Westwing Group SE

XETRA:WEW

Earnings Call Transcript 2022-Q1

[Operator]

Dear, ladies and gentlemen, welcome to the earnings call of Westwing Group SE. [Operator Instructions]

May I now hand you over to Sebastian Sauberlich, who will lead you through this conference. Please go ahead.

[Sebastian Säuberlich, executive]

Yes. Thank you. Good morning, everyone, and thank you for joining us this morning. Today, I will present Westwing's Q1 2022 results.

With our mission in mind to inspire and make every home a beautiful home, let's walk through the business highlights and financials for the first quarter of 2022.

In terms of agenda for today, I will begin by providing key updates of our business operations, followed by details of Westwing's financial performance in Q1, and then we will move into Q&A.

Let me begin with sharing a few words on the general market sentiment we are seeing and our trading performance over the past quarter. The pandemic presented several challenges and opportunities for our business.

From a growth perspective, Westwing has delivered exceptional growth over the previous years and has established itself as a unique player in the Home & Living e-commerce market. Our brand positioning is strengthened, our customer proposition is strong as an inspiration-based Home & Living player.

Moving now out of the pandemic, the world is facing new challenges. Overall, especially in Europe, the war and humanitarian crisis in Ukraine has heavily contributed to an unsecured demand environment and consumer sentiment continues to be on a cautious level.

Additionally, inflationary headwinds driven by rising energy prices have also had a cascading effect on consumer discretionary spending, and therefore, also on the demand for our business. Additionally, post-COVID desires of consumers to travel has also had an impact.

The combination of these events has developed into softer trading for first quarter of 2022, and we expect this trend to continue at least throughout the first half of the year.

Investments we have taken in key areas of our business are important for our long-term success and growth. However, in such uncertain times, we need to and we'll carefully manage our contribution margins and general cost efficiency and are overall more cautious on longer-term investments. All of that in order to return to the clearly adjusted EBITDA profitable again by the end of the year.

Let's now take a look at the summary for Q1. Revenue for the first quarter of 2022 amounted to EUR 111 million, which when compared to the very strong baseline from last year's COVID lockdown period was down by 20%. In addition to the baseline effect, trading was strongly impacted by a challenging demand environment with low consumer sentiment due to the reasons I mentioned earlier.

Adjusted EBITDA for Q1 was minus EUR 1.7 million at an adjusted EBITDA margin of minus 1.5%. The negative adjusted EBITDA result was driven by a lower top line, alongside increased fulfillment costs, the strategic growth investments we took into the areas of technology, marketing and Westwing Collection.

Free cash flow for the period came to minus EUR 17 million, mainly driven by a temporary increase of net working capital as inventories of our bestseller products increased. I will later also share further details on our expectations for working capital this year in the financial section of our presentation.

We continuing to have a strong base of loyal active customers, which stands at 1.6 million for the last 12 months, which is down by 7% year-over-year. This drop in number of active customers reflect a similar trend to our top line development of having a strong baseline from last year in addition to overall lower customer acquisition due to a very difficult market environment.

Our key strategic priority to increase Westwing Collection share towards 50% of GMV, thereby driving differentiation and margins are up, is well on track. And we improved the share to 37% in Q1, up 6 percentage points versus the same quarter last year.

Lastly, based on the current developments, we now rather expect to meet the lower half of the full year guidance in terms of revenue and adjusted EBITDA. But as you know, the full year results are also very much driven by the seasonally strongest Q4 that still lies ahead of us.

Let's now look at some more details for our business update. GMV for Q1 2022 was EUR 128 million against a very strong baseline from last year. On top of the strong baseline demand for our business was also affected by the very difficult market conditions caused by a range of factors we discussed.

As these extraordinary baseline effects from last year make it very difficult to interpret the year-over-year growth rate and determine the underlying structural growth, it's also valuable to look at the 3-year compound annual growth rate of 19%, which we believe is a more accurate reflection of our structural growth over the past years.

I would like to emphasize that the current market environment is indeed challenging and that we had originally planned for a stronger 2022. However, we are still absolutely convinced that our business model and customer proposition are intact that once the market returns, we will continue to scale and expand our business further.

