Marimekko Oyj

OMXH:MEKKO

Earnings Call Transcript 2022-Q2

[Anna Tuominen, executive]

Good afternoon, ladies and gentlemen. My name is Anna Tuominen. I'm the IRO of Marimekko, and it's my pleasure to welcome you to our Q2 results webcast.

In a short while, we'll hear a presentation from our President and CEO, Tiina Alahuhta-Kasko, and after that, we'll have time for questions. [Operator Instructions] With Tiina, we also have our CFO, Elina Anckar, here to answer your questions. But without further ado, Tiina, please go ahead.

[Tiina Alahuhta-Kasko, executive]

Thank you, Anna. And good afternoon, ladies and gentlemen, also on my behalf. I'm very happy to share with you today a little bit about our performance in the first half year of the 2022. But let's get started.

So overall, the positive development of Marimekko's business continued in the second quarter with both our net sales growing and result improving. Our net sales grew by 16% to EUR 38 million, and they were boosted especially by a favorable trend in retail sales, but also internationally. Our net sales in Finland rose by a very strong 25% and international sales were up by 5%. However, the rate of growth of international sales was negatively impacted by a different kind of weighting of wholesale deliveries compared to the previous year. For the full year of 2022, we expect our international net sales to grow clearly. And then thanks, especially to the increased net sales, our comparable operating profit grew by 17% to EUR 5.7 million, representing 15% of net sales.

All in all, I can say that the positive development of Marimekko's business from 1 quarter to the next really shows that our growth strategy works. And this positions us well to develop and grow our sales also in a more challenging market environment. But let's have a closer look to the different drivers.

So as said, this is actually the eighth consecutive quarter of growing net sales and results for Marimekko. When it comes to our net sales development, plus 16% to EUR 38 million, as mentioned, boosted especially by a favorable trend in retail sales in Finland, but also internationally. All of our own stores were opened in the second quarter. And the footfall in our stores continue to grow clearly from the comparison period when some of our stores were still temporarily closed due to the pandemic situation. What was very positive was that both our sales in stores as well as online developed strongly. Our retail sales altogether in total, increased by 37%, with 39% growth and 33% growth in retail sales -- 39% growth in Finland and 33% growth in international retail sales.

When it comes to wholesale, wholesale sales were more or less on par to the previous year in the second quarter. What is good to note also here is that the rate -- however, the rate of the growth of the international sales was negatively impacted by a different kind of weighting of wholesale deliveries compared to the previous year.

Then when we look at the first half year net sales performance, our net sales grew by 20% to EUR 74 million, with sales growing in all our market areas. The net sales were boosted especially by a favorable trend in retail and wholesale sales in Finland, but also by growing international sales. The sales in Finland grew by 26% and international sales were up by 13%. So altogether, a very strong first half of the year for 2022 for Marimekko.

Then when we look at our net sales development in the first half year per market and per product line. We saw sales increasing in every market, as mentioned, but also in all product lines, especially the bags and accessories enjoyed tremendously strong growth in the first half year by nearly 40%. The Asia Pacific region has today, already, the greatest number of stores when we look at our global map and our online store serves customers in 35 countries already.

And then when we look at our brand sales and maybe good to recap that our brand sales -- or brand sales is an unofficial estimate of sales of Marimekko products at consumer prices, which is calculated by adding together Marimekko's own retail net sales and the estimated retail value of Marimekko products sold by other retailers. The Marimekko brand sales in the first half year grew by a strong 34% to EUR 190 million, driven especially by international sales.

Then when we look into our operating profit, we saw an increase of 17% in our comparable operating profit in the second quarter, reaching EUR 5.7 million and representing 15% of net sales. The earnings were boosted especially by increased net sales but also lower depreciation than in the comparison period. On the other hand, there was an increase in fixed cost that had a weakening impact on the result.

We have been also, in this quarter, continuing investing in the building blocks of our international growth, which showed then an increase in marketing and personnel expenses, for example. The relative sales margin was on par with the same period the year before in the second quarter.

