Edited Transcript of MDM.PA earnings conference call or presentation 28-Jul-20 4:00pm GMT

Second, Maisons du Monde showed its adaptability by acting rapidly and decisively to mitigate the impact of the pandemic while maintaining strategic priorities. We, of course, took all measures to protect the health and safety of our employees. And we also took strong action to preserve cash and cut costs, including reducing investments, delaying or canceling store openings, curbing discretionary spend wherever possible, negotiating with our landlords and suppliers and, finally, taking on short-term debt. This, combined, allowed us to post resilient EBITDA and a strong cash position at the end of the half year. Third and finally, building on a key strategic pillar, as you know, Maisons du Monde became increasingly omni-channels for the crisis, validating our business model. With our stores closed, we moved entirely to online and saw a very strong 51% increase in online sales in the second quarter. Overall, online represented 38% of the group’s first half sales. Momentum will, of course, slow down with the reopening of our stores, but we believe that this bigger move to online is a lasting trend that we are well equipped to address.

On Slide 6, we take a look at how all this translated into our headline numbers. Our sales of nearly EUR 489 million were down 13.3% in total and 17.5% on a like-for-like basis. There were actually 3 distinct phases in terms of sales in the half, with, one, a positive but sluggish start of the year due to the docker strike in Marseille, followed by an abrupt drop as our stores were closed overnight and then a strong pickup when they reopened.

Our EBITDA reached EUR 68.8 million, which represents a 29% drop year-on-year. But margin was resilient at 14.1% versus 17.2% in H1 last year stands to our cost-cutting measures, including the swift and rigorous implementation of temporary unemployment, whenever it makes sense all across the company.

We ended the half in a strong cash position at EUR 437 million, an increase of EUR 342 million over end 2019. This is the result of active measures to manage cash and to improve liquidity by drawing down our revolving credit facilities and obtaining a state granted loan each for EUR 150 million. Finally, our indebtedness ratio remained stable at a low 0.9x EBITDA in the half, meaning we have started the second semester with a sound balance sheet. Eric will detail all of this shortly.

On the next few slides, I’d like to give you a bit more granularity on our operations in the half, during which online allowed us to partly offset the impact of the crisis. Let’s start on Slide 7 with the usual breakdown of our sales by geographic channel and category. What is less usual is the minus sign that you see in front of most of the numbers. This, of course, reflects the highly disrupted environment in which we have operated in mid-March. By geography, sales in France were down 18%, and international sales decreased by 7.7%. By channel, store sales fell 27% over the period, while online sales, which I remind you are only booked upon delivery, were up nearly 25%. Finally, by category, furniture was down 9.5% and decoration items decreased by 17.1%. As you know, decoration sales come mainly from our store network.

Let’s focus on Slide 8 on our first half sales. We saw a very similar performance in our — both quarters, although for different reasons. Q1 sales were down 13.1% to EUR 244 million, and Q2 sales were down 13.6% to EUR 245 million. Like-for-like sales evolution for Q2 was minus 16.2% year-on-year, which actually was an improvement over Q1, which stood at minus 18.8%. Overall, we estimate that the COVID-19 had a net unfavorable impact on our sales in the first half of EUR 110 million. This reflects the dynamic between stores and online. As you know, the lockdown measures were not uniform from country to country, but what we can say is that the Maisons du Monde stores were broadly closed as of mid-March until mid-May, and that Modani stores were closed from early April until openings resumed in mid-may and until mid-June regarding the U.S. As a result, the drop in store sales is estimated at EUR 130 million for the period. During the lockdown, as we said, online acted as a shock absorber, partly offsetting the store closures. Our online sales overperformed by what we estimated at about EUR 20 million in the period. This is obviously a very positive development for our omni-channel model, particularly considering online and omni-channel customer acquisitions, as we will detail shortly.

On Slide 9, we look more specifically at our Q2 performance by channel. Overall, Q2 store sales were down 38%. Store activities are essentially 0 during the COVID-19 lockdown and we lost EUR 90 million in store sales between April 1 and May 10. You might remember that the lost store sales in Q1 was EUR 40 million. So we added another EUR 90 million in Q2 in terms of lost store sales. We began reopening stores on May 11 in most countries across Europe, and the entire Maisons du Monde European network was up and running on June 30. Store sales from reopening until the end of the quarter were up by a strong 18%. I believe this is an encouraging result, considering our online activity was substantial throughout the lockdown. So that clearly shows to me the strength and appeal of our brand and of our store experience. It is, of course, too early to infer any lasting trend from these numbers, and we are observing consumer behavior closely in this new normal.

E-commerce sales were boosted, as said before, by about EUR 20 million. Our Q2 online sales rose by 51%. The overall EUR 20 million were observed in Q2. There was no impact on online sales in Q1 due to COVID-19 in terms of sales boost. So all of the impact was in Q2. The performance in Q2, 51% growth, was better than what we initially expected. And this surge led to some fulfillment bottleneck that we are working actively to resolve as we will discuss later.

