Changes in the Group structure
On January 20, 2006, Stockmann agreed to sell the entire shares outstanding in its subsidiary Stockmann Auto Oy Ab to Veho Group Oy Ab, the Ford businesses in Turku and Espoo to SOK as well as Stockmann Auto's VW-Audi business to Helsingin VV-Auto Oy, a Kesko Group company, for a total price of about EUR 70 million. The Finnish Competition Authority approved the transactions at the end of February, and Stockmann's entire vehicle business was transferred to the new owners on March 1, 2006. In the same connection, Stockmann and Veho launched wide-ranging loyal customer cooperation in the area of vehicle sales and services.
Stockmann sold its subsidiary engaged in the Zara business in Russia to the owner of the brand, the Inditex Group of Spain, under an agreement signed on January 30, 2006. In 2002 Stockmann and Inditex concluded an agreement on the basis of which Stockmann received, up to 2010, franchising rights to trade under the Zara brand in Russia. By the end of 2005, Stockmann opened seven Zara stores in Russia, and operations got off to a good start. Sales generated by Stockmann's Zara stores in Russia amounted to just over EUR 46 million in 2005. In step with strong economic growth, the Russian market has become an increasingly interesting environment for retailers. Accordingly, Inditex and Stockmann decided by mutual agreement to terminate their previous contractual arrangements and concentrate henceforth on expanding their own business operations in Russia. Under the agreement that has been made, the business in Russia has been carried on for the account of Inditex as from January 1, 2006, and the final agreement will be made by May 31, 2006, providing that the State Antimonopoly Committee of the Russian Federation approves the transaction. The purchase price is about EUR 41.5 million. The capital gain, to be booked in the second quarter, will improve the Group's earnings substantially in 2006. Stockmann will continue the Zara business in Finland.
In this Interim Report, both Stockmann Auto and the Zara business in Russia are treated as discontinued operations in accordance with IFRS 5.
Sales and result
Stockmann's consolidated sales, stripping out the Zara business in Russia and the Stockmann Auto business for both years, grew by 7.7 per cent. Net of these eliminations, sales decreased by 1.2 per cent to EUR 395.7 million (EUR 400.6 million). The Group's sales abroad amounted to EUR 78.3 million, an increase of 13 per cent. Sales in Finland were down one per cent to EUR 317.5 million. International operations accounted for an increased share of consolidated sales, rising from 17 per cent to 20 per cent and representing 24 per cent of continuing operations. Revenue was EUR 330.5 million, as against EUR 334.1 million in the comparison period.
The gross margin on the Group's operations rose by EUR 3.3 million to EUR 109.3 million and the relative gross margin was 33.1 per cent (31.7 per cent). Hobby Hall's relative gross margin improved, and for the Department Store Division and Seppälä it was at the previous year's level. The improvement in the relative gross margin was attributable to the peeling off of low-margin vehicle sales as from the beginning of March. Operating costs increased by EUR 3.9 million and depreciation diminished by EUR 0.2 million. Operating profit was up by EUR 6.9 million to EUR 8.5 million (EUR 1.6 million).
Other operating income of EUR 7.4 million came from the capital gain on the disposal of Stockmann Auto. In the comparison period there was no other operating income.
Net financial income and expenses improved by EUR 0.1 million and amounted to a gain of EUR 0.2 million (EUR 0.1 million).
Profit before taxes was EUR 8.7 million, up EUR 7.0 million on the figure a year earlier. Direct taxes were EUR 0.3 million, decreasing by EUR 0.2 million on the figure a year earlier. The capital gain on the sale of shares in Stockmann Auto Oy Ab is tax-free in its entirety. Net profit for the report period was EUR 8.4 million, compared with EUR 1.2 million a year earlier.
Earnings per share were EUR 0.16 (EUR 0.02) and diluted for options they were EUR 0.15 (EUR 0.02). Equity per share was EUR 8.40 (EUR 7.81).
