Earnings Call: Q3 2022

Nov 8, 2022

Morning, and welcome to the Boost Q3 2022 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Herman Haraldson, CEO, please go ahead. Thank you. Good morning all and welcome to our Q3 2022 webcast. So, let's just dive into it going to the first slide on the key highlights. So to start with, our Nordic department store strategy stands strong, we believe, with growth in the quarter of 7.8%. We continue growing the business profitably while accelerating market share gains despite discretionary spending Being under continued pressure. For the 1st 9 months, we managed to grow 11.9%, and we are on track to deliver growth well ahead of the market and within our guidance for the year. Markets have continued to be challenging and the consumer sentiment Axten has reached new lows during the quarter along with a steadily increasing inflation. We are now underway with the 2 most important months of the year in terms of sales as well as profits. And our organization is in full execution mode To end the year on a high. Customer acquisition cost has continued at an elevated level throughout the quarter, however, offset by the steadily increasing average order value. So the underlying business drivers All pointed in the right direction and tracked the very positive trend from previous quarters. The cohorts from 2021 continued the positive development compared to the 2020 cohort, Leading to an increase in the true frequency. At return rates, they have stabilized at a low level, again, Thanks to a diversification of categories and not least our unique fair use concept to limit fraud and abusive return behavior. Last and most important, the average order value has continued to increase, and we are at a record high average order value. This development is mainly supported by more items per basket and this is a testament to the strength of our Nordic Department of Strategy along with some tailwinds from FX. The additional revenue streams being Boost Media Partnership, BoostPay and Brand Hub delivered solid results And further progress in the quarter, although comps are becoming somewhat more difficult. Our colleagues in the commercial team along with buying merchandising have done an outstanding job to manage our inventory position in a time of high uncertainty and very low visibility. Our inventory position is healthy as we have managed a strong sell through Of the SES 'twenty two season and are well underway with the auto winter 'twenty two season. We are currently strengthening our product mix The selected campaign price to further improve our offer towards consumers. So, backed by another strong quarter, We reiterate our outlook for 2022 and we expect to deliver accelerated market share gains also for the 4th quarter Backed by solid profitability. With that said, we of course acknowledge a continued challenging external environment. Therefore, with the current market conditions, we see a higher likelihood of achieving the lower end of our outlook for 2022 in terms of net revenue growth. With that said, going to the next slide, which also is the most important one, The customer satisfaction KPIs. So if you look at our KPIs on customer satisfaction, then we can see that During the quarter, we have maintained our 5 star rating on Trustpilis and we have managed to deliver an NPS At a stable and best in industry level. So the whole organization is kind of laser focused To continue to meet and exceed the expectations of our customers in terms of selection, price And convenience. Going to the next slide on the order developments. If we go to the next slide, we can see that the number of orders were more or less in line with last year for boost.com. For the first half year, we are slightly down with a minus of 1.6%. The drop in number of orders is Offset by the increase in average order value and a continued strong development of our additional revenue streams, mainly Boost Media Partnership and Boost Day. The average order value continues to develop stronger in the 3rd quarter And it's up to a record high SEK872 per basket. The main driver is customers adding more items In each basket, due to the continued expansion of the Nordic department store, but also with some positive effects from FX. I'm very excited to see that the ongoing work to build the best selection across all our department store categories It's acknowledged by our customers, putting more things in each basket and supporting the positive development of our market size, which in turn enables us to continue to deliver best in class profitability. Moving to the next slide, the cohort development. We continue to grow our base of active customers on boost.com. In the Q3, we had 6% more active customers Compared to last year and 33% more than the Q3 in 2020. The number of orders per active customer remains Stable and in line with previous years. True frequency developed positively compared to previous years. So we are encouraged to see that the cohorts from the pandemic years continue to behave in line with what we've seen in the past. So I believe that we can now settle the debate once and for all in terms of the stickiness of the COVID cohorts. So having said that, I will now hand over to Sandra for some perspectives on the financial