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Aug 14, 2020 at 7:03 AMThe retail company CECONOMY is moving towards the end of the third quarter of the fiscal year 2019/20 at last year’s level despite Corona. The online business has seen significant growth. Nevertheless, MediaMarktSaturn is facing tough cuts with up to 3,500 layoffs. For the annual result, CECONOMY expects a result in line with the previous year.
(Düsseldorf) CECONOMY AG (“CECONOMY”) has completed the third quarter of 2019/20 with a better-than-expected result. After the business performance in April was still characterized by enormous, coronavirus-related (“COVID-19”) restrictions, sales recovered significantly in May and June. The company reacted promptly and consistently to the crisis and was quickly back on track after the gradual reopening of the markets. The measures taken contributed significantly in the third quarter to fully compensating for the impact on results caused by the COVID-19-related decline in sales and margins, particularly through cost-cutting measures.
“After the end of the market closures, we quickly regained our footing in May. Thanks to the noticeable recovery in sales and comprehensive countermeasures, we were able to close the quarter better than expected. A significant part of this was also the success of our online business, which contributed more than a third to total sales in the third quarter,” says Dr. Bernhard Düttmann, CEO of CECONOMY AG. “With almost three million new customers that we welcomed in our webshops alone since March, we have further solidified our position in the online business. On this strong basis, we will accelerate the expansion of our online sales channels and vigorously advance the digitization of our business model. With the recent launch of our marketplace, we now offer our customers in Germany even more product variety in our webshops.”
Positive Sales Dynamics in May and June, Quarter Result Better than Expected
Sales in the third quarter decreased by 8.4 percent to around 4.1 billion euros, adjusted for currency and portfolio effects. The decline in sales in the third quarter reflects the impact of the Corona crisis and is solely due to the negative sales development resulting from store closures in April and partially in May. With the gradual reopening of the brick-and-mortar business, sales returned to a growth trajectory in May, which accelerated in June. In particular, Germany, Austria, Switzerland, and Italy recorded a strong increase in sales in May and June, while the Netherlands and Sweden developed significantly positively throughout the quarter. In July, the positive sales trend from June continued, particularly thanks to the reduction in VAT in Germany and sustained strong demand for home office, homeschooling, and home entertainment products.
In addition to the positive sales development in May and June, the swiftly initiated cost-cutting measures significantly contributed to CECONOMY achieving an adjusted EBIT of -45 million euros in the third quarter, in line with the previous year (Q3 2018/19: -43 million euros). Savings from the cost and efficiency program also had a positive impact on the results. The decline in sales in the brick-and-mortar business due to store closures in April, combined with a declining gross margin for the entire quarter, negatively affected the adjusted EBIT. However, there was a steady trend improvement in the gross margin on a monthly basis throughout the quarter. Germany achieved a solid increase in results, particularly due to COVID-19-related cost-cutting measures, while Spain and Italy recorded a decline in results due to the impact of COVID-19 on sales and margins.
Growth in Online Business Accelerated by Crisis, Services & Solutions Business Recovers in June
In the third quarter of 2019/20, CECONOMY recorded extraordinarily strong growth in its online business of around 143 percent (145 percent without MediaMarkt Greece). This significantly increased online sales to 1.4 billion euros, raising their share of total sales to 35.2 percent. The persistently high online growth continued despite the gradual reopening of the markets, even in countries not affected by the closure of brick-and-mortar businesses. In the third quarter, one-third (32 percent) of all online orders were picked up in the markets. With the reopening, the pick-up rate also increased again, reaching about 43 percent in June.
The Services & Solutions business experienced a sales decline of around 19 percent to 225 million euros in the third quarter (18 percent without MediaMarkt Greece). This segment thus contributed 5.5 percent to total sales. The main reasons for the decline were the COVID-19-related closures of the markets and subsequently lower customer frequencies, as many services are utilized in connection with purchases in brick-and-mortar retail, especially at Smartbars. Towards the end of the quarter, a recovery began in the Services & Solutions business, with sales in June already back to last year’s level.
“We have completed an extraordinary third quarter, which we closed with a robust business development despite the extremely challenging conditions. The unbroken strong dynamics in the online business is very encouraging, especially considering that more than 90 percent of our markets have been open again since mid-May. It is also encouraging that the Services & Solutions sales returned to last year’s level in June and that the pick-up option has recently been significantly more utilized. Based on the previous business development and available insights, we were ultimately able to specify our outlook for the entire year 2019/20,” explains Karin Sonnenmoser, CFO of CECONOMY AG.
Specified Forecast for the Entire Year 2019/20
Based on the preliminary business development of the first nine months and available insights, CECONOMY specified its forecast for the fiscal year 2019/20 on July 16, 2020. This was done under the assumption that there will be no further restrictions due to the COVID-19 pandemic in the remaining months of the fiscal year that would impair the business again. Based on the recovery during the third quarter, CECONOMY now expects only a slight decline in currency-adjusted total sales for the fiscal year compared to the previous year. Furthermore, CECONOMY expects an EBIT between 165 and 185 million euros, excluding the effects on results from companies valued using the equity method. This is expected to include a positive effect between 5 million euros and 15 million euros due to the introduction of IFRS 16. The forecast is made before portfolio changes. Non-recurring effects on results related to the cost and efficiency program announced on April 29, 2019, COVID-19-related store closures, and the introduction of the operating model are not included.
Positive Sales Development in June Reflected in Liquidity Situation
The positive sales development in June also led to an improvement in the company’s liquidity situation. The additional credit line of 1.7 billion euros, which CECONOMY established in mid-May with the KfW Development Bank and partner banks as part of a new syndicated loan agreement to create additional financial flexibility, has not been utilized at any time. Overall, CECONOMY is well positioned with the existing total credit line of 2.68 billion euros in this unpredictable time.
CECONOMY and MediaMarktSaturn Create Organizational Foundation to Accelerate Transformation
CECONOMY and MediaMarktSaturn are implementing a unified organizational structure (“Operating Model”) across the group to create important structural prerequisites for accelerating the transformation process. The new operating model also takes into account the ongoing centralization of processes. The focus of the new operating model is on unified management structures and standardized processes. This applies to both the administrative functions in the national companies and the market organization. In addition, it enables maximum focus of employees on the customer experience.
COVID-19 Related Store Closures to a Limited Extent
In light of declining customer frequencies due to COVID-19, MediaMarktSaturn is also reviewing its store portfolio across Europe. The corporate group has already decided to permanently close 14 unprofitable markets. The number of European markets may further decrease slightly in the coming months.
As part of the implementation of the new operating model, there will be a reduction of up to 3,500 full-time positions primarily abroad in the next 24 to 36 months. As of June 30, 2020, the company employed around 45,000 employees on a full-time basis across Europe. Details are subject to discussions with employee representatives, which are to begin shortly.
Expected Savings of Just Over 100 Million Euros Annually
CECONOMY expects sustainable savings of just over 100 million euros per year from the implementation of the measures, which are primarily expected to take effect from the fiscal year 2022/23. The costs for implementing the measures are expected to amount to approximately 180 million euros, a significant portion of which is expected to be incurred in the current fiscal year 2019/20. The forecast published on July 16, 2020, for the fiscal year 2019/20 remains unaffected.
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