Business results The Group's results for 2009 were affected by the world economic crisis. Company's major markets shrinked substantially. Purchasing power diminished because of local currency devaluations in Russia, Belarus, Ukraine, growing unemployment and negative future expectations of the population. GDP in 2009 as compared to 2008 decreased by 15% in Ukraine and by 7,9% in Russia. In Belarus GDP grew slightly by 0,2%. Unemployment in Russia and Ukraine increased significantly and was 10% and 9% respectively. Consumption in major markets suffered significantly because of local currency devaluation in 2008 and 2009 in Russia, Ukraine and Belarus. Ukrainian Hryvnia was devalued by 60% against Euro, Russian Rouble - by 30%, Belarussian Rouble - by 33%. As a result, lingerie and apparel markets in the core markets of the Group shrinked by 30-40% as estimated by industry analysts. In 2009 the Group was confronted by the aggressive price competition. Most of the competitors in the retail were lowering their retail prices offering on-going sales and promotion discounts throughout the year. At the same time manufacturers in a situation of significant overstocking as the result of sharp decrease in consumer demand, were acting aggressively to minimise their working capital levels and to recover the cash flows through discounting of stocks. As the result, 2009 results were affected by severe economic turmoil and high level of uncertainty in business environment. Despite the market circumstances the Group managed to deliver the results in line with the revised forecast in May 2009. During 2009 the Group initiated major restructuring in several areas including retail, logistics and supply chain management, marketing and sales, and production planning. Retail. At the end of the reporting period the Group and its franchising partners operated 310 Milavitsa and other lingerie outlets, including 64 stores operated directly by the Group and the rest - by franchising partners. The Group's retail focus has been shifted towards the promotion and support of franchising in cooperation with existing and new trading partners. At the same time the Group will continue operating its own stores in Belarus. Logistics and supply chain management. The major objective for 2009 was to adjust logistics to new market demand conditions calling for fast and addressed shipments to particular clients based on ordered SKUs. In addition, growing number of shops required more detailed planning of replenishments and robust forecast tools based on the current sales and planned stock level. As one of the response measures was installation of high performance sorter machine that allows fast and precise pick-ups and packaging of finished goods to be delivered fast to the growing number of the addresses. In addition, the packaging approach was changed to a smaller amount of goods being packed in one package to serve clients with high percentage of retail operations. In 2009 the Group started implementation of IFS supply chain management system with the objective to optimize stock levels and improve ordering system for the Group and its customers and plans to finalize the implementation in H2 2010. Marketing and sales. In 2009 a new sales strategy for the Russian market was developed. The revision of strategies for other markets will follow in 2010. The major target is to establish additional control over distribution by selecting exclusive trading partners in charge of the regional development, to introduce mandatory reporting systems, and to encourage trading partners to develop Milavitsa branded stores in their regions. The structure of the Group was adjusted to address the emphasis on the brand and product portfolio management aiming to improve the brand image and launch new fashion collections more superior to the competitors' offer. In addition, the new system of the orders collection was also introduced in 2009 that provides faster market information and raised quality of the customer orders. Never-out-of-stock approach for bestselling models in classic collection was developed and will be launched in 2010. Production planning. The Group is in process of upgrading the Axapta Production Planning module in 2010 addressing the respective changes in order collection and logistics procedures. The Group now operates a flexible planning system allowing quick response to changing market conditions. Key Events in 2009 Changes in the composition of the Management Board In Q1 2009 the Group named Ms. Baiba Gegere as the new Chief Financial Officer of the Group and she was appointed to the Management Board of SFG by the Supervisory Board decision adopted on 4 March 2009. In addition, in Q1 2009 SFG's Supervisory Board removed Mr. Remigiusz Pilat from the Management Board with immediate effect in connection with the changes in the structure of SFG's Polish operations. In Q2 the Supervisory Board of the Group resolved to recall the members of the Management Board Mr. Dmitry Podolinski and Mr. Peeter Larin and to appoint Mr. Norberto Rodriguez as the new member of the Management Board of the Group. Mr. Rodriguez joined the Group's management team as the Chief Logistics Officer in October 2007 Sale of PTA Grupp AS On 30 June 2009 the Group entered into an agreement for the sale of all shares in PTA held by the Group to PTA Holding OÜ for a total consideration of EEK 15,224 thousand. The transaction was performed immediately upon signing. EEK 7,401 thousand was paid on the date of the closing of the transaction by way of taking over certain liabilities of the Group and EEK 7,823 thousand will be paid in cash by 31 December 2011 at the latest, carrying interest until full payment. The obligation to pay the purchase price is secured by a share pledge over 100% of all shares in PTA in favour of the Group. PTA operates in the field of manufacture, retail and wholesale of women's apparel under the „PTA“ trademark. With the sale of the apparel business, the Group focused on its core business - design, manufacturing and sale of lingerie. The sale enabled the Group to reallocate financial and managerial resources to its core operations and improve the efficiency of management. PTA made a net loss of EEK 12,189 thousand in 6 months period ended 30 June 2009. Sale of UAB “Linret LT” In November 2009 the Group closed the sale of all its shares in UAB Linret LT. Linret LT was a Lithuanian retail subsidiary, operating 14 retail outlets. Linret LT was engaged primarily in the distribution of Lauma Lingerie and Milavitsa goods in Lithuania through retail chain under Amadea Line brand and also operated franchised stores under Jockey and Yamamay brands. Linret