European Lingerie Group AB (ELG or the “Group”) publishes unaudited 9 Months and Third Quarter 2018 Report (1 January – 30 September, 2018), including pro forma and condensed interim consolidated financial statements.
“The results of the third quarter of 2018 are not satisfactory for ELG, but we finally see that sales have started to pick up from the trend in the first six months. We still observe acceleration of the closure of small specialised retail shops in Southern and Central Europe. Furthermore, in most European markets the macro-economy has started slowing down, which does not support growth. In Q3 2018 though, we believe that the Group hit the bottom line of this decline and we expect sales to be flat or slightly growing in the next periods,” commented CEO of ELG Mr. Peter Partma.
“In 2018 the Group continues investing in new technology, new people and process changes. This affects negatively our profit in the reporting year and the Group will need additional working capital resources in the coming 2-3 years, but it should bring returns through the growth in sales and profit going forward. We expect that these innovations will comprise at least 10% of the total sales next year,” noted Mr. Partma.
“To improve the sales trend, the Group focuses on development of the new distribution channels in the lingerie segment and on growth with blue-chip customers in the textile segment, which starts bringing results,” added Mr. Partma.
Financial performance of the Group was analysed on the basis of the pro forma financial information of European Lingerie Group AB for 9 months 2018, 9 months 2017 and Q3 2017 as well as reported financial information for Q3 2018.
The Group’s sales amounted to EUR 59.2 million in 9 months 2018 (Q3 2018: EUR 20.8 million), representing a 5.8% decrease as compared to pro forma sales of 9 months 2017 (3.7% decrease to pro forma sales of Q3 2017).
In Q3 2018 the Group still faced a decline in revenue, but we see that sales started to pick up from the trend in the first six months and the deficit in sales was significantly lower in Q3 2018 compared to Q1 and Q2 2018 (from 8.5% on pro forma basis in Q1 2018 and 5.4% in Q2 2018 to 3.7% in Q3 2018). The shortfall in sales reduced as a result of improving sales trend in Russia and other countries, which export its products to CIS countries and Europe. In most European markets we see that the macroeconomy has started slowing down and the trading climate is still poor, which does not support growth.
Due to the fact that part of the costs is fixed, decline in revenue caused drop of profitability margins. Normalised EBITDA in 9 months 2018 amounted to EUR 7.9 million (Q3 2018: EUR 3.9 million) and decreased by 28.7% compared to pro forma normalised EBITDA in 9 months 2017 (6.0% decrease to pro forma normalised EBITDA for Q3 2017). Normalised EBITDA margin in 9 months 2018 and 9 months 2017 were 13.3% and 17.6% respectively (Q3 2018 and Q3 2017: 18.6% and 19.1% respectively). EBITDA margin deteriorated mainly due to sales decrease and high impact of marginal sales contribution to EBITDA.
Furthermore, in 9 months 2018 the Group faced additional expenditures in new initiatives, which should improve the processes, stabilize sales and improve profitability margins in the coming periods.
Normalised net profit in 9 months 2018 amounted to EUR 1.6 million (Q3 2018: EUR 1.7 million), compared to pro forma normalised net profit of EUR 5.5 million in 9 months 2017 (Q3 2017: EUR 2.0 million). Normalised net profit margin in 9 months 2018 and 9 months 2017 were 2.7% and 8.7% respectively (8.1% and 9.3% in Q3 2018 and Q3 2017 respectively).
Similarly to EBITDA, lower profitability was due to sales decrease and costs of new initiatives. In addition, there was an increase in finance costs in 9 months 2018 as compared to 9 months 2017 related to incremental costs on borrowings raised for the acquisition of Felina Group and for additional capital needed for future growth and investments that were not present to full extent in 9 months 2017.
Core operating markets for European Lingerie Group are Germany, Spain, France, Poland, Benelux countries, Baltic countries and CIS countries (Russia, Belarus and Ukraine). The Group’s sales in its core markets in 9 months 2018 were 84.0% of its total sales against 84.2% in 9 months 2017 (84.0% in Q3 2018 against 84.7% in Q3 2017).
The largest growth in sales in 9 months 2018 was in the Baltic countries, where the sales increased by 2.3%. This is explained by increased European demand for private label lingerie ready garments manufactured in the Baltics and exported to other countries.
Sales in Benelux countries and Poland had a slight increase in 9 months 2018 (0.8% and 0.7% respectively). The increase percentage though is lower than in 6 months 2018 due to higher previous expectations of the market situation and development than occurred.
Sales in Germany decreased by 0.5% in 9 months 2018 due to the slowdown of the macroeconomic development in Europe, which limits the potential growth.
Spain and France had a decrease in sales in both 9 months and Q3 2018 due to the same reason as in the previous periods, namely, overall change in retail concept in the Southern and Central European countries whereby small specialised retail stores slowly disappear and department and online stores take over the market. This also explains a growth trend of the Group with its largest customers in these countries.
Sales in Russia, Belarus and Ukraine dropped by 21.9%, 20.9% and 18.1% respectively in 9 months 2018 (Q3 2018: drop by 13.7% in Russia, 19.4% in Belarus, 21.1% in Ukraine). In Q3 2018 the trend of sales in Russia improved due to the stabilisation of its market situation. The reason for negative sales trend in Ukraine in Q3 2018 was in the textile segment due to the change of the distributor of Lauma Medical products in this market, which temporarily paused sales of medical goods in this country during the transition period. We expect sales in Russia and Ukraine to recover completely and have a growth in the coming 3-6 months. Sales in Belarus continued to be lower than before due to the change in the strategy of Group’s largest customer in the textile segment.