Mavi Giyim Sanayi ve Ticaret AS

IST:MAVI.E

Earnings Call Analysis

Mavi Q3 2024: Resilience Amid Economic Challenges and Strategic Growth

In Q3 2024, Mavi reported TRY 27.072 billion in sales, up 4% year-on-year, with steady retail growth in Turkey at 7% and online sales at 12%. Despite economic slowdowns affecting consumer demand, the company demonstrated resilience, acquiring 1.2 million new customers. However, gross margins saw a decline of 140 basis points to 50.7%. Looking ahead, Mavi expects a revenue growth of over 60% for the year and an EBITDA margin of over 18.5%, influenced by macroeconomic factors. The company plans to open 17 new stores and invest around 4% in capital expenditures, maintaining a strong net cash position of TRY 3.3 billion.

Navigating a Challenging Economic Landscape

In the third quarter of 2024, Mavi faced significant macroeconomic headwinds impacting consumer demand in Turkey. Following the government's announcement of no minimum wage increase, purchasing power declined, affecting sales across various industries, including Mavi. Despite these challenges, overall retail operations demonstrated resilience, achieving a 3.6% growth in volume. This success was complemented by the acquisition of over 400,000 new customers, bringing the total active Kartus card members to 5.8 million.

Financial Performance Overview

Mavi reported consolidated sales of TRY 27.072 billion for the first nine months of 2024, representing a 4% year-on-year increase. Notably, retail sales in Turkey grew by 7%, and online sales saw a robust growth of 9%. Mavi's EBITDA reached TRY 5.450 billion, yielding a year-to-date EBITDA margin of 20.1%. The company also reported a net income of TRY 2.390 billion, reflecting a net income margin of 8.8%, a 4% growth compared to the previous year.

Channel Performance Insights

Despite an overall slowdown, Mavi's online sales in Turkey grew by 12% in volume, driven chiefly by its direct-to-consumer channel mavi.com, which recorded a 17% growth. However, international revenues faced challenges, contracting by 4.6% overall due to macroeconomic weakness and operational hurdles in European markets. Nevertheless, growth in Mavi's North American operations indicated promising potential.

Store Expansion and Market Positioning

In the first nine months of the year, Mavi successfully opened ten new stores, with plans to end the year with a total of 17 new locations. This expansion has resulted in a 5% increase in retail space, positioning the company favorably to meet sales targets in 2025. The company is focusing on disciplined openings, bolstered by feasibility studies ensuring short payback periods, which contributed positively to new installations.

Margin Pressures and Operational Adjustments

Mavi's gross margin fell to 50.7%, which reflects a 140 basis point decline year-over-year, driven by lower consumer demand and increased mark-downs aimed at stimulating interest. The ongoing increase in operational expenses, largely due to a 25% salary hike for employees, resulted in EBITDA margin pressure, deteriorating by 560 basis points year-on-year. These adjustments indicate a commitment to maintaining employee satisfaction during economic difficulties.

Revised Future Guidance

Mavi revised its year-end guidance, projecting a consolidated revenue growth of over 60% for 2024, with an EBITDA margin exceeding 18.5% (22% when including IFRS 16). With ongoing investments in capital expenditures (approximately 4% of sales), Mavi aims to sustain its strong cash position, currently at TRY 3.3 billion, and maintain no foreign exchange exposure on its balance sheet.

Looking Ahead: Strategies for Future Growth

Despite short-term pressures on margins and operational challenges, Mavi remains committed to long-term growth strategies. The company plans to finalize its strategic roadmap for North America by mid-2025 and is enhancing management and operational efficiencies across various regions. The aim is to leverage current circumstances to solidify its market position, thereby boosting both brand loyalty and market share.

Earnings Call Transcript 2025-Q3

[Duygu Inceoz, executive]

Hello, everyone. Welcome to Mavi webcast regarding the financial results for the third quarter of 2024. As you all know, our financial statements are prepared in accordance with IAS 29 inflationary accounting provisions, and this presentation reflects the financial results, including inflationary accounting. To enable investors analysts to conduct a full-fledged analysis, supplemental historical information for selected key performance indicators are also provided. Please note that such that elevate information is made available only for information purposes.

Our CEO, Cüneyt Yavuz will be presenting the results now followed by a Q&A session. We would like to remind you that this presentation is being recorded. [Operator Instructions]. Now I will leave the floor to Cüneyt.

