KappAhl : Inventory clearing sales affected margins

Fashion chain KappAhl’s (STO: KAHL) second quarter report for December-February was released on Friday. Net sales decreased by 5.8 per cent for the quarter to just over 1.1 billion SEK and 8.6 per cent for the first half compared to previous fiscal year. Impairment loss of 83 million mainly from write-downs of non-current assets on poorly performing shops further reduced earnings.

Operating cash flow turned positive at 68 million where as profit after tax was minus 163 million. The company is disappointed with the performance and says some of that poor run will continue on Q3. Sluggish demand for its products has led to a lot of inventory clearing sales. This in turn affected margins, with gross margin down to 51.9% from 57.2%.

The focus in 2012 is to prioritize on women. The initiatives in the segment have caused much of the sales decline as of late. The main target group is women in the 30-50 range with families. The company admits their recent initiatives in the segment were poor and ill-timed. Winning back market share is the current aim. As one might expect, the company wasn’t very clear on how exactly the new initiatives differ from the old, but it seems even more customer profiling is behind the new offering.

With the profitability in mind, the rate of expansion has been slowed down on purpose and some shops will be closed. A rights issue towards the end of 2011 gave proceeds of around 600 million before costs means that equity/assets ratio increased to 27.7% Gross profit has matched previous year’s level in March. The company expects moderate recovery in the industry in 2012 and to start to see improvement on its own operations. The share was unchanged at 7 SEK on Friday close.