Welcome to the Pierce Group Q4 2023 report. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now, I will hand the conference over to the speaker, CEO Göran Dahlin, CFO Fredrik Ideström. Please go ahead.
Good morning. This is Göran Dahlin, CEO of Pierce Group, and with me today is Fredrik Ideström, our CFO. Going to the Q4 comments, during the fourth quarter, we continued to face challenging market conditions, and our assessment is that the online market continued to decline in Q4, similar to previous quarters, as an effect of the macroeconomic headwinds. We have continued to increase our prices year-over-year and are prioritizing margin improvement over order volume per se, due to our solid cash situation. In addition, we revised our strategy for the Black Week period to prioritize margin over volume, and together with the soft market, these factors led to negative revenue development versus the same period of 10% or 15% in local currencies.
Due to our focus to prioritize margins, gross margin increased versus last year with 6.9 percentage points and with 0.6 percentage points versus previous quarter, excluding changes of for obsolescence assumptions. Adjusted EBIT weakened slightly from SEK -23 million in Q4 2022 to SEK -24 million in Q4 2023. However, we had quite large effects from unusual items in Q4 2023. These are goodwill impairments, trademark amortizations, and changes in obsolescence assumptions. Excluding these, adjusted EBIT improved to SEK -11 million. While we acknowledge that the negative result is never satisfactory, SEK -11 million, excluding the unusual items, is an improvement from the SEK -23 million reported as adjusted EBIT in the fourth quarter of the previous period.
We have a solid cash situation with 222 million SEK, primarily driven by a conservative approach for purchases to ensure strong liquidity position in an uncertain market. Looking forward, we see a prevailing weak consumer demand. The market outlook remains uncertain, but we anticipate a modest improvement in consumer sentiment over the course of 2024. We will continue with our conservative approach in terms of purchasing and inventory to safeguard our strong liquidity position. With that, let's move to page 5, please. Looking at the KPIs with the Trustpilot scores to the left, these we use to track customer satisfaction. They continue to be on a high level across Europe.
We continue to drive improvement in the customer experience, such as, with that, we have continued with the free returns that we launched last year, and we have also implemented a more generous approach to claims in our customer care department. We believe this should influence our customer satisfaction and retention positively mid to long term. To the right is our private brand development. Our private brand products continue to show good resilience in the challenging markets. In Q4, our private brand share was 42%, compared with 38% in Q4 last year. This is despite the price increases that we have applied to our private brand range, and it shows that we have a compelling value for proposition with our private label. Page six, please.
As you can see here from the chart on the left, the active customer base is down versus last year, which is mainly due to less demand and less activity in the market. On the right-hand side, you see the average order value. It continues to increase. The number of orders last twelve months is down in line with the reduced revenue levels. We have grown the average order value primarily due to price increases. Now I will hand over to Fredrik. Page eight, please.
Thank you, Göran. Good morning. This is Fredrik Ideström, and I'm the CFO of Pierce Group. During the fourth quarter, our revenues declined with 10% or 15% in local currencies. We estimate the market, the development to be in line with the total online market, combined with the effects of our changed Black Week approach, and we see significant variances between different countries in Europe. During 2023, we are focused on improving margins, and in the quarter, our prices to customers has increased versus the same period last year. The changed focus can be seen in the profit after variable cost that has increased versus last year with nearly seven percentage points or nearly six percentage points if we exclude the effect from the changed assumptions for slow-moving inventories.
Looking at the gross margin trend to the left, we see that our gross margin continues to increase compared with previous periods. The positive development in 2023 was mainly driven by price increases and lower shipping costs. In Q4, prices declined slightly versus the previous quarter, as Q4 is the main campaign season. Shipping costs in relation to revenue continued to decrease and is almost 2 percentage points lower than 1 year ago. However, with a flattened trend in Q4 versus Q3, this is partly due to our focus of selling off overstocked inventory with higher associated freight costs. We anticipate, all other things equal, a gradual normalization of freight costs, albeit at a moderate rate. There is a risk for potential increases in the coming quarters due to the ongoing situations in the Red Sea region.
