Ladies and gentlemen, welcome to the Boozt Q1 2019 report. Today I'm pleased to present CEO Hermann Haraldsson. For the first part of this call, all participants will be in the listen-only mode, and afterwards there will be a question-and-answer session. Hermann, please begin.
Thank you. Good morning and welcome to this Q1 call. Let's go to the first slide, the key highlights. Before we go into the details, I just want to go through some of the highlights for this first quarter. All in all, the first quarter of 2019 was roughly in line with expectations, roughly we say, because the high returns drove down the net revenue and average order value. All in all, it was in line with our expectations. The growth was supported by Boozt.com with 25% and then also Booztlet that had a very, very strong quarter with a growth of 104%. We are seeing that Booztlet is gaining momentum and even gaining an increased momentum, so that's quite exciting. The gross margin was down versus last year, mainly as we see it due to the spillover from Autumn/Winter 2018.
We saw through the first quarter that the Autumn/Winter clearance in the industry in general went on throughout the entire quarter and markdowns on Autumn/Winter 2018 items. They were probably higher than anyone expected for the industry as well. This is why we see that the campaign stock that we bought could only partly offset the lower margin on the Autumn/Winter 2018 items. A very good thing was that we had more new customers than last year, so the new customer growth continues. We also were able to buy these new customers at a lower maximum cost than we've done previously, so that was positive, which meant that we spent less on marketing.
In general, we are quite cautious in the first quarter on the marketing spend as it is a small quarter, as it is a very highly campaign-driven quarter, and return on the marketing investment in the first quarter is typically less than in the other quarters. So this is also basically unplanned. Of course, obviously, with the lower average order value cost ratio, they were negatively impacted. But again, it's a small quarter, so you shouldn't conclude anything on that. The Adjusted EBIT was down by 7%, mainly driven actually by the Copenhagen beauty store, which had an impact of SEK 5 million. So if you look at the online business alone, our Adjusted EBIT margin was more or less on par with last year.
Also, last year, we had an income of SEK 4 million extraordinary due to the gift card breakage, where we also restated and took gift card breakage from previous years. This is income that we did not have in Q1 this year. So all in all, the Adjusted EBIT was actually more or less on par with last year. This is also why we maintained the outlook for 2019 with a growth of above 27% and an Adjusted EBIT margin improved from 2018. Going to the next slide, looking at the customer satisfaction, this is the most important KPI. We can see that our customers are still very happy. They still give us a 5-star, 9.2 rating on Trustpilot. And then NPS is at a world-class high of 70. So all in all, our customer's happy.
The game is still very much to attract new customers, get them to try Boozt, and we know that if they try Boozt, they will return and become loyal customers. Going to the next slide, the order development, we can see that the number of orders from Boozt.com was up 74%, but the average order value was down 6%, leading to this lower net revenue. We think it's too early to conclude anything on return behavior. This might be a temporary thing. It might be a timing issue. We don't see any structural changes. We have seen some individual brands that have had high returns, but we cannot conclude anything. What we can see, of course, is that the average order value for the last 12 months is pretty stable, so we would rather not conclude that we see this as a trend going forward.
Going to the next slide on the cohort development for Boozt.com, we can see that over the last 12 months, we had an increase of active customers of 32%, so almost 1.5 million customers for Boozt.com last 12 months. They bought on average 2.4, up from 2.39. But again, our very important KPI, the true frequency, went up from 7.2 until 7.8. And this tells us that our customers that were getting a higher share of orders, so the loyal customers, they are increasingly coming back to us. So all in all, all our KPIs are good. The online business is progressing according to plan. Yes, our Other segment, the Copenhagen beauty store, is a loss maker compared to Q1 last year, where we didn't have the Copenhagen Store. But again, the offline business is progressing according to plan.
So we are still quite confident on our very strong position in the market. So having said that, I would like to hand over to Allan Junge-Jensen to give us a financial update.
