Hello, and welcome to Boozt Q3 2019 report. Today, I am pleased to present CEO Hermann Haraldsson and CFO Allan Junge-Jensen. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. Speakers, please begin.
Hello, good morning. This is Hermann, welcome to our Q3 presentation. If we go to the first page, which is the key highlights, just briefly looking at the key highlights, we had 22% net revenue growth in the quarter, and which was Boozt 19% and Boozt let 90%. And, yeah, as we say, growth was impacted by a bit softer parent markets in Sweden and Denmark during the quarter. Positive is that the KPIs are trending in the right direction, very good. The reported gross margin was down in the quarter due to less consignment sales and an early write-down on Boozt.com stock. But at the same time, we've seen that during the season, during the autumn/winter season that we're into now, we have seen an improving gross margin.
So that's positive, has a positive outlook also because it's supported by a very strong inventory position and our risk-sharing agreements. Our Adjusted EBIT improved versus last year, mainly due to scale effect in marketing and admin, and other costs. Also important to highlight that we've changed agreement structure with one of our largest partners. This impacts net revenue negatively, but it improves our net working capital going forward with approximately 1 percentage points. We're adjusting the outlook for revenue to 23-26, mainly due to this change in the agreement structure, as well as we are a bit cautious going into this quarter. But at the same time, we are adjusting the EBIT margin outputs to now above 2.5%.
And finally, we have a number of operational improvement initiatives, which will drive our margin progressions forward, at the same time as we will continue to grow with a high growth rate. Going to the next page, looking at the most important KPIs, the customer satisfaction. Trustpilot is at the same level, 9.2 and 5 stars, same with NPS, which is a very high 73 score. It's very good to see that our customer satisfaction remains at an industry-leading level. Moving to the next page, on Boozt.com order development, we saw an increase in the number of orders of 17% in the quarter, and 23% for the full year so far.
And looking at the average order value, it's quite encouraging for us to see that it's slightly up for the quarter, up 1%. So we're actually quite close now to eliminating the effect on the order value that we saw from the down in order value in Q1, which was due to the excessive returns in Q1. Going to the next slide, looking to the cohort development. We have now, over the last 12 months, had more than 1.5 million customers. They are buying on average 2.44 times, and very encouraging, promising, we see an increase in true frequencies. So basically, all our KPIs are strong and trending still in the right direction.
With this, go to the next page, I would like to hand over to, to Allan for the financial update.
Thank you, Hermann. Allan speaking here. If we move on to the next slide, group results. As you can see, the growth was 22% in the quarter, whereas the growth for the first nine months is approximately 26%. The gross margin in the quarter was primarily compromised by less consignment sales compared to last year, and for the first nine months, it is evident that the gross margin has declined primarily as a consequence of more price investments in the market. To the right, you can see that despite the lower gross margin, the adjusted EBIT margin is improved 0.4 percentage points, and for the first nine months, the adjusted EBIT margin is equivalent to last year.
So if we move on to the next slide, and talk about Boozt.com, our biggest segment, we grew approximately 19% in the quarter, but we showed declining adjusted EBIT margin, of which half the impact versus last year is related to an early write-down of goods from autumn/winter 2018, which accounts for approximately 0.4 percentage points. As for the deviation in the first nine months, the main explanations can be found in too little operational leverage, in particular, fulfillment and staff costs. Our newest categories, sport and beauty, show very strong growth, and the inventory composition is considered very healthy.
Given the early write-down I just talked about of the autumn/winter stock, and, going into, this current autumn/winter season, it has started very well with a decent sell-through, which allows us to take advantage of the many campaign buys in the markets. Gladly, as Hermann also mentioned, the average order value is stable, which is the best denominator for being able to invest in future growth, while at the same time increasing the expected margin. Okay, let's move on to the next slide. Booztlet.com.
