Stockmann is exposed to risks that arise from the operating environment, risks related to the company’s own operations and financial risks.
The general economic situation and the COVID-19 pandemic affect consumers’ purchasing behaviour and purchasing power in all of the Group’s market areas. Consumers’ purchasing behaviour is also influenced by digitalisation, growth of remote working and changing purchasing trends. Rapid and unexpected movements in markets may influence the behaviour of both the financial markets and consumers. Uncertainties related to changes in purchasing behaviour are considered to be the principal risk arising from the operating environment that could affect Stockmann from 2021 onwards.
The uncertainty in the operating environment may continue to affect the operations of Stockmann’s tenants and may consequently have a negative impact on rental income.
Stockmann’s business is affected by normal seasonal fluctuations within a year. The first quarter is typically low in revenue and the fourth quarter is typically higher in revenue. Fashion accounts for approximately 80% of the Group’s revenue. An inherent feature of the fashion trade is the short lifecycle of products and their dependence on trends, the seasonality of sales and the susceptibility to abnormal changes in weather conditions. These factors may have an impact on the Group’s revenue and gross margin. In the retail sector, the products’ value chain from raw material to customers often contains many stages and involves risks related to the fulfilment of human rights, good working conditions, and environmental and other requirements set out in Stockmann’s Code of Conduct and other policies. Responsible management of the supply chain and sustainable use of natural resources are important for the Group’s brands in order to retain customer confidence in Stockmann.
Risks related to production and supply may arise from unusual situations such as an escalation in the COVID-19 pandemic or a new epidemic leading to governmental restrictions, strikes, political uncertainties or conflicts which may stop or cause delays in production or supply of merchandise, which in turn may affect business negatively.
The Group’s operations are based on flexible logistics and the efficient flow of goods and information. Delays and disturbances in logistic and information systems, as well as uncertainties related to logistics partners, can have an adverse effect on operations. Every effort is made to manage these operational risks by developing appropriate back-up systems and alternative ways of operating, and by seeking to minimise disturbances to information systems.
The Group’s revenue, earnings and balance sheet are affected by changes in exchange rates between the Group’s reporting currency, which is the euro, and the Swedish krona, the Norwegian krone and the US dollar and certain other currencies. Currency fluctuations may have an effect on the Group’s business operations. The group is not hedging the foreign exchange risks currently due to the corporate restructuring. Interest rate fluctuations may also have an impact on goodwill.
The Group’s possibilities to arrange new financing are limited during the execution of the corporate restructuring programme. This may have an effect on sufficiency of liquidity and on the financial position.
Failure to meet the requirements, sale and lease-back of properties and repayment of restructuring debt according to the Stockmann plc’s corporate restructuring programme may lead to the termination of the restructuring or bankruptcy.
Business continuity and financial situation
Total cash as per December 31, 2020 was EUR 152.5 million. Both divisions have taken and will take actions to improve cash position and net working capital. The restructuring proceedings caused uncertainty among suppliers, but business relations are gradually returning to normal. The measures to adjust the cost structure and product intake due to the coronavirus have been implemented from the second quarter onwards. During the restructuring, Stockmann plc renegotiated all department store lease agreements and office lease agreements. Thereby current lease costs and sizes of stores were adjusted downwards. These measures support the cash flow.
The District Court approved the programme on 9 February 2021. The restructuring programme is based on the continuation of Stockmann’s department store operations, the sale and lease-back of the department store properties located in Helsinki, Tallinn and Riga and the continuation of Lindex’s business operations as a fixed part of the Stockmann Group. The proceeds from the sale and lease-back of properties will mostly be used for repayment of the secured restructuring debt latest by 31.12.2022.
Efforts have been made to build some flexibility into the restructuring programme by converting some of the unsecured debts into the Company’s series B shares or cut. Half of the hybrid bond will be converted to equity and the other half will be cut.
20 % of the other restructuring debt will be converted to equity or cut. A repayment schedule in accordance with the Restructuring Act has been prepared for the remaining part of the unsecured debt. The repayments will begin April 2022. An unsecured creditor is entitled to exchange the payment described in the repayment schedule for Secured Bond issued by the Company with a bullet principal repayment in five (5) years of the issue.
Stockmann plc will pledge the Stockmann Sverige Ab´s (SSAB) shares and it´s receivables from SSAB as a security for the bond. The different maturity profile of the Secured Bond brings flexibility for the Company and for the first years of the restructuring programme. The programme enables Stockmann to make up to EUR 30 million Tap-Issue on the abovementioned Secured Bond. This Tap-On could be used to cover short term liquidity needs.
As a part of the restructuring programme, the company’s A and B share series will be combined at the General Meeting so that each one (1) A share will be entitled to receive 1.1 B shares. The combination will improve the liquidity of the share and the company’s ability to secure financing from the market.
The Group does not currently hedge against risks arising from fluctuations in foreign exchange rates or interest rate risks.
The prolonged effects of the COVID-19 pandemic will have an impact on Stockmann’s liquidity and financial position and the value of its assets. The management and the Board of Directors regularly assess the operational and strategic risks associated with the situation.
The Swedish tax authorities required Stockmann to provide a security which covers the EUR 35 million in tax and its interest related to the tax authorities’ decision to reassess Stockmann Sverige AB’s taxes for the years 2013–2019. The total additional tax is fully recognised as a liability in the consolidated balance sheet. Stockmann appealed against decisions in Sweden to the local appellate court (Kammarrätten i Göteborg). The tax dispute has been deferred on appeal until the European Court of Justice has ruled on the Swedish interest deduction regulations in another case. On 20 January 2021, the European Court of Justice ruled that the Swedish interest rate deduction regulations were in some respects contrary to European Union law. Following this decision, the Swedish tax authorities abandoned the requirement to provide security for the tax liability and the positive outcome of Stockmann Sverige AB’s tax appeal is likely to be good.