In the 2009 Board Report on Operations, which was approved by Stockmann’s Board of Directors on 11 February 2010, the Board specified the Group’s risk factors as follows.
The Group has business operations in Finland, Sweden, Norway, Russia and the Baltic countries, as well as in the Czech Republic, Slovakia and Ukraine, where operations are in their start-up phase. The risk level in the business environment varies among the countries in which the Stockmann Group operates. The level of business risk in the Baltic countries has diminished significantly since these countries became members of the European Union and, apart from uncertainty in currency exchange rates and the risk of a continuing downturn in the economy, the risks do not differ in any material respect from business risks in Finland. A prolonged and difficult economic situation could also have an impact on the operating conditions for retailing in the Baltic countries.
Business risks in Russia are higher than in the Nordic countries or the Baltic countries, and the operating environment is less stable owing to the undeveloped state of business culture and the country’s infrastructure. The role of the grey economy is still considerable, particularly in the import of consumer goods, and it plays a part in distorting competition. Following a sustained period of growth, Russia’s economy began to slow in the second half of 2008 before experiencing a downturn in 2009, as income from energy sector exports dwindled and the value of the Russian rouble fell. The trend in energy prices will have a material impact on the development of the Russian economy in the next few years.
The economic situation remains difficult and this affects consumers’ purchasing behaviour and purchasing power in all of the Group’s market areas. Stockmann is addressing the situation by launching campaigns, striving to optimize its procurements to meet demand and boosting the efficiency of operations. The investment programme based on Stockmann’s long-term strategy was re-evaluated as a result of the global financial crisis. Some of the investments included in the programme have been postponed and some have been cancelled completely, as growth prospects have weakened considerably compared with earlier estimates. The opening of new stores will continue, but at a slower rate than originally planned. The ongoing enlargement and renovation project at the Helsinki department store and the Nevsky Centre department store and shopping centre project in St Petersburg will be completed according to plan.
Fashion accounts for about half of the Group’s sales. An inherent aspect of the fashion trade is the short life cycle of products and their dependence on trends, the seasonality of sales and their susceptibility to abnormal weather conditions. The Group addresses these factors as part of its day-to-day management of operations. With the exclusion of major exceptional situations, these factors are not expected to have a material effect on the Group’s sales or earnings.
The Group’s operations are based on flexible logistics and efficient flows of goods. Delays and disturbances in the flow of goods and information can have a temporary adverse effect on operations. Every effort is made to control these operational risks by developing appropriate back-up systems and alternative ways of operating, and by making every effort to minimize disturbances to information systems. Operational risks are also met by taking out insurance cover. Operational risks are not considered to have any significant effect on Stockmann’s business activities.
The Group’s revenue and earnings are affected by changes in exchange rates between the Group’s reporting currency, the euro, and the Swedish krona, the Norwegian krone, the Russian rouble, the US dollar and certain other currencies. Financial risks, including risks arising from interest rate fluctuations, are managed in accordance with the risk policy confirmed by the Board of Directors, and these risks are not considered to have a significant effect on the Group’s business operations.
AB Lindex (publ) has claimed through legal proceedings to be eligible to deduct in Swedish taxation the losses of approximately EUR 70 million incurred by Lindex Group’s German subsidiary. The Administrative Court of Appeal in Gothenburg overturned the favourable decisions that AB Lindex had received in the County Administrative Court, and as a consequence Lindex was obliged to refund to the tax authorities approximately EUR 23.8 million in taxes and interest. The taxes that were refunded had no effect on the Stockmann Group’s earnings, because Stockmann recorded the refunded amount of tax and interest as a reduction in Lindex’s equity in the acquisition cost calculation. AB Lindex appealed against the decision of the Administrative Court of Appeal to the Supreme Administrative Court of Sweden, which in the summer of 2009 decided not to review the case. Further action by the company in this case will depend on the result of the legal process described below concerning the elimination of double taxation between AB Lindex and Lindex GmbH.