Adjusted EBIT weakened slightly from -23 million SEK in Q4 2022 to -24 million SEK in Q4 2023, and from -53 to -58 million SEK for the full year. Adjusted EBIT in Q4 was however impacted by three unusual items compared to last year, as Göran mentioned in the summary. Number one, the other segment, which mainly includes our snowmobile business and also included our store, was impaired as part of the annual impairment test, where the value was 17 million SEK lower than the carrying value. The second one, amortization of the trademarks of the discontinued brand we announced in Q3. The effect in Q4 was 1 million SEK, and we will continue to amortize these trademarks until the second quarter of 2026. Number three was the changed assumptions in our model for calculating provisions for obsolete stock.
This change resulted in a significantly increased provision for slow-moving inventories of approximately SEK 44 million in Q3, with a net effect of SEK 39 million for the full year 2023. So in Q4, we had a positive impact of SEK 5 million. To the left, on the side, we have tried to illustrate the Adjusted EBIT, also excluding these three effects, to better explain the underlying development. Adjusted EBIT, excluding these unusual items, was -SEK 11 million for Q4 and -SEK 28 million for the full year, thus an improvement versus the same period last year. Net working capital decreased with SEK 72 million in the quarter and with SEK 139 million compared to one year ago. Excluding the adjusted inventory provision and provisions related to the reorganization announced in Q3, the net working capital decreased with SEK 62 million during the quarter.
Due to the increased provision for slow-moving stock announced with the Q3 result, the reorganization and the impairment of the other segment, the equity decreased during the quarter to SEK 627 million. Our financial position, however, remains solid, with over SEK 220 million in net cash at the end of the period. I will now hand over to Göran to finalize the presentation.
Yes. In Q3, we did a recalibration of our strategy, with a vision to become the unquestionable pure play online retailer in Europe of gear, accessories, and parts for motorcycle riding. This vision is supported by seven strategic pillars. To achieve absolute leadership in the off-road segments and profitable growth in the on-road segment, to have the highest customer loyalty in the industry, to create a simple and powerful go-to-market approach, to be the best in the industry when it comes to pricing and purchasing, to have market-leading value for money on brands, to have a modern and scalable tech stack, to have a lean, fast, and agile organization. Achieving the position that we state in these seven pillars is not a quick fix. It is a significant endeavor, where we need to improve a lot in our operations.
In Q4, we focused on the last point, a lean, fast, and agile organization. I would say that we have achieved this now, and that we have a completely new operating model and new culture in the company. We have taken out more than 50 FTEs in Q4, focusing primarily on management, on managers' positions. And now we are in the right state to improve on the other six points. So 2024 will be a year of transformation, where we lay the foundation for Pierce being a prosperous company for many years ahead. Thank you.
We can open up for questions.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Niklas Ekman from Carnegie. Please go ahead.
Just a couple of questions from my end. Firstly, when you talk about a prevailing weak consumer demand, can you quantify this in any way, and/or can you elaborate a little bit on your view on the sales outlook for 2024? Because you're now, on the one hand, still a very weak market, but you're also carrying very easy comparisons. Are you seeing any signs of turnaround? Do you have any optimism about seeing a return to sales growth in, any of the coming quarters now in 2024?
As we said, previously, we see a continued weak demand. We expect, in the beginning of the year, we expect this to turn around somewhere during 2024. However, the market outlook is very uncertain, so it's very difficult to say when this will be.
Okay, fair enough. Second question, this SEK 17 million goodwill write-down in the other segment, what exactly was this related to?
... The other segment contains our snowmobile business, and it also contained the store that we closed down as part of our reorganization last year. So we did an updated impairment test as we do annually, and the outcome of that test, where one factor, for instance, is the WACC, was that the value was below the carrying value, and thus we did an impairment of SEK 7 million here at the end of Q4.
Okay, but the store, I guess, was a small part of that, so it was mainly-
The store was small.
related to the snowmobile?
Yes. The store was a small part.
