Annual Report 2007/2008
Calendar
AGM September 3, 2008
First quarter
report September 3, 2008 Second quarter
report November 26, 2008 Third quarter
report March 5, 2009
Year-end report June 11, 2009
Contents
Hemtex in brief
Hemtex is the leading Nordic home textile chain with a total of 207 stores in June 2008, of which 143 are located in Sweden, 38 in Finland, ten in Denmark, 11 in Norway, two in Estonia and three in Poland. Of the stores, 182 are owned by the Hemtex Group and 25 by franchise companies.
Using a common brand, the stores sell home furnishing products, with a focus on home textiles. Sales in the con- sumer operations – including franchise stores – amount to SEK 1.7 billion annually, excluding VAT. During the 2007/2008 fiscal year, the Hemtex Group’s sales totaled SEK 1.6 billion.
Hemtex has been listed on the Mid Cap list of the OMX Nordic Exchange Stockholm since October 6, 2005.
2007/2008 in brief 1
President’s comments 2
Hemtex share 4
Board of Directors’ report 8
Income statements 15
Balance sheets 16
Change in shareholders’ equity 18
Cash-flow statements 20
Notes to the financial
statements 21
Eight-year summary 48
Proposed distribution of earnings 49
Audit report 50
Board of Directors 51
Corporate Governance 52
Senior management 55
Hemtex stores 56
Information on the Annual
General Meeting 57
Net sales, SEK M 1,159.7 1,470.5 1,608.3
Sales growth, % 44.1 26.8 9.4
Gross profit margin, % 47.2 52.2 52.7
Operating profit, SEK M 180.9 221.5 141.1
Operating margin, % 15.6 15.1 8.8
Net profit for the year, SEK M 130.5 159.5 96.5
Return on capital employed, % 55.7 45.5 22.8
Return on shareholders’ equity, % 42.6 35.9 20.0
Equity/assets ratio, % 68.0 61.6 53.4
Net debt/EBITDA, multiples – 0.5 0.1 1.0
Earnings per share before dilution, SEK 4.76 5.69 3.31
Earnings per share after dilution, SEK 4.60 5.47 3.31
Cash flow after investments per share, SEK 0.48 – 1.54 – 1.45
Equity per share, SEK 14.21 17.53 16.10
Dividend per share, SEK 2.35 4.85 2.651
Total number of stores 153 186 205
Of which owned by the Group 101 163 180
Number of full-year employees 433 602 757
1) Proposed dividend, of which SEK 1.65 (2.85) in ordinary dividend and SEK 1.00 (2.00) as an extra dividend.
2007/2008
In brief
2005/2006 2006/2007 2007/2008
Key data
The Hemtex Group’s net sales rose 9.4% to SEK 1,608.3 M (1,470.5) during the fiscal year May 1, 2007 to April 30, 2008.
Operating profit amounted to SEK 141.1 M (221.5).
Net profit for the year decreased to SEK 96.5 M (159.5) and earnings per share after dilution amounted to SEK 3.31 (5.47).
The Hemtex Group opened a total of 20 new stores and acquired one store previously run by a franchise holder.
One store was opened in the new Estonian market and two franchise stores were opened in the new Polish market.
Six stores were opened under the new Hemtex & More concept, of which four are located in Sweden and two in Finland.
Another purchasing office was established in Asia – in Shanghai, China.
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.
T he 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 pur- chasing 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 com- munication 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 communica- tion 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
President’s comments
2
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 approxi- mately 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 pro- cesses. Following the establishment of our purchasing office in Shanghai, China in September 2007, we now have two effi- cient purchasing organizations located in Asia. Together with the office in Dhaka, Bangladesh, the Shanghai office is help- ing 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- mater ial 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 com- munication, pricing and product range – will be our principal challenge in a business environment characterized by increas- ingly 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 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 charac- terized 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 offer- ing 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 suc- cessful 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
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Hemtex share
Hemtex has been listed on the Mid Cap list of the OMX Nordic Exchange Stockholm since October 6, 2005.
The Hemtex share is traded under the HEMX symbol and is included in the index for durable goods and services, SX25 Consumer Discretionary. A round lot consists of 100 shares.
On April 30, 2008, Hemtex AB’s share capital amounted to SEK 73.3 M distributed among 29,337,400 shares, each with a par value of SEK 2.50. Each share entitles the holder to one vote at the Annual General Meeting and all shares carry equal rights to the company’s assets and profits.
Weak price trend in a weak stock exchange
During the 2007/2008 fiscal year, the world’s leading stock exchanges declined. On the Stockholm Stock Exchange, the OMXS index, which reflects the develop- ment on the exchange as a whole, fell 23% from May 1, 2007 to April 30, 2008.
