Ladies and gentlemen, welcome to the Boozt Q2 2018 teleconference. 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 it will be a question-and-answer session. Speakers, please begin.
Good morning. This is Hermann Haraldsson. Let's just dive into our presentation for the Q2 2018. If we turn to the first slide, the key highlights, and, as we mentioned at our last call, we came into the quarter with good momentum, and this momentum continued throughout the quarter. So we came out with a 44% growth, driven by Boozt.com, growing 43%, and Booztlet, growing by 90%. The growth part was supported by FX by some 4 percentage points. At the same time as we grew, our KPIs actually developed quite strongly in the quarter, and that drove the improvement in the EBIT margin, even though gross margin was a bit under pressure due to the very long and warm summer.
This momentum means that we now are confident to upgrade our growth outlook from 33%-36%, based on sound new customer intake as well as our customers coming back. We, even though we increase the growth guidance and increase or get more new customers, maintain the adjusted EBIT margin guidance. If we turn to the next slide, which probably is the most important slide, there is customer satisfaction. We can see that our customers, they're happy. This is actually all-time high. Trustpilot continues at 9.2, and the NPS score has gone up to 71. Last time I said that, our NPS of 68 was world-class. It still is. And this is good for us because we know that if customers are happy and rate us highly, there's a high likelihood that they will come back again.
Going to the next slide, on the order development, we can see that the number of orders went up by some 36% in the quarter, and the average order value went up by 5%. The increase in average order value was mainly driven by FX, even though there was a slight increase in items in the basket. So but a good development in average order value with a slight increase if we strip away the FX effect. Going to the next slide, which is the cohort development, we had almost 1.2 million customers in the cohort over the last 12 months, growing by 29%. And even though we're building the customer base with many new customers, we still managed to increase the average number of orders.
As we've said before, going this fast, we will have many first-time customers, in this cohort over the last 12 months. This is why we look at the true frequency, which is telling us, of the people that buy, how, how many times are they buying over the following, 12 months. And we can see that this number went up from 6.1-7.2. And this just tells us that our customers, they are increasing our share of their, their wallets. So this is this is very healthy for us, and, and this is a big explanation why we see this increase in, in the revenues. Going to next slide on the categories, my, my final slide, we as we said before, we are focusing very much on our, our, our different, categories: beauty, Sport & Leisure, and, and kids.
If we start with the beauty category, it's still small, but it's growing, and it's showing some very healthy size and KPIs. Two-thirds of the baskets or the purchases are mixed baskets, meaning that they are buying it with clothes. So there's good economies in these baskets. We have improved the brand portfolio, added some very, very strong brands like MAC, Kiehl's, and Urban Decay. And also we are also now in the process of soon introducing new features like skin test inspiration, making our beauty category become the destination of beauty in our region. The sport and leisure, it's a big thing for us. We will launch Adidas quite soon, and this also will mark the relaunch of the sport side of the category with a more dedicated sport and leisure path.
The good thing about launching the sports & L eisure and launching Adidas and Reebok, that means that the other sports brands that we have, the likes of Puma, Reebok, Asics, and Diadora, they now give us access to the entire range, including the fashion range, meaning that we will improve and that we will now, during the fall, demonstrate a, a very, very strong sports & L eisure category on Boozt. Running also Olsen. And then finally, kids, which also is an area that we are focusing a lot on. We are now in the process of separating kids into teens and kids as those of you who have kids, you know, as, as, as soon as they're 10, 10, 11, they regard themselves as being teenagers.
So we're splitting up, having a dedicated teen category, having an increased marketing focus on the teens, and this at the same time as we are now launching Polo and Vans. And this means that we are expecting our customers to continue to increase our share of their wallets. So turning to the next page, I would like to hand over to Allan to talk about the financials.
Thank you, Hermann. So if we turn to the next page, financial update, and then the next page, results update, we have the net revenue for the group increased by 44% in the quarter and for the first six months by 38%. This of course also supports our increased net revenue guidance for the full year. If you turn to the gross profit, it decreased 2.4 percentage points in the quarter.
