Mavi Giyim Sanayi ve Ticaret AS
IST:MAVI.E
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Mavi Giyim Sanayi ve Ticaret AS
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Ladies and gentlemen, welcome to Mavi's webcast regarding the financial results for the second quarter of 2022. Our CEO, Cüneyt Yavuz, will be presenting the results followed by a Q&A session. We would like to income that this presentation is being recorded and we kindly ask you to keep your microphones muted throughout the presentation. Well, I will leave the floor to Cüneyt Yavuz.
Thank you, Duygu. Hello, everyone. Welcome to our webcast for the financial results of the second quarter of 2022. I'm very pleased to be announcing another strong quarter with solid results. As you know, our first half results reflect the performance of our spring summer season. We are very happy that the historical results we announced yesterday is the reflection of a well-received grade collection, our best-in-class communication, all made possible by our committed team. In the second quarter of 2022, consumer demand continued to be robust amid ongoing high inflation in Turkey.
Turkey sales grew 119% year-over-year in the quarter. This positive trading environment allowed for high salt rates with low markdown spending, which continue to help offset significant product growth pressures. Sales growth was driven both by price and volume. Almost all product categories grew a number of pieces in Turkey. In the first half of the year, we sold 6.2 million items globally, growing 22% year-on-year. As always, dynamic and adaptive supply chain management, efficient product planning and inventory management paved the way for our successful results. Our international operations are also performing well in spite of many externalities taking place globally. International sales grew 16% in constant currency in the second quarter.
Positive operational cash generation in the second quarter resulted with 47% growth in our net cash position, which now stands at TRY 829 million. As promised, continued investments on brand and consumer focusing on product newness and quality continue to bring the market share gains in Turkey. Now let's look at the key highlights for the period and move to Slide 3. Our consolidated sales in the first half of 2022 realized at EUR 4,124 million, growing 125% versus same period last year. Turkey retail sales grew 148% and Turkey online sales grew 58% on a high base. Our EBITDA almost tripling year-on-year realized TRY 1.19 million, resulting in an EBITDA margin of 26.9%. We continue to deliver increasing quarterly earnings, the net income for half 1 2022 is TRY 704 million.
Our balance sheet net cash position increased to TRY 829 million as of the end of July. The total number of monobrand stores globally, including franchisees, reached 461 -- now let's on to Slide 4 to review our channel performance. With the retail channels gaining significant pace this year, our first half 2020 total revenue consists of 65% retail, 24% wholesale and 11% e-commerce sales. 81% of total revenue was generated from Turkey. Traffic in our stores and the demand for Mavi products remain very strong in Turkey. The inflationary environment continues to be a driver for the consumer shopping appetite.
And at Mavi we make sure we have the new and variety at the right price to respond to this demand and remain consumers brand of choice. As a result, our sales in Turkey grew 103% in quarter 2, mainly driven by the retail business, which grew 119% on top of a significantly high base last year. Please recall that within the second quarter of last year, coverage restrictions were fully lifted for the first time, driving a very strong count-up demand. Our e-commerce business in Turkey, which constitutes of Mavi.com and marketplace sales grew only 30% in the quarter, also on top of an extraordinary strong base, especially in the month of May, in which the retailers were on a full lockdown for 17 days in 2021. We expect to see a normalization of online sales growth going forward with the consumer shopping behavior stabilizing.
International operations are back to its normal growth rate, growing 16% in constant currency and 129% in TL terms in the second quarter compared to the same period last year. On Slide 5, we start to focus on Turkey retail business. We have been emphasizing throughout the previous years that retail would continue to be at the heart of our growth strategy. The strong come back of TL performance this year is a testament of how right we [indiscernible]. We continue to open new stores and expand current stores in square meters, while constantly taking new actions to make sure that consumers have a great shopping experience. In the first half of the year, we opened 4 new stores, closed 2 stores and expanded 7 stores in Turkey. As of July, we have 329 on operated stores, totaling close to 167,000 square meters of selling space in Turkey with an average store size of 506 square meters.
On Slide 6, let's elaborate on the same-store performance in Q2 2022. Most of the second quarter is more comparable with last year as all these restrictions had been listed as of June 2021. So we are from now on taking into consideration all this with a proper like-for-like mindset. In quarter 2 traffic in our store was 40% higher than the same period last year, showing the appetite for shopping. Same-store sales grew 119% this quarter with number of transactions increasing 23% and basket size growing 78%. Although there are significant price increases due to the inflationary environment, there was still 9% volume growth in the quarter.