[Ahmet Yavuz, executive]

Thank you, Duygu. Hello, and welcome, everyone. Thank you for being here with us as we present our third quarter results. Before I start on taking you through the results of the third quarter I would like to share with you great news that has made us very happy and proud. Some of you might have already heard that on TIME's World’s Best Companies Sustainable Growth 2025 list, Mavi ranked 8 among 500 companies worldwide and is also the leader in global apparel, footwear and sporting goods industry. The ranking developed by TIME and Statista names 500 companies pairing growth with environmental stewardship The survey evaluated companies that disclose their environmental data transparently and score them according to the revenue growth, financial stability and environmental impact.

As a company committed to sustainable and profitable growth, we are thrilled and honored that our pioneering role in the industry and our sustainability efforts have been recognized on a global scale. This is a great source of motivation for our future initiatives. I would like to take this opportunity to extend my thanks to my Mavi team for their hard work and dedication. This recognition is also a testimony of the great work we will continue to deliver in the coming years.

Now with this great news, let's move on to Slide 4 to provide you the highlights of the third quarter. Recall that in the second quarter following the Eid holiday and the government's announcement of no minimum wage increase for the second half of the year, consumer demand has started to experience a noticeable decline, affecting sales performance across various industries in Turkiye, including Mavi. As the government anti-inflationary measures continue, the cooling down of the economy is resulting in lower purchasing power and softer consumer demand. This, coupled with heightened manufacturing costs has also started putting pressure on margins. As we have consistently communicated to our investment community, Mavi remains exceptionally well positioned to navigate these macroeconomic challenges.

Despite the economic slowdown, the ready-to-wear market in Turkiye is still continuing to grow. Through our strong brand positioning, reliable pricing strategy, high-quality standards, ability to consistently introduce innovations and positive customer experiences, we are continuing to expand our market share in both men's and women's, jeans and lifestyle categories. We are observing that consumer interest and demand for Mavi remains vibrant even under these challenging circumstances. Turkiye retail operations demonstrated resilience with a 3.6% growth in volume on the very high base of last year. We acquired over 400,000 new customers in the third quarter. Online sales growth in Turkiye was driven by the strong performance of mavi.com, which grew 7% on inflation-adjusted real Turkish lira terms and 12% in volume.

We attribute the success to our superior marketing and CRM efforts, including personalized campaigns, brand partnerships, strong communications and data-driven methodologies that cater to diverse customer needs. International sales showed a slight improvement in the third quarter compared to second quarter with 0.5% growth in constant currency terms, mainly led by the North America market and the export markets.

Let's look at our year-to-date performance. Moving to Slide 6. Our consolidated sales reached TRY 27.072 billion in 9 months 2024 growing 4% year-on-year. Specifically Turkiye retail sales grew 7% and Turkiye online sales grew 9% in the period.

EBITDA realized TRY 5.450 billion resulting with an EBITDA margin of 20.1% year-to-date. Our net income growing 4% year-on-year, realized TRY 2.390 billion with 8.8% net income margin. With 1.2 million new customers acquired already, Turkiye active Kartus card members who shopped with us in the last 12 months is 5.8 million as of the end of October.

Moving on to review our channel performance on Slide 8. All channels in Turkiye are impacted by the slowdown in consumer demand but are proving to be resilient. In the third quarter, Turkiye retail sales grew 3.6% in volume and was flat year-on-year in real Turkish lira terms when applying inflation accounting. Turkiye online sales grew 12% in volume and 7% in real lira terms. As of the first 9 months of the year, Turkiye retail sales is up 7%. Online sales is up 9% and wholesale is up 10% year on year.

International revenue grew 0.5% in constant currency during the third quarter, leading to a 4.6% contraction in 9 months. This decrease was primarily driven by macroeconomic demand weaknesses across most of our international markets, the cessation of operations by some wholesale customers and transitionary issues in online and marketplace sales operations in Europe.

It is worth highlighting that our North America business, including Canada, continues to deliver positive results. Export markets also contributed positively this quarter. As you all know, we are in the midst of developing the strategic road map for our North America operations while continuously investing in talent and infrastructure. We plan to be sharing with you our midterm outlook before the end of Q2 2025. Simultaneously, we are focusing on management restructuring, warehouse enhancements and SAP transformations in Europe. We anticipate that these initiatives will start delivering positive outcomes from next year onwards.

Looking into our Turkiye retail business in more detail. In the 9 months of this year, we opened 10 stores, closed 1 store and expanded square meter of 10 stores in Turkiye reaching 345 stores and 183,000 square meters as of end of October. This implies a 5% increase in sales area compared to year-end, which will be supporting our sales targets in 2025.

