Nelly Group AB (publ)

STO:NELLY

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, welcome to the Nelly Group Q4 Report. [Operator Instructions] Today, I am pleased to present Kristina Lukes, CEO. Please begin your meeting.

[Kristina Lukes, Chief Executive Officer]

Well, thank you so much, and good morning, everyone, and warm welcome to this call. Finally, the very first call for Nelly Group. I am hosting this together with David Granath, our Group CFO. And who am I? My name is Kristina Lukes. Pretty new to you all in this context, I joined Nelly as CEO 31st of March last year. And as Nelly Group was born as of 6th of November this -- last year, I now hold the chair as Group CEO. Looking very much forward to having your attention for a short period of time today to talk about the company that I have fallen in love with, Nelly. I will start off by taking you through the main headlines for this quarter linked to the split-up of the group and the structure for the relaunch of Nelly. I will follow by taking the opportunity to put a light on us and briefly share who we are, our strategy and our foundation. I will also present our ongoing relaunch program, including key operational highlights from that in the past quarter. David will thereafter take us through the financial highlights and results, and then I will give some closing remarks on 2021. Moving to Slide 2. The quarter marked the creation of an independent fashion brand, Nelly. We now have full focus on Nelly after Qliro left the group in October and CDON was listed on First North. We also changed our name to Nelly Group. We have the structure for the relaunch of the Nelly brand and our operations with focus on our core and pave the way for our next journey. I am now the CEO of the group. I have a new team on board. And not only my team, but the entire business, we're gathering in the birth town of Nelly, and I would say the fashion and e-commerce heart in Sweden, Borås. So moving to Slide 3. A couple of words on who we are. We are a customer-focused and technology-driven company that offers a vibrant world of fashion. We are a Nordic fashion brand, with SEK 1.3 billion net sales in the Nordics, close to SEK 600 million worth of sales in our own Nelly brand. And this position we have built over more than 15 years since the company was founded in Borås in 2004. We are an inspirational online fashion destination. Back in the days, a lot of consumers flicked through fashion magazines to get inspiration. Today, we offer them on -- in our world, on our site and in our app. We have more than 108 million Nordic visitors, 1.3 million social media followers, and they are engaged and committed and like to stay in our world, 94% completion rate on social media. So our consumers hang out with us, but they also form a very loyal base of consumers. We have 1.3 million social media followers and 1.1 consumers or customers in the Nordics. And they like us. We have high Net Promoter Scores and high engagement rates. And a proof of the pudding of that is that 83% of our orders come from returning customers. So we have some really good assets in our brand and in our loyal consumer base.We are now taking all those assets and build on them through our relaunch. We are working with a renewed brand promise where we promise our consumers to always celebrate the fab her. We are also relaunching part of our operations, moving to an automated warehouse in Borås, so automation of our logistics and optimizing all parts of the value chain, so throughout our operations. Some examples you will see in results from in the past quarter. So moving to Slide 4. This is our strategy in a one-pager. We go to work every day to create and further build her most loved fashion brand. And we promise our target groups to always be on point with a full head to toe look that isn't breaking her bank account and always celebrate the fab her. In our strategy, we have 4 pillars or 4 focus areas. Starting off with the consumer, we call it NELLYtraction, where our ambition is to gain the love from our consumer. Second focus area, we call the NELLYverse. It's all about the complete offering, so adding value to our consumers all through the offer, every -- from the site, to the outfits we show and sell, to the delivery. We measure that in sales. Third area we call NELLYficiency. It's about ensuring that we create value in everything we do and take costs low as share of our sales. Since we are a value-driven company, our fourth area we call NELLYfied, and measure that through engagement rate with our employees, and I would also say with all of our partners and friends working with us. We want them to love Nelly. The results we're aiming for is to gain shares in the Nordic. We're also aiming for higher stock turnover to make sure that our stock is always fresh and improved profitability. If I move to Slide 5 and take us back to the quarter and some operational highlights in the quarter for Nelly. I talked about our strengths and our assets. One of them is our position in the Nordics, and we have put a lot of focus on that in the quarter. We show 4% growth despite a pandemic that we're in the middle of. We know that the fashion market and shoe market is in dramatic decline. And our position where we are strong in party and night life has been hit hard during the pandemic. Despite that, we show growth in the Nordics. We're also the third largest brand in Sweden and second in Norway in our target group in the quarter. I also want to highlight the increased gross margin, and you see a positive trend in several of our operational KPIs in the quarter. We show higher efficiency across the value chain; lower direct selling costs by 20% with higher efficiency due to several activities and process improvements; and a gross margin that continues to improve this quarter with 3.8 percentage point.So if I go to the next slide, our lower return rate is another highlight that I would like to mark out, 5 percentage points lower in Q4 2020 versus 2019. And that's driven by a number of activities but also events in the quarter. The pure fact that we're focusing on the Nordic category mix, but also a digitalized process and exclusion of bad returners that heavily abused our return process. The fourth highlight is around our inventory turnover. We show 32% lower inventory in comparison to last year. We have a significantly higher inventory turnover, much thanks to new processes for purchase and logistics and actions throughout our organization to lower inventory. If we move to Slide 8 (sic) [ Slide 7 ], I hand over to David.