Knowing that, April and May was actually, on a like-for-like basis, had a decent development, then the deterioration, more or less all happened in June as a consequence of an early sales start compared to last year, but also the trading conditions due to the very warm summer that had downward pressure on the margin in June. The trading conditions led to increased promotional activity, and this had continued into July and the first part of August and has actually worsened a bit. If you look at the gross margin for the first six months for the group, then bear in mind, of course, that last year you had the ECCO mono-brand store for the first quarter that affected the gross margin. Turning to adjusted EBIT, it increased 2.7 percentage points in the quarter from 2.2% to 4.9%.
Good developments, if you ask us, but also here, bear in mind that the EBIT margin last year was also a bit affected by some ramp-up costs we had implementing the first phase of the AutoStore. If you look at the EBIT margin for the first six months, you will see that it increased from 0.9% to 2.4%. Also a very decent development. If you turn to the next page, net revenue by segment, Boozt.com grew 43% in the quarter and 38% for the first six months. But perhaps even more impressive was the growth of our smaller segment, Booztlet, which grew 90% in the quarter and almost 100% for the first six months. This is truly impressive, also knowing that Q2 traditionally is not the best quarter for the off-price segment. So considering that, the development is actually quite good.
If you look at the other segments, the increase was approximately SEK 1.4 million. Remember here that the Copenhagen Beauty by Boozt store opened in mid-June, so we did not see a lot of revenue development from that store in the quarter. If you look at the first six months, also here, bear in mind that the first quarter of 2017 was affected by the ECCO mono-brand store. So this is the reason for the decrease. If you turn to the next page, the adjusted EBIT by segments, here you see that Boozt.com increased the margin from 2.5 to 5.4 percentage points. A decent development, and also for the first six months, almost 2 percentage points up from 0.7 to 2.6. Again, with Booztlet, not a quarter you should expect a lot from, but even so, we actually did quite well.
We managed to increase the EBIT margin with 7 percentage points from 3.7% to 10.7% and almost double the EBIT margin again for the first six months. If you go to the segment other, you will see that the EBIT margin in absolute terms deteriorated in the second quarter of 2018. Bear in mind here that we opened the physical store in Copenhagen in mid-June, which attracted some revenue for the last two weeks of the quarter, but the costs actually already commenced April 1st. So this is the reason for the deterioration in the EBIT margin. And also when you look at the first six months, you will see that the opening of the physical store had an impact here.
Turning to the next page, the cost ratio development, I briefly touched upon the gross margin development, the deterioration of 2.3 percentage points. But if you want to sort of split it up in two separate activities or events, you could say that approximately half of the 2.3 percentage points is related to an earlier sales start compared to last year, and the other half is considered what we refer to as the worsening of the trading conditions, which actually took place because of the very warm summer and less activity online. If you look at the cost ratios below, the adjusted fulfillment cost ratio improved by 1.8 percentage points, quite very, very good development in line with our expectations.
The margin cost ratio, despite the fact that we actually got a higher number of new customers in the quarter than we had anticipated, also improved by 0.6 percentage points. The adjustment, admin, and other cost ratio, including staff, improved 2.4 percentage points. And again, if you notice the staff improvement, that's also 0.7 percentage points out of the 2.4. And then lastly, you have the depreciation cost ratio, which improved by 0.1 percentage points. And this is, of course, the fact that revenue was higher and depreciation is more or less the same because the Auto Store has not been built out since the last quarter, significantly. This leads to the adjusted EBIT margin improving by 2.7 percentage points.
If you look at the first six months compared to the first six months of 2017, you will see that the gross margin declines, partly also due to the fact that ECCO was a part of the 2017 figures. But all in all, you can see that all the cost ratios, except the depreciation cost ratio, actually has improved. And this leads to the adjusted EBIT margin improvement of 1.5 percentage points. So, turning to the next page, some key financials besides revenue and adjusted EBIT. The net working capital, an important measurement, out of as percent of last 12 months' revenue, it increased slightly, of 0.2 percentage points. You have to bear in mind that when we compare these figures to each other, that last year we had a lot of paid in tax from participants in the 2012 warrant program.