LT made a loss of EEK 9,278 thousand in the first ten months of 2009. Taking into account the decrease in consumer demand in Lithuania, and the overall state of the Lithuanian economy, the management was of the opinion that it was unlikely that Linret LT will become profitable in 2010 or will generate positive cash flows in the observable future. Taking into account the total investment of SFG in Linret LT, the transaction generated an accounting profit of approximately EEK 782 thousand. The Group intends to continue the shift to franchise operations in Baltics under Lauma Lingerie brand. Sale of Splendo Polska Sp. z o.o. The closing of the agreement for the sale of the Company's shares (90% of the share capital) in Splendo Polska Sp. z o.o., a Polish retail subsidiary operating 7 retail outlets, was completed in October 2009. The operating results of Splendo Polska Sp. z o.o. were not consolidated in the Group's financial results in 2009 and a loss related to the transaction was fully provided as of 31 December 2008. Changes in significant shareholdings The shareholders' register of SFG includes all legal owners of the shares but does not necessarily reflect the allocation of voting rights among shareholders. However, shareholders must notify SFG of changes in allocation of voting rights where a shareholder increases or reduces its participation above or below 5, 10, 15, 20, 25 or 50 per cent, 1/3 or 2/3 of all votes represented by shares. Based on such notifications, SFG identifies the persons holding significant shareholdings. Based on the aforementioned notifications received up to date, the following persons held significant shareholdings in SFG: Mr. Toomas Tool held 9,810,983 shares (24.52% of all votes) as of 28 December 2009; Mr. Stephan David Balkin held 8,000,000 shares (20% of all votes) as of 23 December 2009; Funds managed by Pioneer Pekao Investment Management SA held 4,065,529 shares (10.16% of all votes) as of 14 August 2009. During Q4 2009, the shareholding of SIA Alta Capital Partners reduced below 5% of all votes to 1,864,286 shares (4.66% of all votes based on notification from 3 February 2010) and shareholdings of Mr. Toomas Tool and Mr. Stephan David Balkin increased as indicated above. Changes in the top management of the Group's Russian operations Within the fourth quarter of 2009 Nikolay Dolgiy was appointed the general manager for both of the Group's largest Russian subsidiaries - ZAO “STK Milavitsa” and ZAO “Linret”. Mr. Dolgiy (33) is a skilled manager with over 10 years' experience in managerial positions, primarily in the field of retail. From August 2009, Mr. Dolgiy worked as the first deputy general manager of STK Milavitsa responsible for sales. Restructuring of Russian Retail Operations In December 2009 an action plan was approved for the restructuring of the Group's loss-making retail operations in Russia. The plan included the transfer of Milavitsa retail outlets to franchise partners and the closing of inefficient stores. Other cost-cutting measures under the action plan included the optimisation of the office and warehouse lease expenses and a reduction in the number of employees. The decision to switch to the franchise business model in Russia followed similar reorganization measures in Poland and Lithuania. Financial performance The Group's sales from continuing operations amounted to EEK 1,158,537 thousand in 2009, representing a 26.7% decline as compared to the previous year. Overall wholesale sales from continuing operations decreased by 26.8% and retail sales from continuing operations presented a decrease of 24.4%. The proportion of retail sales in total sales increased by 0.7% and reached 23.3% of total sales in 2009. The Group's gross margin from continuing operations in 2009 increased and was 43.5%, as compared to 41.0% in the previous year. One-off adjustments related to restructuring of Russian operations increased cost of goods sold in 2009 and amounted to EEK 6,572 thousand. As the result, normalized gross margin amounted to 44.0% demonstrating a slight increase in profitability as compared to 2008. This positive effect was observed in Q2 and Q3 2009 mainly due to the increased sales prices in key markets and the beneficial impact of the devaluation of Belarusian Rouble on production costs. The consolidated operating profit from continuing operations amounted to EEK 60,443 thousand, representing a 17.0% increase compared to the year 2008. The consolidated operating margin from continuing operations was 5.2% (3.3% in 2008). The operating profit and the operating margin were adversely influenced by one-off expenses in 2009 and 2008. In 2009, the Group continued with the restructuring of Russian retail operations. One-off expenses related to the restructuring of Russian operations in 2009 amounted to EEK 53,167 thousand, including EEK 13,863 thousand in Q1 2009, EEK 18,353 thousand in Q2 2009, EEK 7,072 thousand in Q3 2009 and EUR 13,879 thousand in Q4 2009 and partially related to initiatives started in prior periods. The Group will finalize closing or transfer of inefficient stores to franchise partners in H1 2010. Restructuring provisions to cover future restructuring losses related to Russian retail chain amounted to EEK 2,425 thousand as of 31 December 2009. The operating loss of the Russian retail operations in 2009 was EEK 103,440 thousand, including one-off expenses amounting to EEK 53,167 thousand. Loan receivable in the amount of EEK 20,356 thousand was fully provided based on the management's assessment of the recoverability of the loan in Q1 2009. The expenses related to the provision have been recognized in other operating expenses from continuing operations in 2009. The management will continue actions to recover the loan balance. In total one-off continuing operating losses related to the restructuring of Russian operations and the provisioning of a loan amounted to EEK 73,523 thousand in 2009 (total normalization adjustments amounted to EEK 83,130 thousand in 2008). As the result, consolidated normalised operating profit from continuing operations amounted to EEK 133,966 thousand for the year 2009, representing a 0.6% decline as compared to 2008. The consolidated normalised operating margin from continuing operations reached 11.6% (8.5% in 2008). On 30 June 2009 the Group closed the transaction for the sale of all shares in PTA Grupp AS (“PTA”) held by the Group to PTA Holding OÜ for total consideration of EEK 15,224 thousand, including EEK 7,401thousand paid upon closing by way of taking over certain liabilities of the Group and the remaining part of the purchase price being payable in cash by 31 December 2011 at the latest and