Boozt AB

STO:BOOZT

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Boozt Q1 2019 report. Today, I'm pleased to present CEO, Hermann Haraldsson. [Operator Instructions] Hermann, please begin.

[Hermann Haraldsson, Co]

Thank you. Good morning, and welcome to this Q1 call. Let's go to the first slide, the key highlights. And before we go into the details, I just want to go through some of the highlights for this first quarter. Overall, the first quarter of 2019 was roughly in line with expectations, roughly we say because the high returns drove down the net revenue and average order value. But all in all, it was in line with our expectations. The growth was supported by Boozt.com with 25% and then also Booztlet that had a very, very strong quarter with a growth of 104%. And we are seeing that Booztlet is gaining momentum and currently even gaining an increased momentum. So that's quite exciting. The gross margin was down versus last year, mainly, as we see it, due to the spillover from autumn/winter '18. And we saw through the first quarter that the autumn/winter period in the industry in general was [ quite all ] flat the entire quarter. And the markdowns on autumn/winter '18 items, they were probably higher than anyone expected for the industry as a whole as well. This is why that -- we see that the campaign stock that we bought, growth partly offset the low margin on the autumn/winter '18 items. A very good thing was that we had more new customers than last year, so the new customer growth continues. We also had to buy these new customers at a lower acquisition cost than we've done previously. So that was a positive, which meant that we spent less on marketing. In general, we are quite cautious in the first quarter on the marketing spend as [ this is more a ] quarter is a very highly campaign-driven quarter and return on the marketing investment in the first quarter is typically less than in the other quarters. So this is also basically on plan. Of course, obviously, with a lower average order value the cost basis were negatively impacted. But again, it's a small quarter, so it -- you shouldn't conclude anything on that. The adjusted EBIT was down by SEK 7 million and mainly driven actually by the Copenhagen Beauty store, which had an effect of SEK 5 million. So if you look at the online business alone, our adjusted EBIT margin were more or less on par with last year. Also last year, we had an income of SEK 12 million extraordinary in Q2, the [ benefits ] of gift card where we also restated and took baggage [ incomes ] from previous years. And this is income that we didn't have in Q1 this year. So all in all, the adjusted EBIT was actually more or less on par with last year. It's also why we're maintaining the outlook for '19 with a growth of above 27% and an adjusted EBIT margin improved from 2018. Going through next slide and looking at the customer satisfaction. This is the most important KPI. We can see that our customers are still very happy. They still give us the five-star, 9.2 rating on Trustpilot. And the NPS is at a world-class high of 70. So all in all, our customer is happy. So the game is still very much to attract new customers, get them to try Boozt. And we know that if they try Boozt, they will return and become loyal customers. Going to the next slide, the order development. We can see that the number of orders [ into come ] was up 34%, but the average order value was down 6%, leading to this lower net revenue. We think it's too early to conclude anything on return behavior, where this might be a temporary thing. It might be a timing issue. We don't see any structural changes. We have seen some [ individual ] brands that have high returns, but it's -- we cannot conclude anything. What we can see of course is that the average order value for the last 12 months is stable. So we would [ rather not ] conclude that we see this as a trend going forward. Going to the next slide on the cohort development for Boozt.com. We can see that over the last 12 months, we had an increase of active customers of 32%, so almost 1.5 million customers for Boozt.com in the last 12 months. They bought on average 2.4, up from 2.39. But again, our very important KPI, the true frequency, went up from 7.2 until 7.8. And this tells us that our customers -- that we're getting a higher share of wallet. So that loyal customers, they are increasingly coming back to us. So all in all, all our KPIs are good. The other business is progressing according to plan yes. Our other segment, the Boozt on Copenhagen is a loss-maker compared to Q1 last year where we didn't have the complete store. But again, the other piece, the off-line piece is progressing according to plan. So we are still quite confident on our very strong position in the market. So having said that, I would like to hand over to Allan Junge to give us a financial update.

