Earnings Call: Q2 2021

Jul 16, 2021

Ladies and gentlemen, welcome to the Nelly Group Q2 presentation. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Today, I'm pleased to present Kristina Lukes, the CEO, and John Afzelius, the CFO. Please begin. Well, thank you. Good, warm, and sunny morning, and welcome to this call where we are to present the Nelly Group results from the first six months in 2021. My name is Kristina Lukes, CEO for Nelly Group, and I'm hosting this call together with John Afzelius, CFO for Nelly. I will start off this presentation with a short reminder on where we are heading as a group, followed by the key highlights from the quarter with extra light shed on the relocation of our warehouse from our manual warehouse in Falkenberg to an automated warehouse in Borås. John, Group CFO, will thereafter take us through the key financials for the quarter, and I will close with an update on strategy and then some closing remarks. After that, we will open up for questions and answers. Our focus is on the first six months of 2021, let's start off with our ambition. We encourage you to join our journey and our community of a fab-loving generation. We are building a company that shall generate sustainable and attractive returns, we believe that a fundament in that journey is our loved community-powered brand, a brand that enables high frequency, low cost of sales, and appealing margins. Moving to slide three. Nelly is an integral part of the young woman's everyday life. This is not new. We've been around since 2004 and built through influencer marketing and through our community of consumers. I often say that Nelly is not only a fashion brand. Nelly.com is not only a fashion destination. We are an integral part of the young woman's everyday life. The brand promise and the promise we give her is to empower femininity and make her feel fab. We embrace that in our brand manifesto, aiming to cater for her needs in feeling fab, and we promise our target group to always celebrate the fab you. Now to the results on slide four for the first six months. Some top highlights. We have a SEK 10 million operating result improvement in the quarter. So far, SEK 37 million operating result improvements in the year. We continue with a strong inventory turnover, where our inventory levels are more or less at par compared to last year and minus 30% versus 2019. We turn our new stock at a high pace. I would like to mention that our current inventory is very fresh in comparison to last year and in comparison to previous seasons. We are growing in the quarter despite the fact that our largest product categories, such as occasion wear, still suffer from pandemic effects in this past quarter. We are finally up and running with our new automated warehouse in Borås. In slide 5, it's impossible to share highlights in the quarter without mentioning our warehouse move project, still on time and budget and with delivery promises kept so far during this transition. From July, Borås is our main warehouse, and we are now ramping down Falkenberg for final closure in August. The 35,000 sq m is located in Borås, equipped with a standardized automation system from AutoStore, packed with 80,000 bins. As we now are live, we have passed the most critical phase and still estimate our annual cost saving of SEK 35 million as valid based on 2020 volumes, and the modularity of the system will not be a restriction for future volume growth. Not only do we have an improved environmental footprint with a green building certificate, sustainable district heating, and renewable energy, needless to say, we are overdue when it comes to investing in our operational platform and logistics. This project and this move give us the prerequisites to create customer value at once, such as faster deliveries and work towards a leading-edge e-commerce. I'd like to hand over to you, John, to take us through the financial results. Thank you very much, Kristina. Please let me initially take you through The Nelly P&L for the quarter. After having seen negative net revenue development in 2020, net revenue grew for the second consecutive quarter, 1% in total and 3% in the Nordics. The main driver behind the growth was primarily healthy growth in several of our everyday fashion categories. Occasion wear sales were flat year-on-year, but please bear in mind that we're more than 50% lower compared to 2019 when it comes to occasion wear. So that rather significant pandemic effect still lingers. While we did see growth in the period, further revenue growth was hampered by primarily two factors. Firstly, the return rate increased from 33.2% in Q2 2020 to 36% in Q2 this year. The higher return rate compared with last year should though be seen in light of the substantial fall in return rate caused by the pandemic in 2020. This was primarily driven by category mix, as we've talked a lot about in the past, but also the pandemic's effect on customer behavior. Especially early in Q2 last year, we saw return rates fall sharply. In Q2 2021, the return rates increased both as we did see customer behavior normalize as comes to return behavior, but also due to a category mix driven mostly by certain everyday fashion categories that I mentioned. They grew well, but they also have a higher than average return rate. Just for reference though, the 36% return rate now booked in Q2 2021 should be compared with 39% in 2019 and 40% in 2018. We are still significantly lower than pre-pandemic levels. Secondly, what also hampered our sales growth was that we had saw lower sales to non-Nordic markets. That affected growth negatively also in Q2 2021. This is a consequence of