If you adjust for that, the net working capital last year as percent of last 12 months' revenue was closer to 7%, leading to an improvement of the net working capital of approximately 1.7 percentage points. If you go to the Capex in the middle of the presentation, you will see that this quarter was characterized by approximately SEK 10.5 million in fixed assets Capex, which is more or less entirely related to the opening of the physical store in Copenhagen. And you also see that the intangibles are on approximately the same level as Q1 2018, SEK 6.7 million, which leads to also that if you look for the first six months, you can see that more or less all fixed assets capitalization is related to the store, and the intangibles is related to capitalization of development costs.
There has been no AutoStore CapEx for the first six months of 2018, but as we go into the second half of 2018, you should expect, as we have mentioned before, a CapEx of approximately SEK 45 million for the build-out of the second phase of the AutoStore, SEK 25 million for capitalized development cost, and approximately SEK 15 million SEK 15 million in capitalization of the beauty store in Copenhagen. Full year effect. If you turn to the last one, operational cash flow, you can see that the operational cash flow was improved quite significantly. And this is, of course, on account that we are comparing ourselves to a quarter where we listed the company on NASDAQ, and this had quite a lot of effect on the expenses of the company. So it's a little bit of unfair comparisons with respect to operational cash flow.
But besides that, the development is very positive. If you turn to the next page, the outlook, as we had mentioned, as Hermann mentioned, the group now expects a net revenue growth above 36% for the full year, which previously has been communicated above 33%. The adjusted EBIT margin is expected to improve slightly compared to 2017. This is unchanged also from previous reports. Bear in mind here that the difficult trading conditions from the end of Q2 continued and even worsened into the first half of Q3, which we expect will impact the gross margin negatively for the third quarter of 2018. The medium-term guidance is unchanged from the time of the listing of the group.
Before I hand over to the operator, I would like to remind everyone that the first third of the 2015 long-term intention program has vested, and this implies that participants, including group management, will exercise after the release of the Q2 report. Now, I would like to hand over to the operator for the Q&A session. Thank you.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone to hang up. Our first question comes from Daniel Schmidt from Danske Bank. Please go ahead. Your line is now open.
Yes. Hello. Good morning, Hermann and Allan. Impressive set of numbers this morning, I have to say. But coming back to what you finished by saying in terms of the outlook and the interpretation of the outlook, given that you are, as you said, 150 basis points ahead on the EBIT margin for the first half versus the first half of last year, and you're still guiding for slightly higher, and you're highlighting the increased level of discounting going into Q3.
Is this, should we take this as sort of the clear negative impact that you in between the lines are addressing when it comes to only slightly higher on EBIT margin for the full year is related entirely to Q3 and what we see now in terms of warm weather conditions and poor start to July, or could that, is there any other factors behind it, and could that change if we get normalized weather conditions now that back to school season is starting and that's the most important part of the Q3 period? I think I'll start there.
Okay. Thank you, Allan, speaking here. Thank you for the question, Daniel. If you look at the deterioration in the first half of Q3, this is what leads us because that's more or less a fact now. That leads us to not adjust the EBIT margin expectations for the full year. But also the fact that, as we have mentioned previously, we would like to grow the business as fast as possible, and this also leaves room for us to invest in acquiring new customers if they are available out there. So knowing that the Q3 will probably be worse than expected, we also leave room for continuing the investment in acquiring new customers. And this is more or less the basis for not changing the EBIT guidance for the full year.
All right. But if I just come back to, I assume that also for you guys, July is a fairly sort of small month, and it's most important that you get the back-to-school season right, which basically starts now and then, of course, the entire September. And do you see any scenario where the Q3 could be saved by normalized weather, or are you pushing the accelerator that much when it comes to acquiring new customers?
To be honest, I don't think that you can recover entirely from the deterioration we saw in the first half of Q3 now. But of course, it is unknown that we haven't yet launched a big new relationship with Adidas and Reebok, and that might surprise us.
That's gonna be in September, right?
Primarily, yes.
Yeah. And is that towards the end of the Q3, or sort of the first of September, or?
Yes. Yes. Yes. No. No. It's at the end of Q3. So the full impact of this new relation you will see in the fourth quarter.