Also, as a positive side information, we opened 5 more stores and expanded 4 more stores after October 31 to this date on our way to exceeding our initial expansion targets. Despite the economic slowdown, the retail sector continues to benefit from increased retail space driven by population shifts, the development of new urban areas and the addition of new shopping malls. We take a disciplined approach to store openings, focusing on robust feasibility studies and short payback periods. I am pleased to share that all the new stores opened over the past year have already delivered positive store contributions.

On Slide 11, let's elaborate on the like-for-like sales store performance. In quarter 3, due to the slowdown in traffic, like-for-like sales contracted 2.5% year-on-year in Turkish lira terms, while growing 1% in volume. Including the contribution of new store sales, 3.6% volume growth was achieved in Turkiye retail operations. Basket size grew 2.4%, 55.4% in nominal terms in the quarter, reflecting effective pricing and increased units per transaction. Our strategic T-shirt campaign responding to warmer-than-expected weather and an increase in women's accessory sales contributed to the UPT increase in third quarter. In 9 months, like-for-like sales grew 3.4% in real Turkish lira terms and 7.1% in volume. Again, including the new stores contribution, 9 months volume growth is 11%.

Moving on to Slide 12 to review category-based developments in Turkiye retail. As of 9 months, all categories grew in number of pieces, except jackets, which is experiencing a weaker season mainly due to relatively warmer weather. In the third quarter, denim, shorts, accessories and non-denim bottoms categories were the drivers of growth, all showing an increase in volume. Denim sales growth for 9 months is at 3%, balanced with the growth in non-denim bottoms category, which grew 28% year-on-year.

Our knits business constituting of T-shirt, sweatshirt and jersey offerings grew 5% and this is balanced with the shorts category, which grew 11%. We are pleased to share that our new women's accessory offerings, including a wide range of handbags were received very well and contributed positively to our accessories category growth of 13%. With these performances, we continue to deliver market share gains in the third quarter, both online and off-line, in men's and women's total apparel and jeans categories and strengthened our position among the top 3 players in the apparel market in Turkiye.

Going forward to review our online sales performance on Page 14. As of the first 9 months, our global online sales, including the wholesale business partners, constitute 10.1% of total consolidated revenue. Online sales in Turkiye consist of only direct-to-consumer channels and grew 9%, driven by the strong 17% growth of mavi.com.

Although marketplace sales have been somewhat softer this year due to reduced traffic and some regulatory restrictions, it is important to highlight that Mavi continues to solidify its position among the top 5 players in the jeans, t-shirt and sweatshirt categories. Online sales cost to 7.9% of total sales in Turkiye. International online contracted 20% in inflation-adjusted Turkish lira figures in the first 9 months. On a positive note, Mavi.com is still the most resilient channel here with 4.2% growth on a constant currency basis. Online business makes up 28.6% of total international sales. At Mavi, we remain committed to enhancing our omnichannel capabilities and elevating the Mavi shopping experience for consumers.

We will continue investing in CRM and data analytics to drive omnichannel growth and ensuring that our online business remains a positive contributor to margins. A quick update on our newly launched MENA online operation serving 5 countries in the region, UAE, Bahrain, Saudi Arabia, Qatar and Kuwait has exceeded $1 million in sales year-to-date. As these sales are fulfilled from our Turkiye warehouse, they are accounted under Turkiye online sales. We look forward to providing more updates in the coming quarters.

Let's move on to review our consolidated financial results. Reviewing our gross margin performance on Slide 16. Due to lower consumer demand, decline in purchasing power and increased mark down communication in the overall market to stimulate shopping appetite, the gross margins have started to slide down as expected. Our gross margin declined 140 basis points from a strong base this quarter and realized at 50.7%. There is 230 basis points lower impact of inflation adjustments due to lower inflation this quarter versus same quarter last year and 90 basis points positive impact of increased imputed interest rate. As of 9 months, our gross margin stands at 51.4%, improving 230 basis points year-on-year.

Moving on to Slide 17 to review our EBITDA performance. In quarter 3, EBITDA margin deteriorated by 560 basis points year-on-year. This decline was mainly driven by 140 basis points decline in gross margin and 380 bps increase in OpEx sales ratio resulting mainly from higher employee costs, including the midyear, 25% salary increase and relatively weak sales performance. EBITDA margin includes 90 bps positive impact of imputed interest in Q3 and 180 bps in 9 months this year compared to the same periods last year.

