European Lingerie Group AB (ELG or the “Group”) publishes unaudited 12 Months and Fourth Quarter 2018 Report (1 January – 31 December, 2018), including pro forma and condensed interim consolidated financial statements.

”Sales results of the fourth quarter of 2018 for European Lingerie Group justified our previous belief that the bottom line of declining sales was hit in Q3 2018 and recovery should start. We see it across most of the markets and especially in Russia. Unfortunately, the trend of closure of small specialized retail shops in Southern and Central Europe still continues and the macroeconomy is slowing down in most European markets, which limits the recovery speed to some extent,” commented CEO of ELG, Mr. Peter Partma.

The new products added to the Group’s product portfolio in 2018 started to convert into sales in Q4 2018. This will continue bringing additional revenue at accelerated speed throughout 2019.

In the end of 2018, ELG launched a new brand Senselle by Felina, a fusion lingerie collection providing unprecedent fit and comfort of premium lingerie garments at great value. First three series of Senselle classical collection are already in retail and the full range will be available from March 2019. Senselle’s target markets are primarily Eastern Europen and CIS countries.

In January 2019 the Group announced the acquisition of Yustyna Ltd (subsequently renamed to Senselle Ltd), a lingerie ready garment producer in Belarus. The acquisition is part of the Group’s strategy to expand operations and add capacity for private label and Senselle by Felina production.

Towards the end of 2018, ELG bought the equipment to start the in-house production of spacer molded cups at Group company Lauma Fabrics plant from January 2019. This step is an important part of the production strategy, reinforcing the full vertical integration of the Group and offers new possibilities for growth.

ELG continues to build and strengthen its international team. As the newest addition, from February 1, 2019 Mrs. Sara Shahin joins Felina GmbH as the new Creative Director. The aim for the Group is to further strengthen the classic collections as well as innovate.

”We continue doing additional strategic investments and market initiatives to respond faster to changes in the market. One of these steps is product range expansion. Another initiative is developing the online channel to embrace a true omni-channel strategy as e-commerce is the future of retail. The results of all these changes will convert into sales gradually and will help ELG sustain the business in the future and earn a stable margin going forward. To achieve that we need to invest part of the profit into these innovations which unfortunately negatively affects the current profitability levels and financial ratios of the Group,” highlighted CEO of ELG, Mr. Partma.

”We understand that the Group is on the edge with its bond financial covenant at the moment and the net debt/EBITDA threshold will go down from 4.50 to 4.25 from February 2019. The management is fully focused that the Group complies with the covenant’s requirements and several improvement steps are in the implementation process,” noted Mr. Partma.

Financial performance of the Group was calculated on the basis of the pro forma financial information of European Lingerie Group AB for 12 months 2018, 12 months 2017 and Q4 2017 as well as reported financial information for Q4 2018.

Group’s sales amounted to EUR 77.2 million in 12 months 2018 (Q4 2018: EUR 18.1 million), representing a 3.6% decrease as compared to pro forma sales of 12 months 2017 (4.7% increase to pro forma sales of Q4 2017).

In Q4 2018, the Group was able to demonstrate growth in sales predicted in the previous quarters. The new product lines delivered first sales results as well as the largest markets of the Group such as Russia, Ukraine, Spain and Poland started gradually recovering and bringing positive tendency. The Group believes that this improving trend will continue in the coming periods as the Group constantly feeds the pipeline with additional novelties, complementary products and other initiatives.

As already mentioned in the previous quarterly reports of 2018, due to the fact that part of the costs is fixed, decline in revenue caused drop of profitability margins. Normalised EBITDA in 12 months 2018 amounted to EUR 9.3 million (Q4 2018: EUR 1.3 million) and decreased by 28.9% compared to pro forma normalised EBITDA in 12 months 2017 (34.6% decrease to pro forma normalised EBITDA for Q4 2017). Normalised EBITDA margin in 12 months 2018 and 12 months 2017 were 12.0% and 16.3% respectively (Q4 2018 and Q4 2017: 7.2% and 11.5% respectively). EBITDA margin deteriorated mainly due to sales decrease and high impact of marginal sales contribution to EBITDA.

