Mavi Giyim Sanayi ve Ticaret AS
IST:MAVI.E
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Mavi Giyim Sanayi ve Ticaret AS
Earnings Call Analysis
Summary
Q2-2024
The company has revised its 2023 revenue growth outlook upwards to 80%, implying strong performance expectations. With plans for 8 new net store openings and expansions in 7 existing stores, the business is actively pursuing growth. The EBITDA margin, excluding IFRS 16, is anticipated to reach 19%, reflecting a positive 100 basis point adjustment from previous estimates.
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Hello, ladies and gentlemen. Welcome to Mavi webcast regarding the Financial Results For the Second Quarter 2022. Our CEO, [ Cuneyt Yavuz ] will be presenting the results, followed by a Q&A session. We would like to inform you that this presentation is being recorded. [Operator Instructions]
Now I will leave the floor to Cuneyt Yavuz.
Thank you, Liu. Hello, everyone. Welcome to our webcast for the financial results for 2023. I hope everyone had a great summer and all is fine. As a leading global denim and lifestyle brand, we have once again delivered a successful performance in this past second quarter, thanks to our brand positioning, dynamic product and price planning, high-quality offerings and our strategy of continuously bringing newness to our customers. We achieved a strong gross margin by managing the rising product costs with the right pricing, effective planning and sourcing strategies. Thanks to the increasing consumer demand for Mavi and our product variety, which enables us to respond quickly to this level of demand. We captured strong growth in all categories and continue to increase our market share in both men's and women's.
Through effective cost management, supported by the strong sales performance, we delivered 150 basis points improvement in OpEx to sales ratio in the second quarter of 2023 despite the minimum wage hike impact included in July figures. We continue to generate cash from operations, and our net cash position increased to TRY 1.913 billion.
International sales recorded only 3% constant currency growth in Q2 2023, mainly due to slower trading in our developed markets. International margins were also pressured this quarter with macroeconomic challenges.
Online sales growth was mostly driven by mavi.com performance in Turkey and direct-to-consumer channels in international markets.
Before going into details, I have a few notes on brand investments and developments about the spring/summer 2023 season. Driven by our All Blue, all better for all approach, we are working passionately to fulfill our commitment to making the most sustainable jeans. This season, we added the natural dye and Mavi archive off-cycle collections to our eco-friendly offering, which combines great design with the latest technology, unique ideas and innovation. We continue at full steam to enrich our omnichannel applications to create the happiest Mavi customers and offer the best shopping experience, both in the stores and online. The strong trust we elicited from our customers is our biggest driver. According to Future Brand Trust survey conducted in the first half of the year, Mavi was named Turkey's most trusted brand among nearly 150 brands from all 16 industries. Reputation, quality, financial soundness, responsibility and affinity were highlighted as Mavi's strengths in terms of trust with customers.
We have long been a favorite love brand in Turkey, and now we are thrilled to crown our profitable position in the market by ranking among the most trusted brands.
After this [ broad ] note, let's look at the key highlights for the first half of 2023. Moving on to Slide 5. Our consolidated sales reached [ TRY 8,415 million ] in the first half 2023, growing 104% year-on-year. Turkey retail sales grew 114%, and Turkey online sales grew 95%. Our EBITDA realized TRY 1.887 billion, resulting in an EBITDA margin of 22.4%. Our net income grew 62% and reached TRY 1.139 billion.
In Turkey, ahead of our targets, we acquired 718,000 new customers in the first half of the year. Number of active [ loyalty ] card members in Turkey is now at 6.4 million.
Moving on to review our channel performance. As of first half of 2023, total revenue consists of 67% retail, 23% wholesale and 10% e-commerce sales. With the continued robust performance, 87% of total consolidated revenue was generated in Turkey. The inflationary environment in Turkey continued to drive demand and as Mavi we make sure, we have the newness and variety at the right price to respond to this demand and remain consumers brand of choice. Because of the [ Eid ] holiday moved from the second quarter last year to first quarter this year, implying a strong [ mix ]. Nevertheless, our sales in Turkey grew 115% in the second quarter, with retail growing 110% and online growing [ 109% ], catching up year.
