Boozt AB

STO:BOOZT

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the Boozt Q2 2024 Report Presentation. [Operator Instructions]

Now, I will hand the conference over to the speakers, CEO, Hermann Haraldsson; and CFO, Sandra Gadd. Please go ahead.

[Hermann Haraldsson, executive]

Thank you, and good morning, everyone, and welcome to our Q2 call 2024.

Let's go to the first slide and it will likely not come as a surprise to you that the market remained challenging in the second quarter, but still, we managed to increase revenue with 11% and maintain a very solid margin. The growth for the quarter was driven by a good reception of the spring/summer collection, which was certainly helped by the improvement in the weather that we saw in the Nordics during April. The warm weather supported both Boozt.com and Booztlet, which both did well, growing revenue with 10% and 13% in the quarter. The growth was, to a large degree, driven by an increase in new customers and looking isolated at the quarter, almost 300,000 new customers bought from our 2 shops, which I believe speaks volumes of our ability to fare well under difficult circumstances. This also indicates, in our view, that even though consumers are holding back, when they buy, they buy online. It's very encouraging to see that our growth has been driven by an increase in active customers.

Similar to what we saw after Q1, campaign goods continued to be more of a challenge to get access to inventories out there that are not in excess like we saw last year, and this impacted our ability to offer really good deals to our customers. It's quite difficult for us to quantify the impact, but it's something that holds back growth slightly, as well as it puts the gross margin under pressure. Looking across product categories, we had a really good quarter with growth in each and every category, again, underpinning the significance of our department store approach.

Support and development, we've seen an increase in active customers shopping from more than 1 category of more than 100,000 customers compared with last year. And this is, to a large extent, driven by our older customer cohorts embracing more categories. The share of multi-category buyers is unchanged at 51%, but the development is slightly held back by the significant inflow of new customers and we know that they initially often only buy from 1 category.

Customer satisfaction, which is the heart of what we do, remains best-in-class. Net promoter score was 75 and slightly up, while our Trustpilot was 4.4 compared with 4.5 last year.

Profitability remains solid with an adjusted EBIT margin of 4.9%, resulting in adjusted EBIT of SEK 92 million. The margin was a bit down compared with Q2 last year, which was mainly due to slightly higher fulfillment costs compared to last year. This is a consequence of the implementation of what we call transfer cells in the fulfillment center. This is the project where we combine and connect our 3 AutoStore cubes. So even though we see this as a kind of a game changer in our fulfillment operations, we have spent considerable resources on implementing and testing. We decided to expense the cost, which then has had a temporary impact on the fulfillment cost ratio.

With the 2 first quarters behind us, we believe it makes sense to narrow our outlook for the year. Based on performance so far, as well as the fact that the trading environment remains challenging, we now expect revenue growth to be in the range of 7% to 11% from previously 5% to 15%, and the adjusted EBIT margin is now expected to be between 5.2% and 5.7%, and this is now from 5.2% to 6%.

Finally, our cash position remains solid. And during the quarter, we announced the decision to start a new share buyback program. And this means that in the next year, we will repurchase own shares of up to SEK 200 million.

So please turn to the next slide. I am very happy to share that we managed to increase our active customer base, mainly by attracting a large number of new customers. The Boozt.com active customer base increased by 7% and Booztlet by 16%. So in total, we were able to attract almost 300,000 new customers in the quarter. Even though we are focusing a lot on getting our customers to buy into our categories, we still want to increase our active customer base. And in an environment with quite muted consumer sentiment, we believe it's a testament of our strength that we are able to attract almost 300,000 new customers. And our conclusion based on that is that, even though consumers are holding back. The consumers that are in the market, they are continuing to go online. So the online penetration continues to accelerate in our view. The increase was broad-based across both platforms, as well as regions.

Our biggest region, the Nordics, increased around 8%, driven by an increase in active customers in all countries in the region, the biggest contributor to growth was Denmark, which increased 10%. Active customers increased close to 40% in Rest of Europe, mainly driven by Germany and the Netherlands. Especially for Booztlet, these markets remain a strategic focus as we see interesting opportunities in the Booztlet segment for the region. Furthermore, Boozt.com has also improved in Germany following several adjustments on the site. Among other things, the implementation of return fees in Germany. But for Boozt.com in Germany, I want to emphasize once again that we continue our principle with the profitability on every order. So it's not a case of kind of empty calories growth in Germany.

