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Stockmann - A Struggling Finnish Department Store

I publish my analysis one day prior to Seekingalpha on finnvestor(dot)blogspot(dot)com.

This department store operates mostly within Finland and other Nordic countries, and about 50 % of its total revenue comes from the Finnish market. The operations of this company are divided into three main sections: Stockmann Retail, Fashion Chains, and Real Estate. Stockmann Retail and Fashion Chains operations contribute to the total revenue quite equally at roughly 47,5 % each, while Real Estate only contributes 5 %. For the past three years, the retail side has taken on substantial operating losses, and is being supported by the fashion and real estate sides of business. Stockmann has reacted to this by trying to improve their gross margins by investing in a more automated supply chain in their central warehouse, and a few other cost cutting actions. The warehouse also accomodates some parts of their new web store operations, which we will talk about later in this post.

First, we can talk about Fashion Chains and Real Estate. Both of these operations are cash flow positive, and seem to be quite well run at least according to the company itself. Fashion Chains is clearly the only real moneymaker currently for Stockmann, but the income is quite variable. It is mainly compromised of a brand called Lindex, and it is difficult to predict anything one way or another about it. It has been profitable for a long time, so we will expect it to stay that way in the future as well.

Real Estate is producing a good steady income, but it is relatively small compared to the two other main operations of the company. An interesting thing to note is that Real Estate is already accomodating a little under half of the entire real estate surface area owned by Stockmann. This means most of the potential brought by Real Estate is already used, since the quality of the rest of the rentable area varies greatly, which lowers the average rent per square meter for the area used by Stockmann currently.

Now we can get on to Stockmann Retail, which is what the entire company is perhaps the most well known for. The retail side of business has sustained very heavy losses for three years straight now, and in my opinion the reasons for this are very simple. This company is old, and it has gotten stuck in old patterns, old ways of working, and old technologies. Stockmann has existed for a long time before the internet, and its current business model is somewhat outdated. The retail business is known for selling higher end clothing and make up, as well as other typical items such as electronics.

The problem is that Stockmann has to either increase their sales significantly, or cut costs to increase gross margins. I believe the retail side of business will lose more and more revenue year to year, because Stockmann's prices are relatively high. The exact same items Stockmann is selling can be found online sometimes for a fraction of the cost. To increase sales, Stockmann greatly invested into their new web store, which doesn't add a whole lot of value to their business. By entering the online store business they are directly competing against Amazon, and that is not a good idea unless Stockmann plans on cutting their prices by quite a bit. Stockmann has taken steps into the right direction with their new automated supply chain, but I remain doubtful that this is enough to turn their course.

Stockmann's current share price (Stockmann B - 6.57) suggests that investors believe Stockmann will be quite profitable despite its past. For all the reasons mentioned I believe there is quite a bit of air in that price, and that there is a profitable shorting opportunity in this stock. I also believe that the following quarters will be the most decisive ones for Stockmann's future, since we are finally beginning to see the true effects of Stockmann's cost cutting measures. The current stock price is very optimistic and reflects the best case scenario, but while it might turn out to be true, there is no reason to buy this stock at a price this high.

I will be following the development of this stock regularly, and updating my predictions accordingly.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.