Sales and earnings trend by business segment
The Department Store Division's sales grew by 14 per cent to EUR 235.8 million. Sales in Finland were up 9 per cent. Sales were spurred by the new department store that was opened in the Jumbo Shopping Centre in Vantaa in October. International Operations' sales were increased by the good like-for-like retail performance by the department stores in Russia and the Baltic countries as well as by the Bestseller stores that were opened in Russia. Sales by International Operations grew by 32 per cent and its share of the division's sales rose to 26 per cent (23 per cent). The Department Store Division's operating result fell by EUR 0.3 million and was EUR 0.1 million negative (profit of EUR 0.2 million in the first quarter of 2005). Earnings in the report period were burdened by the start-up costs for the department store that was opened in the Jumbo Shopping Centre in Vantaa. International Operations reported positive earnings growth, especially owing to the marked improvement in the results posted by the department stores that were opened in Riga and Moscow in 2003 and 2004.
Because the volume and timing of mail order catalogues differed from last year, Hobby Hall's sales declined by 13 per cent to EUR 52.6 million (EUR 60.5 million). Online sales continued their robust growth, making up 44 per cent of Hobby Hall's distance sales in Finland (31 per cent) and 29 per cent of Hobby Hall's distance sales in Estonia (16 per cent). Thanks to the increase in the relative gross margin and effective cost management, Hobby Hall's operating profit improved by EUR 0.3 million and was EUR 1.0 million (EUR 0.7 million).
Seppälä's sales increased by 8 per cent on the same period of last year and were EUR 32.4 million. Sales grew strongly in the Baltic countries and Russia, where they were boosted by the new stores that were opened towards the end of 2005 and at the beginning of 2006 as well as by the good like-for-like sales trend. Due to the energetic establishment of new stores, fixed costs rose more quickly than sales. This led to a dip in Seppälä's operating profit, which was down EUR 0.5 million to EUR 0.8 million (EUR 1.3 million).
Stockmann Auto's sales in January-February were EUR 74.5 million and it reported operating profit of EUR 7.7 million. The operating profit figure includes the EUR 7.4 million capital gain on the disposal of the Stockmann Auto businesses. Stockmann Auto was transferred to the new owners on March 1, 2006.
Financing and capital employed
Liquid assets amounted to EUR 14.5 million at the end of the report period, as against EUR 16.2 million a year earlier and EUR 18.4 million at the end of 2005.
Loan repayments were not made during the report period, nor have new long-term loans been drawn down. Interest-bearing liabilities at the end of March were EUR 97.9 million (EUR 82.7 million), of which EUR 13.4 million consisted of long-term borrowings (EUR 14.9 million). Capital expenditures amounted to EUR 14.9 million. Net working capital totalled EUR 254.9 million and increased by EUR 17.0 million from the beginning of the year. The lower amount of non-interest bearing liabilities increased net working capital. The dividend of EUR 59.5 million for the 2005 financial year, which was declared by a resolution of the Annual General Meeting on March 21, 2006, was paid out on March 31. In 2005 the dividend was paid in April, whereby in the comparative figures it is treated as a distribution of profits and a liability to shareholders. The equity ratio increased on the comparison period and was 64.1 per cent (54.8 per cent). The equity ratio at the end of 2005 was 66.4 per cent.
The return on capital employed over the past 12 months improved as a result of the higher earnings and was 21.6 per cent (19.6 per cent at the end of 2005). The Group's capital employed increased by EUR 55.4 million from March of the previous year and stood at EUR 552.3 million towards the end of the report period (EUR 552.5 million at the end of 2005).
Capital expenditures and current projects
Capital expenditures during the report period totalled EUR 14.9 million (EUR 8.9 million).
The construction works for the major enlargement and transformation project for the department store in the centre of Helsinki got under way. The project involves expanding the department store's commercial premises by about 10 000 square metres by converting existing premises to commercial use and by building new retail space. In addition, completely new goods handling, servicing and customer parking areas will be built. After the enlargement the Helsinki department store will have a total of about 50 000 square metres of retail space. The total cost estimate for the project is approximately EUR 125 million. It is estimated that the works will be completed stage by stage by 2010.
The twelfth Stockmann Beauty store was opened in Helsinki in March. During the first part of the year, three Bestseller stores were opened in Russia: two in St Petersburg and one in Kazan.
At the end of 2006, the Department Store Division is planning to open a fourth department store in Moscow in the Mega Shopping Centre that will go up on the southeast side of the city. The cost estimate for the department store and other retail outlets that are to be built in leased premises is about EUR 16 million for Stockmann's part of the investment. A further objective is to open another seven new Bestseller stores in Russia during 2006.
