Hello, and welcome to the Boozt Q4 2018 report. Today, I'm pleased to present CEO Hermann Haraldsson and CFO Allan Junge-Jensen. For the first part of this, all participants will be in listen-only mode, and afterwards, there'll be a question-and-answer session. Gentlemen, please begin.
Good morning. This is Hermann speaking. I think we should just, just to start by going to the first slide, the key highlights. If we look at the key highlights, there's basically not much new since our announcement four weeks ago. We had a quite strong end to the quarter, with a 39% net revenue growth and a better-than-expected EBIT margin, due to scale effects, and also because gross margin did not deteriorate as we had feared. The growth was supported by Boozt.com, with 37%, and Boozt Labs with 77%. And then currency had a four percentage points impact in Q4. The decline in the adjusted EBIT margin in Q4 compared to last year was driven by, one, the lower gross margin, and then also the investments in the physical stores.
We could offset the decline in gross margin due to scale effects in marketing and admin and other costs, but we couldn't fully recoup the extra cost in the physical stores. For 2018, growth was 38%, which is in line with expectations of more than 36%. The adjusted EBIT was 2.3%, so exceeding our last or latest expectations of 1.5%-2%. However, 0.1% lower than last year, mainly or only because the entry into offline beauty was more costly than expected. Boozt.com and Boozt Labs' EBIT margin was in line with the original expectations. We were quite pleased to see that, the 2.7 percent points gross margin deterioration was offset by improved cost ratios.
So that's all, that was quite good to see. And for 2019 outlook, we expect to grow more than 27%, and also that our Adjusted EBIT margin will improve compared to 2018. So then by that, if we go to the next slide, I will hand over to Allan Junge-Jensen.
Thank you, Hermann. We brought this slide to illustrate the decision-making process back when we released the Q3 report of 2018. By that time, we had realized the growth in the quarter, which was below 30%, and if we anticipated a total growth in full Q4 of 32%, which would lead to just surpassing the 36% for the full year, our internal model suggested that we would deliver approximately an adjusted EBIT margin of 1.8% for the full year. And this was the reason for the revised target at that time of an adjusted EBIT margin between 1.5% and 2.0%. As we now know, the growth realized at 39% for the quarter, which primarily was caused by a well-executed Black Friday and a very strong growth in December.
Best illustrated in the graph to the right, the growth pattern you see here has never been realized in any previous Q4s of the past. So moving on to the next slide.
Yes, thank you, Allan. Going a bit to the KPI section, this is the most important KPI, customer satisfaction. As you will see, both on Trustpilot and NPS, our customers are happy, and this is the best sign to see if they are going to come back. Moving on to the next slide. On the order development slide, you can see that the number of orders in the quarter grew by 33%, and for the full year, 31%. The average order value increased slightly in the quarter, as well as for the full year. If you adjust for the currency, it is around 1% lower than in 2017, or more or less stable, which is good because it's stable on a solid, high level.
Going on to the next slide, on the cohort development, you will see that in 2018, we had almost 1.4 million customers. They bought on average 2.4 times, up from 2017. And finally, the true frequency, where you can see that the true frequency is up versus last year, 6.8 versus 6.3. So that means that the customers that bought in Q4 2017, they bought more frequently, meaning 6.8 times, than the customers who bought in Q4 2016. So that's again telling us that we are getting a higher share of wallet of our customers. So again, very encouraging for us. Turning to the next slide.
This slide is quite important for us, because it's quite important for us to highlight that the online business is progressing according to plan. We are keeping the high growth rates. You can see that the online stores in 2018 grew by 39%, and we are constantly improving the EBIT, with a combined EBIT of the two online stores of 3% in 2018. And we're actually quite encouraged to see that we have increased the online EBIT in a year where gross margin has declined by 2.7 percentage points. So this tells us that the online business is strong and is actually growing and developing fully according to our original plans. Turning to the next slide....
Cohort development and the reason for the high growth and the increased EBIT in the online shops is that the cohorts continue the positive developments that we've seen from the previous years. We can see that the first year churn is there, losing around 35-40% of the first year of revenue. But then we see an increase to cohort revenue, and we've talked about before, you know, after the initial churning year, we see no leaking buckets. On the contrary, we see an increased revenue level, and in a few years, the revenue from the cohort is actually at the same level as the first year.