On Slide 7, let's review category-based developments in Turkey retail. We are happy to report strong growth across our product categories in the first half of 2022. All categories also delivered significant growth in a number of pieces. We are constantly following changing consumer preferences and enriching our product range, offering newness, variety and innovation in response. Our denim category grew 138% year-on-year constituting 42% of total retail sales in Turkey as of the first half of this year. The net business, including our growing short such and [indiscernible] category, it is now 28% of our total Turkey retail sales and continue to deliver robust platforms growing 164%.
Capitalizing on the same trend, our rising category non-dating bottoms grew 163% now constituting 7% of our total Turkey [indiscernible]. [indiscernible] sales is recovering from the pandemic disruption, growing 170%. It makes up 12% of our total Turkey retail revenue. Access to this, including our well-received [indiscernible] collection grew 167% and contribute significantly to our women's business, especially in the spring/summer season. Jackets seasonally being a fall winter product grew 123% in the first half of 2022. Overall, our lifestyle categories grew 161% year-on-year. On Slide 8, let's review our online sales performance. On this slide, we review the total on malls of Mavi including the sales to third-party digital platforms to which we wholesale in addition to our direct-to-consumer online sales made up of Mavi.com and marketplaces that are reported under e-commerce channel.
Recall that our direct-to-consumer e-commerce sales is now 11% of total consolidated sales. Including the wholesale e-com, which only exists in our international business, our total [indiscernible] grew 69% globally and is now 12.9% of total revenue. In Turkey on Mavi.com, we launched with a new upgrade earlier this year. We enhanced the online shopping experience offering speed and ease to our consumers. In the second quarter, online growth in Turkey was softer as expected given a very strong base from last year and the robust retail come back this year. The 17 days full closure in May of 2021 has accounted for half the sales in the quarter. On the other hand, the aggressive marketing strategy of marketplace platforms in 2021 is now normalized.
As a result, online sales in Turkey grew 58%, driven by 61% growth of Mavi.com and 56% growth of marketplace operations and now constitutes 8.9% of total sales in Turkey. International online business growth is on track with 85% in the first half of 2022. The fact that this growth is largely driven by our direct consumer channel is promising. Our own platform Mavi.com grew 114% and marketplaces grew 149% a 31% of total international sales are through online channels as of first half of 2022. Mavis strong digitalization and CRM infrastructure will continue to drive our growth trend in e-commerce. And as I noted in previous quarter updates, the shift towards online will positively impact our margins going forward being a full-price channel across all categories.
As retail operations are back in the play as we had anticipated, online channel capabilities are becoming more important for future growth and in improving the shopping experience for consumers. Let's move on to review our margin performance over the next 2 slides. Slide 9. With rising raw materials and energy prices, currency fluctuations and high inflation in Turkey, gross margin continued to be one of our biggest focus areas. Our strong brand strategy, dynamic product price planning, the newness and variety we bring in response to high consumer demand, resulted with high sell-through rates and lower markdowns in the spring/summer season, meeting high consumer demand with the right product positioning in an inflationary pricing environment supported cost mitigation. Currency impact of international operations has also positively impacted margins.
As a result, gross margin improved 330 basis points in the second quarter and 500 basis points in the first half of 2022. On the other hand, it is important to note that the product cost increases for the second half of the year is much higher. We expect the gross margin levels to gradually think back as more costly products and to the shelves until the end of year. Moving on to Slide 10. The significant OpEx inflation in the second quarter was mostly leveraged by the strong top line growth. We continue to deliver improvements in our rent ratios and our employee cost to sales ratios in Turkey. Our EBITDA margin, excluding IFRS 16 adjustments, has improved 170 basis points in the second quarter to 20.4%. Here, it is important to note that the IFRS 16 impact on EBITDA has become lower compared to previous years because of 2 developments.
First, the ratio of performance-based rent contracts have increased, leaving the related rent costs on the P&L. Second, the total rent cost as a percentage of revenue is decreasing, hence reducing the impact of IFRS 16 on EBITDA. In the first half of 2022, we achieved a record high EBITDA of TRY 1.19 million, including IFRS 16 adjustments with a margin of 26.9%, improving 490 basis points. The operation platform is mainly reflected on our bottom line. In the second quarter, the TRY 403 million reported net income includes EUR 94.6 million one-off tax income due to the revaluation of fixed assets on statutory books. Net income margin in the first half of 2022 is 17.1%, which is significantly higher level than last year or any other [indiscernible]. On Slide 11, we look into our operational cash flow and working capital performance.
