Nelly Group AB (publ)

STO:NELLY

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to Nelly Group's Second Quarter Report 2024. Today, I'm pleased to present CEO, Helena Karlinder-Ostlundh and CFO, Niklas Lingblom. [Operator Instructions]

Now I will hand over to Helena Karlinder-Ostlundh. Please go ahead.

[Helena Karlinder-Ostlundh, executive]

Thank you very much, and welcome to the 2024 second quarter investor presentation for Nelly Group. My name is Helena Karlinder-Ostlundh, and I will be presenting today's call together with Niklas Lingblom, CFO from Nelly Group.

Okay. Let's start with a brief look at today's agenda. We will start with a short video introducing the Nelly business, a little bit about our history and some key stats. I will then provide some comments on the second quarter that we have just concluded before handing over to Niklas to take us through a more detailed financial summary. And as usual, we will then conclude with some questions and answers from you.

I would also like to remind you at this point that you can send us your questions, and this can be done at any point during the presentation.

Okay. So let's get into it. We'll start with a short video introducing the Nelly business.

[Presentation]

[Helena Karlinder-Ostlundh, executive]

Now let's move on to look at Nelly's second quarter performance. We delivered a strong second quarter. We saw both net revenue growth and a marked improvement in our profitability this quarter.

Net revenue grew by 8.8% to SEK 314.1 million, and we also delivered a profit after tax of SEK 26.7 million. And these are very pleasing results. And also underneath these results, we see other areas where we've had significant further improvement in the second quarter, not least in our return rates as well as our gross margin. And Niklas will give you more details on this a little bit later in the presentation.

Now we see these as clear signs that we have built a healthier business and very importantly, a solid base to build on going forward. We have shared in previous presentations that this has been our strategy for the transformation all along, building a strong profitable core that we could then grow.

Okay. So in addition to the high-level financial results, let me share some other highlights from this quarter that we have just concluded.

So as we have been saying in previous quarters as well, very much at the core of our strategy is our work to continue to refine our assortments. And of course, this is all to serve our customers' needs and wants better and better with every quarter. We are now almost at the end of the spring and summer season for 2024. And we see that we are once again on track to achieve a higher sell-through compared to last year.

In addition to this, we all see that we continue to increase our full price share. So both our sell-through and our full price share once again improved in the second quarter.

And in addition to this, we also continue to see materially lower return rates. In fact, in the second quarter, we saw the lowest return rate since we started working more actively with this area during the last year.

Of course, as always is the case in the second quarter, dresses continue to be a very important category. We have many occasions during the second quarter where our customers comes to Nelly as a go-to destination for their ball gowns and graduation dresses and other types of dresses. But as we have also shared previously, dresses are now a much smaller part of our assortment than previously.

We have been building our everyday categories ever since we started our transformation. And very pleasingly, we saw that several of our everyday categories, again, performed very well during the second quarter.

To just name a few, we saw that tops, jeans, pants and beachwear all grew in this past quarter and also were profit accretive for the spring and summer season of 2024.

In addition to this, we also saw that our own brand share once again grew year-on-year. And we really see that our Nelly brands are gaining significant grounds in several of our biggest categories. So we are, of course, very happy about this as we see that, yes, our customers really like what we do in this space.

Now we know that our target audience, young, primarily women but also men, of course. They do really appreciate and crave both newness and uniqueness, so these elements continue to be an important part of what we see as delivering to our customers.

And during the second quarter, we once again took important steps in this direction. Of course, newness and uniqueness, we deliver primarily both through our own Nelly brands as well as the unique relationships we have with some of our most strategic external brands. So here during the second quarter, we delivered several collaborations with some of our most important strategic brands such as Neo Noir and also ADIDAS. In the case of Neo Noir, this was a capsule collection that we designed and produced together with them. And in the case of ADIDAS, it was a very well-received customer event in our flagship store on Drottningsgatan in Stockholm.

Now we saw that our customers really loved these -- both of these collaborations. And so we are very pleased that we have more collaborations with other strategically important brands lined up for later in the summer as well as this fall. We are very excited about these upcoming collaborations as well.

And we will, of course, continue to leverage our flagship store as an important channel to inspire and engage our customers, and it's also a very natural place for these collaborations to be launched and enjoyed by our customers.

