The Ball Group, a European leader in the plus-size women's clothing market, implemented an FX risk management strategy in 2016 to limit its exposure to currency fluctuations. The strategy has helped the company ride out the major currency volatility of the Covid-19 pandemic.
Founded in Denmark in 1988 as a privately owned clothing company, Ball Group was purchased in 2007 by a Danish private equity firm, which in 2016 decided to focus exclusively on the Zizzi brand. The company has also gone from a franchise model to owning all of its own stores. It owns and operates more than 100 concept stores in Northern Europe as well as the online platform zizzi.dk.
The company has grown 20% per year since 2016, reaching DKK 710 million in annual turnover in 2019. This year will likely break that trajectory, with the pandemic leaving a dent in the company’s sales for 2020.
Ball Group was purchased by a German private equity fund in 2019. It is headquartered in Billund, Denmark, where around 150 employees are based.
As Covid-19 has shaken financial markets, disrupted supply chains and crushed consumer demand, the global fashion industry has been hit hard. With foot traffic down in retail stores and people cooped up at home with nowhere to go, clothing sales have felt the squeeze.
One fashion retailer that has managed to ride out the coronavirus storm is the Ball Group, a European leader in the plus-size women’s clothing segment with the brand Zizzi. The company’s strong online sales platform as well as its strategy for managing currency risk have both been a welcome source of stability in a highly volatile time.
“Sales were, to put it mildly, terrible in the spring,” says Ball Group CFO Palle Lilleøre. “On the other hand, we’ve seen good growth in our online business. In addition, our FX hedging strategy has helped shield us from some of the wild currency swings during this period.”
The importance of managing currency risk
With most of its products sourced from Bangladesh, China and India, over 70% of Ball Group’s purchases are in US dollars. Meanwhile, with the bulk of its sales in Scandinavia and Northern Europe, it’s sales currencies are primarily DKK, EUR, SEK and NOK. This leaves the company heavily exposed to currency fluctuations.
What’s more, in the fashion industry, retailers like Ball Group typically commit to purchasing products several months in advance before they actually pay for and receive them.
“Given that time lag, it’s very important that we manage our currency risk exposure. If we buy and the currency trades up or down significantly, we can be heavily impacted,” says Ball Group’s Lilleøre.
That’s why, in 2016, Nordea helped the Ball Group develop an FX risk management strategy that uses a layered hedging approach. The company works in three four-month periods, locking in the exchange rate of a percentage of their currency needs using a combination of FX forwards and FX options.
Protecting the budget rates
The hedging strategy has paid off, particularly with respect to the NOK and the SEK, which plummeted in the spring. The company was also locked into a higher rate on its main payment currency, USD, which also plunged at the start of the pandemic.
“While spot rates on USD were lower than our hedging contracts, the strategy did serve its purpose of managing risk. We do this to protect the budget rates so we don’t have any big swings in our financials and we know what we’re going to get,” says Lilleøre.
That’s exactly the point of hedging, says Nordea Markets Richard Christensen: preventing short-term fluctuations from threatening a company’s long-term goals.
“The idea is that you can plan better and be safe from adverse moves,” says Christensen, who works with Ball Group on its FX hedging.
While the company aims to hedge 85% of its currency needs eight months into the future, Lilleøre’s advice to other companies is to cover at least 50%. Not all companies have been so well-prepared.
A recent study by Nordea found that around half of Nordic small and mid-sized businesses have not taken steps to guard against their currency risk, despite the large and unexpected currency losses many companies have suffered this year.
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Other emergency measures to protect cash flow
Ball Group has taken other emergency measures to protect its cash flow during the pandemic. For example, the company negotiated with its suppliers in Asia to delay orders, to reduce the size of orders and to prolong the payment terms.
“We have been very blessed in terms of our relationship with our vendors,” says Lilleøre, noting that when sales improved in the summer months, Ball Group returned the favour by paying its suppliers earlier than required.
Another big cost in the retail space is real estate. Ball Group has managed to negotiate with its landlords to get some relief on rent, which has also helped the company’s cash flow. In addition, it has participated in some of the government aid packages.
While the summer was a bright spot with people moving around more freely, retail sales are hurting again as local restrictions tighten amid the pandemic’s second wave.
“While online is doing better than we expected, retail in particular is struggling right now, and that’s 100% industry wide. We would like to see it different for sure,” says Lilleøre.
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