On Slide 18, we look into our net income margin performance. Our net income in the third quarter came in higher than market expectations at TRY 741 million. The impact of inflation accounting on net income started to slow down as of this quarter, but still has a significant negative impact of 9 months due to monetary losses rising from the balance sheet. Our net income in the first 9 months of the year is TRY 2.390 billion, growing 4% year-on-year, with a net income margin of 8.8%.

On Slide 19, we will review our operational cash flow and working capital performance. Despite the weakness and more importantly uncertainty of day-to-day sales performance requires more dynamic and flexible inventory management. Thanks to our effective product planning and flexible sourcing capabilities, our inventory levels are under control and consists of only seasonally fresh products. The increase in working capital to 11.7% is a temporary outcome driven by mid-season product drops and the impact of weather-related sales timing. Cash conversion for 9 months is similar to last year's levels.

Moving on to next slide, Slide 20. In the 9 months to October 31, we invested TRY 827 million in capital expenditures, resulting in a CapEx to sales ratio of 3.1%. These expenditures were primarily focused on store openings and expansion as well as digital investments and R&D. CapEx related to our new headquarters is still not included in these figures yet, hence is short of our 5% annual target. Our net cash position as at the end of 9 months is TRY 3.3 billion. As always, the foreign currency debt reflected in our consolidated reports pertains solely to our subsidiaries, which borrow in their respective local currencies, thereby eliminating currency risk. We maintain our policy of holding no foreign exchange exposure on our balance sheet.

And finally, on Slide 21. We are revising our year-end guidance given the realizations in the first 9 months of this year. The macroeconomic pressures we had anticipated for Turkiye in 2024 started earlier and were slightly more pronounced than our initial expectations. The Turkish lira also performed stronger than our forecast lowering the contribution of international operations and negatively impacting margins. Therefore, we are revising our guidance for 2024 accordingly as follows.

The figures are still in nominal terms. Not including the impact of IAS 29 inflationary accounting. Consolidated revenue growth of 60% plus and a corresponding EBITDA margin of 18.5% plus excluding IFRS 16 and 22% plus, including IFRS 16. We have already reached our initial targets for new space and we plan to finalize the year with 17 new stores and 15 square meter expansions. Including some portion of headquarters building investments, the annual CapEx spending will be around 4% of sales and we target to deliver a nominal year-on-year increase on our net cash position.

We are confident that our strong brand position, resilient business model and solid balance sheet will enable us to navigate these challenges by outperforming the industry and continue to be a strong player in the market. My whole team and I are committed for sustaining our profitable growth trajectory over the long term.

Before I finish my part of the presentation, as always, let me give you some color on this last quarter. In November, IAS 29 excluded the nominal figures show, 45% growth in Turkiye retail and 46% growth in Turkiye online sales. In the first retail week of December, we delivered 48% sales growth in Turkiye retail due to the year-end markdown campaign starting in the beginning of December this year as opposed to mid-December last year, Turkiye online sales growth is 122%, but should normalize by the end of the month.

With this final on, as always, I am happy to take any questions you may have. Thank you very much.

[Duygu Inceoz, executive]

[Operator Instructions] [ Hande Akguner ]. Please go ahead.

[Unknown Analyst]

As Mavi, do you have investment plans at countries which has lower labor costs in the future?

[Ahmet Yavuz, executive]

No, no. I heard you. In terms of investment strategies, we are -- we feel we are very privileged to be in Turkey. So as you know, strategically speaking, we are committed to being in Turkey as a great leader in speed to shelf, quality, sustainable, traceability and for all these good reasons. Having said that, there are -- within the sourcing team strategies to expand our near-shoring activities, meaning Georgia, Egypt, Balkans, et cetera, where we can continue to source similar quality products at a better margin. You may be aware or not, I'm not sure. We already do source from Egypt, Georgia and Balkans depending on the product categories from time to time.

And of course, as long as it fits our strategy and sourcing capabilities and quality expectations we will continue to do so. So yes, the short answer is yes, but the long answer is a bit more complicated in terms of balancing out and making sure that we get the right partnership, and that will be sustainable for the future of Mavi. Thank you.

[Duygu Inceoz, executive]

Cemal, you can go ahead.

[Cemal Demirtas, analyst]

My first question is regarding net working capital side. We see an increase in third quarter. I think it's a significant amount, partially attributed to maybe the seasonality. But could you further elaborate whether it was a normal thing or a little bit impact of some other factors on the working capital side? That's my first question.

And the second question is about the market conditions. In the fields, we are hearing that smaller retail stores are having big problems. In Turkey, the smaller ones, and you are rather competitive compared to others. But would you tell us, do we expect any change in the sentiment going forward? Or when do you think the markets will come back from your side?

