Releasing poor results for the third quarter, after months of difficulties, XXL ASA, the leading Nordic sports retailer based in Norway, has come up with a new strategy to present along with its latest results.
The management said that it is disappointed over the sales trend and losses in market share. Moving forward, the company’s focus will still be on improving the balance between growth and gross margins. However, the group will now also implement several cost-cutting initiatives. In order to strengthen the control and speed of inventory reductions, it has asked its finance team to implement measures with a medium-term ambition of reducing the inventory towards 25 million Norwegian kroner (€2.5m-$2.7m) per store.
Another key area of intervention will be the improvement of the top line, especially in Norway. The management admitted that its focus on gross margin control in the past few quarters has to some extent negatively affected its revenues. This was also the case in the third quarter, but XXL acted with more aggressive campaigns toward the end of the period. These actions had limited effects on sales volumes, and had negative effects on the gross margin.
So, XXL is now working on a number of initiatives to turn around the sales trend, including a better assortment and category development, new online front-end, same-day deliveries, an improved marketing mix and more active price monitoring. In particular, the management believes that pure players are gaining momentum and that it needs to innovate to compete. To this end, it will increase the assortment online to match the pure players’ offer. The management also pointed out that too many XXL customers have encountered sold-out products, and it will now focus on having the best-selling products always in stock.
The group is still committed to building a “champion in omni-channel retailing,” as XXL considers that it has a unique opportunity to take this position. It recently launched a new omni-channel stock solution that makes all the inventories within the group available to all platforms at all times.
In line with the existing growth strategy, XXL will continue to invest in new stores, and in making existing ones more “exciting and engaging,” the management said.
In addition, in a bid to strengthen its position as a full-range specialist sport retailer, XXL acquired a niche player within the watersports segment during the quarter, West System Norge. The fast-growing Norwegian company offers a broad range of watersport products, from kayaks and wetsuits to small boats and engines, with around 30 percent of its sales conducted online. XXL said it will use the acquired company’s competence to build a new category. West System Norge will continue as a stand-alone operation, but it will generate synergies where they make sense. The acquisition price has not been disclosed.
Finally, XXL said it is working on improving its reputation, with strengthened leadership, controls and routines.
As previously reported, XXL has launched a new refinancing program that will result in the Altor private equity fund becoming XXL’s largest shareholder, following a private placement designed to strengthen its balance sheet. In light of the change, Hugo Maurstad is set to become the new chairman of the company’s board of directors, replacing Øivind Tidemandsen, who will remain a director.
In line with this program, XXL announced earlier this month that it has obtained commitments for a private placement of new shares worth around NOK 400 million (€39.3m-$43.6m) from its largest shareholders, Tidemandsen’s Dolphin Management, Altor Fund IV, Ferd, Odin Forvaltning and Arctic Funds. The management said the board of directors will be proposing a subsequent offering of around NOK 100 million (€9.8m-$10.9m) to shareholders that have not been allocated shares in the private placement.
Poor results in most countries
XXL ASA’s net income for the three months ended on Sept. 30 tumbled by 78.1 percent to NOK 23 million (€2.2m-$2.5m), as total revenues declined by 1.2 percent from the same period a year earlier to NOK 2,473 million (€243.0m-$269.2m).
The management said the results for the quarter were affected by a continued negative comparable store growth of 4.0 percent, especially in the company’s Norwegian operations, where same-store sales were down by more than 10 percent. September was described as a particularly challenging month, with lower sales volumes impacting the gross margin and Ebitda negatively. Although the company’s Ebitda improved by 11.0 percent to NOK 271 million (€26.5m-$29.5m), it declined to NOK 132 million (€12.9m-$14.3m) excluding the effects of the IFRS 16 implementation, translating into an Ebitda margin of 5.3 percent, compared with 7.6 percent in the same quarter last year. The gross margin inched up by 0.4 percentage points to 37.3 percent.
The group’s lower revenues were partly offset by the opening of seven new stores in the course of 2018. The total number of physical stores reached 85 at the end of the quarter, four more than a year earlier. However, XXL opened no new stores during the latest quarter.
E-commerce accounted for 14.6 percent of the group’s total revenues, up from 14.4 percent in the third quarter of 2018. The company believes that e-commerce will continue to be the most important driver for comparable sales growth. In the quarter XXL worked on a new e-commerce sales site and started testing it in Denmark, where it is still selling only over the internet. New design and features were introduced, such as search filters, new delivery methods and promotional components to lift up services, specific products and campaigns.
In Norway, XXL’s revenues declined by 8.6 percent to NOK 1,112 million (€108.9m-$121.1m), and they were down by 10.2 percent on a comparable store basis. According to the company, the Norwegian market is a competitive one because of discounting by many players, especially online. In September, XXL started to be more aggressive on several campaigns, with good growth online but limited positive sales effect in the stores.
Thanks to lower supplier bonuses, XXL was able to improve the gross margin in Norway by 0.4 percentage points to 39.3 percent. The Ebitda margin improved by 1.9 percentage points to 18.2 percent including IFRS 16 effects. André Sørensen, previously head of retail operations at an electronics retailer, Elkjøp, has been appointed as new managing director in Norway, replacing Anders Kjellén.
XXL has also changed its management in Sweden, where its quarterly revenues of NOK 736 million (€72.2m-$80.2m) were down by 0.2 percent in the local currency, weighed down by a drop in comparable sales of 1.8 percent. The management said that the Swedish market continued to be volatile and price-focused, with a lot of discounting during the quarter.
The company’s gross margin inched down by 0.2 percentage points to 36.5 percent in Sweden during the quarter, but the Ebitda margin improved by 1.6 percentage points to 12.1 percent including IFRS 16 effects. XXL has now recruited a new managing director in Sweden. Anders Lindblom was previously head of operations at another electronics retailer, Elgiganten. He will commence on March 1, 2020, replacing Johan Ljung, who will continue as interim managing director in Sweden until then.
Finland stood out in the latest quarter, with revenues rising by 7.5 percent in euros to the equivalent of NOK 492 million (€48.2m-$53.7m). The growth was driven by higher comparable stores sales, which increased by 4.8 percent. The gross margin expanded by 0.9 percentage points to 35.5 percent in Finland, while the Ebitda margin climbed by 5.5 percentage point to 13.9 percent including IFRS 16 effects.
In Denmark, where the company is still only trading online, sales dropped by 44.8 percent in the local currency, down to the equivalent of NOK 10 million (€1.5m-$1.7m). The company conducted less aggressive campaigns in the country. As a result, the gross margin in Denmark improved by 3.1 percentage points to 20.0 percent, while Ebitda remained negative at NOK 2 million (€196,195-$218,238) including IFRS 16 effects. XXL said it will make further changes in Denmark, such as moving the operations under the Norwegian e-commerce organization.
In Austria, where the company started operating in August 2017, same-store sales declined by 10.0 percent, while overall revenues jumped by 21.2 percent to NOK 123 million (€12.0m-$13.4m). The gross margin rose by 2.8 percentage points to 31.7 percent. Including IFRS 16 effects, the Ebitda margin was a negative 3.1 percent, compared with a more negative level of 16.4 percent for the year-ago quarter.