performance. Thank you. So if we look at the group results, we see a net revenue growth of 7.8% in the 3rd quarter. Growth in local currencies was 4.1% due to the strengthening of all currencies used in Scandinavia in relation to the Swedish krona. As you know, we are negatively affected by the low consumer sentiments and high inflation. However, we saw an acceleration in consumer interest towards the end of the quarter as the autumn winter season kicked off. This resulted in a solid growth in September. The trend with increasing average order values in both our stores continued in the 3rd quarter, which I will come back to within short. Other revenues that consist of revenues not directly related to product sales were 51,200,000 Growth in this revenue stream comes from Boost Media Partnership and Boost Pay. Year to date, net revenue growth was 11.9%, 8.9% in local currencies. Return rates are stable at the same level as last year, both for the quarter as well as year to date. Our department store model, where the diversification of sales contributes to lower returns long term, is working very well. We are in good control of returns and the costs associated with them. The gross margin was 40.1% In the quarter, 0.3 percentage points lower than last year due to slightly lower product margins. Year to date, the gross margin of 40.3% corresponds to a 0.3 percentage point improvement compared to last year. Our focus in the Q3 was to make sure that we ended the springsummer season with satisfying sell through to be able to focus on seasonal goods during the Q4. In addition, we also wanted to make sure that we got a head start into the always so important autumn and winter season. Given the challenging market, we are very satisfied with the gross margin and sell through numbers delivered in the 3rd quarter As the SS22 season sell through is on par with pre pandemic levels and September delivered a relatively strong sale of AV22 goods. We have slowly started to buy into available campaign goods in the markets, and this will enable us to improve our offering to the customers While supporting profitability in a time of high commercial activity across the industry, which is mainly driven by higher inventory levels. The adjusted EBIT margin was 1.9% in the 3rd quarter, which is on par with last year when the adjusted EBIT margin was 2%. Year to date, the adjusted EBIT margin was 2.7%. That is to be compared to 5% last year. So if we move to the next page, we see that the revenue growth for boost.com was 8.2% in the 3rd Quarter 9% year to date. In our kids, beauty and home category, we saw the best performance. From a country perspective, Sweden and Finland performed the best. The average order value for boost.com increased with 8.1% historic high of DKK 872, that is to be compared to DKK 807 last year. As most of you are aware of, the high AOB is, in our view, the key element for us to deliver best in industry profitability. We're happy to see that the department store strategy really supports a sustainable high average order value. The number of active customers increased 6% compared to last year, while true frequency developed positively from 6.9% 6.97 with cohorts displaying encouraging behavior and similar buying patterns as our historic cohorts. Looking at profitability in the Q3, the adjusted EBIT margin decreased from 2.5% last year to 2.1% this year. The decrease in adjusted EBIT margin is mainly related to a lower product margin as a consequence of the high promotional activity currently characterizing the market. Year to date, the adjusted EBIT margin decreased from 5.1% to 2.9%. If we move on to the next page, we see that growth in the boosted segment was 5.9% in the quarter and 27.7% year to date. Boostless growth opportunities are negatively impacted in the short term due to the very high promotional activity in the in season stores, both online and offline as a result of high inventory volumes in our industry. In addition, Bootlets played a key role in managing the inventory risk For the Boost Group in the Q3, successfully selling previous and in season items, bringing the overall inventory of the group to a healthy level. Growth in the Nordics amounted to 8.7%, mainly driven by Finland and Sweden. Rest of Europe Experienced a decline of 17.7 percent impacted by lower sales in Germany as a consequence of us prioritizing profitability. Our boosted customers continue to put more items in their baskets, which contributed to a significant increase in the average order value of DKK 833. The adjusted EBIT margin increased to 0.9 percent, That is to be compared to a negative 0.6% last year. The increase in adjusted EBIT was driven by the increase in net revenue and improved Cost ratios. If we move to the next page, we see the development of the cost ratios. The fulfillment cost ratio that consists of fulfillment costs as well as distribution costs was 11.6% in the 3rd quarter, 0.6 percentage points lower than last year. During the quarter, we increased productivity in our fulfillment operations. Working in the other direction, we, just as others, experience higher costs related to energy, both directly in relation to the we use in our own operations, but we also see significant increases in costs for packaging materials