Our rising star, Booztlet.com, showed 90% growth versus last year's Q3, and also showed an adjusted EBIT margin increase of almost 3 percentage points, which, though, can be explained by the fact that we had an early write-down of the goods coming from Boozt.com. For the first nine months, the growth is well above 100%, and the adjusted EBIT margin is still double digits, which is good. We are leveraging a lot from low customer acquisition costs and a high share of shipping income. All in all, we believe that the Boozt team is very ready for future growth, and we still believe in triple digit growth in the fourth quarter of this year.
This is also something that is supported by the current market situation, which gives us quite some comfort in that we can purchase inventory at attractive prices to fuel this growth. Okay, moving on to the next slide. The other segment, I don't want to talk so much about it, just highlighting that it improved from last year as we have closed the beauty store in Roskilde and also highlighting that we realized a better performance in the outlet store south of Copenhagen. We maintain our outlook for the full year of 2019 of an adjusted loss of approximately SEK 15 million. Moving on to the next slide, talk about cost ratios.
Although we saw some improvement in the fulfillment cost ratio in this quarter versus previous quarters in 2019, we are still not satisfied. Including IFRS 16 depreciations, the deviation to last year is still negative 0.6 percentage points. The margin cost ratio improved 1.7 percentage points versus last year's quarter, and the admin and other cost ratio improved 0.2 percentage points, including IFRS 16 depreciations. As the staff cost, as you can see, increased by 0.5 percentage points, the leverage on the admin and other cost ratio is primarily caused by leverage on other OpEx.
For the first nine months, if you take a look at that, it is evident that the gross margin decline and the increase in the fulfillment cost ratio are the main reasons for delivering the same adjusted EBIT margin after nine months as last year. Moving on to the next slide. Working capital, still high, 11.2%, but, as you know from previous presentations, this is in line with expectations after the third quarter of a fiscal year. However, the shift in goods in delivery inflow, where we bought less campaign goods before the summer, has dramatically improved the operational cash flow, in this quarter from a negative SEK 164 million last year to now a negative SEK 24 million this year. And that is also the reason why we are confident that the current goods inventory composition is very healthy.
For the first nine months, the operational cash flow is positive as opposed to last year, as this shift in deliveries in this year's or this quarter has, of course, a big impact on the cash flow for the first nine months. Finally, you can see that we have capitalized the first SEK 65 million on our AutoS tore expansion phase three, and we expect the remaining part of this phase three to be capitalized in the fourth quarter of 2019. Now back to Hermann, who will proceed with the presentation.
Okay, thank you. Go to the next slide. On the operational improvements, as you know, we have been doing hypergrowth over the last five years, the CAGR 150%, and at the same time as we have been very focused on delivering outstanding customer service. As you will see that we have managed to grow at the same time as we've increased customer satisfaction. That was our main goal, because as we know, as we always say, you never get a second chance to make a first impression. So this is also why we have had quite a bit of redundancy in our operation processes to make sure that we could deliver on our promise.
Also, as this is quite a young setup, we've invested a lot in automation, but there are also still parts of the operations that can't be automated. At the same time, we've also preferred stability with suppliers, because when you're growing above 25% or 30%, you don't want to rock the boat too much. Going forward, when we are seeing not hypergrowth, but high growth, we can see now that there's a little less need for redundancy in our systems. Of course, we will continue the automation journey, but we are now starting to eliminate processes that are inefficient and eliminating this redundancy.
Also at the same time now that we have more oversight and can be more predictive, or can predict more going forward, we have now started to renegotiate all our contracts with suppliers and starting to kind of use our weight in our negotiations and our strength. So this means that we are now entering this new level of operational improvements that we believe will give us some good advantages. Going to the next page, you can say that the adjusted guidance reflects that we are treading carefully into the next five weeks, and it is actually five weeks. At the same time, as we see good operational improvements already.
We are adjusting the net revenue outlook due to a changed agreement structure with a large partner going into a consignment-like agreement. We don't call it consignment agreement because it's not. The goods are still in our warehouse so we are in full control of the customer experience, but this means that it's only the fee that we get as we have no inventory risk that we get as net revenue. It's positive, of course, for the net working capital going forward, and it's we estimate it will have an effect of one. Clearly, for this also will be positive for the gross margin going forward. At the same time, we have seen a bit softer apparel markets, especially at the end of the summer.