Finally, active customers in the Baltics continued to increase significantly and were up around 35% for both Boozt.com and Booztlet compared with last year. This is obviously from low levels, but with a continued high average order value on par with the group, we see decent profitability, as well as strong growth opportunities in the Baltics.

Let's go to the next slide. Growth in the quarter was broad-based and supported by all categories. We don't intend to show this development every quarter, so this is kind of a one-off. But we want to highlight it, for this quarter, as we think it helps to illustrate the power of having more categories to support the business. I think that the 11% overall growth in a very muted market driven by the categories highlights the key advantages of the department store model. Despite a cautious consumer, in general, the women and men's categories were up more than 5% in the quarter. These categories represent around 60% of our business and are, of course, still the main drivers of traffic and revenue to our 2 sites. However, the sports category and the kids category have also reached a size and awareness level, that is beginning to make them shopping destinations on their own. We are not there yet, but nevertheless, they both represent close to 15% of revenue each and they both increased more than 20% for the quarter. And finally, beauty and home, which both are some 5% of revenue, are not quite there yet in terms of being a destination on their own, but we are gradually getting there and we see great potential. So bottom line is that, all categories perform and the numbers of customers buying from more categories is going up. And the latter being important, both in terms of higher customer loyalty, as well as increasing spend per customer and average order value.

So, please turn to next slide, where I would like to hand over to you, Sandra.

[Sandra Gadd, executive]

Thank you. So if we start by looking at the next page, we see the overview of the financial performance in the second quarter and year-to-date. Net revenue growth was, as Hermann mentioned, 11% in the quarter, also in local currencies. Growth was particularly strong in April and May, but less so in June. The slowdown was weather-related, which impacted the attractiveness of our spring/summer collection. Limited campaign buys also had a negative effect on growth compared to last year. As Hermann just talked about, we saw growth in all categories in the second quarter. While growth numbers are higher in the newer categories, we are very satisfied with the sales growth in both the women's and the men's category as they remain the core of our business. Looking at the geographical markets, growth was strong across our core markets where growth in Sweden was 11% and in Denmark 6%, a clear improvement from the first quarter. Finally, growth in the second quarter was positively impacted by the timing of Easter. Easter is normally negative for sales development and impacted the first quarter negatively this year and the second quarter last year.

The promotional environment continued as consumers remain price-sensitive. During the second quarter last year, we believe that the promotional environment was more driven by high inventory levels in the industry, something that we believe is somewhat more settled at this time.

For the first half of '24, net revenue growth was 9%, also in local currencies.

The gross margin was 41.9% in the second quarter and decreased 0.4 percentage points compared to last year and that was driven by the lower level of campaign stock. For the first 6 months of '24, the gross margin was on par with last year at 40.5%.

The adjusted EBIT margin of 4.9% was 0.2 percentage points lower than last year, and that was driven by the lower gross margin, as well as the higher fulfillment cost ratio. For the first half of '24, the adjusted EBIT margin was on par with last year at 3.2%.

If we turn to the next page, we see the development of our 2 segments, Boozt and Booztlet. So if we start with Boozt.com, net revenue growth was 10% with strong growth in our core markets, Sweden and Denmark, which both grew 7% in the second quarter. The growth in the Swedish and the Danish market was an improvement compared to the first quarter where we experienced more of a flattish development. Growth outside of the Nordics was 34%, driven by Germany, but we also saw continued good developments in the Baltics. Revenue growth was mainly driven by the increase in active customers. In the last 12 months, 2.7 million customers shopped at Boozt.com, which is to be compared to 2.5 million at the same time last year. If we look isolated at the second quarter, the number of active customers shopping on Boozt.com increased by 8%. Growth on Boozt.com was also positively impacted by the growth in the average order value of SEK 916, a 3% growth compared to last year. True frequency, that displays the number of transactions per customers, excluding new customers, was slightly up compared to last year to 7.1 from 6.9. The adjusted EBIT margin decreased with 0.2 percentage points to 4.7% due to the lower gross margin and the higher fulfillment cost ratio previously mentioned.

