Focus on profitability

Following weak trends in 2007/2008, we need to consolidate our operations and hone our strategies. Therefore, we will be prioritizing profitability over growing ­market shares and volume growth in 2008/2009.

The performance reported Hemtex in 2007/2008 was weaker than expected.

Net sales rose 9.4%. At the same time, however, we increased the number of stores by approximately 10% to a total of 205.

For comparable stores, sales decreased by 4%, the weakest trend reported in the past two quarters of the fiscal year. There are several reasons for this result. We were impacted when the home textiles market, after reporting stable growth through the 2000s, suddenly began to weaken at the end of 2007 and later fall at the beginning of 2008. We also felt the effect of intensified competition, with new players and growing offerings, ­primarily within the low-price segment. However, the trends were primarily the result of a misjudgment of our sales capacity prior to the autumn of 2007 and the purchasing of too many products, which we were later forced to sell off at substantially reduced prices. Because our costs rose in relation to our sales, our margins were affected negatively. Compared with the preceding year, operating profit for 2007/2008 fell by 36% to SEK 141.1 M.

In addition to a strictly controlled purchasing strategy, we are now implementing a number of measures to improve efficiency and strengthen our margins. Our long-term financial goals remain the same. Growth during favorable profitability serves as a guide for Hemtex.

Rapid expansion

Let us quickly review. During the past three years, we have opened 80 new stores and established a presence in three entirely new markets. Sales have doubled and our market share has increased from 22% to 28% in Sweden and from 7% to 9% in the Nordic region. Such rapid and successful expansion has attracted an increasing number of players, leading to intensified competition. As a result, we need to become even better at developing our offering and the Hemtex brand and strengthening our position, not only in Sweden, but in all of the markets in which we operate. Therefore, we are intensifying our brand building operations beginning in the autumn of 2008.

New communication strategy

As a result of our rapid expansion and growth from a Nordic player to an international retail chain, we are required to communicate with the market in a uniform and efficient manner. In light of this, we have worked since the end of 2007 on developing an entirely new communication strategy for Hemtex, which is now ready for launch. Our goal is to attract a larger number of people to visit Hemtex stores more often and to make further and more frequent purchases, driven by our prices and a desire to shop. To achieve this goal, we must change such areas as our marketing activities. Therefore, we are now taking the next step from rational price and product communication and utilizing a larger number of marketing channels and an entirely new media mix. We aim to create consumer demand for home textiles and to attract consumers to visit our stores for inspiration on simple ways to refurbish their homes. This new strategy will also help reduce the need for price reductions in the future. Instead, we will offer our customer products at lower regular prices, while always retaining a high level of quality and style. Accordingly, sales will become more even throughout the year, resulting to lower costs for logistics and goods handling – and stronger margins.

Focus on existing markets

We will continue the expansion of our network of stores in 2008/2009, but only in existing markets and at a slower rate and with more franchises than before. Our goal of a 15% market share in the Nordic region remains the same. In Sweden, where we will soon be fully established in terms of number of stores, we will continue to grow primarily by enhancing the efficiency of existing stores – for example, through increasing their area and expanding our product range. In Finland, where we currently have 38 stores, the rapid expansion carried out in recent years has also forced us to slow down our rate and instead focus on increasing profitability in our existing network of stores. Nonetheless, the potential in Norway and Denmark remains substantial. With our 11 stores in the Norwegian market, we currently have a long way to go before reaching our long-term goal of approximately 50 stores. In Denmark, we are continuing to expand by establishing proprietary stores in the Copenhagen area, but are also looking for franchise holders in other parts of the country. In addition to our Nordic ventures, we also opened our first stores in the Baltic region, in the Estonian cities of Pärnu and Narva, and established three franchise stores in Poland. Store expansion will continue in both the Baltic region and Poland.

Product range developed continuously

Developing and expanding our product range is a constantly ongoing process. Our product range should always be characterized by function, design and concentration – with home textiles as the foundation. Customers should be enticed to visit our stores and make more purchases by the opportunity to take advantage of our affordable product range within home textiles, as well as non-textile products. We are increasing our resources within design to emphasize this unique position.

We are also supplementing and strengthening our offering with external brands. In May 2008, we launched the U.S. Polo line, which has been well-received and is now part of our slightly higher quality segment. We are also preparing to launch a more distinct children’s line, with proprietary and external brands, as part of our emphasis on the important customer group of families with children.

Larger stores with a broader product range

Expansion through new store formats and broadening of the product range is an important part of our growth strategy. Our new volume concept, Hemtex & More, has been successful and we opened six stores of this type during the year, four in Sweden and two in Finland. This concept enables us to utilize our resources more efficiently, while offering our customers a more inspiring and affordable product range. The expansion of Hemtex & More will continue in 2008/2009. Having more volume stores will enable us to handle cost trends better, while creating a broader product range that will result in more frequent customer visits. In the long term, we expect to be able to establish approximately 40 Hemtex & More stores in the Nordic region.

Efficient value chain

As we establish a presence in more markets and expand our product range, demand is intensifying for an efficient value chain – from supplier product purchasing to our stores. As a result, we constantly work to improve our purchasing pro­cesses. Following the establishment of our purchasing office in Shanghai, China in September 2007, we now have two efficient purchasing organizations located in Asia. Together with the office in Dhaka, Bangladesh, the Shanghai office is helping to strengthen our work to increase our proportion of direct purchasing, further improve our control efforts and evaluate existing and new suppliers even more efficiently. These are key factors since we anticipate that rising raw-mater­ial prices and increased labor costs will soon begin to result in price hikes on our purchases. Constantly remaining up-to-date on new and old purchasing markets will become an important success factor in the future.

Profitability over volume growth in 2008/2009

Our goal is to get back on track as soon as possible. To achieve this target, we are consolidating our operations and prioritizing profitability over growing market shares and volume growth. We are concentrating on previously established markets and intensifying our follow up of the performance of each store. Stores that do not meet our requirements will be discontinued and we will focus instead on developing profitable stores through increasing their area and expanding our product range. We will continue to focus on the Hemtex & More ­concept, with more stores and an even stronger product range. At the same time, we expect the demand situation to remain weak. Developing strategies – primarily within communication, pricing and product range – will be our principal challenge in a business environment characterized by increasingly intense competition.

I was not satisfied with Hemtex’ weak performance in 2007/2008, but I am extremely pleased with the work that is now under way throughout our organization. This work is systematic and strategic, but also time-consuming, and will enable Hemtex to once again report growth with favorable profitability.

Borås, June 2008

Anders Jansson
President and Chief Executive Officer