Mister Spex SE

XETRA:MRX

Earnings Call Transcript 2023-Q1

[Irina Zhurba, executive]

Hi. Good morning, everyone, and welcome to our Q1 2023 results call. The presentation will last approximately 20 minutes and will allow another 10 to 15 minutes for the Q&A. As usual, you can find the presentation online on Investor Relations website under Reports and Presentations. Our speakers today are Dirk Graber and Mirko Caspar. That said, let me hand over to Dirk to begin today's call. Thank you.

[Dirk Graber, executive]

Hello, and welcome also from my side. Thank you for participating. So today, on the agenda, we have a quick, I would say, looking back at 15 years of optical retail industry and Mister Spex. We then give you an update on our strategic initiatives, especially the Lean 4 Leverage program, followed by a financial update for Q1 and our performance. And then as Irina already indicated, we are moving to Q&A. So Mirko will start with 15-year review, basically of the industry and Mister Spex, and then we will take it from there. Over to you, Mirko.

[Mirko Caspar, executive]

Thank you, Dirk, and also welcome from my side. Well, as you may or may not know, it's our birthday. We have 15 years of Mister Spex. So we think that's a good reason to look back 15 years. And let's start with the industry. We see 2 paradigmatic shifts. One is, obviously, prescription glasses have evolved from being a pure medical device and have become an accessory that not only defines how you see the world, but also how the world sees you. And then the other thing is, the possibilities of the digital solutions have been used also in optical to accelerate the online segment to a level that the industry has not thought would have been possible. And we believe we were no small part in that 2 paradigmatic shifts in the industry. So let's quickly look at the last 15 years of Mister Spex.

As you all know, we've been growing market share 15 years consecutively, 14 years of those with double-digit growth. And we have not only reinvented or invented the online part of the business, we have also reinvented the optical retail. And the first store in 2016 was already highly awarded due to the idea and the concept behind really integrated on and offline. And we're really, really happy and proud that, just in the year of our anniversary, we've got awarded again. We're Store of the Year from the German Trade Association for our newest version, the boutique version in Cologne. And I didn't know myself even, but there were more than 400 participants and concepts that have been evaluated by the German Trade Association. So we're really proud that we, for our boutique environment, could really add something again, and made optical retail a little more exciting. And last not least, and we mentioned it when we talked about the industry, the advances in face-scanning technology and custom-made frames in recommendations we've been really driving for 15 years.

Now looking at the strategic update, we'll quickly look at the consumer sentiment, what it does to optical, how we have performed, and then Dirk is going to give you an update on the Lean 4 Leverage program. And starting with consumers, you will highly likely have seen it. Consumer sentiment is still a very low, right? We've seen it at 29%, it would have been a record high had we not had such low levels before -- record low had we not had such low levels before. But what it also means is it is a trend that's improving. What did it do to optical? Well, in optical, we had a bit of pent-up demand. So what you actually see is that, and we're zooming into Germany now here for prescription glasses that actually, the market grew 5% in units in Germany in the months January and February for which we have GfK data. If you look at us, we were again able to outgrow the market with 7% unit growth in Germany in prescription in January and February.

Now [ but leaning ] back the core -- one of the pillars of Lean 4 Leverage is that we want to also drive growth and profitability with capturing more value. So we have increased prices, we have reduced discounts, et cetera. So what did that do if you look at the value side of the business? And if you look at January and February, like I said, for which we have data, the prescription market in Germany grew 6% in value. Due to our strategy for the full quarter, we grew 21% in value in prescription. So that clearly shows that our strategy, building on our strong brand equity, to capture more value is working. So over to Dirk, who's going to tell you a little more about the other pillars of the Lean 4 Leverage.

[Dirk Graber, executive]

Yes. If we focus again on our 3 core pillars of Lean 4 Leverage, I think we made good progress also in Q1 in [ the short term]. So let's first look at -- concentrate on the core. Our retail stores in Q1, again, showed a very strong like-for-like growth, 19%. I think it's notable that all store cohorts contribute basically to this like-for-like growth and did grow. The second thing, which I want to point out, which also sticks out basically -- probably in the presentation, is the improvement of the gross margin of 440 basis points in Q1. On the next slide, we're going to have a more deep dive on how we managed to achieve that. I think Mirko already mentioned, we grew 21% in prescription glasses, Q1 in Germany.

