Kesko - Retail sector expert

[Arttu_Heikura]

I’m a bit puzzled by Onninen’s income statement. Sales grew, and the comparable period’s result included particular weakness due to a clear decline in products related to the green transition. The weakening of the result is probably explained by the fact that sales decreased in Onninen’s largest market, Finland, where it is a market leader and has good pricing power.

EDIT: excerpt from the report “Onninen’s comparable operating profit in Finland was
EUR 9.3 million (EUR 10.4 million).” It seems the result has weakened elsewhere too, not just in Finland. The entire segment’s result decreased by EUR 2.3 million, and Finland’s share of this was EUR 1.1 million.

[JuhaR]

@Arttu_Heikura

Hypermarket market share remained unchanged. Lost some shares in smaller stores.

In other words, price investments were at best able to slow down the decline in market share. Based on the price perception, these investments have seemed quite unfortunate. However, if the sales of discounted products have risen by clear percentages, it seems that within the core customer base, products have been switched from one brand to another.

Another perceptual problem is that under the “permanently affordable” heading, all sorts of exorbitant prices are pushed. And at the same time, the same retailer can have the same basic product labeled “permanently affordable” in two nearby K-Markets, with one being, for example, 20% more expensive than the other. Try to create some price perception or credibility for that sign’s claim then.

[Sijoittaja-alokas]

@Isa_Hudd interviewed Kesko’s CEO Jorma Rauhala.

Kesko Q1'25: Työ jatkuu - Inderes

Topics:

00:00 Introduction
00:15 Key highlights of the early year
00:51 Progress of the price investment program
02:02 Retailer model in grocery trade
04:23 Onninen expected to recover by year-end
05:31 Acquisitions in Denmark and their development
06:55 Gained market share in car sales
07:51 Effects of the trade war on Kesko
08:36 Progress of the updated strategy

[740_GLE]

Don’t traders believe in Kesko, when the long-standing incorrect pricing of A and B shares was clearly emphasized today?

I have previously exchanged my B shares for A shares with a 40-cent arbitrage, but today I was able to exchange the next batch with a 50-cent difference. They closed at a 56-cent difference.

My funds are not sufficient to pursue voting power, so from my perspective, it’s the same to buy cheaper, as I’m collecting these for holding anyway, so it’s the same to buy the series that is cheaper. Therefore, from my perspective, the price difference is an arbitrage, because my voting power doesn’t matter anyway.

[Gadus]

I don’t really understand why there’s a desire to downplay the role of stores other than large hypermarkets. However, they bring volume, and through this, for example, pricing power and scale to the purchasing side and logistics. This segment is happily being handed over to competitors.

Now, a picture is being painted here where K-stores are the new Stockmann, and there’s only a need to arrange a few Citymarkets in the largest cities.

[Sijoittaja-alokas]

Arttu has written a new company report on Kesko right after Q1.

Kesko’s Q1 report was somewhat soft, although the outlook towards the end of the year remains good. We identify several elements supporting Kesko’s earnings, some of which were already visible in the past quarter. In our opinion, the stock’s return expectation remains sufficient, supported by earnings growth and a good dividend yield. We reiterate our ‘add’ recommendation and raise the target price to EUR 21.0 (previously 20.5) due to positive long-term forecast changes and, in particular, the fading uncertainty related to the turnaround in the building and home improvement trade earnings.

Quoted from the report:

Cash flow in the red, balance sheet position stable

Kesko’s Q1 operating cash flow weakened from the comparison period to EUR -25 million (Q1’24: EUR 113 million) due to tied-up working capital. Working capital levels were raised by earlier preparation for the spring season, which has been a trend in the retail sector around the 2024-25 turn of the year, as well as timing factors related to trade receivables. Adjusted for investments and lease costs, free cash flow excluding the impact of acquisitions was a loss of EUR 212 million (Q1’24: - EUR 154 million) in Q1. The company’s balance sheet position remained stable, with the net debt to EBITDA ratio (excluding IFRS 16 items) at 1.6x. However, this figure has been on the rise in recent years largely due to increased store investments, acquisitions, and the construction of Onninen’s and K-Auto’s logistics centers.

Kesko Q1'25: Katse pidemmässä pelissä - Inderes

[JuhaR]

Yesterday, Arttu wrote that “with the result falling short of expectations, the report will likely lead to forecast revisions, at least on our part.” Today, the update did lower the outlook for the coming years, but at the same time, the target price was raised. Okay.

According to today’s analysis: “Support for the investor’s return comes from a dividend yield of approximately 6%, which in itself is not enough to compensate for our set return requirement (8.5%).” What 6 percent dividend yield? For this year, Arttu’s updated estimate expects a dividend yield of 4.6%, and for next year, a dividend yield of 5.4%.