[Ahmet Yavuz, executive]

Just one question, Cemal, just to be clear, when you mentioned the smaller, you mean brand-wise small, company-wise small, or format-wise small just so that we are on the same page?

[Cemal Demirtas, analyst]

In the field, not your format, but overall in the apparel market. And in the wholesale market, we are hearing that many companies who are also exporting are having some difficulties. It's a general multimarket thing we are pursuing. And we are hearing that you're even very competitive compared to many players. But I would like to understand the general market or the traditional sites. How do you see the picture?

[Ahmet Yavuz, executive]

I mean it is also, to a certain extent, I'll take it from here. It goes back to what Hande was asking. I guess Hande was asking that question because she wants to better understand whether we are able to mitigate some of the strong Turkish lira and the rising cost here in Turkey, which is putting a bit of pressure on the gross margins and the pricing capability here in Turkey. Especially vis-a-vis big importers like Zara team, Inditex, H&M, Mango, et cetera. From our perspective, going back to what I was answering to Hande. I mean, strategically speaking, we are not in a big swing kind of mindset. We are looking at selective choices of decision-making to take some of our manufacturing out of the Turkey and put it into right places.

But what is most important is being able to serve the customer with a great product and the sustainable product and the quality product that we want. So it is not an easy journey. So we will not be rushing into sort of mega changes. But you are right in the sense that especially those manufacturers textile managers who are export-dependent are having a hard time. And it's also good for them to have brands like Mavi and also other local strong brands that they can sustain their business, and we will collaborate with them in the coming years. And there will be some headwinds, obviously, but we think -- we believe we can tackle that together, working together.

In terms of the inventory situation, I mean, overall, the inventory -- I mean, I take a look every month with my team. In terms of covers, you can see the volume and value increase there. But I also take a look at what cover we have. So looking at past 12 months, 6 months, 3 months sellout, what sort of inventory on hand do we have? We typically aim in an annual year to be around 90 days. Today, we are at 92 days. So it gives me an indication that we are 1 or 2 days off, and when I calculate where that offness is coming from, off meaning we are in a negative territory or worse than where we would like to be. But when I look at it, it's predominantly coming from the warm weather and the jackets product categories. And we are confident that in the coming months, we will be able to sell these jackets January, February and March.

Although it might hurt us maybe margin-wise, and that's also what I'm alluding to because timing-wise, we may have to give a little more higher markdowns to move the products out. But I'm confident that winter "I'll say it with a smile on my face." I'm confident that winter will come, and we will sell. And what we are able to do also is when we have such a negative impact on a certain category like the jackets, we have also many other categories. We are offsetting some of the inventory or just-in-time management of other inventory to make sure that we come back at 90 days.

I mean today, I was talking with the category and planning team. I'm quite confident that we will close the following quarter in a more normalized sense despite worse off sales than we expected, despite some headwinds. Mavi building on its capability to source in Turkey and have the agility, I think from a working capital management perspective, I mean, we've gone through even worse situations when we have COVID, I think this is sort of a blip in our point in time, and I'm quite confident that we can manage the upcoming situation. One more point vis-a-vis the international competition because since I mentioned it, in terms of pricing gross margin, I mentioned Zara or you mentioned the small ones having a hard time.

We are following almost all the competitors' price points. And as Mavi we are using a lot of data points and consumer points to decide at what price we should be able to price our products. And in terms of these indexes vis-a-vis competition, all the data I have indicates that we are in a competitive situation, and we will maintain that competitive situation as always, as I keep mentioning every quarter in favor of the Turkish consumer because we don't want the consumer to walk away from our brands. On the contrary, we want to remain the consumer's choice in terms of shopping. And again, in my presentation, I mentioned it, but I explicitly mention it again. I'm happy to say that Ipsos data that came in also testifies the fact that we are continuing to win market share and strengthening our position in the market.

So it's also good to see that regardless of where the market is up or down or flat that we, as Mavi are holding, if not improving our position in the market share, which I am happy to say that we are on the positive side of things. And we will continue to remain in this mindset and be competitive and be the top choice of the consumers in the Turkish market. I hope Cemal that answers the questions you might have.

[Cemal Demirtas, analyst]

It's clear. And one last point about financing side. When you need high net working capital, it's a problem for everybody. But how do you expect that to go going forward? And in third quarter, I see a little bit higher needs of working capital. How do you expect to manage next year? Do you expect any relief next year when we see the rate cuts come.

[Ahmet Yavuz, executive]

I mean, I'll leave Duygu to maybe comment on this. Do you want to take this, Duygu?

