Baltika Group ended the second quarter with a net loss of 616 thousand euros. The net profit for the same period last year was 127 thousand euros. The result for the second quarter of 2019 includes a negative impact of 95 thousand euros on the new accounting standard IFRS 16.
The Group's sales revenue decreased by 5% in the second quarter compared to the same period last year and amounted to 10,463 thousand euros. The largest sales channel (90%), retail, sales decreased by 3% and totalled 9,461 thousand euros. Revenue decreased in Estonian and Latvian markets, respectively 6% and 3%, while sales revenue in Lithuania stayed at last year level. The main reason for the decrease in retail sales in the Baltic market was the weak April result, the sales results of May remained at the level of the previous year. With very strong retail sales, June, showed the increase in sales revenue of dresses in all brands as well as in all markets. Sales revenue growth was supported by warm weather. In addition to that, sales of the new summer clothes collection at the full price were higher than in the same period last year. Men and formal clothing sales revenue continues to decrease, while demand for dresses and jersey has increased.
The sales revenue of the second quarter of the Baltika Group's online store Andmorefashion.com increased by 24% compared to the same period last year and amounted to 469 thousand euros. With the biggest share of sales revenue was Monton, which accounted for 34% of sales in the second quarter. Compared with the second quarter last year, the sales revenue increased in all main markets. The most distant countries to which Baltika's brand orders were shipped in the second quarter were Israel, Japan, Australia, USA and Canada.
The sales revenue of business customers (wholesale and franchise customers) in the second quarter was 413 thousand euros, decreasing by 51% compared with last year. The decrease in sales revenue of 420 thousand euros is related to the termination of contracts of franchise partners of Belarus and Ukraine and the decrease in Russian franchise volumes. Another important reason for the decrease in sales revenue was the closure of Spanish, Tenerife franchise store in the end of 2018 and due to the change in cooperation agreement with Peek & Cloppenburg, a chain of German and Central European department stores, in autumn 2018.
The quarter's gross profit was 5,748 thousand euros, lower by 284 thousand euros compared to the same period last year (2Q 2018: 6,032 thousand euros). The decrease in gross profit is primarily due to the decreased sales revenue of retail and business customers. The company`s gross profit margin in second quarter was 54.9%, which is 0.3 p.p higher than the second quarter of the previous year (2 Q 2018: 54.6%).
In the second quarter, Group's distribution expenses were 5,026 thousand euros, decreasing by 183 thousand euros compared to the same period last year. Administrative and general expenses increased in second quarter by 28%, i.e 321 thousand euros and amounted to 887 thousand euros. The increase in administrative and general expenses is driven by the one-off costs related with the former member of Management Board, Meelis Milder, severance pay.
In the first half of the year, the Group's sales revenue decreased by 8% compared to the same period last year and amounted to 17,437 thousand euros. Retail sales decreased by 2% and sales to business customers by 56%, while the sales revenue of the e-store increased by 19%. The Group ended the half-year with a net loss of 2,058 thousand euros, the comparable result of the previous year was a net loss of 855 thousand euros. The main reasons for the weak result of the half-year were the sharp decrease in the sales revenue of business customers and the decrease in retail sales. In addition, the half-year result includes a negative effect of 212 thousand euros of the new accounting standard IFRS 16.
As of 1 January 2019, IFRS 16, “Leases”, amended the recognition of lease contracts so that the rent payments for the remaining term of the lease period are recognized in the statement of financial position at their present value as both assets and liabilities, and period rent expenses are not recognized in income statement, instead of that the depreciation and interest expense are recognized in the income statement. The impact of the mandatory new accounting standard IFRS 16 on the income statement is shown in the table below.
| 2Q 2019 | 6M 2019 | |
| Decrease in rent expenses | 1 610 | 3 215 |
| Increase in depreciation | -1 502 | -3 004 |
| Increase in operating profit | 108 | 211 |
| Calculated interest expense on lease liabilities | -203 | -423 |
| Decrease in the net profit | -95 | -212 |
In addition, IFRS 16 has a significant impact on the company's various balance sheet assets and liabilities. As at 30.06.19, fixed assets (i.e all lease payments at their present value, up to the end of the contract term) increased by 15,075 thousand euros and at the same time short-term lease liabilities increased by 6,543 thousand euros and long-term lease liabilities by 8,744 thousand euros.
Equity
As of the end of the second quarter, the equity of the company is negative and the shareholders' meeting on 12 April 2019 confirmed the following resolutions in order to restore equity and comply with the requirements of the Commercial Law: to increase the nominal value of AS Baltika share to 1 euro and to change the existing shares so that for every 10 shares one new share is given, thereafter decrease the nominal value of the share to 0.10 euros and decrease share capital from 4,079 thousand euros to 408 thousand euros to cover the losses.
The exchange of shares and the increase of the nominal value of the shares were completed on 6 May 2019 and the reduction of share capital was completed on 27 May 2019.
In addition, a decision was taken to increase the share capital by 5 million euros via public offering in August 2019.
KJK Fund, Sicav-SIF, the largest shareholder, holding 38.9% of shares of AS Baltika, has confirmed its willingness to subscribe for new shares pursuant to its proportion of holding and according to terms specified in the Prospectus, up to 5,000 thousand euros depending on usage of other participants’ subscription rights. This means that KJK Fund, Sicav-SIF will also subscribe to shares which it is given additional subscription rights according to the allocation terms specified in the Prospectus and which are not subscribed by other shareholders.