So this means that if you look at the graph, that for 2019, that we more or less maintain the revenue base for 2018, and the growth is very much based on our ability to get revenue from new customers. So this is not a case where we have to start the year by finding a lot of new revenue to get at the same level, but can focus on building this strong customer experience, because we know that the customer base is there, and we start more or less on the base of last year revenue. So this is why we can see that the online shops are progressing on course to plan, and why we still are quite opportunistic for the short. Turn to the next slide.
We have been asked a lot, you know, what happens to CLV, customer lifetime value, if gross margin keeps going down? If you look at the graph, the graph illustrates that if gross margin permanently goes down, then the customer lifetime value is lower, and then obviously, your maximum customer acquisition costs will go down. Our general approach to customer acquisition costs is that over the time, we have allowed the CAC to slightly increase, as we have seen the value of the customers increase over time.
Our strategy for 2019 is to keep the CAC level stable, but obviously, if we see that the gross margin development or deterioration continues, and if gross margin goes below 40%, we will have to evaluate the CAC and if we need to reduce the customer acquisition costs. In general, what we think is good for us is that the local scale and a lean cost structure is key to absorb any gross margin or any negative gross margin development. This also, I would say, we feel quite fit because we're strong on a local scale, and we have a very lean and efficient cost structure. Turn to the next slide, and that's my final slide before I hand over to Allan.
We have been asked a lot why beauty stores and why are we investing in beauty at all? I think it's quite important for us to highlight or emphasize that we are investing in beauty for the long-term potential. If you look at the pros, we have very strong online KPIs. At the end of the year, as expected, share of beauty of orders with beauty was more than 5%. We also still see that it's very much mixed baskets, with around 65% of the beauty baskets being mixed. It's a very attractive segment to be in, because we have very low returns, and also this increases frequency with our loyal customers because they need to replenish the beauty products. And then finally, it fits into our current automation infrastructure.
The cons, obviously, is that the entry into online beauty, because of the physical stores, turned out to be more expensive than expected. We estimate that the losses in the other segments will continue and will be around SEK 20 million in 2019, but down to a single digit in 2020. And this is also because it takes time for us to build awareness around Boozt.com being a beauty destination. Nevertheless, the offline investment is bigger than expected, and of course, we have taken some actions to lower the deficit in Beauty by Boozt. We have changed the shop management, we have reduced the staff costs, and also adjusted opening hours to when the customers are passing by.
We also can see that the conversion rates slowly are increasing. Our conversion rates in 2018 were painfully low, but we've seen in the year so far that our conversion rates in the store are going up, and in general, are evaluating the future strategy for the offline stores. You can say that in general, we are a lot less showroom and a lot more retailers with regards to the physical stores. But for the segment, we expect to have a break even in the beauty segment as a whole in 2020. So that was my last slide. So I will hand over to Allan for the financial update.
Thank you, Hermann, and if we move to the next slide, group results. We mentioned it before, but we see here that the net revenue increased with 39% in the quarter and 38% for the full year. We see that the gross margin was down 1.8 percentage points in the quarter and 2.7 percentage points for the full year, and the adjusted EBIT margin was down 1.7 from last year's Q4, but only 0.1 percentage points down for the full year. If we move to the next slide, Boozt.com. In the quarter, we increased the growth by 37%, and we realized an adjusted EBIT margin of 7.2%, slightly down from last year's 8.3%.
For the full year, we realized a growth of also 37% and an adjusted EBIT margin of 2.7%, up from last year's realized 2.3%. The quarter was characterized by growth in all categories, where particularly sports and beauty had a very strong end to the year. The quarter was also characterized by aggressive pricing, which all in all impacted the growth margin development. And further, we took deliberate actions to purchase some campaign goods, which has led to a higher inventory position end of year. If you wanna highlight some of the weakest growth, you can see here that for Boozt.com, Sweden was a country where we only grew around 24%. If you move on to the next slide, Booztlet.com.
