Well, thank you. Good morning. Warm welcome to this call where we are to present the Nelly Group results from Q1 2021. My name is Kristina Lukes, CEO for Nelly Group, and I'm hosting this call together with our newly appointed CFO for the group, previously CFO for Nelly, John Afzelius. Looking forward to having your attention when we share results from Q1 2021. Slide one 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 Nelly. John, Group CFO, will thereafter 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. One year on the job for me at Nelly, and more specifically since 6th of November 2020 as a separate entity, we are building a company with the ambition to generate sustainable, attractive returns. We believe that a fundament in that journey is our loved community-powered brand, enabling high frequency, low cost of sales, and appealing margins. Slide two. 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. Nelly.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 Nelly, embrace that in our brand manifesto, aiming to cater for her needs in feeling fab. We promise always celebrate the fab you. Slide three, specifically the quarter results then. Here are some top-line highlights. We are backing growth, 5.5% growth in the Nordics in local currencies. A SEK 27 million operating result improvement in a seasonally weak quarter. It's an improvement based on results from several of our relaunch initiatives.
Third 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&L. A fourth highlight is that the building of our new operational platform progresses well. The new automated high-capacity warehouse in Borås is the operational platform for Nelly'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 million. Handing over to John and slide five.
Thank you, Kristina. Let me now guide you through the income statement for Q1. After three consecutive quarters of negative net revenue development, net revenue increased by 3.0%. As you mentioned, we grew 5.5% in local currencies, a slight currency headwind in the quarter. The main drivers behind the growth were primarily healthy growth in everyday fashion and lower returns. 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 Nelly. The significant 7 percentage points improvement in return rate is mainly explained by three 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.
We saw lower sales in higher return rate non-Nordic markets. We should remember that we did decide in early 2020 to discontinue active marketing towards non-Nordic markets, also to halt the translation services of non-Nordic sites to their local languages. We see effects of this also going into Q1. We made the decision in 2020 to deny sales to certain customer cohorts with unsustainable product return behavior. This was implemented in Q2 2020. We've seen positive effects of that through 2020 and going into 2021 as well. Further revenue growth was hampered by primarily two factors. Nelly saw significantly lower sales of occasion wear during the quarter, as parties and occasions, for natural reasons, were scarce. Going into the pandemic, we should remember that party dresses was Nelly's single largest category, a category that declined rather significantly during the quarter.
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 increased by SEK 13 million year-over-year. The main driver behind this increase is 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. 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 occasion wear. We should bear in mind that occasion wear has historically had a large share of high margin own brand products, and the share of own brand products consequently declined in the quarter.
If we turn our attention to the cost side of things, in general, we can say that Nelly's cost base developed favorably during the quarter. 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 million 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 million improvement in admin and other operating costs. This was mainly due to lower costs across the Nelly business, but also due to the dismantling of the Stockholm-based central functions which we are now assuming in Borås and integrating into the Borås-based administration team, which results in cost improvements.
In summary, EBIT improved by SEK 27 million year-over-year. While an operating loss of SEK 15 million may not seem like something to be happy about, it should be pointed out that Nelly typically is loss-making in the first quarter, as the Q1 is the smallest quarter measured by sales. If we move on to slide six, I would like to highlight a few other topics from our Q1 report. 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 Borås. We're now preparing intensely to push the start button later in Q2. Installation work, recruitment, testing, education, et cetera, is on the top of the agenda for the operations team in Nelly 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. In monetary terms, we are targeting an annual cost saving of SEK 35 million. This is based on 2020 volumes. As we have communicated previously, the CapEx tickets for the automation is SEK 84 million. This is financed through a rent supplement over 10 years. On top of that, we foresee CapEx of SEK 26 million. The 84 + 26 adds up to the 110 that you see on the slide. These 26 relate mainly to storage shelves, ventilation, network installations, IT equipment, et cetera, that is needed to operate the warehouse. We're expecting first deliveries from the new warehouse in early Q3, so in effect, we will operate two warehouses during Q2 and Q3.
We estimate that the cost effect of this will be in the range of SEK 35 million-SEK 45 million. What type of costs are those? Well, it typically includes double staffing for two warehouses, a degree of double freight costs as we will ship from two warehouses. Some of the orders will actually be shipped from two warehouses, also costs for decommissioning the old site, et cetera. 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, inventory fell by 28% compared to 31st of March 2020.