The price of the Hemtex share dropped 53%, from SEK 138.50 on May 1, 2007 to SEK 64.75 on April 30, 2008.
The highest price paid was SEK 143.50 on May 3, 2007 and the lowest price was SEK 54 on January 22, 2008. At the end of the fiscal year, the market capitalization of Hemtex was SEK 1,900 M.
During the period, a total of 37.0 million Hemtex shares were traded at a value of SEK 3,231 M. This corresponds to a turnover of 126% of the total number of shares in Hemtex. The turnover rate for the Stockholm Stock Exchange as a whole amounted to 142% during the same period.
Hemtex has 5,197 shareholders
On April 30, 2008, Hemtex had 5,197 shareholders. Most shareholders, 4,608, owned 1,000 shares or less. The pro- portion of institutional ownership amounted to 84% (79) and the proportion of foreign ownership to 28% (41).
On April 30, 2008, Hemtex’ Group Management owned a total of 530,500 shares in Hemtex, which corresponds to 1.8% of the capital and voting rights. Hemtex’ Board
Distribution of owners, %
Foreign owners 28.0 (41.3)%
Mutual fund investors 4.5 (12.1)%
Pension funds and insurance companies 1.7 (5.1)%
Swedish private individuals 16.4 (20.7)%
Others 49.4 (20.8)%
Shareholder structure
On April 30, 2008, Hemtex AB had 5,197 shareholders. The figures in the table below apply to the situation on that date according to the ownership list maintained by VPC AB.
Share of Total no. voting rights
Owner of shares and capital
Hakon Invest AB 4,153,500 14.2%
AB Industrivärden 3,700,000 12.6%
Second AP Fund 2,622,882 8.9%
Orkla ASA 2,394,700 8.2%
Nordea Bank Norge Nominee 1,466,000 5.0%
UBS AG London (Client Account) 1,385,460 4.7%
SEB Investment Management 764,900 2.6%
EFG Private Bank S.A., W8IMY 760,816 2.6%
Fourth AP Fund 596,600 2.0%
Unionen 586,000 2.0%
Other owners 10,906,542 37.2%
Total 29,337,400 100.0%
Ownership structure
No. of % of No. of % of share-
No. of shares owners all owners shares capital
1–200 2,926 56.3 384,302 1.3
201–1,000 1,682 32.4 939,987 3.2
1,001–10,000 442 8.5 1,381,562 4.7
10,001–100,000 115 2.2 3,921,198 13.4
100,001– 32 0.6 22,710,351 77.4
Totalt 5,197 100.0 29,337,400 100.0
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members owned 25,400 shares, corresponding to 0.1% of the capital and voting rights.
Full subscription in Hemtex’ two warrant programs
In June 2007, all warrants in the two previously outstand- ing warrant programs, T01 and T02, were subscribed.
The warrants were issued to key employees and senior executives during the 2004/2005 fiscal year.
Following this subscription, the number of shares rose from 28,017,400 to 29,337,400 and the share capital increased by SEK 3.3 M to SEK 73.3 M. This corresponds to a 4.5% dilution of the share capital and voting rights.
In conjunction with the redemption and the issue of new shares, the company was provided with SEK 23.9 M.
The former Chairman of the Board redeemed 2,000 war- rants against 80,000 shares, the President redeemed 9,400 warrants against 376,000 shares, other senior executives redeemed 15,400 warrants against 616,000 shares and others redeemed 6,200 warrants against 248,000 shares.
Incentive program 2007–2010
At the Annual General Meeting on September 5, 2007, a resolution was taken to introduce long-term incentive programs for senior executives within the Hemtex Group through the issue of warrants and employee stock options in Hemtex AB. Within the framework of the two programs,
The Hemtex share is monitored and analyzed continuously by Swedish banks and stockbrokers. A current list of the analysts who monitor Hemtex is available under Investor Relations at www.hemtex.com.
Analysis factors
Athough they are often based on similar analysis factors, the assessments and valuation models of individual analysts and stockbrokers vary. A compilation of the factors that analysts consider to be most important is provided below:
• Home textile market as a whole. The market for home fur- nishings and textiles is among the fastest growing retail sectors.
• Hemtex’ strategy for profitable growth and the company’s financial goals.
• Business model – Hemtex’ revenues are generated from three sources – mainly sales in own stores, but also wholesaling to franchises and franchise fees.
• Growth rate in comparable stores and the number of new establishments.
• How well the establishment in new markets is progressing is important for future growth and profitability.