In the quarter, we realized a growth of 76%, and adjusted EBIT margin of 10.3%, which was up from last year's 8.6%. For the full year, we realized a growth of about 100%, more precisely 116%, and an adjusted EBIT margin of 11.5%, again, up from last year's realized 10.4%. The quarter was characterized by limited offers on Black Friday, as we deliberately chose to have all the good offers made available on Boozt.com. This is also the reason for the higher adjusted EBIT margin in the quarter versus last year. For Booztlet, we are very optimistic for 2019, and we aim also here to have a very strong growth.
We also took actions to make direct purchases for Booztlet.com, and this is also what will fuel the growth for 2019. If you move on to the next slide, the other segment, it was, as Hermann mentioned, impacted by a difficult retail environment, deliberate clearance sale in our Booztlet store in Taastrup, and we had some inventory write-downs across the stores. As of today, we have, as Hermann mentioned, taken actions to limit the losses in the other segments by reducing staff and opening hours in the flagship store in Copenhagen. But we do, however, expect to have a loss of around SEK 20 million in the other segment in 2019, although improving as we go along. If we move to the next page, cost ratios.
In the quarter, we saw a decline of the gross margin of 1.8 percentage points. Unfortunately, this was not offset by improvements in the fulfillment cost ratio, as we saw the impact of surcharges from distributors surrounding Black Friday and Christmas period. Marketing and admin cost ratio improved in line with expectations, but ultimately, the adjusted EBIT margin decreased with 1.7 percentage points versus last year in the quarter. For the full year, gross margin was down 2.7 percentage points, but we are fully offset by gains in the three major cost ratios, leaving the adjusted EBIT margin only 0.1 percentage points behind last year.
The graph to the right illustrates the development over the past eight quarters, which has developed downwards in line with expectations, and as you can see here, it's only the fulfillment cost ratio which has small spike upwards in this Q4. If we move on to the next slide, key financials. First topic, Net Working Capital. Here, you will see an increase in the working capital ratio to last 12 months net revenue. It is impacted by one more red day, end of December this year versus last year, and if you take this into account and adjust for the approximate SEK 40 million, then the working capital to revenue ratio is in line with the level from last year.
CapEx developed as expected with the build-out of the AutoStore phase two in Q4, and now in, in place, now, our AutoStore is in place now at the beginning of 2019 with two fully equipped AutoStore . Operational cash flow was also impacted by lack of one banking day end of December, but, we also had some deliberate increases in goods inventory, as mentioned before, for these opportunistic campaign goods, bought in the fourth quarter. For the full year, operational cash flow was, slightly negative, but, remember also here that comparison figures is the year of the group's, IPO, which impacted operational cash flow at that time. Moving on to the next slide, capacity expansion and automation.
In the beginning of 2019, we are expanding the AutoStore with what we refer to as phase three, as planned. Fully built out during 2019, this will accommodate approximately SEK 4 billion-SEK 5 billion in net revenue. In addition to the AutoStore , we are planning to automate two separate areas of the warehouse, bulk area for storage, and we have this special storage room for beauty flammable products. Both automation exercises is to increase the efficiency in the warehouse. All in all, we expect to have approximately SEK 150 million in tangible CapEx for 2019, and you should expect approximately 1% of net revenue in tangible CapEx for 2019. If we move on to the next slide, the outlook, I know that Hermann has mentioned it, but I just wanna highlight.
Net revenue outlook for the year is to increase or to be above 27% and to improve the realized Adjusted EBIT margin in 2018. We maintain our medium-term target of a revenue growth between 25%-30%, and we also maintain the Adjusted EBIT margin to be above 6% in 3-5 years after the IPO. So, this concludes our presentation, and I'd now like to hand it over to the operator.
Thank you. So, ladies and gentlemen, if you haven't already, and you have a question, please could you press zero and then one on your phone keypad now in order to enter the queue? And then after I announce you, just ask that question. And if you find that question has been answered before it's your turn to speak, just press zero and then two to cancel. And we go straight over to the line of Niklas Ekman of Carnegie. Please go ahead, sir, your line is now open.
Thank you. Yes, first of all, I'm curious to hear if you could elaborate a bit more on what happened in December here. What was behind this significant improvement? What happened in the market? What was it with your performance? And also if this has any read-across here going into 2019 and the current trading at the start of Q1, whether this trend has at all continued, or if you are seeing a performance more in line with the guidance here that you provided of 27% growth and slight margin expansion. That's my first question.