So -- and at the same time, we reduced our marketing budget or spend by 320 basis points in percent of sales, which is remarkable, I think, in the combination. Number four, we -- and that's more of a, I would say, notice to everybody, we did decide quite opportunistically to invest in contact lens inventory and stock up additional EUR 6.5 million. Why did we do that? You may ask, especially because contact lenses were reducing in Q1. I think it's a number of topics. The one is we want to stay competitive, and especially since our large or all contact lens suppliers announced significant price increases between 6% and 9% in Q1, executed in Q1 as well, we wanted to basically stay competitive in this transition period of the market. We also seen obviously a higher return of invested capital versus just the money in the bank.

And we only bought fast-moving contact lenses, which we can sell within 6 months. So it is basically an opportunistic approach, but I think with a good return of capital, which you will see basically over the next 2 quarters being sold off as well and getting to a normal level again. One more thing. That was more of an outlook to Q2. In April, we even refined our price positioning for our standard 1.5 single vision lens, which was for free so far. And I'll give you in 2 slides basically an update what we've done with that standard less. And maybe as the last 2 points, we did already, a few months ago, set up this transformation office. It's really helped to put Lean 4 Leverage into the entire organization. We even now introduced the Lean management philosophy with some external help, and I think with a good traction already over the last weeks and months that we've seen so far. So that is the overview.

And now let's go into the details, especially on the margin side first. 440 basis points versus Q1 last year and still 200 basis points versus Q1 2021, right? So one driver was our continued focus to reduce discount rates, meaning we're doing lower -- less campaigns with higher discounts. So we focus on lower discounts or no discounts in our campaigns. And on the other hand, we've been strong on pricing. So we continue to push basically supplier price increases also to the market, and we actively manage basically lens prices, again, plus what we've done is we also looked at, I would say, marketing channels. And here, we basically focused on the marketing channels, which are less price-sensitive. And in the end, it led to significantly increased average order values for prescription glasses, plus 14% versus Q1 last year and in sunglasses, even 16%.

So it not only helps on the gross margin side, but also trickles down to contribution margin 2 or 3 because the variable costs are typically based on units and not on price. So therefore, this is a significant driver for our overall EBITDA improvement. So now let's have a look into our change in the standard lens prices. So historically, the standard free 1.5 lens was a significant part of our USP. As you know, we've grown the brand over the years and we significantly increased our brand awareness, but also our physical presence, with now over 70 stores. What we also done is we've focused more on independent and luxury. Therefore, we decided to actively basically increase the price from 0 to EUR 19.95 in most of our markets. And we've started that mid of April. And so far, we've basically seen a good, I would say, transition in that pricing with no significant impact on volumes.

So, so far, we are very happy, and everything is in line with our expectation. It should lead again to a small further improvement of our gross margin, especially in prescription glasses. So now let's look at the financial update. I think we will show you a strong development in all key categories and also in our key region, Germany and also have a look at how we significantly improved our EBITDA margin in Q1. So now look at the -- have a look at the product segments. What you see is the overall 6% in Q1 is driven by prescription glasses, which overall grew 19%, as Mirko already mentioned, some pent-up demand. But on the other hand, obviously, a lot of new stores and, I would say, a good traction of Mister Spex in the core market, Germany. Sunglasses, here, we grew 6%. I would say we've seen quite poor weather conditions in Q1 '23 versus Q1 2022, right? So therefore, we see a slower demand pickup so far until end of March. I think weather significantly improved in Q2.

And -- so we don't see a big risk so far for the entire year on sunglasses. Therefore, we are okay with the result in Q1 here. In contact lenses, I already mentioned it, we've seen a negative development. Here, it's a deliberate decision for margin, where we said, okay, we want to improve our overall gross margin. And therefore, we are not basically [ growing ] actively in all marketing channels, especially the ones which are very price-aggressive and price-sensitive, where no money is to be made. And the second driver here was the negative impact of the Norwegian and the Swedish krona in the market. I think positive, on the other hand, again, in the prescription and sunglass segment, our focus on the higher-value boutique segment, which comprises basically luxury and independent brands, especially increased by 39%, our own brands by 13%. Overall, we added 3 new stores in Q1 and ending the quarter with 71.