[Duygu Inceoz, executive]

Yes, Cemal, we did look into the working capital, and it seems like it's going to get better as of the end of the year because this is the mixed season, mid-season meaning the fall-winter season is 6 months for us. End of October is mid-season where it is very important that we sell full price and also the phasing of the weather and the drops. So it is very seasonal actually, it will get better by the end of the year. And as we guided our net cash position will have increased compared to last year.

So that means actually it's going to be by the end of the fourth quarter we'll be higher than it is right now. So if you're asking about financing, we don't see ourselves in need of financing for a while. For 2025, we haven't finalized plans on the cash share anything right now, unfortunately.

[Ahmet Yavuz, executive]

[ Hande ], do you want to follow up on the left off?

[Unknown Analyst]

I can ask. Economic data shows us that general cost level on abroad has increased due to the increase of the interest rates. Did you took any specific precaution about debt increase? Or do you think that increase is like a one-off case?

[Ahmet Yavuz, executive]

I'm not 100% clear. But in terms of debt situation, we are a cash-positive company. And in terms of current short-term perspective, meaning like next 6 months to 9 months, I see including our investment plans like CapEx plans, I see no reason why we would be narrowing any cash for any reason. And generally speaking, you may recall in the other quarters where we have this kind of discussion because we also get a question in terms of the cash position we have and how we are going to utilize that cash. We typically use the strong cash position, strong balance sheet position we have in terms of capacity booking, raw material buying and using our cash power to get favorable price terms in terms of getting the products.

And we are building a plan, let's say, in terms of working in tandem with the economic slowdown, so that we're managing our net cash position to a normalized situation where hopefully the inflation rate slows down to more reasonable rates. And hence, the borrowing costs also come down. And until that time, we, as a team, we'll do everything to make sure that our working capital position and our balance sheet remains strong and that we don't fall into a need to borrow money from these situations. [ Baris ]?

[Unknown Analyst]

Yes. It looks like margins are normalized, but do you see any further margin contraction for Q4 or 2025 because you also have a lot of inventory, as mentioned before. And you said January, February and March, you will make some markdowns to decrease the inventory. So should we expect further margin pressure in terms of the EBITDA margins? And if so, how much?

[Ahmet Yavuz, executive]

Yes. I mean, I think once we close the year, I will have a much better feel and a presentation for you guys to guide you for the next year in terms of what we expect. But we are -- I mean, what you see is -- what you see also what we see is the same, meaning cost pressures are there on the one hand, the economy is cooling off. Therefore, consumers choice of spending their valuable money is slowing down. And also the competitive environment is increasing. As Mavi, we will do our best to continue to track the consumer sentiments, continue to build great products and offer great innovations and good quality products to the consumer at a reasonable and very reasonable price point. That's priority #1.

We want to make sure that for the disposable income that is available for the Turkish consumer, that Mavi remains an important choice. That will definitely, and is still, as I mentioned in my presentation, is putting pressure on margins. We have come to a more normalized. We had a very happy period, let's say, the past 18 months or so, but we are now coming into a more normalized period. So around 50s numbers. And of course, we will do our best to maintain those 50s. So at this point in time, for me to say that 50 will be something lower or high, it's too early to make a call. We also have to see in terms of how the minimum wage adjustment comes in. So there is still other data points that have to come in for me to get a better clear understanding of guidance.

So we are building our plans generally speaking, to maintain this kind of balance sheet. But are we under pressure? Yes, we are under pressure in terms of margins. Costs are going up. Consumers footfall on units per transaction is slowing down. there are some challenges in that sense. I think Duygu also wants to add something.

[Duygu Inceoz, executive]

I do want to add something. This is the first time in the third quarter that we are seeing gross margin decline, which is actually a normalization, as you said. So we do have a high base. And this is the first quarter that we're seeing it. And so we will continue to have that high base for at least 2 more quarters, at least the fourth quarter and first quarter. So you should expect gross margins to continue to normalize in the next 2 quarters. in that sense. But if you're asking apart from that, when we reach that normalized basis, is there going to be anything further that is something we need to see and work on for next year. So in the short term, yes, because we still have a high base in terms of gross margins.

[Unknown Analyst]

Just a quick follow-up. When you said gross margins will be going down in Q4, did you see it on quarter-over-quarter or year-over-year basis?

[Duygu Inceoz, executive]

It's year-over-year. We always start year-over-year. Quarters are totally separate from each other because we have a very high seasonality where the products that we sell and the gross margins of the products are very separate. So it's very important we never talk quarter to quarter.