Now as I've said, we see very clear further positive steps during the second quarter in our assortments. But as we all know, customers vote with their feet. So what are our customers telling us?

Well, they like what we have done, but they also think we can still do better. I think that is very clear from the fact that very pleasingly, we saw that our total traffic to the site was up year-on-year for the second quarter. However, conversion was down year-on-year. So this tells us that what we are doing and the changes we have made in our assortment are very well received by our customer, but there is more work to do to continue to refine our assortment and our offering and of course, as I said before, offer newness and uniqueness.

We see that we are already on the right path and that there is much more potential and opportunity to continue on this path and serve our customers better and better going forward.

In addition to some of the changes we have driven in our assortment during the second quarter, I would also like to very briefly comment on our marketing costs. So we saw in the second quarter that we had a higher marketing spend compared to last year. And this is really a reflection of the work we are doing in this space at the moment. Like with so many other areas in the business, we are on a transition path here, where we have started working towards a different set of metrics and also new ways of working.

And this is really focused on ensuring that we generate a profitable traffic that is actually worth investing in. So here as well, we have more work to do and the work will continue over the coming quarters. To ensure that, as I said, we generate profitable traffic, we maintain solid cost control, and of course, we will also continue to work on our organic traffic to make sure that we do not become overly reliant on our paid traffic going forward.

Lastly, before I hand over to Niklas, I would also like to just share that we made some important steps in our IT infrastructure during the second quarter. We have in previous investor presentations shared our plans to overhaul Nelly's entire core systems architecture. And here, we took some important steps, as I said, during the second quarter as we switched on several new systems that are absolutely central to operating our business. And this was executed without major incidents.

So over the coming quarters, we will continue to, of course, develop and refine the functionality of these new systems that have now gone live. And we also have additional projects remaining in this space that we will continue to work on going forward. And as we have also shared in previous presentations, we see this work running into 2025 as well.

So to summarize, we have delivered a strong second quarter with both net revenue growth and improved profitability. I think we really conclude from this that our strategy is working. And even though we have come a long way. We are also excited by the fact that we see much more potential that we have yet to realize. So we will keep working hard on driving these improvements across all areas of the business to continue to build a healthy and strong Nelly.

Okay. I will now hand over to Niklas for a financial summary.

[Niklas Lingblom, executive]

Thank you, Helena. Now, then let us look at the financials in some more detail. As commented by Helena, we are pleased to present a top line growth of 8.8% in the second quarter. Net revenue amounted to SEK 314 million compared to SEK 289 million last year. And main drivers for net revenue growth were the strong improvement in return rate, sales from our physical flagship store at Drottningsgatan in Stockholm, contributed to increased sales as well. Currency effects in the second quarter were slightly positive, and the net revenue in local currencies grew 8.4%.

And looking at total traffic in the Nordics, we saw an increase by 7%. However, the conversion rate of 2% in the quarter was lower than last year. Total number of orders in the Nordics, as a result, decreased by 6%, but we also saw an increase in average order value of 6% in the quarter, and this was mainly driven by higher average item value.

And now let's move to the next slide to shed some light on Nelly's profitability. We saw a strong increase in operating profit in the second quarter, where we performed an operating profit of SEK 30 million, which was SEK 23 million improvement compared to last year.

Operating margin improved to 9.7% from 2.7% last year. This improved operating profit was positively affected by a strong gross profit, but we also maintained good cost control in the quarter, which we'll look at in more detail a little bit.

Looking at the last 12 months now. Operating profit amounted to SEK 69 million, resulting in an operating margin of 6.4% for the same 12-month period. And to conclude, we are now happy to say that Nelly has performed 5 consecutive profitable quarters.

So now let's look at the income statement in some more detail. And as previously noted, we saw net revenue growth of 8.8% to SEK 314 million and gross profit of SEK 172 million and a gross margin of 54.7% in the second quarter. Gross profit amounted to SEK 172 million in the quarter, up 22% compared to last year, amounting to an increase of SEK 31 million.

Gross margin increased to 54.7% from 49%. And this was driven by higher share of own products, less campaign activity and as well as slightly positive currency effects.

And now looking at our operational costs, warehousing and distribution costs amounted to SEK 42 million compared to SEK 49 million last year. And warehousing and distributing costs as a share of net revenue decreased to 13.4% compared to 17% last year. So this is an improvement.