And then when looking at the first half year performance, our earnings also improved clearly, reaching EUR 12.3 million with 17% growth, representing 16.6% of net sales. Similar drivers are also in the first half year, earnings being boosted especially by increased net sales but also lower depreciation than in the comparison period. On the other hand, there was an increase in fixed cost as well as lower relative sales margin that had a weakening impact on the results.

So to elaborate a little bit what are the drivers behind the increase in fixed cost and the lower relative sales margin. So starting with the fixed costs. In the first 6 months, they were increased, particularly by higher marketing expenses as well as new recruitments made to strengthen the building blocks of our international growth and increased personnel costs in the stores. It's good to remember that in the comparison period, there were still some temporary layoffs in the retail organization.

Then when looking into the lower relative sales margin, it was weakened in the first half year by increased logistic costs that were resulting from a general increase in transport costs as well as higher discounts.

So why higher discounts? In the first half year, discounts increased due to the successful end-of-season sales as well as three clearance sales of stores, the lease term of which expired. On the other hand, the relative sales margin was supported by good margins per product, higher share of retail sales of total net sales as well as higher licensing income.

Then if we have a look into the key events in the second quarter of this year. So we have had, in the second quarter of this year, a lot of really exciting news in the area of brand collaborations. And at the beginning of April, Marimekko and IKEA announced a brand collaboration inspired by the Nordic sauna culture, which combines in a beautiful way, Marimekko's art of print making with IKEA's home furnishing knowledge. This limited-edition collection will be launched in March 2023 at most IKEA stores worldwide and will certainly support in further increasing Marimekko's international brand awareness also amongst entirely new consumer groups.

In June, we also launched on market a limited-edition collaboration collection with the modern luxury brand, Mansur Gavriel. This capsule celebrating the optimistic lifestyle marries in a beautiful way Mansur Gavriel's quality craftsmanship and most iconic bag styles with two bold and iconic Marimekko prints from the 1960s.

In the second quarter of the year, our store network in Asia strengthened. Two new Marimekko stores were opened in China, Mainland and one in Hong Kong, a pop-up in South Korea became a permanent store and a Marimekko pop-up cafe was opened in Thailand. So even in this digitalizing new world, we believe that physical stores do play still a very important role for consumers as inspirational, experiential meaning places centering around personal service. In addition, these sort of creative retail concepts, including, for example, the pop-up cafe, they helped to further deepen the Marimekko brand experience, creating it even -- to become even more holistic one, introducing our brand to new audiences and at the same time, further strengthening loyalty of the existing Marimekko fans.

Then after a 2-year break due to the coronavirus pandemic, in May, we had the chance to continue our 30-year tradition of open to all fashion shows in the Esplanadi park in Helsinki. And this time around, after 2-year break, we decided to expand the event to a full Marimekko day around the city with also other connected events. This tradition really reflects strongly several of our core values, including the sense of community, equality and inclusion.

We have been working for many years with the Helsinki Pride. And this year, we were very proud to be one of the main partners of Helsinki Pride. The Marimekko culture is very much based on equality, diversity and inclusion, and it is really important for us to be able to promote and nurture these values across our entire value chain.

Then in June, we published our sustainability review for 2021, detailing the steps that we take on our ambitious sustainability journey. At Marimekko, we really want to be at the forefront of developing more sustainable products and practices. And in '21, our work included, for example, reducing waste, increasing the share of more sustainable materials in our products and overall, in various ways, extending the lifetime of our products. And as a result of continuous development, work and emission offsetting, our own operations have been carbon neutral since 2020.

And then moving on to the outlook for 2022. So starting first with a more general view. The development of the pandemic situation in different markets, Russia's war against Ukraine, political tensions, increased inflation and raising interest rates impacting the global economic trend as well as the development of consumers' purchasing behavior affect the development of the global economy trend as well as the development of consumers' purchasing behavior, and this way can also have an impact on Marimekko's business.

The falling consumer confidence in some of our market areas can affect the business negatively in particular, during the second half of the year. While the Russia's war against Ukraine does not directly affect Marimekko's business, for us, this war against Ukraine still causes disturbances in global supply chains and contribute to the general economic situation, consumers' purchasing power and behavior. And these factors may impact Marimekko's sales and profitability as well as operational reliability and efficiency of our value chain.

