How a women’s fashion retailer is navigating the Covid-19 storm

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 Chief Sales Manager 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.

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.