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. We believe that this illustrates that Nelly has been able to increase sales and in spite of an almost 30% lower inventory. We note that inventory turnover on the new in-season stock was strong in Q1, almost doubling from a year earlier. All this is a result of a 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 the quarter amounted to SEK 185 million, 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 in-deliveries ahead of the spring season sales. The high inventory turnover in the quarter, coupled with low returns from Q4, made Q1 less cash draining than usual. In summary, we have a solid cash position, and apart from government tax credits, we have no interest-bearing debt.
Kristina, with that, I'd like to hand over to you again.
Thank you. Over to the last part of the presentation, where we will share a short update of the company presentation, starting with a film.
[Presentation]
Moving to slide eight. Nelly is today a leading Nordic fashion experience situated in Borås. 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 AutoStore. 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 hair styling, combinations, accessories, makeup. We supply and offer a mix of own brands, must-have brands, and cooperations or collabs. 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 Nelly Group also consists of the brand NLY Man, targeting the growing online men's segment. Slide nine then.
Nelly's current core today is the core in how we want to utilize our platform and expand our business further. Nelly 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 Zalando since around two years back. NLY Man, 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 - 25-year-old fashionistas 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 1.3 million followers on social media, 1.2 million customers placing 2.7 million 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 market on emerging trends and creates 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. Who is our target group? Well, it's fashionistas or women 15 - 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, intimates. Moving to slide 13. Yesterday, Nelly 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 type of target group, but at three different occasions. Everyday fab, so going to school or going out with the garbage. Party fab. Well, that's after work on a Thursday night. Our current core, 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 believe can drive celebration of feeling fab of life every day in multiple situations with different product and services needs. Moving to slide 16. Nelly'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 sq m located in Borås.
A standardized automation system delivered from AutoStore with room for further growth, but also with the ambition to create cost efficiency, faster deliveries to our customers, and an improved environmental footprint. Moving to slide 17. We are relaunching Nelly, and we are building a sound and sustainable Nelly 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 three 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 Managemen t. Respect the planet as a second area. We are, as we speak, conducting an extensive analysis together with STICA, where we've been active members from the start.
In 2020, our reduction of emission by 46% in own operations is a good step on our path. The analysis will guide us further into ambitions, targets, and plans. Third 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 NetOnNet, will join us this summer. 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. If you do wish to ask a question, please press zero one on your telephone keypad. If you do wish to withdraw your question, you can do so by pressing zero two on your telephone keypad. Our first question comes from the line of Nicklas Fhärm from SEB. Please go ahead. Your line is open.
Thanks, operator. Good morning to everybody. Thanks for the call. I have a few questions. I'll start maybe with three, and perhaps I can come back later into the call. 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. My question, I guess, is whether you think this is a new and perhaps a bit more sustainable level for the rest of 2021 as well, I guess.
Do you want me to take that, Kristina, or?
Hey, you can go ahead.
Yes. Hello, Nicklas. Nice to meet you again. Well, as I described, there are three 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 occasion wear declined rather significantly during the quarter. We do not believe that we will have as high a share of, let's say, party dresses going forward, in a more normal market, we do expect occasions and parties to increase. While we don't believe it will entirely revert that component, I'm sincerely hoping that we will see more parties and occasions going forward than we're seeing now. It is a natural behavior when it comes to that kind of wear that many of our young customers order three dresses and return or return two. There is a high return rate on those categories.
When it comes to the other two drivers for the return rate, 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 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 think you offered quite a good explanation, but if we can get some more color and detail on the actual gross margin bridge, which I think deserves some credit, almost up 3% year-on-year. The way I understand it is that it's mainly from lowered markdowns because you have a cleaner inventory in the quarter. What about FX effects and the possibly negative, I suppose, impact on gross margins from a lower share of private label sales, et cetera?
Yes, you actually sum up well the presentation I gave a few minutes ago. The main explanation for the improvement is, as we stated, let's say a more fresh inventory. That's the main explanation. 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 occasion wear, which is a clear negative. FX does play a smaller part, but it's not worth mentioning in this regard. It's mainly those two factors.
Yeah. Thanks for clearing that out. 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. My third question is actually on working capital in the quarter. Basically you managed to take down inventories by more or less SEK 80 million from a year ago.
Yes
to 14.6% of sales, right? The working capital in the cash flow, even though the negative impact has been reduced year-on-year, it's still down SEK 30 million. My question is really what is driving the working capital change in this quarter in addition to the change in inventories, please?