Turning to Slide 10. We focus on our online performance. During lockdown, as we said, we turned briefly into an e-commerce pure player. And the strong 51% growth came across countries, but this was particularly the case in Belgium, Germany and Switzerland, where growth ranged from 55% to 85% in those countries. All indicators were green, traffic, order value and average basket were all strongly up year-on-year. Besides, we saw excellent customer dynamics with new customers up by more than 50% over the second quarter. If you remember, that was also the number we mentioned for April. Well, that lasted all across the quarter, 50% new customers. And that is to compare to a 10% growth in Q1. So a vivid acceleration in terms of new online customer acquisition.

We also observed the growing base of multichannel customers with, as we know, lifetime value is higher as the 1 out of every 10 customers who bought online used to be store-only. This number, as you might recall, was 1 in 5 for the month of April, when stores were still closed. We expect the balance between stores and online to return to a more normalized level, especially considering our temporarily reduced inventory in furniture. But it is interesting to note that online activity remained high through the end of June when product availability was still high, so even as the stores reopened, which demonstrates once again the complementarity of our channels.

Slide 11 provides a bridge of our EBITDA to show you how profitability was impacted by COVID-19 but also how our decisive action on costs helped limit its effect. As you see on the slide, the drop on EBITDA year-on-year can be mainly explained by the following factors: first, store sales lost due to COVID-19, which represents the biggest chunk, offset partially by extra online sales. So the net-net represents EUR 110 million of lost sales, as we said, with an estimated flow through to EBITDA of circa EUR 50 million. Second bucket, the extra cost incurred through the crisis, and that includes additional logistic costs, particularly temporary storage due to a limited capacity in goods received at the warehouse, combined with sanitary measures. All of this impacted negatively the EBITDA by about EUR 10 million. And on the other hand, the cost-cutting measures we undertook and the rent cancellations we negotiated for the period had a positive net impact on our operating costs by EUR 25 million. So as a result, H1 EBITDA stood at EUR 69 million. That is only EUR 28 million below its H1 2019 level of EUR 97 million.

On Slide 12, we look at our store portfolio. As you know, we actively manage this portfolio to optimize the footprint. But as you can imagine, our expansion plans have been impacted by the pandemic and will be for the rest of the year. So what happened in Q2? Well, we opened 1 store in Paris, and we also closed 6 stores: 2 in France, 1 in Germany and 3 in the U.S. Among the 3 in the U.S., we have the 2 Maisons du Monde pilot store, which as previously announced, we have decided to close down permanently as we believe it is crucial for now to remain focused on our core market. Therefore, at the end of H1, our total store network stood at 366 stores for a total sales area of a little over 428,000 square meters. This is to be compared to 376 stores, so 10 stores less. This is 432,000 square meters so basically, in terms of sales space, the network has stayed stable. Looking ahead, we currently assume between 4 and 8 openings in H2, of which 1/3 in France and 1 to 3 closures in the period. So for the full year, we currently expect in this — the market conditions being what they are, those numbers can move a little bit. But we currently expect for the full year, a contraction of our total store network by 4 to 8 stores on a net basis, with the reduction mainly in France in terms of square meters.

This is clearly a different expansion plan from that of last year, of course, which included 41 gross store openings and 14 closures. But postponing openings in the current environment is the right thing to do both in terms of preserving cash and also in terms of observing consumer behavior in the post-COVID-19 environment before deciding, sorry, on capital allocation plans.

With that, I’d like to hand over to Eric, and I will return to make some concluding remarks.

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Eric Bosmans, Maisons du Monde S.A. – Administrative & Financial Director [4]

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Thank you, Julie, and good evening to everyone. Let me begin on Slide 14 with a quick overview of our main indicators. Our sales, as already mentioned by Julie, at EUR 488.9 million were down 13.3% in total and 17.5% on a like-for-like basis. This drop reflects the impact of 8 weeks of store closures that were partly offset by a strong online growth and better-than-expected activity after our stores reopened beginning in mid-May. Our gross margin at 64.1% of sales is broadly stable year-on-year due to the combination of an unfavorable product mix, offset by a favorable foreign exchange effect and lower promotions in the half year. Trade margin decreased by 18.6% and was impacted by higher logistics costs, as previously mentioned. EBITDA was down 29.1% to EUR 68.8 million, impacted by store closures. Margin at 14.1% was resilient dropping by 310 basis points only. EBITDA — EBIT was a negative EUR 7.3 million due to higher D&A, and net income was a negative EUR 20.4 million. We reduced our net debt by almost EUR 67 million in the half or 8.7% to EUR 762.7 million. Finally, we generated a robust cash flow in the half of EUR 42.6 million. Let’s look at all of this in greater detail.

On Slide 15, we focused on our second quarter sales. They came in at EUR 245.2 million, a drop of 13.6%. We estimate that the COVID-19 had an impact on our sales in the quarter of about EUR 70 million.

Within the quarter, each month was a different story, with a sequential improvement month after month as shown on the graph. With all our stores closed during the whole month, April was, of course, the low point, with a year-on-year decline of 33%. Our store sales were close to 0, save for some residual sales at Modani, which closed its stores on April 3.

Group online sales were up 18% in the month, while online sales orders were strongly picking up at 54%. It is important to note that we book sales to the profit and loss account when they’re actually delivered. This is why actual sales in any given month are different from orders. In May, store sales gradually resumed as of the 11th of May, and our year-on-year group total sales drop was reduced to 15%. Store sales were down 36% in the month, while online sales rose a strong 43%. And orders continue to grow at 68% year-on-year in the month.

