Nelly Group AB (publ)

STO:NELLY

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to the Nelly Group Q2 presentation. [Operator Instructions]. Today, I'm pleased to present Kristina Lukes, the CEO; and John Afzelius, the CFO. Please begin.

[Kristina Lukes, Chief Executive Officer]

Well, thank you. Good warm and sunny morning, and welcome to this call, where we are to present the Nelly Group results from the first 6 months in 2021. My name is Kristina Lukes, CEO for Nelly Group. And I'm hosting this call together with John Afzelius, CFO for Nelly. I will start off this presentation with a short reminder on where we are heading as a group, followed by the key highlights from the quarter with extra light shed on the relocation of our warehouse from our manual warehouse in Falkenberg to an automated warehouse in Borås. John, Group CFO, will thereafter take us through the key financials for the quarter, and I will close with an update on strategy and some closing remarks. After that, we will open up for questions and answers. Even if our focus is on the first 6 months of 2021, let's start off with our ambition. We encourage you to join our journey and our community of a fab-loving generation. We are building a company that shall generate sustainable and attractive returns. And we believe that fundament in that journey is our loved community-powered brand, a brand that enables high frequency, low cost of sales and appealing margins. So moving to Slide 3. Nelly is an integral part of the young women's everyday life. This is not new. We've been around since 2004 and built through influencer marketing and through our community of consumers. I often say that Nelly is not only a fashion brand. Nelly.com is not only a fashion destination. We are an integral part of the young women's everyday life. And the brand promise and the promise we give her is to empower femininity and make her feel fab. And we embrace that in our brand manifesto, aiming to cater for her needs in feeling fab. And we promise our target group to always celebrate the fab you. So now to the results on Slide 4 for the first 6 months. Some top highlights. We have a SEK 10 million operating result improvement in the quarter. So far, SEK 37 million operating result improvements in the year. We continue with a strong inventory turnover, where our inventory levels are more or less at par compared to last year and minus 30% versus 2019. And we turn our new stock at a high pace. I would like to mention that our current inventory is very fresh in comparison to last year and in comparison to previous seasons. We are growing in the quarter despite the fact that our largest product categories, such as occasional wear, still suffer from pandemic effects in this past quarter. We are finally up and running with our new automated warehouse in Borås. So in Slide 5, it's impossible to share highlights in the quarter without mentioning our warehouse move project, still on time and budget and with delivery promises kept so far during this transition. From July, Borås is our main warehouse. And we are now ramping down Falkenberg for final closure in August. The 35,000-square meter is located in Borås equipped with a standardized automation system from AutoStore packed with 80,000 bins. As we now are live, we have passed the most critical phase and still estimate our annual cost saving of SEK 35 million as valid based on 2020 volumes. And the modularity of the system will not be a restriction for future volume growth. Not only do we have an improved environmental footprint with a green building certificate, sustainable district heating and renewable energy, needless to say, we are overdue when it comes to investing in our operational platform and logistics. This project and this move give us the prerequisites to create customer value at once, such as faster deliveries, and work towards a leading-edge e-commerce. I'd like to hand over to you, John, to take us through the financial results.

[John Afzelius-Jenevall]

