We are all facing a dynamic and unprecedented situation due to the Covid-19 outbreak. With this press release we aim to provide more information on the impact of the Covid-19 outbreak on ELG as well as the measures taken by the Group. As we move forward and continue to work together, we want to reassure our partners, that our top priorities remain serving our customers, keeping healthy long-term business relationships with our suppliers, as well as respecting our financing providers and investors, all the while taking care of our employees.
The revenue and business of the Group is primarily dependent on retail stores being open and available to end-consumers as well as the general attitude and desire for people to shop for lingerie. The restrictive measures implemented by governments in our core markets (Germany, Russia, the Baltic states, Spain, Benelux, Italy and France) have a direct impact on the Group’s sales and its supply chain.
The impact of the Covid-19 outbreak on the four core business areas of the Group is as follows:
Lingerie segment (Felina and its group entities)
The sales of Felina started to slow down in mid-March and it was directly linked to the closing down of stores in our core markets (either mandatory or voluntarily)– initially in Italy, Spain and France, and followed by Germany and other countries. Russia was the last to implement the measures related to the Covid-19 outbreak, therefore this market was still open for trading until April, and the sales in Russia are only now starting to shrink. Felina sales has lost its volume as a result of the close down of stores and channels. The pressure on the sell out and stock turn will become even more significant in short term with only online customers having a consistent demand for goods and being served on a case-by-case basis.
As response measures for Felina GmbH (German core operations) – in Germany support from the government is available in the form of ‘Kurzarbeit’ financing to the Covid-19 outbreak. whereby 60% (or 67%) of net salaries of the employees in downtime are paid by the state directly to the respective employees, and the employer does not carry any costs (including payroll taxes) for the employees in downtime (‘Kurzarbeit’). Felina GmbH has implemented said measures for most of its employees starting from 7 April 2020. Payroll expenses in Germany is one of the largest fixed cost positions of the Group.
With respect to the Felina trading entities – most of the employees are in paid downtime and we have applied for the support of the respective states to the extent available.
With regard to the production unit Felina Hungary, we have decreased the number of employees by around 7% – mainly the elderly employees, who have the right to receive a pension. Paid vacation for most of the Felina Hungary staff was initiated on 7 April 20202, and following that downtime, paid by Felina Hungary, is expected to commence. Support programs by the government were delayed in Hungary as compared to other countries, and said programs have only been indicatively announced on 7 April 2020, and those are currently being evaluated by the Group. The negative effect of Felina Hungary is partially offset by orders for the production of textile masks, which allows us to use the capacity of the factory at approximately 15-20% in April 2020.
Felina produces and sources goods in Europe, whereas most of its competitors rely on Asia for sourcing and production, which leads to a short-term competitive advantage for ELG. In the long run, the reliability and local sourcing might become a relevant factor in the customer sourcing preferences. We also see the possibility of medium-term sewing capacity sale. Felina is well-positioned to service customer demand from its readily available stock as soon as demand picks up.
Textile segment (Lauma Fabrics and its group entities)
Up until the last week of March 2020, cancellations and postponements of orders were only observed for clients from Western markets, but not for clients from Eastern markets. However, in the last week of March 2020 we saw postponements of orders and a major slow-down of incoming payments by customers from Eastern markets as well. Furthermore, Russia announced a ‘public holiday’ lockdown, which was recently prolonged until the end of April 2020. Most of the customers of Lauma Fabrics have currently suspended their orders and closed their production.
As response measures for Lauma Fabrics, the management has initiated downtime for the employees of Lauma Fabrics, which will commence this week and will last until end of April 2020. Said downtime is fully financed by the government of Latvia. Part of the sales department of Lauma Fabrics will continue to service and arrange for shipments for the customers, that have placed/will place orders. Purchase of supplies has been postponed, but Lauma Fabrics maintains a close cooperation with its suppliers.
The German production units of Lauma Fabrics have applied for downtime and have implemented ‘Kurzarbeit’ on the same terms as for Felina GmbH.
In the textile segment we expect, that some of our competitors might not overcome this period. To-date we have received, and expect to keep receiving, counter sample requests from European lingerie brands with the intent to potentially switch their purchase of materials to Lauma Fabrics; this has also the purpose of sourcing in Europe instead of their current sourcing in Asia. We also expect a trend by European brands to diversify their sourcing, we believe that sourcing in Europe will increase. Furthermore, Lauma Fabrics is well positioned-for the pick-up of operations, once the restrictions are lifted – our finished-goods stock is sufficient to provide fast deliveries to the customers, and the reserves of material stock will allow us to promptly restart the production process as soon as customer demand revives.
Medical Goods segment (Lauma Medical)
Currently the medical unit of ELG continues to work, and merely a minor decrease in sales and incoming payments is observed. The main products of our medical goods segment are elastic belts/supports and bandages. The largest market is Russia. Lauma Medical is a branded and highly priced product, and it is mainly distributed through pharmacies, which remain open. However, risk factors for continued trading are: open border for Russia, cancellation of planned surgeries that partially initiates the demand, availability of materials for production and RUB/EUR exchange rate stabilization. Nevertheless, we expect, that the operations will remain running with only a minor decrease.
E-commerce (Dessus Dessous)
Dessus Dessous is a premium online store for the sale of high-end lingerie, with its key market being France. After a weak 2019, we have had a healthy, stable business growth rate. We expect for the business to remain up and running as long as people are allowed to go to work in France. The impact of the Covid-19 outbreak in Dessus Dessous mainly stems from employee absence, a lower supply of garments (brands continue to ship, but less frequently) and mailing/post overload. However, we see, that customers continue to shop online and in the long-term we see, that the business is well-positioned to capture the general trend of online-shopping.
Concluding remarks
As we look forward, and we adapt ourselves and our operations to various restrictions imposed by local governments to contain the further spread of Covid-19, we appreciate the patience and cooperation of our customers, suppliers, employees and financiers. We also intend to initiate discussions with the bond investors to amend the terms of bond financing. All implemented measures, as well as the general approach by the Group and its companies, are targeted at a long-term sustainability of the business as well as its positioning for the period of revived demand. Our business model is based on providing high-quality products in relatively short lead times, sourced locally. This is the fundament that is stable as many short-term disruptions come and go. The Group has been taking a number of practical actions designed to reduce the risk of Covid-19 having a material long-term impact on our operations, and we will continue to do so.
This information is information that European Lingerie Group AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication, through the agency of the contact person set out below, at 16.30 CET on 8 April 2020.
For more information, please contact:
Baiba Birzniece
Head of M&A, Strategy and Investor Relations
European Lingerie Group AS
+371 2609 4605
baiba.birzniece@elg-corporate.com