But of course, we are closely monitoring the impact of both the war as well as the coronavirus situation and also the development of the general economic situation, consumer confidence and purchasing power, and we will adjust our operations and plans should circumstances require.

And what is also good to remember is that because of the seasonal nature of our business, the major portion of our company's euro-denominated net sales and earnings are typically generated during the second half of the year. In percentage terms, net sales growth is expected to be stronger at the beginning of 2020 than in the second half of the year. In 2020, the pandemic still had a negative impact on the footfall in Marimekko's own stores at the beginning of the year. And the net sales in the second half of the year were supported, for example, by substantial nonrecurring promotional deliveries in wholesale in Finland.

Then if we look into the net sales development in our two major market areas, Finland and Asia Pacific. In Finland, where the country traditionally represents about half of our company's net sales, we expect the sales to grow on the previous year. What we have also mentioned before is that the total value of nonrecurring promotional deliveries in wholesale in 2022 is estimated to be substantially lower than the year before. It's good to also remember that in 2021, the vast majority of these nonrecurring promotional deliveries took place in the second half of the year in 2021.

Then in Asia Pacific, which is our second largest market area playing an important role in our international growth, we do expect net sales in the Asia Pacific region to increase clearly in 2022 as our total international sales though the accrual of the sales will be weighted differently between the quarters than in the comparison year. It is our aim to open approximately 5 to 10 new Marimekko stores and shop-in-shops in 2022. And like in 2021, also this year, most of the planned openings will be in Asia. Overall, when it comes to channels, we do estimate both retail and wholesale sales to increase in 2022. Also, licensing income is forecasted to be higher than in the previous year.

And then if we move into the supply chain. It is clear that the coronavirus pandemic-related restrictions and Russia's war against Ukraine caused disruptions in global supply chains. And these disruptions have resulted in delivery delays and thus, again, impact also Marimekko's net sales and profitability. In addition, disruptions in supply chains increased logistic costs, which have also grown overall worldwide. And what is good to, of course, remember is that net sales and earnings essentially depend on maintaining the operational reliability and efficiency of distribution centers and logistics in the exceptional situation.

Overall, the cost of raw and other materials have increased globally. Early commitment to product orders, which is typical of our industry, that means that changes in raw and other material prices affect Marimekko with a delay. In addition, the early commitment to product orders further emphasized by this pandemic situation, weakens Marimekko's ability to optimize product orders and respond to rapid fluctuations in demand, especially in exceptional situation, as well as increases risk related to inventory.

But we are very actively working on both mitigating these negative effects of disruptions in supply chains and increased cost as well as to secure sales development also in a weaker general economic situation. And we feel that we're strongly positioned to do that with our very strong desirable brand and collections that speak to an even wider audience around the world.

Then when we look into the growth investments as we have also communicated earlier in the year, we will be continuing to accelerate our long-term investments to international -- or investments to long-term international growth. And we will be investing, especially in increasing brand awareness in digital and omnichannel business in developing sustainability and in recruitment, supporting our growth as well as in IT systems. Therefore, the fixed costs are expected to be up on the previous year. Also, marketing expenses are expected to be up. Good to also keep in mind that in 2021, fixed costs were still decreased by partly temporary cost savings.

Then we reiterate our financial guidance for 2022, which is that the Marimekko Group's net sales for 2022 are expected to grow from the previous year. And the comparable operating profit margin is estimated to be approximately some 70% to 20%. The global supply chain disruptions and generally increased material logistic costs as well as the development of consumer confidence and purchasing power, in particular, do cause volatility to the outlook for 2022.

But with these words, I will end my presentation, and we're here, ready for any questions. Thank you.

[Anna Tuominen, executive]

Thank you, Tiina. We do have a couple of questions, but there's still time to post more questions on the chat if you want to. I would like to start with a few detailed questions related to outlook -- the market outlook.

The first question relates to the Finnish retail. As the years' 2020 and 2021 were a bit distorted by corona pandemic, would you say that there, for example, looking at years' 2018 and '19 would give a good estimate of the seasonal split in Finnish sales? Or was the company very different in 2018?

