Earnings Call: Q1 2021

Apr 21, 2021

[SPEAKER MARGARET HENRIK SUNDSTROM:] Well, thank you. Good morning and warm welcome to this call, where we are to present the Nelig Group results from Q1 2021. My name is Kristina Lueck Ges, CEO for Nelig Group, And I'm hosting this call together with our newly appointed CFO for the group, previously CFO for Nelly, Jan Absilius. Looking forward to having your attention when we share results from Q1 2021. Slide 1 then. I will start off this presentation with top line reminder of who we are, followed by sharing the key highlights from the quarter and our ongoing reshape or call it the relaunch of Nelig. John, Group CFO, will thereafter to take us through the key financials for the quarter. After the specific Q1 presentation, We want to take the opportunity to share our company presentation and a short film, in total around 10 minutes. We will thereafter close the presentation with closing remarks and open up for questions and answers. Even if our focus is on Q1 2021 now, some words on our ambition. We encourage you to join our journey and hence our community of a fab loving generation. 1 year on the job for me at Nelig and more specifically since 6th November 2020 as a separate entity, we are building a company with the ambition to generate sustainable, attractive returns. We believe that a fundamental in that journey is our loved community powered brand, enabling high frequency, low cost of sales and appealing margins. Slide 2. Nelly is an integral part of the young woman's everyday life. This is not new, but built since 2004 through influencer marketing and through our community of consumers. Nelly is not only a fashion brand. Neli.com is not only a fashion destination. We are an integral part of the young woman's everyday life. And the promise we give her is to empower femininity and make her feel fab. We, say all 300 employees at Neli, embrace that in our Brand Manifesto, aiming to cater for her needs in feeling fab. And we promise, always celebrate the fab view. Slide 3, and specifically, the quarter results then. Here are some top line highlights. We are backing growth, 5 0.5% growth in the Nordics in local currencies. A SEK 27,000,000 operating result improvement in a seasonally weak quarter. It's an improvement based on results from several of our relaunch initiatives. 3rd highlight is that we continue with a very strong inventory turnover, where our inventory levels are down 28% compared to last year. And we turn our new stock at a high pace, close to double up versus last year on this season's stock, delivering effects throughout our P and L. A 4th highlight is that the building of our new operational platform progress as well. The new automated high capacity warehouse in Poros is the operational platform for Nelli's future growth. It's expected to decrease fulfillment and distribution costs, shorten delivery times and improve environmental footprint. The annual cost saving target is SEK 35,000,000. So handing over to Jan and Slide 5. Thank you, Cristina. Let me now then guide you through the income statement for Q1. And after 3 consecutive quarters of negative net revenue development, net revenue increased by 3.0%. And as you mentioned, we grew 5.5% in local currencies, so a slight currency headwind in the quarter. The main drivers behind the growth were primarily healthy growth in everyday fashion and lower returns. And several categories within everyday fashion and sportswear grew well. And this comes both as a consequence of customer behavior, but also due to active category work by Nelley. And the significant 7 percentage points improvement in return rate is mainly explained by 3 rather distinct factors. Firstly, we saw lower sales in return intensive categories such as party dresses, And this was both a consequence of active category management, but also changed customer behavior during the pandemic. Secondly, we saw lower sales in higher return rate non Nordic markets. And we should remember that we did decide in early 2020 to discontinue active marketing towards non Nordic markets and also to halt the translation services of non Nordic sites to their local languages. And this we see effects of this also going into Q1. Thirdly, we made the decision in 2020 to deny sales to certain customer cohorts with unsustainable product return behavior. This was implemented in Q2 2020, and we've seen positive effects of that through 2020 and going into 2021 as well. Further revenue growth was hampered by primarily two factors. Firstly, Nelie saw significantly lower sales of occasionwear during the quarter as parties and occasions for natural reasons were scarce. And going into the pandemic, we should remember that party dresses was Nelie's single largest category and a category that declined rather significantly during the quarter. Secondly, the previously mentioned Lower sales to non Nordic markets did affect growth negatively also in Q1 2021. If we turn our attention to gross profit, it's increased by DKK 13,000,000 year on year. And the main driver behind this increase Lower volumes of old inventory in 2021 compared to 2020. Lower volumes of old inventory results in lower outlet sales volumes and also lower inventory write offs. And this improvement is a pleasing result. It's pleasing to see that our focus on outgoing stock levels has paid off, and I will revert to that on the next slide. The gross margin increase came in spite of significantly lower sales of Ocationware. We should bear in mind that Ocassionware has historically had a large share of high margin owned brand products and the share of owned brand Products consequently declined in the quarter. If we turn our attention to The cost