Finally, in June, we actually had an outstanding month firing on both cylinders. Overall sales were up 42% year-on-year, while store sales up 21% and online sales up a remarkable 99%. Online sales booked in the month were very high, thanks to deliveries that happened in the month relating to sales order placed in prior months. Online sales orders in the month is growing year-on-year significantly at 33%, although (inaudible) than April and May.

Let’s turn to Slide 16 to the share of international and online sales in our overall performance. In H1 of this year, international sales totaled EUR 236.8 billion. That’s actually down versus the same period last year when we posted international sales of EUR 256.6 million. But in terms of their weight in the overall mix, international sales has grown to 48% versus 45% in H1 last year. On a compound growth basis, international sales have grown 7% per year over the 2-year period between H1 ’18 and H1 of this year. Online sales for their part has grown both in absolute terms and in their share of total sales. In H1 2020, they stood at EUR 186 million and represented 38% of total sales versus 26% in the same period last year, and 24% in the first half of 2018. On a compound basis, they have grown by 24% per year in the 3-year period.

The following slide, Slide 19, continues to run through our P&L — sorry. We are now moving to Slide 17. On Slide 17, we present a bridge that shows you the various impacts on our sales between H1 of last year and this year. As you can see, the drop in like-for-like sales represented EUR 89.6 million, this was partly offset, however, by a positive contribution of EUR 20.1 million from stores opened in 2019. We also had a positive contribution of EUR 0.7 million, from Modani and Rhinov, while the 2020 net store closure of 10 stores had an unfavorable impact of EUR 6.3 million.

Moving now to Slide 18. This slide shows you how we went from sales to EBITDA. Gross margin at EUR 313.4 million dropped slightly less than sales, and this increased slightly as a percentage of sales by 10 basis points to 64.1%. This reflects a favorable currency effect from the U.S. dollar, lower online promotion and offset partly by an adverse product mix as furniture weighs more in the mix. Trade margin decreased by 3.4% as a percentage of sales as a result of higher logistics costs related to the COVID-19 and the French docker strike earlier in the year as well as less efficient absorption of fixed costs due to lower sales. Our operating costs were down by 14.1%, closely tracking the drop in sales. Advertising costs were down 3% as we optimized online marketing, and store operating and central costs were down 15.7% as a result of our strict cost management. This resulted in EBITDA of EUR 68.8 million, a year-on-year drop limited to just 29.1%, with associated margin of 14.1%. Let me add to this full year — that for this full year, we expect full year operating cost reduction to be below 10% due to better than previously expected sales activity.

The following slide, Slide 19, continues to run through our P&L from EBITDA to net income. Our EBIT at a negative EUR 7.3 million was impacted by a combination of lower EBITDA and higher D&A, coming mainly from the 41 store openings in 2019. Operating costs below EBIT improved year-on-year, thanks to an increase in fair value of derivatives and by lower preopening charges as we had fewer openings in the first half of this year. Financial results improved year-on-year, mainly thanks to a foreign exchange gain of EUR 1.8 million. Cost of net debt was slightly higher in the year in the half year at EUR 3.8 million compared to EUR 3.3 million last year as a result of us drawing down our revolving credit facility in March. Income tax was a charge to profit and loss account of EUR 4.9 million, resulting from the combination of a net loss before tax of EUR 15.5 million, with an effective tax rate of 31%, the trade tax charge applicable in 3 jurisdictions and one-off tax provision resulting mainly from a tax audit.

On Slide 20, you see that we posted a sharp improvement of EUR 73 million in working capital in the half, largely due to our proactive cash management in H1. Inventory was reduced by EUR 37.2 million or 17.6% due to a combination of lower orders on our part and higher-than-expected post lockdown activity. We saw an increase of EUR 19 million in receivables and prepaid expenses in the half year, mainly due to seasonality and amount receivable from governments for temporary unemployment. Net trade payables, combined with other payables improved working capital by about EUR 55 million. This includes ad-hoc renegotiation of payment terms with suppliers and several one-off items, including mainly deferring rent payments and cash from undelivered sales. Overall, our change in working capital was a positive EUR 72.7 million.

On Slide 21, we focus on cash flow, which, as I mentioned previously, was a strong EUR 42.6 million, a swing of EUR 54 million year-on-year. In terms of CapEx, as we slowed our expansion to 3 gross openings this half versus 15 last year, our CapEx was down 15% to EUR 19.8 million. This CapEx included EUR 8 million for store openings, development or refurbishments, IT costs for EUR 6 million and logistics investment for EUR 4 million.

The positive free cash flow year-on-year results mainly from the cash generated EUR 73 million variations in working capital, and it was close to 0 last year. Cash CapEx lower than last year by just under EUR 7 million, including change in debt on fixed assets and a EUR 20 million reduction in EBITDA year-on-year. It is important to note that without the ad-hoc renegotiation of payment terms with suppliers and the one-off items of deferred rent payments and cash from undelivered online sales, free cash flow would have been slightly negative in H1.

I will conclude my section on Slide 22 with a look at our excellent liquidity position, which allows us to face the current uncertainty with a high degree of comfort. At June 30, we have cash and cash equivalents amounting to EUR 437.3 million. On March 17, we fully drew down our EUR 150 million revolving credit facility. And on June 4, we further strengthened our liquidity by signing an agreement for a EUR 150 million loan that is 900% guaranteed by the French state. We have also successfully negotiated a covenant holiday for the testing period of June and December 2020 of our EUR 200 million senior credit facility maturing in the second quarter of 2021. So we are covenant-free until our debt matures at the end of May 2021.