The strong wholesale growth is mostly related to low base and the relatively irregular nature of shipments. In the first 6 months, covering our spring/summer 2023 season, sales in Turkey grew 119%. We continue to with the softness in demand internationally, especially in developed markets. Total international revenue in constant currency grew 3% in the second quarter and 8% in the first half of the year. Retail and direct-to-consumer online channels were the better performance.
Let's look into our Turkey retail business in more detail. In Turkey, growing in retail continues to be at the heart of our business strategy, despite the slowdown of store openings in the recent years. We will continue to expand current stores and 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 half of 2023, we opened 4 and closed 4 stores, and we are now operating 329 own operated stores across 169,000 square meters of selling space in Turkey with an average store size of 513 square meters. Most of the new square meter planned for 2023 will take place in the second half of the year.
On Slide 10, let's elaborate on the like-for-like store performance. Traffic growth of 16% in first half 2023, despite continued strong consumer demand. Like-for-like sales grew 116% in the first half of the year, driven by 81% basket size growth and 19% transaction growth. Basket size growth was enabled not only by the dynamic pricing strategy, but also the newness driven by right product mix. As Mavi management, we always review the success of our growth figures especially in these days of high inflation with actual volumes in number of pieces sold. We are happy to report that 18.5% volume growth was achieved in the first half of 2023, in line with management's sustainable growth targets.
Moving on to Slide 11 to review category-based developments in Turkey retail. We continue to trace strong growth across our product categories. All product categories also delivered growth in number of pieces as stated earlier. Both Denim and non-Denim business grew above 110% in Turkey, with Denim constituting 42% of total Turkey retail sales as of first half 2023. We are constantly following changing consumer preferences and enriching our product range, especially in casual lifestyle categories.
Knits business constituting of T-shirt, sweatshirt and jersey offerings grew 107% year-on-year and make up 28% of our retail sales in Turkey. Capitalizing on the same trend, our new category non-Denim bottoms grew 135%, now constituting 8% of sales in the spring/summer season. Jackets being one of our focused categories in the recent quarters continued its strong momentum and grew 166% in the first half of 2023. Accessories grew 97% and shirts grew 108% this season.
Going forward to review our online sales performance on to Page 13. 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 of the third-party digital platforms to reach the wholesale. In the first half of 2023, our direct-to-consumer e-commerce sales share in total consolidated revenue is 10%, whereas including the wholesale e-com, total online sale is 10.7% of total consolidated revenue.
Online sales in Turkey consists of only direct-to-consumer channels and grew 95%, driven by the strong 131% 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% of total sales in Turkey. International online business grew 35% in the first half, negatively impacted by the macro driven demand weakness in some markets, direct-to-consumer channels platform relatively better, growing 49%. Online makes up 29% of total international sales. With retail being a significant channel for the consumer, especially in Turkey context, omnichannel capabilities are becoming more important for our future growth and in improving the shopping experience for consumers. Our omnichannel projects are launched successfully, and we witnessed the initiatives driving incremental sales.
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. We review our gross margin performance on Slide 15. Recall that in 2022, the high product cost started kicking in, in the second half of the year. Hence, in the first half of 2023, there was significant product cost inflation due to a low base. On the other hand, with the current FX levels, we are witnessing deterioration in international gross margins in the last few quarters. In Turkey, strong demand was captured with variety, newness and right product price positioning, which resulted in high sell-through rates with low markdown spending. All in all, we view to 52.1% gross margin in the second quarter as a success and the 390 basis points decline as a normalization from the extraordinary low base.
Moving on to Slide 16 to review our EBITDA and bottom line performance. It should be noted that Turkey OpEx figures include the impact of the latest minimum wage hike that was effective as of July. Nevertheless, the significant OpEx inflation in the first half of the year was once again leveraged by the strong top line growth and effective cost management. We continue to deliver improvements in our rent ratios in Turkey retail business. On the other hand, there is a notable deterioration of OpEx ratio in the international markets due to soft sales growth.