And we've seen some weaker consumer sentiment in Sweden and Denmark, especially. And this is also why we are kind of moving courses into the quarter, also not to chase unhealthy growth, because we don't need it, because we have a quite strong inventory composition and position. Also, finally, the Black Friday is a question mark. It's one week- it starts one week later, and it's also, I would say, now, the next five weeks, and the three weeks after Black Friday will determine, you know, what the growth will be and how optimistic it can be. But at the same time, we are upgrading our profitability expectations. This is mainly due to operational improvements that we see already. This is...
We've made some small first steps in our operations to drive increased profitability, both the short and long term. I think it's important for us to say that we are now entering the medium term post the IPO. Next year, after Q4 release, we will issue new guidance for the coming years, but we want to reiterate that we intend to keep on investing in growth and at the same time reaching our midterm EBIT margin of 6%. So therefore, if we go to the next page, the outlook, as we said before, we changed it slightly.
We do an adjustment of the net revenue growth to be now between 23 and 26, but at the same time, we upgrade our expectations on EBIT margin to be above 2.5% for the full year. So with this, I would like to hand over to the operator again for the Q&A session.
Thank you. If you would like to ask a question, please press zero one on your telephone keypad. If you would like to withdraw a question, you may do so by pressing zero two to cancel. That is zero one if you would like to ask a question. Our first question is from Daniel Schmidt, from Danske Bank.
Yes, hello, Hermann and Allan. Can you hear me?
Yes, yes. Good morning. [cross talk]
Good, good. Good morning. A couple of questions from me then. Starting with the gross margin, I think you said, Allan, that the early write down impact was 0.4 percentage points. And you also write that you hope to recoup this or more than recoup this within Booztlet.com and the autumn and winter season. And am I, am I getting you right, that you already did some of that recouping in September and in the Q3 report then?
Yeah, that is correct. This is also the reason for the elevated adjusted EBIT margin in the third quarter for Booztlet, as I just mentioned. So yeah, that is correct.
Because it sounded like you said SEK 3 million or something like that. And does that mean that there will be something similar to recoup in Q4, or is there a sort of a situation here where already most of that has been taken?
There will still be some, but for the most part, the sale has gone relatively well on Booztlet.com, but there will still be a slight impact in Q4 on both segments.
Okay. All right. And then you write that the fulfillment ratio has been negatively impacted by the implementation of new robotics or robot system. And that, of course, is something that you're doing in order to get more effective further out. Should we see further impact of that short term, or is that gonna turn into a benefit as we go into later part of this year and into 2020?
Thanks, Hermann. Yes, you're right, that we implemented this robot system, which is actually a very big step for us, because now we are in full control of all our processes. Obviously, we've done this to increase speed in the warehouse and to reduce the amount of man-hours needed, and we are already now seeing the impact, and we will see even more in Q4, and of course, next year.
So is it fair to say then, that the sort of the costly part of that implementation is behind us, and that we should start to see some of the benefits coming through in already Q4? Is that what you're saying?
Yes, that's what I'm saying.
Yeah. Then gradually into 2020, because it's gonna take some time, I guess.
Actually, not that long. It's once you improve processes, it's... I'm not saying it's straightforward, but it's actually once you've got the automation and the platform right, you can actually quite fast start to do these improvements. So we've seen already [audio distortion]
And then just thirdly, on your outlook and your course, we've acknowledged that Black Friday is also later this year, as you say, and that is, of course, comprising the holiday season as well. And then you have this agreement structure with a big supplier, and you're stating that sort of consumer sentiment in Sweden and Denmark has been a bit weakish. Is it fair to assume that all these three things are equally weighted into the downgrade that you're doing, or how should we view it?