side of things. We in general, we can say that Nelis cost base developed favorably during the quarter. Fulfillment and distribution costs were SEK 9,000,000 lower, and this was both due to lower volumes handled, but also due to efficiency improvements in the current Falkenberg warehouse, which is most pleasing to see. Marketing costs increased by SEK 6,000,000 in the quarter. This was partly due to new initiatives, but also due to higher performance marketing costs in Q1. We saw a SEK 12,000,000 improvement in admin and other operating costs. This was mainly due to lower costs across the Nelie business, but also due to the dismantling of the Stockholm based central functions, which we are now assuming in Boros and integrating into the Boros based administration team, which yields results in cost improvements. So in summary, EBIT improved by SEK 27,000,000 year on year. And while an operating loss of SEK 15,000,000 may not seem like something to be happy about, it should be pointed out that Nel typically is loss making in the 1st quarter as Q1 is the smallest quarter measured by sales. So if we move on to Slide 6, I would like to highlight a few other topics from our Q1 report. And starting out with the warehouse, We are excited with the new warehouse project. It is progressing well and the basic structure of the automation has been erected in our brand new warehouse, a newly constructed warehouse in Bulus. And we're now preparing intensely to push the start button later in Q2. So installation work, recruitment, Testing, education, etcetera, is on the top of the agenda for the operations team in Nelie currently. We are excited about the project and we believe that it will meet the objectives. Firstly, reducing fulfillment and distribution costs. Secondly, shortening delivery times and also improving our environmental footprint. And In monetary terms, we are targeting an annual cost improvement annual cost saving of DKK 35,000,000 And this is based on 2020 volumes. As we have communicated previously, the CapEx tickets for the automation is DKK84 1,000,000 and this is financed through a rent supplement over 10 years. On top of that, we foresee CapEx of SEK 26,000,000. So the SEK 84,000,000 plus SEK 26,000,000 adds up to the SEK 110,000,000 that you see on the slide. And these 26 relate mainly to storage shelves, ventilation, network installations, IT equipment, etcetera, that is needed to operate the warehouse. We are expecting first deliveries from the new warehouse in early Q3. So in effect, we will operate 2 warehouses during Q2 and Q3. And we estimate that the cost effect of this will be in the range of NOK 35,000,000 to NOK 45,000,000. And what type of costs are those? Well, it typically includes, well, double staffing for 2 warehouses, A degree of double freight costs as we will ship from 2 warehouses. Some of the orders will actually be shipped from 2 warehouses, But also costs for decommissioning the old site, etcetera. Secondly, I'd like to provide a bit more detail on the inventory turnover. It was strong in the quarter. It improved significantly compared to Q1 and inventory fell by 28% compared to 31st March 2020. And as measured in inventory share of sales, it amounted to 15%, which is a 5 percentage point improvement from Q1 2020, so rather healthy levels. And we believe that this illustrates that Nelie has been able to increase sales and in spite of an almost 30% lower inventory. And we note that inventory turnover on the new in season stock was strong in Q1, almost doubling from a year earlier. And all this is a result of the focus through 2020 on reducing stock levels. We did that by lowering the targets for the outgoing season stock levels in combination with liquidating old stock through primarily outlet channels. We maintain this focus on in season sales and thereby minimizing Outgoing season stock levels in 2021, as we believe strongly that this will support margins over the product cycle And is more capital efficient and will hence lead to a better return on capital. Lastly, I'd like to draw your attention to the balance sheet. Cash at the end of Quarter amounted to SEK 185,000,000 and we did not tap into our credit facilities. The Q1 is a seasonally weak cash flow quarter as low sales are coupled with high end deliveries ahead of the during season sales. But the high inventory turnover in the quarter, coupled with low returns from Q4, Made Q1 less cash draining than usual. And so in summary, we have a solid cash position. And apart from government tax credits. We have no interest bearing debt. So Cristina, with that, I'd like to hand over to you again. Thank you. Now over to the last part of the presentation, where we will share a short updated company presentation, starting with the film. So moving to Slide 8. Nelig is today a leading Nordic fashion experience situated in Boras. 