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 affects consumers’ purchasing behaviour and purchasing power in all of the Group’s market areas. Consumers’ purchasing behaviour is also influenced by digitalisation, increasing competition 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 during 2020.
The operating environment may also affect the operations of Stockmann’s tenants and consequently may have a negative impact on rental income and the occupancy rate of Stockmann’s properties. These, particularly if related to the biggest tenants of the properties, may have an effect on the fair value of the real estate.
Stockmann’s business is affected by seasonal fluctuations within a year. The first quarter is typically low in revenue and the fourth quarter 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 may arise from unusual situations such as the outbreak of an epidemic, 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. Operational risks are also met by taking out insurance cover.
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. Financial risks, mainly risks arising from interest rate fluctuations due to the Group’s high level of debt and hence high interest costs, and risks related to refinancing, breaching financial covenants under finance agreements and liquidity may have an effect on the financial position. Interest rate fluctuations may also have an impact on goodwill and the valuation of properties owned by the Group, and thus on the fair value of these assets. Financial risks are managed in accordance with the risk policy confirmed by the Board of Directors.
Business continuity, risks and financial situation in COVID-19 situation
The view of the management and the Board of Directors is that Stockmann’s business remains viable and can be restored to a sound basis. However, the coronavirus and the restrictions it has caused have, and will continue to have, a significant impact on the company’s customer volumes and cash flow. Stockmann plc’s decision to file for restructuring was supported by debtors representing more than half of the debts, and Stockmann continues to have a constructive dialogue with its financers also during the restructuring phase. As a result of the filing for restructuring the District Court ruled a temporary prohibition of collection for Stockmann plc and approximately EUR 640 million of the Group’s external debts (interest bearing loans including the hybrid bond which is treated as equity, trade and other short term liabilities) are subject to restructuring. This has caused uncertainty among suppliers, but the management foresees that the business relations will gradually normalise. The measures to adjust the cost structure and product intake due to the corona-virus will materialise from Q2 onwards. These will provide support to the cash flow.
In Stockmann’s financial assets on 31 March 2020 there was a unrealized foreign exchange gain of EUR 15.2 million of derivatives. All derivate contracts were closed by the banks on 6 April 2020. The Group is not hedging its foreign exchange positions currently.
The prolonged coronavirus situation will have a negative impact on Stockmann’s liquidity, financial position and the value of assets. The management and the Board of Directors regularly assess the operational and strategic risks associated with the situation. Risks are also assessed as part of the ongoing restructuring process.
Stockmann is in discussions with the Swedish tax authorities regarding the possible provision of security related to Stockmann Sverige AB’s tax dispute with the Swedish authorities’ reassessment decisions for the years 2013-2017 totalling EUR 22 million plus interest.
Stockmann is working on drawing up a proposal for the restructuring programme. As part of the preparation of the programme Stockmann will assess the sale and leaseback alternatives of its real estates. The process concerning strategic alternatives for the ownership of Lindex continues is on hold.