Our leverage at the end of June is 0.9x EBITDA, and it is stable versus the end of 2019. Our strong liquidity gives us sufficient flexibility and headroom to be able to address even the worst-case scenario as regards the evolution of COVID-19 in the coming months.

With that, I will now hand back to Julie.

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Julie Walbaum, Maisons du Monde S.A. – CEO & Director [5]

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Thank you, Eric. So on Slide 24, I’d like to take you through our current trading. After strong in-store growth following reopening, as we said, we are returning to more normalized patterns with balance gradually returning between stores and online. Our July store sales are well oriented, with activity boosted by the summer and private sales, which we are holding this year in July versus June last year in most of our markets. So through July 26, our store like-for-like growth — we are usually not communicating on store like-for-like, but given the exceptional circumstances, we thought it would be useful for you to have elements on this. And through July 26, our store like-for-like growth for the month was in the high single digits. Concerning online, the order backlog that accumulated as a result of higher activity is resolving progressively as fulfillment normalizes across France and other EU countries. Online order intake is currently returning to pre-lockdown growth levels in large part due to reduced inventory in furniture, as I mentioned. This reduced inventory is linked to the impact of the pandemic at 3 levels: first, the closure of our Asian suppliers for most of the first quarter, delaying inventory restocking; second, the group’s decision to freeze most supply orders from mid-March to early May, and to restore them selectively since in the logic of cash preservation in this context of very limited visibility; and third, the better-than-anticipated sales activity over Q2. Obviously, we are putting all efforts into resolving product availability bottlenecks. However, we expect material product shortage, particularly in furniture over Q3 and possibly Q4.

On the following slide, Slide 25, we look at our commercial and development priorities for the year. As you can imagine, a certain number of projects has seen a tangible change. And we have also been led to be more selective in defining our priorities. So following up on what I’ve just described, we are first and foremost focused on continuing to offer our customers a quality and safe omni-channel shopping experience and still exceptional sanitary conditions. We are also, as I just said, actively working towards normalizing the supply level by selectively rebuilding inventory while maintaining financial discipline in the context, again, of limited visibility. We expect this specific challenge to be solved by the end of the year. And just to be very clear, this concerns furniture. Product availability on decoration items is not a challenge.

Over the fall, we also plan to launch our curated marketplace. The project which was planned to be launched over the summer that we’re planning before the crisis, but it is taking a bit longer than expected, given the unique circumstances. So we plan to start our marketplace operations with more than 20,000 products in the following categories: furniture, bedding, outdoor, textile, we will then double our assortments online by the start of the marketplace. Another key priority is to advance on our building of second warehouse in the north of France, which will enhance our logistics and help avoid issues like those we faced because of the Marseille strike in Q1. We now expect the stage opening with the first section coming at the end of 2021 or early 2022. These strategic priorities will be supported by continued cost discipline and tight cash management as making sure we allocate our capital and human resources in the best possible way to optimize EBITDA for the year will be a constant focus for the management team.

Let me conclude on Slide 26 with a few forward-looking comments in terms of performance. We expect our H2 performance to improve versus H1, assuming we do not face the second lockdown that most stores remain open and that online continues to perform well. However, we currently estimate that H2 will likely be down versus the same period last year as we expect the coming months to remain challenging with continued headwinds in consumer demand and supply chain performance.

Store and online sales patterns should gradually normalize. And as just mentioned, we expect some product shortage in the coming months, which may bias our channel mix for the rest of the year. As a result of all of the above, we do not believe it is appropriate to provide full year guidance in the current environment. What we can share is that in terms of our stores network, as I said, we currently expect to reduce the network by 4 to 8 stores on a net basis. Our strong balance sheet and liquidity should provide all the necessary flexibility and headroom to address all scenarios, as Eric said, regarding the evolution of COVID-19.

I will conclude by saying that Maisons du Monde has just gone through an unprecedented event, but this trying period has allowed us, I believe, to demonstrate the resilience of our group and the strength of our omni-channel and international business model with an acceleration of underlying trends that are core to our strategy. It has also revealed our customer’s strong attachment to our brands and collections as demonstrated by online numbers and the rebound in stores from June. This has reinforced my confidence that Maisons du Monde is well positioned to successfully navigate the post COVID-19 consumption environment.

Thank you very much for your attention. Eric and I are now happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Nicolas Langlet from Exane.

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Nicolas Langlet, Exane BNP Paribas, Research Division – Research Analyst [2]

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I’ve got 3 questions, please. The first one on the cost optimization. So you mentioned it’s going to be below the initial minus 10%, given higher sales activity. Is it fair to extrapolate what we saw in H1, so around 97% decline? And then of the 2020 cost optimization, how much could be sustained going into 2021?

Second question on the gross margin, which was quite resilient in H1. Are you expecting kind of the same trend in H2 or there are some additional element that could impact the gross margin in H2?

And last question on the renegotiation with landlords, can you update on the negotiation? And you mentioned a positive impact in H1. Should we expect any reversal in H2 or not? And then what are the midterm implication of the discussion you had with your landlords?