[David Granath, Chief Financial Officer]

Thank you very much, Kristina. Having been through the highlights of the quarter, let us take a look at the income statement. The income statement reflects Nelly Group. Previously, we reported 3 segments and Qliro Group headquarters separately. From this quarter and onwards, we report Nelly as one group, including central functions, which will be integrated in Borås. Net sales amounted to SEK 394 million. It's lower than last year, but it increased 2% in local currencies. Gross profit increased 18%, and we see the second quarter in a row with higher gross margin compared to last year. In Q4, the improvement was almost 4 percentage points. EBITDA, clearly on the positive side, due to higher efficiency, focus on the Nordics, lowered return rate and lower cost of central functions. The result of discontinued operations included a positive effect from the distribution of CDON in the quarter, amounting to SEK 529 million. This is an accounting effect that does not impact cash flow or tax for the period, and the capital gain does not impact equity. However, it does mean that the result of the tax for continued and discontinued operations amounted to SEK 509 million. Moving on to Slide 8, cash flow during the quarter. The business had a positive cash flow during the quarter. This was mainly due to the seasonal pattern, which usually includes inflows in the second and the fourth quarter. This gave us a cash position of SEK 230 million at the end of the year. As we leave the peak season, net inventory levels decreased SEK 45 million in the quarter, and we see a continued good inventory turnover, as Kristina mentioned. We did not utilize our credit facility and have no interest-bearing liabilities. Overall, we have a seasonal strong cash position, sufficient for coming season, and as you might know, the coming warehouse automation is financed via Catena. And now back to you, Kristina.

[Kristina Lukes, Chief Executive Officer]

Thank you, David. And on to the next slide, where I promised to talk a little bit about 2021, where we are in the middle of the start of relaunching Nelly, building on our core strengths and assets to create a profitable foundation. We're working to optimize our platform where core assets are data-driven digital sales, influencer marketing, where we have been the pioneers and we continue to strengthen our position, and fashion-savvy purchasing and efficient operations. Culture is in -- is core in the work we do in 2021. We want to build on the winning culture within Nelly, but gear up performance and result orientation. And we do that when we gather all of our functions in Borås and then hence also closing our Stockholm office. Needless to say, logistics is in the center of 2021. We are aiming to move our warehouse from Falkenberg to an automated warehouse in Borås during the summer of 2021. We not only move to an automated warehouse, but improve processes and work on strengthening a sustainable value chain. I want to finish off with maybe the most important part of it all, and it's putting the consumer in the center of everything we do. We're relaunching the Nelly brand, making sure we celebrate the fab you every day, not only on a Friday evening, but even on a rainy, or today, a snowy Thursday morning. And we do that with a much tighter target audience, 15- to 25-year-old, in the Nordic, who have the need to feel fab every day. Thank you so much for listening in, and thank you for maybe celebrating the fab you. Our relaunch has just begun. Thank you.

[Operator]

[Operator Instructions] Okay. We've got a couple of questions coming through. The first is from the line of [ Kaisa Elstrom ] of [ Habit De Moda ].

[Unknown Attendee]

My name is [ Kaisa Elstrom ] from Habit Magazine. The focus is much on her, fab her. But what about him? I wonder how [ Nelly Man ] develops, and what's your plan for Nelly Man?

[Kristina Lukes, Chief Executive Officer]

Well, the core and the large part of our business is [ Nelly For Her ] so we have not communicated previously the split of the business between nelly.com and Nelly Man, but we have a clear focus on her.

[Unknown Attendee]

Do you want to develop it? How -- the revenue for Nelly Man and the development?

[Kristina Lukes, Chief Executive Officer]

The revenue for Nelly Man and for nelly.com, the split, we have not communicated.

[David Granath, Chief Financial Officer]

No.

[Operator]

Our next question comes from the line of Nick Fhärm of SEB.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

I have to confess, I've missed your presentation because I was tied up in another call at the same time. So sorry if I have to ask a few questions that you may actually answered already. But here we go. You can hear me?

