LINDEX SIX-MONTH REPORT

LINDEX SIX-MONTH REPORT 1 September 2000 - 28 February 2001 Weaker demand affects Lindex's results for the first six months · The weaker demand which was noted in the first quarter continued during the second quarter and affected the six-month profit. · The gross profit margin was affected by the unusually large price reductions for the period. · Operating profit fell to SEK 37M (161) and profit after financial items amounted to SEK 46M (175). Profit after financial items in the Nordic countries fell to SEK 128M (220). · In the first six months of the financial year, Lindex's sales rose by 14.1 per cent (13.4) to SEK 2,366M (2,073). Same-stores sales increased by 5.7 per cent (5.2). New stores contributed with a sales increase of 8.4 per cent (8.2). · In total, Lindex opened 12 (15) new stores during the first six months of the financial year of which 4 (6) are in Germany. · The action programme which was initiated during the first quarter made the intended impact on the surplus inventory during the second quarter. This has now been cleared. In anticipation of continued weaker market growth, structural changes will also be implemented in the operations. These are expected to generate an annual contribution to profit of approximately SEK 100M. · As previously announced, Jörgen Johansson has been appointed new President of AB Lindex. Jörgen Johansson, who is currently President of Saba Trading, will join Lindex no later than 1 August. Lindex is a retail chain with 345 stores of which 313 are in the Nordic market and 32 stores in Germany. The Group's product segments are ladies' wear, lingerie/hosiery, children's clothing, and cosmetics. For further information, please contact: Hans Johansson, President Mobile: +46 705-41 and CEO 94 63 Åsa Lindell Byström, Director of Group Communications & Investor Mobile: +46 706-33 Relations 59 79 Peter Andersson, Chief Mobile: +46 705-84 Financial Officer 44 37 Market and demand The mild autumn weather and the reduced readiness to buy had a significant impact on demand in the first quarter. During the second quarter, growth in demand was also weaker than in the corresponding period during the previous year. All countries showed a similar change. Consumers' readiness to buy continued to fall. SCB's Consumer Confidence Indicator1 for Sweden continued to fall and showed a drop of 7 percentage points from index 14 in December to index 7 during February. In Germany, demand2) weakened and sales of the retail clothing sector fell from 11 per cent growth in September to a 9 per cent decline in February. According to HUI's economic forecast in March 2001, the slow-down in the Swedish economy is more severe than previously estimated. The weakening trend which was noticed in the first quarter was thus further confirmed during the second quarter. In total, this means that the high sales growth in the retail clothing sector in recent years has not continued during the first six months of the financial year. Demand in Lindex's markets currently show either a weaker growth rate or a decline. Increased sales with lower margins During the period September 2000 - February 2001, Lindex's sales increased by 14.1 per cent (13.4) to SEK 2,366M (2,073). Lindex's same- stores sales rose by 5.7 per cent (5.2). Excluding exchange rate fluctuations, the increase amounted to 4.8 per cent. New stores generated an increase of 8.4 per cent (8.2). Sales of autumn and winter garments were maintained with unusually large price reductions aimed at balancing the inventories, especially during October-November but also during the remainder of the six months. Price reductions during January-February, which is normally the year's most important seasonal sales period, were increased still further through the clearance sale of the autumn inventory. The unusually large price reductions for the period meant that the sales trend was positively affected whereas the gross profit margin was negatively affected. The same-stores sales increase exceeded the growth in the respective markets during the period. Lower gross profit margins affected profit Operating profit in the first six months of the financial year amounted to SEK 37M (161). Profit after financial items fell to SEK 46M (175). The gross profit margin was affected by the unusually large price reductions for the period and fell to 49.4 per cent (52.9). Profit after financial items for the first six months in the Nordic countries fell to SEK 128M (220). The net charge (sales minus costs) for the establishment of stores in Germany amounted to SEK 82M (46) in the first six months of the financial year. As a significant proportion of the Group's purchases are made in USD or USD-linked currencies, Lindex is exposed to fluctuations in the USD rate. The rising rates of these currencies during the first six months of the 2000/2001 financial year have affected the 1 The share of the households which believe that their finances will improve over the next 12 months compared with the same period in the previous year (For an exact definition, see page 14) 2 According to Textilwirtschaft Testclub gross profit margin. Lindex's hedging policy with contracts for a period of six to eight months from date of order reduces the currency risk and thus cushions the effect on the gross profit margin. Financial income and expenses amounted to SEK 9M (14). During the first six months of the financial year, interest-bearing liabilities averaged SEK 561M (323) and interest expenses amounted to SEK 16M (8). Profit per share after full tax was SEK 1.90 (9.00) in the first six months of the financial year. Action programme During the first quarter, an action programme was initiated aimed at adapting product supply, costs and investments to the new market conditions. In addition, marketing activities aimed mainly at Lindex Card customers were intensified. Clearance of the surplus inventory of