and fuel surcharges from last mile providers. On the good side, these costs don't constitute a significant part of our total fulfillment cost and are protected by an industry leading average order Last year, the fulfillment cost ratio was negatively impacted by shortage of capacity due to higher than expected growth in Year to date, the fulfillment cost ratio increased from 11.6% to 11.8%. We expect the ratio to decrease gradually as we improve productivity. We still believe that 11% is a good benchmark on where the ratio The marketing cost ratio decreased from 12% to 11.4% in the Order with an absolute spend in line with last year. Our business continues to be managed based on the core principle of a profitable and sustainable Due to our strong unit economics and high basket size, we will continue to invest in marketing to continue our accelerated and profitable market share Thanks. Year to date, the marketing cost ratio increased to 11.1% compared to 10.7% last year. The adjusted admin and other cost ratio increased from 10.7% to 11% in the quarter, And we're pleased to see that we have stabilized the development and managed to partially offset the slowdown in growth and short term deleverage of our investments into the cost base. The ratio was positively impacted by the decision to ensure that the organization and cost Space reflects the current environment and growth opportunities. With effect from July 1, we reduced staff that implied monthly savings of Approximately $3,000,000 The cost of redundancy payments incurred in June and amounted to $9,500,000 Part of the savings were earmarked to make sure that we could give existing staff salary increases. Those took effect September 1. Hence, slightly higher salary costs in absolute terms are to be expected in the Q4 and coming into next year. Year to date, the adjusted admin and other cost ratio increased 1 percentage point to 10.8%. The depreciation cost ratio increased from 3.5% to 4.2% in the quarter, which was in line with and impacted by the significant investments we made this year as well as end of last year in order to increase our automated fulfillment capacity. The ratio is expected to decrease over the next few years as we gradually grow into the capacity expansion. Year to date, the depreciation cost ratio increased to 3.8%, which is to be compared to 3.1% last year. Moving on to the next page. We see that the net working capital of 8.4% of the net revenue for the last 12 months last year and 24% compared to June of this year. Inventory in relation to LTM revenues was slightly lower than last year. In Q3, we, as we always do, build up inventory for Q4 to deliver the growth we plan for. However, the in delivery of the winter 2022 season was slightly behind last year, minorly impacted by global supply chain disruptions. Last year, the inventory position was partially impacted by temporary capacity constraints at the warehouse. Making sure that our inventory position is and remains healthy is our first priority at this time. This is a key priority for our organization as markets volatile and visibility is low. Backed by a strong track record, we remain confident that we have the right $488,600,000 to a positive $90,100,000 driven by cash flow from changes in working capital and investing activities. In the Q2, we invested in the 7th expansion phase of Autostar. This investment is to be finalized during the Q4. Year to date, we have invested $371,100,000 in fixed assets, where of around $30,000,000 was in the 3rd quarter. The majority of this year's investments are related to the Autostar installation, which will enable us to continue to grow in the coming years as we previously stated. Finally, as we believe that a strong cash position is key in the current market environment, we're happy to see that our cash position exceeds DKK 1,000,000,000 at the end of the quarter and that we have a net cash position of DKK 90,100,000. That concludes the financial update. And I would now like to hand back to Ron. Thank you, Sandra. And let's go So the next slide, talking about the Nordic department store. Over the last couple of years, we have made significant progress In building the leading Nordic department store. Our crucial part has been to establish a full assortment across all categories as well as the introduction of the home category. We still have a lot of work in front of us to further increase The depth and our expertise, while we have already seen a very positive impact of the increased selection with customers putting more items into the basket. And this benefits the most important KPI, the average order value. I just wanted to share a little insight From our department store strategy and just how meaningful this is in relation to custom loyalty and to the share of wallet. To the left, you see the average female Boost customer shopping only in the women's category. The spending for the last 12 months amounts to a net revenue of SEK1000. To the right, you see the average female customer who shopped across all our categories, including boots led during the last 12 months. The total spending goes up to SEK 20,000 and the isolated spending in the women's category goes up 7 times. Needless to say, the majority of our customers are still shopping in 