Thank you, Hermann. Turning into the next page, we can see that the group net revenue was up 29% versus the first quarter of last year. As Hermann mentioned, we also realized the gross margin, which is 1.3 percentage points down versus last year, showing that the quarter has been quite challenged by high inventory levels in the industry. As you might recall, we tried to mitigate this pressure on gross margin by increasing our levels of campaign buyers at the end of 2018. But in the first quarter, it has not been enough to completely offset the pressure in the market. The Adjusted EBIT margin is down 0.8 percentage points, and Hermann also mentioned that it's approximately SEK 7 million worse than the first quarter of last year. All in all, we are actually satisfied with the results given the conditions in the first quarter of 2019.
Let's go to the next page. Boozt.com, it grew 25% in the quarter. Once again, it shows that we are able to attract new and existing customers at a high rate. Our newest categories, sports and beauty, they performed very well during Q1 and actually had a growth which was more than 100% in the quarter. The Adjusted EBIT margin is slightly compromised versus last year, and that's mainly due to the lower average order value, which is a result of the elevated return levels in the first quarter. Remembering here that the gross average order value was actually in line with last year. Hermann also mentioned that we managed to attract more new customers versus last year in actual terms, which is very good. And therefore, we also realized a much lower customer acquisition cost in this quarter, which is also very good.
Turning into the next page, Booztlet.com, once again, a very strong quarter, grew more than 100%, showing that there is high attraction in this off-price segment, and it's performing very well, if you ask us. The Adjusted EBIT margin is deliberately lower versus last year, which is due to the fact that we have spent more marketing in various media channels as we are constantly testing levels of spending per customer acquisition in this segment. The first data looks very promising, and it demonstrates to us that there's a great potential in this off-price segment. All in all, we believe that this segment proves to be very strong, and we also expect the momentum to continue in the coming quarters. So let's turn to the next page. Segment Other.
Remember that it consists of primarily our three physical stores, where two are Boozt stores, and the third one is our outlet store located south of Copenhagen. We had a loss of SEK 5 million in the quarter, primarily driven by the beauty store in Copenhagen. Also remember here that that beauty store was not a part of our first quarter in 2018 as it opened in June last year. During this quarter, we have sent messages to limit the loss in the Copenhagen store, but they will not show themselves until the second quarter of 2019. As you already know by now, we have decided to close down the beauty store in Roskilde, where we expect to have one-off costs of around SEK 5 million . Despite that, we still maintain our expectations for the Other segment to have a loss of around SEK 20 million during 2019.
Let's turn to the next page. Cost ratios. Here, you can see in the top that the gross margin is down 1.3%. As mentioned, this is a result of a tough trading environment, and we also had some clearance of Autumn/Winter 2018 at higher discounts in the quarter. Except for the marketing cost ratios, all the cost ratios were hit by the six percentage points lower average order value. And this is due to that we have experienced the cost of maybe three percentage points higher returns. There's no single explanation. Hermann told a little bit about it, but there is no single explanation to the increase in the return levels. But we can see that it's the fashion part of our business which has these increased return levels.
Historically, we have not seen such a sudden increase in the return rates while we, of course, will monitor this closely in the coming months. All in all, the Adjusted EBIT margin is down 0.8 percentage points versus last year. Let's turn to the next page. Key financials. Last time we spoke in February, we said that the working capital levels would be higher end of Q1 than at least we expected, and that also turned out to be true. As we also said, we had paid for goods inventory much earlier compared to last year, and also that we deliberately increased our stock levels for campaign stock end of 2018. This has put constraints on our cash position, which is approximately SEK 120 million lower than last year.
We will expect to recover some of this deviation in the months to come, so you should also expect that the working capital levels should be moving in the right direction. CapEx in the quarter, for the most part, linked to our development of our own platform, and it's in line with what we have also communicated previously of around one percentage point of net revenue. Let's turn to the next page. The outlook. Hermann mentioned it in the beginning, but I just want to stress it again that well through our smallest quarter, which last year was below 20% of full-year revenue, we maintain our full-year guidance of net revenue growth of more than 27% and an Adjusted EBIT margin to improve from the 2.3% we realized last year. That concludes our presentation, and I will now hand it over to the operator.
Thank you. Ladies and gentlemen, we're now ready to take your questions. If you do wish to ask a question, please press zero one on your telephone keypad. Our first question comes from the line of Daniel Schmidt from Danske Bank.