[Arttu_Heikura]

@JuhaR

For this year, Arttu’s updated estimate expects a 4.6% dividend yield and for next year a 5.4% dividend yield.

Yes, there’s a typo here, it should be 5%. I’ll correct it.

@JuhaR

In today’s update, the outlook for the coming years was lowered, but at the same time the target price was raised. Ok.

The report stated that the turnaround in RT trade seems even more certain, and at the same time, long-term forecasts increased. The headline and valuation section also indicate that a longer perspective is emphasized in the view. It’s not going to be a skyrocketing stock, but in my books, this leans more towards the positive than the negative side.

[peruspiensijoittaja]

First of all, thanks to Inderes, @Kesko_IR, and CEO Rauhala. It was great to hear that topics and questions raised (at least) on this forum are heard and reacted to even in earnings reviews/company interviews. I believe I speak for a large group when I say: it is highly commendable that there is a willingness for such dialogue! Thank you.

Regarding the matter itself and Rauhala’s arguments, I partially agree with the CEO, but also (respectfully) disagree. Kesko has excellent, comprehensive experience in management through the retailer model. I also agree that the retailer model and a store-specific business concept is one good way to build a “personalized offer,” i.e., a combination of store experience, products, pricing, customer service experience, and offers built and targeted for different customer segments. In retail research, at least Porter (Competitive Strategy), Bell & Lattin (Shopping Behavior and Consumer Preference for Store Price Format), Coe & Lee (The Strategic Localization of Transnational Retailers) have famously demonstrated the effectiveness of this strategic competitive advantage.

However, I maintain my stance that the retailer model, as a strategic choice and operating model, is no longer as competitive a way to create a personalized offering (offer, i.e., a store-specific business concept) today or in the future. Historically, the retailer has had the best data and understanding to comprehend customer needs and build the best store-specific business concept. But today, and increasingly likely in the future, as more and more customer touchpoints (from which data is collected) occur digitally (social media, online store, app, in-store shopping behavior, etc.), the average K-retailer no longer knows their customer as well as an algorithm built on good data. It’s difficult to see a model where a local retailer and their “own data” would beat a model with data collected from all touchpoints + good algorithms (used to build a store-specific assortment, pricing, customer experience, store layout, etc.). To simplify: If a store-specific business concept is a winning concept, for example, an unnamed cooperative store can, if it wishes, build a Sale at Helsinki-Vantaa that is very relevant and different from a Sale in a cottage town. In this process, especially in the future, the determining factor for success is no longer the “retailer model,” but rather the ability to collect, understand, and process comprehensive customer data into a personalized customer experience.

Furthermore, it appears that at least in e-commerce fulfillment, Kesko has not yet been able to find a model where the retailer model is more competitive than other models. On the contrary, I understand that there seems to be quite a struggle among retailers about whose K-Rauta delivers online store orders (because volumes bring efficiency vs. it’s not worth building a picking center at every single K-Rauta) and which grocery retailer gets the “micro fulfillment” system next to their K-Supermarket/K-Citymarket to bring volume… (and it’s not worth building it for everyone)? Does the retailer invest in their own delivery robots, or is Wolt supposedly more profitable? The retailer model certainly brings competitiveness to local store properties, but e-commerce investments, product development, and partnerships add complexity to the retailer model, where the retailer is no longer a “competitive advantage.”

It was great to hear in the interview that the CEO is aware of the different possibilities of the retailer model. And despite my critical argumentation, I am not yet burying the retailer model. It still has advantages, but in the future, it would be great to hear as part of Kesko’s investment story how the retailer model brings competitiveness to the future of digitalizing retail – surely that trend (digitalization) should not be resisted? And why is this question essential? Because @Jussi69 pointed out that moving away from the retailer model is not an easy option (if it proved uncompetitive for the company) → therefore, adapting the retailer model to the digital age could be a “new decade of success.” With the current model, unfortunately, it seems to be constantly taking a beating.

PS. It was great to hear that regarding price reductions, price elasticity seemed to be clearly below -1 (double-digit growth was achieved when prices for branded products decreased by 4-6% and Pirkka by 9-12%). At such levels of price elasticity, price reductions should definitely be continued! To create a stronger price perception, I agree with @JuhaR that in the future, “permanently affordable” needs better targeting to impact price perceptions. Better products and narrowing the investment to a smaller selection could be wise. But in any case, at this level of price elasticity, this should be continued!

Pirkka Sour Cream permanently affordable at €0.39 and a winning price perception! And next to that, the Taffel dips with a normal good margin! This way, we’ll continue to get volume & margins for K-stores in the future

[Sijoittaja-alokas]

Here are Arttu’s comments on Kesko’s Danish acquisitions.