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Julie Walbaum, Maisons du Monde S.A. – CEO & Director [3]

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Thank you, Nicolas. I will take your third question around the landlords, and Eric will answer your first 2 questions.

So yes, we are now coming to an end regarding our discussion with the landlords. The opportunity and the challenge for us in this period is that we have very, very large number of landlords, the concentration of our store with large real estate brokers is very limited. So it was a very lengthy process, but we are now coming to an end. And we have indeed posted EUR 5 million cost savings over H1. We can expect some more in H2. But the large part has been booked in H1, though. And we are talking here about temporary cuts of part of the rent of the period. The other 2 possibilities, which were — was the main facility, which was to adapt the rent level and to the actual sales level, after reopening, which was indeed a big ask that the retailers were making because we feel that it is very important that this kind of cost can adapt to the actual sales activity is — has not produced the targeted — the hoped effect. And I believe this is true across the industry. As you could see, the state — the government moderation has not given very strict guidance. So it was very much a one-to-one negotiation. And across the industry, it seems that we are not really yet to go to variable rent level. So we are talking about cuts and then after, we should go back at least after a few months, which would be over this year to normal levels of rent and still indexed.

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Eric Bosmans, Maisons du Monde S.A. – Administrative & Financial Director [4]

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Okay. Nicolas, thanks for your questions. And I will start with the gross margin question. So the gross margin indeed in H1 was actually stable year-on-year. Typically, in any given year, the gross margin is higher in the second half than it is in the first half, and we expect this year to be no exception to that. What will happen actually year-on-year in terms of gross margin, there are mainly 2 things. Obviously, we moved our sales that were last year in June into July. So you would expect that we have a slight negative impact year-on-year on the H2 gross margin, but we also expect a slightly favorable exchange rate impact. So all in all, we don’t expect the gross margin year-on-year to move significantly compared to what it was last year. So which basically means that, for the year, the gross margin should be in the same region, should be similar to the gross margin that we had last year. So that’s your question on the gross margin.

And on the cost, so basically, the way we look at costs, and we said we were looking to reduce costs. And, we specified that, by that, we meant store and central costs, basically head office costs, and that includes marketing. And this is on an IFRS 16 basis because obviously, that plays a role because it largely excludes the rents from that. So — and the 10% that was indeed mentioned was on that basis. What we achieved in H1 was actually 14%. So obviously, we did better than what we aimed for. And as regards to the second half of the year, if you look at how we achieved our cost reduction, we — what we said, we placed 85% of the staff on temporary unemployment. That’s with Maisons du Monde. For Modani, they furloughed 45% of their staff. And actually, the headcount was reduced by 20%. We froze recruitment plans for a large extent. A number of people took a pay cut, the CEO, the overall Executive Committee and the Board. And we also negotiated a EUR 5 million payment reduction with our landlords, and that is in that bracket of costs even under IFRS 16. So obviously, none of that is expected to be repeated in the second half of the year or even in the future years. However, we also said that we were going to have — maintain cost discipline, which will obviously carry on into the second half of the year and for the foreseeable future. But the big chunk of our cost was actually due to one-off actions.

And when we also mentioned the 10% decrease, that was at the time where our view on the business pickup after store reopening would be much lower than what it was in reality, so which — that’s the reason basically for all in all, that we said we will be below 10% for the year.

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Operator [5]

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(Operator Instructions) And the next question comes from the line of Georgina Johanan from JPMorgan.

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Georgina Sarah Johanan, JPMorgan Chase & Co, Research Division – Analyst [6]

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A few questions from me, please. The first one was just disclosure question really. Apologies if I’ve missed it, but I think this is the first time you’ve talked about a trade margin. And could you just clarify exactly — or the types of costs that are included between the gross margin and the trade margin, please? The second question was just on the gross margin in H1. Appreciate you’ve given moving parts, but could you put some magnitude around those moving parts, please? And then the third question was just looking into the second half and the availability constraints that you’ve talked about, presumably you have an idea of what products you’d like to order but can’t. So can you give us a sense of maybe in euro million what that impact is going to be on the sales base, please?

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Julie Walbaum, Maisons du Monde S.A. – CEO & Director [7]

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Thanks, Georgina. I’ll take your third question, and Eric will answer the first two ones. Just to make sure I understand it well, your question is around what type of products we would have like to have and do not have?

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Georgina Sarah Johanan, JPMorgan Chase & Co, Research Division – Analyst [8]

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No, sorry, more on the magnitude. I understand it’s furniture products. Obviously, any more color would be great. But more around the magnitude, the sales that you think you will miss out on, please?

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Julie Walbaum, Maisons du Monde S.A. – CEO & Director [9]

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Yes. Okay. Well, it is obviously very, very hard to assess and to quantify that because, as you know, we have what we call a long tail model. So we have more than 5,000 SKUs in furniture, and we have a fairly flat curves with all of these as we sell across product categories. Obviously, it’s different from one category to the rest, but we have more than 1,000 sofas, for example, and it is hard to imagine what will be the shift from unavailable SKU to available SKU because, obviously, for 1 user need, we have — we usually have several options. But if we have less options, that doesn’t mean that customer will not buy.