299 passionate employees, both in our head office and soon also in our warehouse. A relaunched operational platform is planned to be in place 2021 with an automated high capacity outdoor store. We inspire with a head to toe look. What does that mean? Well, it's the complete look. Of course, fashion and shoes, but also hairstyling, combinations, accessories, makeup. We supply and offer a mix of own brands, must have brands and corporations or co lands. We are worn by her icons and by herself, our target group, in her own channels. We know influencer and friends play the most important role in creating fashion inspiration for our target group. The group, Nelig Group, also consists of the brand Eneliman, targeting the growing online men's segment. Slide 9 then. Nelis current core today is the core in how we want to utilize our platform and and our business further. Nelie today is the inspirational platform for a complete head to toe look on our own site as the core, but also via business to business. We sell our own brands via Salamblo since around 2 years back. Neligimam, targeting the young men's segment is another part of our business, while everyday occasions and Other categories that deliver into feeling fab and is not traditional fashion and shoes guides us in our expansion of our business further. Slide 10, we believe that the love and engagement of our target group, 15 to 25 year old fascinistas in the Nordics, is the prerequisite for sustainable profitability, but also further expansion. We have an engaging community, and the commitment from our target group often grows over time. Slide 11. Putting the engagement into figures. We have 1,300,000 followers on social media, 1,200,000 customers placing 2,700,000 orders, and close to 20% of our target group visits us on a weekly basis. We have a completion rate on Instagram of 94% and a very high content creation from our target group, or call it, community. Our community based platform enables short time to the market on emerging trends and create a valuable source of data for us to analyze and act upon and make sustainable, profitable commercial choices throughout our value chain. Slide 12 then. So who is our target group? Well, it's fashionistas or women 15% to 25% in the Nordics. We have More than 50%, 60% of our target group in the Nordics in our customer database, but more than age then. This is her. It's Denise. She shops 18 times a year for her appearance. And her appearance means the obvious fashion and shoes categories, but also nails, hair, accessories, phone case, intimate. Moving to Slide 13. Yesterday, Nelig successfully built a position with a very clear and strong party focus. Low frequency needs were catered. With the ongoing relaunch of the brand, we're targeting a tighter target group, but at 3 different occasions. Everyday fab, So going to school or going out with the garbage, party fad, well, that's after work on a Thursday night. And our current quarter, the occasion fab, the special prom occasion or the wedding. The market is, of course, much larger with a higher frequency. Remember that Denise purchases 18 times per year for her appearance. The market for feeling fab is constant for her every day, and hence, a high frequency with many more opportunities to cater to her needs. Fashion, beauty, nails, hair, needs beyond fashion. Slide 14. Our brand is well known, a fundament for expansion, whether expanding profitability or growing. Our awareness, or call it mental share, is multiple times larger than our current market share in the Nordics. We have a brand, move on to Slide 15, that we can believe can drive celebration of and feeling path of life every day in multiple situations with different product and services needs. Moving to Slide 16. Nelig's current core, being our brand, Customer data and a long e commerce experience is soon to be complemented with a new operational platform through the introduction of a high capacity automated warehouse, 35,000 square meter located in Burrows, a standardized automation system delivered from Altesterstor with room for further growth, but also with the ambition to create cost efficiency, faster deliveries to our customers and an improved environmental footprint. Novitas 9 17, we are relaunching NELI and we are building a sound and Sustainable Neli, together with our target group. Core in that journey is to build that together with her. Her expectations are high. We believe that this will be a continuous improvement journey. Our sustainability strategy focuses on 3 areas: empowering femininity straight from the core of the brand. In 2020, we have more than 60% female representation in Board of Directors and Executive Management. Respect the planet as a second area. We are, as we speak, conducting an extensive analysis together with Stylka, where we've been active members from the starts. In 2020, our reduction of emission by 46% in own operations is a good step on our path, And the analysis will guide us further into ambitions, targets and plans. 3rd area, fair and equal. We work in a network with suppliers and partners. And in 2020, we improved transparency through public list of suppliers to set the base for a strong improvement throughout our value chain going forward. Slide 19, happy to present our Board of Directors steering our journey with representation from large and small Nordic e commerce businesses, extensive experience from fashion and sustainability. Slide 20. This is my team. Where we during the quarter communicated that Stefan Svensson, currently working on net.net will join us this summer. So I'm very glad to have a full team on board. Thank you for your attention. We have now closed the quarter on our own, a quarter that provided positive signs from the relaunch of Nelly and growth. The new journey has just begun. Thank you. Thank you. Our first question comes from the line of Nicholas Frum from SEB. Please go ahead. Your line is open. Thanks, operator, and good morning to everybody. Thanks for the call. I have a few questions. I'll start maybe with 3 and perhaps I can come back later into the call. But to start somewhere, it would be very helpful to ask a little bit more about The, let's say, the new return policy and results, which are Quite impressive, obviously, having been reduced to slightly north of 30% of sales. And my question, I guess, is whether you think this is New and perhaps a bit more sustainable level for the rest of 2021 as well, I guess. Do you want me to take that, Cristina? Or Hey, you can go ahead. Yes. Hello, Niklas. Nice