1 to 2 categories, but we have seen an acceleration of customers shopping in 3 or more categories over the last 2 years. The current slowdown makes it more challenging to acquire new customers At the same pace as historically. So even though we still will be chasing new customers to our shop, We spent considerable time and resources to grab the opportunity to develop our loyal customer base by upselling the Nordic department store. So moving on to our final slide, the outlook. We have Managed to deliver accelerated market share gains as well as best in industry profitability for the 1st 9 months of the year. It is quite difficult for us to predict the duration and the severity of the current slowdown. But I firmly believe We have put ourselves in a position to make the most of the situation and we stand ready to further accelerate organic market share gains. On the back of the strong execution and very rapid response to the changes in the market, we are quite pleased to reiterate the outlook Considering the market conditions, there is, however, currently a high likelihood of achieving the lower end of the guidance in terms of net revenue growth. In terms of profitability, we still expect to deliver adjusted EBIT in the level of SEK235 So this concludes our presentation. And I would like now to hand over to the operator to get the Q and A session underway. Thank you. We will now begin the question and answer session. Your first question comes from Daniel Schmidt from Danske Bank. Please go ahead. Yes. Good morning, Herman and Sanddun. A couple of questions from me. Starting with the last slide, Hermann, That you commented on stating that the current market situation price of higher likelihood of achieving the lower end Of your net revenue guidance for the full year, does in any way sort of Just looking at weather conditions over the past couple of months, I think it was quite favorable in September, but the opposite in October November. Has that played in? Or is that marginal for you? Has that played in or is that marginal for you? Good morning, Del. Of course, we base our forecast or guidance on kind of what has happened. So when we guide in basically maintain the guidance is because we expect things to kind of at least not get worse than they are now. Having said that, The next 6 weeks will kind of define everything. And so far so good, I would say. But We expect the rest of the quarter to be very competitive, very promotional driven, But this is kind of an environment that we're 5 inches So we're based kind of things at least not getting worse. Having said that, of course, they are probably worse than we expected after Q2 with the consumer sentiment being And also in all 4 countries at the same time. So so far kind of we're on track, but Again, we're just waiting for what happens during the next 6 weeks. But what I'm trying to get to is, do you think it's a combination of the weather conditions We've had in the past 5 weeks, which I think has been unusually warm, which I guess is making people less inclined to look for For autumn winter collection wear or is it more the fact that you have this deterioration in consumer confidence? It's probably both. I think it's very good to distinguish because if it had been normal, If we didn't have a war and a cost of living crisis, we would have blamed it on the weather. But kind of I think it's The weather, of course, can be an advantage for the rest of the year if it gets colder. But I think it's to me, it's more consumer sentiment. And also we see that attracting new customers is harder than before. At the same time, as the customers that we get in, they buy more. So that's why we believe that the consumer sentiment, of course, has probably more to say than the winner. All right. Okay. Moving on to what you said on terms of customers buying more And average order value reached all time high, I think you said, and of course, partly supported by The FX situation, but also customers putting more things in their basket. At the same time, have you been sort of active on this space in terms of any campaign driven incentives or metrics that stick Gout versus your normal sort of activity in terms of pushing average order value even higher? Well, I think this is something that we built over time and it is the department store strategy and making sure that all our categories are visible in our commercials, both in the e mails, but also in what we do offline. It's just starting to pay off, I think so. It's not like we do a short term push into anything. This is more the long term trend that we've seen that people put more items in the basket. Okay. And then thirdly, coming back to which of course is a little bit surprising that Boost Did not outgrow boost in the quarter, but I think you had a good explanation for that on one of those slides with high promotion Activity in the Q3 from any every sort of competitor basically. Now heading into the last quarter of this year and your increased focus Based on campaign goods and filling the assortment, is that going to neutralize? I Suppose a continued high level of promotional activity from competition heading into the last 3 months of this year, will we see a comeback of I think that to address kind of The competition and promotional