All right. The same goes for the launch of PO.P, or exactly?
This is Hermann here. We are in the process of launching PO.P now, so that will come sooner than Adidas.
Okay. All right. Then, given that you're focusing on acquiring and stepping up, or keeping the pace high when it comes to the customer base and so on, the guidance on top line, you do raise it, but you did have 38% growth for the first half of this year. Now you're saying 33%-36% for the full year. Now, I do understand that the base is continuously growing, so it's harder and harder to grow as fast as you have done. But, is that a cautious uplift of the full year guidance, or how do you see it?
Daniel, it's Hermann here. It's actually how we expected. We have gained from our basically old customers coming back and very good availability of new customers in the first half. We assume, you know, a number of new customers that we can buy during the second half. And it would be very optimistic for us to believe that we could still get as many new customers as we got in the first half. So, this is. I would not say it being cautious. This is just being prudent to say that this is how it's going to be. Also, you have some big shopping events taking place, you know, with the Black Friday being the most prominent one. And so it's you have to be careful not being overconfident in our view.
Yeah. Yeah. All right. Then just finishing off with sort of the other segments, beauty and sport and kids and so on, could you say anything about the growth rate that you've seen in these categories? If you grew by 44% as a group in Q2 and 38% for the first half, you know it's coming from very low levels, especially cosmetics, but could you say anything in terms of the level of growth that these other categories are delivering?
Yes. Yes. We can say that beauty doesn't make sense to talk growth because obviously, you know, it's, it's up-and-down growth in the beauty segment compared to last year.
Yeah.
If you look at sports and kids, actually, they have been growing below the average growth of Boozt. And that's because we haven't really launched them, as we talked before. We are in the process of relaunching both sports and the teens. So this is also why basically we've spent the most of the Q2 to set all up, to be ready for the launches of both teens and sports. So, it's going to be exciting to see how that will take off in the second half.
Yeah. Adidas is a big part of that, I guess.
It's a big part also because we also believe that this will bring some extra interest. But the positive thing has been that other brands, and especially the other sports brands, now give us access to their full range and their fashion range. So it's going to be a very well-assorted athletic store that we will be launching.
Was it more, was it Puma that you mentioned in that on that particular topic?
Yes. Yes. Yes. If you are very fashion conscious, which I know you are, Daniel, then you will see that we have launched some of the, like, special editions, stuff like that. So it's actually quite interesting to see how that's developing.
Okay. And maybe then a final question. Of course, you did launch cosmetics in June, but it's a ridiculous comparison on a Q2 basis then. But, I think you said that towards the end of last year and I don't know if it was the full year or that quarter, it was 2% of total sales. I might be wrong, but that's my recollection. Could you say anything about the level now if you look at the first half of this year? Is it 3% of sales, or how fast is it moving?
I don't recall that we mentioned any specific number, but I can confirm that we are above 2% in revenue, as I said. It's growing.
Yeah. But it's still a small percentage, or?
It's a small percentage, but it actually shows some good signs. And we've actually been quite confirmed that beauty is a very strong complementary to our fashion offering because we have these mixed factors. And also the thing is that our customers who buy beauty, they actually increase the frequency of the purchases over time. So it actually reinforces kind of the customer interaction. So we are actually very pleased with beauty. And even though, you know, we are quite impatient people, even though we think it could be moving faster, it's probably moving quite healthily compared to what you normally would see.
Do you see the low level of return rates that you would have expected from beauty?
Beauty is amazing because there were practically no returns. It's like, something like 3%. So.
Yeah.
We like, we like beauty.
Okay. Thank you. That's all for me.
Thanks.
Thank you. Our next question comes from Niklas Ekman from Carnegie. Please go ahead. You're like.
Thank you. Yes, a couple of questions. Firstly, you talked a bit about the weather impact here, and I'm curious because you talk mainly about gross margin pressure. Has this had any impact also on your sales? And I'm talking both in now towards the end of Q2 and also in the beginning of Q3, or is it mainly a gross margin issue that you're addressing?
Allan here. Thank you, Niklas, for that question. It's a good question. Mainly, it is related to gross margin. We have not seen deterioration of the revenue projections in the first half of Q3.