If I take the example at store level, we managed to see, even in July, where [product availability] is smaller, the impact of the service and of the advice and the conversion rate has actually stayed stable. So — but the number of products per order has a bit reduced. So this balance between conversion rates, average basket is really hard to quantify and the capacity of customers to buy 1 product apart from the other and also — instead of the other. And also what is hard to quantify because we’ve never done it yet before is the effect of the marketplace, which should be launched in fall. So depending on when in fall it would have more or less big effect but obviously, this is one of the big objectives of the marketplace is to be able to face this kind of shortage situations. And this is why also we are putting extra SKUs in terms of furniture in our marketplace at time of start to compensate for the lower inventory as Maisons du Monde [rebounds]. So this is really a combination of moving parts. This is why it’s too hard to quantify. What I can say is, of course, when we started the selective reordering, we, of course, focused on the fast turners on the best selling items when it comes to furniture. It’s actually interesting because we have a different logic between decoration and furniture. For us decoration absolutely needs to have a fairly substantial dimension of freshness and newness. So we actually ordered quite a few new items in terms of decoration collections. And decoration collections are performing well. We are very happy so far. So this is great. But in terms of furniture, where you have less of this need, we wanted to focus as a cash preservation measure on the best selling items.

So obviously, we reduced significantly the number of SKUs we ordered, but we added depth on those best sellers. So this is also one reason why it is hard to quantify. So we are absolutely actively working on this to adapt to the better-than-anticipated sales situation, which is a good problem to have. And we would resolve this by the end of this year and making sure we are preparing a good ’21. And by then, we are also lucky enough to be able to enjoy our off-store sales and our decoration sales on the web because there is no inventory challenge in decoration. As you know, the stores represent a bigger chunk of total sales in Q3 and especially in Q4. And as you can imagine, having less product availability in furniture meaning probably a higher mix of decoration in terms of total sales, and this should be good for margins. So all in all, this is probably the best quarter to have this kind of furniture [availability] challenge because we are selling more decoration in fall and winter. And obviously, we are still working on that.

Okay. Eric, do you want to take the first question?

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Eric Bosmans, Maisons du Monde S.A. – Administrative & Financial Director [10]

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Yes, Georgina. So indeed, this is the first time, I believe that we are showing a trade margin. There are several reasons why we did that. Obviously, the move to IFRS 16, we thought we would give additional transparency on the cost between the gross margin and EBITDA, which obviously a big chunk of costs. And the reason why we showed the trade margin is because we committed to reduce the store and the central costs. And we thought, in the interest of transparency, that we should show what those store and central costs were. And that’s basically the costs that are between the trade margin and EBITDA. So that’s the very reason why we did that. So that’s, I think, to answer your question on trade margin.

To your question on gross margin, again, it is indeed stable year-on-year, it’s slightly increasing by 10 basis points. And there are 3 elements to that. One is an unfavorable mix because we had more furniture than we did a year ago, and that is partly because the web actually, the weight of the web itself was actually higher. So that’s obviously a negative impact as furniture actually attracts lower gross margin than just decoration.

The U.S. dollar, we had a more favorable hedging rate in the half. And the promotions, as we said, partly because we moved the sale from June — the sale was actually moved from June to July. And all in all, if we want to put some numbers around that — and obviously, you appreciate that gross margin is not just made of those 3 things. There are lots of moving parts. But if we want to put some numbers, the mix is probably around 80 basis points [adverse] again. And that’s offset by the U.S. dollars and the promotion sold — and the promotions and sales for about half and half. So that’s very much the moving parts behind the gross margin.

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Operator [11]

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(Operator Instructions) And the next question comes from the line of Florent Thy-Tine from Midcap Partners.

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Florent Thy-Tine, Midcap Partners, Research Division – Co-Head of Equity Research [12]

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2 question on my side. The first one on the state-guaranteed loan. What is your intent regarding this loan? Do you think you will need it or can we expect a repayment next year? And my second question is more general on the sector environment with the merger of Conforama and BUT and in a bankruptcy [instead of] EBITDA. What is your view on that movement? And can we expect lower price pressure in the coming months?

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Eric Bosmans, Maisons du Monde S.A. – Administrative & Financial Director [13]

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So I will start actually with the loan. Indeed, we borrowed EUR 150 million. The earliest we could repay the loan is actually 12 months after we took the loan. So that would be in June 2021. And as we stand, we have not taken a formal decision about what we will do with that loan. Obviously, as I said, it’s for a minimum of 12 months. We can go up to an additional 5 years. After that, it will very much depend on how things evolve in the next few months and partially around the COVID-19 situation. So basically, if things go well, and if we are not into lockdown again, and we might decide to repay the loan in 2021. If the situation is massively different, we might decide to prolong it for a longer period of time, but no decision has been taken yet at this moment in time.