[Tiina Alahuhta-Kasko, executive]

So when we look at Marimekko altogether, it's good to keep in mind, as I mentioned, I could pull the slide also here, is that there is a seasonal nature in our business with the major portion of our euro-denominated net sales and earnings traditionally being generated during the second half of the year. And that has been quite a typical cycle. I mean that's a typical seasonality in the longer term. It's nothing new that has happened now in the pandemic period.

When we look at our retail sales development, it has been very strong. And if you look back to our like half-year performance in the previous years also, in the prepandemic times, we are in a much stronger level today. So that is, of course, very good strong development. And keeping in mind that direct-to-consumer retail is the core of Marimekko's distribution strategy. So very, very happy to see that and believe that it's also a sign of the ever-stronger brand of Marimekko and the strong desirability that we have.

[Anna Tuominen, executive]

In the outlook, you mentioned also that the nonrecurring promotional sales in Finland are expected to be lower than previous year. Are you able to give us an estimate of how much lower?

[Tiina Alahuhta-Kasko, executive]

So unfortunately, we are not able to elaborate further on the size of the nonrecurring promotional deliveries more than what we have said in the market outlook.

[Anna Tuominen, executive]

There's questions about the international sales. Would you go through a bit what were the main drivers for the increase? So there was an increase of 5% in the international sales. And do you have any specific sales targets for coming years in the strategy for international sales?

[Tiina Alahuhta-Kasko, executive]

Yes. So when it comes to the second quarter of the year and if we look at the different market areas, so understanding that the Asia Pacific really represents the most -- like the second biggest market area for Marimekko, if we start with that, we saw an increase of 9% in the second quarter net sales, with both retail and wholesale sales growing. What is good to note though in the Asia Pacific wholesale sales, this kind of different weighting of wholesale deliveries compared to the previous quarter as well as the worsened pandemic situation, which had a negative impact on the replenishment orders. They had a negative impact in some countries to the wholesale development in the second quarter, but good development overall in the market.

Then if we look at the other regions, so Scandinavia increased by 4%, EMEA by 7%. We saw a decline of 10% in North America. If one asks what are some of the key drivers there. In the comparison period in 2021 in Q2, which was kind of the highlight quarter of Marimekko's 70th anniversary, we did a big pop-up campaign with Nordstrom, one of the big department store chains in the U.S. which took place in nine cities and also online. And this year, we didn't have this campaign. So that, of course, had an impact. We have been also closing a couple of stores within the last months in the U.S. due to the expiration of leases, which has then also impacted the growth in retail sales in North America despite the fact that it still grew.

[Anna Tuominen, executive]

You also mentioned, both in the report and in the presentation that the international sales are expected to grow clearly during the whole year. Are you able to define what clearly means that the growth on the first 6 months was already 13%. So should one expect accelerating growth from now on or something that you can comment on?

[Tiina Alahuhta-Kasko, executive]

So unfortunately, I'm not able to elaborate that much more deeply, but it's basically exactly Anna, what you said is that on a full year 2022 level, we do estimate our international sales to grow clearly. And we also estimate the Asia Pacific Region sales to grow clearly. So I think overall, we're on a very good track as a company in terms of our net sales and overall profitability.

[Anna Tuominen, executive]

Few questions related to production and products. Are you planning -- or is it possible to increase the production in Finland in the coming years?

[Tiina Alahuhta-Kasko, executive]

So it's -- first of all, it's good to remember that Marimekko's lifestyle product range is very wide with different types of products that require also different types of production methods and knowledge. So the required production capacity, the machinery, the manufacturing skills, materials and supplies required to make these Marimekko lifestyle products, unfortunately, cannot be found to the scale needed in Finland.

However, what is good to keep in mind is that our design -- our entire design and product development is actually done in Finland. And in addition, actually, we have, of course, our own textile printing mill here in Helsinki, where we print around 1 million meters of fabric every year for all of our product lines. So not only in home collections, but actually also for our bags and accessories and fashion lines, which are then shown into also ready-made products. So actually, it plays a really important role also in our production but then also from the point of view of allowing us to participate in, let's say, sustainability development initiatives in the industry through our factory.