Now when we look at our segments in Germany, which was our focus again in Q1, it's part of our Lean 4 Leverage strategy, we grew 12%, adding 3 new stores. And so -- showing a good and resilient performance and also an increase in growth rate versus Q1 last year. Internationally, we really focused our, I would say, energy resources management attention on the German market because the bang for the buck was just significantly higher. And therefore -- and in combination with, I would say, the weak Norwegian [ krone ] and Swedish krona, we've seen a decline of 8% internationally. It doesn't mean that we don't believe in international markets in the long run. But in our aim to get to cash flow breakeven faster than -- let's say, rather sooner than later, this is a deliberate decision also to focus on the German market.

So now let's look at the overall financial performance in Q1. What you see, the significant improvement in EBITDA of 7% and adjusted EBITDA of EBITDA of 6.4% is driven by gross margin improvement. We've already seen 440 basis points and the reduced marketing expense of 320 basis points. Personnel expense slightly increased, especially due to the 20 new stores on a year-over-year, I would say, comparison basis, while operating expenses stayed more or less flat. All right. So having looked at that, we do also confirm our guidance for 2023. Q1 was in line with our expectation. So we do expect net revenues for the full year to increase mid- to high single digits and also returning to a positive adjusted EBITDA margin again in the low single-digit margin percentage.

What you can expect from Q2? We seen basically another positive impact from the lens price change of the 1.5 single vision lens. We opened 3 additional stores. And we will also see a pickup -- seasonal pickup from sunglasses in the second quarter as normal. And so -- therefore, the expected improvement in gross margin will be, I would say, we expect an improvement, but not as high as in Q1. That's mainly driven by the product mix. So having said that, we are now moving to Q&A, and I hand over to Irina to moderate that.

[Operator]

Okay. [Operator Instructions]. Your first question comes from the line of Alexander from Jefferies.

[Alexander Thiel, analyst]

A couple of points from my side. First, maybe a remark. I believe all analysts would appreciate if we could get the presentation before the call or even during the call. I just tried to download it, but it's still not working. My first question is on your omnichannel business model. Could you shed some light on how much revenue is contributed from the online side versus brick-and-mortar stores? And the difference you see in the growth rate there? And could you remind me again of your store target for this year, please?

The second one is on your profitability guidance for '23. You're currently below kind of the full year guidance, but obviously, against the toughest comp in Q1. So how should we think about the following quarters, especially given the shift in sales mix? I mean I assume gross margin in Q2 will be definitely lower. What will be the impact on profitability going into the second half?

[Dirk Graber, executive]

Okay. Thank you, Alexander, for the questions. So first of all, I would say, the omnichannel splits online versus off-line. I would say it's -- offline is obviously slightly improving versus -- in terms of share due to 20 stores. And -- therefore, [ while it's ] still -- online is, I would say, significant like the larger part of the business and significantly contributing to our revenue mix, right? So looking at, I would say, the profitability improvement for the full year, yes, if you -- I mean, we do expect significant improvements also in the next quarters. When you look at basically last year, we started -- we finished the year with a negative EBITDA of EUR 6.5 million.

And we now basically already improved by roughly EUR 3 million our EBITDA versus last year. So we do expect to improve in EBITDA on a quarterly basis as well for the full year. So we will see step-by-step, basically, improvements towards our target in terms of low single-digit EBITDA margin. So that's, I think, in line with the expectation where we want to go. And in terms of gross margin, you're right, we do expect obviously gross margin to be slightly lower in the second quarter. That's naturally because of the product mix. But again, we plan to improve gross margin versus last year, right? So that is always -- and we want to see further improvements in the overall P&L structure for the next quarters to come.

