XXL grows fast, looks around Austria and at Russia

Last year was a good year for XXL, the leading Nordic sporting goods retailer based in Norway. It posted revenues for the fourth quarter of 2016 that were up by 17.5 percent over the year-ago quarter to 2,151 million Norwegian kroner (€242.4m-$258.1m), with a 4.2 percent increase on a comparable store basis, in spite of negative currency effects.

The sales volumes in all the group's markets were positively impacted by good autumn conditions with snow in October and a couple of weeks in early November. However, December proved to be more challenging, with a lack of cold and snow in all major regions of the Nordic countries.

E-commerce had a strong growth at 52.2 percent, representing 13.4 percent of the total operating revenues of the group in the quarter. XXL sells online and offline in Norway, Sweden and Finland, and it recently added a web store for the Danish market.

The company's Norwegian operations gave a strong performance, with revenues jumping by 19.5 percent to NOK 1,203 million (€135.6m-$144.4m), or by 5.6 percent on a comparable store basis. Sales in the country accounted for 56.0 percent of the group's total revenues. The gross margin inched up by 1.9 percentage points to 45.7 percent.

In Sweden, XXL's revenues grew by 5.2 percent to NOK 609 million (€68.6m-$73.1m) - or by 13.0 percent in the local currency - with same-store growth of 6.3 percent. The gross margin dipped by 1.1 percentage points to 37.8 percent, weighed down by unfavorable exchange rates.

Finland stood out in the quarter, with sales up by 32.9 percent to NOK 326 million (€36.8m-$39.1m). They rose by 36.0 percent in the local currency, with growth of 13.3 percent on a comparable store basis. The opening of new stores during the year helped the gross margin soar by 5.3 percentage points to 39.9 percent in the country.

Overall, XXL opened six new stores and ended the quarter with a total of 64 stores in the Nordic countries. The company expanded into Denmark in May with only an e-commerce offering. The launch came with aggressive pricing and high marketing spending that will return negative profits during the first years of operation. The revenues generated in Denmark amounted to NOK 13 million (€1.5m-$1.6m) during the quarter.

The group's gross margin increased by 1.4 percentage points to 42.4 percent, driven by the strong performances in Norway and Finland, with a peak during the Black Friday promotion. This pushed the quarterly operating margin up by 0.8 percentage points to 13.3 percent before amortization (Ebitda).

For the full past year, XXL ASA generated total revenues of NOK 7,813 million (€879.5m-$936.9m). Sales grew 20.4 percent, with organic growth and thanks to the addition of 12 new stores and the development of e-commerce. XXL is gaining market shares in all markets. In local currencies, the group recorded growth of 14.7 per cent in Norway, 17.7 percent in Sweden and 35.5 per cent in Finland.

The year saw XXL expanding the warehousing capacity in Norway, the launch of new front-end websites in all markets and the signing of the first two lease contracts for store openings in Austria, with a view to opening at least one of two stores at the end of 2017.

The gross margin was stable for the year at 39.9 per cent, in spite of an aggressive launch of e-commerce in Denmark, along with negative currency effects. However, the Ebitda margin inched down by 0.7 percentage points to 10.5 percent. Net earnings increased to NOK 501 million (€56.8m-$59.8m) from NOK 427 million in the previous year.

Looking at 2017, the management said that revenues decreased by 8.1 percent in January, impacted by unusually poor winter conditions throughout the Nordics. The company has already signed ten new lease agreements for store openings due to take place this year. In the long term, the group is expecting same-store growth in the mid-single digits this year, and gross margins in the low 40's in Norway, in the high 30's in Sweden and between the mid- and high 30's in Finland.

XXL plans to roll out a new category of products, called Sportstech, in all its physical and online stores this year, after a successful test in 2016. This will include sports watches, action cameras, drones, GPS systems, cycle computers, sunglasses and other innovative products, mostly electronic, by well-known brands.

In presenting its financial results to analysts, the management pointed out that it is setting up a centralized organization in Austria for purchasing, customer support and other functions that will be scalable for Germany and Switzerland. Aside from a strong marketing spend, it plans to invest between €1.7 million and €1.9 million per store in Austria, aiming for average annual sales of €12 million per store and a payback in four to five years' time, considering that the gross and Ebitda margins will be similar to those that it has reached in Sweden. XXL plans to introduce e-commerce in Austria at the end of this year.

The company has no intention to open physical stores in Russia or to enter that market, but it wants to communicate with the Russian consumers who do their shopping in Finland. It will get its Finnish website translated into Russian and offer the same prices in euros for them to order items and pick them up at any of its Finnish stores. It will open a store this spring in Lappeenranta, near the Russian border, where any of the six million people living in the St. Petersburg area can pick up the products after driving for about two hours.