The opportunity ahead of us remains massive, and the current adverse market developments and volatility will be challenging, but certainly manageable on our way to building the company we envision.

As these baseline effects are very important to understand when talking about Q1 2022 relative growth, let me provide some more details here.

When looking deeper into the trends we are seeing and assuming historic seasonality, we expect to regain growth momentum in Q3 and Q4 this year as we leave the extraordinary baseline effects from last year behind us. We have illustrated this effect in the chart below.

Usually, Q1 and Q4 are seasonally the strongest quarters, as you see in 2019, the last year that was not affected by COVID. When we take the seasonal pattern of 2019 and apply it to our weak first quarter of 2022, we will get to slight growth in H2 2022, and therefore, significantly surpassed the size we were before the pandemic began. So this shows how important it is to keep the baseline effect in mind when interpreting and forecasting growth in 2022.

Our 3-year CAGR that we internally look at a lot, as said before, is 19% for Q1 2022 versus Q1 '19.

Let me now give you some more details on the development of our active customers. The number of total active customers declined by 7% year-over-year and stands at 1.6 million active customers as per the end of Q1. The total figure is up by 61% on a 2-year basis, showcasing the exceptional growth in our customer base over the last 2 years.

The decline in Q1 2022 is driven by the same drivers of our top line. On the one hand, we are facing a strong baseline from previous year. And on the other hand, the currently lower demand with Home & Living e-commerce impacts our churn, as well as our new customer acquisition negatively.

In terms of new customer acquisitions, it's important to note that although Q1 2022 is down versus previous year, it is still significantly above the levels of Q1 2020 and Q1 2019. So despite the current market weakness, we are able to maintain our ability to attract more new customers.

On Westwing Collection. We continued the upward trajectory towards the 50% of GMV target share of the high-margin Westwing Collection. In Q1 2022, we achieved a Westwing Collection share of group GMV of 37%, which is up 6 percentage points versus the previous year.

Our midterm target is to get this figure towards the 50%, which will be done through a combination of increased customer reach and awareness, as well as expansion into further product categories.

And we are on track to expand into further categories with Decoration and Tableware next on our roadmap. Additionally, we remain focused on embedding sustainability into the Westwing Collection, and we are proud to feature certified and sustainable products in our range, which is set to expand over the coming months and years.

Further details of our ESG strategy can be found on our website, where you may refer to our first ever sustainability report published in March.

In February this year, we also successfully opened a new warehouse in Poznan, Poland, further boosting our total shipping and storage capacity. The warehouse has a capacity of 80,000 square meters with the option to expand further and will be dedicated for storing and shipping our larger products.

We believe the inclusion of this warehouse in our existing footprint of 6 warehouses is key to us, enabling our strategic target of EUR 1 billion revenue over the coming years. That concludes the business update section of our presentation. I will now take you through some further details of our financial results.

Revenue for the first quarter of 2022 decreased by 20% year-over-year against the last year extraordinary baseline. The DACH segment generated revenues of EUR 61 million, while the International segment generated revenues of EUR 50 million. Here, too, you can see the impact on year-over-year growth rates due to the extraordinary baseline.

Let's take a closer look at our P&L for Q1. Our gross margin for Q1 2022 is 48.7%, which is 1.9 percentage points less than the extreme strong Q1 2021. Gross margin was mainly impacted by higher costs related to sea freight.

Fulfillment ratio for the period increased by 4 percentage points, which was in part due to higher inventory storage costs, as well as due to lower utilization of our now increased warehouse infrastructure. In addition, in January, higher inflationary pressure has resulted in a general cost rise in logistics and fulfillment related services.

Overall, the effect of our gross margin with rising fulfillment costs, resulted in a contribution margin of 25.3% for Q1, which is down by roughly 6 percentage points compared to last year.

In terms of marketing, we maintained our marketing expenses in line with our target range of 9% to 11% of sales. While we remain confident that these marketing investments are key to enabling Westwing's growth ambitions, we are keeping a watchful eye on cost efficiency and also reviewing our investment decisions continuously.

Our tech and long-term growth investments are also visible in our G&A ratio. In combination with the lower top line, we've increased the G&A ratio for the period by roughly 8 percentage points versus last year. The large portion of these increases are allocated to our costs associated with expansion of Westwing Collection, as well as upgrades to our technology function, both fundamental to the health of our operating model.

