Welcome to Nelly Group 2023 full year results. Today, I am pleased to present CEO Helena Karlinder-Östlundh and Interim CFO Ola Wahlström. After the presentation, there will be a question and answer session. Participants are able to ask questions in written form on the audiocast page. Now, I will hand over to Helena Karlinder-Östlundh. Please go ahead.
Thank you very much, and a warm welcome to the 2023 fourth quarter call for Nelly Group. My name is Helena Karlinder-Östlundh, and I'm hosting today's call together with Ola Wahlström, Interim CFO for Nelly Group. Let's, as usual, begin with a brief overview of what we will cover in today's presentation. We'll start with a short introduction to the Nelly business and our customer community. This will be followed by an update on the key areas that continue to form the basis of our transformation journey towards long-term profitability. Ola will then go through the operational and financial summary for the fourth quarter before we open up for your questions. We have received some questions in advance, but you can, as usual, also submit questions in writing throughout today's presentation.
Let me begin by providing you with a brief introduction to the Nelly business and our customer community. Nelly was founded in Borås in 2004, and 20 years later, this is still where we are headquartered today. At the time it was founded, and for many years thereafter, Nelly was considered a true pioneer in online fashion for young women in the Nordics. To this day, we continue to be primarily an e-commerce business, but we are delighted and proud to now also be operating a successful flagship store on Drottninggatan in Stockholm. Through the 1.9 million orders we fulfill every year, we help our 1 million active customers look, and more importantly, feel their best every day, whether they want to shine at a party or just feel confident as they go about their daily life.
We have built a Nordic community of 2.5 million amazing Nelly members who love fashion as much as we do, and we have 1.2 million followers across our social media platforms. Now, let's look at the fourth quarter of 2023 in more detail and also share a few comments on the full year 2023. Pleasingly, we delivered our third profitable quarter in a row with a clear gross margin improvement year-on-year. We furthermore turned an operating profit for the whole of 2023, despite a weak first quarter and lower net revenues across the year. We're pleased about this result, but we are also clear that much further work remains to secure long-term profitability, not least in turning around the continued negative trend in our traffic and conversion.
Since we started our transformation journey 18 months ago, we have continuously emphasized that the strength of our assortment is fundamental to becoming a healthy and profitable business. During the fourth quarter, we continued to optimize our assortment breadth and pleasingly sold significantly higher quantities of our top-performing products compared to last year. This is a clear sign that our strategy of creating a narrower and stronger product offering with more depth is working. Our autumn and winter collection had a strong start during the third quarter, and during the fourth quarter, we further solidified our position in several important everyday categories, such as pants, jackets, and jeans. These categories are core to our business, not least in an economic climate where customers are carefully considering every purchase and may be more willing to invest in everyday fashion that can be worn for many different occasions.
Through our continued work to refine our assortment, we delivered several important improvements in the quarter. Our Nelly brands performed very well and grew as a share of our total sales, both for the fourth quarter and on a full year basis for 2023. We achieved a higher sell-through of the autumn-winter collection compared to last year, and we also increased the full price share of our total sales. Our return rate for the fourth quarter was slightly higher compared to the same quarter last year, but we achieved an improvement for the year as a whole.
It is important to note here that our slightly increased return rate during the fourth quarter was due to lower B2B sales, which historically have come without a right to return items, and the product mix, which in this quarter, to a larger extent, consisted of categories where we have not yet taken as many mitigating actions. We have further potential to realize in the strength of our assortment going forward, but these are clear signs that we are on the right path and that our customers are willing to prioritize attractive and relevant products, even in this prudent economic climate. We also further refined our customer activation approach in the fourth quarter. As in previous quarters, we focused on closely managing our spend on paid traffic and building up our organic traffic.
We once again increased our organic share of total traffic in the quarter, and this will become even more important for us going forward as traditional paid marketing strategies are becoming both more expensive and less effective. In line with this approach, we were pleased to see that hyped product drops and capsule collection launches continued to be powerful activation methods for us as they generated a strong customer response and showed significant potential to further scale such activities in the future. Our flagship store on Drottninggatan in Stockholm has now been open for a full quarter, and it is evident to us that this is an invaluable gathering place where we can deepen the relationship with our customers.
The store has helped us evolve our customer understanding, and going forward, we see significant potential in using the physical space more to amplify our regular marketing activities and further grow the Nelly brand. To summarize, during the fourth quarter, we realized several important improvements, both in the efficiency and the effectiveness of our customer communication activities. However, it is also clear that we will need to intensify our focus on generating traffic going forward, both by continuing to optimize our spend in this area, but also, and most critically, by further strengthening the Nelly brand through the right assortment, attractive pricing, and unique collaborations with our external brand partners.
