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
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. The coronavirus and the restrictions imposed because of it have had, and will continue to have, a material effect on the company’s customer volumes, cash flow and result. Stockmann plc’s decision to file for restructuring was supported by creditors representing more than half of the company’s debts, and Stockmann will continue to have a constructive dialogue with its finance providers and other key stakeholders during the restructuring phase.
As a result of the filing for restructuring, the District Court ordered a temporary prohibition of collection and enforcement for Stockmann plc, and approximately EUR 645 million of the Group’s external debts (interest-bearing loans including the hybrid bond which is treated as equity, trade payables and other short-term liabilities) are subject to restructuring. The situation 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. These measures support the cash flow.
As part of the initiation of the restructuring proceedings, the financing banks that served as derivative counterparties closed all of Stockmann plc’s derivative contracts on 6 April 2020. The realised foreign exchange gains at the time the contracts were closed, totalling EUR 8.9 million, have been treated as current receivables. The Group does not currently hedge against risks arising from fluctuations in foreign exchange rates or interest rate risks.
The prolonged effects of the coronavirus 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. Risks are also assessed as part of the ongoing restructuring proceedings.
By 28 December 2020 Stockmann will provide the Swedish tax authorities with a security which will cover the EUR 26 million in tax and its interest, which is related to the tax authorities’ decision to reassess Stockmann Sverige AB’s taxes for the years 2013–2017. In the third quarter Stockmann received decisions from the Swedish tax authorities on additional tax for the years 2018 and 2019 totalling around EUR 8 million. The total additional tax for the years 2013-2019 is approximately EUR 34 million, which is fully recognized as a liability in the consolidated balance sheet.
Stockmann is preparing a draft restructuring programme. As part of the preparation of the programme, Stockmann will assess sale and leaseback alternatives for its real estate properties. The process concerning strategic alternatives for the ownership of Lindex is currently on hold.