[Ahmet Yavuz, executive]

Next, Baris?

[Duygu Inceoz, executive]

Amir.

[Ahmet Yavuz, executive]

Okay. Sorry. Amir.

[Amir Chomaev, analyst]

I had a question related to the next two quarters of 2025, the first and the second one. As we know, there will be salary increase probably and also, the economic situation will improve not as fast as we expect. So do you expect a lot of relative weak performance in the first 2 quarters of 2025 related to the previous years?

[Ahmet Yavuz, executive]

For us, from where we sit, and I'll give you more color when we finish the year. But from where we sit, we mentioned this. So therefore, I will mention it again. For next year, first quarter, it will be a challenging quarter for Mavi, not because of salary increases or slowdown in the economy because we had a very strong quarter 1, if you look at our numbers. So we will be tackling with a very strong basis on quarter 1. Therefore, for the first half of the year, it will be a more neutral year for us, quarter 1 being a bit of an uphill battle and quarter 2 hopefully being a better year.

On the other side, I mean, I cannot fully agree or disagree with what you're saying whether the economy will be slow or bad. The thing is when there is a salary adjustment, actually, that will give a breathing space, and it will come back. So our experience has been salary adjustments have been beneficial to consumer brands like Mavi and there has been, as you know, one year since there has been a salary adjustment. So it is biting into people's purchasing power and pockets as we speak. Hopefully, they get at 25, 30, 35, I don't know the percentage, salary increase that will be determined in a couple of weeks. That typically trickles down in a positive way to our sales.

So that's why you need to see what the adjustment rate is and how the consumer behaves following that adjustment, it's still a bit of uncertainty for us. But generally speaking, when we talk about the margin, there will be a challenge as I'll just reiterate. It will be a margin under pressure kind of a year, which as Mavi, it's not something new. It's every year that we have to tackle it, which will be another year that we would have to deal with that. We will always favor the consumer vis-a-vis 1 point or 2-point margins for the company because we want the footfall and the franchise to remain at Mavi umbrella. We are here for the long run and market share and wardrobe shares, and that's our firm commitment to the consumers and to the investment community.

And in terms of our a bit deterioration on OpEx, as I mentioned in my presentation, we are also in favor of our employees. We did -- we had not budgeted the salary adjustment in our OpEx, but we did do a 25% salary increase upon this high inflationary environment. Therefore, the second half of the year, there was an OpEx bump more than we planned for. But this will also hopefully normalize because we will be doing the salary adjustments based on the current 25% adjustment that we made. So there won't be as much a huge jump semester to semester in terms of salary adjustments, hopefully, normalizing a bit of our OpEx transition for the first half of next year. So these are my sort of what's on my mind transparent agenda points that I can currently share with you.

[Amir Chomaev, analyst]

And I have one more question. In case of the end of this military conflict between Russia and Ukraine, do you think it will give you some advantage in the profitability and what do you think general about this area of the sales, let's say, this geographical area?

[Ahmet Yavuz, executive]

Yes. You will recall, I'll reiterate our strategy for Russia. It's quite clear actually. We have a small business there, our retail business, retail operations of around 16, 17 stores that we are maintaining. Clearly, if there is a bit more peace coming into the region, on the normal services, we have aspirations to expand those stores up to 50, 60 locations identified and CapEx are identified. But at this point in time, we have chosen since the site of the conflict, we have made it public, that we will maintain our position and not expand our business in Russia until this conflict is resolved. So to a point, like if there is a bit of a normalization coming in, and peace coming in and which will benefit Russia and Russian consumer, we will definitely take advantage of that and see what more we can do and what more new stores we can open up in the Russian market.

So our office is up and running. Our stores are up and running. Our products are going back and forth. Our business is currently not -- we are not growing it as a percentage of sales, as you can see over the last 3, 4 years, our international business opportunely has shrunk. And one of the key reasons is because the Russia business has been stable or flat in the last couple of years. So as a percentage, international portion of our business has come down. I would love to see if the environment enables to see us continue to grow our Russia business. It is a natural geography for us and it's retail business. Consumers know the brand. They are good tourists coming in and know us, know the brand. So there is a big upside in the Russian market for Mavi for many years to come.

[Duygu Inceoz, executive]

We have some questions on the chat screen. Mehmet Gerz is asking, is your guidance revision for the upcoming quarter or the whole of 2024 fiscal year. Now this is the guidance update for the whole year.

[Ahmet Yavuz, executive]

Yes.