As we enter the next phase of our transformation journey, it is of the utmost importance that we sustain the many improvements that we have already achieved across the business, not least, the disciplined cost control that we have established over the last 18 months. We again benefited from this in the fourth quarter as we maintained a lower cost base, especially across our warehousing and distribution, our marketing activities, and our payroll. As we have highlighted in previous investor presentations, there are some areas where we have not yet seen as much progress, and where we now need to really accelerate our work. We were able to increase the focus on overhauling our core systems architecture already during the third quarter. During the fourth quarter, we took major steps in the right direction by entering into agreements with several new vendors and starting key projects.
This transition towards a new fit-for-purpose systems landscape will be completed over several phases, with this first phase firmly focused on enabling a smoother customer experience with more opportunity for personalization and inspiration. Driving major improvements in this area will be an important focus throughout 2024. To summarize the fourth quarter and the full year 2023, we continue our path towards long-term profitability and have achieved important milestones along the way. We are pleased that we have today been able to post not only our third positive quarter in a row, but also an operating profit for the full year. However, we are under no illusion that we are done. Much work remains, but we feel encouraged and energized as we enter into this next phase of our transformation.
I will now hand over to Ola Wahlström to take us through the operational and financial summary for the fourth quarter.
Thank you for the introduction, Helena. Please let me provide some more details on the quarter four financials. Net revenue declined by 22.1% in the fourth quarter. The main driver was lower sales before returns. Additional factors contributing to the decline in sales were: lower B2B sales and lower freight income. We saw a significant increase of the share of organic traffic, while paid traffic was lower, which correlates with the lower spending on performance marketing in the quarter. Campaign activity was high in the markets, and the competition for customers continued to be tough. The return rate increased with one percentage point to 33% during the fourth quarter, mainly due to lower B2B sales, which have no returns. For the full year, we saw a small decline in returns in total.
Gross margin increased by 8.9 percentage points to 50%. The main reasons for the higher gross margin were, firstly, higher margins due to our profitability focus, which entails more selective campaign activities, and secondly, lower freight and custom costs, as well as lower sales to outlet partners and higher share of own brands in the quarter. Currency effects slightly offset this effect. The higher gross margin, combined with the lower net revenue, only resulted in a SEK 8 million gross profit decrease in the quarter. Let's now take a look at the cost side of the P&L. In total, the fulfillment and distribution costs were SEK 12 million lower than last year, where we are happy to see that the costs have scaled with the lower volumes. The distribution costs fell largely in line with the lower volume shifts in the quarter.
Marketing costs amounted to SEK 26 million in the quarter, compared to SEK 41 million a year ago. The main reasons for the lower marketing spend were the lower volumes of paid traffic. In addition, more cost-efficient working methods and a reduction on PR and marketing activities also contributed. Admin and other operating costs were down SEK 7 million compared to last year. The decrease in costs was mainly driven by lower payroll costs. All in all, EBIT in the quarter was 26 million improvements compared to Q4 last year. And to summarize, while net revenue was markedly lower than last year, the significantly higher gross margin, in combination with the lower cost base, resulted in a SEK 24 million EBIT, which is an 8% operating margin. On, on the next slide, let's look at a few other aspects of the quarter we just closed.
A positive highlight is that the organic traffic to Nelly's site, Nelly sites increased. The lower spend on performance marketing has led to lower volumes of the paid traffic to our sites. In the Nordics, traffic declined by about 11%. The lower traffic, combined with a lower conversion rate, implied that the number of orders fell by 22% in the Nordics. Average order values saw a small increase to with 1% in the quarter. And the average order value is the product of the average number of items per parcel and the average value of these items. The increase is mainly driven by higher average item value. Our return rate for the quarter increased with one percentage point compared to 2022, and was mainly driven by lower B2B sales that had no returns. Moving on to our operating costs.
Operating costs were down by more than SEK 12 million in the quarter. We also have the full effects of earlier cost reduction programs in place. Much like in the second quarter, the fourth quarter is recognized by strong seasonal sales, where we build up our cash position. Net cash flow from the operations amounted to SEK 50 million, a decrease from last year's SEK 62 million. After now having been through the seasonal cash high point of the second half of the year, we build up inventory in the inventory through the course of Q1. Cash at the end of the quarter amounted to SEK 151 million, and did not use short-term credit lines at all. Finally, it's worth noting that Nelly has no interest-bearing debt, apart from government tax credits.
