Nelly Group AB (publ)

STO:NELLY

Earnings Call Analysis

Nelly Group's Steady Growth and Improved Profitability in Q3

In the third quarter, Nelly Group reported a 1.4% increase in net revenue to SEK 239.6 million and after-tax profits of SEK 22.3 million. The company has strengthened its own brand share to 45.2% from 39.4% and improved its operating margin to 10.5%, significantly up from 5.4% a year ago. The gross margin rose to 54.5%, reflecting consistent improvements in operational efficiency. While some out-of-stock challenges impacted sales, a focus on marketing and unique product offerings helped maintain profitability. The company ended the quarter with a strong cash position of SEK 190 million, showcasing healthier financial management.

Financial Performance Overview

In the third quarter of 2024, Nelly Group reported a modest net revenue growth of 1.4%, bringing total revenue to SEK 239.6 million, up from SEK 236.4 million in the year-ago period. The profit after tax was SEK 22.3 million, reflecting a positive trend as the company continues its transformation efforts. Notably, when adjusting for currency effects, revenue growth in local currencies was stronger at 3.6%. However, there was a decline in the total number of orders by 10.4%. Despite this, the average order value increased by 1.8%, showcasing a strategy aimed at improving profitability rather than just sheer sales volume.

Strengthening Core Brand and Product Strategy

A key highlight of the quarter was the growth of Nelly's own brand share, which surged to 45.2% from 39.4% a year ago. This indicates strong brand loyalty and consumer acceptance of their products. The company recognizes significant potential in its proprietary brands and aims to enhance their presence further. However, they faced issues with out-of-stocks for popular styles, emphasizing the need for better inventory management to support this growth.

Operational Efficiency and Profit Margins

Gross profit margin improved significantly to 54.5%, compared to 50.7% in the same quarter last year. The operating margin also showed marked progress, increasing to 10.5%, up from 9.7% in the previous quarter and 5.4% in the same quarter last year. Strong operational efficiencies led to reduced distribution costs, helping to bolster profitability. For the last 12 months, the operating profit was SEK 81 million, resulting in a sustained operating margin of 7.5%. This reflects Nelly's ongoing commitment to cost management and scalability.

Return Rate Improvement and Customer Experience

Nelly Group achieved a significant reduction in return rates, which fell to 27.1% from 34.3% in the same quarter last year. This marked improvement not only leads to cost savings but also enhances customer experience and satisfaction. The strategy to optimize product offerings has proven effective as lower return rates positively impact both operational efficiency and sustainability efforts.

Investment in Marketing and Brand Collaborations

Marketing expenses increased to SEK 23.8 million, representing 9.9% of net revenue, up from 8.9% the previous year. This increase aims to support Nelly's brand-building activities and drive more efficient, full-price sales rather than relying on discounts. The company also launched various collaborations with external brands and organized events in their flagship Stockholm store, further enhancing customer engagement and brand visibility.

Cash Position and Future Outlook

At the end of the quarter, Nelly reported a strong cash position of SEK 190 million with no short-term credit utilized, indicating solid financial health. The company acknowledges the inherent volatility in fashion retail and is actively exploring strategies to maximize shareholder value. Going forward, they remain focused on generating profitable growth while balancing various operational challenges, including anticipated difficulties in achieving consistent top-line sales in a challenging market environment.

Conclusion and Strategic Focus

Overall, Nelly Group's third quarter results reflect a period of adaptation and strategic realignment. While facing challenges in the overall retail landscape, the company has made strides in enhancing brand loyalty, operational efficiency, and customer satisfaction. The focus remains on building a more robust business model with an eye toward future growth, emphasizing the importance of their proprietary brands alongside a carefully managed inventory strategy.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to Nelly Group Third Quarter Report 2024. Today, I am 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 third quarter investor presentation for Nelly Group. My name is Helena Karlinder-Ostlundh, and I'm the CEO of Nelly Group. And I'm co-hosting today's call together with Niklas Lingblom, CFO for Nelly Group.

Today's call will be divided into 3 parts. We will start with a short video to introduce the Nelly business, which will also include a little bit of information about our history and some key stats. We will then focus on the third quarter and provide both an operational and a financial update. So I will provide some comments on the quarter, and we will also receive a financial summary from Niklas. And as usual, we will then conclude with a question-and-answer session. And at this point, I would like to remind you, as usual, that you are very welcome to send us your questions at any point during today's call. So let's kick off with a short video introducing the Nelly business.

[Presentation]

[Helena Karlinder-Ostlundh, executive]

Now let's move on to have a closer look at Nelly's third quarter performance. Net revenue grew by 1.4% to SEK 239.6 million and we delivered a profit after tax of SEK 22.3 million for the third quarter. These third quarter results clearly show that we're making continued progress towards becoming a much healthier business. And this is further demonstrated by a number of underlying KPIs, which I will go into a bit more detail on shortly.

