Verkkokauppa.com Oyj

OMXH:VERK

Earnings Call Transcript 2020-Q3

[Panu Porkka, CEO & Managing Director]

All right. So good morning, everybody, and welcome to Verkkokauppa.com's Q3 report presentation. If you have any questions, please send them to [e-mail], and all questions will be the read out loud at the end of the presentation in the Q&A section. Today, joining with me and also available for questions, CFO, Mikko Forsell.I will start key figures, highlights from this morning's report regarding sales and profitability development. We will also give you some insight on company's development on competitive advantages and how we prepare ourselves for major international players entering probably the market. And then we will have some consumer insights as well and at the end, key takeaways and questions, if there are any.Let's start with a few highlights. First of all, revenue, important topic for a growth company. We were able to have a growth of 7.3%. So nice growth that we've been having this far continuing almost revenue at EUR 130 million. If you look at the margin side, first of all, the gross margin was increased from previous year already a quite high level, even to 16.2% this year and because of the revenue development and stronger gross margin, gross profit was actually up by 10%. From the cost perspective, nothing surprising on that level. Personnel expenses slightly up mainly due to, for example, logistical reasons that with the increased demand, we also need increased capacity from that side. In other operating expenses, almost plateauing to last year's level, slight increase in credit loss provision.So altogether, because of the strong top line and gross profit development, operating profit was actually increased by almost 30% to EUR 5.6 million, so it is not only all-time high for Q4 -- Q3, it is actually the company's all-time record on a quarter profit, which leads to a very nice operating margin of 4.3%, which is already at the top range of our midterm plans.So all in all, a solid quarter in performance in revenue and profitability growth. And because of the good situation and development of the company, it was not a surprise that this morning the Board of Directors decided to pay out a quarterly growing dividend EUR 0.055 per share. So thank you to all the new owners and also welcoming all new investors to this great journey of ours.If we have a slight deeper look into the revenue and sales development, first of all, it is clear to be seen that our strong web channel in consumer demand is growing and really driving our sales at the moment. Not only the revenue, but we also see that although we are the most visited site and the best-known brand here in Finland, we still get a lot of new users to our website. In Q3, it was increased by 20%, which, on the other hand, says that there's still a lot of market potential here in Finland. And first -- and second that the brand work that we have been doing for increased exposure and better understandment is really paying off as people are more and more intrigued to go to our site.Also, the change in consumer behavior is clearly to be seen in deliveries and delivery options used. Fast deliveries, so including express and same-day deliveries, are really booming. They are almost up 300% compared to last year. And from the category side, we also see that, although almost all categories are growing, that we are getting more and more support from the midsized and smaller categories, which has been the plan for a few years now. So those ones really carrying out and really paying the tribute and really also are main growth drivers at the moment.In the same spirit, still, it is good to understand that the COVID and the travel restrictions are really hammering our export business at the moment, strong headwind from that part of the business. But the strong web consumers is really overcompensating all those losses and really pulling through a nice sales development.From the profitability side, this has been the key focus area for this year. We have said that this year, we are really looking for profitable growth. And until so far, first 3 quarters, we have done a good job on that one. Obviously, the sales mix is in favor of a stronger margin. As a lower-margin business like export is declining, it automatically has a slight increase in the general margins.Second thing that we see is that with the strong development in mid- and small-sized categories as the average margin is higher in those, as they are increasing and developing, it has a positive impact also on the general margin. And the third one that normally decreases the margin is that if you have problems with the stock turnover, if you have problems with obsolete stock, you need to get rid of it with the lower price. This time and this year, we've been managing that very good. There has been no missed purchases and there are -- there's no obsolete stock that we need to get rid of, and that's also really one key issue that we were not losing margin.On the other hand, revenue growth, you can steer with margin and basically marketing investments. And if we see that we were pulling revenue growth of 7% with a higher margin and not increasing marketing efforts, we can clearly state that, that has paid off better than previous year. And then really underlying that the general cost structure normally in good hands and also during this quarter, they are mostly plateauing. So all the effort on top line and profit really also paying out then in the bottom line.From cash position from balance sheet, nothing spectacular. Inventory levels are slightly higher at this point. We are increasing our inventory levels because we are preparing ourselves for the major season going ahead. But also, we want to make sure that if COVID will have some issues around production or transportation from Far East that we are ahead of that game. So we are now already making plans that we can be sure that the coming season next year in springtime will be good from availability point of view.Cash flow positive, strongly developed from last year. Investments extremely low until this, so far, so less than EUR 1 million. It underlines that the lean structure of the company that there are no big needs for investment just to operate the business. But saying that, we are actively looking into technology investments