AB Lindex (publ) and its German subsidiary, Lindex GmbH, have requested the German and Swedish competent authorities to eliminate the double taxation arising from intra-Group transactions in the fiscal years 1997–2004 on the basis of the Tax Treaty between Germany and Sweden and the EC Arbitration Convention. The double taxation resulted from the presumptive income tax payable by Lindex GmbH, which meant that a total of EUR 94 million was added to the taxable income of Lindex GmbH. Depending on the decision of the authorities, AB Lindex could receive a partial or full refund of the approximately EUR 26 million in taxes paid on the aforementioned income. The tax effect of the claim has not been recorded in the income statement.
The International Commercial Arbitration Court of Moscow (ICAC) ruled in favour of Stockmann in the dispute over the lease of Stockmann’s Smolenskaya department store in the centre of Moscow. The court case concerned the exercising of a 10-year extension on the lease in accordance with the lease agreement. Despite the ruling, the lessors cut off the supply of electricity to the Stockmann department store, forcing its closure. Due to the costs arising from the closure and the undepreciated net expenditure, Stockmann recorded a provision of EUR 14 million in the earnings for the second quarter of 2008. In 2008, Stockmann initiated legal proceedings against the lessors of the Smolenskaya department store in the International Commercial Arbitration Court (ICAC) in Moscow, claiming damages of about USD 75 million due to the closure of the department store, which the management of Stockmann considers to be in breach of the lease agreement. In its decision on 14 April 2009, the court of arbitration ruled in favour of Stockmann, though reducing the amount of damages awarded to about USD 7 million, and ordered the lessors to reimburse Stockmann for the legal expenses incurred. The Stockmann Group has not recorded this damages sum in the income statement. In order for the ruling to be enforced, it has to be confirmed by a Russian court of general jurisdiction. In July 2009, the lessors filed a claim with the court of first instance in Moscow, demanding that the court overturn the decision of the International Commercial Arbitration Court. The Arbitration Court of the City of Moscow and the Cassation Court, which serves as the court of first appeal, have overturned the rulings of the International Commercial Arbitration Court. Stockmann has appealed against this decision to the Highest Arbitration Court of Russia, where the case is still pending. The Stockmann Group has no other major legal proceedings pending.
The Board of Directors most recently added to its account of the Group’s risk factors published in the 2009 Board Report on Operations in Stockmann’s Interim Report for 1 January - 30 June 2010, as follows.
No change has occurred in the general risk factors since the publication on 11 February 2010 of the review presented in the Board Report on Operations. Particular risks in the short term concern changes in the shopping behaviour of consumers in Stockmann's market areas.
AB Lindex (publ) has through legal proceedings requested to be eligible to deduct in Swedish taxation the losses of approximately EUR 70 million incurred by the Lindex Group's German subsidiary. In 2008 the Gothenburg Administrative Court of Appeal overturned the favourable decisions that AB Lindex had received in the County Administrative Court, and as a consequence Lindex was obliged to refund to the tax authorities approximately EUR 23.8 million in taxes and interest. The taxes that were refunded had no effect on the Stockmann Group's earnings, because Stockmann recognised the refunded amount of tax and interest as a reduction in Lindex's equity in the acquisition cost calculation. AB Lindex appealed against the decision of the Administrative Court of Appeal to the Supreme Administrative Court of Sweden, which in the summer of 2009 decided not to review the case. Further action by the company in this case will depend on the result of the legal process described below concerning the elimination of double taxation between AB Lindex and Lindex GmbH.
AB Lindex (publ) and its German subsidiary, Lindex GmbH, have requested the German and Swedish competent authorities to eliminate the double taxation arising from intra-Group transactions in the tax years 1997-2004 on the basis of the EC Arbitration Convention and the tax treaty between Germany and Sweden. The double taxation resulted from the presumptive income tax payable by Lindex GmbH, which meant that a total of EUR 94 million was added to the taxable income of Lindex GmbH. Depending on the decision of the authorities, AB Lindex could receive a partial or full refund of the approximately EUR 26 million in taxes paid on the aforementioned income. The tax effect of the claim has not been recognised in the income statement.