Mavi Giyim Sanayi ve Ticaret AS
IST:MAVI.E
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Mavi Giyim Sanayi ve Ticaret AS
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Hello, everyone. Welcome to Mavi webcast regarding the financial results for the first quarter of 2023. Our CEO, Cuneyt Yavuz, will be presenting the results, followed by Q&A session. We would likely inform you that this presentation is being recorded, and we kindly ask you to keep your microphones muted throughout the presentation.
Now I will leave the floor to Cuneyt Yavuz.
Thank you, Duygu. Hello, everyone. Welcome to our webcast for the financial results of the first quarter of 2023. I would like to take a few minutes to elaborate on the general trading environment in the quarter following a very successful year, 2023 started off with a strong quarter, both operationally and financially. Our spring/summer collection was well received by consumers. And hence, the solid top line growth was driven both by price and volume.
Almost all product categories continue to grow a number of pieces for both women and men. Our strong brand strategy, demand-creating newness, supported by a dynamic price planning helped offset part of the significant product cost inflation experienced this quarter. We continue to focus on excelling dynamic supply chain management, flexible and responsive [indiscernible] planning and efficient inventory management.
As a result, we achieved a relatively strong gross margin performance for a seasonally softer first quarter. Through effective cost management, supported by the strong sales performance, we delivered 170 basis points improvement in OpEx to sales ratio in the first quarter of 2023. With continued operational cash generation, our net cash position increased to TRY 1.896 billion.
In Turkey Retail, February was marked by the devastating earthquake that impacted 11 provinces in Turkey. Recall that we had ceased operations in 32 points of sales after the disaster. As of today, 5 stores remain temporarily closed, with 1 being permanently closed. Consumer demand returned to its robust levels after March amid high inflation. The Eid holiday season moved from May last year to April this year, positively impacting the quarter sales.
With the right product, right price, high-quality strategy, we continue to grow sales volumes in jeans, women and men lifestyle categories in Turkey. International sales recorded 12% constant currency growth in Q1 2023, despite an economic slowdown in some of our markets. International sales and margins were pressured this quarter as currency levels remained relatively stable. Online sales growth was mostly driven by mavi.com performance in Turkey, and the positive marketplace performance in the international markets.
Let's look at the key highlights for the period. Let's move on to Slide 6. Our consolidated sales in the first quarter realized at TRY 3,947 billion, growing 109% year-on-year. Turkey retail sales grew 119%, and Turkey online sales grew 82%. Our EBITDA realized TRY 911 million, resulting in an EBITDA margin of 23.1%. Our net income growing 71%, reached TRY 515 million. In Turkey, we acquired 282,000 new customers in the first 3 months of the year. Number of active [ loyalty ] card members in Turkey for the first time exceeded 6 million.
Moving on to review our channel performance. In Turkey, the inflationary environment continue to drive consumers to shop, and we start to make sure we have the newness and variety at the right price to respond to this demand and remain consumers brand of choice. Recall that Eid holiday moved from second quarter last year to first quarter this year, further positively impacting Q1 sales. As a result, our sales in Turkey grew 124% in the quarter, with Turkey retail growing 119%. The wholesale growth of 170% is mostly related to low base.
We continue to witness some softness in demand internationally, especially in Europe. Nevertheless, total international revenue grew 12% in constant currency and 50% in TL terms in Q1 2023. Retail and direct-to-consumer online channels were the drivers of growth internationally. With the continued robust performance, 86% of total consolidated revenue was generated in Turkey in the first quarter.
Now let's focus on Turkey retail business. Growing retail is still at the heart of our business strategy in Turkey, despite the slowdown of store openings in the recent years. We will continue to expand current stores in square meters, grow our product offering, while constantly taking new actions to make sure that consumers have a great shopping experience. Having said that, in the first quarter, we opened 2 new stores, closed 3 stores to close the period with 328 on operated stores, 167,000 square meters of selling space in Turkey with an average store size of 510 square meters.
On Slide 11, let's elaborate on the like-for-like store performance. Traffic growth of 19% in Q1 2023. This plays continued strong consumer demand, including the positive impact of Eid-holiday moving to April. In the quarter, like-for-like sales grew 124%, driven by 94% basket size growth and 15.4% transaction growth. Basket size growth was enabled not only by the dynamic pricing strategy but also the newness driven right product and product mix -- right product mix. As Mavi management, we always review the success of our growth figures, especially in these days of high inflation with actual volume growth in number of pieces sold. 12% volume growth was achieved in Q1 2023, and this is in line with Mavi's growth targets.