and really investing for our future capabilities, to scale future capabilities to grow and also outside our business. We haven't found any yet, but we are really hoping that next year or the next, there will be some part of the business that we can really invest in to be even better in future years.Cash position strong. Like last year, equity ratio on a solid level. And still on top of that, we have a credit facility negotiated. Obviously, no need for that at this given point.Guidance was updated on the 24th of September due to the good results of the first 3 quarters and also our outlook to the full year. So revenue is expected to be between EUR 525 million and EUR 550 million, and profit bracket was increased quite a lot. Now the expectation is to be between EUR 17 million and EUR 21 million. And if you compare that to last year's EUR 11 million, so it's already clear that there will be a major increase in profitability and profit this year.Our future goals, our mission is to be the Nordic leader in retail landscape in operational excellency. We strongly believe in our business model. It is the best suited in retail at the moment, own ecosystem that can really support and drive the development and lower cost mentality to making sure that we can have those probably cheaper prices. It all starts with the brand, with the brand promise, you need to connect yourself with the consumer. Here in Finland, we have a really strong brand. We are the most visited site, we had 20 million site visits during Q3. The Finnish Post Office is conducting a large consumer survey every year. And this year, again, we were voted to be the best Finnish one. And last year, we were slightly behind also in the international category behind Zalando. This year, we are proud to say that we were on the same level as Zalando. So this small start-up like company in Finland is really pushing to be on the same level with international giants.About the brand, a few data points. It's just not our opinion. Brand index is measuring buzz about the brand. So if you compare it to all other direct competitors, here in Finland, people are talking more about the brand. And if you ask the consumer about recommendations, we are the most recommended brand compared to our retail comparison here in Finland. The brand is just a promise. You need to execute it with consumer experience. We've been working hard on this subject for a few years already back. The site has been updated again. The search engine is functioning better than ever, utilizing wisdom of crowd. The content in categories and category structure is improved that the surging and browsing is really seamless, better than before. The chat is in pilot to be automated. And also this outlet products, so products that are returned to the store, normally, we're only here in Jätkäsaari store physically to be bought. Now we are just on the verge to have all those products online as well. And really making sure that the omnichannel approach is delivered for all consumers in Finland. Not forgetting about the in-store experience, how we could measure footfall in stores or how we could provide people -- consumers in store even better in-store experience, we are working, obviously, also hard on. Assortment has been the backbone and is the backbone. We have introduced new categories, new subcategories basically every year. Now we even started the new site, Verkkokauppa.fi, to underline also the leadership, not only as a brand but also from the Finnish perspective. And this site is dedicated solely to Finnish great projects. So we also, from our approach, wanted to help those ones who were losing footfall in the stores and didn't get the needed attention and experience for their product because of people not going to the stores anymore. So we were able to utilize our site and give them the exposure they deserve for their great products. MDA has been also one big driver as a big midsized category. We are just on the words to have the last missing A brand lineup listed. And after that, I think it's quite certain to say that we have the best assortment in MDA also here in Finland. Obviously, there is a need for face mask and disinfection products, we are providing those. And we wanted to make sure that at least one of each is provided to almost in purchasing price because we want everybody to be in the status to be -- to afford to purchase those kind of products. And on top of that, a lot of smaller brands, A brands and designer brands implemented and introduced. So the assortment is constantly refreshed and getting new ideas and when we see something is really picking up on search engine, we go there, search what are the people buying and then introduce those kind of products quite quickly to the website. And the last bit, obviously, those products need to be delivered. We understand our role model has been the pilot, and we are really pushing for faster deliveries and flexible and multiple delivery options. I think it is already quite fair to say that the so-called bottlenecking last mile in Finland is, I think, nowadays not given anymore. It is easy to purchase. You can have it during few hours or the same day or next day what you purchase from home. So I think that discussion is getting less and less in Finland. It's not only about the fast deliveries. We just wanted to highlight that even back in year 2014, we already introduced 3-hour express deliveries as the first one here in Finland. So we were ahead of our time. Nobody was utilizing that. But nowadays, a lot of people are utilizing it. And we see that a lot of competitors are utilizing or offering it as well. It's okay. We understand that we need to be the one who introduces these kind of things as the first one. From delivery side, in total, home deliveries are really booming. So people are not just starting their purchasing route from the digital interface, they are also completing it to be delivered at home. In Q3, home deliveries increased by 45%, which is a high amount. And if you look at deliveries which included some part of extra service, is it installation or getting rid of the old one, so people really understand nowadays that from your own sofa, you can have everything covered just for a few clicks and, those services are getting more and more attention and people are utilizing those more and more.And then the last