June 25, 2022

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Crisis Analyst at XXL: - If they can't turn this situation around, the XXL is worth nothing

Crisis Analyst at XXL: – If they can’t turn this situation around, the XXL is worth nothing

On Tuesday after trading closed, the XXL sports equipment chain announced that the company expects a decline in revenue in the second quarter of this year, compared to the same quarter last year.

More precisely, XXL expects revenue for the quarter to end at NOK 2.2 billion, NOK 200 million less than the sports series’ sales achieved in the corresponding quarter last year. In addition, the company expects a gross profit of NOK 190-220 million, compared to NOK 392 million in the second quarter of last year.

When the Oslo Stock Exchange opened on Wednesday morning, the stock was down 19 percent. However, during the trading day, the stock recovered from parts of the dramatic decline, and at 15.30, the stock was down about 16 percent.

Analyst Markus Borge Heiberg at Kepler Cheuvreux is well aware that investors are reacting negatively:

If the level of business volume they announced on Tuesday is the new normal, XXL will have virtually zero profits going forward, given that they are unable to cut costs. And if they can’t change that situation, the XXL isn’t worth anything, says Borg.

After a price drop on Wednesday, XXL was valued at NOK 1.9 billion.

weak market

Epidemics and indoor gyms have increased the demand for sports equipment and in the summer and fall of 2020, the listed sports chain was able to report strong sales numbers. This brought the XXL share to a peak of NOK 28.6 in October 2020, which corresponds to an increase of nearly 700 percent from the bottom in March 2020.

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However, the stock has fallen more or less continuously since then. Since the peak in October 2020, the stock has fallen more than 70 percent. The price drop so far this year is close to 44 per cent.

Stock has been poor lately, and there has been concern that sales of sports equipment will generally stall, Heiberg says.

Marcus Borg Heiberg, analyst at Kepler-Chuvreu.

Marcus Borg Heiberg, analyst at Kepler-Chuvreu. (Photo: Knut Eagle Wang)

Despite the fact that retail sales have generally remained at a stable level, a larger share of the money now goes into categories such as apparel and food, according to Heiberg.

XXL Director Pål Wibe confirmed to DN that the reason for the decline in sales and profits in the second quarter was due to a weak market.

– Rotate each stone to cut costs

Webby says that the company, as they also write in the stock exchange announcement, is implementing measures to adapt to market conditions.

– In addition to reducing purchase volumes, we are guiding every stone to cutting costs wherever possible. Wibe says he’s written previously that stock is getting healthier in the XXL and that we have better procedures.

What exactly these actions entail other than reductions in purchase volumes, however, Wibe won’t say anything about this time:

We don’t comment on stock price and valuation, but I used to say we get the price we deserve in the end. We will return to specific measures in the quarterly report when it is presented.

CEO Pål Wibe at the XXL store in Alnabru in Oslo.  During the pandemic, the chain has been able to report strong sales numbers.

CEO Pål Wibe at the XXL store in Alnabru in Oslo. During the pandemic, the chain has been able to report strong sales numbers. (Photo: Peter Berntsen)

Heiberg, for his part, believes a good deal is needed to resolve the crisis XXL is going through.

– XXL are strong in e-commerce, but they are not a pure e-commerce company. When you have large stores with employees, this leads to higher costs. Now, in addition, the earnings from online shopping are also declining, which is not good news.

He thinks XXL failed to make himself relevant

Reducing material costs and increasing the prioritization of online shopping could be a potential solution to the profitability problem as Heiberg sees it. But he also believes the sports chain is struggling to make itself relevant to the customer.

– They do not work in the “excellent” sector or in the “cheap” sector. In the consumer’s eyes, one is simply a little unsure of what the XXL really is. Historically, they have done well in Norway, but in the Nordic countries there is strong competition, Heiberg says.

It’s a tough balancing act for XXL selling brands. If they had a unique display, the model would have worked. But the product is not unique. One can buy all the same items from other online retailers. We thought it was possible for Pål Wibe to create this unique show, but he’s quit now.

Kepler Cheuvreux currently has a hold recommendation on XXL stock with a target price of NOK 11. At 15.30, XXL stock was trading at NOK 7.42 per share.

– Given the opportunities offered by XXL and the risk profile, we thought the company’s pricing was reasonable. Then of course we have to decide this again, but we haven’t done that yet, Heiberg says.

the retirement

The latest results announcement comes just one month after CEO Wibe has finished his job, two years after taking over as CEO. To DN Chairman said Hugo Morestad that there were disagreements that led to the departure of Webby.

Hamar’s MSc in Economics joined the sports equipment giant on April 1, 2020, after six years in the low-cost Europris series. Hence he entered a time when XXL stock was at a low point, and the company was in crisis.

Shortly thereafter, a new financing plan was introduced, as well as strong sales numbers for the XXL in the summer and fall of 2020, and investors regained confidence in the stake.

Wibe will continue as president of the sports equipment chain until the end of August this year.

The fact that you don’t have a long-term leader now increases uncertainty about choosing the right position. XXL doesn’t have the market with it, when it doesn’t make money despite the fact that turnover is still above the 2019 level, says Heiberg, simply put, there is a lack of a clear plan that we can believe in.

However, Heiberg notes that it appears as if the chain has learned from the previous crisis, in which the XXL had a huge stockpile.

– It looks as if they’re going to handle this differently than they did in the lead-up to 2020. Probably by making a high degree of discounts on merchandise. Perhaps that means the company doesn’t have to end up with too much inventory, and at the same time get lower margins when it sells at discounts, Heiberg says. (Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.