• How well the establishment of new store concepts, such as the larger stores, Hemtex & More, is progressing is an increasingly important factor for future growth in existing markets.
• Gross profit margin trend – Hemtex focuses on upstream integration in the value chain for better control and increased efficiency and profitable purchasing.
• Follow-up of the largest controllable cost items – personnel costs and other expenses.
How the Hemtex share is analyzed
a total of seven senior executives acquired 120,000 war- rants at market price and were allotted 120,000 employee stock options without charge. Each warrant entitles the participant to subscribe for one new share. The President holds 30,000 warrants and 30,000 employee stock options.
Other senior executives hold 15,000 warrants and 15,000 employee stock options each.
The subscription period takes place from June 1 to July 31, 2010. If all warrants and employee stock options are exercised, it will correspond to a 0.82% dilution of the share capital and number of votes.
Dividend policy
The Board of Director’s goal is to propose dividends that, over time, correspond to an average of approximately 30 to 50% of consolidated net profit for the year after tax.
The date for, as well as the amount of, future dividends will be dependent on the company’s earnings, expansion and acquisition opportunities and financial position in other respects.
Proposed dividend of SEK 2.65
The Board of Directors of Hemtex AB proposes that the Annual General Meeting on September 3, 2008 approve a dividend for the 2007/2008 fiscal year amounting to SEK 2.65 (4.85) per share, corresponding to SEK 77.7 M (142.3).
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Jul Aug Sept Jan 2008
Dec Feb Mar Apr Oct Nov
120
Jun May 2007 40 60 80 100 140 160
The Share OMX Stockholm_PI Source: NASDAQOMX
Hemtex share trend Hemtex share turnover
5,000
4,000
3,000
2,000
1,000
0
Share turnover, 000s Source: NASDAQOMX
Jul Aug Sept Jan
2008
Dec Feb Mar Apr Oct Nov
Jun May 2007 SHARE
The proposed dividend comprises an ordinary dividend of SEK 1. 65 (2.85), corresponding to 50% (50) of the year’s profits, and an extra dividend of SEK 1 (2). Assuming that the Annual General Meeting approves the Board of Directors’
proposal, the dividend is expected to be paid by VPC on September 11, 2008.
The proposed record day for the right to dividends is September 8, 2008.
Persons with insider status
Trading in shares in a company in which a person has insider status is called insider trading. Such trading must be registered according to law and reported to the Swedish Financial Supervisory Authority. Hemtex is obligated to report to the Financial Supervisory Authority which persons are insiders in Hemtex. These persons must register their shareholdings and all changes in their holdings. Certain closely related individuals and legal entities may also be subject to the reporting obligation. Hemtex’ management, Board of Directors, auditors and certain other employees are considered to have insider status in Hemtex. A link to a complete list of the persons with insider status is available under Investor Relations at www.hemtex.com.
Stock market information
Hemtex’ information to the stock market must be charac- terized by openness, accuracy, relevance and speed. This year, for the first time, Hemtex has prepared a fully web- based annual report and thereby selected a distribution channel that is directly accessible to all. As a result, the format of the printed annual report has been simplified and its contents limited to the formal components.
Hemtex’ press releases, interim reports and annual reports are available under Investor Relations at www.hemtex.
com. The website also contains additional information about the company, financial trends and the share. In addition, it is possible to subscribe on the website for press releases, interim reports, annual reports and the share’s closing price.