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Julie Walbaum, Maisons du Monde S.A. – CEO & Director [14]

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Regarding your other questions around the market environment, so it is true that our sector is going through a lot of movements. So finally, the merger between Conforama and BUT about which a lot of noise has been made over the recent months is finally taking place. Well, this does not impact us that much because when we look at our customer base, the proximity, the number of customers who buy both at Conforama or BUT and Maisons du Monde is very low. So we are definitely targeting different audiences. So the impact on us should be fairly limited. Now it is true that the sector is under a lot of pressure. If I look at companies where — that we see more in our customer base, such as Alinea, CASA, Habitat, all of them are going through financial difficulties. Alinea, as you know, there also CASA, the Virgin company, which operates many decoration stores. Habitat, as you know, which has been rebought but through — needs to go through quite a bit of change probably. And it is indeed for me revealing the difficulties of the sector and then the barriers to entry. Because if you look at the decoration companies, such as CASA, for example, and they do need store traffic to ensure sufficient sales density to ensure proper economics. And if you — and so a period like COVID-19 and the increasing digitalization put a lot of risk on those decoration-focused model. And if you look at furniture suppliers, then you look — you need a lot of cash to place big orders, to have a lot of storage, and so you need companies with a lot of cash. And you don’t have that many companies with a lot of cash and relatively high margins to be able to go through this kind of period. So I do expect indeed that the crisis will drive further consolidation in the sector in France, but also across Europe. I do also expect the digitalization to accelerate and we know that a lot of companies need to do massive investments to their business model to go — to operate these digital shifts. So indeed, I expect that some market consolidation will take place. And now for us, it is very important to stay focused on our customers to make sure that our brand stays strong and relevant because I think that the recipe, the secret sauce is really in having a balanced model between furniture and decoration, as I said. And stores and online, more than ever, I think that stores are needed. It is very interesting to see that when stores reopen, they showed great dynamics as well as online. So you do have complementarity of those channels. So it is very important I think to have the two.

So it will be very interesting to see how the market evolves but now more than ever, between our balance across channels, our balance across countries and the strength of our brands, I believe that we have the fundamentals required to successfully navigate the next few months and years. And if you had on top of that the liquidity that we have, I think that we can — obviously, we need to stay vigilant, but we can think that we will navigate that properly.

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Florent Thy-Tine, Midcap Partners, Research Division – Co-Head of Equity Research [15]

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Okay. And would you be interested in acquiring a pure player, for example, to accelerate in the digitalization?

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Julie Walbaum, Maisons du Monde S.A. – CEO & Director [16]

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I think the context is very much at focusing on operations. Like right now, it is paramount to make sure that, first, we offer the best customer experience because at the end of the day, the brand is only rich if customers recognize the strength of that brand. So you absolutely need to ensure this customer experience also to make sure that customers come back organically and that you don’t need to pour marketing money on the table to make them come back and supply anew. So customer experience is absolutely key. Making sure that we reinforce our omni-channel model. I think the crisis was very much of — for us, a learning moment on a number of dimensions and I’m very proud of what — all of that the teams have achieved. And among those things, we have progressed on a number of dimensions, and one of them is thinking about this omni-channel performance.

And then obviously, it is about maintaining the financial discipline and the cost discipline because this is not over the next semester, at least, has — it’s a lot of uncertainty, and we need absolutely to stay vigilant and make sure that we maintain the balance between that and entering the long-term through strategic priorities. It’s not 1 or 0. We actually need to strike this balance. So this is the focus for now.

And I believe for the next 6 months, it is absolutely important to make sure to be very clear with your teams about what the priority are and the priority are our customer experience and cost discipline.

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Operator [17]

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And the next question comes from the line of (inaudible) Ben Lenin from (inaudible)

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Unidentified Analyst, [18]

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2 questions on my side, please. To come back on the trade margin, regarding the 3.4 percentage point decrease, can you give us a bit of detail regarding the main components, especially the one that are kind of one-off, exceptional like the docker strike or other things linked to — due to the COVID-19 and other that are more structural?

And the second question is on the online shortage. You mentioned that orders intakes are back to pre-lockdown period. But if I’m correct, during the Q1, the online growth was quite negative during Q1. Should we expect the negative impact due to this short term or just back to normal to mid to high single-digit growth for the H2 online?

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Julie Walbaum, Maisons du Monde S.A. – CEO & Director [19]

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Thank you for asking those questions and particularly the second because, indeed, it is a good opportunity to clarify what I meant by pre-lockdown levels. So you mentioned the Q1, which, indeed, when it comes to online, was actually a decrease in sales because it was minus 2.7%. In terms of order intake that was a plus 12%, which was good but not great. And we’ve been using our sales (inaudible) better results. The Q1 was already a very particular context with, as you know, some private sales in France, which were moved ahead to 2019 and also the strike that were already disrupting the supply chain. So yes, not Q1 is the right quarter to — Q1 is probably not the right quarter to consider when I’m talking pre-lockdown levels.

And I should — so it’s more like going from the [surge to the light route]. But also, I would like to clarify the fact that it will still be some sort of abnormal numbers I expect for the remainder of the year when it comes to online because this availability by definition will limit the online growth because, obviously, it does not make sense to put a lot of online marketing, if you don’t have products to sell. Obviously, we have decoration, but the main — the bulk of our sales is furniture. So online will not, at least in Q3, reveal its full potential. So even at the end of the year, it will be too early to say what is the sort of long-term balance between stores and online. We will probably need to wait Q4 and early 2021 to see the sort of more sustainable balance between (inaudible) stores and online because I do believe that online should take a higher share in the mix and probably at a faster pace than what we mentioned in the CMD last year.

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Unidentified Analyst, [20]

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And on the trade margin?