In 2005 Stockmann signed an agreement on the purchase of a 10 000-odd square metre commercial plot on Nevsky Prospect, St Petersburg's high street. The plot is located next to the Vosstaniya Square underground station, in the immediate vicinity of Moscow Station. Stockmann will erect on the plot a shopping centre with about 50 000 square metres of gross floor space. According to plans, this will be the site of a full-scale Stockmann department store with about 20 000 square metres of retail space, other retail stores, a hotel and an underground car-park. The department store and shopping centre investment will have a price tag of about EUR 120 million. Plans call for opening the department store and shopping centre in autumn 2008.
The Department Store Division's capital expenditures totalled EUR 12.8 million.
Hobby Hall's capital expenditures amounted to EUR 0.7 million.
Seppälä's capital expenditures came to EUR 1.2 million. During the report period, Seppälä opened in Russia a store in both St Petersburg and Kazan. During 2006, Seppälä intends to open a further ten or so stores in Latvia, Lithuania and Russia.
Other capital expenditures in the report period amounted to EUR 0.2 million.
Annual General Meeting
The Annual General Meeting resolved on March 21, 2006, in accordance with the proposal of the Board's Appointments and Compensation Committee, that seven members be elected to seats on the Board and re-elected the incumbent directors, Lasse Koivu, managing director, Föreningen Konstsamfundet r.f.; Erkki Etola, managing director, Oy Etola Ab; Professor Eva Liljeblom; Kari Niemistö, managing director, Oy Selective Investor Ab; Christoffer Taxell, LL.M.; Carola Teir-Lehtinen, senior vice president, Corporate Communications, Fortum Corporation; and Henry Wiklund, managing director, Svenska litteratursällskapet i Finland rf; for a term of office up to the end of the next Annual General Meeting.
At its organization meeting on March 21, 2006, the Board of Directors re-elected Lasse Koivu as its chairman and Erkki Etola as its vice chairman. The Board of Directors re-elected Lasse Koivu chairman of the Appointments and Compensation Committee and re-elected as the other members of the committee Erkki Etola, Eva Liljeblom and Henry Wiklund.
Re-elected as regular auditors were Wilhelm Holmberg, Authorized Public Accountant, and Henrik Holmbom, Authorized Public Accountant. KPMG Oy Ab will continue as the deputy auditor.
The Annual General Meeting approved the Board of Directors' proposal on the granting of share options to Stockmann's Loyal Customers. The total maximum of 2 500 000 share options will be granted without consideration to Stockmann's Loyal Customers in disapplication of shareholders' pre-emptive subscription rights. The subscription rights are to be disapplied because by granting the share options, the company will offer Loyal Customers a benefit that rewards them for their continued patronage and at the same time improves Stockmann's competitive position. The share options will be granted to Loyal Customers whose purchases during January 1, 2006 - December 31, 2007, together with purchases made on parallel cards for the same account, are at least EUR 6 000 in total amount. For purchases of at least EUR 6 000, a Loyal Customer will receive 20 share options without consideration. In addition, for each full 500 euros by which the purchases exceed EUR 6 000, the Loyal Customer will receive an additional two share options. Each share option will entitle its holder to subscribe for one Stockmann plc Series B share. The subscription price is the volume-weighted average price of the Series B share on the Helsinki Stock Exchange during the period February 1 - February 28, 2006, which is EUR 33.35. On the record date for each dividend payout, the subscription price of a share subscribed for with the share options will be lowered by the amount of the dividends that may be declared after March 21, 2006, and prior to the share subscription. The subscription periods for the shares are May 2, 2008 - May 31, 2008, May 2, 2009 - May 31, 2009 and May 2, 2010 - May 31, 2010. As a consequence of the subscriptions, the company's share capital can be increased by a maximum of EUR 5 000 000.