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Increase in Total no. Increase of Total
Date Transaction no. of shares of shares share capital, SEK share capital, SEK
Jan. 29, 1970 Company founded 100 10,000
Nov. 18, 1974 New issue 650 750 65,000 75,000
May 5, 1980 New issue 610 1,360 61,000 136,000
May 5, 1980 Bonus issue 140 1,500 14,000 150,000
Jan. 13, 1981 New issue 1,390 2,890 139,000 289,000
Jan. 13, 1981 Bonus issue 110 3,000 11,000 300,000
Jan. 18, 1982 New issue 2,950 5,950 295,000 595,000
Jan. 18, 1982 Bonus issue 50 6,000 5,000 600,000
Mar. 14, 1983 New issue 2,000 8,000 200,000 800,000
Jun. 27, 1984 New issue 2,000 10,000 200,000 1,000,000
Mar. 27, 1985 New issue 3,000 13,000 300,000 1,300,000
Apr. 7, 1988 New issue 3,000 16,000 300,000 1,600,000
Jan. 18, 1989 New issue 7,000 23,000 700,000 2,300,000
Mar. 2, 1990 New issue 7,000 30,000 700,000 3,000,000
Feb. 12, 1991 New issue 8,500 38,500 850,000 3,850,000
Feb. 12, 1991 Bonus issue 1,500 40,000 150,000 4,000,000
Mar. 26, 1992 New issue 10,000 50,000 1,000,000 5,000,000
Dec. 16, 1992 New issue 4,000 54,000 400,000 5,400,000
Dec. 16, 1992 Bonus issue 11,000 65,000 1,100,000 6,500,000
Jan. 9, 1995 New issue 15,000 80,000 1,500,000 8,000,000
Jan. 9, 1995 Bonus issue 20,000 100,000 2,000,000 10,000,000
Jun. 2, 2000 New issue 190,000 290,000 19,000,000 29,000,000
Feb. 12, 2002 New issue 50,825 340,825 5,082,500 34,082,500
July 1, 2003 New issue 100,000 440,825 10,000,000 44,082,500
Jan. 20, 2004 New issue 155,585 596,410 15,558,500 59,641,000
Oct. 13, 2004 New issue 43,740 640,150 4,374,000 64,015,000
Mar. 1, 2005 New issue 15,000 655,150 1,500,000 65,515,000
Mar. 16, 2005 New issue 9,660 664,810 966,000 66,481,000
Aug. 18, 2005 Split 40:1 25,927,590 26,592,400 66,481,000
Oct. 6, 2005 New issue 1,425,000 28,017,400 3,562,500 70,043,500
Jun. 20, 2007 New issue 400,000 28,417,400 1,000,000 71,043,500
Jun. 20, 2007 New issue 920,000 29,337,400 2,300,000 73,343,500
The information contained in these fact boxes is updated under Investor Relations at www.hemtex.com prior to all interim reports.
Share capital trends
7
8
Board of Directors’ report
The Board of Directors and the President of Hemtex AB (publ), Corporate Registration Number 556132-7056, hereby present the Annual Report and consolidated financial statements for the fiscal year May 1, 2007 to April 30, 2008.
General information about the operations
Hemtex is the leading home textile chain in the Nordic region, with a total of 205 stores as of April 30, 2008, of which 143 in Sweden, 38 in Finland, ten in Denmark, 11 in Norway, one in Estonia and two in Poland. Of the stores, 180 are owned by the Group and 25 by franchise holders.
On April 30, 2008, there were 23 franchise stores in Sweden and two in Poland.
Under a common brand, Hemtex sells interior decorating products focused on home textiles. The assortment is divided into four product areas: Bedroom, Bathroom, Windows and Dining & Entertainment. All product areas are supplemented by non-textile home accessories. The chain stores have two forms of operation: own stores and franchise stores. Regardless of operation form, the stores are managed in accordance with the Hemtex concept and guidelines, but with scope for local business influences.
Hemtex AB is the Group’s Parent Company. The Parent Company operates Swedish stores and is responsible for concept development, marketing, business management, controlling and product supply to Hemtex stores. In addi- tion to the Parent Company, Hemtex AB, the Hemtex Group includes wholly-owned subsidiaries Hemtex Oy (Finland), Hemtex A/S (Denmark), Hemtex AS (Norway), Hemtex (Shanghai) Co., Ltd. and Hemtex Finans AB.
Hemtex share and ownership
Hemtex AB’s share capital amounts to SEK 73.3 M distrib- uted among 29,337,400 shares, each with a par value of SEK 2.50. Each share entitles the holder to one vote at the Annual General Meeting and all shares carry equal rights to the company’s assets and profits. There is one class of shares and no limitations in terms of the number of votes each shareholder may cast at the Annual General Meeting.
There is no regulation in Hemtex’ Articles of Association limiting the right to transfer shares. Hemtex AB has not entered into any agreements that would be affected by a possible takeover bid.
Hemtex AB is a Nordic Mid-Cap company, listed on OMX Nordic Exchange Stockholm AB. The principal owners at the close of the fiscal year were Hakon Invest AB with 14.2% of the shares and AB Industrivärden with 12.6% of the shares. No other shareholder holds, directly or indirectly, more than 10% of the shares in Hemtex AB.
The Board of Directors and any deputy Board members are appointed at the Annual General Meeting for the period until the next Annual General Meeting. There are no regulations in Hemtex’ Articles of Association concerning the appointment and dismissal of Board members.
Risk factors
Hemtex is exposed to a number of risk factors, which are wholly or partly beyond the control of the company, but which may influence the Group’s sales and profit.
Cyclical
Demand for home textiles are highly influenced by overall trends in society, for example, the recent increase in interest for house and home has contributed to growth in the home textile industry. Demand is also naturally influenced by the general development of the economy and in particular by trends in private consumption. A positive business trend normally has a positive impact on Hemtex’ sales and earn- ings trend. A weak business trend has a negative impact on sales and profits if disposable income simultaneously decreases. However, Hemtex estimates that the home textile industry is less cyclical than certain other retail segments. The reason is that most products are replaced relatively frequently and the cost of purchasing home textiles is comparatively low.