Good morning, Hermann and Allan. Just wanted to ask a couple of questions, starting with the return rates being substantially higher than what you've seen before. Hermann, you said that it's too early to call it a trend. Could you say anything about the development so far in Q2 and how that sort of stacks up versus what you saw in Q1?
Allan speaking here. Thank you for the question, Daniel. To be honest, it is too early to conclude anything, remembering that returns are only coming after a closing of a month. Now we are in the midst of May. I believe that in a couple of weeks' time, we will know what the return levels would be for April. Until then, we don't have any indications so far that it's being either worse or better.
Okay. If worse comes to worse, then this seems to be the new level for some reason. Is there any measures that you can sort of act on that is going to mitigate these costs for the returns if they stay this elevated?
Yes. Daniel, this is Hermann. Obviously, if flexible returns get higher, actually, we have experienced over the last year that returns kind of had increased like one percentage points. So we've been expecting a slight increase in returns, but there's not this jump that we saw in the first quarter. We are constantly working on kind of making it more smooth, trying to automate as much as possible. And so on the fulfillment side, that's the key thing we can do is to basically be more effective and trying to make it, yeah, less costly. And of course, we're using on the site all kinds of algorithms to give good size advice, which is mainly the sizing. But again, it's very early to conclude also.
In a season where you have a lot of campaigns, you get a lot of offers, consumers might be enticed to maybe add some more items into the basket if it's at the customer's price because the risk is so low and the return is. So I think it's very early to conclude anything on returns, and we shouldn't jump to any conclusions on that.
All right. But are you contemplating at all incentivizing the customer not to return by giving them an extra discount or anything like that if they sort of give up the right to return for free? Or is there anything or return fees for that matter? Is that something you're contemplating?
You know what? It's ingrained in our company culture that we love returns because if you love returns, then customers will find it easy to return. Customers don't add things to the basket just to return. They hope that it fits because that's the easiest thing. So what we need to do is to help them make the right choice and then make it easy to return. And that's a key thing for us and reduce costs. And fortunately, also with kind of developing the last mile, distributors are also becoming more efficient. So I believe that there's room for more efficiency in the return handling process.
Okay. Okay. Second topic, the gross margin. You mentioned, Hermann, that, of course, as you also said in Q4, that you were buying campaign goods at sort of a cheaper price than last year, but that didn't fully mitigate the promotional pressure in the market. What are you seeing going forward in terms of your inventory and campaign goods and the purchase price that you've sort of had this year versus last year? And that in relation to what the market is doing, what should we expect?
Yeah. I think in general, of course, the market is inherently unstable at the moment. 80% of the market is offline, physical retailing, and their comparative position is not being improved. So we are just preparing for a situation where it's not going to be an easy ride. And personally, I was a bit surprised that the markdowns for Autumn/Winter 2018 stuff in the first quarter was that high. So the industry was literally selling out at close to cost prices. And to be honest, I don't know what will happen. We have the Booztlet, which is our biggest opportunity in the market because that's where you also can get some very good deals. That's our kind of hedging instrument.
My take is that with 80% of the market, which is offline, not gaining competitive strength and us focusing extremely much on becoming the market leader in the Nordics, becoming kind of the local champion, we're only getting stronger. You will see from now on until the next three, four, five years, you will have these flips, but our position is only getting stronger. We just have to act on the opportunities. By having both Boozt.com and Booztlet, I think we're in a quite a good spot.
Yeah. Okay. And then just a final question on the full-year outlook, which is unchanged. And you started the year with a bit more negative earnings than last year. Should we think about the year as being quite sort of back-end heavy, i.e., that sort of the growth in earnings would really come in the second half rather than in Q2?
Again, it's difficult to say. Of course, Autumn/Winter is always strong because that's where the heavy beauty stuff is. That's where you buy the coats, the winter stuff. So obviously, the second half is always the most important part of the year. But we are.
Yeah. Please go ahead. No, go ahead.
No, no. So we are not betting on that the second half will be much better than last year. So we have a plan. It's progressing according to expectations, which is also why we maintain the tailored guidance.
Yeah. Yeah. Does it at all sort of hinge on return rates normalizing, or could you cope with elevated return rates and still get to your target?
Yes.