When it comes to our production countries today, the majority of the products -- of the Marimekko products are produced within Europe. And it's good to remember that high-quality production knowledge and craftmanship can be today found all around the world, and our objective is to always find the best possible production place for each of the Marimekko product with sustainability and quality being some of the most important drivers of that decision-making.

[Anna Tuominen, executive]

There's actually another question related to this production in EU as now the euro is -- has a lower value, for example, compared to USD. Does that affect your decision making, for example, in bringing back production more to Europe?

[Tiina Alahuhta-Kasko, executive]

Well, we need to look at the kind of production place choices in a more sort of longer-term view. And we very much believe in building strong relationships with our suppliers. There are partner suppliers. And so we're not the ones that would be going around in like very tactical terms, when we look at the, like short-term tactical terms when we look at the production place choices because we want to ensure that the quality, sustainability standards of our products are high and what we expect.

But of course, we need to kind of follow the development of the different currencies in the longer term. Overall, in this sort of new environment that we are embarking on, coming out from the pandemic, we need to always evaluate our kind of approach as to be the most competitive and value driving for our customers.

[Anna Tuominen, executive]

Another question related to products. Will there be a men's collection in Marimekko sometime soon?

[Tiina Alahuhta-Kasko, executive]

Thank you for that question. I'm very happy to share with you that already, for some years, we have been featuring as part of our collections, the Marimekko's Kioski segment, which is an entity -- a genderless or unisex entity that also provides options in ready-to-wear also for men, and it has been really happy to see to have even more men within the community of Marimekko. So this is something that we also hope to continue, the Kioski program.

[Anna Tuominen, executive]

How do you see the North America market development? Are you -- is it still a core market? Are you investing there for the future?

[Tiina Alahuhta-Kasko, executive]

Thank you. And I already elaborated a little bit on the second quarter development in the North America market. But -- so on top of that, what I would say, yes, North America is one of our most -- like the key main markets. And actually, at the moment, we are in the process of finalizing the new location of the Marimekko flagship store in New York. So we're very excited about that.

[Anna Tuominen, executive]

There's also a sort of follow-up question related to Nordstrom campaign in Q1 last year. How long did the campaign last? Did it include also H2? But the campaign was ended in mid-July last year. So not really an effect for the second half.

[Tiina Alahuhta-Kasko, executive]

Yes. And maybe something to add is that, that kind of a pop-in campaign, it's typically something that brands -- it's something that brands wants that type of a campaign. So that took place last year.

[Anna Tuominen, executive]

Question related to the shareholder returns and dividends. Marimekko has been paying a yearly dividend. Has there been discussions or has there been consideration of share buybacks, especially in a period of high market volatility when stock prices fall sharply like earlier in June this year? Would buybacks in favorable market conditions benefit shareholders even more? Or is that an issue of liquidity?

[Tiina Alahuhta-Kasko, executive]

So we do not have these kind of plans.

[Anna Tuominen, executive]

And actually, the share split done this year was -- total liquidity to share.

Any thoughts on paying dividends quarterly?

[Tiina Alahuhta-Kasko, executive]

We don't have anything to elaborate on that.

[Anna Tuominen, executive]

Finally, a question with the brand collaboration with IKEA. Some might fear that IKEA, as a partner, would damage the exclusive and luxurious image of Marimekko brand. How do you see this?

[Tiina Alahuhta-Kasko, executive]

I'm not concerned about that actually at all. So IKEA is, of course, a world leader in their own segment. They have been actually really helping to build the awareness and recognizability of Scandinavian design and lifestyle around the world. They have been also doing these sort of similar limited-edition brand collaborations with other leading brands in their own industries.

And we actually see, at Marimekko, the collaboration with IKEA as a tremendous opportunity to be able to share the joy and optimism of our art of print making now in this context inspired by the Nordic sauna culture in a very democratic way to people around the world. So this is an invitation to also get acquainted with Marimekko, and we're very excited about that.

[Anna Tuominen, executive]

Thank you, Tiina. That was all the questions this time. We hope that you'll join us next time in mid-September when we have our first ever Capital Markets Day. Hope to see you there. Thank you.