Baltika
Quarterly report

Baltika's Financial Results, 1 quarter 2011

On the whole, Baltika Group’s performance in the first two months of the first quarter of 2011 corresponded to the company’s expectations while March proved a disappointment. Although the third month of the year seems to have been a failure for the fashion industry across Europe, we have to admit that growth in the proportion of goods of the new season proved notably smaller than anticipated, particularly in the retail markets of Eastern Europe where the result fell 250 thousand euros short of expectations. Considerably smaller sales of high-margin products, the weakening of the Ukrainian hryvna against the euro and some non-recurring expenses of around 160 thousand euros caused a result that was atypically poor for March, remaining 500 thousand euros below target.

According to management’s estimates, the dramatic deterioration in the achievement of operating targets will be limited to one month, March. Operating results for April will again be in line with the company’s expectations and plans.

The Group’s sales and the profitability of its retail system continued to improve in the first quarter of 2011. After a period of two years, this was the second consecutive quarter of sales growth: compared with the first quarter of the previous year the Group achieved 9% retail sales growth although the sales area was 8% smaller on average. Strong sales growth coupled with increased efficiency and an improved gross margin allowed ending the first quarter of 2011 with a 15% larger gross profit (5,891 thousand euros).

The gross margin for the first quarter of 2011 was 50% (Q1 2010: 46%), which is attributed to the recovery of consumer spending and better inventory and discount management

The Group’s sales per square metre (sales efficiency) grew by 18%. The indicator improved in all of the Group’s retail markets, particularly in Lithuania (up 23%) and Latvia and Ukraine (up 21%). At the level of the stores, the Group’s retail system generated a profit of 312 thousand euros compared with a loss of 63 thousand euros incurred in the first quarter of the previous year.

Baltika ended the first quarter of 2011 with a net loss of 2,364 thousand euros. Although the net loss for the first quarter of 2010 was 2,027 thousand euros, on a comparative basis the result for the first quarter of 2011 is 602 thousands euros , i.e. 22% better. The figure for the previous year was improved by the divestment of the MasCara and Herold brands of AS Virulane and the sale of some items of property, plant and equipment that yielded 256 thousand euros. Moreover, in 2010 movements in foreign exchange rates had a positive impact: in the first quarter of 2010 AS Baltika earned a foreign exchange gain of 514 thousand euros in contrast to a foreign exchange loss of 169 thousand euros incurred in the first quarter of 2011.

Although in general operating results are following a positive trend, management has decided to adopt resolute measures in response to the negative results for March:

-It has been decided that the Group will discontinue its operations in the Polish market as of 31 July 2011. A provision for the expenses that might be incurred on closing the Polish operations was made already in 2010. Therefore, the discontinuance of operations should have no one-off negative impact on the Group’s results;

-During the period until the year-end, the management board will cut general administrative and operating expenses by at least 320 thousand euros;

-The stores that perform below expectations will remain under careful scrutiny. In the first half of 2011, the Group will close five stores (four of them were closed in the first quarter) and in the second half-year a further six (including four in Poland). This will have a significant positive impact on the profitability of the retail system;

-Management of the Russian market will be strengthened;

-The Group’s brand management processes will be analysed so as to find additional opportunities for increasing revenue and cutting expenses.

In the first quarter of 2011 the Group reinforced its top management: in January the position of retail operations director was filled by Luke Dobbs who has extensive industry experience from British retail chains and in February the position of chief financial officer was taken over by Maigi Pärnik who has a strong finance and IT background. The Group is also developing a centralised visual merchandising function.

With the assistance of the international consulting firm Roland Berger, in summer 2010 Baltika developed its strategy until 2014. In the preliminary phase in 2011 the Group will develop and implement the required strategic tools and a development plan with a view to becoming a profitable growing international clothing business by 2014.

In the current year, Baltika will focus on the following projects:

-refreshing the Monton and Mosaic brands as well as their retail concepts in partnership with the international creative agency Dan Pearlman and gradually renovating the stores;

-the test version of the Monton e-shop;

-discontinuing Mosaic’s children’s collection and increasing the brand’s ladieswear collection;

-developing Baltman’s special-order suit service - increasing the offering of quality products aimed a specific customers in both Estonia and foreign countries;

-preparing for Ivo Nikkolo’s international growth;

-multi-channelling or preparing for growth through different sales channels.

The company’s management board has proposed to the shareholders that the company issue an additional 3,150 thousand shares at an issue price of 1 euro each. The funds raised through the share issue will be used as supplementary financing for the Group’s re-emerging growth. In cooperation with the international creative agency Dan Pearlman, Baltika is refreshing its two larger brands, Monton and Mosaic, and their retail concepts. The new concepts will gradually be adopted on revamping the Group’s existing stores as well as opening new ones. The extra funds will also be used for financing some development projects that are in their preparatory stage and making additional purchases in response to growing sales.  

The company expects that in the next quarters of 2011 sales will continue growing and efficiency will continue improving across all its markets. According to management’s estimates, the summarized result for the next nine months of the year will be positive.