the decision we made in early 2020 to discontinue active marketing towards certain non-Nordic markets or in fact all non-Nordic markets. We also halted translation services of these non-Nordic sites to their local languages. Gross profit-wise, we increased SEK 6 million. The main driver of the improved gross profit is the higher gross margin that is primarily driven by less discounting in 2020 than last year. This is pleasing to see. We have lower volumes of old inventory. That implies higher gross margins as fresh stock require less discounting in order to be sold. This is an improvement that is satisfying to see, and it's a satisfying result of our focus on outgoing stock levels, which I'll revert to in a bit. Let me then take you through the cost side of the P&L. Fulfillment and distribution costs, they were SEK 4 million lower in the quarter, partly due to lower volumes handled, but also due to better efficiency in the current warehouse. It should be noted, as you can see in the little gray oval, that the cost line includes warehouse project cost of about SEK 1 million. We're particularly happy to see our Falkenberg operations, i.e. the current warehouse, delivering high efficiency despite the fact that they're only weeks away from shutting down operations. We really want to thank the Falkenberg staff for delivering all the way to the finish line. Marketing costs increased by SEK 7 million compared to Q2 2020. This is mainly due to higher performance marketing costs, but also due to the repositioning of the Nelly brand. Again, it's worth noting that the marketing pricing fell rather steeply in Q2 2020 as many online marketing buyers were quite cautious as the pandemic struck. Pricing-wise, we've seen a normalization in Q2 2020 to almost pre-pandemic levels. Continuing with admin and other operating costs, they decreased by SEK 6 million year on year. This is mainly due to the dismantling of the Stockholm-based central functions, which are being integrated or actually have been integrated into Nelly's Borås-based administration team. All in all, in summary, we improved operating profit with SEK 10 million year on year. Moving on to the next slide, please let me highlight a few other points from the Q2 report. Starting, of course, which is difficult not to do, with the warehouse project. Three months ago, when we presented Q1, our warehouse team was intensely busy with installation work, recruitment, testing, education, et cetera. Today, three months later, we're happy to note that the new automated warehouse in Borås is operational. We were there this morning and we're already delivering the majority of customer orders from the new facility. A most pleasing development to see, of course. We believe that the project will meet the objectives of reducing fulfillment and distribution costs, shorten delivery times, improve the environmental footprint, but also give us room for growth. As we communicated in Q1, we're targeting an annual cost improvement of SEK 35 million, based on 2020 volumes, we have so far no reason to believe that that target will not be met. The CapEx ticket for the automation solution in isolation is SEK 84 million, which is financed through a rent supplement over 10 years. In addition to the automation solution, we estimate capital expenditure of about SEK 26 million, relating to items like storage shelves, ventilation installations, network installations, IT equipment, et cetera. Most of the CapEx has now been committed, and we have no reason to believe that we would have to exceed the SEK 26 million communicated. We are currently, during the month of July, operating and delivering customer orders from two warehouses, Falkenberg and the new Borås site. We estimate the cost effect of this to be in the range of SEK 35 million-SEK 45 million. As previously communicated, and as of June, we have spent SEK 4 million of that. This includes double staffing, a degree of double freight costs for decommissioning the old site, et cetera. While most of the cost remains to be incurred and is ahead of us, we now believe that we will have a fallout in the lower end of that range. Moving on to the next highlights. Inventory turnover remained strong in Q2, and current season stock sold well in relation to stock levels and, in particular, our most recent arrivals moved quickly. An inventory share of sales amounted to a sound 12.5%, which is slightly higher than the 11.9% recorded last year, but still significantly lower than the pre-Q2 levels of about 20%. We are turning over inventory at a very sound rate, which we are committed to continuing to do. We're happy to note that Nelly has been able to increase sales in spite of actually maintaining these low stock levels, about 30% lower than pre-pandemic levels. This is the result of a focus that we did start early in late 2019, early 2020, on reducing stock levels by both lowering the target for outgoing season stock levels, but also, primarily in 2019 and 2020, liquidating old stock. As you may have heard us say before, we maintain the focus on maximizing in-season sales and thereby minimizing outgoing season stock levels, as we firmly believe that this will be supportive of margins over the product cycle and is more capital efficient. Finally, I'd like to mention cash flows. Cash flows from operations in Q2 this year was weaker than 2020. This was mainly due to the significant inventory reduction that drove down working capital last year. However, we see cash flow from operating activities before working capital changes improving in the quarter, which is pleasing. Worth noting is that the SEK 12.9 million cash flow from investing