Thank you very much, Kristina. So let me initially take you through the Nelly P&L for the quarter. After having seen negative net revenue development in 2020, net revenue grew for the second consecutive quarter, 1% in total and 3% in the Nordics. The main driver behind the growth was primarily healthy growth in several of our everyday fashion categories. Occasionwear sales were flat year-on-year, but please bear in mind that we are more than 50% lower compared to 2019 when it comes to occasionwear. So that rather significant pandemic effect still lingers. And while we did see growth in the period, further revenue growth was hampered by primarily 2 factors. Firstly, the return rates increased from 33.2% in Q2 2020 to 36% in Q2 this year. And the higher return rate compared with last year should though be seen in light of the substantial fall in return rate caused by the pandemic in 2020. This was primarily driven by category mix, as we've talked a lot about in the past, but also the pandemic's effect on customer behavior. Especially early in Q2 last year, we saw return rates fall sharply. In Q2 2021, the return rates increased, both as we did see customer behavior normalize as it comes to return behavior, but also due to a category mix driven mostly by certain everyday fashion categories that I mentioned. They grew well, but they also have a higher-than-average return rate. And just for reference, though, the 36% return rate now booked in Q2 2021 should be compared with 39% in 2019 and 40% in 2018. So we are still significantly lower than pre-pandemic levels. Secondly, what also hampered our sales growth was that we sold -- we had -- saw lower sales in non-Nordic markets and that affected growth negatively also in Q2 2021. This is a consequence of the decision we made in early 2020 to discontinue active marketing towards certain non-Nordic markets and -- or in fact, all non-Nordic markets. And we also halted translation services of these non-Nordic sites to their local languages. Gross profit-wise, we increased SEK 6 million. The main driver of the improved gross profit is the higher gross margin that drives -- that is primarily driven by less discounting in 2020 (sic) [ 2021 ] than last year, and this is pleasing to see. We have lower volumes of old inventory. That implies higher gross margins as fresh stock require less discounting in order to be sold. So this is an improvement that is satisfying to see and it's satisfying results of our focus on outgoing stock levels, which I'll revert to in a bit. So let me then take you through the cost side of the P&L. Fulfillment and distribution costs, they were SEK 4 million lower in the quarter, partly due to lower volumes handled but also due to better efficiency in the current warehouse. And it should be noted, as you can see in the little gray oval, that the cost line includes warehouse project cost of about SEK 1 million. And we're particularly happy to see our Falkenberg operations, i.e., the current warehouse, delivering high efficiency despite the fact that they are only weeks away from being shut -- from shutting down operations. And we really want to thank the Falkenberg be staff for delivering all the way to the finish line. Marketing costs increased by SEK 7 million compared to Q2 2020, and this is mainly due to higher performance marketing costs, but also due to the repositioning of the Nelly brand. Again, it's worth noting that the marketing pricing fell rather steeply in Q2 2020 as many online buyers -- online marketing buyers were quite cautious as the pandemic struck. So pricing-wise, we've seen a normalization in Q2 2020 to almost pre-pandemic levels. Continuing with admin and other operating costs, they decreased by SEK 6 million year-on-year, and this is mainly due to the dismantling of the Stockholm-based central functions, which are being integrated -- or actually had been integrated into Nelly's Borås-based administration team. So all in all, in summary, we improved operating profit with SEK 10 million year-on-year. So moving on to the next slide. Please let me highlight a few other points from the Q2 report starting, of course, which is difficult not to do, with the warehouse project. Three months ago, when we presented Q1, our warehouse team was intensely busy with installation work, recruitment, testing, education, et cetera. And today, 3 months later, we're happy to note that the new automated warehouse in Borås is operational. We were there this morning, and we're already delivering the majority of customer orders from the new facility. So a most pleasing development to see, of course. We believe that the project will meet the objectives of reducing fulfillment and distribution costs, shorten delivery times, improve the environmental footprint but also give us room for growth. As we communicated in Q1, we're targeting an annual cost improvement of SEK 35 million based on 2020 volumes and we have so far no reason to believe that, that target will not be met. The CapEx ticket for the automation solution in isolation is SEK 84 million, which is financed through a rent supplement over 10 years. In addition to the automation solution, we estimate capital expenditure of about SEK 26 million relating to items like storage shelves, ventilation installations, network installations, IT equipment, et cetera. Most of the CapEx has now been committed and we have no reason to believe that we would have to exceed the SEK 26 million communicated. We are currently, during the month of July, operating and delivering customer orders from 2 warehouses, Falkenberg and the new Borås site. And we estimate the cost effect of this to be in the range of SEK 35 million to SEK 45 million, as previously communicated. Of the -- and as of June -- or as of now -- as of June, in fact, we have spent SEK 4 million of that. This includes double staffing, a degree of double freight costs, costs for decommissioning the old site, et cetera. And while most of the cost remains to be incurred and is ahead of us, we now believe that we will have a fallout in the lower end of that range. Moving on to the next highlights. We -- inventory turnover remained strong in Q2 and current season stock sold well in relation to stock levels, and in particular, our most recent arrivals moved quickly. And inventory share of sales amounted to a sound 12.5%, which is slightly higher than the 11.9% recorded last year, but still significantly lower than the pre-Q2 levels of about 20%. So we are turning over inventory at a very sound rate, which we are committed to continuing to do. We're happy to note that Nelly has been able to increase sales in spite of actually maintaining these low stock levels, about 30% lower than pre-pandemic levels. And this is the result of a focus that we did start early in late 2019, early 2020 on reducing stock levels by both lowering the target for outgoing season stock levels, but also primarily in 2019 and 2020 liquidating old stock. And as you may have heard us say before, we maintain the focus on maximizing in-season sales and thereby minimizing outgoing season stock levels as we firmly believe that this will be supportive of margins over the product cycle and is more capital efficient. Finally, I'd like to mention cash flows and cash flows from operations in Q2 this year was weaker than 2020. This was mainly due to the significant inventory reduction that drove down working capital last year. However, we see cash flow from operating activities before working capital changes improving in the quarter, which is pleasing. Worth noting is that the SEK 12.9 million cash flow from investing activities that was incurred in Q2 2020. And this rather notable increase is, of course, attributable to the warehouse project and the CapEx coming from that end. Cash at the end of the quarter amounted to SEK 185 million, and we did not tap into our credit facilities. So in summary, we have a solid cash position. We have not used our credit facilities. And apart from government tax credits, we have no interest-bearing debt. So having plowed through these highlights, Kristina, I'd like to hand back to you again.