activity, I think you just have to look at the inventory level of all the listed companies in our space. They all have too much inventory. So you should expect a high degree of campaign and promotional activity for the rest of the year. And that also means that Boostlet is kind of when everything else is painted in yellow, kind of Boost can hardly be more yellow than the rest. So that's Of course, Boosted will be less competitive, but we always see that during that week, etcetera, that's not the prime of Boosted because then The market is very yellow. So long term, of course, elevated inventory levels with brands, Benefits booklet as they can be paid by us, but short term, of course, it's difficult for them to shout much louder. And we don't want to sacrifice kind of the long term image of Brewster. So we'd rather grow slower and then prepare us for when the market gets more normalized And also now that we can get more campaign activity. So we look at Boost and Boost that are kind of 2 brands in the portfolio. And Our big concern has been to make sure that we don't have too much inventory. Our inventory level is spot on at the moment. So that's why if it's boosted, boosted growing in the current market environment, we don't really mind as long as the long term trend is good and both shops are making money. Yes. All right. And speaking about Promotional activity, given the environment that we're in, in terms of consumer sentiment and consumer confidence being Rock bottom basically. Do you think that focus in the markets when it comes to consumers' willingness to Spend is going to turn even more to the Black Week versus sort of the Christmas season? Daniel, the answer would be, I don't know. We haven't been in this situation Since we started the company, right, so we're having a cost of living crisis and stuff and stuff. Of course, you would Assume that if people have been holding back because of the weather, then there might be a time to say, okay, I will wait to buy outerwear Because I know that in a couple of weeks, there will be a total activity. So that might kind of advocate that Black Week and It's very hard to say. I know it's kind of mumbled bumble for me, Daniel, but it's difficult to be very clear on that. We don't know. But I guess we can conclude that most customers are in the market, they want to make a good deal and make sure that they get a good price on what they intend to buy. And that's That was basically what I was Getting at that sort of the bargain hunting incentive or willingness to find Good deals is going to be even higher this time versus last year, but we'll see. And then finally, everyone for Sandra, could you give us any guidance on the level of CapEx for next year? No, we don't give guidance for next year yet, but I can just reconfirm what we said before that With the investments we made this year and we'll finalize in the Q4, we expect low CapEx next year and that hasn't changed in any way. Obviously, with lower growth rates than we saw at the end or we assumed In the beginning of the year, the capacity should last for quite some time. So no big investments next year. Thank you. Thank you. Thank you. The next question comes from Nicholas Ekman from Carnegie. Please go ahead. Thank you. Just a couple of questions. Firstly, on the guidance and given what you're saying here about the market It's being very campaign driven. You're guiding for sales in the low end, but you're still you're not saying the low end in terms of earnings. If the market is more campaign driven, doesn't that mean a greater risk to earnings, but maybe a solid Sales outlook, if you understand my question, can you elaborate a little bit on why you feel optimistic on earnings and not sales? Yes, that's because we have very good control of our costs. We We made the rightsizing of the organization in June. And again, the basket size, it really, really protects And even though we have seen increases in electricity, in packaging, etcetera, That doesn't kind of impact us as much as some that have lower basket size. So a lot of protection in this is due to a basket So this was even though we have kind of come in might come in at a lower end of our guidance, We still maintain the profitability because it's kind of the underlying operation is actually very smooth at the moment. Very clear. Thanks. And on your Autostore now, you've increased the capacity by 70% this year and of course, Sales growth has slowed during the same time. This must mean you have excess capacity. Is that something that is or will Hamper your or sorry, increase your costs a little bit in the coming quarters? Well, you see the depreciation ratio, it is Higher than last year. And so obviously, the longer it takes to grow into when you have like optimal efficiency from that, It will cost a little more under depreciation, but that's intentional and we rather we will never or we never want to end up in the situation we had last That was horrible, where we didn't have enough space. So we think this is good. And this also gives us time. The good thing, if you want to look at positively at things, It's that since we have the biggest Autostar installation, we didn't have time before to optimize the processes and flows and How to use this in an optimal way because