Yes, good morning, Niklas. This is Hermann. It's December, basically, you know, it sounds easy, but we had, you know, the weather turned winterish, so people started to buy winter clothes. We saw that people had been holding back on typical clothes, probably waiting for the Black Friday. And then when you saw more normal activity, they came back. We saw that also in the amount of new customers. So I think it was kind of a this wave waiting to come that just came because of the fundamentals in the market were right. Going into nineteen current trading, it is actually as we have guided and expected, so we don't see any behavioral, abnormal behavior.
Things seem to develop as we expect at the moment.
Okay, that's very clear. Thank you. And then secondly, here, the inventory, as you talk about here, the opportunistic buying and inventory up 72% year-over-year. What kind of products are you buying? And is this mainly for Booztlet, or is it for Boozt? And is this something that could be gross margin accretive, or are you expecting campaigns here, and that this will be a sales driver rather than a margin driver?
Thank you. Allan here. Thank you, Niklas. Yes, the optimistic purchases of campaign goods is for both segments, Boozt.com and Booztlet.com. It is, it serve actually two purposes. One is to, to drive, the revenue expectation, but also as a margin, preservation. All in all, we believe that this is, what also can, can, steer, the 2019 development in line with our expectations also of gross margin, which is expected to be around the, the level of, of 2018.
Sorry, can you repeat that again? You expect the gross margin to be in line with to in in-
No, around-
In line.
Around, yeah, in 2019, around same level as, as 2018.
Okay, very, very good. And can you elaborate a bit here on the CapEx as well? SEK 150 million is a fairly significant step up. How much of this is related to phase three of the distribution center? How much of this is the headquarters move? If you could just give some more details on-
Yeah
- what you expect.
Of course. The AutoStore phase three is approximately SEK 100 million of the SEK 150 million. The warehouse, oh, no, sorry, the headquarters move is approximately SEK 15 million, and the rest is for the two automation projects, as indicated.
Okay. And phase three, if you could give some details there as well. What kind of expansion are we talking about? Is it similar to phase one and phase two, or is this a bigger build-out?
No, it's the same size, but although separately from build-out from AutoStore one and two.
Okay, excellent. Thanks.
So, same size, yeah, same size as one of those two modules.
Yes, exactly. That's, that's very clear. Thanks. I think I'll pause here, and I might come back with more. Thanks.
Yeah, sure.
Okay, so we're now open. Daniel Schmidt, please go ahead. Your line is now open.
Yes, hello, good morning, Hermann and Allan. Coming back to the guidance a bit that you gave this morning, and I think you, Allan, you said that you expect the gross margin to be around the same level as in 2018. And then, of course, we've seen fulfillment costs coming up a bit in late 2018 into 2019, given what some of your distributors have done with the pricing. It clearly comes down to that the leverage will be quite a lot on marketing spend. Could you shed some more details on your thinking there?
Yes, your analysis is correct. The leverage will primarily be in the marketing cost ratio for 2019. Also expected slightly in the admin and other cost ratio. But it is true that the fulfillment cost ratio, all in all, should not be expected to have a lot of leverage on account of particularly the risk of price pressure on the distribution.
Given that marketing spend is, of course, something that you quite a lot control yourselves, maybe not the pricing in the market, but your, your budget, of course, could you give us some more details on your thinking on offline and online, and how this is gonna play out on a quarterly basis, given your plans right now?
Well, I don't wanna comment on the quarterly. You should expect the same seasonality swings as you probably saw in 2018. But what we can disclose is, as we have done before, is the fact that much of the leverage comes from us having more or less a fixed budget for all the offline media, which is fixed at the 2018 level. So what you will see is primarily an increase in the marketing cost ratio associated with the online media groups.
All right. And if I remember correctly, the offline budget is around half of the tie-in, so the marketing budget, and if that's fixed to 2019, the same level as 2018, are you then expanding the online in line with top line, or is there also gonna be some leverage there?
That's too early to conclude, so I don't wanna speculate about that.
Okay, okay. Well, that's quite clear what well, sort of where the leverage is coming from then. Then just secondly, coming into the other segment and the beauty segment, and you had total losses of SEK 20 million last year. And now you're guiding for the same amount of losses in 2019. I do think that you actually said, in connection with the Q3, that you were expecting a run rate of minus SEK 4 million per quarter. It sounds that it's a bit more now. Has anything dramatically changed, or why is it a bit higher?