Yep. Thank you. That's all from me.
The next question comes from the line of Niklas Ekman from Carnegie. Please go ahead.
Thank you. Yes. A couple of follow-ups on the return rates here that we've been talking about. You said here that you've said for a while now that you expect return rates to increase. And I think you said here that you were expecting kind of an increase of about 1% per year. Can you give any kind of indication what kind of return rates you saw in this quarter, at least the year-over-year impact? Are we talking about a 5% or even a 10% increase, just to understand the magnitude?
You mean in Q1?
Yes, in Q1.
Yeah. It was a little more than a three percentage point increase, to be exact.
Okay. Excellent. And historically, you've seen a rate of around 1% per year?
Yes, correct. So in that respect, it was somewhat elevated compared to our models.
Okay. That makes sense. And also, I'm curious here about, again, the financial targets for the full year, how confident you are about these targets. I mean, you had rather easy comparisons here in Q1. The comparisons are a lot tougher. And I expect or suspect that the cold spring weather here has delayed the spring season. Are you at all worried about the start of Q2 and whether it will be difficult to recoup that when the warm weather comes?
Yeah. Deliberately, for the first 20 minutes, we haven't talked about the weather because it's been such a topic over the last year. Of course, April last year was extremely strong because you had the summer basically came in April 3rd, and then we went from winter to summer. We haven't seen that. And also, we have seen less sales in dresses and shorts, etc., etc., etc. But it's quite early to conclude on the first quarter yet. So I would rather like to or second quarter, I would like to refrain from concluding anything on that. Yes.
Okay. Fair enough. I also noted that your non-Nordic sales here have been quite strong, both in Q4 and now again in Q1. Is this just a coincidence, or have you done any changes in your non-Nordic business?
We have. I wouldn't say it's a coincidence, but we have kind of tested a bit on the marketing, especially in Germany, where we see there's a kind of pocket of Scandinavian fashion lovers. But this is not a trend of us expanding into outside the Nordics. So in that respect, it's kind of a random thing or coincidence. We are still focusing on the Nordics and just take the revenue that we can get outside the Nordics. If we have some low-hanging fruits in Germany, in the Netherlands, we take them. But we are not going to do any big pushes towards outside the Nordics. So it's still very much focused on becoming the local champion in the Nordics.
With the strategy you have now for the non-Nordic business, this is highly incremental. Is that right to assume? Given that you are spending very little on marketing, you generally would have a higher margin on that business despite higher freight costs.
Yes. Yes. It's incremental. And in Germany, returns are extremely high, close to 60%. So this is why you don't want to spend too much on marketing and basically want to make money on every order you make in German fashion. So again, we take the low-hanging fruits and don't do anything further than that.
Okay. Excellent. And you talked about beauty and sports here as well, growing more than 100%. Are you ready to state roughly the share of sales that these two divisions make up?
Not yet. Beauty is still below 5%, and there's still a lot of growth to be had in the beauty segment. The sports segment has been very strong. The launch of Adidas was as good or might even have been better than we expected. But we haven't really disclosed yet the share of these two segments. But they are growing quite heavily. And I think that in the sports sector, we can see that sports category, that we are attracting also other brands than Adidas and are now getting into quite a confident sports/alternative segment on Boozt.com.
Excellent. Thanks. And also, if you could say anything about your investments in 2019, what kind of CapEx you're expecting?
Again, the same level as we have communicated earlier, we have started implementing the AutoStore stage three. But you will see it for the record in the second quarter of this year. So the CapEx level is reaffirmed as we communicated last time in Q4 of 2018. I believe it was SEK 130 million to tangible CapEx and around SEK 40 million to other CapEx.
Okay. Excellent. Thank you very much. Those are my questions.
The next question comes from the line of Michael Benedict from Berenberg. Please go ahead.
Morning, All. A couple from me. Firstly, as I understand it, your EBIT guidance was predicated on a flat gross margin. Given the gross margin pressures we've seen, are there any levers down below gross margin that you can pull to sort of hit your full-year guidance?
Yes. Good morning. The obvious answer would be the marketing. If we continue to see lower acquisition costs, then we can reduce marketing expense. So kind of that's the easiest lever to use on lower gross margin. But we are still believing that overall, the gross margin will be as we expected for 2019.