carrying interest until full payment. The transaction resulted in a EEK 23,845 thousand loss in the consolidated results of the Group in 2009 (Note 36). Further details of the transaction are provided in section ‘Key events'. In accordance with the requirements of the International Financial Reporting Standards PTA operations (apparel business line) are now regarded as discontinued operations for the purposes of financial reporting. Accordingly, PTA's financial performance is not consolidated in sales and expenses, but instead the consolidated loss from PTA's business operations in the amount of EEK 12,189 thousand for the 6 months' period ended 30 June 2009 and the loss generated by the sales transaction are recorded separately in the consolidated income statement as a loss from discontinued operations in the total amount of EEK 36,034 thousand. Consolidated net profit from foreign exchange rate fluctuations amounted to EEK 15,208 thousand in 2009. SP ZAO Milavitsa accrued a foreign exchange gain in the amount of EEK 37,356 thousand that was caused partially by EUR-denominated intra-Group trading in Q1 2009, while Russian operations suffered a loss from foreign exchange rate fluctuations. Starting from April 2009, all trading to Russia is Russian Rouble denominated to minimise unrealized foreign exchange gains and losses within the Group. Income tax expenses from continuing operations amounted to EEK 54,888 thousand against EEK 87,777 thousand in the previous year. In Q4 2009 the Group recognized a deferred tax in the amount of EEK 18,119 thousand. Income tax expense in 2009 was higher than anticipated due to taxable foreign exchange gains of SP ZAO Milavitsa. However, high overall effective tax rate is the temporary result of the loss making subsidiaries' net loss position for the reporting period, non-tax deductable one-off expenses discussed above and other non-tax deductable expenses in Belarus (mainly employee remuneration). For the year 2009, consolidated net loss from continuing operations attributable to equity holders amounted to EEK 2,582 thousand, compared to net loss of EEK 111,091 thousand in 2008 (Note 28); net margin from continuing operations attributable to equity holders was -0.2% (up from a negative margin of 7.0% in 2008). Consolidated normalised net profit from continuing operations attributable to equity holders (excluding one-off expenses in the amount of EEK 73,523 thousand) amounted to EEK 64,387 thousand, compared to net loss of EEK 31,415 thousand in 2008 (one-off expenses in 2008 amounted to EEK 83,130 thousand); normalised net margin from continuing operations was 5.6% (-2.0% in 2008). In 2009, the Group's return on equity was negative and amounted to -6.8% (-17.3% in 2008) and return on assets was -3.8% (-10.4% in 2008). Financial position As of 31 December 2009 consolidated assets amounted to EEK 850,423 thousand representing a decrease of 29.6% as compared to the position as of 31 December 2008. The value of total asset base in EUR terms was significantly impacted by the devaluation of the Belarusian Rouble which depreciated against the Euro by 33.4% in 2009, decreasing the value of assets based in Belarus in EUR terms. Furthermore, due to the sale of PTA on 30 June 2009 and the sale of UAB “Linret LT” in November 2009, the financial position of PTA and UAB “Linret LT” are not consolidated as of 31 December 2009, causing a further decrease in the assets of the Group. Property, plant and intangibles balances decreased by EEK 132,448 thousand as compared to 31 December 2008, the key reason being the impact of the foreign exchange rate in the amount of EEK 60,102 thousand and the sale of PTA and UAB “Linret LT” in the amount of EEK 25,674 thousand. Trade receivables decreased by EEK 36,395 thousand as compared to 31 December 2008 and amounted to EEK 131,618 thousand as of 31 December 2009. Payment discipline of key customers in Russia improved during 2009. Inventory balance decreased by EEK 168,123 thousand and amounted to EEK 266,289 thousand as of 31 December 2009. This was partially related to the disposal of PTA; however, a major decrease was achieved through changes in the production planning to adjust to the new level of the working capital resulting from decreased sales volumes and through the devaluation of the Belarusian Rouble which depreciated against the Euro by 33.4% in 2009, decreasing the value of inventories based in Belarus in EUR terms. Foreign exchange fluctuations also left a negative impact on the Group's equity, in the form of a negative change in currency translation reserve in the amount of EEK 128,453 thousand for the year. On the overall basis, equity attributable to equity holders decreased by EEK 151,391 thousand and amounted to EEK 489,856 thousand as of 31 December 2009. Current liabilities decreased by EEK 186,532 thousand in 2009, in line with management expectations. The liquidity position of the Group improved in 2009 with respect to the total balance of borrowings and related maturities. Current and non-current loans and borrowings decreased by EEK 106,209 thousand to EEK 28,242 thousand as of 31 December 2009. Loans received and loans repaid in 2009 amounted to EEK 102,609 thousand and EEK 177,338 thousand respectively, including finance lease liabilities repaid in the amount of EEK 13,722 thousand. PTA loan balance in the amount of EEK 31,606 thousand was eliminated from the consolidated financial position as the result of the PTA sales transaction. However, as at the date of disposal PTA had two loans and an overdraft from Danske Bank A/S Estonian branch outstanding which were secured by a surety provided by AS Silvano Fashion Group. The surety agreement was not terminated after the PTA sales transaction and the balance of loans and credit line amounted to EEK 23,423 thousand as of 31 December 2009; however, the liability of the Group to Danske Bank A/S Estonian branch is in turn secured by a commercial pledge over PTA's assets. In January 2010 a credit line facility of Lauma Lingerie with Unicredit Bank in Latvia was prolonged, decreasing the available facility's limit with the bank from EEK 21,905 thousand to EEK 17,211 thousand until 31 March 2010 and to EEK 15,647 thousand until 30 April 2010. Information on the maturity of current borrowings is presented in Note 29 to the consolidated financial statements. Tax liabilities and other payables, including payables to employees, amounted to EEK 68,790 thousand. Provisions amounted to EEK 3,395 thousand as of 31 December 2009 and included provisions for the restructuring of Russian retail operations in the amount of EEK 2,441 thousand. Sales from continuing operations Women's