At the same time, given the lower top line, we are now shifting gears to being much more conservative, and we also reviewing our investments. Overall, this brings us to an adjusted EBITDA margin of minus 1.5% for Q1.

As highlighted in our guidance, profitability is expected to remain at lower levels for H1 and then improve in the second half of the year with our seasonally strongest quarter in Q4.

When we look at the segments, I think it's a similar picture. So DACH continued to be profitable for the quarter, while International reported minus 7.5% adjusted EBIT margin for the same period. So the delta is fairly in line.

Turning now to our cash flow in Q1. Starting with our net working capital and net CapEx development. Our net working capital position at the end of Q1 2022 stood at positive EUR 16 million. This increase is mainly driven by higher inventory levels related to the lower top line and supply chain disruptions that required extensive inventory buffers to cover supply volatility.

Fortunately, the obsolescence risk is rather low in our industry, so this is primarily a cash flow timing issue, not a structural issue. While we expect net working capital to remain significantly positive for the next 2 years -- 2 quarters -- sorry, we are confident that these effects are temporary and that we will begin returning to our structurally negative net working capital position, gaining pace towards the end of this year. And in a moment, I will provide some more details on the expected working capital development on the next slide.

Our CapEx ratio is 4.1% of revenue for Q1, representing a EUR 3 million increase in CapEx spending versus previous year. This increase is mainly driven by onetime investments into equipment for our recently opened warehouse and ongoing investments in our growing technology function, with focus on the development of proprietary software.

Coming now towards some details on our expectation for net working capital for the next quarters. As you can see, we are significantly in the positive territory with our structurally negative working capital positions maintained in previous years.

Commenting now on our expectations for the individual elements for the working capital. Firstly, it is evident that the large part of this increase is due to significant increase in inventories.

Currently, we are well equipped with inventory as we ordered significant inventory buffers due to the supply chain disruption. Additionally, the lower top line also has prevented us from selling this inventory up as we had originally planned.

From Q4 onwards, we will reach a significantly reduced inventory level as we have already reduced our order levels and buffer level. Additionally, we expect high sales for our seasonally strongest fourth quarter. So we expect to be able to sell a portion of this inventory, which in general, has a very low obsolescence risk given the longer product life cycles in Home & Living.

Inventory prepayments. This has actually reduced versus last year in part due to low level of purchasing new inventory as we were adequately equipped already. Similarly, we also expected decrease in inventory prepayments towards the end of 2022 based on the lower purchase of volumes.

For trade receivables, we foresee no significant change and for trade payables, this figure will go down in Q2, Q3 due to seasonally lower top line, and hence lower purchases to be made, before increasing in the seasonally strong fourth quarter again.

Contract liabilities, which consists mainly of customer prepayments, will also follow a similar pattern as driven by top line, decreasing over the next 2 quarters and then increase again slightly towards the end of the year.

The increase in working capital in combination with a slightly negative adjusted EBITDA resulted in a free cash flow of minus EUR 17.1 million for Q1. Based on the combination of these effects, our net cash position, as you can find on the next slide, stands at a strong EUR 79.3 million per the end of Q1, which provides us with reassuring strategic optionality in the current challenging landscape.

Also to tie in what we just discussed on the profitability and net working capital outlook. Based on our guidance and profitability and expected increase in inventory in the second and third quarter, we do not expect -- that we do expect a lower net cash position by the end of Q2 and Q3, before then will increase again in the fourth quarter due to the significantly improving working capital and profitability of the business.

With that, let me give you the outlook for the remainder of 2022. For the full year 2022, we guided revenue between EUR 460 million and EUR 540 million at respective year-over-year growth rate between minus 12% to plus 3%.

For adjusted EBITDA, we guided an adjusted EBITA margin between minus 2% and 3%. Due to a constantly lower consumer sentiment observed across all segments over the last month and basically no signs for immediate short-term improvement of the macroenvironment, we now expect to meet the lower half of our full year outlook in terms of revenue and profitability guidance.

Before we now move to the Q&A session, a quick summary on where we stand. So we processed 4 million orders within the last 12 months also with 1.6 billion loyal active customers across our markets. Realized revenues of EUR 111 million in the first quarter and an adjusted EBITDA margin of minus 1.5%.