Yes, that actually, the short answer is yes. Again, it's actually to explain the consumer sentiment in the quarter, because we've seen that there's been a kind of a bit of a bounce back in the beginning of this quarter. But again, you know, it's just like last year, you know, you have such a big part of our sales left. You have Black Friday coming in 10 days, 12 days. What's that? Yeah, 13 days, I think. And so that means that, you know, there's a lot of uncertainties, and you have the partnership or this partner agreement. So this is why we are a bit cautious going into the quarter.
Yeah. And then a last question on competition and Zalando in connection with the Q3 report, were quite upbeat when it came to the Swedish market, and partly sort of stating that the fact that they're up with their warehouse, they're more Scandinavian design, and their assortment is driving growth for them. Are you seeing anything of that, or what's your response to that?
Yeah, we see them all the time, so that's, of course, kind of—I'm tempted to say business as usual. I don't know if the weaker consumer sentiment in Denmark and Sweden, or what we see as a consumer sentiment, is influenced by Zalando, but we've seen it simultaneously in Denmark and Sweden. So we haven't, we don't feel that there's been a larger pressure on us from their part than before. Obviously, they have their mid-season sale has been very long, I think, but I think it's just business as usual. It's an everyday competition for us.
Okay. Okay, that was all for me. Thank you.
Our next question is from Daniel Ovin, from Nordea. Please go ahead. The line is open.
Yes, thank you very much for taking my questions. So starting on the sales growth and the sales growth outlook, so you took down your guidance for this year, and also you talked about that you've been in a high kind of hyper-growth environment. And so how should we think of this going forward? Do you see now the next few years sales continuing to drop from your new guidance this year? And also, what is the main reason for this? It does not sound like it was competition, so do you see that the rate of online penetration is coming down, or how should we think around that? And then following on to that, on the margin side, when your growth calms down, should we then expect that your margins continue rapidly upwards? That's the first question.
Yeah, I think this is Hermann here. I think it's important to highlight that the absolute growth is still intact, so we are growing quite highly in absolute numbers. Of course, you know, the law of big numbers says that at some time growth will come down. We will come up with a new midterm guidance and a Q4 report next year, but we intend to continue to grow. We can also see now that we can see the potential operation improvements will allow us to keep on investing a lot in attracting new customers.
But we still keep it growing, but it's for us too early to go out and state anything about the growth going forward over the next 3-5 years. But of course, obviously still want to be the one growing the most in the region.
Okay, thank you. And then the second question then. Now, you mentioned that you signed a new consignment deal with one of your biggest brands. So is this a shift in strategy, you would say? Do you expect more of those consignment deals to come over the next few quarters or years? And then going out further, do you have any in mind, any target in mind? Where do you think you want consignment to be? And then finally, any margin impact? Can you say anything of what you expect from margin increase from consignment deals?
Regarding the consignment, it's, it, it's, as we've said before, we have not been very interested in doing consignment deals because it limits our growth. When you're growing more than 20%, brands, then you go to the brands and ask them to commit more than 20% more inventory for the coming season or coming year. And they have the risk, so they are quite reluctant. We saw that when we started the company, when we went from a consignment model to an owned-buy model. Eventually, and I know—I don't know if that's in 5 years or 10 years, a big part of our sales will be consignment, because once you stop growing as much and grow maybe 3%-5%, it's more predictable, and it's easier for us to make these agreements.
But this is a test with a big partner to see how it works. It's very important for us that the goods are in our warehouse, because we think that both unit economy-wise, as well as customer experience, it has to sit in our warehouse. So before we have done this test and seen the outcome, then we will see if we want to kind of move more of the partners towards consignment. So that's the answer. Regarding gross margin, I don't think it's appropriate for us now to convey a message on what that has the impact is on gross margin. But the good thing is that net working capital we expect to be 1-2 points down.
Okay, thank you. Then, last question then, on the marketing cost. So, I think that you previously said you expected the second half marketing cost to come up, and I think the mention 10% of sales for the full year, has, has been mentioned. So now with this quarter, it looks like marketing cost continues down. So, what, how should we think of this? Are you planning a large marketing splash in Q4, or should we revise that, that you're actually, planning to continue to take down marketing? And also perhaps if you could say anything about this for the next few years, I mean, should we continue to expect that line to come down? That's my last question. Thank you.