activities that was incurred in Q2 2020, and this rather notable increase is, of course, attributable to the warehouse project and the CapEx coming from that end. Cash at the end of the quarter amounted to SEK 185 million, and we did not tap into our credit facilities. In summary, we have a solid cash position. We have not used our credit facilities, and apart from government tax credits, we have no interest-bearing debts. Having plowed through these highlights, Kristina, I'd like to hand back to you again. Thank you. Some final highlights from the first 6 months in 2021. We are continuing with progress on our sustainability roadmap, and we're proud to welcome close to 50% women of our operational staff in our new warehouse. Under our theme, Respect the Planet, we have increased our share of sustainable materials in the first 6 months of this year by 50%, to an actual share of 18% versus our 2021 full year target of 21%. We have furthermore increased our nearshoring share by 15 percentage points to now form the majority share of our total volume. Worth mentioning is that we've completed our climate footprint audit, a starting point for setting our updated vision and sustainability strategy and roadmap. Over to the last part of the presentation and slide 9, where we will share a short update on strategy. First, let me just recap what we are aiming for. 2020 and 2021 has been all about creating a sustainable, solid, and profitable core business for Nelly. We're relaunching the company, reorganizing ourselves to a slimmer, more efficient organization, centralizing the business to Borås, building a new warehouse, and investing in an AutoStore, starting the repositioning of the Nelly brand towards a more defined, loyal, and profitable target group in the Nordics. The passion and dedication from that target group is strong. She shops at our platform and engages with us on our social channels. Putting the engagement into figures on slide 10, we have 1.3 million followers on social media, 1.2 million customers placing 2.7 million orders, of which more than 42% of total sales come from own brands. Close to 20% of our target group visits us on a weekly basis on any of our channels. Completion rate of 96% on Instagram and a high content creation from our target group or our customers in their channels. Our community-based platform enables short time to market on emerging trends, but also a valuable source of data for us to analyze and make the right commercial choices in our daily trading every day. The community of customers form the base for our next growth journey following the relaunch. On the next slide, in the repositioning of our brand, we choose to focus on the most profitable and loyal consumer, who we've always, by the way, been more relevant towards, the young fashionista, around 15 to 25 years old, every day looking for inspiration on how to look and feel fab. We have more than two-thirds of our target group in the Nordics as part of our customer database. More than an age, we look at how she behaves. Let's call her Denise. She shops 18 times a year for her appearance, and compare that to the approximate two times a year she shops at Nelly today. She's very active on social media and is influenced by peers on what and how to look. Her appearance means the obvious fashion and shoes categories, but also nails, hair, accessories, phone cases, intimate products. Nelly successfully built the position with a clear party focus. Moving to slide 13. That party focus is a low-frequency needs catered. However, I would say high in engagement, which is very positive for our brand, but low frequency. With the relaunch of the brand, we're targeting a more defined target group, but also building relevance towards more occasions. We call it three occasions instead of just one. Everyday fab, party fab, and our previous core occasion fab, the special prom occasion or party occasion. The market is, of course, much larger with a higher frequency when we aim for more occasions. Remember Denise's 18 purchases per year for her appearance. The market for feeling fab is large every day, and hence, a high frequency with many more opportunities to cater to her needs, where our brand and our position is relevant. Fashion, beauty, nails, hair. Needs beyond our current offering in fashion and a higher frequency than our current two times per year. Our brand is well-known, a fundament for expansion and growth. Our awareness, or call it mental share, is multiple times larger than our current market share in the Nordics. Needless to say, we strive toward a market share more similar to our awareness or mental share rather than the one we have today. Thank you for your attention. We have shared highlights from the first six months for Nelly Group with a SEK 10 million operating result improvement as a result of several relaunch initiatives, and our automated warehouse in Borås is now up and running on time and budget. We are on our way to build a stable and profitable core business, forming the base for our next growth journey. Thank you so much for listening. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypads. May I remind you that if you want to ask a question, please press 01 on your telephone keypads. And there are no questions at this time. Please go ahead, speakers. Well, if there are no more questions, at least from my end, Nelly, we're a significant player in our market, but we're not the largest company on the Stockholm Stock Exchange. Please don't hesitate to contact us directly. We pride ourselves by being rather personal. Please don't hesitate to contact us. Yeah. Please do that. Thank you for your attention.