[Allan Junge-Jensen]

Thank you, Hermann. And turning to the next page, we can see that the Boozt net revenue was up 25% versus the first quarter of last year. As Hermann mentioned, we also realized the gross margin, which is 1.3 percentage points down versus last year, showing that it was really quite challenged by high inventory level in the industry. As you might recall, we tried to mitigate this pressure on gross margin by increasing our levels of campaign buys at the end of 2018. But in the first quarter, it had not been enough to completely offset the pressure in the market. The adjusted EBIT margin is down 0.8 percentage points, and Hermann also mentioned that it's approximately SEK 7 million worse than the first quarter of last year. All in all, we are actually satisfied with the results given the conditions in the first quarter of 2019. Let's go to the next page. Boozt.com, it grew 25% in the quarter. Once again, it shows that we are able to attract new and existing customers at high rates. Our newest category, Sport and Beauty, they performed very well during Q1 and actually had a growth which was more than 100% in the quarter. The adjusted EBIT margin is slightly compromised versus last year, and that's mainly due to the lower average order value, which is a result of the elevated churn levels in the first quarter. Remembering here that the gross average order value was actually in line with last year. Hermann also mentioned that we managed to attract more new customers versus last year in net returns which is very good. And therefore, we also realized a much lower customer acquisition cost in this quarter, which is also very good. Turning to the next page with Booztlet.com once again, a very strong quarter, grew more than 100% showing that there is high attraction in this off-line segment. And it's performing very well, if you ask us. The adjusted EBIT margin is deliberately lower versus last year, which is due to the fact that we have spent more marketing in various media channels as we have been testing levels of spending per customer acquisition in this segment. The first data looks very promising, and it demonstrates to us that there's a great potential in this off process. All in all, we believe that this segment proves to be very strong, and we also expect the momentum to continue in the coming quarters. So let's turn to the next page, segment Other. Remember that it consists primarily of 3 physical stores where 2 are new stores and the third one is in our outlet store located in South Copenhagen. We had a loss of SEK 5 million in the quarter primarily driven by the new store in Copenhagen. And also remember here that, that new store was a not a part of our first quarter in 2018, as it opened in June last year. During this quarter, we have taken measures to limit the loss in the Copenhagen store, but they will not show results until the second quarter of 2019. As you already know by now, we have decided to close down the Boozt store in Roskilde where we expect to have one-off costs of around SEK 5 million. But despite that, we still maintain our expectations for the Other segment to have a loss of around SEK 20 million during 2019. Let's turn to the next page, cost ratios. Here, you see at the top that gross margin is down 1.3%. As mentioned, this is the result of a tough trading environment and we also had some clearance of fall/winter '18 with higher discounts in the quarter. Except for the marketing cost ratios, all cost ratios were hit by the 6 percentage points lower average order [ lessen ] and it is due to that we have experienced cost of 3 percentage points higher in returns. There's no single explanation. Hermann talked a little about it, but there is no single explanation to the increase in the return levels. But we can see that it's the fashion part of our business which is the -- which had these increased return levels. Historically, we have not seen such -- some increase in the return rates, while we of course will monitor these closely in the coming months. All in all, the adjusted EBIT margin is therefore down 0.8 percentage points versus last year. Let's turn to the next page, key financials. The last time we spoke, in February, we said that the working capital levels would be higher in the Q1 as we expected, and that also turned out to be true. And as we also said, we had paid for goods, inventory much earlier compared to last year and also that we deliberately decreased our stock levels for campaign stock end of 2018. This had put constraints on our cash position which is approximately SEK 120 million lower than last year. We will expect to record some of this deviation in the months to come. So you should expect that the working capital levels will be moving in the right direction. CapEx in the quarter, for the most part, led to our development of our own platform and it's in line with also -- what we have also communicated previously of around 1 percentage points of difference. Let's turn to the next page, the outlook. Hermann mentioned it in the beginning, but I just want to stress it again, that [ well through ] our slowest quarter which last year was below 20% of full year revenue. We maintain our full year guidance of net revenue growth of more than 27% and an adjusted EBIT margin to improve from 2.3% in realized [ assets ]. That concludes our presentation, and I will now hand it over to the operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Daniel Schmidt from Danske.

[Daniel Schmidt, Research Analyst]

Just wanted to ask a couple of question and starting with the return rates being substantially higher than what you've seen before, and Hermann you said that it's too early to call it a trend. So do you see anything about the development so far in Q2 and how that sort of stacks up versus what you saw in Q1?

[Allan Junge-Jensen]

Allan speaking here. Thank you for the question, Daniel. It is -- to be honest, it is too early to conclude anything, remembering that returns are only coming after the closing of the month. And now we are in the midst of May. So I believe that in a couple of weeks' time, we will know what the return levels will be for April. But until then, we don't have any indications so far but [ instead ] it's been neither worse or better.

[Daniel Schmidt, Research Analyst]

Okay. And if worse comes to worst, and this seems to be the new level for some reason, is there any measures that you can sort of act on that is going to mitigate this cost for the returns if they stay this elevated?

