (€12.5m-$13.9m). The gross margin expanded by 2.1 percentage points to 33.6 percent.
The company opened its first store in the heart of Vienna on April 1, and the associated costs caused the Ebitda margin to remain negative at 5.0 percent of sales as compared to a negative margin of 24.3 percent for the year-ago quarter.
The company has announced that Jakob Olsbø, the former global director of marketing operations at Circle K, has been appointed as the group's new chief marketing officer. He started in his new position in June. For the future, the management said that it is working on fine-tuning the balance between revenues and gross margins in combination with a controlled reduction in inventories. XXL has defined many initiatives to deliver on its goal of improving the working capital situation and gradually reducing operating costs down to about 25 percent of sales.