autumn and winter clothing during the autumn started in October and continued throughout the six-month period. The surplus inventory has now been dealt with and only limited quantities remain of the autumn and winter collections. A long-term adaptation of the purchasing volumes to the lower demand also started in the first quarter. However, spring clothing was ordered during late spring 2000 and could only be adjusted to a limited extent. The problem of too high product supply, therefore, remains at the start of the third quarter. However, reduced repurchases and postponed deliveries of basic garments will nonetheless make impact at the end of the third quarter. Full impact is expected during the fourth quarter. In the short term, the cost adaptations have involved an increased focus on expenses. A general employment freeze has been implemented with the exception of the resources which are required for new stores. The cost trend within this area was broken during the second quarter and expenses are now on a par with the previous year. Store operations have been made even more efficient (expressed as hours worked in relation to sales). This effectivisation process continues and, in the long term, the development of more large stores will generate efficiency gains. All investment plans have been examined and this has affected the expansion rate for the financial year. In total, approximately 20 new stores are planned during the financial year. Investment in existing stores, such as the introduction of cosmetics departments and upgrading projects is also being implemented at a slower rate. Taken together, this action is expected to enable Lindex to achieve a reduction in inward deliveries, costs and investment to a level which corresponds with the lower growth in the market. In view of the weaker market growth, additional measures will be required in the long term. To create a platform for continued growth and to provide criteria for a sustainable long-term profit level, the next phase of the action programme will therefore include structural changes. These structural changes are expected to generate an annual contribution to profit of approximately SEK 100M. The strategy for Lindex´s investments in Germany stands. However, there is a need to consolidate the operations and the expansion will therefore be implemented at a slower rate for some time to come. Taxes Paid and deferred taxes amounted to SEK 19M (51) in the first six months of the financial year. The tax rate in Sweden, Finland and Norway was 28 per cent and in Hong Kong 16.5 per cent. The tax rate in Germany was 44 per cent during December and was reduced to 38 per cent from January. Deferred income taxes recoverable on accumulated losses carried forward in the German company are reported at SEK 73M, which reduced "Tax on the period's profit" by SEK 20M (11). New establishments - 12 new stores of which 4 are in Germany During the first six months of the financial year, Lindex opened a total of 12 (15) new stores - 1 in Sweden, 5 in Norway, 2 in Finland and 4 in Germany. The store network comprised 341 stores on 28 February 2001. During the 2000/2001 financial year, the expansion rate is expected to amount to approximately 20 stores of which 5-7 stores will be in Germany. The expansion rate will be lower than in the previous financial year. This forms a part of the action programme which was initiated during the first quarter and is aimed at strengthening profitability. Developments in Germany During Lindex's first two years in Germany, the establishment of stores was concentrated on a homogenous region in Nordrhein-Westfalen in Western Germany. From autumn 2000, the foundation has been laid for yet another region through the establishment of a large store in central Berlin. Additional stores are planned in and around Berlin. The store in Berlin, which has a prime location in Kurfürstendamm, has developed positively and is currently one of largest stores from a sales perspective. Market research shows that customers in Berlin are very satisfied the Lindex concept with regard to level of service as well as store design and product range. Number of visitors and average purchases per customer in Germany are currently on a par with the other markets. The conversion ratio (number of paying customers as a percentage of number of visitors) also continued to increase, from approximately 16 per cent in autumn 1998 to more than 23 per cent during the first half of the 2000/2001 financial year. The proportion of repeat customers also increased significantly during the period. The sales growth during the first half of the year was significantly lower than anticipated due to reduced consumer readiness to buy and the very warm autumn weather. The same-stores sales development for the 1999/2000 financial year amounted to 18 per cent. During the first half of the 2000/2001 financial year, the corresponding figure was 1 per cent. The sales increase during 1999/2000 and expectations of continued high growth led to a decision for a significant increase in product supply. The weaker demand during the autumn thus also generated a substantial surplus inventory in the German operations. This surplus inventory has been cleared through significantly increased price reductions, especially during the second quarter, which had a significant effect on profit during the period. In addition, the result in the German company is charged with the high expansion rate and through the increasing number of stores which have not yet achieved a sustainable profitability level. Of these stores the majority (16) were established during the 1999/2000 financial year. In total, this generated a net charge for the six months of SEK 82M (46). Two of Lindex's stores in Germany achieved break-even (income exceeds expenditure) with regard to operating profit before depreciation. However, developments during the autumn meant