Operational improvements as well as lower volumes, partly due to the improvement in the return rate contributed positively to the low costs.

Marketing costs amounted to SEK 41 million compared to SEK 29.3 million, and as a share of net revenue increased to 13% from 10.2%. And as previously commented, this was mainly driven by our current transition to a new marketing model with different metrics.

And the administration and other operating expenses increased to SEK 59 million from SEK 55 million last year, mainly due to increased IT costs and the addition of our flagship store at Drottningsgatan in Stockholm. Administration and other operating expenses as a share of net revenue improved to 18.6% from 19.2%.

And overall, total operational expenses as a share of net revenue improved to 45% from 46% last year. So this is showcasing good cost control in the quarter for us.

And now we'd also like to shed some light on a few additional KPIs. Looking at the return rate over the past quarters, it is clear that our strategic initiatives are giving good results. We've seen a steady trend towards a lower return rate and have a return rate of 31.3% in the second quarter, which is the lowest since our strategic initiative began last year.

Changes in assortment, implementation of a new return management platform are a few of those actions that has contributed to the improvement. And we may emphasize that a lower return rate does not only guide top line growth for us but also lower operational costs and contributes to profitability overall.

And lastly, let me give you some comments on balance sheet and our current cash position. We end the quarter with a solid cash position of [ SEK 220 million ] and no short-term credit utilized. We saw strong cash flow from operations, which amounted to SEK 106 million in the quarter compared to SEK 77 million last year. Net cash flow amounted to SEK 94 million compared to SEK 113 million, while last year's cash flow was positive and affected by the rights issue of SEK 47 million.

Investments in noncurrent assets amounted to minus SEK 7 million and were mainly related to IT projects.

Equity ratio was strengthened in the quarter and improved to 23.8% from 18.7% last year. And we will also like to note that Nelly has no interest-bearing debt apart from government tax credits.

So to summarize, we are happy to conclude that Nelly showed growth of 8.8% in the quarter, increased operating profit with SEK 23 million to SEK 30 million and performed an operating margin of 9.7%. And as such, has now shown profitability in 5 consecutive quarters.

And with that, I'd like to hand back to Helena for some last comments.

[Helena Karlinder-Ostlundh, executive]

Thank you very much, Niklas. This concludes our presentation today, and we will shortly move on to your questions. However, before we do that, I would, of course, like to take this opportunity to really say a big thank you to the entire Nelly team for another solid strong quarter. I know how much hard work goes into these results. And I really want have to just express my appreciation for the entire Nelly team.

And of course, also a big thank you to our wonderful customers. They really are the most interesting and wonderful community to serve. So a big thank you to our customers as well.

Okay. So with that, let's move on to your questions and yes answer some of them.

[Unknown Executive]

Thank you, Helena and thank you for submitting questions before and during the presentation. Let's start by answering the first one. This question is for you, Helena, and it's from [ Albin ]. Now that your flagship store has been open for about a year. How would you sum up the stores importance and its financial impact on the business?

[Helena Karlinder-Ostlundh, executive]

Yes, great question. So I think we have also been clear previously that we continue to be primarily an e-commerce business. So of course, revenue wise, this store is a small part of the business. However, I would say it has had a very significant and important sort of role for us in that it's not even been open for a year. And we feel like we've learned a lot actually about both our customer base. We were getting early reads on our assortments And we've also actually delivered a lot of eventing and drops and launches in the store. And most importantly overall, we've seen an incredible customer response to the store. So yes, we feel revenue-wise small part of the business, but a really, really important one strategically.

[Unknown Executive]

Thank you very much, Helena. Next question is for you, Niklas, and this one is also from Albin. How do you assess that your tax deferral will impact profitability going forward?

[Niklas Lingblom, executive]

Right. So let me elaborate a bit on that. So we amortize our tax deferral on a number of basis according to plan. And as can also be seen by the fact that outstanding tax deferrals decreased by about SEK 11 million compared to last year's balance. We see some effects on the net results from interest rates, but the main effect is on cash flow, I'd say.

[Unknown Executive]

Thank you very much. We move on to the next question, also for you, Niklas. And the four following questions is from Nicklas Fharm, SEB Equities. Can you outline the main drivers and the magnitude of impact in the Q2 gross margin bridge compared to Q2 last year?