[Duygu Inceoz, executive]

[ Hüseyin Sert ] has a question. As we know that either IMF or government advice to increase minimum wage according to targeted inflation, considering the fact that targeted inflation will not hold, it is extremely that a significant portion of households will lose real purchasing power. Therefore, is there any risk in terms of trade-off between sales and margins of Mavi? How will we manage the risk?

[Ahmet Yavuz, executive]

I think we talked more or less about this. So let's go step by step is our approach. First, let's see what the adjustment is and then we take it from there. I mean, of course, in terms of managing the balance sheet, we talked about the working capital, inventory management, speed to shelf, operational efficiency, OpEx management, cost management is going to be critical. Having said that, on the other side, it will be also as critical to continue to be great quality, great service, a very competitive price positioning for Mavi with great new products where the consumer feels that they get the best out of their every single Turkish lira. I think we have that base. We have that service element. We have those omnichannel platforms, whether it's e-com, online or all the other channels, whether it's wholesale or franchise firms.

Therefore, we will be -- I mean, we wake up every day, come to work and see how we can gain new customers and continue to build our business. I also mentioned there were some hints within my presentation, where we are exceeding a few of our new store openings and expansions. We are still investing in new stores and expansions and upgrades in terms of shopping experience. Therefore, that will also help mitigate some of the negative push for next year as the base of reach of Mavi products for the consumers increase. So yes, it will not be an easy year. We are building, as always, a defensive -- with a defensive mindset, a strong balance sheet, which protects the balance sheet, but also protects the consumer. So we're trying to walk that tightrope, keeping the customers happy as always. The other question?

[Duygu Inceoz, executive]

Now we have [ Emre ] who asked, do you have any growth expectations for next 5 years? Is 10% real growth per year a rational goal?

[Ahmet Yavuz, executive]

That's a big question and a very good question. My ambition, again, I made a point about it specifically in my presentation, my current plan I mean I'm also talking with my lead team, my CFO and the other C-suite members and also head of heads of International business. We want to close the year, and then it makes sense for me, I think, in April, May before the end of quarter 2, let me put it that way to give you guys a more elaborate next strategy. I had mentioned almost within the early times of this year, talking about the Mavi strategy, but we have also, of course, upgraded and revised our next plans, including domestic and international plants as well as sourcing, nearshoring, gross margin protection, market share in new categories, the whole package.

So I do expect that we will be ready to share with you a more longer view of what we think we can continue to do and continue to win in Turkiye as well as in the international markets. So I have to ask for your patience. We are working day and night to put together our strategies to take Mavi to a new heights in the coming years.

[Duygu Inceoz, executive]

We have one last question from Mehmet Gerz. Where is the new headquarters and how much is [ that going to cost ]?

[Ahmet Yavuz, executive]

The new offices -- it's a rental office. It's being built, I mean, as we speak, so the whole new tables, whatever the whole thing is being done. It's in Maslak area again. So we are not moving far away from where we are right now. And in terms of the money, it's a ballpark figure. I don't know, it's not huge, but it's $6 million, $7 million, but depends on as we go on a run rate. It can go $1 million up, $1 million down. So a bit of that we will reflect it in quarter 4 because I know the construction has started. So some of it we will start spending now. Originally, we had built it into our CapEx spending that we would spend all of it this year. But as per the design and so on, took a bit longer than our original plan. In a way, it's good because then we can phase from 1 year to another the CapEx spend and the money spent.

So it shouldn't be that much of a significant impact on our cash flow and overall CapEx. And hopefully, we spend more of our valuable money on building new stores and continue to invest behind the brand in the coming years. Thank you.

No, the old HQ is not our own property. Actually, we don't own anything as Mavi, it's all rented and this current property is also a rented property. I don't know what will happen to it, but yes, the owners will have to find new tenants. I have to talk with them and see how it goes. Thank you very much. Any other questions that I can oblige? Yes, that's it for now.

As always, Duygu, my IR head, Bige our CFO, who is also with us, myself, Cüneyt we are here to help answer any questions you might have down the road. We -- although the numbers are not the best-in-class that we would have wanted to be, but we generally speaking, are quite confident of Mavi and Mavi's balance sheet and the brand strength.

And with these thoughts, I would like to extend our warm feelings for seasons holidays and wish you all a healthy, happy end of this year and even a happier and healthier and more prosperous 2025. And Look forward to being together with you in the closing of the year numbers. And then following that, hopefully, going on a roadshow to talk with you face-to-face physically to share with you our longer-term plans of how we think we will continue to build the Mavi brand and grow our business.

Thank you all and take care. Bye-bye.