Weather and seasonal variations
The weather affects sales of home textiles. A mild autumn and winter normally has a negative impact on sales and a cold and rainy summer normally contributes to higher sales figures.
Sales of home textiles also have seasonal variations.
During the autumn and winter, more expensive products such as quilts and pillows for the bedroom are sold, while summer sales comprise mostly terry towels. In general, sales are highest during the autumn and winter, with December being traditionally the best month.
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Fashion risks
Demand for interior decorating and home textiles is now more influenced by fashion trends than in the past, similar to the clothing industry. Consequently, Hemtex is depend- ent upon consumers’ preferences in terms of design, quality and prices of goods in Hemtex stores. Accordingly, Hemtex continuously monitors trends within home textiles and associated industries. When fashion trends are about to reach commercial volumes, Hemtex reacts rapidly. In order to choose the correct assortment, time is an import- ant factor and it is also vital that design and purchasing occur as closely as possible to the sales season. It is also important to keep in mind that manufacture and delivery require lead times to keep costs at a reasonable level.
Central functions at the head office in Borås are working on ensuring that the entire value chain, from concept to sales, is handled as efficiently as possible.
Financial risk management
For information on financial risks and risk policies, refer to Note 31.
Key events The market
During the 2007/2008 fiscal year, Hemtex reported extremely strong customer growth. The number of cus- tomer receipts increased during the year by slightly more than 12% (15). The average purchase decreased to SEK 188 (201) per receipt, primarily due to a change in the product range mix. Hemtex maintained a strong position as market leader in the Swedish market for home textiles.
Measured over the most recent 12-month period (April 2007 – March 2008), Hemtex’ market share dropped to
28.1%, compared with 31.3% during the period April 2006 to March 2007. Hemtex’ closest competitors had 12.7% and 10.0%, respectively. During the first quarter of 2008, Hemtex’ market share declined somewhat to 27.8%
(29.1) in a market that, according to figures from the GfK market research company, decreased in value by 5%.
According to Hemtex’ calculations, the market share in Finland amounted to approximately 9%. In the Danish market, Hemtex estimates that the market share amounted to slightly more than 2%. The potential for continued growth in the markets outside Sweden is substantial.
Establishments and acquisitions
During the 2007/2008 fiscal year, the Group opened a total of 20 new stores, of which eight in Sweden, five in Finland, four in Norway, two in Denmark and one in Estonia. In Sweden, stores were opened in Falköping, Gävle, Gothenburg (Eriksberg), Landskrona, Nynäshamn, Tyresö, Vällingby and Stockholm (Heron City). In Finland, stores were opened in Helsinki (Kampen), Kuopio, Lojo, Mikkeli and Tampere. In Norway, stores were opened in Drammen, Hamar, Kongsberg and Lorenskog. In Denmark, one store was opened in the district of Valby in Copen- hagen and one in Vejle in Jutland. The Group’s first store in Estonia was opened in Pärnu.
Three franchise stores were opened during the 2007/2008 fiscal year. One store was opened in Kiruna and two stores were opened in Warsaw and Rumia, Poland.
The Group acquired a franchise store in Motala, Sweden at the end of the fiscal year. Further details about the acquisition are available in Note 29.
Number of stores per market
April 30 2001 2002 2003 2004 2005 2006 2007 2008
Sweden 8 10 12 21 44 70 113 120
Finland — 4 4 5 12 22 34 38
Denmark 8 7 4 6 6 8 8 10
Norway — — — — — 1 8 11
Estonia — — — — — — — 1
Total stores in the Group 16 21 20 32 62 101 163 180
Franchise stores in Sweden 76 77 78 75 67 52 23 23
Franchise stores in Poland — — — — — — — 2
Total no. of stores in chain 92 98 98 107 129 153 186 205
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In March, a store in Vetlanda, Sweden was sold to a fran- chise holder.
During the 2007/2008 fiscal year, four stores were closed. The Group closed one store in central Stockholm, one at CC Vest in Oslo, Norway, and a small store in central Helsinki, Finland. A franchise store was closed in Öland, Sweden.
As Hemtex expands its network of outlets, it simultan- eously enhances its ability to project its brand identity.
Sales growth in the various markets becomes easier as the number of visitors and customers increases and more opportunities to sell the Hemtex range are established.