The Annual General Meeting passed the Board of Directors' proposal on the granting of share options to key employees of the Stockmann Group. A total of 1 500 000 share options will be granted to key employees belonging to the senior and middle management of Stockmann and its wholly-owned subsidiary in disapplication of shareholders' pre-emptive subscription rights. The disapplication of the subscription right is made because the share options are part of the Group's incentive and commitment-building scheme for key employees and is an important element in maintaining the company's competitiveness in the international recruitment market. Of the share options, 375 000 will bear the marking 2006A, 375 000 the marking 2006B, 375 000 the marking 2006C, and 375 000 the marking 2006D. The subscription period for shares with share option 2006A is March 1, 2008 - March 31, 2010; with share option 2006B, March 1, 2009 - March 31, 2011; with share option 2006C, March 1, 2010 - March 31, 2012; and with share option 2006D, March 1, 2011 - March 31, 2013. The subscription period for shares will not, however, commence with the 2006B and 2006D share options unless the Group's financial targets criteria as determined by the Board of Directors prior to the distribution of these share options have been met. Those share options 2006B and 2006D in respect of which the criteria determined by the Board of Directors have not been met shall lapse in the manner decided by the Board of Directors. Each share option will entitle its holder to subscribe for one Stockmann plc Series B share, whereby a total maximum of 1 500 000 shares can be subscribed for with the share options. The subscription price for each share through the exercise of the 2006A and 2006B share options is the volume-weighted average price of the company's Series B share on the Helsinki Stock Exchange during the period February 1 - February 28, 2006, plus 10 per cent, amounting to EUR 36.69 per share. The subscription price with the 2006C and 2006D share options is the volume-weighted average price of the company's Series B share on the Helsinki Stock Exchange during the period February 1 - February 28, 2008, plus 10 per cent. On the record date for each dividend payout, the subscription price of the shares to be subscribed for with share options will be lowered by the amount of dividends declared after the commencement of the period for determining the subscription price and prior to the share subscription. As a consequence of the subscriptions, the company's share capital can be increased by a maximum of EUR 3 000 000.
The Annual General Meeting passed a resolution to authorize the Board of Directors to decide on transferring a maximum of 396 876 of the company's own Series B shares (treasury shares) in one or more instalments. The authorization will be valid for one year.
Shares and shareholders
The company's market capitalization at the end of March was EUR 1 788.1 million (EUR 1 378.8 million). At the end of 2005 the market capitalization was EUR 1 761.3 million.
Stockmann's share prices underperformed both the OMX Helsinki index and the OMX Helsinki CAP index during the report period. At the end of March the stock exchange price of the Series A share was EUR 32.50, compared with EUR 32.11 at the end of 2005, and the Series B share was selling at EUR 33.08, as against EUR 32.53 at the end of 2005.
The 23 350 Stockmann shares subscribed for in December 2005 with the share options for 2000 were entered in the Trade Register on February 28, 2006, and they were admitted to public trading on the Helsinki Stock Exchange together with existing shares on March 1, 2006. As a consequence of the subscriptions, the share capital was increased by EUR 46 700. Following the increase, the share capital was EUR 108 966 084. At March 31, 2006, Stockmann had 24 564 234 Series A shares and 29 918 799 Series B shares.
Stockmann held 386 946 of its own Series B shares (treasury shares) at the end of March 2006 and they represented 0.7 per cent of all the shares outstanding as well as 0.1 per cent of the total votes. The shares were bought back at a total price of EUR 5.8 million.
The company's Board of Directors does not have valid authorizations to increase the share capital or to float issues of convertible bonds or bonds with warrants or to buy back its own shares.
During the report period the Stockmann Group had an average payroll of 9 986 employees, or 205 more than in the comparison period. The department store in the Jumbo Shopping Centre and the new stores in Moscow and St Petersburg brought an increase in the number of employees, but the personnel strength was reduced by the disposals of the Zara business in Russia at the beginning of 2006 and Stockmann Auto at the beginning of March. The personnel of Zara in Russia and Stockmann Auto transferred to the new owners' employ under the terms of their current employment contracts. Stockmann's average number of employees, converted to full-time staff, increased by 159 and was 8 112.
At the end of March 2006 the number of staff working abroad was 3 064 people. At the end of March 2005, Stockmann had 3 016 people working abroad. The proportion of the total personnel who were working abroad was 32 per cent (31 per cent).
Retail sales excluding the motor trade are estimated to increase by about 2-3 per cent in Finland in 2006. The markets in Russia and the Baltic countries are set to continue growing faster than the Finnish market. Because of the divestment of the vehicle business and the Zara business in Russia, Stockmann's sales in 2006 will be lower and are estimated to come in at just over EUR 1.6 billion. Sales generated by continuing operations are estimated to grow.
The capital gain on the sale of the company that was engaged in the Zara business in Russia will improve second-quarter earnings significantly. In the second quarter, earnings from continuing operations are also expected to improve on the previous year. For the full year in 2006, Stockmann's target is for the Group to post markedly higher profit before taxes in 2006 than it did in 2005.
The full report including tables can be downloaded from the enclosed link.