[Alexander Thiel, analyst]

Okay. That's very clear. Could you remind me again what you're baking in right now on the personnel costs over wage inflation? What do you expect there? I think in the first quarter, we are now up [indiscernible] year-over-year. And my second one would be on your reporting structure, the other operating expenses, I mean, with the Lean 4 Leverage program, it would be, I think, highly beneficial if you could break out like marketing, fulfillment, other costs in the other operating expense. So we can basically see where the cost savings are coming from.

[Dirk Graber, executive]

So on salary inflation. So we have different parts basically of the business that we manage slightly different. So we have obviously higher salary inflation on the, I would say, lower end of salary [ factors ]. So here, I would say in entry-level salaries, it's more like, I would say, 7% to 10%, while on, I would say, higher salaries, the increase is more 3% to 5%. On average, I would say that we're probably talking about a 6%, 7% salary increase versus prior year. So on the cost and the other operational topics, we understood that. So we will, I would say, consider that basically coming back in the Q2 reporting and also make it sometimes easier to understand certain mechanics of P&L management and also in terms of Lean 4 Leverage impact. That’s understood.

[Alexander Thiel, analyst]

Okay. That's good. Just a follow-up on the first one. I couldn't hear the number of new stores that you're planning. So the 10 to 20 is still valid? Or is there any change on the opening of new stores?

[Dirk Graber, executive]

No, no, sorry. Maybe either there was a misunderstanding. So we're planning up to 10 stores. We opened 6 now, and we'll be opportunistic basically for the remaining 4 up to 10 in the second half of the year. But focus is really on the existing store network and like-for-like performance of the entire organization. But if there are opportunistic, I would say, stores available that we can open in interesting locations, which are promising, then we may add a few more, up to 10 for the entire year.

[Operator]

[Operator Instructions] Okay. Okay, next we have a question from the line of Cédric Rossi from Bryan Garnier.

[Cedric Rossi, analyst]

Sorry for the background noise. I have 3 questions. The first one is regarding the prescription sales up [ 18% ]. Could you elaborate a little bit more on the growth by category, whether high end or the entry price have outperformed or not and whether it's own brands or private labels? And the second one is regarding your pricing reaction. So it's reassuring to see no negative customer reaction so far. How do you attribute that? Is it because some of your peers have also increased prices? Or is it also still your very good value for money positioning? And my third question is to bounce back on the previous question, what kind of salary inflation have you budgeted for this year?

[Dirk Graber, executive]

Okay. Mirko, do you want to quickly give a few comments on, I would say, boutique and private label development and I then -- and also maybe on the pricing reactions of the consumers. And I'm happy then basically to take the rest.

[Mirko Caspar, executive]

Right. Of course, Dirk. So PG growth again is overproportionately driven by boutique. If you take PG and SG together, boutique grew again 39%. It grew around -- a little slower in PG, but it definitely was the driving force. If you look at own brand, that is slightly losing a bit of share in the first quarter, but we have new SKUs coming in. So we believe that private label is going to be on a similar level as a share as last year, but boutique is the driving force for growth. Then on the price increases, well, there's a few factors. One is, partly due to the growth of boutique, we are also entering segments that are less price-sensitive. And that obviously allows for price increases with less negative reaction, number one.

Number two, yes, the market has increased prices partly, but what you have seen is that in the market, at least in Germany, value development and unit development, there was almost no gap in the market. The large gap came from us. So we were able to overproportionately increase prices without consumers, [ they're choosing then ] lower-priced products or purchasing less. So -- and that effect I really attribute to 2 factors. One is the attractive and still unique positioning for those consumers who like to buy great glasses in an easy, approachable way. And we could just -- we're still unique in that -- for that customer segment, and that is why increasing prices has allowed us to still outgrow the market in units.

And the other thing is really, in the past, I think we had a fantastic value for money positioning, and we still have a great one even after the price increases that comes on top of the strong brands.

[Dirk Graber, executive]

Okay. And then maybe on the last question, salary increases or HR cost increases. Maybe let's split it like that. So we expect overall HR costs to increase by 10%. And 6%, 7% of that 10% come from increased salaries and the remaining comes from the additional stores, especially we've tried to reduce headcount in other departments. But overall, we do expect a 10% increase.