Implemented new establishments and acquisitions, combined with the otherwise positive development of the Hemtex Group in recent years, secure the Hemtex strategy, which focuses on continued growth through the establish- ment of new stores, geographic expansion, launching of new store formats and broadening of the range.
Mergers
During the 2007/2008 fiscal year, seven wholly owned subsidiaries merged with Hemtex AB. For more informa- tion, refer to Note 30.
Comments on the income statement Net sales
Consolidated sales consist of sales to consumers in own stores and wholesale selling to franchise stores in the Hemtex chain. During the 2007/2008 fiscal year, the Group’s total net sales increased by 9.4% (26.8) to SEK 1,608.3 M (1,470.5). Organic growth accounted for 5.6 percentage points and acquired franchise stores for the remaining 3.8 percentage points. Including unchanged exchange rates, the increase was 9.0%. Sales increases during the fiscal year were a result of continued favorable demand for the Group’s products and capital from newly established and acquired stores.
Of the Group’s net sales, the Finnish operations accounted for SEK 227.3 M (197.7), operations in Denmark for SEK 76.3 M (84.4*) and operations in Norway for SEK 56.3 M (25.4). The Group’s first store in Estonia, which opened in June 2007, contributed sales of SEK 3.0 M. Other operating income amounted to SEK 15.6 M (15.1) and primarily comprised franchise fees and bonus payments from suppliers and business partners.
In the 2007/2008 fiscal year, net sales in the consumer operations in all markets (including franchise stores) increased by 4% to SEK 1,674 (1,606) M.
Earnings
Consolidated gross profit (sales revenues less cost of goods sold) increased by 10.6% to SEK 848.3 M (766.9). The gross profit margin rose to 52.7% (52.2), attributable mainly to a favorable exchange rate trend, an increase in the proportion of consolidated sales in retail stores and lower purchasing prices due to the company’s focus on improved purchasing processes. The increased share of retail sales within the Group resulted from the establish- ment of new stores and the earlier acquisition of franchise stores. Accordingly, the share of wholesale sales to franchise stores declined to SEK 105.0 M (182.8) during the fiscal year.
During the third and fourth quarters, nonrecurring costs pertaining to inventories were charged against gross profit. Direct additional costs attributable to inventory management amounted to about SEK 31.0 M (0.0) during the 2007/2008 fiscal year.
One aim of purchasing activities is to increase the share of goods purchased directly from producers to approxi- mately 80%. The proportion of direct purchases is cur- rently slightly more than 73%. The objective is that the portion of purchasing from Asia will total 80% and the current level is 69%.
To reduce the exchange-rate risk, Hemtex hedges a significant portion of the Group’s contracted flows in foreign currency. Exchange-rate risks are followed up and exchange-rate differences are calculated as the difference between the actual price paid and the calculated price. In accordance with the Group’s finance policy, at least 65%
of contracted flows must be hedged. The exchange-rate differences that affected earnings during the fiscal year were positive and totaled SEK 48.9 M (18.7). The change in the value of outstanding forward contracts, applying IAS 39, had an adverse impact of SEK 1.0 M (0) on gross profit during the fiscal year.
Operating expenses, excluding goods for resale and depreciation, amortization and impairment of tangible and intangible fixed assets, amounted to SEK 683.2 M (534.2). As a percentage of sales, these expenses amounted to 42.5% (36.3). The increase in costs as a percentage of BOARD OF DIRECTORS’ REPORT
*) In Denmark, a store in Copenhagen’s Illum department store was closed in March 2007.
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sales was attributable to store expansion and will be offset by growth in the gross margin for newly established and acquired stores.
Of depreciation, amortization and impairment of tangible and intangible fixed assets, goodwill accounted for SEK 0.6 (0.0), rental rights for SEK 6.2 M (5.0) and other depreciation for SEK 32.8 M (21.4).
Operating profit amounted to SEK 141.1 M (221.5), which means that the operating margin dropped to 8.8%
(15.1). Operating profit was reported in all markets, apart from the newly established markets of Norway and Estonia, where establishment costs were charged against earnings.
Profit before tax amounted to SEK 132.7 M (221.1), resulting in a profit margin of 8.3% (15.0). Net profit for the year amounted to SEK 96.5 M (159.5), corresponding to a 6.0% (10.8) share of net sales.
During the fiscal year, the return on shareholders’
equity was 20.0% (35.9). The return on operating capital amounted to 24.5% (54.7). The interest-coverage ratio amounted to a multiple of 15.6 (111.9).
Comments on the balance sheet Goodwill
Total goodwill in the Hemtex Group, as reported in the consolidated balance sheet on April 30, 2008, amounted to SEK 279.2 M (279.3). Swedish operations accounted for SEK 261.4 M (261.7) of the Group’s goodwill and Danish operations accounted for the remainder.