That's flat. You still expect flat gross margin?
Yes. That's correct.
Thank you. The only other one from me is, given the difficult conditions in the market, are you seeing any subscale competitors continue to struggle? I think you may have mentioned that last time, Ron.
Yeah. We are seeing a lot of physical retailers struggling. You are seeing bankruptcies in the Nordics at the moment, which obviously also has an impact on the level of stock that is being cleared in the market. So as I said before, the market is basically inherently unstable at the moment. So I think that with regards to online fashion e-commerce, our peers, apart from our German friends, seem to be flattening in their growth. The physical retailers, they seem to don't see any growth. So this is why you just have to be agile and expect or be prepared for the worst and take the opportunities that you can see in the market.
Brilliant. Thank you.
The next question comes from the line of Daniel Ovin from Nordea. Please go ahead.
Yes. Good morning. So I had one question here on the Q2. I'm seeing that the inventory levels are up quite a lot. I mean, it looks to be up close to 50% versus last year. And then also, given that we're now middle of May already, so how should we think about Q2? Can you give any more guidance? How do you think around markdowns for Q2?
Yeah. As I said before, it's too early to conclude anything on Q2. So I would rather not say anything because we still have important parts of the quarter left. So it's just too early to have any first statements on the quarter.
Okay. Second question also. I noticed that the marketing cost was down quite significantly on a group level, but still, you managed to grow quite nicely. I wonder, how do you think about marketing spend going forward? Will you continue to keep that down? Should we expect also the rest of the quarters this year to enjoy quite a good margin uplift from lower marketing spend?
I hope not. I hope that we can buy even more customers at our defined cost of acquisition . So in Q1, we've deliberately spent less because the unit economics in the marketing are just lower in the quarter. But we have guided that we are over time seeing reduced marketing spend as we go bigger. But unless we can continue to have a high amount of new customers at a lower cost of acquisition cost, then we can keep marketing costs down. But we are expecting that we will see a decline over the year from last year, but it will probably not be a big reduction in marketing spend.
Okay. Thanks. And then final question also on the beauty stores. So you'll be guiding for around up to SEK 20 million in cost. And now you seem to be along those lines in Q1. But you're also guiding now that you're going to close one of the stores. So is that not going to have a positive impact then to close that? Or how do you expect that loss from these stores to play out for the rest of the year?
Allan speaking here. Yes, you will see a benefit from closing down Roskilde in the business going forward. But as you also mentioned, you will have one-off costs in relation to the closing of Roskilde. So that's why we maintain the guidance. You will have some savings from closing it, but then you will have one-off costs. So we still expect the loss to be around SEK 20 million. And then we also see that the outlet store south of Copenhagen in Taastrup is actually performing a little bit above our expectations. So that's the reason.
Okay. Okay. That's all from me. Thank you.
We have a follow-up question from the line of Daniel Schmidt from Danske Bank. Please go ahead.
Daniel, we cannot hear you.
One moment.
Hello.
Hello. Yep. We can hear now.
Okay. Sorry. Just two more questions. You said the marketing spend will be down year-on-year, but maybe not as big of a reduction. Are you referring to Q1 being a big reduction and then we'll see sort of that dropping a bit less in the coming quarters? Is that the interpretation you should make?
Yes. That's correct, Daniel.
Yep. And then a second question, sort of more from a helicopter perspective. What's your sort of take on Zalando's sort of push when it comes to the Partner Program? And what's your own thinking and your own plans? Are you contemplating doing something similar?
As we've said before, we think that being in control of the procurement process is extremely important. When we state to a customer that if you order now, you will get it tomorrow free of charge, that's quite important. Once you have a Partner Program with items coming from different locations, you're no longer in control. We are quite hesitant towards this model, to be quite honest. We have no plans on going into the partner kind of model.
Now, first time being at least, I assume. Okay. That's all from me. Thank you.
Thank you.
As there are no further questions, I'll hand back to the speakers.
Okay. This concludes the call, and thank you. We will probably see you later. Thank you. Bye.
This now concludes our conference call. Thank you all for attending. You may now disconnect your line.