Furthermore, while the Group was able to stop the negative trend in sales, it still continues investing its current profit into several initiatives and new projects, which will allow it to sustain the revenue and expand into new sales channels, products and target customer segments in the future, but reduces operating profit margins in the short term.

Normalised net profit in 12 months 2018 amounted to EUR 413 thousand (Q4 2018: loss of EUR 1.37 million), compared to pro forma normalised net profit of EUR 6.0 million in 12 months 2017 (Q4 2017: profit of EUR 512 thousand). Normalised net profit margin in 12 months 2018 and 12 months 2017 were 0.5% and 7.5% respectively (-7.6% and 3.0% in Q4 2018 and Q4 2017 respectively).

Similarly to EBITDA, lower profitability was due to sales decrease and costs of new initiatives impact. In addition, there was an increase in finance costs in 12 months 2018 as compared to 12 months 2017 related to incremental costs on borrowings raised for the acquisitions of Felina Group and Dessus-Dessous SAS that were not present to full extent in 12 months 2017.

Core operating markets for European Lingerie Group are Germany, Spain, France, Poland, Benelux countries, Baltic countries and CIS countries (Russia, Belarus and Ukraine). The Group’s sales in its core markets in 12 months 2018 were 83.7% of its total sales against 83.5% in 12 months 2017 (82.8% in Q4 2018 against 81.2% in Q4 2017).

The largest growth in sales in Q4 2018 was in Russia and Ukraine. These markets dropped by 9.6% and 9.2% respectively in 12 months 2018, but the trend in Q4 2018 reversed completely, which justified the Group’s recovery expectations in these markets and outweighed half of the previous deficit in the reporting year (increase by 41.0% in Russia and 21.4% in Ukraine in Q4 2018).

Sales in Belarus dropped by 16.4% in 12 months 2018 (4.2% in Q4 2018) and continued to be lower than before due to the change in the strategy of the Group’s largest customer in the textile segment, which decided to change most of its product range. To compensate this loss, the Group continues growing with other customers in Belarus in the textile segment and expands usage of materials in its own newly introduced brand Senselle by Felina.

Spain and Poland also delivered sizeable growth in the last quarter whereby sales in these countries in Q4 2018 increased by 16.0% and 16.2 respectively. This is a result of several activities including development of the omni-channel strategy with the largest customer in Spain as well as expansion of the Group’s lingerie products’ presence in the retail channels in these countries.

In 12 months 2018, the sales in Poland increased by 3.6% whereas the sales in Spain reduced by 1.5%. The net deficit in Spain is still heavily influenced by the change of the total retail concept in Southern Europe we described in the previous quarterly reports, but the Group gradually replaces the lost turnover of small specialized retails with other sales channels and the sales deficit reduces.

Sales in Benelux continued positive trend in Q4 2018 and 12 months 2018 at the rate of increase of 6.8% and 3.6% respectively and the drop in sales in this market in Q4 2018 was only a temporary issue to balance the previous higher growth expectations with the actual development of the market. Sales in Germany decreased by 0.4% in 12 months 2018 and by 0.2% in Q4 2018 due to the slowdown of the European macroeconomy and blocked potential growth.

France had a decrease in sales in 12 months 2018 by 4.8% due to the same reason as before, namely, the overall change in retail concept in Southern and Central European countries, but this deficit started reducing and in Q4 2018 was only 1.4% comparing to 6.9% deficit in Q2 2018 and 6.1% in Q3 2018. The balance of sales growth vs margin will be the main issue in this market in the coming periods as the Group’s main competitors in France continue suffering and try to improve their sales by reducing prices and offering higher discounts to customers not only for previous season collections, but also for novelties. In part of these cases the Group chooses not to follow the general price trend and to better sell less, but at a higher margin.

Sales in the Baltic countries reduced by 4.6% in Q4 2018, but in 12 months 2018 there was growth in these markets of 0.5%. The repeating growth is explained by the stabilisation of the market situation in Russia and other CIS countries, but during Q4 2018 the Group put more focus on balancing sales growth with cashflow returns and customer payments and in some cases chose to postpone shipments to Q1 2019 in order not to increase its working capital position further.

European Lingerie Group AB 12 Months and Fourth Quarter 2018 Report is available for viewing and download here and the presentation of the report here.