The valuation takes into consideration the Group’s accrued earnings values for acquired operations, the Group’s market shares in Sweden and Denmark, the strength of the Hemtex brand in these markets, established supplier contacts and the expertise of the Group’s employees.
Inventories
The rate of inventory turnover declined somewhat during the year and at the end of the fiscal year amounted to 2.5 (2.9) times annually. On April 30, 2008, inventories amounted to SEK 337.9 M (264.5). The increase in inven- tories was due to the increased number of stores, the higher share of proprietary imports and sales that were lower than planned. Hemtex’ purchasing function now accounts for slightly more than 95% of the supply of products to the stores, while the share of external brands has continu- ously been reduced. Of the total inventories, wholesale
inventories accounted for SEK 111.3 M (101.7). At the end of April 2008, inventories per store within the Group averaged SEK 1.3 M (1.0). Inventories will decline in conjunction with low volumes of incoming deliveries during the summer.
Financial position
On April 30, 2008, the Group’s cash and cash equivalents amounted to SEK 31.5 M (56.7).
Interest-bearing liabilities increased during the operating year, as a result of major investments in the Group’s store portfolio, and amounted to SEK 205.5 M (72.7) on April 30, 2008. Of the interest-bearing liabilities, SEK 145.5 M will mature during the period ending on April 30, 2009 and the remaining SEK 60.0 M will mature later. All liabilities will mature within five years. Overdraft facilities are reported as a current liability.
The total credit limits for the Hemtex Group amounted to SEK 444.5 M (222.6) on April 30, 2008, including limits on letters of credit and currency forward contracts.
Of the total credit facilities, SEK 224.6 M (110.5) was utilized by the end of the fiscal year.
The collective value of purchase orders for which cur- rency forward contracts were signed amounted to USD 15.5 M (13.0) on April 30, 2008. The value of these out- standing currency forward contracts amounted to a nega- tive SEK 3.5 M (neg: 2.5) on the balance-sheet date.
Net debt, defined as interest-bearing liabilities less cash and cash equivalents, increased by SEK 158.0 M and amounted to SEK 174.0 M (16.0) at the end of the fiscal year.
The net debt/equity ratio amounted to 37% (3) on April 30, 2008. The equity/assets ratio declined to 53% com- pared with 62% on April 30, 2007.
Comments on the cash-flow statement Cash flow and investments
Cash flow from operating activities decreased by SEK 175.3 M to SEK 24.2 M. Cash flow after investments for the 2007/2008 fiscal year amounted to negative SEK 42.2 M (neg: 43.3) SEK M due to inventory accumulation and sales that were lower than expected.
The Group’s net investments affecting cash flow amounted to SEK 66.4 M (242.8) during the 2007/2008 fiscal year. Of the investments, SEK 1.7 M (186.3) was
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attributable to the acquisition of stores, SEK 55.0 M (50.8) to investments in new establishments and renovated stores and SEK 9.7 M (5.7) to other investments. Investments in goodwill amounted to SEK 0.2 M (167.0) during the fiscal year.
Personnel
During the 2007/2008 fiscal year, the number of full-year employees was 757 (602). The personnel increase is mainly attributable to store expansion. During the year, the number of Group-owned stores increased from 163 to 180 units, corresponding to an increase of 10%. The distribution is 7% men and 93% women. Approximately 89% work in the store organization and 11% work in central functions such as purchasing, logistics, marketing and administration.
Hemtex’s gender equality plan is continuously revised and shall characterize the work being carried out in many areas. Examples contained in the policy include: salary differences based on gender must not exist, working con- ditions shall be adapted to both women and men and educational and developmental opportunities shall be equal. A salary survey based on an equality perspective was implemented during the year.
The systematic work environment effort within Hemtex is based on all employees within the Group being provided with sound, safe and pleasant workplaces and that all managers are educated within the area. Courses on work- ing environment and safety are conducted on a continuous basis to include new employees in the organization. Within Hemtex, all store managers are required to participate in this course. Work environment inspections and subsequent action plans are implemented annually to continuously improve the environment and satisfaction in Hemtex operations.
A comprehensive crisis management plan is in place to ensure efficient crisis management. The plan highlights potential incidents that could occur and how they shall be handled. A central crisis management team and crisis sup- port representatives in stores were appointed and trained.
The crisis team meets on a regular basis to develop the crisis management work and ensure that the organization is pre- pared in the event of unforeseen incidents, such as the risk of injury to an individual employee or the company in its entirety.
Hemtex AB has collective bargaining agreements with the Salaried Employees Union HTF and the Swedish Commercial Employees Union.