apparel operations were fully divested as of 31 December 2009 after the sale of PTA at the end of H1 2009 and are no longer part of continuing operations of the Group. Continuing operations include design, production and sale of women lingerie. Sales by business segments -------------------------------------------------------------------------------- | | 2009 | 2008 | Change | -------------------------------------------------------------------------------- | Wholesale | 869,685 | 1,188,139 | -26.8% | -------------------------------------------------------------------------------- | Retail | 270,295 | 357,384 | -24.4% | -------------------------------------------------------------------------------- | Other operations | 18,557 | 34,860 | -46.8% | -------------------------------------------------------------------------------- | Total | 1,158,537 | 1,580,383 | -26.7% | -------------------------------------------------------------------------------- The majority of lingerie sales revenue in 2009 in the amount of EEK 677,420 thousand was generated in the Russian market, accounting for 58.5% of all lingerie sales in 2009 as compared to EEK 898,521 thousand in 2008. Sales in Russia comprise both retail sales and wholesale. The second largest region for lingerie sales was Belarus, where sales reached EEK 306,016 thousand, contributing 26.4% of lingerie sales (both retail and wholesale) as compared to EEK 361,169 thousand in 2008. Sales in the major markets, including Russia, Belarus, and Ukraine, were heavily affected by the economic situation and devaluation of the local currencies. As the result, sales in 2009 were lower as compared to 2008. Wholesale operations decreased to a larger extent than retail operations. Starting from Q2 sales in the major markets, including Russia and Ukraine demonstrated a positive trend as compared to the first quarter. As the result, sales in Q2 and Q3 2009 improved as compared to Q1 2009 however were still lower than in Q2 and Q3 2008. Milavitsa sales in the summer months were at the 2008 level. Although still affected by the economic situation and the devaluation of the local currencies, sales in the major markets demonstrated positive trend in terms of pieces sold in Q4 2009 as compared to the respective period in 2008. As the result, in the Group's largest subsidiary SP ZAO Milavitsa, sales in Q4 2009 improved in volume terms as compared to Q4 2008; however, sales decreased in monetary terms due to increased proportion of cheaper products in the sales and additional discounts introduced in H2 2009. In Q4 2009 the Group suffered from customer traffic slowdown attributable in part to swine flue worries and a relatively cold winter. Wholesale operations improved during the year as many of the Group's Russian and Ukrainian wholesale partners realized their excess stock levels reducing them to the normal operational levels after being overstocked in 2008 as a result of a sharp decrease in demand caused by the overall economic crisis. Decrease in sales in Belarus was lower as compared to sales trends in Russia, Ukraine and the Baltic countries, leading to the growing share of the Belarusian market in the total sales in 2009 as compared to the previous year. This is an effect of the more stable economic situation in Belarus compared to the neighboring countries as well as the tight control over distribution that the Group has developed in the country. A number of actions have been introduced to the market including additional marketing activities in Belarus, Ukraine and Russia and supportive measures in the opening of new franchised stores. Dealers and distributors were motivated to increase their sales activities in the exchange for favorable pricing opportunities. A new order processing and reservation system introduced by Milavitsa at the end of Q2 allowed trading partners broader access to the Group's stock, speedier packing and delivery. As the result Milavitsa managed to reach 2008 sales level in terms of units sold during summer months and exceed last year's level in Q4 2009. Changes in the top management of the Group's Russian operations took place in the second half of 2009 in order to execute a new sales strategy in that core market and improve corporate governance of the Russian subsidiaries of the Group. Changes in the sales strategy were introduced to the trading partners in late September and later developed and presented to the trading partners in December. The Group targets increased control over its distribution and intends to adjust its organizational structure accordingly. In terms of lingerie brands, the sales of “Milavitsa” core brand accounted for 74.4% of total lingerie sales revenue in 2009 (2008: 76.1%) and amounted to EEK 848,139 thousand. The sales of “Lauma Lingerie” core brand accounted for 5.3% of total lingerie sales (2008: 5.7%) and amounted to EEK 60,412 thousand. Other brands such as “Alisee”, “Aveline”, “Hidalgo” and “Laumelle” comprised 20.3% of total lingerie sales in 2009 (2008: 18.2%), amounting to EEK 231,429 thousand mainly due to the growth of sales of lower priced goods under “Aveline” brand. Wholesale In 2009, wholesale revenue amounted to EEK 869,685 thousand, representing 75.1% of the Group's total revenue (2008: 75.2%). The main wholesale regions were Russia, Belarus, Ukraine and the Baltic States. Gradual improvements in sales were observed already in Q2 2009. Furthermore, the second half of 2009 demonstrated an increase in lingerie wholesale revenue of 5.6% as compared to the first half of 2009 as many of the Milavitsa's Russian and Ukrainian wholesale partners had adjusted their working capital levels to the new market and trading circumstances caused by the crisis at the end of 2008. Most of the lingerie wholesale partners are located in Russia, the key market for the Group. Milavitsa franchised stores which are being serviced through wholesale partners were affected by the crisis to a much smaller degree, as compared to purely wholesales deliveries ending in the uncontrolled retail (open markets, kiosks, department stores, other). A new channel of distribution was introduced in Ukraine by Milavitsa in late 2008 and early 2009. The channel allowed the Group to offset the sharp decrease in sales caused by the economic crisis and the inability of the old distribution network to address the new circumstances. Although still below the 2008 level, sales in the Ukrainian market demonstrated positive trends in Q2 and Q3 2009. Q4 2009, however, saw a slowdown in Ukrainian sales caused by the difficult economic situation in the country, flue quarantine in some shopping centres and pre-election uncertainty. Lauma Lingerie experienced