And as we are now on track to becoming a much healthier business, we are also focused on generating profitable growth. And here as well, we have delivered further visible steps during this quarter, which I will also comment on in just a few moments. So let's start by looking at some of the telltale signs that we have indeed become a much healthier business since we started our transformation some 2.5 years ago. And we'll start with a look at our own brand share.

Our own brand share grew in the third quarter to 45.2% as compared to 39.4% in the same quarter last year. We further strengthened our position in a number of categories, including our jeans, knits, pants and tops. And of course, these are all absolute staples in the everyday assortment that we really want to provide to our customer.

It's also worth noting that most of our top sellers during the third quarter came from our own Nelly brands and also in our flagship store in Stockholm just over 75% of our assortment comes from our Nelly brands. So this is, of course, a fantastic shop window for both existing and new customers to get to know our brands and designs.

Going forward, we believe that we have significantly more potential in our own Nelly brands. During the third quarter, we did suffer from out of stocks on some of our most popular styles during several periods during the quarter. And of course, now that we have made significant changes in our assortment during this transformation journey and we're seeing higher average quantities of our top sellers, we do need to work through our quantification process to ensure that we can secure adequate quantities of our key products going forward.

In addition to growing our own brand share, another key sign that we have become a much healthier business is our return rates, which we further improved in the third quarter. In fact, our return rates in this past quarter was the lowest it's been since we started our transformation and came in at 27.1% as compared to 34.3% in the same quarter last year. And this is the result of a truly cross-functional strategy.

So for the last couple of years, we have created our assortment, designed our customer communication and set up various key operational processes with the return rate in mind from the very start. So we are really making decisions based on optimizing our return rates and this has generated significant results.

And of course, improvement in the return rates provide impact throughout the business. We have seen an improved sell-through especially on seasonal products as we usually have quite a short window to sell seasonal products. And of course, if we have a high return rate of them -- on them, they often come back and have to be sold out of season, which is considerably more challenging.

The improvement in our return rate also generate cost savings, not only in our distribution cost, but actually also in our discount cost as again, it is much more challenging for us to sell product at full price out of season.

The improvement in the return rates have also generated positive impacts from a sustainability perspective and most importantly, they provide a much better customer experience. Of course, our customers are much happier if they love the products and they receive them and don't want to return them.

Furthermore, I also want to highlight our strengthened gross margin. This improved year-on-year to -- for the third quarter land on 54.5% as compared to 50.7% in the same quarter last year. This gross margin improvement that we've seen consistently over the last 2 years has been fundamentally enabled by the reduction in our assortment brand.

So we have talked about this many times before. The assortment strategy with narrower but stronger assortment has fundamentally enabled us to focus on fewer styles and make much better buying decisions which, again, has enabled us to achieve a higher full price share and also during the periods where we needed to drive sales through discounts on certain products, we have managed to do so with lower discount levels.

So both of these things have contributed to our continued strong gross margin and of course, our growth in our own brand share that I mentioned just a moment ago, also contributed positively to the gross margin.

So as I mentioned previously, as we do feel that we have now built and continue to build a much healthier business, we are focused on generating profitable growth. This year, we have made a number of changes, both in our KPIs and our processes when it comes to paid marketing. And this is to ensure that we can generate more profitable traffic in all of our paid advertising.

We are now seeing very positive signs that these changes are working. And so during the third quarter, we chose to invest in our paid advertising. Marketing as a percentage of net revenue increased to 9.9% as compared to 8.9% in the third quarter last year.

However, we specifically drove towards more full-price sales and lower discount levels, which contributed significantly to improved profitability per order. So even though we made a bigger investment in our marketing, we drove more profitable traffic with that marketing.

We have also, in particular, in the third quarter, increased our focus and intensity on TikTok, both in terms of paid advertising and also in terms of driving organic traffic with very positive results. Overall, we saw a slight growth in our traffic during the third quarter, although once again with a lower conversion rate, which landed on 1.8% as compared to 2.1% in the same quarter last year.

This lower conversion rate was driven by a number of different factors, including the fact that we continue to operate in a tough market and we also stuck with our strategy of driving more considered sales that are primarily product-driven rather than discount driven. As I mentioned before, we also faced out of stocks on some of our best-selling products during various periods in the quarter.

And weather-wise, we had a late autumn start, which pushed sales, particularly of jackets and boots into the fourth quarter. Now we do need to continue to address our conversion rates. And note here, we will at least be looking at securing sufficient stocks going forward and also optimizing our IT systems that went live at the end of the second quarter.