to meet you again. Well, we as I described, there are 3 main components to the reduction in return rates. The first one being the rather significant mix change, of course, where occasion dresses And sales of vacation where declined rather significantly during the quarter. We do While we do not believe that we will have as high a share of, let's say, party dressers going forward, I mean, in a more normal market, We do expect occasions and parties to increase. So that while we don't believe it will entirely revert that component, I think it's I'm sincerely hoping that we will see more parties on Acetius going forward than we're seeing now. And it is a natural behavior when it comes to that kind of wear that many of our young customers Order 3 dresses and return or return 2. So there is a high return rate on those categories. When it comes to the other two drivers for the return rates, both of them are sustainable, I. E, the active decisions to exit the non Nordic markets, that's a decision we made. And we're not going in back in the same manner anytime soon. Thirdly, of course, the shutting down or Denying sales to certain customers who are unsustainable in their behavior when it comes to product returns. That is also sustainable. I can add to that, because that is not a once off, the last explanation. It's part of our ongoing improvement process when it comes to returns and a continuous review where there are customers added and removed to the list, where we learn how to improve that process continuously. Thanks. This is very helpful. Thanks a lot. My second question is still on Q1 results. And I'd like to I think you offered quite a good explanation, but if we can get some more color and detail of the actual gross margin bridge, which I think deserves some credit, almost up 3% year on year. The way I understand It's mainly from lowered markdowns because we have a cleaner inventory in the quarter. But what about FX effects And the possibly negative, I suppose, impact on gross margins from a lower share of private label sales, etcetera. Yes. You actually sum up the well, The presentation I gave a couple of minutes a few minutes ago. It's the main and one clear The main explanation for the improvement is, as we stated, let's say, a more fresh inventory. And so that's the main explanation. And but all else, if we disregard That effect, we see that we were still able to maintain a sound gross margin In spite of that negative that you just mentioned, I. E, the significant decrease in location wear, Which is a clear negative. FX does play Smaller parts, so I mean but it's not worth mentioning in this regard. So it's mainly those two factors. Yes. Thanks for clearing that out. And third and final question in this round at least. I have to say though, I think the cost guidance for the new DC is a key item, but I'm sure we can come back to that. But My third question is actually on working capital in the quarter. So basically, you managed to take down inventories by more or €80,000,000 from a year ago to 14.6 percent of sales, right? But the working capital and the cash flow, Even though the negative impact has been reduced year on year, it's still down €30,000,000 So my question is really what is driving the working capital change in this quarter in addition to the change in inventories, please. Yes. When looking at the well, as I mentioned a few minutes ago, firstly, Q1 is typically a cash negative quarter. Then if we compare with Q1 2020, that was a rather It was a rather well, it's difficult to use the term extreme, but it was a rather significant working capital buildup in Q1 last year. So We do improve from that level. And the main one of the main drivers to It being so much less is the high inventory turnover. So Q1 is a typically a cash degenerative quarter for us as we're building up ahead of the spring season sales. And then the blow in this quarter is mitigated by the higher inventory turnover. I don't know if that I mean it addresses your question, but Well, in a way it does. But I guess because at the end of the day, it's a quite clear improvement year on year, so that's all fine. I guess my Possibly a more detailed question would be, have you changed any payment terms or anything in the effect of working capital? No. And let me add to that also. I mean, the inventory build on effect and the positive cash flow effect of that Came primarily in Q2 2020 and also Q3 2020. So the main Since then though, we're happy to see that we're continuing at that minus 30% level roughly. So the main positive cash flow boost from that inventory build down that you referred to Came in Q2 and Q3 2020. Now we're happy to see that we can maintain that low inventory and still actually increase sales in this quarter compared to last year. I think to add on that, it's I presented that last quarter as well. It's a key KPI for us because of the positive effects we can see financially, but it also It gives the entire organization a focus on what is relevant for our target group here and now, which gives us more positive commercial effects. One of them is also how we manage the total assortment, automatic replenishment versus new products coming in that is also delivering positive effects. Right, right. Thank you so much. And perhaps if possible, I can come back into the call later on. I have some more questions. Thank you. Please do. Thank you. Thank you. Thank you. We have no more questions from the line. We have one more question from David from EQS Management. Please go ahead. Your line is open. Hello. Thanks for the presentation. I have a question on your growth rate. I'm looking at the numbers of orders in Nordic, which came down a little. And the line