Yeah, we expect marketing actually to come up again in the quarter, and we still expect that our marketing cost ratio will be around 10% for the full year. It's been on the low end also because you don't want to chase too much revenue during the summertime if it's unhealthy revenue. Also, if you don't have any stock issues, you should be tight. But we might have been cutting marketing a bit too much for the nine months. We will see a rebound, and also now with the operational improvements we see, that will allow us to still be aggressive on marketing both next year and the following year.
So we actually intend to keep marketing at a very high level and still reaching our 6% EBIT target.
Okay, perfect. That was all my questions. Thank you very much.
Our next question is from Niklas Ekman, from Carnegie. Please go ahead. Your line is open.
Thank you. Yes, first question is on this consignment deal. You're not saying which brand this is. Can you at least say if this is a top three brand, and if you can give any kind of indication what the impact that has or what share of sales this brand represents today?
We don't disclose the brands, and that's in agreement with the brand, because it's a test, and so we don't want to kind of talk about which brand it is. On the impact of sales, it's maybe close to somewhere between 2%-3% of our total sales this brand represents.
Okay. So that would be a top three brand, for sure?
It would be somewhere on top three, top five, yes.
Okay. And am I right in assuming that this was on their initiative, not yours?
It's actually been a mutual thing. We have been discussing with this brand on kind of innovative ways of working with them in the Nordics. So, this is, that is kind of been a mutual arrangement going, yeah, with this brand.
Okay. And also a question on this write down of inventory in Q3, you quantify the effect for Boozt.com, but not for the entire group. Has this had a material impact on group earnings in Q3?
Hi, Niklas. Yeah, no, not a lot. When it's more related to the segment reporting, so when Boozt.com is making the write down and transfers the goods to Booztlet, then it gives Booztlet an opportunity to clear those items at a higher discount and still realize a reasonable good gross margin. So, there is a small impact, but that's more due to, you know, the distribution of the write down over the second half. But for the most part, the write down on Boozt.com is captured by Booztlet, which is also shown in that they are realizing a better adjusted EBIT margin in Q3.
Okay.
So, yeah. There is a small impact on group, but it's not the entire write-down.
Okay. And also, your comment on current trading, you're talking about a rise in gross margin, but is it right to assume that you've also seen an accelerated sales growth in the start of Q4?
This is Hermann. Yes, that's correct. The autumn-winter gross margin is good. Even the positions were healthy, and we've seen that during the quarter, sales growth has accelerated, and is as we have expected. So far, so good. But again, you know, we have five more weeks, so we can either be happy or depressed after three or four weeks, so it's difficult to say.
Okay. And finally, just a question here. When you talk about the medium-term outlook here and a little bit of a shift in trend here with a rise in profitability and a little bit lower growth... You talk about growth below 25%, but looking at kind of 2020, do you think that you will already see growth rates falling below 20% for 2020?
Niklas, it's too early for us to say. We come out with new guidance after Q4, and I try not to talk about kind of the growth expectations for 2020. So you will have to be patient and wait in February, when we issue kind of the guidance for the year and for the next meeting term.
Okay. Okay, fair enough. And just a quick question as well here. Can you clarify the CapEx guidance for the full year?
Yes, it is unchanged from a previous communication.
Okay, excellent. Thank you.
Our next question is from Michael Benedict, from Berenberg. Please go ahead. Your line is open.
Morning, all. One of few from me, but I can go one at a time if easiest. Would it be fair to say in the coming years you're sort of expecting a flip from previously? I think previously we had some leverage in marketing and deleverage in fulfillment. Would it be fair to say that's going to sort of reverse in the coming years?
You will see a leverage in fulfillment, definitely. Marketing, obviously, we expect marketing slightly, over time to go down, but for the coming years, the marketing cost ratio will be quite stable, we expect. So, it's not quite the reverse, but you will see, definitely some leverage in the fulfillment costs.