So here, we have previously communicated that working and improving on our new IT infrastructure will continue for the rest of this year as well as into 2025. Now another key part of generating profitable growth is being able to offer our customers unique products and experiences. We are seeing strong and increasing interest from our external brands here to deepen -- to further deepen the relationship with us. And this is key to us as well, as I said, in order to be able to offer unique products and experiences that we know our customers love.

For example, this year, we have so far launched collaborations, both with Neo Noir and in the third quarter with True Religion. We also launched a number of new brands, including Hunter and Pilgrim, which is a very popular Danish brand. In addition to this, we continue to organize various events and happenings in our flagship store, which has now been opened for 1 year and delivered its strongest performance to date in the third quarter.

Through these collaborations, brand launches and events in store, we are able to provide uniqueness to our customers, and we know that this is very important, in particular, for our target audience. Nelly is very well positioned to continue working with external brands in this way. So we look forward to many more exciting collaborations and new brand launches going forward.

So to summarize, we are seeing clear signs that we have built and continue to build a much healthier business. And so we do continue to focus on driving profitable growth and we feel like we are creating better and better conditions for achieving this. Now I will hand over to Niklas for a financial summary.

[Niklas Lingblom, executive]

Thank you, Helena. So let me walk you through the financials in some more detail. As commented by Helena, third quarter is showing a net revenue growth of 1.4%. Net revenue amounted to SEK 240 million compared to SEK 236 million last year. Main driver for net revenue growth was a strong improvement in return rate. Sales from our physical flagship store in Stockholm contributed to increased sales.

Currency effects affected the quarter slightly negative versus the same quarter last year, and net revenue in local currencies grew 3.6%. Total number of orders in the Nordics decreased by 10.4%. But at the same time, we saw an increase in average order value of 1.8%, which was mainly driven by the higher average item value.

And let's look at the next slide. Third quarter is showing a continued improvement in our operating margin with 10.5% compared to 9.7% second quarter this year and 5.4% comparable quarter last year. Operating profit amounted to SEK 25.1 million compared to SEK 12.8 million last year.

The improved operating profit was driven by stronger gross profits, continued focus on maintaining good cost control overall, but we're also showing good scalability through lower warehousing and distribution costs both in absolute terms and relative to net revenue. And for the last 12 months, we can conclude that operating profit amounted to SEK 81 million, resulting in an operating margin of 7.5%.

And now let's look some more at the income statement on the next slide. Net revenue amounted to SEK 239.6 million compared to SEK 236.4 million. Gross profit amounted to SEK 130.7 million compared to SEK 119.8 million. A good improvement in gross margin to 54.5% compared to 50.7%.

Warehousing and distribution costs amounted to SEK 28 million compared to SEK 33.7 million, improving both in absolute terms as well as relative to net revenue, where we saw the ratio improved to 11.7% from 14.3% last year. And the improvement was mainly driven by operational improvements and lower volumes and to a good extent, lower return volumes.

Marketing costs amounted to SEK 23.8 million compared to SEK 21.1 million, showing an increase in cost of SEK 2.7 million, which was partly driven by brand building activities besides somewhat higher spend on performance marketing. And the marketing costs relative to net revenue increased to 9.9% from 8.9% last year.

Administration and other operating expenses amounted to SEK 53.8 million compared to SEK 52.1 million, increasing by SEK 1.7 million, mainly due to increased costs from the addition of our Nelly flagship store and IT-related operating expenses. Admin and other operating expenses related to net revenue amounted to 22.4% compared to 22% last year.

And overall, looking at total operational expenses as a share of net revenue, they improved to 44% from 45.2%. And so showcasing Nelly Group's continued focus on cost control. And then let's move to the next and last slide. So we end the quarter with a solid cash position of SEK 190 million with no short-term credit utilized. Typical for the third quarter, we have a bit of inventory buildup ahead of Q4, which we also see this quarter as expected. And cash flow from operations amounted to negative SEK 18.5 million compared to negative SEK 30.9 million last year. And the difference compared to last year was mainly driven by a change in trade payables.

Investments in noncurrent assets amounted to SEK 3.1 million compared to SEK 8.9 million last year, and these were related to IT projects. Net cash flow amounted to SEK 29.5 million compared to SEK 29.7 million last year. We would also like to note that Nelly has no interest-bearing debt apart from government tax credits.

And -- so to conclude, net revenue grew by 1.4% in the third quarter, while increasing our operating margin to 10.5%. And last 12 months are now showing a solid operating profit of SEK 81 million and operating margin of 7.5%. And with that, I'd like to hand back to Helena.

[Helena Karlinder-Ostlundh, executive]

Thank you so much, Niklas. This concludes today's presentation. But before we move on to the third part of today's call, which is the question-and-answer session, I would just like to take this opportunity to once again thank all our wonderful customers who have come with us on this exciting journey of our transformation. And of course, a heartfelt thank you to our Nelly team. I am truly in awe of your hard work and dedication to building a strong Nelly. Thank you.