Despite the challenging macro environment, our total OpEx-to-sales ratio improved 160 basis points year-on-year in the first half. As a result, our EBITDA, excluding the IFRS 16 adjustments grew 73% year-on-year, resulting with an EBITDA margin of 18.9%. EBITDA margin, including IFRS 16 realized 22.4% in the first half of 2023. Thanks to our net cash position, the increase in net financial expenses is limited and the operational performance is mostly mainly reflected to our bottom line. Our net income in the second quarter realized TRY 624 million, bringing the net income for 6 months to TRY 1.139 billion with a net income margin of 30.5%.
On Slide 17, we look into our operational cash flow and working capital performance. Operational cash conversion is 49% due to increasing working capital requirements, which is the result of the increasing cost of inventory and the initiatives taken to mitigate product cost pressures such as cash payments, early looking, advance payments for raw materials and so forth. The 135% year-over-year increase in inventory level at the end of July 2023, is largely driven by 88% product cost inflation year-on-year. Inventory in number of pieces in Turkey is only 24% higher compared to the same year last year and is in line with the sales growth and demand expectations. Inventory comprises of all fresh seasonal products.
Now let's move on to Slide 18. We spent TRY 186 million in capital expenditures in the first half of the year resulting in a CapEx to sales ratio of 2.2%. On the retail side, we have a few store openings and new store concept transformations taking place. Apart from retail, we have been investing predominantly on IT projects, digital investments and R&D. Although, we have been using our cash in working capital in order to mitigate product cost increases and optimize gross margins, we continued cash generation from operations. Our net cash position continued to increase and reached on TRY 1.913 billion as of the end of quarter 2.
As always, all of the foreign currencies that you see on our consolidated reports belong to our subsidiaries, all borrowing in their respective local currencies and hence, does 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 with the availability of funding being very restricted lately in order to be prudent, we issued 2 more corporate bonds this month, a TRY 500 million bond with a maturity of 1 year and another TRY 500 million bond with a maturity of 2 years to qualify domestic investors. We will have paid back most of our bank loans by the end of this year.
On Slide 19, confident that we would sustain this performance after the end of the year, we are revising our 2023 guidance upwards from the previously announced 75% to 80% growth. We are now planning 8 new net store openings and square meter expansions in 7 stores, which will all come through in the second half of the year. We increased our EBITDA margin, excluding IFRS 16 expectation by 100 basis points to 19% plus or minus 0.5% and EBITDA margin, including IFRS 16 expectation by 50 basis points to 22.5%, plus or minus 0.5%. We target to stay in the net cash territory and plan to spend 3% of sales as CapEx, leaving these 2 items unchanged.
As always, I would like to provide some insights on the current trading environment as of date. Fall/Winter 2023 season started in August and as of September, we are in the back-to-school season, which, as you know, is an important shopping period for retail. I am happy to report that our back-to-school sales is performing pretty strong. Turkey retail sales increased 81% in August and 91% in the first 14 days of September. Online sales in Turkey grew 120% in August and 154% in the first 14 days of September.
With this final positive note, I am now ready to take any questions you may have. Thank you very much.
[Operator Instructions] Mustafa from AK Yatirim. Congratulations on positive results. I'd like to ask the overall competitor environment in Turkey. How is the market share of organized market enrolling compared to traditional markets and the market share of domestic players evolving [indiscernible] international player, and secondly, I'd like to ask the demand out within the financial operations in quarter 3. Is there any recovery signs?
Okay. Thank you, Mustafa. If you by means -- by means of our [ organized ] marketplaces traditionally open bazaars versus the brand in the environment given the economic environment, I would say the balance remains still in the favor of the organized trades. I think Turkish, especially in our garment and ready-to-wear industry, Turkish market is extremely competitive. The shopping experience itself is very pleasant. And Turkish brands are, I think, holding up and doing a great job under the current conditions. And I'm also looking into the future, I don't necessarily see this sense changing one way or another to the, let's say, to the disadvantage of the organized trade. So I'm quite confident that this will remain the situation for many years to come.