Moving on to Slide 12 to review category-based developments in Turkey retail. We continue to trade strong growth of customer product categories. Almost all categories also delivered growth in number of pieces, as stated earlier. Both denim and non-denim businesses grew 120% in Turkey, with denim constituting 45% of total Turkey retail sales in Q1 2023. Denim's weight in sales is higher in the first quarter compared to the 39% in full year 2022. Due to seasonality, our spring lifestyle products are relatively smaller ticket items, and holiday season sales include more denim products.
We are constantly following changing consumer preferences and enriching our product range, especially in casual lifestyle categories. Knits business constituting of T-shirts, sweatshirt and Jersey offerings, grew 117% year-on-year and make up 25% of our retail sales in Turkey. Capitalizing on the same trend, our new category, non-denim bottoms, grew 141%. Jackets being one of our focus categories in the recent quarters, continued its strong momentum and grew 173% in Q1 2023. Accessories grew 105%, and shirts grew 100% this quarter.
In the next section, let's review our online sales performance. Our direct-to-consumer online sales are made up of mavi.com and marketplace sales that are reported under e-commerce channel. In these charts, we review the total online sales of Mavi, including the sales to third-party digital platforms to which we wholesale. In the first quarter of 2023, our direct-to-consumer e-commerce sales share in total consolidated revenue is 10%. Whereas including the wholesale e-com, total online sales is 11.4% of total consolidated revenue.
Online sales in Turkey consists of only direct-to-consumer channels and grew 82%, driven by the 115% growth of our own website, mavi.com. Marketplace performance varies among platforms. There are some platforms growing aggressively and some that are cutting down on marketing spend, hence performing softer. Online sales now constitute 8.3% of total Turkey sales.
International online business grew 56% in the first quarter, largely driven by direct-to-consumer channels and constitute 30% of total international sales. With retail being a significant channel for the consumer, especially in a Turkey context, omnichannel capabilities are becoming more important for future growth and in improving the shopping experience for consumers. Mavi will continue to invest in digitalization and CRM projects that support omnichannel growth and make sure online business continues to be a positive contributor to margins.
Let's move on to review our consolidated financial results. On Slide 16, we review our gross margin performance. Recall that, in 2022, the higher product costs started kicking in, in the second half of the year. Hence, in the first quarter of 2023, there was significant product cost inflation due to low base. On the other hand, with the exchange rates remaining relatively stable, we are also witnessing deterioration in international gross margins in the last few quarters, meeting high consumer demand with newness, variety and the right product price positioning supported cost mitigation. As a result, the gross margin decline of 670 basis points should be considered a normalization from the extraordinary base. And we view the 49.7% gross margin as a seasonally strong performance, given the macroeconomic conditions.
On Slide 17, we review our EBITDA and bottom line performance. The significant OpEx inflation in the first quarter was again leveraged by the strong top line growth. We continue to deliver improvements in our rent ratios and our central operating expenses. Total OpEx to sales ratio improved 170 basis points year-on-year. As a result, our EBITDA, excluding the IFRS 16 adjustments grew 66% year-on-year, resulting with an EBITDA margin of 19.6%. EBITDA margin including IFRS 16, realized 23.1% in the first quarter of 2023. Thanks to our net cash position. The increase in net financial expenses were limited, and hence, the operational performance was mainly reflected to our bottom line. Our net income increased 71% to TRY 515 million, and net income margin realized at 13.1% in the quarter.
On Slide 18, we look into our operational cash flow and working capital performance. Operational cash conversion is relatively lower in the first quarter due to working capital requirements. This is in part due to seasonality of the quarter, but is also the result of the increasing cost of inventory and the initiatives taken to mitigate product cost pressures, such as cash payments, early booking, advance payments for raw materials and so forth. The 147% year-on-year increase in inventory that were at the end of April 2023 is largely driven by 107% product cost inflation year-on-year. Inventory in number of pieces in Turkey is 27% higher compared to an extraordinary low base of Q1 2022 and in line with business plans and demand expectations. Inventory, as always, comprises of all fresh spring/summer season products.
Let's now move on to the next slide. We spent TRY 86 million in capital expenditures in the first 3 months, resulting in a CapEx to sales ratio of 2.2%. On the retail side, we had a few store openings and new store concept transformations taking place. Apart from retail, we have been investing predominantly on IT projects and digital investments. With positive cash generation in the first quarter, our net cash increased to TRY 1.896 billion. All of the foreign currency that you see on our consolidated reports belong to our subsidiaries, all borrowing in their respective local currencies. And hence, they do not pose a currency risk. We continue our approach of holding no foreign exchange position in our balance sheet.
On the other hand, average cost of debt is increasing in Turkey, and we foresee higher rates going forward. We are sharing our financial -- official financial guidance for the year as promised. For the financial year 2023, we are expecting 75% plus or minus 5% consolidated sales growth, with net 5 store openings and 7 square meter expansions planned for the year. We expect an EBITDA margin of 18%, plus or minus 0.5%, excluding IFRS 16, and 22% plus or minus 0.5%, including IFRS 16. We are foreseeing a decline in our net cash position within the year due to our plans and strategies to use cash and mitigating cost pressures, but we target to stay in the net cash territory.