one, this is actually the most utilized way of deliveries here in Finland. We have a huge parcel locker network, and people really like to order those purchases to those lockers if they are on the way home or somewhere where they are going either way, so people utilize those lockers because they can themselves choose what time they pick the purchases up from that. So those are the areas that we are working on and making sure that we have the leadership in those line of businesses.Short summary for what's expected out of Q4. Obviously, we are monitoring the situation around COVID closely, making sure staff customer safety comes first, and we are expecting quite heavy traffic and load on website, not only during Black Friday, but also during Singles Day and Cyber Monday. So we are doing load test and making sure that we do all we can to keep on the promise and also deliver and the availability is on a needed level. So it is untypical that we go into the market segment or competitive situation or landscape with a concrete introduction of -- or view on a specific one. We wanted to once have it here so that we can discuss the topic that we are asked quite a lot in general. We have lost count how many times Amazon SE sites have been launched so far during these 3, 4 years. At least today morning, they were not. I don't know if they will be tomorrow. That's not the point. We have been always fighting against pure players and international giants, which Alibaba, Zalando and so on. So the price fight or the competitive situation against e-com giants is nothing new to us. And people are purchasing from all over the world already. But still, what we do and what we believe that makes us success, not only today or in the past history, but also in the future, are the key competitive advantages or those areas in retail, where we believe and actually most of the people believe, in those areas in retail, you have to be good or best. If we start with the price, price is probably the most important part if purchase is online. It's super transparent. You don't need any additional service to the product. You just purchase something and you probably pick where it is cheapest or close to be the cheapest. We have been conducting comparisons to a lot of players throughout the years. Also, in this moment, we are taking our main categories, taking the top sellers, comparing those to, for example, Amazon, and making sure that our price always probably cheaper prices is met. So meaning that over 50% of times, we need to be cheaper on the other hand. The second thing good to understand probably for people outside of Finland that the market environment and the price pressure in Finland has been tougher for many, many years already than in other Nordic regions because there are 2 Nordic big players and one pure e-com player, us, who are fighting on a smaller market to grow with market share. So you can see it in our margin that they are quite low, you can see it in competitors' profitability numbers that the Finnish market is brutal, it has been brutal, and it will stay that way. So our price level is already lower than in Sweden or Norway in most of the cases. The second thing is around convenience, and that is actually one of the things that we can provide unmatched convenience as we are the only one with local big warehouses here in Finland. If you compare us to other e-commerce players that come from abroad, nobody can match the delivery times that we do here in Finland. We can offer express deliveries in greater Helsinki area. We can offer same-day deliveries in Helsinki and Tampere area. And next day and the day after, probably everything is shipped to the consumer. So if you don't have a local warehouse, you can't be faster than us here in Finland -- in the Finnish market. And obviously, also the availability, as we can purchase volumes already to be stocked here. We can be quite fast with new lineups and new introductions and really have the availability right away on the needed level. The third thing is around the assortment. Yes, we have less SKUs than a lot of e-commerce players. But you need to understand that we don't have books. We don't sell content. We don't have fashion. We don't have clothes. We don't have shoes. We don't have a lot of the categories that others are offering. What we do is -- the categories that we offer, the categories where we focus on, we have a wide, broad and most relevant assortment compared to all other players. So we really make sure that we are at least on the same level in the categories that we run. And until so far, we have been doing that very, very well. People know that the most technical products, the most kicky products, the newest products that we are known to be the house of brands, the ones who really have also those special products in lineup, and we have a large warehouse, so we can really also expand our assortment from what it is already at this given point. And also what I mentioned earlier, our site Verkkokauppa.fi, we have already all relevant Finnish products on our side. So we can really already now offer to the Finnish consumer all that they need in the categories that we have focused on.And the last one goes around customer experience and helping and servicing consumers. It is clear that our approach with the 4 destination megastores that we have here in Finland, we are miles ahead of those ones who don't have any stores here. What we see and has been the way for a few years already that a lot of pure players are going into the physical footprint as well. So we believe, from the starting point, that the mix between a strong web and strong stores is the best one. And with this business model and with this omnichannel approach, we can offer all customers all the needs they want. A lot of people want to go to the store. They want to talk to our staff, we are known to be super fair and transparent to the consumer, and we are really helping out what's the need. We are not pushing for products. We are not pushing for extra purchases or we are not pushing for a certain brand. We are really there to make the consumer pick the right choice. And also a lot of services, if you have problems with the product, you want to return it, it's always more convenient to go to store, get the refund back or change it into a new product and to ship it somewhere and wait for