REVENUE

Baltika Group ended the first quarter of 2011 with revenue of 11,771 thousand euros, a 7% increase year-over-year.

Revenue by business segment

RETAIL

Retail revenue for the first quarter of 2011 amounted to 10,755 thousand euros, a 8% increase year-over-year, growing for the second consecutive quarter (Q4 2010: +7%). In the first quarter of 2011 retail revenue grew in Latvia (25%), Estonia and Russia (14%). In Lithuania, retail revenue remained stable compared with the same period in 2010 and in Ukraine and Poland retail revenues decreased somewhat. The latter developments are attributable to substantial cutbacks in the sales area: due to the restructuring of the store network the sales area has decreased by around 20% in both Lithuania and Ukraine and roughly 16% in Poland.

Retail sales by market

BRANDS

In terms of brands, the largest proportion of Baltika’s retail revenue is generated by Monton whose retail sales for the first quarter of 2011 accounted for 52% of the Group’s total retail revenue. Mosaic contributed 32%, and Baltman and Ivo Nikkolo 8% each.

The brands’ sales results and efficiency indicators have improved significantly, affirming that the economic environment and consumer sentiment have stabilised and the improvements made to the Group’s collection development process and management of the retail system have been effective. The brands’ marketing activities have been reinforced with a strong focus on enhancing both visual and customer communication by creating more attractive window displays, being more active in using different communication channels, etc.

In the first quarter of 2011, retail sales of Monton totalled 5,641 thousand euros. Compared with the same period in 2010, sales grew by 8% while the sales area contracted by 8%. 

Although Mosaic’s target customer group has shown a slower recovery from the crisis, Mosaic’s sales and efficiency indicators have improved – retail sales for the first quarter of 2011 amounted to 3,417 thousand euros, a 2% increase year-over-year while the sales area shrank by 12% and sales per square metre grew by 12%.

Mosaic plays an important role in Baltika’s wholesale operations. In the first quarter of 2011 it contributed 69% to the Group’s total wholesale revenue. The continuously increasing pre-orders of Peek & Cloppenburg, one of the largest European department store chains, have transformed Mosaic into an international European clothing brand. In addition to Mosaic’s brand stores in Estonia, Latvia, Lithuania, Ukraine and Russia, the brand is on sale in 29 cities in ten European countries. The Mosaic collection is carried by 11 Peek & Cloppenburg department stores in Germany, ten in Austria, eight in Poland, three in Slovakia, two in Slovenia and Croatia, and one in the Netherlands, the Czech Republic, Hungary and Romania each.

Baltman’s retail revenue for the first quarter of 2011 was 810 thousand euros, 18% up year-over-year, achieved on a sales area that was 17% smaller than a year ago. Baltman’s sales efficiency has improved by 29%, reflecting recovery of demand for men’s fashion and more efficient management of the retail business. The collection rejuvenation process started last year is yielding good results.

Baltman’s special-order suit service launched in 2010 has already found loyal clientele in Estonia and the brand will expand with the service to Latvia and Lithuania. The special-order suit service offers the customer an opportunity to obtain a suit made of specially ordered fabric according to the customer’s own specifications.

Ivo Nikkolo sustained steady performance throughout the economic downturn, posting strong growth also in the first quarter of 2011. The brand’s retail revenue rose to 882 thousand euros, a 43% improvement year-over-year, while the sales area contracted by 5%. In the first quarter of 2011, the brand’s sales per square metre grew by 41% and comparable store sales by 27% (year-over-year).

STORES AND SALES AREA

At the end of the first quarter of 2011, Baltika had 116 stores in six countries with a total sales area of 23,961 square metres, 15 stores and 2,217 square metres less than a year ago. In the first quarter of 2011, the Group closed four stores: two in Lithuania, one in Ukraine and one in Russia. The Group will continue monitoring the profitability of the stores and streamlining its retail system.

Stores by market

WHOLESALE

Baltika’s wholesale revenue for the first quarter of 2011 amounted to 845 thousand euros, a 18% decrease from the first quarter of 2010. On the other hand, wholesale revenue from sales to comparable customers grew by 39%. In the first quarter of 2010, 41% of the Group’s wholesale revenue was generated by the products of AS Virulane; to date the brands of AS Virulane have been divested.

The most notable sales growth was achieved in the Western and Eastern European markets in connection with the acceptance of the Group’s products to an increasing number of Peek & Cloppenburg department stores. If in the first quarter of 2010 Mosaic was represented at 30 Peek & Cloppenburg department stores, to date the brand has penetrated a further 10 department stores and two new markets – the Netherlands and Romania. Previously Mosaic was already represented at selected Peek & Cloppenburg department stores in Germany, Austria, Poland, Slovakia, Slovenia, Hungary, the Czech Republic and Croatia. In the Austrian and Polish markets, the brand is represented in most of the chain’s department stores. Peek & Cloppenburg is one of the leading European department store chains that has more than 80 department stores in Germany and over 100 department stores across Europe. 