We are planning to spend 3% of sales as CapEx. I would also like to provide some insight on the current trading environment as I traditionally do to give you a flavor of how the business is running, following the [indiscernible] of first quarter. We continue to see high demand for our products and a positive pricing environment as of today. Turkey retail sales in May grew 92% on a high base, that includes Eid holiday sales. Online sales in Turkey grew 98% in May, driven by 141% growth of mavi.com.
With this final positive note, I'm happy to take any questions you may have. The floor is yours.
[Operator Instructions] We have a question from [indiscernible].
Thank you for the presentation, and congratulations for very good results. You always surprised us on the positive side, even in the pandemic time. So congratulations once again. My first question is about the trading updates. We see a little bit maybe slowdown in the international sites from the numbers. Could you just give us some color on that front? That's my first question.
And the second question is, recently, Turkish lira is depreciating steeply. And what should be the impact on your financial -- the short-term impact on your financials? And related to that, when we look at the Turkish confectionery or textile industry, we see some shift from Turkey to other regions, like Egypt, Morocco. We have been hearing in the media that some ecosystem is moving to other countries because of less competitiveness of Turkish players that was in the media recently because of the high inflation and low depreciation and margin erosions.
How do you see that after recent developments? Do you think that this kind of shift will make additional pressure on the profitable to the Turkey operations if the ecosystem moves to another country than the producers in Turkey will be less profitable? And it's -- long term, it looks like a long-term risk. So I would like to understand how is this picture from your side? Any comment on that?
Thank you, [ Jamal ] and thanks for the encouraging remarks. It's always nice to hear that. And hopefully, across the year, as we come in with the next quarter and the results will continue to positively surprise both ourselves and yours -- you in terms of delivering good results. Starting from the last point you made in terms of the manufacturing environment, you are very right, and it's also reflected in the comments that I made because of the valuation of Turkish lira, expenses going up in Turkish lira in terms of labor, energy going up.
But at the same time, the Turkish lira not depreciating along the sides of international currencies, whether it's U.S. dollars or euros. Turkey from a manufacturing point of view has been losing its competitiveness. I think it's a point in time situation, and I think this will be corrected across the board. Therefore, I would be less worried about that. Having said that, I know, and I've been doing this business for 15 years. Brands and companies do move their manufacturing to make the most out of opportunities they have. Turkey is one country. Egypt is another, maybe Vietnam, Bangladesh, China and sometimes African countries depending on the product portfolio. So big companies do move around.
Having said that, I think the Turkish textile environment is quite sturdy. If I look at our own manufacturing base, which is 100-plus suppliers that we operate with, they're mostly well-positioned financially solid companies. And we do a follow-up just to make sure everything is fine. Their credit listings and linings to see if they are also in business. I think as we can see after the elections, there has been some impact that has been taken place on the currency and the valuation. Therefore, as the Turkish lira becomes more normalized, I think there will be a more normalized trading environment and Turkey will hopefully remain a more competitive place for manufacturing.
Despite all this, I think whether there is this move in or move out, just from this point of view, I think we are well positioned with our suppliers to continue our business. And I think the cyclical nature of our business is, as you know, is more or less on a 6 months outlook is quite firm, and there's a lot of contracts that have been signed in. Therefore, if you talk about the next 6 months, I mean, from today till the end of the year, covering the fall/winter period, I think Mavi in terms of -- you've already placed the manufacturing, products have been produced, our plans are in place. The suppliers are up and running, either the raw materials or the designs have been submitted. So directionally, I don't see any big hiccups coming in.
And hopefully, with some correction, it will be even more competitive for the manufacturers. You're right. There has been a lot of pressure from that perspective. But for the foreseeable future, I think there will be some correction, and there will be some normalization. That's my take at least for the time being. And maybe the following quarter when we get together, we can do a reassessment of this point because it's a quite valid point.
I think in terms of the depreciation situation, we talked about the negative potentials of manufacturing on Turkish lira depreciation. Of course, the other side is what about cost include Mavi or any other manufacturer who's buying in U.S. dollars or raw materials, what is Mavi stake for the future? As you would recall that if you've been following us, I'm also sharing this for all those who are -- who might be tuning in lately, but we are always have been across the many, many years, have been hedging against our imports and dollar exposures.