In terms of our business outlook for international operations, I think the first half of the year was more challenging, and we have just started the second half of the year. The numbers and sentiments are coming in much stronger, both on wholesale and retail as well as online sales are of the shipments and offtakes are [ clearing ] better. I think this is sort of a [ tangible ]. I mean it's good to have some of our business in international markets and then some of our -- major part of our business in Turkey. It gives us an opportunity to balance the sheet -- manage the balance sheet in a proper way.
But generally speaking, especially when it comes to a mid- to long-term perspective, we are very [ best ] in what we can do more when it comes to North America business, which includes the U.S. and Canada. Slowly, but truly, I think we will be delivering better and better results in the territory. Europe is generally speaking, more converting into e-com and wholesale part of the business is more stable. That would be a fair assessment of the situation when it comes to EU. And then we have some export markets that Turkey team is managing, which is more the Balkans, Middle East [indiscernible] CIS countries, and in that area, we're also growing in double-digit dollar terms. And that part of the business, although it's small, I believe it will continue to grow over the many years to come.
[indiscernible] has another question. Could you please give us developments in Russia, how is the business environment there? Is there any decision for this operation like exit or continue to do business as usual or expanding operations there.
Thank you, [indiscernible] for bringing this up. I purposefully in a way skipped Russia when talking about the international operations because in our prior discussions, I have mentioned that as Mavi, our position on Russia is to maintain what we have. So we are sort of in a holding position when it comes to Russia. So we're not opening new stores. We're not either closing stores. We have about 17 retail shops in Russia. Overall, the business is doing very well. It's a net cash positive driving and growing business. Having said that, some of the Turkish brands and local competitors we have and even some international brands have been taking a look at Russia as an opportunistic market and trying to grow their business. Our approach is more defensive. Therefore, we are more on a holding position when it comes to Russia. We are making the best of what we have there, which is doing very well, but we are not taking the earnings we make to reinvest back into Russia.
So we are more in a watch and see position depending on how the current conflict evolves. We see ourselves more on a, let's say, [indiscernible] camp approach. So we are at little bit of [indiscernible] relationship when it comes to the Russia business. Thank you.
So at this point, I guess there are no more questions coming in.
Okay, hold on. Okay, [indiscernible] has a question.
[indiscernible] has a question. Thank you for the presentation. Net working capital as a percentage of sales has been increasing in the last 2 quarters, we see net working capital evolving for the rest of the year.
In my presentation, I alluded that I guess you are right for pointing this out. Our working capital percentage has gone up for the simple reason that we are using the positive cash we are generating to -- as a means -- as a tool to defend our gross margin in terms of our sourcing strategies, booking capacity, booking raw materials and at times, making timely cash payments to get really competitive pricing, good quality products versus the competitors. So we want to leverage the strong balance sheet we have in terms of managing our business standard. So what you see right now at this level, probably -- looking at our cash conversion rates and our growth momentum. These sort of ratios that we are at currently will be maintained for a few more quarters unless the economic environment changes in another direction, meaning inflation starts coming down. But it's not going to happen any time soon could be a fair comment to say [indiscernible] has a question.
[indiscernible] has a question. He says in the case of a lower Turkish lira devaluation and higher interest rates in the next 12 months, how would you foresee local demand in 2024 compared to 2022.
I think what is most critical here, and maybe we don't 100% have the answer for is over the last 18 months, let's say, more or less, the government strategy has been to make sure that the income levels of especially the greater part of the population, whether it's the minimum wage levels or the government employees or the [ retirees ] to be paid and to stay as competitive as possible. This morning, I was also listening to the news, economic news, where the ministry is responsible for the economics was saying that also for the retirees fallen back that they will be more [ proof ].
So this is a question of whether the governments will be supporting the greater masses, numbers of consumers to be able to go up and shop, which also fuels the economic dynamism, I think, in Turkey. But I guess what's on everybody's mind is where to be sort of go through a mini correction or a slowdown in the economy. This for me is very difficult to say. So from Mavi's perspective, what we are trying to achieve is we want to make sure that our reach, as I mentioned, typically, in a year, we gained 1 million new customers or in a half a year, we typically gain 0.5 million new customers. But as I mentioned in my presentation, this year, we gained 700,000 new customers. So we are 40% more accessible, let's say, or more aggressive reach in terms of what we're offering to the consumer.