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Eric Bosmans, Maisons du Monde S.A. – Administrative & Financial Director [21]

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Yes. Your question on trade margin, trade margin moved adversely by 3.4 percentage points year-on-year. And there are a number of reasons for that. One are very much one-offs and it’s due to the French strike and the COVID-19 cost. So let me just give you some color about what happened. Because of the strikes first, we had to get containers actually — our main warehouses are in the Marseille region in the south of France. And so we had to divert some containers to all the ports, for instance, Barcelona in Spain and what — so that obviously generated extra costs. We also had to pay extra to the actual ports because we had containers actually stuck in the ports. And then we started to — when the strike actually started to finish, then we had another challenge is that we just didn’t have the people at our warehouse to unload the containers. So we had to pay storage cost — which we actually pay the actual rental of the container itself, but also extra storage costs. And that’s obviously very much one-offs. And what also happened in the first half of the year is that because in terms of percentage rate of those costs because we had a lower denominator because of lower sales, the absorption was actually less efficient and that, to some extent, will carry on into H2. So all in all, to your question, what is recurring and what was the one-off, you can probably assume a big chunk was actually one-offs. And when I say that, we are probably talking about 2/3 and this is a number to be taken with caution. But if I were to give you color, it’s probably about 2/3 that could be considered as a one-off and 1/3 probably slightly more structural. But it will very much depend on what happens in the next few months in terms of sales, in terms of sales mix, in terms of the COVID-19 evolution. So it’s quite hard to predict precisely what’s going to happen.

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Unidentified Analyst, [22]

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And those one-offs are very limited to H1? Or should we also expect a bit of one-off for Q3 due to the lot of detail that you mentioned?

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Eric Bosmans, Maisons du Monde S.A. – Administrative & Financial Director [23]

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It’s mainly H1, but we should expect some in Q3 and possibly 4 as well.

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Operator [24]

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So the next question comes from the line of Clement [Genelor] of (inaudible).

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Unidentified Analyst, [25]

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I got 2 questions from my side, if I may. The first one is on gross margin. So you mentioned that in Q3, furniture sales will be, of course, affected by (inaudible) so I guess that globally, in H2, we should have a positive mix margin on gross margin. But you also globally expect a stable gross margin. So I was just wondering what of the moving part is such a positive mix offsetting? My second question is regarding partial unemployment. Back in the last May, you said that you will keep some in-store employees under partial employment. Is it still the case? And what’s your view on this matter regarding H2?

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Julie Walbaum, Maisons du Monde S.A. – CEO & Director [26]

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Thank you very much. I’ll take your questions around temporary unemployment, and Eric will detail the gross margin. So it is true. We said that at time of reopening, we designed our store operating model to run on limited staff levels to make sure that we protect EBITDA. That’s what we did. We limited the opening hours, and we also removed some store activities like shuffling some teams in the store to make sure we really stay efficient and limit costs. And now what happened is that the peak was quite strong, plus 18% in store sales at store reopening. So it made no sense. It was not — it could not be — it was not legitimate for us to claim any government help with such a peak in sales. So — and you know we do our workforce planning for the following fortnight. So obviously, at the time of reopening, we had our planning done for the rest of May. But at the end of May, when it came to do the planning for June for the first fortnight of June, we stopped temporary unemployment because for us, it did not make sense, either technically or ethically and to resort to temporary unemployment that was state covered for the rest of — for June. That was for network operations. Now it is true that overall, because we decided to open with less store routines than before, it is true that some teams at the headquarters did not need to resume as early as store reopening. And because of the number of projects that we delayed or canceled for cost protection — in the cost protection logic — costs reduction logic, we maintain some technical unemployment at the headquarters. We did that actually up until early July. Obviously, it was — it phased down between mid-May and early July. Now everyone is back at the office. But we managed to protect costs as much as possible. But more at headquarter level than at store level. And as you can imagine, the staff costs — the biggest chunk of the staff cost is at store level.

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Eric Bosmans, Maisons du Monde S.A. – Administrative & Financial Director [27]

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I will take your question on gross margin. And indeed, I said gross margin for half 2 is expected to be similar from half to last year. You’re right, the mix effect will have or should have a positive impact. However, we should not expect a positive impact from exchange rates. And going the other way, as we mentioned, we moved — well, actually, the government decided to move the summer sales into later in the year, and that’s true in a lot of countries. It’s true in France, but in other countries as well. So we should have higher promotion in H2 compared to H2 last year. So all in all, that’s why we expect a relatively stable gross margin year-on-year.

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Operator [28]

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There are no further questions at the moment. Please go ahead.

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Christopher Welton, Maisons du Monde S.A. – Head of Investor & Banking Relations [29]

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Okay. Well, thank you very much. We appreciate the time that you spent. If you have any questions, you know where to get me, my phone number is at the end of the press release that we issued earlier this evening, and I’ll be around tonight and tomorrow to answer your questions. As far as that, we’re done here. Thank you. Thank you for participating. Please stay healthy. Please stay safe, and have a good summer.

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Julie Walbaum, Maisons du Monde S.A. – CEO & Director [30]

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Thank you. Have a good evening, everyone.

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Eric Bosmans, Maisons du Monde S.A. – Administrative & Financial Director [31]

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Thank you. Goodbye.

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Operator [32]

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Thank you so much. That does conclude our conference for today. Thank you for participating. You may all disconnect.