Strong cash position ready for uncertain market development
July – September 2023
- Net revenue decreased by 1%, totalling SEK 369 (373) million.
- Additional provision for slow moving inventory of SEK 44 million, affecting cost of goods sold, which constitutes 11.9 percent of revenue.
- Operating profit (EBIT) was SEK -47 (-15) million. Adjusted operating profit (EBIT) was SEK -47 (-9) million and the adjusted operating margin was -12.7% (-2.4%).
- Cash flow for the period was SEK -1 (96) million.
- Earnings per share before and after dilution was SEK -0.77 (-0.26).
January – September 2023
- Net revenue decreased by 7%, totalling SEK 1,154 (1,243) million.
- Additional provision for slow moving inventory of SEK 44 million, affecting cost of goods sold, which constitutes 3.8 percent of revenue.
- Operating profit (EBIT) was SEK -66 (-37) million. Adjusted operating profit (EBIT) totalled SEK -61 (-30) million and the adjusted operating margin was -5.3% (-2.4%).
- Cash flow for the period was SEK 30 (100) million.
- Earnings per share before and after dilution was SEK -0.59 (-0.66).
|SEKm (unless stated otherwise)||2023||2022||2023||2022||Sep 2023||2022|
|Growth in local currencies (%)||-9%||0%||-12%||2%||-10%||1%|
|Profit after variable costs||34||60||176||192||236||252|
|Operating profit (EBIT)||-47||-15||-66||-37||-97||-68|
|Adjusted operating profit (EBIT)||-47||-9||-61||-30||-84||-53|
|Profit/loss for the period||-61||-20||-47||-35||-70||-58|
|Gross margin (%)||30.7%||39.1%||37.8%||39.9%||37.8%||39.3%|
|Profit after variable costs (%)||9.3%||16.2%||15.3%||15.5%||14.9%||15.1%|
|Adjusted operating margin (EBIT) (%)||-12.7%||-2.4%||-5.3%||-2.4%||-5.3%||-3.2%|
|Cash flow for the period||-1||96||30||100||46||117|
|Net debt (+) / Net cash (-)||-171||-115||-171||-115||-171||-136|
Significant events during the reporting period
The Company made the decision to revise some of the base assumptions of its provision for slow moving inventory as a response to the current market conditions. This resulted in an increased provision of SEK 44 million affecting third quarter 2023.
Significant events after the end of the reporting period
To accelerate the development of market leading private brands, on 1 November 2023 the Board of Directors decided to consolidate the Company’s brand portfolio, spreading investments across fewer brands. Some private brands will be removed, and products merged into the remaining brands. This will result in an accelerated depreciation relating to trademarks that will be distributed over the next few years, starting in fourth quarter of 2023. It may also lead to potential impairment of the brands during the fourth quarter of 2023. The total cost is approximately SEK 20 million.
Change of Chief Financial Officer
On 7 November 2023 Fredrik Ideström (current Chief Strategy Officer) was appointed as Group Chief Financial Officer, replacing Niclas Olsson who resigned from his role. The change will be effective as of 15 December 2023.
Rightsizing the company – Operational efficiency program
In order to improve efficiency and agility, the Company is planning to initiate an operational efficiency program to adjust the structure of the organization. It will therefore start a process with authorities and unions as per country specific legislation and practices. This could affect approximately 50 employees, across all functions and countries where Pierce has offices, and is expected to be implemented during the fourth quarter. The goal is to implement a more team-based operating model with fewer managers and a greater individual mandate and responsibility. To support this planned organizational simplification, the Company will improve its core processes through the implementation of Lean methodology across the company accompanied with an increase of digitization and automation. The ambition for the new operating model is to generate annual profit improvement of approximately SEK 25 million, which will affect earnings already from the first quarter of 2024, while the effect on cash flow will be generated gradually during the first half of 2024. The planned change will result in a non-recurring cost corresponding to approximately SEK 15 million in the fourth quarter 2023.
As expected, the quarter showed relatively weak sales due to low season and a continued weak demand. However, we estimate that we maintained market share. We continued our focus from the beginning of 2023 on preserving cash and improving margins with successful results. Unfortunately, in-spite of our efforts, we did not manage to reach a positive EBIT for the third quarter, excluding extraordinary items, which is a disappointment to the organization and me.
During the last months we have worked hard to create a new simplified, streamlined, and geared platform for Pierce for 2024 and onwards. As I mentioned in my previous CEO letter, we have been conducting a revision of our strategy. Pierce’s long-term ambition is to become the unquestionable leading pure play online retailer in the European market for gear, accessories and parts for motorcycle riding.
As a part of this strategy revision, we have re-calibrated our growth strategy. 24MX is by far the largest online retailer in Europe within the smaller but profitable Offroad segment. Despite having a leading position, we still have a huge potential to grow. Consequently, we aim to enhance our specialist position to consolidate and grow our market share within the Offroad segment. We have an excellent position with strong own and external brands that we will leverage further.
XLMOTO has a challenger position in the much larger but in general less profitable Onroad segment. We are adjusting our approach by more clearly prioritizing profitable growth. We’ll be more selective in which brands we partner with, what markets we invest in and which specific customer segments we target.
In the current overall soft market, customer relevance and retention are more crucial than ever. Therefore, we have made increased customer retention and loyalty to one of our absolute top priorities and we will take several important steps to increase sales from recurring customers during the coming quarters.
We will also be simplifying our go-to-market model by gradually consolidating our 39 local sites into 3 global sites, among other initiatives. This will help us streamline our work processes and create a better customer experience through enhanced personalization.
Consolidating our portfolio of our own brands will enable us to focus our brand investments to fewer brands. This, we expect, will accelerate our brand-building initiatives with the aim of developing our own private brands into market-leading value-for-money brands.
During the quarter, we have adjusted the assumptions underpinning depreciation of inventory, resulting in a significant adjustment of the inventory provision for slow moving stock in the quarter. The purpose was to reflect today’s market situation and our increased focus on shorter product life cycles, thereby creating a more attractive customer offering.
Finally, our goal is to implement a more team-based operating model with fewer managers and greater individual mandate and responsibility. Accordingly, we plan to initiate a process with unions and employees according to local rules in countries where we have operations during the fourth quarter that may affect approximately 50 employees. To support this organizational simplification, we will improve our core processes through the implementation of Lean methodology across the company accompanied by an increase of digitization and automation. The ambition for the planned operating model is to generate annual profit improvement of approximately SEK 25 million, which will affect earnings already from the first quarter of 2024, while the corresponding effect on cash flow will be generated gradually during the first half of 2024.
The changes planned to be implemented will entail non-recurring costs during the third and fourth quarters this year. The adjustments to the assumption of write-downs of slow-moving inventory affected the third quarter by SEK 44 million, while the consolidation of the brand portfolio will entail costs of approximately SEK 20 million in the form of accelerated depreciation in the coming years including a possible write-down in the fourth quarter. Finally, the planned organizational change is expected to entail a cost of approximately SEK 15 million during the fourth quarter.
Upon the successful implementation of all these planned initiatives, focusing on our customer relevance across our two main segments in addition to the overall simplifications and digitalization of our operational set-up, we are all set for a new and exciting journey onwards.
Göran Dahlin, CEO