Kesko announced it had completed the acquisition of Danish hardware store CF Petersen & Søn. In addition, the company announced it had received regulatory approval for its Tømmergaarden acquisition. We had previously included CF Petersen’s figures in our forecasts starting from May 1st, and we will include Tømmergaarden’s at the latest in connection with our Q2 pre-commentary.

Kesko: Tanskan vireillä olevat yritysostot viimeistelyä vaille valmiit - Inderes

[Arttu_Heikura]

CEO Rauhala was interviewed by McKinsey. The topics were digitalization, data utilization, and artificial intelligence.

Kesko bets data and AI will drive growth | McKinsey

[Kesko_IR]

For those interested in data, digital, and AI matters, we can also recommend the recent data statement report.

This is a voluntary report that complements our financial and responsibility reporting and explains how Kesko utilizes data in improving customer experience, as well as in enhancing its own operations, business development, and value creation. It includes many clear case examples from all three business sectors.

Kesko’s Data Statement: https://www.kesko.fi/sijoittaja/raportit-ja-presentaatiot/#event61519

[Tsemi]

On another platform, there was an interesting public price observation made by a consumer customer. With a picture and dates. In this case, from K-market.

A coffee package was highlighted with a ‘Permanently Affordable’ label. Over a five-week period, however, the price of the coffee package highlighted by the label had risen by 11%.

It doesn’t seem very permanently affordable. It seems more misleading. And it raises questions. Was this the only case, or is this being done more widely?

If changed costs or inflation are cited as the reason, the price tag could at least have been removed.

If this practice is true, Kesko might be playing with consumers’ trust, as well as the credibility of the Kesko brand and price campaign.

[Musti]

@Tsemi

On another platform, there was an interesting public price observation made by a consumer customer. With a picture and dates. In this case, from K-market.

A coffee package was highlighted with a “Permanently affordable” label. However, over a five-week period, the price of the coffee package highlighted by the label had risen by 11%.

It doesn’t seem very permanently affordable. It seems more misleading.

Even at the risk that this belongs more in the “My Experiences” thread, I felt my observations were similar. Now that I’ve also checked the receipts from the K-Ruoka app, at least in my local Citymarket, for example, the price of “Permanently affordable” fruit soup has indeed risen by a couple of percent in recent weeks.

But this is apparently how it’s intended, so there’s no “news” in that.

(source)

But if we’re being completely honest, that campaign, in my opinion (and many others writing here), seems to have been a bit of a miss in many ways, and the image marketing has turned comical when something like Juhla Mokka has been sold under it for 7-8 euros, etc.

I, for one, shop at K-stores despite that campaign (and chuckling a bit at it), not because of it. Kesko is not going to win the price competition; hardly anyone (including the company’s management) thinks it will. The competitive advantage in the grocery trade must come from quality, selection, location, brand, and such. And more broadly, the investment case relies on completely different things, such as profitability, other business operations, etc.

[Alamaki]

As the trade war seems to subside, this brings growth to construction and housing trade. It is true that cyclical sectors benefit first from the end of the trade war, as they have been heavily punished. The next wave is construction, home furnishing, and a diverse rise in consumption. Kesko offers supply in these segments. A nice increase in results is available with a good dividend. At least dividend investors will be pleased.

[740_GLE]

I more than tenfold increased my voting power in a few months, but now the B-shares have run out and my portfolio holds only top-tier A-class shares.

Even tenfold increasing my voting power still doesn’t make the general meeting look up from its coffee cup, but getting another twenty shares just by clicking the mouse is fine by me.

I was last holding A-shares during the corona panic, after which, once the price difference normalized, I had already managed to switch to B-shares. Now, a new market situation created sufficient arbitrage to switch back.

Waiting for B-shares cheaper than A-shares…

[Alamaki]

As a dividend investor, I gladly take the excellent advantage that Series A offers. Why not buy a good dividend more cheaply, which Series A often offers in relation to Series B?

[Ossi_S]

Don’t A and B series shares have the same dividend right? A-shares have 10 votes, while B-shares have only 1.

[Kesko_IR]

Yes, the dividend is the same regardless of the share class, and the difference in voting rights is what you mentioned

[740_GLE]

Exactly, and that’s precisely why I dared to stretch the concept of arbitrage from my perspective to Kesko’s shares.

In the general sense, it’s not pure arbitrage because voting power has traditionally had some value, which is why A-shares are usually more expensive. For my part, I dared to call it arbitrage because the voting power of my position does not sway the general meeting in any direction, meaning my choice is dictated by the lower purchase price.

During major changes, the more liquid B-share reacts faster, which turned the prices “upside down” for the second time within 5 years.

Nevertheless, one should be careful trading A-shares, because the trading volume is so small that an order for a few hundred shares already eats deep into the ask side or even through it. This doesn’t bother me, because I am willing to hold my Kesko shares for however long as long as the company continues its good performance. I will only sell my Kesko shares to buy a larger bundle of the cheaper share class.