a sharp reduction in sales in their major markets being affected by the crisis to a greater extent due to its higher pricing positioning and inability of the distribution partners to meet current market conditions. Certain changes in the management of the company were made to address the market realities. Lauma Lingerie is in the process of implementing a revised sales strategy for its core markets including Russia, Ukraine and the Baltics. Retail operations Total lingerie retail sales of the Group in 2009 amounted to EEK 270,295 thousand, representing a 24.4% decrease as compared to 2008. Lingerie retail operations were conducted in Latvia, Russia, Belarus, and Lithuania. At the end of 2009 the Group operated 64 own retail outlets with a total area of 5,523 square meters. Additionally as of 31 December 2009 there were more than 250 Milavitsa branded shops operated by Milavitsa trading partners in Russia, Belarus, Ukraine, Moldavia, Kazakhstan, Uzbekistan, Kirgizstan, Latvia, Romania, Azerbaijan, Armenia, Portugal and Cyprus, of which 10 shops were opened in Q4. In 2009 17 new own lingerie stores were opened, including 12 under Milavitsa name in Belarus, 2 stores under Lauma Lingerie brand name in Latvia, 1 under Yamamay and 2 under Jockey brand names in Lithuania. Yamamay and Jockey shops along with other shops in Lithuania were subsequently sold as a result of the disposal by the Group of all its shares in UAB “Linert LT” in November 2009. Details of the transaction are provided in section ‘Key events'. Additionally, 33 underperforming stores were closed: 13 PTA stores, 15 Oblicie stores and 3 Milavitsa stores in Russia, 2 Milavitsa stores in Belarus. 18 Oblicie stores in Russia were rebranded to Milavitsa. Number of own stores as at: -------------------------------------------------------------------------------- | | 31.12.2009 | 31.12.2008 | -------------------------------------------------------------------------------- | Latvia | 5 | 3 | -------------------------------------------------------------------------------- | Poland | 0 | 7 | -------------------------------------------------------------------------------- | Belarus | 38 | 28 | -------------------------------------------------------------------------------- | Russia | 21 | 52 | -------------------------------------------------------------------------------- | Lithuania | 0 | 16 | -------------------------------------------------------------------------------- | Total stores | 64 | 106 | -------------------------------------------------------------------------------- | Total sales area, sq m | 5,523 | 9,549 | -------------------------------------------------------------------------------- In Belarus, two ineffective stores were closed and 12 new Milavitsa stores were opened, adding to the growth of the retail sales in the country. A number of sales promotions were conducted in the Milavitsa retail chain. Own retail operations in Belarus remain one of the key priorities for the Group's further sales development in Belarus. In the Baltics, the overall consumer market demand continued to deteriorate affecting practically all retail segments. Lingerie retail sales decreased by 31.4% as compared to 2008, amounting to EEK 19,214 thousand. The decision to divest the Group's retail subsidiary in Lithuania was taken in H2 2009 due to adverse current market situation and its prospects. In respect of lingerie retail in Russia, in the first half of 2009 the Group's main focus was on rebranding Oblicie stores to Milavitsa stores, closing poor-performing stores, and improving sales performance. As a result, 18 lingerie stores were closed and 18 stores were rebranded. The strategic decision to shift focus from own retail chain towards the development of Milavitsa franchise network was made in H2 2009 to terminate the loss making own retail operations in Russia. As the result, the Group's own Oblicie stores were rebranded to Milavitsa and a transfer of stores to Milavitsa trading partners was commenced while non-performing stores are being closed. Certain structural and management changes have been made in the Group's Russian operations (including the establishment of a separate franchise department and the recruitment of the new experienced general manager) to implement the selected strategy. Own stores by concept -------------------------------------------------------------------------------- | Market | Milavitsa | Oblicie | Lauma | Total | Sales area, | | | stores | stores | Lingerie | | sq m | | | | | stores | | | -------------------------------------------------------------------------------- | Belarus | 38 | 0 | 0 | 38 | 3,411 | -------------------------------------------------------------------------------- | Russia | 19 | 2 | 0 | 21 | 1,754 | -------------------------------------------------------------------------------- | Latvia | 0 | 0 | 5 | 5 | 358 | -------------------------------------------------------------------------------- | Total | 57 | 2 | 5 | 64 | 5,523 | -------------------------------------------------------------------------------- Discontinued operations Discontinued operations' results include operations of PTA (apparel business line) for 6 months' period ended 30 June 2009. Results of PTA operations are presented in the consolidated income statement as a single line item under ‘Loss from discontinued operations'. Production, sourcing, purchasing and logistics Due to increased uncertainty in the marketplace and sharply falling demand in Q4 2008 and Q1 2009 the Group's manufacturing companies reduced their production and purchasing volumes in 2009. In addition, adjustments in the production planning process were made to adjust for changing circumstances. For example, the Group's largest production subsidiary SP ZAO Milavitsa switched from quarterly production planning to monthly planning. As the result of the adjustments in production and sourcing volumes as well as in the production planning process, the Group was able to decrease inventories to normal levels. Consequently, the Group's working capital position has improved significantly. The total volume of production in SP ZAO Milavitsa amounted to 14,303 thousand pieces in 2009, representing a 24.3% decrease as compared to the previous year. The total production volumes in Lauma Lingerie amounted to 660 thousand pieces in 2009, showing a decrease of 65.3% as compared to the previous year. In broad terms, the utilisation of own production capacities in SP ZAO Milavitsa remained at the level of 2008, while outsourced production capacities were the major source for the production output decrease. However, at the end of 2009 the number of cooperation partners for