The impact of the full realization of the public share emission on the Group's financial position is shown in the pro forma equity table below.
| EQUITY | 30 June 2019 | pro forma entry | pro forma |
| Share capital at par value | 408 | 5,000 | 5,408 |
| Share premium | 0 | 0 | 0 |
| Reserves | 0 | 0 | 0 |
| Retained earnings | -341 | 0 | -341 |
| Net profit (loss) for the period | -2,058 | 0 | -2,058 |
| TOTAL EQUITY | -1,991 | 5,000 | 3,009 |
pro forma entry agenda number 7 of the annual general meeting of shareholders impact: “To decrease the share capital in the remaining amount of losses 4,012,972 euros after all reserves have been used to cover these losses by simplified reduction as follows: to decrease the share capital with three million six hundred seventy one thousand five hundred thirty six (3,671,536) euros.
Highlights of the period until the date of release of this quarterly report
- In 12 April 2019, the Annual General Meeting of AS Baltika shareholders approved the increase of the nominal value of AS Baltika share from 0.1 euros to 1 euros and to exchange the existing shares so that 1 new share can be received for every 10 shares. The exchange of shares was completed on May 6, 2019.
- In 12 April 2019, the Annual General Meeting of AS Baltika shareholders approved the reduction of the the nominal value of the share to 0.1 euros from 1 euros by reducing the share capital by 3,672 thousand euros to cover losses. The reduction of share capital was completed on May 27, 2019.
- On May 20, 2019, an agreement between KJK Fund Sicav-SIF, the major shareholder of the company, and AS Baltika about the on short-term convertible bonds (K-bonds) with the maturity date of August 2019, was signed. Between KJK Fund, Sicav-SIF and AS Baltika an agreement has been made for refinancing the bonds with the aim of converting the amount payable for the bonds into a long-term loan with a maturity of May 20 2022 with an annual interest rate of 6%.
- On June 26, 2019 company's Supervisory Board approved the resignation of Meelis Milder, member of the Management Board of the company. On the same date, the mandate of Meelis Milder's Management Board member ended. Meelis Milder will continue as an advisor to the company on the basis of a one-year contract signed on June 26, 2019.
- By decision of the company's Supervisory Board, from June 26, 2019 the CEO of AS Baltika is Mae Hansen, who will be responsible for implementing the 2019-2020 action plan, confirmed by the Supervisory Board on March 2019. From June 26, 2019 the Management Board of AS Baltika continues with two members, Mae Hansen as a CEO, who will be responsible for the sales, marketing and retail business processes and Maigi Pärnik-Pernik, who will be responsible for product development and support functions.
- On 12 July 2019, AS Baltika terminated the franchise contract before the deadline with the Russian franchise partner OÜ Ellipse Group.
- On 16 July 2019, at 10:00 am, the offering period of AS Baltika public share emission began.
Consolidated statement of financial position
| 30 June 2019 | 31 Dec 2018 | |
| ASSETS | ||
| Current assets | ||
| Cash and cash equivalents | 1,101 | 428 |
| Trade and other receivables | 998 | 866 |
| Inventories | 10,920 | 10,707 |
| Total current assets | 13,019 | 12,001 |
| Non-current assets | ||
| Deferred income tax asset | 286 | 286 |
| Other non-current assets | 213 | 287 |
| Property, plant and equipment | 16,804 | 1,878 |
| Intangible assets | 520 | 543 |
| Total non-current assets | 17,823 | 2,994 |
| TOTAL ASSETS | 30,842 | 14,995 |
| LIABILITIES AND EQUITY | ||
| Current liabilities | ||
| Borrowings | 17,824 | 7,829 |
| Trade and other payables | 5,460 | 5,934 |
| Total current liabilities | 23,284 | 13,763 |
| Non-current liabilities | ||
| Borrowings | 9,549 | 1,165 |
| Total non-current liabilities | 9,549 | 1,165 |
| TOTAL LIABILITIES | 32,833 | 14,928 |
| EQUITY | ||
| Share capital at par value | 408 | 4,079 |
| Share premium | 0 | 0 |
| Reserves | 0 | 1,107 |
| Retained earnings | -341 | 0 |
| Net profit (loss) for the period | -2,058 | -5,119 |
| TOTAL EQUITY | -1,991 | 67 |
| TOTAL LIABILITIES AND EQUITY | 30,842 | 14,995 |
Consolidated statement of profit and loss and comprehensive income
| 2Q 2019 | 2Q 2018 | 6M 2019 | 6M 2018 | |
| Revenue | 10,463 | 11,041 | 19,733 | 21,384 |
| Client bonus provision | 0 | 0 | 0 | 0 |
| Revenue after client bonus provision | 10,463 | 11,041 | 19,733 | 21,384 |
| Cost of goods sold | -4,715 | -5,009 | -9,551 | -10,469 |
| Gross profit | 5,748 | 6,032 | 10,182 | 10,915 |
| Distribution costs | -5,026 | -5,209 | -10,055 | -10,336 |
| Administrative and general expenses | -887 | -566 | -1,485 | -1,161 |
| Other operating income (-expense) | -68 | 4 | 49 | -13 |
| Operating profit (loss) | -233 | 261 | -1,309 | -595 |
| Finance costs | -383 | -134 | -749 | -260 |
| Profit (loss) before income tax | -616 | 127 | -2,058 | -855 |
| Income tax expense | 0 | 0 | 0 | 0 |
| Net profit (loss) for the period | -616 | 127 | -2,058 | -855 |
| Total comprehensive income (loss) for the period | -616 | 127 | -2,058 | -855 |
| Basic earnings per share from net loss for the period, EUR | -0.03 | 0.00 | -0.07 | -0.02 |
| Diluted earnings per share from net loss for the period, EUR | -0.03 | 0.00 | -0.07 | -0.02 |
Maigi Pärnik-Pernik
Member of the Management Board
maigi.parnik@baltikagroup.com
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