January 28, 2023

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XXL’s earnings announcement surprised the analyst: – Much lower than the market had expected

This year’s XXL pre-Christmas gift to the market was of the broad, partly dark kind.

In an announcement on the stock exchange on Wednesday morning The sporting equipment chain reported capital appreciation, new agreements with banks, an exit from Austria, and a sharp decline in both income and earnings in the fourth quarter.

Arctic Securities analyst Carl Frederik Bierk summarizes the press release as follows:

– That was not a pleasant message.

He has no doubts about the heavier weight.

– Most importantly, what they say about the fourth quarter. They indicate the interest, tax, depreciation and amortization ratio in the fourth quarter, which should be the strongest quarter of the year, between NOK 50 and 100 million. It is much lower than the market expected.

Strong retreat

About the last three months of the year, for which the quarterly report wasn’t submitted until the beginning of February, XXL wrote that it remains a challenging market.

“declining consumer confidence and generally lower demand for sporting equipment” is noted, as well as rising inventories throughout the value chain. This, in turn, leads to aggressive pricing and marketing.

The company stated that “the massive discounts and high campaign activity contributed to a significantly lower gross profit margin”. Fourth-quarter earnings and earnings estimates have been revised downward.

XXL expects revenue between NOK 2.3 and 2.4 billion, down from NOK 2.7 billion in the fourth quarter of last year. The gross result (ebitda) is expected to be between NOK 50 and 100 million, compared to NOK 403 million last year.

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In addition, there will be costs associated with moving out of Austria, as well as any inventory write-downs.

— It’s weak, and it’s resulting in net debt at the end of the quarter, 1.2 billion, which is much higher than what we were dealing with. Even with the new equity, the company still has debt to be serviced going forward, and it’s counting on increasing profitability in 2023 as it was three months ago, says analyst Bjerke.

He and Arctic themselves projected NOK 245 million, while a pool of analysts covering the company forecast NOK 238 million.

Carl Frederick Bjerke, analyst at Arctic Securities.

Carl Frederick Bjerke, analyst at Arctic Securities. (Photo: Sebastian S. Berkvik)

Chairman: – Winning

– It’s likely to be turbulent in 2023, too, says XXL chairman and shareholder Hugo Maurstad.

– That’s why we think it’s important to have a solid balance. We’re doing this to reduce debt and make sure we have enough liquidity to take advantage of opportunities next year. The net debt will be very low after that. He says this is a win-win for both XXL and the banks.

– And for the shareholders?

– We believe that shareholders will benefit from this.

He recalls that last year’s fourth quarter sales of NOK 2.7 billion were the best ever for XXL. So, he thinks the sales volume now is decent, but he notes that the gross margins are very low.

— As we commented during the third quarter presentation, we’re on our way to achieving better cost control. Exiting Austria will reduce costs. It will also help reduce a number of central costs, Morstad says.

– Was it wrong to enter Austria?

– Yes, I would say so. The XXL concept is very strong and good in the Nordic countries, but in Austria there are competitors who are much stronger and require a different range of products than we had in the Nordic countries, he says.

President Hugo Morstad.

President Hugo Morstad. (Photo: Diederik Lennerud Arnesen)

Half a billion

In addition to the bleak profit forecast, it also became clear that half a billion kroner would be raised in the new money, which would be used to pay off the loans.

The issue was fully guaranteed by the largest owner, the Altor buyout fund, but there were also pre-commitments to subscribe to the new shares:

  • Altor has committed to underwriting the shares for NOK 119 million.
  • Øyvind Tidemandsen’s Dolphin Management, the second largest owner, has committed to underwriting the shares for NOK 50 million.
  • Arctic Asset Management has committed to underwrite NOK 30 million worth of shares.
  • Chairman Hugo Maurstads Funkybiz undertook to subscribe to the shares for ten million kronor.

He also stated that the company had received support from other owners, including Ferd, who had indicated that they would subscribe to shares corresponding to their relative holdings. Ferd is the fourth largest owner in the XXL.

The subscription price for the issue will be determined after the close of trading on Wednesday, but there is a minimum of NOK 3.7 per share.

– I think 500 million is kind of a pain limit for what you can get, based on the size of the company. If you assume the issue is at NOK four, the number of shares increases by about 50 percent. It would be a severe mitigation. But the support from the largest shareholders can only be described as good, sums up analyst Bjerke at Arctic Securities.

XXL also opened a fix issue to compensate for the mitigating effect, among other things with the reservation that the market price remains higher than the subscription price set for the given version.

– I evaluate companies on “enterprise value”, which does not change if I print new shares, says Chairman Morstad.

I believe in a weak start

Analyst Bjerke believes there is definitely a soft start to the new year.

Now the weather is looking good at first, but it seems pretty clear that demand for sports equipment is somewhat weaker this year than last year.

The analyst further points to lower consumption among customers as a key explanation.

—but there’s also fierce competition as XXL has lost market share in recent quarters, he points out.

Chairman Hugo Morstad says costs related to income will fall next year, while gross margins will rise again.

We have much less inventory than we had 6-8 weeks ago. He says we don’t have the same need to make deductions as before.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For additional terms look here.