below that was the average Order value in Nordic also came down a little. Can you talk a little bit more, where did the net revenue growth come from? You want to start off, John, by defining your net revenue? Yes. So Net revenue is the main net in net revenue is, of course, net of returns. So If you say gross revenues and net revenues mainly through the return rates. And the 2 main drivers To the net revenue growth, the growth in non occasionwear, I. E, everyday wear and sportswear. And secondly, also the significant return rate improvement. So a 7 percentage point improvement. So less returns drive net revenue. So that was the main And those 2 were the main contributors to the growth in spite of the drag we had from location wear and non Nordic sales. Yes. Does that answer your question? That makes sense. Yes, yes, very good. And then to follow, well, another question on your marketing spend. You mentioned higher performance marketing costs. Could you talk a little bit more about where are you going to focus in marketing going forward? And How do you where do you have edge in marketing? It's not an easy job to do profitable marketing. No, it's not an easy job. It's the core of what we're trying what we're aiming for is to further strengthen our brand. So, if we start off with performance marketing, there are 2 reasons, 2 main reasons why we see an inflation in the quarter. The first one being the core of our brand in occasionwear and party. Then of course, Since because of the relaunch of the brand, we're investing in other categories and other occasions, So that drive costs. The other is inflation in the market, where I also believe that we have further jobs to be done. Does that answer the question? Okay. Thank you. Yes. Okay. It seems like we have no more questions from the ball. I will hand it back to our speakers. Sorry, we have one follow-up question from Nicholas Brown. Please go ahead. Your line is open. Thanks, operator, again. So I just wanted to come back to the guidance on Costs for the new DC and operating 2 DCs simultaneously throughout a few quarters coming up. And I guess You've been quite clear also saying what these costs are. So that was actually one of my questions already being answered. But can I ask you, will these €35,000,000 to €45,000,000 simply be added to the new cost line, which is fulfillment and distribution costs In your new P and L disclosure? Yes. I am thinking out loud here, but I think they entirely will end up on those lines. I'm thinking outgoing I mean double outgoing freight for instance is definitely in there and then the double staffing will definitely be in there. So the I think the answer is yes. Full stop. Yes, that's good. And just a clarification, I mean, you also kindly provide us with CapEx guidance summing up to CHF 110,000,000, Out of which the SEK84 million for the DC, but that would be Amortized over the 10 year period, right? So it's not SEK 84,000,000 in 2021, is it? Exactly. We have to pay upfront. No. We wanted to be clear on the total amount. So the total amount is CHF 1.10. The largest component of that, the 84,000,000 is in essence a lease that is In essence, a straight lease over 10 years through technically then a rent supplement. As we do write in the report, though, we have an option. So we can refinance that if we want to ahead of that, but we're not paying the full amount upfront. Thanks again. And just final question, just Generally speaking, no guidance, but I was just thinking about the possibility to drive Sales growth in your core Nordic markets by increasing marketing spend or customer acquisition costs in 2021 versus the possibility to actually maintain the margin gains elsewhere and actually lift the EBIT margin for the group in this year. Do you have any thoughts on What you would rather choose, where you think you will go in that perspective? What's more important right here and now, you think? Do you want to should I take that, Kristina? Or do you want to talk? I can Start off and you can build on it. The core in our strategy is profitability. And I think if the world was so easy that you can choose the 1 or the other, That would also be an easier job for us. So I think, As I mentioned, I think we have a job to be done when it comes to improving efficiency in performance marketing. I can stop there and you can build on it, Jan. If the question is how do you prioritize between growth and profitability, like Kristina said, It's the latter. And I think the we saw signs of it in Q4. We're seeing signs of it now That the decisions made during 2020 and the strategy we've laid is starting to bear fruit. And that is we've I mean, the decision to exit the non Nordic markets is also In line with that strategy to prioritize profitability ahead of growth. So To a certain degree, they, of course, go hand in hand, but to we are prioritizing profitability Going forward. On that note and also coupled to your earlier question, the One of the main drivers for future profitability is, of course, the warehouse investment. And as we indicated, the €35,000,000 annual cost saving is what we're targeting. And if this all goes well, we should be we should see the first signs of that in Q4. According to the current planning, we're only running 1 warehouse and that's the new one in Q4 2021. That's very helpful, very helpful. Thank you so much for taking all these questions. Thank you, Niklas. A pleasure. Thank you. Thank you. We have no more questions from the line. I will hand it back to our speakers Scott, any closing comments? Well, I think thank you so much for your attention and for Good questions. We will finish this call and go out and focus on Q2. Thank you. Thank you very much.