So if I look at where we have hedged for this year, we are pretty much covered wherever we have, U.S. dollar-based imports and costs coming in. And I think, if I'm not mistaken, I mean don't take me literally, but we have hedged more or less everything around USD 21, USD 21.5 so whatever imports we have. So we are already more than well off in terms of what is to come. And we are more focused on pleasing the consumer to making sure that there is a happy consumer shopping and have the best products and the most competitive price that is on offer. Therefore, unless there is an extraordinary negative downturn on the market, generally speaking, you all by now know that I'm quite bullish about what Mavi can do. I am quite confident we will continue to gain share. We have a very strong and we enjoy a very strong men's market share with #2 position. And on women's, we are #3 position. So we are quite relatively strong and growing.
And I think with the product offering, the pricing, the quality, even in such, let's say, negative circumstances, I think Mavi will continue to flourish and consumers with their very valuable money will choose to spend it with us, and they will rightly do so because I think we are offering a really good product for a really good price on a very timely and favorable position.
Now in terms of the international markets, Turkey has been growing disproportionately fast, and we were typically an 80-20 kind of set up, 80% Turkey, 20% international. The international markets also themselves are growing top line. But as I mentioned in my comments, Europe is the one that is sort of flat. It's only growing 1% in quarter 1. North America business is growing between in U.S. dollars 5%-ish. So it's also going -- I would like it to be growing 7%, 8% much a bit faster. Russia is growing at around 50% year-on-year, so it's doing much better. Actually, you don't get to see the nitty-gritty, but generally speaking, the slowdown in Europe has been, for us, numbers are being offset by the Russia business. So that's sort of a wash within themselves.
And then we have Rest of the World business, which is more the franchise business in the CIS countries, Balkans, Eastern Turkey -- East of Turkey, Turkey Republics and Middle East, and that is growing around 27%. So it's small, but growing in the right direction. So generally speaking, I would say international business is still growing, not in double digit, but in a very solid single-digit -- high single-digit numbers. And I think this will be the case for the rest of the year.
We are also trying to be careful with this part of the business, because as I mentioned and as you were mentioning through the manufacturing part, the margins here are under pressure because what we were selling at $100 is not making as much money as it used to. But I think this normalization period across the next couple of months, it should come back to where it was. So we did an offshoot, there were good times, there were bad times. And also in Turkey last year, there were good times and then bad times. I think we are coming into a more -- in terms of financials, a more normalized non-territory across the next few months.
I hope that answers the questions you've raised. But if you have any clarification request, I'm more than happy to oblige.
It's very clear.
Do we have any other questions?
There is one question coming from [indiscernible].
Hello. I'm curious about the OpEx growth. It seems that the ratio of OpEx to sales is very low actually, one of the lowest quarters that I've seen maybe in the last couple of years. So can you give us some details about that?
So let me give you a flavor of how the operational costs delivered good results. On the one hand, of course, we had very strong top line growth, which is, of course, as a percentage, positively impacting the ratio. But Turkey retail, on the other hand, Turkey retail stores OpEx to revenue ratio further improved in quarter 1, about 50 basis points, mostly coming from rents and also other store expenses, which other store expenses typically in the previous periods included a lot of energy and cleaning related costs, which are normalized to a certain extent.
Rents, I keep also sharing with you that about 1/3 of our business is on a more rent ratio business. So more of our business, as we do better business, is improving. Rents were down about 100 bps. And also, at the same time, employee cost increased 130 bps due to wage increases. In terms of the headquarter central operating expenses, we were down 40 basis points. So I think from a headquarters perspective, in terms of headcount and headcount progression in the headquarters, we were more disciplined and continue to deliver some good measures and savings.
So net-net, international also OpEx sales remained relatively stable, while sales increased. So net-net, we were able to deliver pretty good results in OpEx. Again, if you recall, generally speaking, I've said that from a margin perspective, our company through our digitalization efforts, big data management, consumer and customer service level analytical tools, we will continue to improve and optimize overheads, rent ratios and also despite a lot of the challenges, find opportunities to improve the cost of products, gross margins through better markdown optimization.
And these are again areas inch by inch, step by step, we are making progress, and we continue to make progress. In this quarter 2, again, I see slight improvements -- good improvements in this area. So a lot of the headwind that's coming from inflationary pressure, cost pressure, exchange rate pressure, we do our best utmost offset by good product planning, pricing, buying at the right price and selling at the right price, dynamic pricing as well as internally making sure that the other costs related to rent overheads are very much under control. And we are quite disciplined. And actually, we work on a more annual basis. And we have pretty good insight of what will happen until the end of this year, and we also have a pretty good idea of what will happen next year in terms of where the organization and costs are going. So kudos to my team and their hard work to make sure that keep the expenses under control. Thank you.
Okay. It seems like there are no other questions. I would like to thank everybody for their attendance and look forward to meeting you all in good health in the next quarterly update, all my best and have a good summer period. Take care.