Okay. Excellent. And then I was curious about your fulfillment costs as well. These have been around 13.5% of sales now in Q1 and Q2. And I was wondering if that is a decent guidance for what we should expect because obviously, it was a much higher number in Q2 of last year, and it remained elevated going into Q3. So I was wondering if this was a result of kind of startup costs from the new fulfillment center and if the current rate in H1 is a more comparable number, around 13.5%.
Yes. Allan again here. Yes, but bear in mind, it's true, Niklas, that last year was, was affected by the, the launch of the AutoStore. And if you look at the, the fulfillment cost ratio for the past two quarters, it has been, it has been, developing decently. Going into Q3, you will see some seasonality in the fulfillment cost ratio. Bear in mind that all in-deliveries for the main season takes place in Q1 and Q3. And this affects will affect the, the fulfillment cost ratio in specific quarters.
Okay. Okay. Fair enough. And I guess the same question on marketing costs. Is it likely that you should see an increase now that you have a lot of, a lot of new launches of Adidas and, and other, other brands in the autumn? Do you see this number rising, temporarily?
No, that's not the expectation. But you probably won't see a very high decrease in the marketing cost ratio because we still wanna keep momentum and secure the growth.
Okay. Excellent. And I was wondering, well, you had this slide before where you talked about the growth categories, beauty, kids, and sports. I was wondering.
Yes.
Have these been instrumental to the strong growth seen in the quarter, the 44% growth? Have these categories grown significantly more than your traditional business?
Niklas, this is Hermann. No, actually, no. On the contrary, they have not. We haven't really launched relaunched new categories because we've been waiting for Adidas and Reebok to enter and also for a launch of the teen site. So actually, they have not contributed to the growth, and they're actually growing a bit below the average growth. So it's not the categories so far.
Okay. Okay. Interesting. And you talked about the fulfillment center now and the second step of these investments. Just to be clear here, you talked about CapEx of SEK 45 million for this, and then you mentioned another SEK 15 million for the beauty store. And I thought that this store was launched in Q2 already. Is this another 15 million? What is that related to in Q3?
This is just, to be prudent, there will be some additional CapEx in the beginning of Q3 related to the physical store. So you took SEK 10.5 in Q2, and you will take some remaining in Q3 related to the Copenhagen store. So in total, approximately SEK 50. Might be slightly lower.
For the full year. For the full year.
For the full year, yes.
Oh, SEK 15 million for the full year. Okay. Okay. That's better. And when do you expect to have this second leg of the fulfillment center or the AutoStore up and running?
before Black Friday.
Okay. That sounds good. And then some interesting ones here. Your financial expenses have been relatively high in relation to your very limited debt. And you mention here that there have been some currency adjustments. I was wondering, what is the underlying financial expenses that we should pencil in for the coming quarters?
The financial expenses, you have to take into consideration the financial income on the same on the same page. So, it is mainly the derivatives changes in derivative contracts, which has generated both the income and the expense. So if you if you take a look at the sort of the true interest exposure, it's approximately SEK 0.7 million per quarter related to the financing of the AutoStore.
Yeah. That sounds familiar. And finally, the tax guidance. Obviously, a much higher tax in this quarter because of, I think, this is due to a change in, a revaluation of, tax loss carry forward because of the lowered tax rate in Sweden. Is that what that comes from? And do you have an estimate for what kind of taxes we should expect, going forward?
That is, that is true, Niklas. It is entirely related to the change of the deferred tax asset, which leaves a higher tax rate in this quarter. With respect to the tax rate going forward, I don't wanna speculate about it other than saying that it's, there is a legal tax rate. Because if I do that, you can also deduct some other key performance indicators for the group, so.
Okay. Okay. Fair enough. Thank you. That, that's all my questions for now.
Thank you. Our next question comes from Michelle Wilson from Berenberg. Please go ahead. Your line is now open.
Hi. Good morning. Just a few follow-ups from me, really. First of all, just on the revenue side, did you mention that you can get access to any inventory you want from Adidas and Reebok and also Puma? And just wanted to check in terms of the revenue guidance that you set for the full year, is there an assumption of a boost in Q4, from getting Reebok and Adidas onto the site?