No, I think this is the cushion we are allowing ourselves to have, because in the short term, we haven't seen the effects that we wanted to. So, optimistically, yes, you could aim for SEK 4 million, but remember that the other segment is also impacted by the performance of the Booztlet store in Taastrup, and if that goes better than expected, then you will most likely reach the four. But if it's on par right now, we estimate around SEK 20 million in loss.
Okay, so you're, you're conservative in that sort of guidance. Is that fair to say?
I think it's on par with expectations.
Okay. And then, of course, I think you answered the current trading question already, but at the same time, you are also saying and writing, and as you did also in the pre-announced press release, that you're entering 2019 in a better shape than ever, and you were quite upbeat on Booztlet's top line, and you should grow more than 27%. You've sort of... You have beaten top-line guidance a couple of times since you came to the stock market. Is there anything different in your guidance for 2019, when you look at what you can be able to achieve? Was that sort of the very low end of what you should achieve, or how should we view that guidance?
Daniel, this is Hermann here. I think that, I think the answer must be it depends. You only... We know the history, we know the customer behavior, and, and, and, you might say, you know, we, we are aiming for the, for the moon, and, and, and, seasonality, has impacts. We can see. You know, I think the key thing is to look at the cohorts. If you, if you go and look at the cohort slide that we know, like, we more or less bring the 2018 revenue with us into 2019, and then, kind of our ability to, to, to get new customers. But, but of course, you know, we are, we are confident, and, and saying that we will grow above 27%.
I don't wanna guide, you know, does that mean 28, 29, 30%? I think the answer must be that it depends. But I think the main, the key thing is that we still see the migration from offline to online. Our customers are more happy than ever, so but also it's the big numbers, so but we are still quite bullish on the case.
Okay, all right. And just coming back to Allan again, sorry for many questions. You said on the campaign goods that there was a gross margin preservation. Does that mean that you need to have more of those to keep the gross margin steady as you get into the summer and autumn of this year? Of course, it's difficult with visibility, but you catch my drift.
Yeah, I catch your drift, and I think it's too early to say anything in relation to the second half of 2019. The campaign goods serve two purposes, as I mentioned, to increase revenue, but also to have preservations for the gross margin, meaning it's a fantastic hedging tool also if you want to make use of higher discounts to clear older items in your goods and inventory composition. So in that respect, it's not a margin booster, but more a preservation tool.
Okay, good. And then finally, you said also that, beauty was around 5% of orders, towards the end of 2018. Could you give us the final number in terms of share of the total sales for the full year?
No, we can't.
No?
No, we don't do that, Daniel, but of course, in Q4, in December especially, you know, that's...
... Well, all we men, we buy beautiful for women because we don't have any imagination to, or creativity, but, but, but we, it was more than 5% and, and, but it's progressing quite steadily and, and, and looking quite good. But we don't wanna disclose yet the specific numbers for the, for the beauty segment.
All right, thank you.
Welcome.
We're now over to the line of Michael Benedict at Berenberg. Please go ahead. Your line is now open.
Good morning, all. Just two from me. Firstly, I like the growth in the rest of the Europe segment was particularly strong. Is there any change in your strategy in respect to this? And is it likely to become more of a focus area? Secondly, is the full range of Adidas and Reebok now in place? I think you said last time around that it would be dropping in Q1. How are sales progressing, and are there any other similar brands to be launched?
Yes, this is Hermann here. If you look at the rest of Europe, it's been growing and growing a lot, and the growth continues. We actually haven't changed our strategy for rest of Europe. Luckily, there seem to be a lot of consumers in Germany, in Netherlands, in France, that like Nordic fashion and have found the best Nordic fashion store in Europe, so they come to us. And they actually continue to do that, so we also see that in 2019 that we continue to grow. So we are not, you know, we are not, you know, we are, as we said before, we are very cautious with regards to expanding into outside the Nordics.
We believe that the key in our industry is to have local scale, and be the local champion, and we believe that we are getting there in the Nordics. So we would still sell to everyone outside the Nordics that want to buy, but we won't make any big bets on that. But with regards to Adidas and Reebok, we still haven't the full assortment. That's coming in now. We started in Q4 with I wouldn't say a limited, maybe half the full assortment, and it actually was a very, very big success, so, but these are during the next month, you will see more or less the full range of Adidas and Reebok coming in. I guess you're asking, you know, is Nike coming?