[Kristina Lukes, Chief Executive Officer]

Absolutely.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes. All right. So I think starting out with the sort of Q4 results, in a way, the first kind of more, let's say, clean Nelly quarter reported. I was just going to ask you to start. So returns have been sort of an ongoing theme for Nelly for many, many years, and they have been certainly going both up and down. And in this quarter, it was quite impressive improvement in return rates. And my question is really, where do you think you should be in terms of returns as a percentage of sales? And yes, let's start there.

[Kristina Lukes, Chief Executive Officer]

A very good question. Thank you. And this is an area that we need to constantly work with. It's part of the business model that we're in. The decline in return rate in the quarter derives from a mix of reasons. One of them being our focus on the Nordics, with lower return rates in the Nordics. Second is category mix. Third is automated processes and then general improvement of the process, of the return process. And fourth is that we've blocked around 2,000 bad returners.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

I see, I see. Seems to be a little bit of an industry phenomena actually. I'm talking about Boozt and others as well doing the same thing. Can I ask you, when you say category mix, is that more specifically relating to less part addresses being sold in the quarter where presumably return rates are higher?

[Kristina Lukes, Chief Executive Officer]

Yes. I don't think it's presumably. It's in part the occasion dresses per definition has a higher degree of return rates due to the nature of the category.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes, yes. All right. A little bit along the same lines. Where do you think your inventory composition is? And where do you think inventory or stocking trade levels should be, either as a percentage of sales or in some other metric terms, please?

[Kristina Lukes, Chief Executive Officer]

If I start off, I'm looking at David to see what we have communicated previously. But if I just start off by referring to our strategy, where one of our key KPIs is inventory turnover, indicating that, that is a key area for us, and we are happy with the progress, both with the decline of inventory by 32% and the fact that we have a significant improvement of the turnover rate. And the reason for that is that we want to have fresh inventory to stay relevant to our consumer here and now. If that answers the question in a more general term. But the figures and the targets we have, when it comes to absolute turnover figures, is not something that we have shared yet.

[David Granath, Chief Financial Officer]

But I mean, it's the same as most areas within the business. I mean we're continuously working with the operational excellence. And this is just one part of it that we're -- we will continue to work with this area, and we're happy with the progress, and we will try to improve every day.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes. But is that the same thing to say that the -- I guess what I'm asking is the actual delta in Q4 stocking trade levels. Is that something we should expect sort of year-on-year going into Q1 2021, Q2, et cetera, et cetera, onwards for the full year as well? Or is this exceptionally sort of good working capital management in this particular quarter that we're looking at right now?

[David Granath, Chief Financial Officer]

I mean referring to the -- you refer to working capital in the quarter, I mean it's both a seasonal trend, I would say, that we have 2 quarters with higher inventory. So that's one part of it. But then I would say that you can see the decline quarter-over-quarter in inventory, as we've seen before, as we took down inventory heavily in Q2. So we're more focused on the inventory turnover.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Right. All right. Let's move on. I don't know if there's a huge line of other questions coming up or not, but in interest of time, when I look at your disclosure, you're talking about direct sales costs as sort of separated from cost of goods, right? And my question is, yes, I assume then that within the direct sales cost, you would have items such as fulfillment costs, right?

[David Granath, Chief Financial Officer]

Correct.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes. So my question is, would you care to give us an update on sort of fulfillment costs to sales or some development here? And also, would be very happy if you could sort of let us in a bit more on the plan for installation of the order store system in this year and how you think that will actually impact fulfillment cost ratios.

[Kristina Lukes, Chief Executive Officer]

I tried to write down the questions, but I think there were 5 or 6 in a row. No problem. But if I again start off and then David can continue. I'd like to start off with the targets of why we are moving our warehouse from Falkenberg to an automated warehouse in Borås. And the rationale behind that are a couple. One is to create a more efficient and sustainable operations there through automization, but also by the pure layout of the facility. Second is to ensure flexibility in size of inventory. And third is to ensure a quicker and more diverse opportunity for consumers to get delivery. So that sort of gives you the rationale behind the move as such. But then back to the development in the quarter when it comes to fulfillment, that's a part of direct selling costs.

[David Granath, Chief Financial Officer]

And I mean we don't give any breakdown specifically on the fulfillment as part of the direct selling costs, but we can see -- definitely see that we've seen efficiency improvements in fulfillment during the quarter.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

And I mean, it's safe to assume that you expect a significant reduction in fulfillment costs once your order store solution is up and running. Otherwise, you wouldn't be investing in it. But could -- would you share -- would you like to share any sort of KPIs that you expected to derive out of these investments?

[Kristina Lukes, Chief Executive Officer]

I think we will have to come back to that. And I think, yes, it's fair to say that we're expecting a significant decrease. But if I would comment totally on direct selling costs, I mean, if we're talking 20%, so of course it has a lot to do with process improvement and the work that we have initiated when it comes up to gear up performance and be very clear on the targets and ambitions we set throughout the organization.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes. Perhaps just one final question on this particular line. Is there also a corresponding decrease in marketing to sales in this quarter, which explains some of the 20% decline year-on-year?