Okay, great. Very helpful. Thank you. And then on the consignment agreement, could you give us some sort of steer on the consignment sales impact we should be modeling in for Q4 and FY 2020, in terms of reconciling from transactional net revenue down to your actual net revenue?
Yeah. Allan speaking here. It is difficult to say, as the sales has not materialized yet, but, we are estimating that, as Hermann mentioned, that the full year impact of, this consignment agreement structure, which started on October first, can have up to one percentage points impact on, on full year guidance. So it is, of course, a substantial partner, also in terms of size.
Okay. And that's a 12-month impact to 1 percentage point?
Yeah.
Great. Thank you. I think that's all from me. Thank you.
Our next question is from Anders Wennberg from Catella. Please go ahead. Your line is open.
Hello, Anders.
Yeah.
A couple of questions, if I may. First, on the consignment deal you're doing for Q4, can you kind of explain to me what is different with that one compared to the one you had with ECCO a couple of years ago, and why this one is more attractive? And secondly, on the current trading, it sounds like October is better in terms of growth margins, and also a little bit better growth. How was September compared to July and August? Can you help us? And how is November tracking so far? Obviously, you have the acceleration. Thanks.
Yeah, yeah. Hi, Anders, this is Hermann. When we did the ECCO deal, we were running the ECCO monobrand store. So we were running the official ECCO store, and as a kind of a part of that agreement, we also sold ECCO on Boozt.com. With the—so this agreement is different in that way, that for the consumer, there's no difference. They still are buying with Boozt, they're getting their shipment from Boozt. So the main difference is that we were running the official ECCO store at the time. Regarding the-
So you had a ECCO, had a store front, that said ECCO on it, and-
Yes.
And now the consumer is actually going into the Boozt store.
It's Boozt.com.
Boozt.com.
It's .com purely, yes. So this partner doesn't have any special professional rights with regards to entry into Boozt or something like that. On the sales, it was mainly August that was disappointing during the summer. Actually quite disappointing for us. So I think that has been the main reason for the quarter being softer than expected. September picked a bit up, maybe not as much as we had hoped for. And then October has been okay, and November so far has been very good.
So it's also why we say, you know, you have to judge a season by the full half year, because you see fluctuations, you see changes in moods, and even though we haven't mentioned weather in any report, also you know when the season starts, you know, if it's cold or it's warm, that has influences. But so far for the Q4, it's actually quite promising with a good gross margins.
Okay. If you reported in mid-August, didn't you see the weakness in August when you had your Q2 report, or did it actually happen in the second half of August?
Typically, you end the end-season sales end of August. So, our revenue typically is quite skewed or biased towards the end of the month. So, it was, we basically expected to sell more at the end of sale, at the end of August, than we actually did, and also in the beginning of September, same time.
Okay. Thank you.
As there are no further questions, I will hand the word back to the speakers for any final comments.
Okay, thank you. Before I close this call, I just would like to hand it back to Allan, who is on his last, as for now, at least, investor call, for Boozt.com.
Yes. Thank you, Hermann. And I prepared a few words to say. I would like to take this opportunity to thank you, Hermann, in particular, for giving me a call back in 2010. You managed to convince me to take on the challenging task to be a part of a team who wanted to build the greatest fashion e-commerce company in the Nordics, and it has not always been an easy task. The challenges we have overcome together prove one thing in my mind: Great companies are built by people, and there's no easy recipe for success. No matter your talent, you need to work hard to achieve your goals, and I believe we have done so, at least for now, because you and I also share the same value that you are never really done.
There's always a battle to win tomorrow, which is why I'm also confident that the appointment of Sandra Gadd as new CFO will continue this path for the benefit of Boozt in the coming years. I also want to use this opportunity to thank my great colleagues, who each and every day make an effort to make Boozt a greater company. And finally, I look forward to follow Boozt as a shareholder, because I believe you can do it. Your nickname, The Hermanator, is there for a reason. Thank you, Hermann, and back to you.
Okay, thank you, and yeah, we will meet and see you at [audio distortion] . Thank you.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.