that no further stores, other than the two stores already reported, achieved break-even during the period. Despite unchanged same-stores sales and substantially increased price reductions, losses per store have been reduced compared with the first half in the previous year. Inventories Inventories on 28 February 2001 amounted to SEK 976M compared with SEK 945M on 31 August 2000. On 28 February 2001, inventories were SEK 275M (46) higher than during the corresponding period in the previous year. New stores and new cosmetics departments accounted for SEK 117M (94). Same-stores inventories increased by SEK 158M (-48). Excluding currency effects, the same-stores increase was SEK 134M (-41). The reduction in inventories of SEK -41M in the previous year, which generated a shortfall of products, affects the comparison between the years. The year's increase in inventories consists mainly of brought forward inward deliveries of spring products. IT During the period, the IT systems were adapted to cope with a change over to the euro in Germany and Finland in autumn 2001. Global purchasing network Lindex's purchasing network consists of purchasing offices in Hong Kong, Shanghai, New Delhi, Seoul, Dhaka, Istanbul and Bucharest. The latest establishment was in Shanghai in January 2001. The purchasing offices give a local presence in the most important purchasing markets which enables efficient quality control, increased flexibility and lower purchase prices. New purchasing offices also have a positive effect on quality and service in nearby purchasing markets. Over the past year Lindex has developed further its concept for the acquisition of textiles. This means that Lindex selects the textiles which are then purchased by the manufacturer or by Lindex. This is currently taking place in Rumania, Bulgaria and Turkey. This "integration backwards" provides for reduced purchasing prices, improved quality control, and an opportunity to expand into more purchasing markets. In addition, the lead times can be shortened as Lindex is given better opportunities for controlling the production process. Investments The Group's net investments in fixed assets amounted to SEK 145M (72) in the first six months of the financial year. Most of this related to investments in new stores in which the strategy to expand the size of the stores had an effect on the investment amount per store. The introduction of the cosmetics concept in Norway increased investment in existing stores. Investments were also affected by increased IT investments and an expansion of the head office property. Cash flow Cash flow after investments amounted to SEK -235M (78) in the first six months of the financial year. The increase in inventories, compared with 31 August 2000, affected the cash flow from the current operations by SEK -31M (51), and trade debtors by SEK -60M (-27). Of total trade debtors of SEK 292M (232), trade debtors for the Lindex Card amounted to SEK 289M (230). The cash flow after investments was also affected by an increased negative cash flow from the investment operations of SEK -172M (-80). The effects of the action programme will begin to make an impact during the third quarter. In addition to a gradual recovery in profit, reduced inventories will have a positive effect on the cash flow from the current operations. In addition, the lower establishment rate will generate a reduced cash flow from the investment operations. Financing and liquidity On 28 February 2001, liquid funds amounted to SEK 109M compared with SEK 104M on 31 August 2000. On 28 February 2001, net borrowing was SEK 628M compared with SEK 321M on 31 August 2000, an increase of SEK 307M. The increased borrowing is due to increased inventories, trade debtors, investments and the fall in profit. During the period, the net debt/equity ratio increased from 67.8 per cent (33.6) and the equity ratio fell to 39.7 per cent compared with 44.2 per cent on 31 August 2000. Personnel The number of full-time employees during the latest 12 month period (March 2000 - February 2001) amounted to 2,881 compared with 2,678 during the 1999/2000 financial year. The increase is the result of recruitment by the newly-opened stores. Incentive scheme The Annual General Meeting on 18 January 2001 resolved to implement a new incentive scheme for senior executives in the Lindex Group and resultant acquisitions and transfers of the company's own shares. The intention of the scheme is to increase Lindex's value by strengthening still further the executives' commitment and by stimulating competence development. In addition, the programme will lead to greater opportunities for keeping competent staff and recruiting new competent staff. The scheme is based on issuing warrants for Lindex shares. To secure the value of the issued warrants cost-efficiently, AB Lindex intends to buy back its own shares in order to have access to shares when the warrant holders wish to exercise their warrants. The incentive scheme relates to the period 1 September 2000 - 31 August 2001. The warrants have a duration of three years and may not be exercised until two years from date of issue. Parent Company Sales increased by SEK 100M, equivalent to 7.8 per cent, to SEK 1,395M (1,295). Profit after financial items fell to SEK 174M (214). Net investments in fixed assets were made of SEK 32M (45). Future information dates Interim Report for the first nine months of the 2000/2001 financial year will be published on 28 June 2001. Preliminary Accounts Report 2000/2001 will be published on 11 October 2001. Alingsås, 29 March 2001 AB Lindex (publ) Board of Directors ------------------------------------------------------------ This information was brought to you by BIT http://www.bit.se The following files are available for download: http://www.bit.se/bitonline/2001/03/29/20010329BIT01020/bit0001.doc http://www.bit.se/bitonline/2001/03/29/20010329BIT01020/bit0001.pdf