The huge Home & Living market of EUR 120 billion is still very early in e-commerce, and we are size-wise still tiny compared to the huge opportunity in front of us, as we intend to lead the shift to online in a EUR 120 billion market.

Our business model focused on loyalty remains unparalleled, with 80% orders coming from repeat customers. We are strongly growing our Westwing Collection share, where we sell gorgeous best sellers at good prices and for us very attractive margins. We have an attractive target P&L improved during 2020. We have a very strong cash profile with a low CapEx ratio and usually a negative net working capital, to that we should return over the next quarter.

With that, I'm happy to take your questions.

[Operator]

[Operator Instructions] And the first question is coming from Volker Bosse at Baader Bank.

[Volker Bosse, analyst]

Volker Bosse with Baader Bank speaking. I would like to start with -- yes, what is your general view on the current situation? Did you already internally switch gear, so to say, to crisis mode by cutting costs or -- well, by postponing projects or how do you look at this current situation and how did you react?

I think you sound more cautious by saying the crisis will be at least until end of H1. So you showed us the hopes are on the second half, but how much confidence you have?

Can you also give us a bit more insight on consumer trends? We saw that the average value per basket increased? How was it achieved? And perhaps, you can also share some observation regarding the regional trends. I mean, perhaps which countries stands out, some highlights, some lowlights to get a kind of flavor regarding the regional differences?

And finally, it would be interested, I mean, sales minus 20%, on a group level, how was the difference in Westwing now and the daily themes segment?

[Sebastian Säuberlich, executive]

Volker, thank you for your questions. I think a general view on the current situation, I think, yes, we are switching gears, but I think we're not going into panic mode yet or like into full crisis mode. So I mean, we believe we see a temporary market weakness, which is causing short-term top line distortions.

We have -- and our investments have a clear long-term character, so it would be wrong to kind of fully cut them now for short-term profitability as we are convinced in the long-term opportunity our market has. However, I mean, normal in such a situation, we are like -- I think we're moving much more to being very cost cautious and reviewing basically every new investment very, very carefully, but also reviewing the investments we have made, whether we can delay that or reduce that.

So I think we're reacting well to the crisis, but we're not in panic mode yet. But I think we have to also to admit that our cost base is too high given the current top line levels. And that is the situation, and it's something we have to deal with it.

Second question on consumer trends, AOV. I think what we see basically there's we see AOV, as you said, going up. So that is mainly driven by 2 effects. On the one is the mix effect was our Westwing Collection business that continues to increase its group share and has usually structurally a higher AOV, as it has also higher furniture share. And on the other hand, it's also driven by price increases that we see across the board, and we have to pass on to our consumers, right? So as you see, our gross margin is fairly stable. It's not completely stable, so we were not able to pass on everything, but we passed on a lot of the price increases that we see and that's also driving AOV up.

Regarding regional differences, I mean, there are like -- as always in a portfolio of countries they are differences, but we don't see any significant differences that we want to highlight at this point. So it's a fairly stable picture, obviously, some countries suffering a bit more, but also because they were benefiting more last year. It's more like a baseline effect that we think is the current effect of what we see in this year.

And can you remind me of the third question?

[Volker Bosse, analyst]

Yes, last was, the difference between Westwing Now and daily themes in comparison to the minus 20% on average group level?

[Sebastian Säuberlich, executive]

Yes. Okay. Now I got reminded why I didn't -- I cannot answer on that because, as you know, we are not reporting kind of the -- that we were reporting the segment in DACH and International, and that's how we think on the customers. We don't think too much whether -- in which channel they place an order, and hence, we do not report that. But I would expect that it's roughly in line.

[Volker Bosse, analyst]

I would expect that Westwing now is declining less severe, let's put it that way as the average value per basket is going up. And Westwing now has a bit – has a higher ticket, isn't it true to assume so?

[Sebastian Säuberlich, executive]

Yes, that's what -- I think what you can see in the Western Collection share and the Western Collection share is also, by a large part driven by the permanent assortment. So that's true, yes. But overall, I think there's not a huge difference, but we see a general trend towards the Westwing collection that we've seen kind of every quarter over the past quarters, right?