So our position is to act local to understand the dynamics of purchasing power and the needs of the consumer and be very aware of the consumers' shopping habits and needs. So regardless of slowdowns or speed ups, et cetera, my position is Mavi will continue to gain market share and sell more products further down the road. In terms of a devaluation and risk, just to reiterate, you will all recall that we are pretty good in terms of hedging ourselves. And when I look at our current numbers for fall/winter, which is this season, and also spring/summer, which is the coming season for 2024. We are in a very well position to the current exchange rates. Although we don't have much of an exchange rate exposure, mostly 80% of what we produce is in Turkey and Turkish lira denominated, although impacted by dollars. The 20% import is coming from outside countries.
But even so, I think from a fluctuation and inflation and cost management perspective, regardless of ups and downs. I think Mavi will be -- remain to be accessible to consumers. Therefore, for consumers who need to shop and buy clothing and enjoy new clothing and enjoy the new season. We will continue to be refreshed and exciting for the consumers.
[ Sezan ] has a follow-up question. He is saying according to the news flow, textile sectors having difficulties, especially for transform [indiscernible] the advantage for Mavi or not?
This is an overall challenge for everybody, but it is an advantage for Mavi to [ assure that ] in the sense that to twofold. On the one hand, of the 130-plus suppliers we work with there all top notch. So as you know, we have very strong sustainable targets, ESG targets, social compliance targets, environment targets. So the manufacturers that we operate with are of quality operators, therefore, already within our cost structure, their quality is embedded. And therefore, this so-called [indiscernible] on third-party outside what they call washing, packaging, ironing or third-party supports, is becoming a challenge because for them, cash flow and cash has become scarce. And therefore, this industry where there's a lot of delayed payments, postponed payments. They have been struggling, that is true.
But if you look at Mavi's ecosystem, [indiscernible] even in cases where there is some opportunity financially, again, going back to what I mentioned, we are using our net cash position to this end. So we are supporting our ecosystem selectively, of course, with the sourcing team and finance team assessing the suppliers and manufacturers and giving them the necessary cash outlays, and you're giving them the opportunity to get that business up a lot. So I think overall, we are in a pretty good position. But generally speaking, the industry, I mean the point there is right. You're right, both [indiscernible] because of cash. And also, generally the industry because of increasing costs in real terms, in dollar terms because of minimum wages, et cetera, is having a harder time when it comes to also exports.
But this means put it in another way, that there is more capacity that Mavi can utilize on. So this gives us a greater advantage of greater marketing power and also greater [indiscernible] to continue to manufacture in Turkey and get the products onto the shelves.
[ Bulent ] From HSBC have a follow-up question [indiscernible]. With a stronger Turkish lira mean multinational peers will be more competitive.
I mean this -- of course, this is a pendulum moment. I mean, overall, I think Mavi where we are positioned and how we are running our business. We are in okay, situation whether it goes this way or that way. So we are covering -- because from a pricing perspective, the -- let's say, the global price competitors, which are H&M, Zara and the likes or the local price competitors, which are caught on a [indiscernible], et cetera, they get impacted, as you mentioned, with a high tier or a low tier, but Mavi is sort of holding a position where we can grab customers from both ends. And also, as you are aware, we're increasing our category shares, as I mentioned, new categories that we're entering into. We are also growing our square meters slowly, but surely.
So there is more space to offer new and more products which also the consumer is more willing to buy, which are all helping us hedge away, take away new customers in might new categories into new customers wardrobes on both ends of the spectrum. But generally speaking, a stronger tier would make for the industry, not for Mavi for the industry more competitive for Zara's, H&M vis-a-vis the local trays, that's true.
Another one, last 2 years [indiscernible] decision led to demand pull forward. Do you think tighter rates, particularly on credit cards, lower installment terms could mean consumer spending to be pressured next 3, 6 months?