outsourced production in Q4 2009 increased by 30% compared to Q3 2009 with majority of new contracts concluded in late December 2009 in order to prepare for the increased production volumes in 2010. In respect of logistics, the implementation of a supply chain management system on the basis of IFS software application is in process is planned to be finalised in H1 2010. Capital investments In 2009, the Group's investments in continuing operations totalled EEK 22,750 thousand with investments into retail amounting to EEK 6,478 thousand. Other investments were made in equipment and facilities to maintain effective production. Personnel At the end of December 2009, the Group employed 3,164 employees including 472 in retail and 1,992 in production. The rest were employed in wholesale, administration and support operations. The average number of employees in 2009 was 3,085. Total salaries and wages in 2009 amounted to EEK 263,426 thousand. The remuneration of the members of the Management Board totalled EEK 10,092 thousand. The members of the Management Board also serve as executives for the Group's subsidiaries. Outlook for 2010 The Group's overall strategy focuses on organic growth in 2010, improved logistics, and strengthening its franchising model. For 2010 management expects the first stage of recovery in major export markets and slight growth in consumer demand. 2010 Group's goals are based on upper single-digit growth for the major export markets. Management does not forecast any substantial devaluation of local currencies in major export markets against USD and Euro that would result in lowering purchasing power, particularly for imported goods, and shrinking of consumer goods consumption. To achieve organic growth in 2010 the Group is planning further development of its retail and wholesale operations. Improvement of logistics and the upgrade of the franchising model are two core activities to focus on in 2010. Logistics is currently being restructured to address the growing retail demand for customized, low-quantity shipments and shortened lead-time. In franchising the key point is to motivate, firstly, the existing partners to grow in depth by adding new shops in the region and raising efficiency of retail operations and, secondly, potential partners in new geographical areas where the Group's shops are not yet present. In retail, the main focus for 2010 will be on the franchising partners' retail networks, i.e. Milavitsa branded stores in Russia, Ukraine and other CIS countries. Newly developed franchising policies and standards are currently being implemented by the partners including logistics, pricing, retailing principles, IT support, and HR policies with close monitoring and support from the Group. The Group's own retail network will be limited to the home market of the Group's largest subsidiary, Milavitsa - Belarus - where the Group currently operates 38 own stores and Latvia market. The target for the Group's own retail is to continue increasing efficiency of retail operations and adding up 8-10 outlets per annum in 2010. The goal is to maintain the current level of sales per square meter with moderate expansion and investments into new stores. In Russia, the Group will complete the restructuring of own retail operations whereby own shops will be fully transferred to franchising partners in the regions in H1 2010. The Group will continue supporting its franchising model by enhancing brand awareness and recognition, supplementing collections, and performing consumer campaigns and other marketing measures for all the markets. For all own shops in Belarus and partners' stores in other countries the Group will launch IT support system enhancing supply chain management and stock planning for the wholesalers and the shops. In wholesale, the main focus for 2010 will be on upgrading existing wholesale network, strengthening relationships with existing dealers, exploring new markets and new product niches, and improving planning and logistics for wholesale distribution. Upgrading existing distribution network calls for new wholesale policies including pricing, special events, new collections' presentations, as well as better collection and analysis of orders. The Group plans to restructure its planning principles and calendar to assist dealers in placing more precise orders by reducing the lead-time from order to actual shipment. The Group plans to work on raising existing dealers' loyalty to the Group and its products via closer communication with partners, offering competitive terms and conditions, providing marketing and PR support, organizing round-table conferences with key accounts on a quarterly basis. For the geographical expansure, the Group will work to insure a uniform penetration ratio in all markets. New planning and logistics procedures are intended to clearly reflect the difference between classic and fashion collections offerings and are aimed at shortening lead-time, allowing wholesale partners to prepare more detailed and precise forecasts. In 2009 the Group performed major restructurings of the loss making apparel and lingerie retail operations. Restructuring of Russian operations will be finalized in H1 2010. As the result, the Group's operations are expected to generate positive cash flows and strong basis for the profitability in 2010 have been created. In general, in 2010 the Group aims at raising efficiency of the existing operations, upgrading logistics, finalization of restructuring of Russian operations and strengthening its franchising model and polishing brands. Selected financial data The Group's operating results are summarised in the following figures and ratios: -------------------------------------------------------------------------------- | Key figures and ratios | 2009 | 2008 | Change | -------------------------------------------------------------------------------- | Net sales from continuing | 1,158,537 | 1,580,383 | -421,846 | | operations (EUR thousand) | | | | -------------------------------------------------------------------------------- | Net profit from continuing | -2,582 | -111,091 | 108,509 | | operations, attributable to the | | | | | owners of the company (EUR | | | | | thousand) | | | | -------------------------------------------------------------------------------- | Earnings before interest, taxes | 94,693 | 93,175 | 1,518 | | and depreciation (EBITDA) from | | | | | continuing operations (EUR | | | | | thousand) | | | | -------------------------------------------------------------------------------- | Earnings before interest and | 60,443 | 51,649 | 8,794 | | taxes (EBIT) from continuing | | | | | operations (EUR