it. So here, you can see that this is the way we think. This is also the way a lot of retailers think, and it doesn't matter where the competition comes from. These are the elements you need to be good at. These are the elements you should be best at, at least, in some cases. And in a lot of these cases, we can honestly say we are best at. We know that it takes a lot of work to be on that level, but we understand that and we make sure that these competitive advantages stay there also for the future. On the same topic, still in discussion, I think it is crucial to understand that markets are different. Market entry is different from time, for example, in '90s, in end of '90s. If we look at market entry in Germany or U.K., the online penetration was close to no, 0. There was no market. There was no market share. The table was clean. So it was easier for anybody to go and start picking up and building the leadership and market share. If you then go years towards this day, back in '17, for example, in Netherlands, where the market was more mature, 9% online penetration. In Finland, we have probably 12%, maybe 13% by end of year. So not on this level, even higher, but already quite mature market, you had a local hero like ball.com. In those cases, it is impossible that somebody comes from outside and takes over the whole market. What it does, it -- the penetration goes up or accelerates and market shift bought online accelerates normally, which is also a profitable thing for all players or at least the top players in the market. Another way to look at it, not from the channel perspective, I mean, we have here a study made with onliners, with off-liners, with omnichannel players from a category perspective, that even player who owns a category, who is really, really good in one category regardless of the channel, during the time, for example, a big American giant is coming to the market. In most of the cases, they were not only growing, they were gaining market share. So my point or our point is that if you are doing something and you are doing it better than anybody else, it really should support you whatever the competitors or whatever new competitors should come, if you make sure that you have the same elements as competitive advantages. Obviously, onliners will probably benefit slightly more as consumption is going towards online. Penetration is going up. It's like as people are going more and more to certain areas like e-commerce in a digital world, everybody around it, everybody present will have more exposure, in general. From that topic going then to the market from consumer perspective and Finnish consumer perspective, this is out of the post office study as last year and this year. When did you last buy goods from online? And here, in slide blue, I don't know the exact color. You have people who have just purchased today or yesterday, this week or past week, this month, a few months back, and these kind of active people have seen that they have increased their frequencies in purchases just within 1 year. And this is also interesting that last year, people ask do you purchase online and almost 10% said, no, I don't purchase online at all. That number was decreased to 6% in just one year. So it is quite clear to be seeing that this year will go to 0 in just a matter of a few years' time.Another way to look at it to, let's say, 5 years going into the future. It was -- the same question was to 3 different -- consumers we divided in 3 different groups. We have the forerunners who are quite active in online already, we had the basic users, sometimes purchasing, and we have those who were quite critic -- critical thoughts online. And we asked them or they asked them, how do you purchase nowadays? And from those active users, 43% said, okay, I utilize online channel; 34% said I utilized both; and 22% of the purchases were done only with brick-and-mortar as the main channel. And if you look at this, what should happen in 5-year times, these kind of people, 90% of all purchases is online or omnichannel, only 9% is brick-and-mortar. In this basic group, I think quite interesting is to see that today, as there's a -- 53% of my purchases is just brick-and-mortar, normal purchases, maybe daily purchases or I don't know what kind of purchases. That number in just 5 years' time will be deducted by half. So they say only every fourth purchase will be done in brick-and-mortar. And obviously, the critics are saying the same. So from a market perspective, it is quite clear that shift to online is permanent and it will pick up, it will accelerate and it will continue. So today's situation could or should be seen as the new norm of consumer behavior. So just wrapping it up, strong performance in most of operations, solid profit Q1, Q2, Q3. So far so focused area really paying off. Market is changing. We were able to utilize the opportunities. Obviously, we are getting a lot of attention from our website -- to our website. And like said before, the category and campaign management really working nowadays in our favor that we were able to have healthier margin than before.Guidance was updated because of strong Q3 and also our outlook for the rest of the year. Brand is stronger than ever, but we still maintain and keep our focus on that because we need it for future times. Uncertainties around COVID, obviously, they haven't vanished anywhere. Nobody knows what happens after the second wave. Will there be a third wave or fourth wave? So we are pretty much expecting and planning operations to this status that this should continue for some times. We understand that export will be in a strong headwind, but understand also that consumer demand to web channels and web purchases and deliveries will be increasing. And on top of that, the financial situation is solid from the company's perspective, strong cash. So there are opportunities that we can then utilize if they come to our path. All right. Before we start, there are questions or a question. Don't forget about the most important time of the year, spend some time with your families. And if there are some wishes that you need to fulfill, don't be worried that a lot of brick-and-mortar offering is going away. We have the widest assortment, for example, in toys. So you can safely purchase those kind of products from home. Thank you, and Mikko, questions.