[Niklas Lingblom, executive]

Thank you. Yes, of course. So the main positive drivers of improved gross margin was a higher full price share. In other words, less campaign-driven revenue as well as higher share of own brands. And we also saw a small positive impact on gross margin from currency effects in the quarter.

[Unknown Executive]

Thank you, Niklas. Our next question is for you Helena. From the context of a marked year-on-year increase in share of sales from private labels, can you explain why the return rates are so much lower?

[Helena Karlinder-Ostlundh, executive]

Yes. So I think both of these areas are areas that we've worked really intensively on for some time now. So obviously working very intensely with our assortment and in particular, our own brand's assortments. And I know historically, this relationship hasn't existed, but we've also worked very strongly on our return rates. And we ultimately see that the fact that we both increased our share of sales of our own label and been able to lower the return rate come down to the fact that our customers really like what we do. They like our product. They like our assortment. So for us, this is, of course, doubly pleasing that we're seeing both of these trends.

[Unknown Executive]

Thank you, Helena. We will proceed by asking as the next question to you, Niklas. Can you elaborate on the main drivers behind the significant improvement in operating cash flow from the working capital release in Q2?

[Niklas Lingblom, executive]

Yes. So the main driver behind the strong cash flow, I would say, is related to the improved operating profit, of course, but as well, a lower level of inventory, which is a result of our refinement in assortment, and we will now also see a higher sell-through. We also saw increased account payables, which also affect the cash flow positively.

[Unknown Executive]

Moving on to the next question, and this one is for you, Helena. Q2 reports the first quarter with net sales growth since 10 quarters Q4 2021. How do you plan for growth from here on in the light of your strategic decision to lower your net sales in order to prioritize profitable volumes?

[Helena Karlinder-Ostlundh, executive]

Yes, it's a good question. And I also mentioned this in the presentation that we have had the strategy all along to build a profitable core that we could then grow and of course, as any business, we target profitability and growth. Every business does. So I think we are very pleased with the progress we've made, and we will continue to focus on maintaining and improving our profitability and, of course, growing like any other business, but we're really focused on the work and taking every quarter sort of -- or one by one. So I would say we will continue to implement our strategy, simply put.

[Unknown Executive]

Thank you. Next question is for you, Niklas, and this one is from [indiscernible] incredible, impressive work by you is 31% return rate the final milestone or how low do you think is possible.

[Niklas Lingblom, executive]

Yes. Thank you [ Emily ]. And of course, we we're very happy to see the low level of returns in the quarter. And working on eliminating necessary returns have been a core part of our strategy. We will continue to work with the great focus to keep the return rate down going forward. And as we have seen good structural changes from the initiative we've performed so far. So this will be in an ongoing focus for us.

[Unknown Executive]

Yes, thank you, Niklas. We will move along with another question for you, Helena. Could you elaborate on what the new IT systems hopefully will result in and why you think it's so important?

[Helena Karlinder-Ostlundh, executive]

Yes. Yes. So we shared the information that we would be really getting into this work a little while ago. And I think as a primarily e-commerce business, of course, our IT infrastructure is incredibly important to us. And I'm really pleased here that we've signed on with a lot of really capable and strong and progressive partners in this space and started working on implementing this whole architecture. So I think it will mean an improved customer experience in the sense that it will allow for much more flexibility for our teams in how they work and how they can sort of mold the customer offer, if you will, to make it as attractive as possible. So, I think, may be not the most obvious sort of visible effect for the customer, but really important behind the scenes for us to continue to improve our customer experience.

[Unknown Executive]

Thank you. We will now finish off this Q&A session by answering the last question. The last question is from Philippe. Do you believe that you are in growth mode now and going forward?

[Helena Karlinder-Ostlundh, executive]

Yes. Well, as I said before, every business wants to be profitable and grow and so does Nelly. So yes, we've come a long way. We have a lot more to do, and we will continue to work hard on the things that we still feel have much more potential to improve. So yes, tune into future presentations, and you'll see.

Thank you so much, Emily. Fantastic. Thank you, everyone. And yes, this concludes today's presentation, and we look forward to speaking to you again next quarter. Thank you.

[Niklas Lingblom, executive]

Thank you.

[Unknown Executive]

Thank you.