Russia’s invasion of Ukraine is beginning to have clear ripple effects on neighboring economies. Poland’s biggest fashion retailer, LPP, which pulled out of both markets shortly after the start of the war on February 24, said on an investor call today that it now had stocks due be moved.
The family business, listed on the Warsaw Stock Exchange, saw its share price fall by 7.5% today on the news, with a year-to-date collapse of almost 40%. The biggest fall occurred on the day of the Russian invasion.
Many Western retailers have moved out of Russia and Ukraine, but few are as exposed to surplus goods as those in Eastern European countries. The largest LPP brands, in order of number of stores, are: Sinsay (743), Reserved (447), Cropp (398) House, (368), Mohito (286) and Outlet (2). However, Reserved is the company’s flagship brand and had the highest sales volumes ahead of Sinsay in FY21/22.
The problem for the Gdańsk-based company is that of these more than 2,200 stores, 553 are in Russia and 159 in Ukraine, almost a third of the company’s total assets. The decision to suspend business activity in Ukraine – and halt all sales, both online and in retail stores, in the Russian market – means a nearly 25% revenue loss for LPP, leaving behind an inventory puzzle.
With supply chains still messy, and warehousing and increased logistics costsLPP is preparing for a squeeze on profits and margins, according to Vice President Przemyslaw Lutkiewicz.
Presumably, there will also be repercussions from reduced orders on major supply partners in Bangladesh (supplying 40% of the product), China (33%), Myanmar (10%), Turkey (6%) , as well as others, all in South Asia.
In the year ending January 2022, LPP’s revenue reached $3.3 billion (14 billion Polish złoty), generating a net profit of $223 million. But the two current and future quarters promise to be difficult.
Diversification in Western Europe
Last week, LPP released a statement to calm investors, saying the company’s financial condition “remains stable.” He estimated that revenues for 2022/23 – excluding the Ukrainian and Russian markets – “could exceed” $3.7 billion (or 16 billion Polish złoty), implying an increase in sales of one year. 13% year on year.
Helping to offset lost revenue is a planned pivot to more e-commerce, where sales are expected to exceed $1.17 billion by the end of the current fiscal year and have reached 30% of total sales in the fourth quarter of fiscal year 21/22; and the opening of new markets. However, many of these stores won’t appear until 2023, when Sinsay debuts in Italy and Greece, and Reserved franchise stores open in Cyprus.
The company said it will also continue to expand Reserved’s footprint in Germany and Britain while exploring EU markets. “Facing the impossibility of predicting the future situation of war-ravaged Ukraine, we have decided to focus our development on the countries of the European Union where we are already present. At the same time, we want to expand into new markets, especially in Southern Europe, where we see potential for our brands,” Lutkiewicz said.
LPP trusts its youngest brand Sinsay, with the aim of opening up to 440 stores. “In doing so, we want to grow two strong pillars of the business – Reserved, our flagship product, and Sinsay, and implement further expansions from this stable position,” Lutkiewicz noted.