Okay. And, and, and thirdly, kind of coming back to the first question, if, if we do see a continued weak market in at least the first half of 2024, will the SEK 25 million of cost reductions, will that be sufficient for you to reach break even in 2024, do you think? And, and that's particularly considering that even, even adjusting for all the one-offs, you're still... I think you talked about losses of SEK 28 million in 2023. So it- will the SEK 25 million in cost reductions, will that be sufficient, do you think?
Well, I would say that we don't give a prognosis of what we think our result will be in 2024. What we can say is that we have a clear plan for the future. We have taken out a lot of costs, as you mentioned, and that we have a leaner, more faster, more agile organization. I'm satisfied with the situation we have in terms of the organization now. We have how should I say this? We have good hopes for the future, but again, 2024 will be very hard work for us to change a lot of things in the company to achieve a platform, a more prosperous platform.
Sounds good. Finally, maybe just a question on the inventory reduction. You've reduced inventory quite significantly now in Q3 and Q4. Do you have sufficient inventory now to meet the peak season? Or, do you expect a significant increase in inventory now in Q1 and Q2?
This is something that we're working on very, very diligently to improve the health of the stock, to reduce slow movers, to reduce obsolete products, et cetera, and being able to without increasing the total stock value to have a more attractive inventory, be poised for the upcoming high season. Our judgment today is that we have a very—we have a very good availability today, and our judgment is that we're well set for the high season.
Sounds good. Thank you so much for taking my questions, and best of luck in the coming quarters.
Thank you. Thanks.
The next question comes from Daniel Ovin from Nordea. Please go ahead.
Yes, good morning, Göran and Fredrik, and thank you for taking my questions. So the first questions are on the two cost lines, the admin cost and the sales and distribution cost. So starting with the adjusted admin costs, which were up quite a lot, SEK 61 million versus SEK 47 million, and right here, that is an adjusted number still, but I don't know the increase. Was there still some amortization cost in that, or is there any one-offs in that number? Maybe you can elaborate a little bit on the increase on that line first. Thank you.
So, Daniel, just could you please repeat the numbers you referred to, just to make it some 100% sure what you-
Yeah, it seems in the report, it says that the adjusted admin costs were SEK 61 million versus SEK 47 million last year. And that seems to have been then adjusted for this one-off you have. But I don't know if there is still a write-down in that in that cost line or not. Or is there any other one-off cost in that SEK 61 million?
No, I don't think there is. So, the administration costs for Q4 were SEK 55 million in 2022 and SEK 76 million in 2023. And that was the unadjusted. And then we had some extraordinary items in 2022, which I recall relate to the CEO transition that year. And then this year, the main extraordinary item related to the reorganization, which is also part of the administration cost.
Okay. All right. Okay, and on the sales and distribution costs, which were unchanged year-over-year then, and you still have the sales down 10%. And as I remember it, there's quite a part of that cost that is still variable. So what's the reason why this cost is still up while sales is down a lot? Is there any cost line here that has been moving up, some inflation, wages, et cetera? Maybe you can elaborate a bit around that.
I mean, so we are affected by inflation and also by the, the currencies, where I believe the, the Polish zloty has strengthened versus the SEK. So both of them are-
Yeah, okay. So it's, FX and inflation, basically?
Yes.
Yeah. All right. Okay, and just to clarify also on the gross margin, which was up quite a lot here, and as I understand, the shipping cost gains here worth 1.8 percentage points. But you also had this inventory write down end of 2023. So can you just repeat if you—I don't know if you mentioned it, but how much was the gross margin held by that inventory write down? Do you quantify that number, or is it purely price increases that brings up the gross margin, the other 5%?
Yeah, so the other part. So going back, the effect, you could say, if you compare quarter-over-quarter, was 6.9 percentage points, Q4 2022 to Q4 2023 on gross margin. And
Yeah
... Excluding the and, and we changed the assumptions on the inventory, and if we kind of compare with the old assumptions, so to say, the effect in Q4 was, let's see, point 0.9 percentage points, positive on the gross margin. So that is-
Okay
on slide 9 in the presentation. I don't know if you see. So on the left-hand side, we have the, kind of, solid line shows the reported gross margin, and the dotted line shows the, kind of, if we exclude the changed assumptions on the inventory provision.