If we move on to Booztlet, we saw a net revenue growth of 13% in line with growth in the first quarter. Just as in the first quarter, growth was limited by the lower level of campaign stock while the number of new customers fueled growth. Growth in active customers, that now totaled 876,000, increased 17% in the second quarter. Growth in the Nordics was 9% and growth outside of the Nordics was 42%. We continue to invest in building a relevant and price-attractive product assortment on Booztlet and we believe that this also supported growth in the second quarter. However, we also see that the typical Booztlet customer continues to be pressured from the decline in disposable incomes as the frequency of buying decreased slightly compared to last year. We saw this behavior also in the first quarter. The average order value continued to increase on Booztlet. For the second quarter, the AOV was up 5% to SEK 919. The adjusted EBIT margin for the quarter was on par with last year at 5.9%.

So if we move on to next page, we see the development of the cost ratios in the second quarter. The fulfillment cost ratio of 11.4% increased 0.2 percentage points. This increase was mainly driven by the temporary use of manual hours during the ongoing installation of transfer cells previously mentioned. The implementation of transfer cells will increase the level of automation for consolidation of orders where 1 order is picked from more than 1 AutoStore cube. We expect that this temporary effect to stop during the third quarter. Going forward, we expect to see cost efficiencies as manual minutes per order is expected to decrease significantly. The transfer cell should be fully implemented in the first part of Q4.

Aside from this effect, we continue to see positive development in the cost ratio as we improve processes, continue to focus on cost control, and invest further in building strong leadership, and foster a performance-driven culture in our fulfillment center. Meanwhile, we also see continued improvement in distribution costs. This is related to the more disciplined setup where we guide customers to the optimal carrier from both a cost and a service alternative, given the customer's preference and geographical location.

The marketing cost ratio for the quarter was largely on par with the same quarter last year at 10.8%, that is to be compared to 11.1% last year. We continue to gain benefits from loyal customer cohorts, both from higher share of returning customers along with an increased net spend. The loyal customers tend to come as direct traffic to a higher degree than prior periods, where new customers are recruited through performance media. In the second quarter, we experienced high competition in the cost per click. However, our marketing mix of online, off-line, and relevant sponsorships enabled us to leverage investments and we continue to stay relevant and attractive to the Nordic consumers. The adjusted admin and other cost ratio of 11.9% corresponds to a decrease of 0.4 percentage points, driven by scale efficiencies. The depreciation cost ratio of 3.6% was roughly on par with last year's 3.7% as expected.

Moving on to my last slide, where we have an overview of cash-related KPIs for the second quarter. We see that net working capital share of last 12 months' revenue increased from 11.1% to 12.2%, driven by the higher inventory levels to support continued growth for the year. The absolute inventory level of SEK 2.4 billion compared to SEK 2.2 billion last year is fresh and relevant for the upcoming season. Inventory, as a percentage of revenue, declined from 30.8% to 29.8%, which is mainly a reflection of the good sell-through of the spring and summer collections.

Free cash flow of SEK 90 million improved compared to last year's negative SEK 5 million. The improvement was mainly driven by a more favorable development in operating working capital compared to last year. For the first half of '24, [Technical Difficulty] cash flow was a negative SEK 595 million, which is an improvement of SEK 137 million compared to last year. Cash flow from investing activities was SEK 48 million in the second quarter and is mainly related to the investment in transfer cells for the consolidation within the fulfillment center. The net cash position of SEK 297 million to be compared to SEK 430 million last year is affected by the repurchase of shares where we have bought shares for SEK 185 million since our annual general meeting in 2023. The cash position at the end of the second quarter was SEK 725 million.

And this ends the financial overview. So back to you, Hermann.