I think the overall to slow down and tackle with inflation, we are expecting as the overall economy for the consumers wanting to [ cool off ] a little bit, that's true. But overall, I mean, if you look at my experience with Mavi, which is more or less more than 15 -- almost 15 years will be minus 2 months, 14 years and 10 months. Ups and downs, we have always year-on-year in good times or bad times, however, you define it. We have been a growing company. So our mantra, we will continue to grow for the next couple of years has not changed. So our position as management, who's leading the Mavi team, Mavi business is that we are ready for the challenges that might be coming this way or that way to continue to grow our business.
But as you're alluding to, everybody is expecting a sort of a slowdown for the coming year in the economy or certain cool off to come in, how it will happen, when it will happen, we don't know. So we keep the momentum going and be prepared for the future challenges.
On your comment, as a consumer, I find your pricing very well. I believe there is some room to increase further. Actually, this comment let me put it this way. In my career with Mavi, this is a comment we want to hear. So we always want to have a room to grow. And I think this is exactly what we are after, meaning we are a little behind in terms of price -- taking prices. We do catch up. But we give that breathing space to the consumers and consumers are cognizant and aware of what we are doing. And therefore, we are being rewarded by increased traffic and more consumers coming and shopping with us.
We could, in theory, price up another 10%, 15% and probably not lose a lot more sales on the contrary gain more sales. But what we want to do is we want to make sure that more and more consumers are introduced into Mavi and can get into the habit of Mavi because we are not far off from much of the -- many of the consumers in Turkey, and their willingness to shop. So we want to be an accessible brand. And also, we take it as a challenge. I mean we use our balance sheet, our sourcing capabilities, innovation, to be even more competitive when it comes to pricing because that's how business is a bit of a [ cutthroat ] business. It is "Me Too" business. Everybody is selling a pair of jeans. Everybody is trying to sell a pair of T-shirts or a pair of sweatshirts.
And we have to make sure, both from a price quality and the newness and the variety and the offering that we have to be a much better company. And that's how the world is. There is no time to rest. So people continue to run and work really hard and hopefully, more and more of our consumers will join you in saying we believe the pricing and the quality and the product we get at Mavi is great. That is one of our actual targets that we want to hear from consumers say. In total, we have -- I mean the question came about card, which is our loyalty cardholders, CRM cardholders. In total, there are gross 8.8 million cardholders and of those 6.4 million are active consumers.
A point I can add is that about 75% to 80% of everyday sales goes through cardholders, which in many of our 3 prior meetings I mentioned, this gives us an extreme leverage in terms of understanding the consumer behavior, which then translates into all the planning, pricing, campaign, communication, product type that we can offer to the different segments and needs of consumers. So we are truly a consumer-centric brand. And we, I think, differentiate ourselves by miles versus any other competition in the Turkish market or international markets with our [ card discount ] program and our awareness and knowledge about who are consumers, how they behave, what they are asking from us, which then translates into the actions, decision strategies that we are developing day in, day out.
No. I mean, there's a question we often get. Are you planning to this card business international tool like [indiscernible] in the past. No, we are not. The frequency with which consumers are shopping at this point at least are not at that level. But even so, we prefer to keep [indiscernible] as a proprietary tool for us where a lot of the AI digital transformation, product marketing, product planning, markdown management, pricing strategy, future growth strategy, categories that we're going to answer. So there is a lot of homework as we speak even today, that is -- that my team is working on to figure out how we are going to win. That also is one of the key reasons why I am confident whether it's good times or challenging times as Mavi we will find a way. If consumers out there shopping, we will be the brand of choice and give them right product and the right pricing and the right quality for many years to come.
I guess that's all for now on unless anything -- any other question pops out or any other question pops out.
As always, I wish you all the best, and I look forward to catching up with all of you in quarter 3 with again great results, good news and a growing Mavi business. And in the meantime, I do hope the same for all of you. Whatever you're doing that everything is going your way, and you stay healthy and happy and look forward to meeting and seeing all of you in a couple of months. All my best, and take care. Bye-bye.
Thank you, Ahmet Yavuz.