Wholesale growth has also been supported by the opening of Stockmann’s new stores in the Russian market (particularly the flagship store in St Petersburg).

FINANCIAL PERFORMANCE

Operating expenses will remain under careful scrutiny also in 2011 but the Group does not expect further cost savings. Economic recovery in Baltika’s target markets has triggered a rise in lease and labour expenses and preparations for a new growth cycle require additional expenditures and investments. Distribution expenses for the period grew by 1% to 7,028 thousand euros. In the retail system, lease expenses remained at the same level as in the previous year but charges per square metre increased. In 2010 many leases entailed temporary crisis-induced discounts which to date have ended.

In the first quarter of 2011, Baltika earned a gross profit of 5,891 thousand euros, a 15% increase year-over-year on a sales area that was 8% smaller on average. The vigorous growth may be attributed to a significantly improved gross margin. The Group’s gross margin for the first quarter was 50% (Q1 2010: 46%).

First quarter operating loss from the core business was 2,095 thousand euros against 2,004 thousand euros for the first quarter of 2010. The figure for the previous year was improved by the divestment of the MasCara and Herold brands of AS Virulane and the sale of some items of property, plant and equipment that yielded 256 thousand euros. In addition, in the first quarter of 2010 movements in foreign exchange rates had a positive impact and AS Baltika earned foreign exchange gain of 304 thousand euros in contrast to a foreign exchange loss of 189 thousnd euros incurred in the first quarter of 2011. Comparative operating loss (excluding the effects of a non-recurring sales transaction and movements in foreign exchange rates) for the first quarter of 2011 was 658 thousand euros, i.e. 26% smaller than a year ago.

The Group’s finance costs for the first quarter of 2011 were 287 thousand euros, 25% up year-over-year. The largest finance cost item was interest expense. At the end of the first quarter of 2011, the weighted average loan interest rate for the Group’s loan portfolio was 6.13% (Q1 2010: 5.39%).

Baltika Group ended the first quarter of 2011 with a net loss of 2,364 thousand euros. The net loss for the first quarter of 2010 was 2,024 thousand euros. Comparative net loss for the first quarter of 2011 (excluding the effect of a non-recurring sales transaction and movements in foreign exchange rates) was 602 thousand euros, i.e. 22% smaller than a year ago.

FINANCIAL POSITION

At 31 March 2011, Baltika Group had total assets of 37,636 thousand euros, a 5% decrease compared with 31 December 2010.

Trade and other receivables remained stable compared with the previous year-end, totalling 3,120 thousand euros at the end of the first quarter. Trade receivables decreased by 2% to 1,280 thousand euros. The net amount of trade receivables includes the allowance for doubtful receivables of 34 thousand euros.

At the end of the first quarter, inventories totalled 10,209 thousand euros, a decrease of 595 thousand euros, i.e. 6% compared with the previous year-end.

Trade payables as at the end of the first quarter stood at 4,994 thousand euros, a 640 thousand euro increase on the year-end figure.

At the end of the first quarter, the Group’s net debt (interest-bearing liabilities less cash and bank balances) was 19,333 thousand euros. The year-end net debt to equity ratio was 190%. The Group’s equity as at 31 March 2011 amounted to 10,158 thousand euros.

INVESTMENT

Baltika did not make any major investments in the first quarter of 2011.

PEOPLE

At 31 March 2011, Baltika Group employed a total of 1,418 people (31 December 2010: 1,419): 801 (799) in the retail system, 433 (442) in manufacturing and 184 (178) at the head office and logistics centre. The period’s average number of staff was 1,400 (Q1 2010: 1,672)

Employee remuneration expenses for the first quarter of 2011 totalled 2,614 thousand euros (Q1 2010: 2,708 thousand euros). The remuneration of the members of the supervisory council and management board totalled 80 thousand euros (Q1 2010: 80 thousand euros).

In the reporting period, the composition of the management board changed: Maigi Pärnik-Pernik stepped up as chief financial officer and member of the management board of AS Baltika on 30 March. Meelis Milder, Maire Milder, Boriss Loifenfeld and Andrew James David Paterson continue as members of the management board. The former chief financial officer and member of the management board Ülle Järv has been appointed the internal auditor of AS Baltika effective as of 1 May.

KEY FIGURES OF THE GROUP (Q1 2011)

Definitions of key ratios

Gross margin = (Revenue-Cost of goods sold)/Revenue

Operating margin = Operating profit/Revenue

EBT margin = Profit before income tax/Revenue

Net margin = Net profit (attributable to parent)/Revenue

Current ratio = Current assets/Current liabilities

Inventory turnover = Revenue/Average inventories*

Debt to equity ratio = Interest-bearing liabilities/Equity

Return on equity (ROE) = Net profit (attributable to parent)/Average equity*

Return on assets (ROA) = Net profit (attributable to parent)/Average total assets*

*Based on 12-month average

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(unaudited, thousand)

Maigi Pärnik

CFO, Member of the Management Board

+372 630 2731

maigi.parnik@baltikagroup.com