[Hermann Haraldsson, executive]

Thank you, Sandra. As mentioned initially, we have decided to narrow our guidance for the full year. This is, of course, a natural consequence of us having more than 7 months of sales in the books. We now expect a revenue growth of 7% to 11% compared with previously 5% to 15%. We believe that given the circumstances, we have delivered a solid first half of the year, 9-point -- 9% growth is strong, which gives us confidence in raising the lower end of the guidance from 5% to 7%. At the same time, we don't think it's realistic to get 15% growth. But still, you will notice that the midpoint of the range is slightly down from 10% to 9%. The change is mainly a reflection of the fact that we continue to operate in a very challenging trading environment.

On the one hand, we don't expect this to change dramatically in the short-term. The trading environment will probably continue to be challenging due to the continued muted consumer sentiment. And on the other hand, and probably mainly availability of campaign goods is still limited compared to earlier. You could say that campaign goods are kind of icing on the cake for our business, and it is -- as it is still uncertain how much we can get our hands on, this probably will have an impact on the growth for the second half as well. What we have seen earlier is that, if there is a surplus of goods in the markets, it takes some years for the market to adjust, this is what we saw in the aftermath of COVID. If there is an undersupply, as we see now, our experience is that, the market reacts much faster, so we see the lower availability of campaign goods as a more temporary issue.

We also changed the expectations for the adjusted EBIT margin to be in the range of 5.2% to 5.7%, previously it was from 5.2% to 6%. This is still a relatively broad range, but the result is highly dependent on the level of promotional activity, as well as the customers' willingness to buy in the second half of the year. The updated margin range also indicates that despite a difficult year, we still expect to end up with a margin that is better than last year. And when the tide turns, we will be well on track to reach our target of an adjusted EBIT margin of 10% in 5 years.

So please turn to my next and last slide. As we have mentioned earlier, visibility going into the second half of the year is, to some degree, limited. Consumer sentiment is still quite muted and recent macroeconomic developments do not provide a much clearer picture. We don't expect it to become worse, but we foresee a volatile trading environment for the rest of the year. Our main objective has always been to run a tight ship and to have the right lineup for when the tide turns again. We have a very tight cost control with a value chain or cost structure, if you like, that probably is best-in-class in our industry. We have a very healthy inventory that is not clouded by all goods that need to be moved before we focus on the current season.

With the investments that we've made and are making in a warehouse, we have built a very efficient fulfillment machine, which allows us to scale without losing productivity and without having to invest as much as we previously thought. Our categories provide us a natural hedge and we are -- as we are not dependent on a single category. So we are seeing that when fashion is slowing down, other categories are leading the growth.

And finally, we are cash-rich, making us the masters of our own house. There is no doubt that it is only a matter of time before the tide turns, we don't know when. But when this happens, we are ready to take more than our fair share of the growth in the market.

So this concludes our presentation. So, operator, will you please open up for questions?

[Operator]

[Operator Instructions] The next question comes from Daniel Schmidt from Danske Bank.

[Daniel Schmidt, analyst]

Just following from what you ended up saying when it comes to campaign availability being still sort of limited as you go into the second half of this year. And you also said that had a negative impact on the gross margin in Q2. Should we expect the same negative gross margin and gross margin should be down year-over-year on the back of that?

[Sandra Gadd, executive]

Well, I'm not going to comment on the gross margin targets for a specific quarter. But, obviously, it impacts, and I think we have quite a lot of mitigating factors. We are stocking up on never out of stock items. And I think we have a good one. But the risk is obviously in the gross margin when the trading environment is very tough and there's limited campaign buys. But I think the efficiencies we have, I think, it's reflected in our guidance, but there is a risk on the gross margin.

[Daniel Schmidt, analyst]

Okay. And then just jumping on to what you mentioned in terms of extra [indiscernible] related to fulfillment in the quarter. You said when it comes to the [ timing of the order ] that will be finished by beginning of Q4. Is there any chance that you can quantify [indiscernible] Q3?

[Sandra Gadd, executive]

We have -- the effects that we had from that testing, also we had some other maintenance costs that were temporarily inflated. If we take those effects away, we were better than last year. So that you can conclude. And I think at the end of the year, we expect that the fulfillment -- full year fulfillment cost ratio will be better than last year. So we have this effect, but we are very confident with what we're doing and the effects -- the gains that we're going to get from that.