[Hermann Haraldsson, Co]

Yes. Daniel, this is Hermann. Obviously, if let's say returns get higher after -- we have experienced over the last year that returns increased last year 1 percentage point. So we've been expecting a slight increase in returns, but there's not this jump that we saw in the first quarter. We are constantly working on kind of making it more smooth, trying to automate as much as possible. And so that's -- on the improvement side, that's the key thing we can do is to basically be more effective and trying to make it yes, less costly. So that -- and of course, we're using on the size all kinds of efforts to keep goods in sizes that -- this is mainly the sizing for it. Again, it's very early to conclude also Europe in a season where we have a lot of campaigns, you get a lot of offers, consumers might be -- try to maybe add some more items but [ it's protected ] because of price and because the risk is so low in the returns. So I think it's very early to conclude anything on returns, and we shouldn't jump to any conclusions on it.

[Daniel Schmidt, Research Analyst]

All right. But are you contemplating at all incentivizing the customer not to return by giving them an extra discount or anything like that if they sort of give up the right to return for free? Or is there anything, or return fees, for that matter? Is that something you're contemplating?

[Hermann Haraldsson, Co]

You know what, it's ingrained in our company culture that we love returns because if you love returns, then customers will find it easy to return. Customers don't add things to the basket just to return. They hope that it fits because that's interesting. So you -- what we need to do is to help them make the right choice and then make it easy to return. And that's the key thing for us and reduces cost. Fortunately, with also with kind of development, last-mile distributors are also becoming more efficient. So I believe that this will -- going forward, efficiency is in the return handling process.

[Daniel Schmidt, Research Analyst]

Okay. Okay. And second topic, the gross margin, and you mentioned, Hermann, that of course as you also said in the Q4 that you were buying campaign goods at a sort of a cheaper price than last year. But that didn't solely mitigate the promotional pressure in the market. What are you seeing going forward in terms of your inventory in campaign goods and the purchase price that you've sort of had this year versus last year and that in relation to what the market is doing? What should we expect?

[Hermann Haraldsson, Co]

Yes. I think generally now of course the market is inherently being stable at the moment. 80% of the market is off-line [ with regioning ] and so their comparative position is not being improved. So we are just preparing for a situation where it's not going to be an issue. And personally, I was a bit surprised that the markdowns for autumn/winter '18 stopped. In the first quarter, it wasn't that high. So the industry was literally selling out at close to cost prices. And to be honest, I don't know what will happen. We have the Booztlet, which is our piece of a huge industry in the market because that's where you also can get some very good deals. That's our kind of hedging instrument. But my take is that with [ instrument ] of the market, which off-line not gaining competitive [ stream ] and us focusing it too much on becoming the market leader in the Nordics, focused on the Nordics, becoming kind of the local champion, we're only getting stronger. And you will see from now on until over the next 3, 4, 5 years, you will have this blips. But our position is only getting stronger. So we just have to act on the opportunities. And by having both Boozt.com and Booztlet, I think we're in quite a good spot.

[Daniel Schmidt, Research Analyst]

Yes. Okay. And then just a final question on the full year outlook, which is unchanged. And you started the year a bit -- a little bit more negative earnings than last year. Should we think about the year as being quite sort of back-end heavy, i.e., that the, then the growth in earnings will really come in the second half rather than in Q2?

[Hermann Haraldsson, Co]

Again, it's difficult to say. Of course, autumn/winter is always strong because that's where the heavy -- the huge stuff is. That's where you buy the coats, the winter stuff. So obviously that, the second half is always the most important half year-- no, so we are not betting on that, that the second half will be much better than the last year. So we are -- we have a plan, it's progressing according to our expectations. It's also why we maintain the guidance.

[Daniel Schmidt, Research Analyst]

Yes, yes. Does it at all hinge on the return rates normalizing? Or could you cope with elevated return rates and still get to your target?

[Hermann Haraldsson, Co]

Yes.

[Operator]

And the next question comes from the line of Niklas Ekman from Carnegie.

[Niklas Ekman]

Yes. A couple of follow-ups on the return rates here that we've been talking about. You said here that you -- you've said for a while now that you expect return rates to increase. And I think you said here that you were expecting kind of increase of about 1% per year. Can you give any kind of indication what kind of return rates you saw in this quarter or at least the year-over-year impact? Are we talking about a 5% or even a 10% increase just to understand the magnitude?

[Allan Junge-Jensen]

You mean in Q1?

[Niklas Ekman]

Yes, in Q1.

