Baltika's Unaudited Financial Results, 2 quarter 2011
On the whole, Baltika Group's performance in the second quarter of 2011
corresponded to the company's expectations. The focus of the period was on
improving efficiency by restructuring the Group's retail network and
streamlining the internal processes. Throughout the first half-year, the
company continued to enhance its collections creation process, upgrade
inventory and discount management, aim its marketing efforts more directly at
the brands' target customers and improve customer service at the stores. Thanks
to determined streamlining, in the second quarter sales per square metre grew
by 10%, and even more in local currencies. At the same time, store operating
expenses were almost 10% smaller and costs per square metre dropped by 1.4%.
Second quarter gross margin rose to 58% (Q2 2010: 56%) and discount rates
improved significantly; the average discount rate for the second quarter was 5
percentage points smaller than a year ago. Inventory turnover increased and
although the world market saw an upsurge in raw materials prices (particularly
cotton) and cost inflation in China was substantial, the Group succeeded in
maintaining its cost to sales price ratio stable.
Sales level with the second quarter of 2010 were achieved on an 9% smaller
sales area while gross profit grew by 4% and operating expenses (distribution
and administrative expenses) declined by 6%. In the second quarter, the Group's
profit centres considerably improved their performance, all brands and
continuing retail markets generated a profit and total profit of the retail
system grew by 57% year-over-year.
Operating loss for the second quarter of 2011 was 99 thousand euros compared
with an operating loss of 511 thousand euros for the second quarter of 2010.
The current year second quarter figure includes a foreign exchange loss of 94
thousand euros while in the comparative period the Group earned foreign
exchange gain of 304 thousand euros. The second quarter of 2011 ended in a net
loss of 444 thousand euros against a net loss of 886 thousand euros for the
second quarter of 2010.
Second quarter highlights:
-- The Group continued to monitor all underperforming stores and closed its
Evropeysky store in Moscow. This will lower operating expenses in Russia
and will increase the profitability of the retail system. At the same time,
the Group opened a store in a shopping centre in Odessa, Ukraine.
-- The Group reinforced management of the Russian market by hiring a
professional with over 15 years of retailing experience.
-- The sannual general meeting that convened on 11 May 2011 decided to
increase the share capital of AS Baltika by issuing 3,150,000 additional
shares with an issue price of 1 euro each. As a sufficient quantity of
shares was not subscribed for, the company cancelled the issue. On 27 June
2011 the supervisory council resolved to increase the share capital of AS
Baltika by the issue of 4,300,000 additional registered shares with an
issue price of 0.70 euros each. The new shares are being offered to
existing and new shareholders through a public offering and can be
subscribed for from 19 July to 2 August. The shareholder KJK Fund Sicav-SIF
has signed the obligation to subscribe for 2,142,857 shares, the
shareholder E.Miroglio S.A. for 2,157,142 shares and the shareholder East
Capital Baltic Fund for 333,000 shares.
The ongoing share issue is designed to support implementation of Baltika's
adopted strategy:
-- Sales will be increased, mainly by improving the efficiency of existing
stores, opening new stores and making more active use of additional sales
channels. For this, the company will complete a refresh of the visual
identities and retail concepts of the Monton and Mosaic brands, a project
undertaken in partnership with the creative agency Dan Pearlman, and will
begin gradual refurbishment of the stores. The new retail concepts will be
applied in at least one new store in Ukraine and one in Latvia and three
stores that will be taken over from a Russian wholesale partner in the
Siberia region in Russia. In addition, the company will continue
preparations for launching the Monton e-shop (testing has been scheduled
for the fourth quarter of this year) and making new wholesale and franchise
offers (the first contracts should be signed in the first half of 2012).
Baltika will exit the Polish market in the third quarter of 2011 and
associated sales will be discontinued in august.
-- To improve management efficiency and product development and better utilise
the sales resources, a new and more effective brand and sales management
structure will be implemented in the third quarter of 2011. Baltika will
continue to operate with four brands but will centralise a number of
activities that used to be brand-based and will streamline its matrix
management structure by reducing management levels and specifying
responsibilities.
-- To raise the efficiency of its manufacturing operations, the Group will
develop a strategic development plan for its factories. This will be done
in the third quarter. Options include complete integration of the product
development and manufacturing operations and transformation of the
factories into an independent profit centre freely competing in the market.
The purpose of both options is to continue lowering the cost of conversion.
The Group anticipates current growth to continue in the following quarters and
management's target is to achieve a positive net result for the second
half-year.