Clas Ohlson – Business Transformation

22. September 2008

Members: Krzysztof Sobala, Li Shuguo, Markus Wikstrand, Steven Torres, Vadim Gerstein

„Your success is in the BAG”

„We advise the Bosses”

2

Executive summary

• Potential savings (improvements):• Increase of inventory turnover• Increase account payables• Use of leverage• Relocation of marketing expenditure• Decrease of staff turnover• Benefits from strengthening corporate culture• Directing efforts towards profitable markets

• Performance assumptions:• 15% growth per annum• Decreasing operating margin kept above 10% target

„We advise the Bosses”

3

In order to retain high growth and profitability Clas Ohlson needs to revise its operational, marketing, financial, HR and expansion strategies

Cutting operational and selling cost are necessary to increase operating margin

Maintaining a growth rate of 15% requires investment financed by leverage

Establishment of corporate culture as a way of reducing costs of staff turnover and improving efficiency

Focusing on profitable and high-potential markets

Combination of improvements within areas is required

„We advise the Bosses”

4

Cost cutting can be achieved by reducing inventory time

Reasons:

Clas Ohlson Jula Teknikmagasinet

Inventory turnover 3.13 times 5.29 times 6.57 times

Inventory (SEKm) 952.6 368.7 73.8

Remedies:

Problem areas:

• Efficiency of logistics investment

• Bargaining power relations with suppliers

• Inflexible product range

Improved operating marginSource: annual report Clas Ohlson, Jula & Teknikmagasinet

„We advise the Bosses”

5

Meeting the target of 15% annual sales growth requires aggregate investment expenditures of SEK2bn* during the 5-year period

*On the assumption of no currency risk and stable sales in old stores

NEW STORE OPENINGS - INVESTMENT REQUIRED• Constant increase of sales as well as decreasing margin will make the number of necessary stores

grow exponentially (150 in 5 years)

• Increasing investments require more capital that has to be raised either internally or externally

SALES

GROWTH

DECREASING

MARGIN

74% growth in

revenueDecrease by 19%

„We advise the Bosses”

6

Bank loans can be used to provide the company with cheaper capital

Clas Ohlson needs to increase its financial leverage in order to finance a quicker expansion and increase the ROE

A major competitor has trade payables / assets ratio of 0.3 while Clas Ohlson’s merely is 0.1, possible room for increase

Doubling the trade payables to assets ratio by renegotiating contracts with suppliers, would increase ROE by 11%.

Plenty of room for incurring financial debt and providing access to cheap capital make further expansion possible

Source: annual report Clas Ohlson, Teknikmagasinet & Jula

„We advise the Bosses”

7

Cuts in marketing expenditure in Norway and Sweden are crucial

0%

20%

40%

60%

80%

100%

120%

Sweden Norway Finland

Brand awareness

Made purchases vistors percentage

In Sweden and Norway, focus on internal efficiency to capitalize on resources within sales and marketing.Process focus

Keywords: segment, marketing mix, communication

In Finland and the UK allocate more resources to increase market efficiency.Customer focus

Keywords: method, processes, procurement, measure

Allocate resources to marketing budgets in Finland and the UK

Source: annual report Clas Ohlson

„We advise the Bosses”

8

HR related costs should be addressed by focusing on aligning the corporate culture with the strategy implementation

• Staff turnover decrease by 1% will reduce training hours by 2%*

• Introducing an efficient eHR system will reduce administrative expenses

• UK market needs a different internal cultural setting (avoid Wal-Mart example in Germany)

• Cause of high employment turnover lies in the internal weakness of corporate culture

• Claiming external factors is ambiguous

→ Investigation of reasons for employee leaving (e.g. through exit interviews)

→Secure needed talent by introducing new compensation and motivation models (e.g. staff discounts)

Increase of efficiencyCost reduction

Employees are Clas Ohlson’s most vital asset

* Compare calculation in the Backup, slide 11

„We advise the Bosses”

9

Focusing on expansion opportunities in Finland, Norway and the UK enables Clas Ohlson to grow despite a slump in the Swedish market

Source: Clas Ohlson 07/08 , 07/06 and 06/05 annual reports*,** - compare with backup slide 12

• The Finnish and British markets are the most attractive in terms of purchasing power

• Good opportunity to succeed in the British market due to Clas Ohlson’s cost competitiveness

• Downturn in the Swedish market is a result of a negative consumption trend → relocation of investments is advisable

• Finnish sales still underperforms in comparison to Norwegian. However growth opportunities exist → better store locations for smaller stores are crucial

• Strong performance in Norway maintained due to huge purchasing power and favourable consumption trends; reduction in marketing costs (in favour of Finland) is recommended

B A C K U P

„Your success is in the BAG”

„We advise the Bosses”

11

Calculation of staff turnover reduction potential

03/04 04/05 05/06 06/07 07/08 08/09E

Number of employees 1767 2030 2342 2645 2974 3420Training hours 33983 39970 49370 53750 69630 68402Staff turnover 4,6% 3,7% 6,1% 6,6% 9,0% 8,0%Number of stores 38 48 59 71 86 106Employee increase 15% 15% 13% 12% 15%Training hours per emloyee 19 20 21 20 23 22

Training hours increase 18% 24% 9% 30% -2%

„We advise the Bosses”

12

Market potential evaluation

As of 2008 Sweden Norway Finland UK

No. of our stores 45 29 12

No. of our stores on the market (incl. Us) 200 309 87 917

Population 9200000 4700000 5300000 61000000

GDP per capita 36900 45500 34800 37300

Market potential 46000 15210 60920 66521

Market potential (PPP weigted) 1697 692 2120 2481

49 31 16 96

No. of stores opened 7 5 3 15

no. Of months of operations 35 29 20 84

No. Of months benefited from the previous period 68 16 0

Total number of months 103 45 20 168

Sales 0807 2585,9 1716,8 358,9 4661,6

Sales 0706 2345,4 1458,2 297,6 4101,2

Sales increase 240,5 258,6 61,3 560,4

Sales increase (new stores) 206,1428571 221,6571429 52,54285714 480,3428571

Sales increase per store 34,35714286 51,72 20,43 32,02

Sales per month in SEKm 2,001386963 4,925714286 2,627142857 2,859183673

„We advise the Bosses”

13

Use of financial leverage and growth simulation

Leverage Interest bearing liabilities to assetsClas Ohlson 32% 0%Jula 62% 0%Teknikmagasinet 49% 12,40%

growth rate 15%

cost of new store 13000000

Financial year 2007/2008 2008/2009f 2009/2010f 2010/2011f 2011/2012f 2012/2013f Total

Net sales 4 661,60 5360,84 6164,966 7089,7109 8153,16754 9376,14267

Sales per store opened 32,02285714 32,02285714 32,02285714 32,02285714 32,02285714 32,02285714

Stores to be open 15 22 25 29 33 38 150

Investment requirement 195 000 000 283 863 490 326 443 014 375 409 466 431 720 886 496 479 019 1 913 915 875