thousand) | | | | -------------------------------------------------------------------------------- | Operating margin from continuing | 5.2% | 3.3% | - | | operations, % | | | | -------------------------------------------------------------------------------- | Net margin from continuing | -0.2% | -7.0% | - | | operations attributable to the | | | | | owners of the company, % | | | | -------------------------------------------------------------------------------- | ROA, % | -3.8% | -10.4% | - | -------------------------------------------------------------------------------- | ROE, % | -6.8% | -17.3% | - | -------------------------------------------------------------------------------- | Earnings per share (EPS), in EUR | -0.97 | -2.97 | - | -------------------------------------------------------------------------------- | Current ratio | 2.8 | 2.1 | - | -------------------------------------------------------------------------------- | Quick ratio | 1.6 | 1.1 | - | -------------------------------------------------------------------------------- Underlying formulas: Operating margin from continuing operations = operating profit from continuing operations / sales revenue Net margin from continuing operations = net profit from continuing operations attributable to the owners of the company/ sales revenue ROA (return on assets) = net profit attributable to the owners of the company/ average total assets ROE (return on equity) = net profit attributable to the owners of the company/ average equity attributable to equity holders of the parent EPS (earnings per share) = net profit attributable to the owners of the company/ weighted average number of ordinary shares Current ratio = current assets / current liabilities Quick ratio = (current assets - inventories) / current liabilities Consolidated statement of financial position As of 31 December -------------------------------------------------------------------------------- | In thousands of EEK | 2009 | 2008 | -------------------------------------------------------------------------------- | ASSETS | | | -------------------------------------------------------------------------------- | Non-current assets | | | -------------------------------------------------------------------------------- | Property, plant and equipment | 168,248 | 293,530 | -------------------------------------------------------------------------------- | Intangible assets | 8,919 | 16,085 | -------------------------------------------------------------------------------- | Investment property | 20,090 | 23,141 | -------------------------------------------------------------------------------- | Investments in equity accounted investees | 2,175 | 2,879 | -------------------------------------------------------------------------------- | Available-for-sale financial assets | 5,664 | 8,716 | -------------------------------------------------------------------------------- | Deferred tax asset | 18,119 | 0 | -------------------------------------------------------------------------------- | Other receivables | 9,920 | 26,051 | -------------------------------------------------------------------------------- | Total non-current assets | 233,135 | 370,402 | -------------------------------------------------------------------------------- | Current assets | | | -------------------------------------------------------------------------------- | Inventories | 266,289 | 434,412 | -------------------------------------------------------------------------------- | Corporate income tax asset | 7,260 | 15,115 | -------------------------------------------------------------------------------- | Other tax receivable | 22,875 | 42,574 | -------------------------------------------------------------------------------- | Trade receivables | 131,618 | 168,013 | -------------------------------------------------------------------------------- | Other receivables | 18,260 | 46,658 | -------------------------------------------------------------------------------- | Prepayments | 9,529 | 49,209 | -------------------------------------------------------------------------------- | Cash and cash equivalents | 153,931 | 82,129 | -------------------------------------------------------------------------------- | Assets classified as held for sale | 7,526 | 0 | -------------------------------------------------------------------------------- | Total current assets | 617,288 | 838,110 | -------------------------------------------------------------------------------- | TOTAL ASSETS | 850,423 | 1,208,512 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | LIABILITIES AND EQUITY | | | -------------------------------------------------------------------------------- | Equity | | | -------------------------------------------------------------------------------- | Share capital at par value | 400,000 | 400,000 | -------------------------------------------------------------------------------- | Share premium | 223,293 | 223,293 | -------------------------------------------------------------------------------- | Own shares | -7,041 | -7,041 | -------------------------------------------------------------------------------- | Statutory capital reserve | 1,046 | 1,046 | -------------------------------------------------------------------------------- | Translation reserve | -186,539 | -58,086 | -------------------------------------------------------------------------------- | Retained earnings | 59,097 | 82,035 | -------------------------------------------------------------------------------- | Total equity attributable to equity holders of | 489,856 | 641,247 | | the parent | | | -------------------------------------------------------------------------------- | Non-controlling interest | 136,141 | 141,977 | -------------------------------------------------------------------------------- | Total equity | 625,997 | 783,224 | -------------------------------------------------------------------------------- | Non-current liabilities | | | -------------------------------------------------------------------------------- | Loans and borrowings | 4,052 | 18,197 | -------------------------------------------------------------------------------- | Deferred tax liabilities | 0 | 203 | -------------------------------------------------------------------------------- | Other liabilities | 1,455 | 1,312 | -------------------------------------------------------------------------------- | Provisions | 0 | 125 | -------------------------------------------------------------------------------- | Total non-current liabilities | 5,507 | 19,837 | -------------------------------------------------------------------------------- | Current liabilities | | | -------------------------------------------------------------------------------- | Loans and borrowings | 24,190 | 116,254 | -------------------------------------------------------------------------------- | Trade payables | 123,999 | 167,951 | -------------------------------------------------------------------------------- | Corporate income tax payable | 3,552 | 4,006 | -------------------------------------------------------------------------------- | Other tax payable | 24,831 | 18,150 | -------------------------------------------------------------------------------- | Other payables | 14,270 | 27,584 | -------------------------------------------------------------------------------- | Provisions | 3,395 | 44,296 | -------------------------------------------------------------------------------- | Accrued expenses | 24,033 | 27,210 | -------------------------------------------------------------------------------- | Deferred income | 649 | 0 | -------------------------------------------------------------------------------- | Total current liabilities | 218,919 | 405,451 | -------------------------------------------------------------------------------- | Total liabilities | 224,426 | 425,288 | -------------------------------------------------------------------------------- | TOTAL LIABILITIES AND EQUITY | 850,423 | 1,208,512 | -------------------------------------------------------------------------------- Consolidated income statement For the year ended 31 December -------------------------------------------------------------------------------- | In thousands of EEK | 2009 | 2008 | | | | (re-resented*) | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Continuing operations | | | -------------------------------------------------------------------------------- | Revenue | | | -------------------------------------------------------------------------------- | Sales revenue | 1,158,537 | 1,580,383 | -------------------------------------------------------------------------------- | Costs of goods sold | -654,998 | -932,052 | -------------------------------------------------------------------------------- | Gross Profit | 503,539 | 648,331 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Other operating income | 17,070 | 28,462 | -------------------------------------------------------------------------------- | Distribution costs | -179,373 | -262,221 | -------------------------------------------------------------------------------- | Administrative costs | -160,002 | -196,255 | -------------------------------------------------------------------------------- | Other operating expenses | -120,791 | -166,668 | -------------------------------------------------------------------------------- | Operating profit | 60,443 | 51,649 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Finance income and finance costs | | | -------------------------------------------------------------------------------- | Finance income | 27,694 | 8,668 | -------------------------------------------------------------------------------- | Finance costs | -11,172 | -66,670 | -------------------------------------------------------------------------------- | Net finance income/ (costs) | 16,522 | -58,002 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Share of profit of equity accounted | -313 | 1,752 | | investees | | | -------------------------------------------------------------------------------- | Profit before tax | 76,652 | -4,601 | -------------------------------------------------------------------------------- | Income tax expense | -54,888 | -87,777 | -------------------------------------------------------------------------------- | Profit/ (loss) from continuing operations | 21,764 | -92,378 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Discontinued operations | | | -------------------------------------------------------------------------------- | Loss from discontinued operation (net of | -36,034 | -7,870 | | income tax) | | | -------------------------------------------------------------------------------- | Profit/ (loss) for the period | -14,270 | -100,248 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Attributable to | | | -------------------------------------------------------------------------------- | Owners of the Company | -38,616 | -118,961 | -------------------------------------------------------------------------------- | Non-controlling interest | 24,346 | 18,713 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Loss per share | | | -------------------------------------------------------------------------------- | Basic loss per share (in EEK) | -0.97 | -2.97 | -------------------------------------------------------------------------------- | Diluted loss per share (in EEK) | -0.97 | -2.97 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Continuing operations | | | -------------------------------------------------------------------------------- | Basic loss per share (in EEK) | -0.07 | -2.78 | -------------------------------------------------------------------------------- | Diluted loss per share (in EEK) | -0.07 | -2.78 | -------------------------------------------------------------------------------- Consolidated statement of comprehensive income For the year ended 31 December -------------------------------------------------------------------------------- | In thousands of EEK | 2009 | 2008 | | | | (re-presented* | -------------------------------------------------------------------------------- | Loss for the period | -14,270 | -100,248 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Other comprehensive income | | | -------------------------------------------------------------------------------- | Foreign currency translation differences | -158,525 | 23,840 | | for foreign operations | | | -------------------------------------------------------------------------------- | Other comprehensive income for the period | -158,525 | 23,840 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Total comprehensive income | -172,795 | -76,408 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Total comprehensive income attributable to: | | | -------------------------------------------------------------------------------- | Owners of the Company | -167,069 | -100,535 | -------------------------------------------------------------------------------- | Non-controlling interest | -5,726 | 24,127 | -------------------------------------------------------------------------------- | Total comprehensive income | -172,795 | -76,408 | -------------------------------------------------------------------------------- Dmitry Ditchkovsky Chairman of the Management Board AS Silvano Fashion Group Tel +375 17 288 07 70