To summarize, we are pleased to see the effects of many of the changes performed during 2023 have had effect, and we enter 2024 as a healthier business in terms of profitability and cash position. Having been through the financials, I'd like to hand back over to Helena.
Thank you very much, Ola. This concludes today's presentation, but before we open for your questions, I would like to take the opportunity to thank our wonderful customers who continue to inspire us on our transformation journey and, of course, the amazing Nelly team. None of the achievements we've been able to celebrate so far would have been possible without their passion, dedication, and resilience. Thank you. Now, without further ado, let's open for questions.
Thank you for your questions. Let's get started with the first one. How does Nelly take advantage of the older customers, the persons that has become older than the targeted younger customer? This would be the perfect growth potential, to start sell clothes to 30-, 40-year-old persons. They are already in the customer data bank and easy to target. Are there any plans on starting collection for the 80s to 90s generation?
That's a great question. We actually see, both in our customer database and also in our store, that we have customers of all ages shopping with us, and we quite often actually hear that customers have been with us for a really long time, which always makes us very happy. It is, though, we feel important to be really clear on our target audience, and to have that target audience in mind, both when we make decisions about design and production, as well as, options for delivery methods and so on. So we do feel that is a strength. At the moment, we have no plans to change or extend our target audience, but you never know what could happen in the future.
Thank you. We are moving on to the next one. Regarding the second cost-saving program you did, yeah, you are at the same cost level of SEK 55 million on admin costs as in the second quarter. However, you now, you now have fewer employees. How is that you don't see a greater effect from the second cost savings program on that cost item?
Thank you for this question. First of all, let me just reiterate that we have realized both cost programs to full effect, which we're really, really pleased about. It's important to note that there are differences between quarters, so you can't really compare the second to the fourth quarter in that way. Then, secondly, I also want to note that we've also launched the Nelly store during the autumn, so that also has an effect, of course.
Thank you, Ola. We will be moving on. How would you compare your sales development in Q4, -22% year-on-year in a market context?
So, well, in short, we have a continued focus on profitability going forward and, where we will continue to develop our assortment, both with our own brand as well as external brands, and we believe that there is more to do, and we will continue to focus both on the top line and the profitability going forward. So I think this both relates to the sales development as well as questions that you might have in regards to our gross margin being such a lift this quarter.
Thank you, Ola. Moving on to the next question: What should you do to start driving growth again?
Yes, that is also a very good question. So we are really pleased about the result we've posted today, but of course, we have a lot more work to do to turn around the negative trend that we still see in our traffic and our conversion. And going forward, this will be a really important focus area for us. So of course, we will start to address this by further optimizing our spend on paid traffic, but we also have to really continue to invest in our Nelly brand. And the way we will do this is really by continuing to further develop our assortment. That is a key piece of the equation. And also always offering attractive pricing to price-sensitive customer out there.
We also see really great potential in deepening our relationships and our collaborations with our external brand partners going forward. Multi-pronged approach going forward to addressing this trend.
Thank you, Helena. We are moving on. The next questioner wants to ask us to explain the cost effects of rate of return. Would you comment, please, Ola?
So, returns generally have an effect throughout the whole business, so both in handling, in freight, and other things. So it's quite a complex area, and this is why it's such a big focus area, both what we've been doing during 2023, and it still continues to be a great focus area going forward, and great potential within.
Thank you very much. Moving on with another question, could you walk us through the Q4 gross margin bridge and put some numbers on the impact from the more important factors, please? For example, what was the negative impact from FX in Q4 gross margin year-on-year?
Okay, thank you. So, we are, of course, really happy to see an 8.9 percentage point increase in the gross margin, where we have a mix of the following effects. We have a positive impact from the lower campaign activity in the quarter, where we have seen a higher share of full price sales connected to our autumn and winter collection. Additionally, we have several additional positive effects, such as lower freight and costs and customs, and higher share of Nelly own brands. And in regards to the FX, so this is foremost connected to this, to sales, so not as much on the purchase side.
Thank you, Ola. This leads us to the final question that will conclude this Q&A session. You did a couple of interesting brand collaborations in 2023. Are there any collaborations planned for 2024?
Yes, absolutely. We actually saw during 2023 that our customer responded really well to those brand collaborations. We got a lot of excitement and hype around them. So we have a few more planned for 2024 already, that we're really excited about. And, you know, we love our brands, our customers love our brands, so yes, lots more potential and opportunity there. Great, thank you very much. Those were all the questions for today. Thank you.
Thank you.
Thank you!