Yes. As I mentioned a few minutes ago, firstly, Q1 is typically a cash negative quarter. If we compare with Q1 2020, 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. We do improve from that level and one of the main drivers to it being so much less is the high inventory turnover. Q1 is typically a cash-generative quarter for us as we're building up ahead of the spring season sales. The blow in this quarter is mitigated by the high inventory turnover. I don't know if 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-over-year, so that's all fine. I guess my possibly more detailed question would be, have you changed any payment terms or anything?
No
affecting working capital?
No, let me add to that also. The inventory build down effect and the positive cash flow effect of that came primarily in Q2 2020 and also Q3 2020. Since then, though, we're happy to see that we're continuing at that - 30% level, roughly. 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, 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 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. Thank you so much. 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. If you do wish to ask a question, please press 01 on telephone keypad now. We have one more question from David from EQS Group.
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, which 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.
Yes
Net revenue?
Please. Net revenue is the main net in net revenue is, of course, net of returns. If you say gross revenues and net revenues differ mainly through the return rate. The two main drivers to the net revenue growth were the growth in non-occasion wear, i.e., everyday wear and sportswear, and secondly, also the significant return rate improvement. A seven percentage point improvement. Less returns drive net revenue. Those two were the main contributors to the growth in spite of the drag we had from occasion wear and non-Nordic sales.
Yeah.
Does that answer your question?
That makes sense. Yeah. Very good. Then to follow, well, another question on your marketing spend. You mentioned the higher performance marketing costs. Could you talk a little bit more about where are you going to focus in marketing going forward, and where do you have edge in marketing as 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 aiming for is to further strengthen our brand. If we start off with performance marketing, there are two main reasons why we see an inflation in the quarter. The first one being the core of our brand in occasion wear and party. Of course, because of the relaunch of the brand, we're investing in other categories and other occasions, so that drives costs. The other is inflation in the market, where I also believe that we have further job to be done. Does that answer the question?
Thank you.
Yeah.
Okay. Seems like we have no more questions from the board. I will hand it back to our speakers. Oh, sorry. We have one follow-up question from Nicklas Fhärm. Please go ahead. Your line is open.
Thanks, operator, again. I just wanted to come back to the guidance on the costs for the new DC and operating two DCs simultaneously throughout a few quarters coming up. I guess you've been quite clear also saying what these costs are, so that was actually one of my questions already being answered. Can I ask you, will these SEK 35 million-SEK 45 million simply be added to the new cost line, which is fulfillment and distribution costs in your new P&L disclosure?
Yes. I'm thinking out loud here, but I think they entirely will end up on those lines. I'm thinking double outgoing freight, for instance, is definitely in there. The double staffing will definitely be in there. I think the answer is yes.
Full stop.
Yep. That's good. Just a clarification, you also kindly provide us with CapEx guidance summing up to SEK 110 million.
Out of which the SEK 84 million for the DC, but that will be amortized over the 10-year period. Right? It's not SEK 84 million in 2021, is it?
Exactly. I mean.
Do you have to pay up front?
No. We wanted to be clear on the total amount. The total amount is SEK 110. The largest component of that, the SEK 84, 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. We're not paying the full amount upfront.
Great. Thanks again. Just a 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 or where you think you will go in that perspective? What's more important right here and now, you think?
Should I take that, Kristina, or do you want to start?
Well, I can start off, and you can build on it. I mean, at the core in our strategy is profitability. I think if the world was so easy that you can choose the one or the other, that would also be an easier job for us. 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, John.
If the question is how do you prioritize between growth and profitability, like Kristina said, it's the latter. I think 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. That is the decision to exit the non-Nordic markets is also in line with that strategy to prioritize profitability ahead of growth. To a certain degree, they of course go hand in hand, but we are prioritizing profitability going forward. On that note, and also coupled to your earlier question, one of the main drivers for future profitability is of course the warehouse investment. As we indicated, the SEK 35 million annual cost saving is what we're targeting. If this all goes well, we should see the first signs of that in Q4.
According to the current planning, we're only running one warehouse, and that's the new one in Q4 2021.
That's very helpful. Thank you so much for taking all these questions.
Thank you, Nicklas. A pleasure.
Thank you.
Thank you. We have no more questions from the line. I will hand it back to our speakers for any closing comments.
Well, I 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.