I can tell you, no, they're not. No news from that part, but we have, the interesting thing is a lot of other very interesting sports athletic brands have actually approached us, want to be a part of the game. So, we are seeing a sports athletic category growing a lot with a very interesting brand portfolio. So I guess, you know, when we stop calling Nike, they might start call us.
Great. Thank you very much.
Okay, we're now over to Ludwig Kapellen at ABG. Hi, Ludwig, your line is now open.
Thank you very much. Ludwig Kapellen here with ABG. So a couple of questions from me. We've talked about the top line guidance before, and 27, above 27% is a quite accurate number. So could you provide some details how we get to that? Is it mainly based on this cohort explanation that you show?
Yes, Ludwig, this is Hermann. Yes, it's based on the cohort. It's based on the cohorts. Again, as I said, we know that more or less we have the 18% base in place. And again, we're saying that we expect to grow above 27%. That doesn't mean that we expect to grow 27.5%, but again, it's in this high growth environment, it's a bit silly to be exact, you know, is it 28, is it 29? Because, you know, you are shooting with the big guns, and we are going into new categories like the sports, but we're doing buys that we basically don't know, you know, how big it's going to be.
So there will be a lot of tests and experiments. So this is why we're saying that we can see that based on the current customer base, we will grow more than 27%. And then, depending on the category performance, we can see that how much more than 27% we can grow.
Okay. Thank you. And also, if you look at the wording on your margin guidance, you say this year that you want an improvement versus last year, versus a slight improvement versus last year that you said last year. What does that imply?
Now it's just, you could be asking Ben Bernanke, you know, what, you know, the phrasing and the wording. It's, of course, you know, we expect to improve gross margin, no, EBIT margin compared to last year, and it's probably a bit more than slight. That's the only answer I can give to you.
So you can't quantify slight improvement versus improvement?
It's, you know, it's a bit silly again when we're talking this growth rates today, is it 0.1, 0.2, 0.3, 0.4, 0.5? But, you know, we said last year a slight improvement, now we're seeing improvement, so obviously we expect to make an improvement in EBIT margin, and not only a slight improvement.
Okay. About inventory levels in the industry, last time in conjunction with the Q3, you talked about continued high inventory and potential markdown pressure into 2019. How's the inventory level like now in the industry?
It's difficult to speculate for the full industry, but our revenue or our goods inventory level is higher than you would normally see at this point in time. But remember here that it is a deliberate action we took.
... a couple of months ago, where we decided to have this opportunistic approach to try and get as much leverage from campaign goods as possible going into 2019. We have done this in the past with success, and we are willing to sort of also take the risk from a working capital perspective to increase the inventory levels, as we have a very, I wouldn't say, well, we have a very loyal customer base, and we know more or less their behavior. And then, if we have the right offers to them, then we can definitely sell the products.
Okay, thank you. That was all for me.
Okay, just to prompt one more time, if anyone's got any final questions at this stage, please do press zero and then one. We go back for a final question from Niklas Ekman at Carnegie. Please go ahead. Your line is open again.
Thank you. Just a real quick one here. If you could say anything on the tax outlook here for 2019. Obviously, a big correction here in Q4, and I assume that was due to revaluation of tax loss carry forward. Well, what's your best estimate for tax rate in 2019?
Allan here. Yeah, we had the re-estimation of the Swedish tax, but that was actually done in Q2. The reason for the much higher tax is that we don't account for any deferred tax asset in the Danish subsidiaries. So that's the reason. But I don't wanna speculate about the tax levels for 2019, just stating that they're probably going to be higher than the corporate tax level in Sweden, as we don't account for any deferred tax assets in the Danish subsidiaries.
Okay. Thanks a lot. Thanks, that's, that's my final question.
In fact, that was the final question on today's call, so gentlemen, may I please pass it back to you for any closing comments at this stage?
Okay, this is Hermann. Thank you, and I hope you have a good day. Thank you. Bye-bye.
This now concludes today's call, so thank you all very much for attending, and you can now disconnect your lines.