there's nobody else telling us that. So we can use this time to make sure that we can make the most out of the investments that we have. Yes. We would say also as we continue growing, we will grow into it. So we know that the presentation will go down. So the cost won't go up. No, no, it won't go up. That's a fair point. Thanks. And thirdly, Those media partnership, you talked a lot about that in Q1 and Q2. But in this quarter, Other sales are only up by CHF 4,000,000. So have we kind of passed the peak here in terms of earnings contribution from Boost Media Partnership or is that something where you see significant further potential in coming quarters? Well, it's also seasonal. That Of course, Q3 and when you have a very promotional environment, you don't put as much Or the brands, it's harder to sell that media space to the brands. But we have high hopes for our Boost Media partnership. There's high ambitions to continue to grow Is there any risk in it in terms of brands not having the money to invest in In the range that we would like them to, yes, maybe, but we still believe that there's a lot to do there. And we hope The brands will continue to prioritize our space since we are quite efficient and can make sure that it reaches our customer base that is Thanks. Super, thanks. And just a final question. On campaign wise, what do you see in terms of potential here short term? You say that you're very happy with your current inventory levels. And I know after Q2, you said that there was a rising opportunity for campaign buys, but your inventory was too high. Are you better balanced now? Do you think that there is much more opportunity here? Is that a company that will support Q4 already? Or are we more talking 2023? That's a good question, Niklas. We believe that the stock composition now is very good. It's Actually, right where we wanted to be. We have started to do campaign buys, but we are cautious because it's really hard to predict How kind of the last 6 months 6 weeks of the year or 8 weeks will But obviously, we are kind of going out to market now and trying to campaign bias. And If things go as expected, we would probably increase our campaign base, which bodes well for both Boost and Boostless for 2023. Super, that's very clear. Thanks for taking my questions. You're welcome. Thank you. Thank you. Your next question comes from Benjamin Wallstreet from ABG. Please go ahead. Good morning, guys. So a couple of questions from me on the autumn and winter season. First off, and this might sound silly, when did autumn start for Boost? It's actually a good question. It probably started in October, right? In September? Yes. It's not like winter coats in September, but some of the more things you wear to the office and stuff. So I would say September. Yes, you can see we can't even Sure. So somewhere in September then, I take it. Perfect. Additionally, there seems to have been like a so this is As far as I understand, this is later than usual. Is your view that you will sort of catch up on autumn winter sales during Q4? Like should we expect a significant boost in this quarter from a delayed autumn? We expect kind of the rest of the year to kind of go as we As planned, it would be nice if there was a kind of a boost in consumer demand because what you're hinting to is like The sales of warm outerwear, of course, is has not taken off yet. So that might Kick off. But again, as we have many more categories than only fashion that's been compensated, so stock levels are good. But of course, we expect to sell as Expected, but I also kind of in Cuban ice, if it gets really, really cold and people are but that might Too much to hope for, but of course, we are relative. But we don't want to have any firm views on that, that there's pent up demand due to the weather. That's because we have The consumer sentiment and the promotional environment, which kind of weighs the other way around. So I think you just have to be it's basically a daily trading at the moment. All right. Perfect. Thank you very much for that. Another this might be a Slightly smaller part of your business anyways, but do you want to share more on the reasoning behind reducing marketing spend in Germany? I believe it was something you commented on End of report. Yes. We want to make money in all our markets. And we've seen that the Germans At least our German customers seem to be even more depressed than a lot of customers. So it's just like There has been a kind of upwards or the payback on the market in Germany has been deteriorating with return rates Still being at a very high level, and so it doesn't really make sense to push too much for Germany. We can see that resources spent in the Nordic Give a much higher return on our marketing investments, which is why we just basically convert much back on Germany. Yes. Perfect. Loud and clear. Thank you very much for taking my questions. You're welcome. Thank you. There are no further questions at this time. I'll now hand back to Mr. Haraldsson for closing remarks. Yes. Thank you very much for participating in our Q3 webcast. This concludes the call and I look forward to meeting a lot of you over the next couple of weeks. Thank you very much. Bye bye. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.