[Kristina Lukes, Chief Executive Officer]

Thank you. So some final highlights from the first 6 months in 2021. We are continuing with progress on our sustainability road map. And we're proud to welcome close to 50% women of our operational staff in our new warehouse. Under our theme, respect the planet, we have increased our share of sustainable materials in the first 6 months of this year by 50% to an actual share of 18% versus our 2021 full year target of 21%. We have furthermore increased our near-shoring share by 15 percentage points to form -- to now form the majority share of our total volume. Worth mentioning is that we've completed our climate footprint audit, a starting point for setting our updated vision and sustainability strategy and road map. Now over to the last part of the presentation on Slide 9, where we will share a short update on strategy. But first, let me just recap what we are aiming for. 2020 and 2021 has been all about creating a sustainable, solid and profitable core business for Nelly. We're relaunching the company; reorganizing ourselves to a slimmer, more efficient organization; centralizing the business to Borås; building a new warehouse and investing in an AutoStore, starting the repositioning of the Nelly brand towards a more defined, loyal and profitable target group in the Nordics. And the passion and dedication from that target group is strong. She shops at our platform and engages with this on our social channels. So putting the engagement into figures on Slide 10, we have 1.3 million followers on social media; 1.2 million customers placing 2.7 million orders, of which more than 40% -- or 42% of total sales come from own brands. Close to 20% of our target group visits us on a weekly basis on any of our channels, completion rate of 96% on Instagram and a high content creation from our target group or our customers in their channels. Our community-based platform enables short time to market on emerging trends, but also a valuable source of data for us to analyze and make the right commercial choices in our daily trading every day. And the community of customers form the base for our next growth journey following the relaunch. On the next slide, in the repositioning of our brand, we choose to focus on the most profitable and loyal consumer, who we've always, by the way, been more relevant towards, the young fashionista, around 15 to 25 years old, every day looking for inspiration on how to look and feel fab. We have more than 2/3 of our target group in the Nordics as part of our customer database. More than an age, we look at how she behaves. Let's call her Denise. She shops 18 times a year for her appearance, and compare that to the approximate twice a year. She shops at Nelly today. She is very active on social media and is influenced by peers on what and how to look. Her appearance means the obvious fashion and shoes categories, but also nails, hair, accessories, phone cases, intimate products. Nelly successfully built the position with a clear party focus. Moving to Slide 13. That party focus is a low-frequency needs cater. However, I would say, high in engagement, which is very positive for our brand, but low frequency. With the relaunch of the brand, we're targeting a more defined target group, but also building relevance towards more occasions. We call it 3 occasions instead of just 1: everyday fab, party fab, and our previous core, occasion fab, the special promo-casion or party occasion. The market is, of course, much larger with a higher frequency when we aim for more occasions. Remember, Denise's 18 purchases per year for her appearance. The market for feeling fab is large every day, and hence, a high frequency with many more opportunities to cater to her needs where our brand and our position is relevant. Fashion, beauty, nails, hair needs beyond our current offering in fashion and a higher frequency than our current 2 times per year. Our brand is well known, a fundament for expansion and growth. Our awareness, or call it, mental share is multiple times larger than our current market share in the Nordics. Needless to say, we strive towards a market share more similar to our awareness or mental share rather than the one we have today. Thank you for your attention. We have shared highlights from the first 6 months for Nelly Group with a SEK 10 million operating result improvement as a result of several relaunch initiatives and our automated warehouse in Borås is now up and running on time and budget. We are on our way to build a stable and profitable core business forming the base for our next growth journey. Thank you so much for listening.

[Operator]

[Operator Instructions] And there are no questions at this time. Please go ahead, speakers.

[John Afzelius-Jenevall]

Well, if there are no more questions, at least from my end, Nelly is not -- I mean we're a significant player in our market, but we're not the largest company on the Stockholm Stock Exchange. So please don't hesitate to contact us directly. We pride ourselves by being rather personal and so please don't hesitate to contact us.

[Kristina Lukes, Chief Executive Officer]

Yes. Please do that. And thank you for your attention.