Yeah. Hello, Michelle. This is Hermann. In our forecast, we are assuming that Adidas and Reebok are launched. And so this is including the expectations from the launch of both Adidas and Reebok. And yes, we have access to the full range. So it's going to be quite a strong launch for Adidas and Reebok.
Okay. Great. Thanks. And then on the gross margin side, understand the kind of weather impact in Q3. Could you quantify that for us at all? 'Cause it, it does feel like your EBIT margin guidance is, is very conservative, so it might help us kind of put that in context if you could quantify the, the weather impact on Q3 gross margin.
Yes, Allan speaking here. Yes, at least I can try. Obviously, I do not know the full impact for Q3, but a good estimate at this point in time would be that you will see the same deterioration of approximately 2 percentage points as you saw in Q2 versus Q3 last year. So, having that in mind, it can range from 1-3, depending on also on some of the perhaps expected recovery of gross margin in September. So it's too early to say, but it in that neighborhood. And some of that will materialize in the worsening of the EBIT margin. But again, since we also believe that we have a very strong cost control, it will not all materialize as the worsening of the EBIT margin.
Okay. Great. That's really helpful. Thank you. And then just finally on fulfillment costs, I didn't quite catch your answer to the question earlier there on the seasonality. I think you said that the orders are coming in in Q1 and Q3, so the fulfillment cost is a bit higher in those quarters. I didn't really understand that.
Yeah. It, specifically, the fulfillment part of the ratio, which drives costs when you are in delivering 80% of all the goods that you are supposed to sell within the next six months, that automatically drives up the cost of fulfillment in that specific quarter, Q1 and Q3.
Your inbound deliveries, the cost of that goes through the fulfillment cost line rather than the COGS line?
Yep. Yes. That's true.
Okay. Thank you. That, that was everything I had.
Thank you. Our next question comes from Laurits Louis Kjaergaard from ABG. Please go ahead. Your line is now open.
Hello. Thank you very much. Good morning. Just a few words on the geographical split that you've posted. Last quarter's year-on-year was pretty similar to this one. I'm just wondering on the rest of Europe where you write that consumer appetite for Norwegian fashion brands has increased despite no change in marketing strategy. Could you just comment on what exactly this is driving? And also if you have ambitions to increase marketing outside of the Nordics. Thank you very much.
Yes. Thank you for that. It's true. I mean, it's not we're not talking about a significant amount of the revenue, outside of, of the Nordics. And it is, more volatile than, than the rest of, our business. But, but, in general, you can say that we are sort of experimenting on a country-by-country basis with, different marketing initiatives. And some of them prove, good, and some of them prove less good. And, the, the main thing about, the, the rest of Europe is to secure all the activities that actually, turns into revenue and, and new customers in that specific region. So it's a it's a more of a trial area for us, not a not a significant growth area.
So for this quarter, is it more like a one-off, would you say? And also, what, what type of brands is it that's driving it right now?
Yeah. Just to elaborate again, when you look at the growth rate, you also have to compare it to the we are comparing it to a relatively weak second quarter of 2017 in rest of Europe. So I mean, it's even though it's above 80%, it more or less the revenue in this quarter has been the same for the last three quarters. So you on a if you compare it to Q4 of 2017, you wouldn't see a lot of increase in in the rest of Europe revenue. So it is more volatile. And on a quarter-by-quarter basis, it can also grow between 20%-80% depending on seasonality. And this is Hermann here. As we said before, our focus is on the Nordics. And we have some 5% outside the Nordics.
And you will have a lot of kind of Nordic die-hards in Europe that want to buy Nordic brands, and especially Danish brands. And they find us, and we sell to them at good margins. But we are not going to do any kind of active marketing in the outside of the Nordics.
Thank you very much.
Thank you. I remind you, if you do wish to ask a question, please press 01 on your telephone keypad. Okay. As there appear to be no further questions, I'll return the conference to you, speakers.
Okay. Thank you. And good talking to you. And so we will just go back to work and make sure that we deliver on the promises. So have a good day.
Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.