All right. Let's move on to the final part of today's call and answer some of your questions.

[Unknown Executive]

Thank you, Helena, and thank you all for your questions to us. We will start this Q&A session with the first one. This first question comes from [ Alvin Ericsson ], and it will be Helena providing an answer. You currently have a large cash position. Do you have any plans going forward on how it can be best managed to create shareholder value?

[Helena Karlinder-Ostlundh, executive]

Yes. Thank you. Well, we're, of course, very pleased -- let me say that to start with. We're very pleased that we've managed to improve our cash position in this way. And I think that, too, of course, is a clear sign that we are a healthier business. And of course, we're always evaluating the best ways to maximize shareholder value. I think it is important to remember here that fashion retail can be quite a volatile industry, and there are also seasonal effects to keep in mind. And we, together with our Board, of course, have an obligation to make sure that we can have a secure cash position over time. So -- but yes, we're very pleased with the development, of course.

[Unknown Executive]

Thank you, Helena. Next, we received a few questions regarding the level of private label share of sales as well as level of return rates. So are you satisfied with your current level of private label sales share? Or what level would you like to be at? And is it a reasonable level of return rates to expect going forward? Helena?

[Helena Karlinder-Ostlundh, executive]

Thank you. Let me start with the question regarding our private label share. So what I would say there is that we are really proud of our Nelly brands and the assortment that we're able to offer under these brands. And of course, we're so pleased and thankful that the customer is responding to it so well. So as I also mentioned during the presentation, we see further potential in our brands and we'll continue to have them as a key part of our strategy. So I guess, in short, we're not satisfied. We're going to continue to focus on our own labels going forward.

And then the second part of the question was about the return rate. And here as well, I mean, we provided some additional information here during the presentation, but this is a core KPI for us that we focus on, on a daily basis. And the initiatives we've driven in this space have already given us a good result. We have a lot more that we want to do in our return rate strategy. And so we're going to keep working on this. And yes, as I said, it's a core part of our business to remove any unnecessary returns as we have communicated previously as well.

[Unknown Executive]

Thank you. The next question will also be to you, Helena. Given the very low return rate and strong e-commerce in general as well as for competitors like H&M in September, the revenue was quite weak. Could you elaborate on the different factors affecting revenue? This one was from [ Yuan ].

[Helena Karlinder-Ostlundh, executive]

Yes, of course. So first, I would like to be clear that, of course, we are not satisfied with our top line sales I think it is important to differentiate a little bit and actually sort of clarify that from an e-commerce perspective, the market has been quite challenging for fashion retail in particular. So that's important to keep in mind. But we believe in our strategy. We've seen very positive results from our strategy so far. And we're going to stick with it. And part of that strategy, of course, also is to keep working on top line sales.

[Unknown Executive]

Thank you, Helena. All right. We will move on to the next question from Nicklas Fhärm at SEB Equities. How would you describe the stock levels going into October Q4? For you, Niklas.

[Niklas Lingblom, executive]

Yes. Thank you, Anna. So as usual, we see inventory buildup in the third quarter ahead of Q4. And yes, we can also conclude that we see our stock levels as healthy going out of Q3, I would say.

[Unknown Executive]

Thank you, Niklas. We have received a question regarding our IT development. How much of the IT development have you launched already? What effect has this had? Helena?

[Helena Karlinder-Ostlundh, executive]

So as we communicated in our Q2 report, we went live with a number of central new IT systems at the end of the second quarter. And of course, these things do take time and we have communicated previously that we will continue to work on our IT implementation for the rest of this year and actually quite a bit into 2025 as well. But I think the exciting thing is that now that we have many of our core systems in place, we can really intensify our work with optimizing the front-end experience, if you will, so that the experience that the customer sees -- saw and that's very exciting for us.

[Unknown Executive]

Yes. Thank you, Helena. And thank you again for all your questions. We are wrapping this Q&A session up with the last question. This one is from [ Yuan ] who's wondering, are you looking at opening a store in other cities like Gothenburg? Helena?

[Helena Karlinder-Ostlundh, executive]

Yes. Thank you for the suggestion. We have not, as of today, made any decisions to open further stores. But what I would say is that we have had an incredible response from existing and new customers in our flagship store in Stockholm. And we've also actually seen that in addition to it becoming a favorite destination for many Stockholmers, we have a lot of tourists as well in our store from the other Nordic markets. So yes, you never know, nothing decided. But as I said, it's proven a really great addition to our business for us to have the flagship store in Stockholm.

Yes. Okay. Thank you very much. That concludes our question-and-answer session and wraps up today's presentation. Thank you.

[Unknown Executive]

Thank you.

[Niklas Lingblom, executive]

Thank you.