The average cost of inventory is 81% higher than that of the same period last year, and we are taking several initiatives to mitigate product cost pressures such as cash payments, early bookings, advanced payments for raw materials. As of end of July 2022, the inventory level in number of pieces in Turkey is only 21% higher compared to end of July 2021. Reflecting sales volume growth and comprises of all fresh mainly fall into 2022 season products. Nevertheless, net working capital is back to our targeted strategic levels of 5% of sales. We generated significant operational cash in the second quarter despite the increasing working capital requirements compared to year-end. Operational cash generation in the 6 months was TRY 426 million with a cash flowing ratio of 46%.
Now let's move on to Slide 12. We spent TRY 118 million in capital expenditures in the first half of the year, resulting in a CapEx to sales ratio of 2.9%. On the retail side, we had store openings, square meter expansions and new store concept transformation taking place. Apart from retail, we have been investing predominantly on IT projects and digital investments. With strong cash generation in the second quarter, our net cash increased 47% compared to the end of first quarter of TRY 829 million. All of the foreign currency that you see on our consolidated deposits belong to our subsidiaries, all borrowing in their respective local currencies and hence, does not cause the 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 high rates going forward.
We recently applied to the Capital Markets Board for debt instrument issue selling to further diversify our liquidity options, if need be. Moving on to Slide 13. We are revising our full year guidance with the 6-month realizations and the positive market conditions we continue to experience. For the financial year 2022, we are revising our consolidated sales growth target of 220% growth versus 100% previously. We still plan to open net 3 stores, but 13 store expansions instead of 11 within the year in total, including the ones already completed. We are revising our EBITDA margin expectation, including IFRS 16 to 19% plus/minus 0.5% as we see our profitability prospects better than our initial estimations.
On the other hand, as previously explained, due to positive developments on the rent cost, the impact of IFRS 16 adjustments are low compared to previous years. Hence, we are keeping the EBITDA target, including IFRS 16, up 24% plus/minus 0.5%. Our net cash position, expectation and CapEx targets are unchanged. As always, I would also like to give you some color on the current trading environment as of date. We had a great start to our fall interest season. We are experiencing a proper strong back-to-school season, just like [indiscernible] days with great demand for our products and positive pricing amount. Turkey retail same-store sales increased 153% in August and 135% in the first 15 days of September year-on-year. I'm happy to report that one sales in Turkey is already back to normal with 95% growth in August. With this final note, I'm happy to take your questions now. Thank you.
[Operator Instructions]
[indiscernible] has a question.
Congratulations for very good results. And I also appreciate your perspective during the pandemic towards your employees and stakeholders. I really appreciate that from the analyst perspective. And I see your numbers are improving further. I would like to understand the impact of the increases in rents and the employee, the salaries, we see some impact in the second quarter. What kind of a picture could we see in the rest of the year regarding the rent expenses and personnel expenses, how much increase you did in this quarter? And what could be the trends in the following quarters? And could you give us some picture about the trends in 2023?
Thank you very much for the warm words. It's also encouraging to get emotional support from you, too. And I think even now over and above the Panel, you know, we're going through [indiscernible] and our priority to maintain a good working relation, shifted both our third-party service providers as well as taking care of our employees is still top of mind, and it's one of my top priorities. And therefore, it is critical that you raised the question. Let me start with rent expenses. The rental expenses overall, I mean, have been coming down as a part of the revenue ratio, and rents are right now down 170% basis points versus where we were the same period last year. Generally speaking, as we continue to price competitively bring newness and bring in great products with good pricing.
I am quite confident that as a ratio of sales [indiscernible], as you will recall, in many of my previous also conversations, we'll always continue to slightly improve from one season to another. And I think this past season, I think summer was a testament of that. And looking into the future, I also expect our [indiscernible] ratio as a percentage of sales to continue to remain same, if not yet better in the -- in this fall winter season also. When we come to the salaries bit, employee cost is down overall 200 basis points and central operating expenses are down roughly 140 basis points. Some of the overall consolidated deterioration or negative trend was due to some of the incentives that were provided in international markets that were lifted. So we did have a base impact of support coming in from Germany, U.S., Canada, these markets where we were getting government subsidies, which were listed during COVID.