Board activities during 2007/2008
The Board of Directors is responsible for the company’s organization and management of the company’s business, which includes establishing the company’s strategy. The Board also has the task of appointing a president. The Board’s work follows an annual agenda that is designed to secure the Board’s requirement for information. In other respects, the Board and the President follow the special work instruction established by the Board that defines the division of work between the Board and the President. The control issues that are the responsibility of the Board will be handled by the Board in its entirety.
During the fiscal year, Hemtex AB was the Franchiser in accordance with contracts signed with each Franchise Holder. The existing franchise contract was most recently revised in the spring of 2004. The Franchise Holders are linked through an association and are represented by the Board of the Franchise Holders’ Association in contacts with Hemtex AB.
An evaluation of the Board’s work was conducted in June 2008. Hemtex’ Nomination Committee has been given access to parts of the evaluation relevant to its work.
For more detailed information about the meetings held by the Board, the work of the Nomination Committee and the Remuneration Committee, refer to the Corporate Governance section on pages 52 to 54.
Guidelines for remuneration to senior executives
The Annual General Meeting held on September 5, 2007 adopted the following guidelines for remuneration and other employment terms for company management. The Board of Directors proposes that the same guidelines apply for the next fiscal year.
For more information about remuneration, refer to Note 4.
Remuneration Committee
The members of the Board of Directors appoint a Remu- neration Committee for each fiscal year from within its own ranks. The task of the Committee is to prepare BOARD OF DIRECTORS’ REPORT
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proposals concerning salary and other remuneration for the President and CEO and to decide on proposals con- cerning salaries and other remuneration for other senior management. During the fiscal year, the members of the Remuneration Committee were Chairman Mats Olsson, Bodil Eriksson and Kia Orback Pettersson.
Basic principles
Remuneration to senior management at Hemtex is based on principles related to performance, competitiveness and merit. To reflect these principles, a variety of remuneration components are applied in various degrees. Accordingly, a combination of several components is used to reflect these remuneration components in a balanced manner.
The total remuneration to senior management comprises fixed salary, variable components in the form of annual variable remuneration and long-term variable remuneration, pension and other benefits. Together, these components form an integrated remuneration package.
Each fiscal year, the details of the total remuneration are presented to senior management in the annual report for the current fiscal year, including previously determined long-term variable remuneration that has not yet fallen due for payment.
The relationship between fixed and variable salary and the connection between performance and remuneration Fixed salary is determined on the basis that it must be competitive. The absolute level depends on the scope and complexity of the current position and the annual per- formance of senior management.
Performance is primarily reflected in the variable com- ponents with regard to both annual and long-term variable salary. Although variations may occur over time depending on the market for remuneration, the goal in terms of annual variable salary for senior management is currently 40% of fixed salary. Long-term salary is designed to comprise both warrants and employee stock options. For employee stock options, a given goal level must be attained for certain key data in order for this portion of the salary to achieve an outcome. The key data that is currently used is “Earnings per share.” The outcome of employee stock options is limited through the implementation of a “ceiling”
– in other words, a maximum outcome.
The relationship between fixed and variable salary shall reflect the Board’s assessment of a reasonable balance between fixed and variable remuneration components and prevailing market practice for senior managers.
Variable remuneration in brief
Annual variable remuneration is cash-based and related to the direct operational goal for budgeted Group earnings before appropriations and tax. This goal was approved by the Board of Directors.
Share-based, long-term variable remuneration plans are submitted to the Annual General Meeting for approval. The outcome of the plans depends on three different variables:
the individual’s investment is shares, a long-term goal for earnings per share during the maturity in effect for each program and the share price trend. Prior to the Annual General Meeting to be held on September 3, 2008, no new share-based remuneration programs have been proposed.
Pension
Pension benefits shall be competitive in each native country.
For members of senior management whose employment contract contains an agreement concerning pension bene- fits in addition to ITP, a supplementary premium is included. This premium amounts to a certain percentage based on fixed monthly salary, including bonuses for the President and CEO, and a certain percentage based on the fixed monthly salary of other members of senior manage- ment whose agreement includes this benefit.
The retirement age is normally 65, but can vary in individual cases.
Other benefits
The basic rule is that other benefits, such as company cars and healthcare plans, shall be competitive in the local market.
Significant events after the close of the fiscal year At a meeting held in June 2008, the Board resolved to supplement the Group’s financial goals. The current goals stipulate that the Group shall increase its net sales by 15%
annually, that the operating margin shall total 15% during one business cycle and that the market share in the Nordic region shall be 15%. In addition to these three goals, the
