Key financials of the VRG S.A. Group after three quarters of 2020 (MSSF16):
• Sales: PLN 621.7m (-15.5% YoY)
• Net profit (loss): -PLN 29.3m
• Gross margin: 48.0% (-3.3 pp. YoY), compared with 46.9 in 2Q 2020
• SG&A: PLN 295m (-12.5% YoY)
• Store network: 566 stores (-20 YoY) in 102 cities, 145 franchise stores (+3 YoY), 52,600 m2 floor surface (-2% YoY) – progressing optimisation focused on outlet profitability, with floor surface stabilisation
• Online: 24.3% share in sales (+11.1 pp YoY) – a good signal for meeting the target of up to 30% share of online sales in total sales by the end of 2020
Kraków, 10 November 2020. The third quarter of 2020 was a time of recovery for VRG after the spring shopping mall lockdown, an unprecedented disruption for the entire industry. The company worked consistently to rebuild demand and sales. Regardless of the pandemic, VRG generated a profit increase up to PLN 5 million in that quarter, compared to a 1.8 million loss in the previous year. Despite the significantly reduced traffic in malls between July and September compared to the previous year (down by an estimated 20% YoY), the company’s sales were above the baseline scenario projected for that time.
“We have good collections, with a product range tailored to consumers’ current expectations. We have learned a lesson from the first lockdown, and we know how to respond effectively when an administrative ban prevents us from serving customers in brick-and-mortar stores. In terms of products, operations and logistics, we are prepared to face the challenges of the pandemic. Nevertheless, the inability to sell offline in November, and even more so in December, will inevitably affect the result generated by the company at the end of the year. The last quarter is too important for retail,” commented Andrzej Jaworski, President of the Board of VRG S.A. ¬
Gradual revival of in-store sales
VRG successfully launched new clothing collections in the third quarter, expanding its range with products focused on the casual segment. At the same time, YoY sales of formal clothing stabilised as holding weddings and other family celebrations became possible, which was felt primarily by the Vistula brand. Regardless of the rebuilding of traffic in shopping malls, the share of online sales continued to grow.
The jewellery segment recorded a strong result. W.Kruk was a group sales leader both online and in physical stores. The brand generated monthly PLN/m2 sales of PLN 3,169 (8.6% growth YoY), which was influenced by sales growths in gold jewellery and luxury watches. Sales were also supported by new products in W.Kruk’s range, including the next edition of the ambassador's collection Freedom, prepared in cooperation with Martyna Wojciechowska.
As a result, VRG ended the third quarter with sales at 249.4 million, just 0.7% lower than in the same period the previous year. Thanks to the new range for the autumn-winter season and the return of customers to stores, the margin could be improved compared to the second quarter. At 49.1%, it recorded a 1.9 pp drop YoY (for comparison, the gross margin in 2Q20 was 46.9%). As a result, the company was making up for the declines in sales and profit caused by Covid-19 and the first lockdown. In the first nine months of 2020, sales generated by VRG were 15.5% lower than in the same period of the previous year (down by 23.2% YoY at the end of the first half of 2020).
“We were pleased with the sales in September and early October. The company had prepared well for the season in terms of the offer, both in the clothing segment and the jewellery segment, regardless of the challenge of stocking up stores in the face of disrupted supply chains,” commented Radosław Jakociuk, Vice President of VRG S.A. responsible for the Group’s operations and brand divisions.
“Unfortunately, the increases covid-19 statistics and the restrictions introduced gradually by the government, preventing the organisation of family celebrations and business meetings, as well as re-transition of an increasing group of Poles to remote work caused a breakdown of traffic in shopping malls and, consequently, in our showrooms, negatively affecting sales. Already a few days before the temporary closure of our stores in malls, the traffic there was at hardly half of the volume recorded in the same period of the previous year,” he added.
Response to the challenges of the pandemic
As members of the company’s board point out, VRG is prepared to support sales despite the ban on offline stores trading, thanks to the experience of the second quarter and investments in the e-commerce channel and logistics made this year. “Already in October, we got additional stations ready in our warehouses, which allow us to pick orders for e-store shipments on a scale similar to that we handled during the highest sales peaks of the first lockdown, when online sales grew by several hundred percent,” emphasized Michał Zimnicki, CFO and Vice President of the Board of VRG S.A., whose responsibilities include logistics.
In terms of the product range, the Group’s brands are adapted to the current realities (increased weight of the casual segment at the expense of formal fashion). The holiday season approaching, also W.Kruk has prepared new products. A new Swiss brand will join the family of exclusive watches sold by W.Kruk. It will appear in the offer of a new showroom at the Raffles Hotel in Warsaw at the end of November. In this way, W.Kruk is strengthening its position as the strongest distributor of prestigious watches in Poland.
In response to the decision to close physical stores between 7 and 29 November, the company has launched a campaign to support sales in the online channel (such as an early start of the Black Friday promotion). To protect liquidity, steps have also been taken to reduce the company’s operating costs. Since 7 November, VRG employees’ working hours have been reduced by 20%, with a similar reduction in wages. The pay reduction has also affected VRG’s management board. Talks with shopping malls to negotiate tenancy terms have been undertaken. The management board of VRG is also expecting an administrative rent relief and state support for personnel costs. Orders of 2021 spring-summer collections have been downsized by 15% to 20% (depending on the range). “In financial and liquidity terms, the company’s situation remains stable, with little use of credit lines available,” said Michał Zimnicki.
Annual result depends on the duration of showroom lockdown
As members of VRG’s management board have unanimously pointed out, despite the internal mobilization of the company’s resources, the inability to serve customers in large commercial venues where most showrooms are located in the end-of-year months which are critical for retail will not be without impact on VRG’s result. Therefore, on 9 November the company updated the baseline scenario which now assumes a loss of up to 25% of sales in the whole of 2020.