[Daniel Schmidt, analyst]

Okay, good. And maybe coming back and we've started here, Hermann, you mentioned that you have this target of reaching 10% in '28. And you wouldn't [indiscernible] development to get there. Looking at, of course, this year, we are very sort of short in period. You have the same margin you had in H1 last year. And you're [ down a bit ] when it comes to [ ability what change ] do you think during this past experience you didn't expect at the start of the year?

[Hermann Haraldsson, executive]

I think I said that it would not be linear. So...

[Daniel Schmidt, analyst]

Okay. Maybe we are wrong then, that was my [indiscernible] and you shouldn't expect that to be back-end loaded.

[Hermann Haraldsson, executive]

No, no. But it's going to kind of -- we don't expect it to be very back-end loaded, but it's still kind of -- it would be bumpy -- it will be a bumpy ride, you will say so. Still the midpoint of our guidance is down 0.1%. So it's not that a big adjustment. What we're just saying is that, we don't expect to get the growth of 15%. And, of course, if we have had a 50% growth, then EBIT will follow. We think as we've said before, that in a muted consumer market sentiment, where we have bought the goods, we need to make sure that we don't have too much stocks, so we have to take the liberty of clearing, which might mean that the margin would come at the low end. But, again, our best guess is around this 5.5% plus/minus for the full year, which is an improvement in a trade environment that is still quite challenging. So, actually, to be honest, I don't think much has changed. And again, we are only like 6 months into this 5-year journey. So it's very early to conclude.

[Daniel Schmidt, analyst]

Yes, sure. I appreciate that. It's only 6 months. Okay. Just a final question on the competition. I mean, if you look at 1 of your major competitors in the Swedish market, they have improved delivery times by a lot recently and [indiscernible]. Did that have any impact on your offering in the Swedish market?

[Hermann Haraldsson, executive]

No.

[Operator]

The next question comes from Benjamin Wahlstedt from ABG Sundal Collier.

[Benjamin Wahlstedt, analyst]

Okay. There's maybe echo from me as well. Hermann, you write in the report about inclement weather has improved. To be perfectly clear here, do you mean improved [indiscernible]? Or are you talking about something else? And what time period are you referring to here?

[Hermann Haraldsson, executive]

Can you say that again?

[Benjamin Wahlstedt, analyst]

Which part? All of it?

[Hermann Haraldsson, executive]

Yes, about the weather. I just didn't understand what you said, when it improved...

[Benjamin Wahlstedt, analyst]

You write in the report that said inclement weather has improved. To be clear, is the weather warmer or drier, or something else? And what's the time period?

[Hermann Haraldsson, executive]

I think when we went out of Q1, we said that the spring had been dismal and typical lousy Nordic weather. April was good. Spring came -- summer came, continued in May. And that is always good for our sales when the sun shines. So in the spring, of course, now we're hoping that it gets cold fast. But so as long as the weather is true to season, then we are quite happy.

[Benjamin Wahlstedt, analyst]

Perfect. And a follow-up on that one. I also want to ask the year-on-year comparable in terms of promotions in gross margin into Q3. Last year, the start of Q3 was not supportive of summer season product sales, I believe, it was very wet and very cold. Is this something that impacted the promotional landscape last year, do you think with competitors struggling to get rid of the last part of summer season assortment? And would this mean a normalized weather pattern could be positive for you both in terms of sales and possibly also gross margins through a lower campaign intensity?

[Hermann Haraldsson, executive]

That's a difficult question. You cannot always blame it on the weather. But there's so many factors coming into play with consumer sentiment. Last year, you probably had a lot of clearance in the market because you had overstocking in the market, so it had an effect. This year, you probably have kind of understocking in the market, but where the consumer is more conservative and more cautious. So what -- basically, what we always hope is that, we are true to season so that the spring starts when the spring should start and that the fall starts or winter starts when it's supposed to start. So we are not looking at the long-term weather forecast. But, of course, if it's an Indian summer in September, we know that will drag out the autumn/winter sales. So -- but I think that we're getting to a more normal post or pre-COVID environment where it's consumer sentiment, it's the offers, it's the market that is deciding. So I don't think that there are so many excuses to be said.