[Allan Junge-Jensen]

Yes. It was a little more than a 3 percentage points' increase, to be exact.

[Niklas Ekman]

Okay. Excellent. And historically, you've seen a rate of around 1% per year?

[Allan Junge-Jensen]

Yes, correct. So in that respect, it was somewhat elevated compared to our models.

[Niklas Ekman]

Okay. That makes sense. And also I'm curious here about the again, the financial targets for the full year, how confident you are about these targets. I mean you had rather easy comparisons here in Q1. The comparisons are a lot tougher, and I expect or suspect that the cold spring weather here has delayed the spring season. Are you at all worried about the start of Q2 and whether it will be difficult to recoup that if -- when the warm weather comes?

[Hermann Haraldsson, Co]

Yes. Deliberately, for the first 20 minutes, we haven't talked about the weather because it was such a topic for the last year. Of course, April last year was extremely strong plus you had the summer [ heat ] which came April 3. And then we went from winter to summer. We haven't seen that and also now we haven't seen that [ save ] in May and the investors and [ shorters ] -- but it's quite a lot to conclude on the first quarter yet. So I rather would like to -- for our second quarter, I would like to refrain from concluding anything on that yet.

[Niklas Ekman]

Okay. Fair enough. I would also note that your non-Nordic sales here have been quite strong, both in Q4, now again in Q1. Is this just a coincidence? Or have you done any changes in your non-Nordic business?

[Hermann Haraldsson, Co]

We have -- I wouldn't say it's a coincidence, but we have kind of tested a bit on the other marketing in Germany where we see there's a kind of pockets of this [ canay of special ] numbers. But this is not a trend of us expanding into the -- into outside the Nordics. So that is the, it's kind of random thing or coincidence. We have been focusing on the Nordics and just take the revenue that we can get outside the Nordics. If we have some low-hanging fruits in Germany, in the Netherlands, we take them. But we're not going to do any big pushes towards -- outside the Nordics. So it's still very much focused on becoming the [ normal ] champion in the Nordics.

[Niklas Ekman]

And with the strategy you have now for the non-Nordic business, this is highly incremental. Is that right to assume, given that you are spending very little on marketing? You generally would have a higher margin on that business despite higher trade costs.

[Hermann Haraldsson, Co]

Yes, yes. It's incremental. And in Germany, returns are extremely high, like close to 60%. So this is why you don't want to spend too much on marketing. And basically, you want to make money on every order you make in Germany. So let's just -- again, we're taking the low-hanging fruits and don't do anything for that.

[Niklas Ekman]

Okay. Excellent. And you talked about Beauty and Sports here as well growing more than 100%. Is it -- are you ready to state roughly the share of sales that these 2 divisions make up?

[Hermann Haraldsson, Co]

Not yet. Beauty is still below 5%, and it's not the growth we should have in the Beauty segment. The Sports segment has been very strong. The launch of adidas was as good or might even have been better than we expected so -- but we haven't really disclosed yet the share of Beauty and Sports. But they're growing quite heavily. And I think that in the Sports sector, we can see that the Sports category that we're attracting also other brands than adidas and is now getting to quite a confident Sports/Athleisure segment and [ is a call ].

[Niklas Ekman]

Excellent. And also if you could say anything about your investments in 2019, what kind of CapEx you're expecting.

[Allan Junge-Jensen]

Allan here. The same level as we have communicated earlier. We have not -- we have started implementing the [ auto of ] Phase 3. But you will see it for the record in the second quarter of this year. So the CapEx level is reaffirmed as we communicated last time in Q4 2018. I believe it was SEK 130 million to tangible CapEx and around SEK 40 million to other [ sectors ].

[Operator]

And the next question comes from the line of Michael Benedict from Berenberg.

[Michael Benedict, Analyst]

A couple from me. Firstly, as I understand it, your EBIT guidance was predicated on a flat gross margin. Given the gross margin pressures we've seen, are there any levers down below gross margin that you can pull to sort of be -- hit your full year guidance?

[Hermann Haraldsson, Co]

That's a good point, yes. The obvious answer would be the marketing. If we continue to see lower costs, efficient costs, then we can reduce the marketing spend. So that's kind of the easiest lever to use on lower gross margin. But we are still believing that overall, the gross margin will be as we expected for '19.

[Michael Benedict, Analyst]

And that's flat -- you should expect flat gross margin?

[Hermann Haraldsson, Co]

That's correct, yes.

[Michael Benedict, Analyst]

Okay. And the only other one from me is given the difficult conditions in the market, are you seeing any subscale competitors continue to struggle? I think you may have mentioned that last time around.

