Top Secret expects margin to improve considerably

Top Secret implements a policy of more balanced and limited procurement of the autumn-winter 2019 collection. This will ensure a sharp reduction in inventory at the end of the season, which will provide a boost to the margin in subsequent periods.

In the first quarter of 2019, the fashion segment generated PLN 54.3m in revenue, up 9.1% compared to the corresponding period of the previous year. The sales margin fell in the period by 26.5%, to PLN 16.2m. Distribution costs and administrative expenses grew slower than revenue, only by 7.4% year on year. As a result, in the first three months of 2019 Top Secret’s operating result went down by PLN 7.8m relative to the previous year.

“The performance in the first quarter was heavily affected by the situation in the second half of the previous year. We deliberately planned a wider choice in the autumn-winter 2018 collection, which was also focused more on winter clothing. We based our assumptions on the strong sales record of jerseys, jackets and coats in 2017, which were all mostly sold out. In addition, trends showed more room for further expansion of the autumn and winter product groups. However, we ultimately faced weather and market conditions which were extremely unfavourable for that collection. In the last four months of 2018, temperatures were several degrees higher than the average in the same period in previous years,” said Bogusz Kruszyński, the President of the Management Board of Redan S.A.

A drop in the customers’ interest in warm clothes, typical for that period, caused a year-on-year 56% increase in the inventory of the autumn-winter collection as at the end of December 2018. As a result, a decision was made to make a strong clearance in 2019 of merchandise from previous seasons in all distribution channels, which adversely affected the margin.

After a temporary underperformance in the fashion segment, it is expected that its margin will improve in subsequent periods. The positive effect will mainly come from changes in the collection. “For the purposes of the collection concept and order structure for the autumn/winter 2019 season, we assumed more averaged weather conditions and market trends. We have also reduced procurement as we still have products from the previous season, some of which, because of the weather, did not appear on shelves. Overall, this will contribute to higher margin on sales in subsequent periods,” said Bogusz Kruszyński.

In the first quarter of 2019, the TXM discount segment posted revenue from continuing operations of PLN 56.7m, down 10.8% compared to the same period of the previous year. The sales margin fell by 6.2 percentage points year on year, to 32.6%. Concurrently, distribution costs and administrative expenses were reduced by 9.3%, to PLN 32.1m. In effect, TXM’s operating result was lower by PLN 2.4m relative to the previous year.

“The achieved performance is unsatisfactory. The weaker result in the discount segment was attributable to the fact that the product offer at stores was all but optimal, with deep markdowns of autumn and winter products. To enable the company to continue trading, restructuring process was commenced with the intention to improve TXM’s liquidity and financial performance. Its purpose is also to protect all entities that remain in a business relationship with TXM as well as their interests to the greatest possible extent,” said the President of the Management Board of Redan S.A. Mr Kruszyński added that the opening of the restructuring proceedings would enable TXM to use its available funds to purchase merchandise to better stock its stores.

Taking into account the results of both segments, in the first quarter of 2019 the Redan Group’s consolidated revenue was PLN 111m, having dropped by 2.1% year on year. The operating result declined year on year by PLN 10.5m. The two segments of the Redan Group – the fashion and the discount businesses, are fully independent of each other. Operations carried out in each of them are not related to one another and are not shared, save for IT support services provided by Redan to TXM. In particular, each segment has: different merchandise, separate stores, separate warehouses, different sources of funding, and there are no employees serving in both segments at the same time.