But even regardless of that, overall, our position in terms of OpEx to sales and other expense basis are improving and will continue to improve. I think right now, we are growing in real terms. And as we continue to grow in real terms, as Mavi as the leader of the team, with the support of the Board, we will be competitively paying our employees to keep the best talent on board to continue to deliver the stellar results we are seeing, and I'm confident we will do that. But overall, in terms of direction and the field that we want to get, both on rent ratios and SG&A ratios. I do expect that as a percentage of revenue, you can assume same or better results moving forward, including for 2023. I hope that gives you a clear picture of where we stand and what my perspective is.
[indiscernible] has the next question.
Firstly, a follow-up question about your rent expenses. You talked about that you switch some of your contracts to turn over base. Can you give a number on that front, what percent of your stores rent costs are turnover based? And my second question is you talk about more positive products that will lower your gross margin in the second half of the year. Can you still give us a guidance about what percentage we should expect in terms of deterioration? And lastly, you talked about your market share gains. I don't know how accurate it will be to extrapolate your results to the entire sector, but can you give us some color on the competition environment and quantify your market share gains and overall market -- your views about overall market.
So overall, in terms of rent ratios, as we move down the road about of our total stores, about 1/3 of them right now are under a contract of rent ratio of revenue ratio. And the 2 stores are still with month-to-month fixed income fixed rent payments and adjusted on an annual basis. So that's sort of the overall picture. In terms of the margins lowering down, we do expect that we will still close the year overall as an annual year in a better with margin improvement versus year-on-year. In the full winter, as we go into the season, of course, we will be following extremely dynamic pricing. And every month, almost new products are coming in.
So we will follow where the competition is on where the pricing is. But for comparison between a spring/summer versus fall winter. I mean right now, we are thinking there will be 2% to 3% margin deterioration or pressure in terms of our balance sheet. Usually, that's the case, by the way. So let's see. I don't want to be extremely optimistic. There's a lot of headwinds. And I also want to protect the consumer and traffic with right pricing. But at the same time, if and then we see the opportunity in terms of pricing and gaining mix, newness as well as markdown and contain management, we might come in with a surprise. But generally speaking, right now, what we are budgets between roughly speaking, 2% margin erosion versus spring/summer. But total annual yield still delivering our margin improvement versus last moving a positive trend.
In terms of the market share position in terms of where we are and what our market share is, we are definitely, [indiscernible]. I mean that's our field. We don't have all that quality data coming in. We are following Ipsos data, which is coming biannually. And we are right now #4 to #2 in manan#3 in women in terms of total overall market share in the FRP. The good news I can share with you is overall, when I talk with my retail business partners, relatively speaking, everybody is happy with how their business is proceeding. But I have a sense that we are doing a bit better than how they are doing. I think the great estimate is in the amount of traffic that has increased that we are seeing. We see -- we saw in the spring, summer and also starting with the back-to-school period more than 40% traffic increase, 40.
So that's really encouraging. It means that we are becoming people's choice to come and shop. The bigger player, as you know, we have a couple of very big players within the competitive environment. But as Mavi we can, over the next seasons, continue to sultify our second top position in the market depending on how we look at it from a men's or women's perspective, but definitely moving in the right direction and growing in absolute volume as well as one side impact also is our marketing team typically has a target of gaining 1 million new cartridge cardholders that have -- that are never bought or used a car to start, which is our CRM modest. And we are back on track. So this year, after the funder, I think this will be another year where we'll have more than 1 million new customers coming and shopping, which is also a good testament that we are moving in the right direction. I just want to also throw that in as a fact.
Just want to correct some little point in terms of the gross margin, we do expect some erosion in the second half compared to a year-over-year last year, not post-[indiscernible]...
Yes, versus say... Overall consolidated budget would be an improvement versus last year Yes. Thank you for the cash I didn't mean it [indiscernible].
Thank you. Great. Ladies and gentlemen, do we have any other questions?
Okay. It seems like we are done for today. I really -- I appreciate the fact that you have all joined in that turn into our quarterly update. I look forward to coming in with good and strong results in the coming quarters and wish you all the best in this competitive and highly interesting times. All my best. Take care. Bye-bye.