[Sandra Gadd, executive]

No. And to be honest, the key to success is to stay very close to the market, listen to what the customers are -- what they want and what they need, and having the right offer in the right prices, it's just as easy and hard as that.

[Operator]

The next question comes from Niklas Ekman from Carnegie.

[Niklas Ekman, analyst]

Yes, can I follow-up a little bit on the kind of current trading discussions here, weather discussions? When you said sales were slower in June, have you seen any change in -- so far in July, August, given that we're halfway through the quarter? And I'm asking this specifically because the midpoint of your guidance here requires a slight pickup of growth in H2, even though you face significantly tougher comparisons in the second half. So I'm just curious if you've seen anything here in the start of the quarter that gives you confidence about this new updated target.

[Sandra Gadd, executive]

Well, we don't comment on months, you know that we don't comment on current trading like that. But June was cold and July and August has been more summer-like, I guess. So -- but it's all implied. We know that we're very strong in Q4. We know that that's when we're super competitive, but Q3 is also an important quarter, obviously.

[Niklas Ekman, analyst]

Okay. Fair enough. And also, following up on this discussion about campaign buys. I realize it's difficult to exactly quantify here. But, I mean, where are we now? Are we looking at back-to-normal levels of campaign buys from having been at exceptional levels in '23? Or are you below normal levels at the moment? Is there any way to quantify where we are in this cycle?

[Sandra Gadd, executive]

I would say that we're below and that's also why we think there's an understock in the market. So -- and it affects us. We are stocking up on never out of stock items and that can compensate for one part, but not fully. However, going into the new -- after this season, this is something that we take into account, since we know that, that availability might continue, we don't know that, but then we can take that into account. But that was not something that we were aware of when we made the big buying for the [indiscernible] system.

[Niklas Ekman, analyst]

Okay, clear. Also, I'm curious, you have -- in the last 12 months now, you've had SEK 97 million in one-off cost, that's rolling 12 months. I'm just curious, are there any of these costs that are not related to share-based compensation. So are there any real one-off costs? Or should we really view this as more staff-related costs or staff-related expenses?

[Sandra Gadd, executive]

I do not think that there's anything else what I can remember. But we need to double-check. But I don't think so at least, but I'll get back to you on that.

[Niklas Ekman, analyst]

Okay, clear. Also, buybacks, you announced the ambition to resume buybacks. When do you expect to start this? Because I think the press release was out late June, and I haven't seen any resumed buybacks.

[Hermann Haraldsson, executive]

Yes, we've been in silent period, we can't buy. So it will probably start soon. So we have said now, we are now going to do the buyback and we will kind of do it gradually as we progress towards the next AGM.

[Niklas Ekman, analyst]

Okay. That's very clear. And just finally, these extraordinary fulfillment costs, the temporary costs you talked about that would continue in Q3. Do you expect them to be of similar magnitude in Q3 or higher or lower than what you saw in Q2?

[Sandra Gadd, executive]

I would say a bit less.

[Hermann Haraldsson, executive]

Yes, we took the bulk in Q2.

[Operator]

[Operator Instructions] The next question comes from Aurore Tigerschiold from DNB Markets.

[Aurore Tigerschiöld, analyst]

Just a quick one. I was wondering if you could provide some further flavor on your inventory position heading into Q3 given the high season, Black Friday, and so on?

[Hermann Haraldsson, executive]

Yes. Inventory position is actually quite good. We -- sell through has been good for the spring/summer. So we don't have any old stock issues so we can focus on the new season. And we have had a lot of in deliveries during the summer. So kind of the potential supply chain issues with containers having to sail around Africa has not affected us and we don't expect it to affect us. So we -- our -- kind of our stock position going into the last 4 months is actually quite solid. Of course, we would have liked to have more campaign goods. So ideally, it would have been slightly higher, but [indiscernible] is why we have a kind of a ceiling on the growth. But I think that we are quite well prepared for the next 4 months.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Hermann Haraldsson, executive]

Okay. Thank you for the questions, good questions. So this concludes the call. And, I guess, we will meet you out there in the near future. Thank you very much, and have a good day.