[Hermann Haraldsson, Co]

Yes. We are seeing a lot of physical retailers struggling. You are seeing bankruptcies in the Nordics at the moment, which after-year sales has an impact on the level of stock that is being cleared in the market. So as I said before, the market is basically inherently unstable at the moment. So we -- I think that with regards to online, fashion e-commerce, our peers apart from German brands, seem to be lacking in their growth. And the physical retailers, they see -- don't see any growth. So this is why you just have to be agile and expect or prepare for the worst and take the opportunities that you could see in the markets.

[Operator]

And the next question comes from the line of Daniel Ovin, Nordea.

[Daniel Ovin, Senior Analyst]

Yes. So I have one question here on the Q2. I'm thinking -- I'm seeing that the inventory levels are up quite a lot. I mean it must be up around close to 50% versus last year. And then also given that we're now end of -- middle of May already, so how should we think about Q2? Can you give any more guidance how do you think around markdowns for Q2?

[Hermann Haraldsson, Co]

Yes. As we said before, it's too early to conclude anything on Q2. So I wouldn't rather say anything because we still have important parts of the quarter left. So it's just too early to have any fair statements on the quarter.

[Daniel Ovin, Senior Analyst]

Okay. And then a second question also. I noticed that the marketing cost was down quite significantly on a group level, but still you managed to grow quite nicely. So I wonder, how do you think about marketing spend going forward? Is this -- will you continue to keep that down? And should we expect also the rest of the quarters this year to enjoy quite a good margin uplift from lower marketing spend?

[Hermann Haraldsson, Co]

I hope not. I hope that we can buy even more customers around defined [ acquisition ] costs. So it's -- in Q1, we've deliberately spent that because we -- the huge economics in the marketing are just lower in the quarter. So -- but we have guided that we over time seen reduced marketing spend as we go bigger so -- but on that, we can continue to have a high amount of new customers and a lower acquisition cost, then we're going to keep marketing cost down. But we're expecting that we will see a decline over the year from last year, but it will probably not be a big reduction in that respect.

[Daniel Ovin, Senior Analyst]

Okay. And then final question also on the Beauty stores. So you were guiding for around up to SEK 20 million in costs. Now you seem to be along those lines in Q1, but you're also guiding now that you're going to close one of the stores. So is that not going to have a positive impact then to close that? Or how do you expect that loss from these stores to play out for the rest of the year?

[Allan Junge-Jensen]

Allan speaking here. Yes, you will see a benefit from closing down Roskilde in the business going forward. But as you also mentioned, you will have one-off costs relating to the closing of Roskilde. So that's why we maintain the guidance. We will have some savings from closing it, but then we will have one-off costs. So we still expect the loss to be around SEK 20 million. And then we also see that the outlet stores starts -- in Copenhagen starts exactly performing a bit above our expectations. So that's the reason.

[Operator]

And we have a follow-up question from the line of Daniel Schmidt from Danske Bank.

[Hermann Haraldsson, Co]

Daniel, we cannot hear you.

[Operator]

One moment.

[Daniel Schmidt, Research Analyst]

Hello?

[Hermann Haraldsson, Co]

Hello? Yes. We hear you now.

[Daniel Schmidt, Research Analyst]

Okay. Sorry. Just 2 more questions. You said the marketing spend will be down year-on-year but maybe not as big of a reduction. Are you referring to Q1 being a big reduction and then we'll see sort of that dropping a bit less in the coming quarter? Is that the interpretation you should make?

[Hermann Haraldsson, Co]

Yes, that's correct, Daniel.

[Daniel Schmidt, Research Analyst]

Yes. And then a second question is more from a helicopter perspective. What's your sort of take on Zalando's sort of push when it comes to the partner program? And what's your own thinking and your own plans? Are you kind of contemplating doing something similar?

[Hermann Haraldsson, Co]

As we've said before, we think that being in control of the consumer process is extremely important. And when we state to a customer that if you order now, you will get it tomorrow free of charge, that's quite important. And once you have a partner program with items coming from different locations, you're no longer in control. So we are quite hesitant towards [ shifting ] to this model to be our [ partner ]. So we have no plans on going into the partner kind of model.

[Daniel Schmidt, Research Analyst]

Not for the time being at least, I assume. Okay.

[Operator]

As there are no further questions, I'll hand back to the speakers.

[Hermann Haraldsson, Co]

Okay. This -- so this concludes the call. And thank you, and we will [ promise you a big impact ].

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.