[David Granath, Chief Financial Officer]

You don't have marketing in that line item.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay. Excellent. Okay. Then we move on to the next line. And I take the same question, how did marketing to sales develop in the quarter?

[David Granath, Chief Financial Officer]

Thank you for that question. I mean, historically, we have not commented on marketing. Just to clarify, it's in our reporting the low gross profit, so…

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay. All right. Can I also just assume that the decrease in sort of private label share of sales has more -- is probably linked to the sort of implications from the pandemic and the occasional dress category developments? Or is that a sort of strategic change that we should be aware of going forward?

[Kristina Lukes, Chief Executive Officer]

Well, no, it's not a strategic change. I would say it's linked to mainly 2 reasons. You can add on, David, if you want to. One of them is our agile action related to the pandemic where we put a very strong focus on our total inventory. And of course, the speed in external brands, we can be quicker to move both to put the gas on and to brake. That is one reason. The other reason is that we are strong in party and occasion dresses in our own Nelly brand. And those are, of course, categories that have suffered as a consequence of the ongoing pandemic.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay, okay. Would you like to share any sort of target level for sort of the medium-term outlook in 2022, '23, something like that, in terms of your wish for private label share of total Nelly Group sales?

[Kristina Lukes, Chief Executive Officer]

No. Not at the moment.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay, okay. Then I think -- just one. Yes. I'm sorry?

[Kristina Lukes, Chief Executive Officer]

But we take the question as an input going forward.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes, I appreciate that. Final question on sort of Q4 results. The U.S. dollar has been sort of quite volatile for all importers in -- reporting in Swedish kroner for the past year, obviously. And I was just wondering if you comment on the sort of gross margin bridge. Is there any specific impact from the U.S. dollar in upstream sourcing that you would like to mention?

[David Granath, Chief Financial Officer]

I mean the biggest effect we have on currency is more towards the -- at least in terms of sales is towards the Norwegian kroner.

[Operator]

[Operator Instructions] Okay. There seems to be no further questions apart from Nick, so I'll reopen your line, Nick.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

So just coming back with a few more final questions, if I may. Now going into 2021, obviously, Nelly Group is now Nelly, and there will be some changes to overheads and sort of previous central function cost lines, I suppose. What do you expect in terms of costs or overhead headquarter costs for running Nelly Group sort of on a clean basis every quarter or every year going forward?

[David Granath, Chief Financial Officer]

You're referring then to the so-called central functions that we mentioned earlier?

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes.

[David Granath, Chief Financial Officer]

Yes. I mean previously, we have said that we are on a SEK 30 million rolling basis last 2 quarters. And I think we see in the report now that we are at a level of around SEK 20 million now, and this will continue down. I mean I will be leaving end of March. And so will -- the remaining of the people working at the central functions and these functions will be integrated in Borås. So I would say it will continue to go down during the year. And I would say, second half of the year, you will see continued lowered center function costs, and we will report on it going forward. Or actually, we won't report going forward, but…

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

It should be a rather significant reduction, of course?

[David Granath, Chief Financial Officer]

Yes, it will continue to go down.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes, yes. Okay. Final question. I know it's early days for you as sort of -- well, I mean, you, by definition, have always been listed or at least for a long time, but without your former sisters and brothers in CDON and Qliro. And I guess my final question is, are there any discussions within the management team or on a Board level to introduce sort of an updated set of financial targets and objectives for Nelly Group?

[Kristina Lukes, Chief Executive Officer]

Well, yes, there is a discussion just as well as a discussion around KPIs to share. I think this quarter is a mix of previous Qliro Group and the Nelly Group, and you can see that in the report as well, that we've taken a small step into clarifying and giving as much relevant data as possible. I am sure that we will continue those discussions in the quarters to come.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes. Looking forward to that, it will be very helpful. And I think if you consider breaking out the SG&A costs into fulfillment and marketing and whatever, what the other peers are doing in the industry, I think that, too, would be very, very helpful for us outside just trying to analyze the company.

[Kristina Lukes, Chief Executive Officer]

Yes. I think I very much appreciate the input. And that's also part of the process now. We are -- I mean thank you so much for giving your thoughts on that at this at the time period that we're in.

[Operator]

And as there's no further questions from the line, I'll hand back to our speakers for the closing comments.

[Kristina Lukes, Chief Executive Officer]

All right. Well, thank you so much, both for listening into the presentation, and great for us to be in the limelight on our own a little bit today. And also thank you for some great questions, food for thought for us going forward. Looking forward to maybe seeing you again soon. Thank you.