[Volker Bosse, analyst]

One additional, if I may, I mean, it's just an observation as a consumer and as a receiver of your daily mails. My observation is that you have less promotional campaigns with famous brands like LEGO or Leifheit, or is that true or perhaps a bit more general? How do you see the response of brands by asking them to team up with you and your daily themes offers, so how reactive? Is that business going better or worse than before? Is there any trend foreseeable because I think that is a great opportunity to you -- to be -- to present -- yes, to present then yourself as a partner for these brands, who are missing own online stores and online shopping is all over the place. So how do you see that working out?

[Sebastian Säuberlich, executive]

Yes. I think we see that working out okay with the existing brands we have with the kind of partners we have already worked with. So I think that we continuously work with them and promote them. But what we have also seen and that new brand acquisition has slowed down a bit. We see kind of that peaking at the beginning of corona now slowing down a bit. But we expect that also the current market situation will enable us to improve here and increase the brand acquisition and improve the brand acquisition, so to say, over the next coming quarters.

But yes, we are -- I think we also fully believe that new brands and kind of fresh brands and attractive offering in our daily themes newsletter is a key driver of loyalty and retention, and that's why we put a lot of effort here. But it has to be improved, I agree.

[Operator]

[Operator Instructions] The next question is coming from [ Max Kaufman ], private investor.

[Unknown Attendee]

[Foreign Language]

[Sebastian Säuberlich, executive]

[Foreign Language] May I answer in English or do you want me to answer in German?

[Unknown Attendee]

Your choice.

[Sebastian Säuberlich, executive]

So the question was about growth rates at 23%-24%. And I think we're still convinced of the midterm targets we have set out and the opportunity that is out there. So we believe that once kind of growth levels have normalized, A, based on the baseline effect; B, also on the current trading or the current consumer sentiment. So we believe we can return back to the growth levels that we've also now seen if we look at the 3-year CAGR, so that's the 19% roughly. So it's something like, let's say, 15% to 20%. We believe that we will return to those growth rates as we believe is the structural growth of the market.

Honestly, like it's super hard to predict whether we will already see that in 2023, given the current market environment, but I think once we are back into kind of yes, a more normal situation, that's what we expect, and that's what we plan for now.

[Operator]

There are no further questions at the moment. One question just came in while speaking. The next question is coming from Catharina Claes at Berenberg.

[Catharina Claes, analyst]

I just wondered whether you can give us a bit of an overview of the current trading you see at the moment. And when you say that you are expecting to reach the lower half of the guidance, can you be a bit more specific? Or is this a common kind of that we can work with?

[Sebastian Säuberlich, executive]

Yes. Catharina, so I think what we see is basically that what we've seen in Q1 is continuing in Q2, roughly, right? So and then there's a bit of seasonal effect on top, so that Q2 is usually slightly lower than the Q1. So that's what we're seeing currently. So there has been no change in what we've seen. So that means that we roughly expect H1 to be in line with what we've seen in Q1.

And then as such, we're going to return to growth as the baseline effects are gone. I think just to remind you, last year, we had a very strong May and at April and also already in June saw kind of like the demand reducing and that should help us then from June onwards and then for sure in Q3. But I think right now, we don't see kind of a change of the situation either to the positive nor to the negative.

[Operator]

The next question is coming from [ Mark Fitz ] private investor.

[Unknown Attendee]

Just one short one. How strong do you think will be the effect on customer behavior, especially in the club segment with the new European omnibus guideline, which basically rivals, which is in my opinion, one of the club USPs.

[Sebastian Säuberlich, executive]

Yes. We're currently evaluating the omnibus guideline and how that will impact our business. So I think it's too early to tell. So our current view is that will not have a big impact as it always compares to as far as I know and just, no -- just have to be careful there really, that price offered within the last 30 days. So it will not have a significant impact at our current view but as said, we are still investigating here.

[Operator]

There seem to be no further questions at the moment. No new questions have come in. For closing remarks, I get back to speakers.

[Sebastian Säuberlich, executive]

Okay, then thank you, everyone. I'll talk to you soon when we talk about our half yearly figures and have a good day, and yes, goodbye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.