[Mikko Forsell, Chief Financial Officer]

Yes. There is one question related to scalability of the business. So I will read it loud. So how much operational leverage do you have left with your existing infrastructure?

[Panu Porkka, CEO & Managing Director]

It was a good question, quite complex. So basically asking how -- what about the cost level or how much leverage is there left in our business. I would like to answer it from another point of view. The biggest or one big cost position to us is obviously rents. We have 4 megastores, and we believe that we can fulfill the best possible consumer experience, the omnichannel experience, with these 4 stores. So this time and this point, we don't see that there will be any need for additional stores. So from that perspective, we think that we are on the level we can be but also we will be. From, let's say, marketing automation, campaigning and combining those 2, I think we can still achieve something. But on the other hand, we want to invest in brand and visibility and the story behind it because that's also the plateau or the foundation to introduce new categories every year. And from the logistical side, I think we have a good setup already. There might be some areas we can improve. There might be some investment areas we can do. So I think there is slight improvement. But from the profitability-wise, I think 4.3% that we have in this quarter is already a quite high number. So it can't be expected that from that profitability level we can double it or something like that.

[Mikko Forsell, Chief Financial Officer]

Thank you. That was it.

[Panu Porkka, CEO & Managing Director]

All right. Thank you. And from our side, from company side, all the best on this, at least rainy Friday here in Finland. Take care.