Stockmann announced its new targets ahead of CMD

Translation: Original comment published in Finnish on 11/14/2023 at 6:02 am EET

Today, Stockmann announced its updated strategy and new financial targets separately for the Lindex and Stockmann divisions. At least at headline level, the strategy did not offer any major upheaval. The targets seem quite expected, although challenging for the Stockmann division. For the company, however, we feel the possible exit from the Stockmann division is more important and interesting than its operational improvement. No new information was provided in this respect. Stockmann will open its strategy and targets more at the CMD on Thursday.

Lindex’s target increases by 3-5% and maintains its current margin in the long term

For Lindex, the company announced that its three strategic goals are to accelerate growth, transform into a sustainable business, and decouple cost from growth. These are big and logical themes that are difficult to assess in more detail at this stage.

Lindex's financial targets are:

• 3-5% annual local currency revenue growth and reaching revenue of SEK 10 billion by 2030
• Digital sales account for 30% of revenue in the medium-term
• 15% adjusted EBIT margin in the long-term

We believe that the growth target is relatively expected. Lindex’s main markets (the Nordic countries) grow slowly, and Lindex already has a strong market position here, but in other countries the company should be able to grow. The SEK 10 billion target would with the current exchange rate mean good EUR 850 million and thus an annual growth rate of approximately 4.5% until 2030. We have expected Lindex to grow by 2-3% in the next few years. Digital sales have accounted for 19% this year and we believe that growth will mainly come from digital channels, so the 30% target is logical.

In terms of profitability, Lindex is already close to the target level of 15%, although this is a very good level compared to its history (15-year average 9%). The formulation of the margin target (in the long-term) raises some questions as to whether weaker profitability is expected in the short/medium term. In any case, we believe that the target is relatively expected, because the company cannot really target lower profitability than currently, but on the other hand, the current level is already excellent in our opinion. In our forecasts, the margin will fall to 11-12% in the next few years.

In the Stockmann division, possible exit is more important than the targets

For the Stockmann division, the company also announced three strategic objectives that are further development of the offering toward premium and luxury categories, grow and leverage the loyal customer base, and ensure a seamless omnichannel customer experience. These are very familiar themes in themselves, and it is more of a question of their implementation. With regard to the first point, the company emphasizes the role of Helsinki department store, which can be interpreted to mean that other department stores are not as important and could at some point be closed down. However, the company can hardly announce this before having concrete plans/decisions.

The financial targets of the Stockmann division are:

• Revenue growth in line with market growth in the medium-term
• Reaching a positive free cash flow in the medium-term
• 5% adjusted EBIT margin in the medium-term

Stockmann’s development is currently negative with all of these indicators and we find it difficult to reach these targets. A 5% EBIT margin would with current revenue mean EBIT of approximately EUR 15 million (2023e: -5 MEUR). We estimate that this would mean roughly zero income, when we consider the share of rents only visible in financial costs. Thus, the margin target and positive cash flow target are well aligned. We consider the targets challenging for Stockmann, and the possible exit from the Stockmann division is far more important for the company. In this respect, as expected, the release did not provide any new information, as the strategic assessment is expected to be completed next year.

CMD on Thursday

Stockmann will host a CMD on Thursday for the first time in over a decade, where the now announced strategy and targets will be discussed in more detail. Questions raised by the release include at least Lindex’s margin outlook for the next few years and the measures with which the company aims to increase the profitability of the Stockmann division. The event can be watched on inderesTV on November 16 starting at 1 pm EET.