Yeah. Okay. Okay, good. All right, and then just finally, my question on your strategy here, because it seems like you have prioritized here to preserve the gross margin and then also the cash flow. But then that has had a negative impact on sales, and also an Adjusted EBIT, I guess, from a bit of a costly leverage also. So how do you think here going forward, is this a strategy you will continue, or do you see now that you are sufficiently confident in your cash situation? Or how do you think... I mean, will you continue to prioritize the way you have, or do you think that that's gonna change anyhow in 2024? That's my last question.
We will continue to prioritize or balance between sales and cash. We have a very solid cash situation, so we have the room to be more flexible, so to speak, when it comes to pricing. And we need to meet the demand in the market on a daily basis. So our aim is, long term, to increase our margins back to levels that we had before the crisis. And we think that's doable. At the moment, the overstock situation in the market seems to be... Our assessment is that it's still pretty high, and that influences our possibilities to increase the margins further.
Yeah. Okay. Perfect. That's all my questions. Thank you very much.
Thank you. Thank you.
The next question comes from Eric Thysell from Garn Invest. Please go ahead.
Good day, everyone. Thank you for taking my question. I have two questions, starting with the first one. Regarding the underlying markets, you're saying that Pierce is performing in line with the negative trend. Could you please comment more on the situation for the different players, those with primarily physical stores, online, and for the different countries? Who are well-positioned in this negative market and who are not? Thank you.
Sorry, could you have any interruption?
Yeah.
Could you please repeat? Sorry for that. Could you please repeat the question?
Oh, okay.
Sorry.
Regarding the underlying market, you're saying that Pierce Group is performing in line with the current negative trend. Could you please elaborate more on the situation for your peers, those with primarily physical stores, online, the different countries, who are well-positioned in this market and who are not?
Yeah, we can say that from our side, we think that we have a good position in this market because we are the biggest online retailer, we are the most Pan-European retailer, and we have a very well-functioning central warehouse in Northern Poland that reaches large part of the European market, in large markets. We also have a very, very strong position in the off-road segment, where we have a lot left to do. Then, who of our competitors that is well-poised and who is not, it's difficult to comment on individual competitors. In general, we think that the online shift will come back after having... Yeah, the whole market has been declining, we think both online and offline.
We think that the market will bounce back and that the online shift also will resume. So, yeah, I think that is as much as we can say, I think, regarding this.
Well, thank you. My next question is regarding customer loyalty, one of your-
Mm-hmm
- strategic pillars.
Yeah.
What are actions taken with regards to this strategic priority?
... Mm-hmm. A couple of them are, we mentioned, that we have introduced free return policy and that we also have changed the approach that we have in customer care with a much more generous approach to our customers. We believe that, that has a big impact on customer satisfaction, and that, that in the long run will re-drive customer loyalty. But we are also doing more other things, more direct things to improve our tech stack, to enable us to work more actively with, with customer loyalty. We have some shortcomings in the tech stack today that does not really allow us to work with, with customer loyalty in such a way that we would like.
Mm-hmm. Fine. And, thank you. Finally, you mentioned previously that you would prioritize working with products with a shorter life cycle-
Yep.
and thereby also improving customer offering with regards to the assortment. Can you please elaborate more on that?
Mm-hmm. Now, this is something that we, we mentioned, that we want to improve the health of our healthiness of our stock. And with that, what we mean is that we have too much products that are a little bit too old, and, and not the enough products and assortments that are up of the latest collection. So, we need to continue to decrease our stock levels of the old assortment, so to speak, to increase the assortment of new assortment. And the change in obsolescence reserves that we did reflect the way that we want to work going forward. We're already seeing an improvement in this, but this is not, again, like many other things here, this is not a quick fix.
It's something that we need to work with for several months, going forward, or several quarters going forward, to achieve the position where we want to be.
Thank you very much, Anton. Thank you.
Thank you.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.
So I would just like to clarify regarding the question on our operating costs. So the sales and distribution costs during the quarter were flat in million SEK versus the same quarter last year. Whereas the administration costs, so to say, were impacted by inflation and Polish zloty upwards.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thank you very much for listening to us for this quarterly call. I hope you all have a great day. Thank you.