Bike24 Holding AG (BIKE) Earnings Call Transcript & Summary

Thank you, Moritz. Welcome, everybody, to our quarterly results presentation. Please allow me to start with the general update on the quarter before I hand over to Timm to guide you through the financials. From a macroeconomic standpoint, Q3 this year was a challenging quarter. With the German consumer sentiment reaching new all-time lows, customers are more conscious with their spending. However, the quarterly results also shows that the cycling trend is sustainable. Our business model is resilient and our strategy pays off. Our numbers shows that. Our active customer base reached a new all-time high with almost 914,000 active customers during the last 12 months. While Timm will go into the details later, I'm proud to say that this growth was largely driven by new customers especially in our localized markets. When looking at a court analysis, I'm confident that many of these new customers will return to us for follow-up purchases. This again shows that even in less favorable economic times, customers appreciate a superior product offering and attractive pricing. Our total sales grew by 13% year-over-year, primarily driven by a strong acceleration of full-bike sales growth as well as a strong demand in our biggest market, DACH, where sales grew 11% and being supported by promotional activities. Full-bike sales were up 64% on the back of easing supply challenges. We can confidently state we are taking market share here. Also, our broad brand portfolio, whether bio bikes or e-bikes, of more than 60 bike brands is a key in winning customers for our full-bike segment. Another point that makes me confident about the future is the ongoing acceleration of sales growth in our localized markets. France, grew more than 300% followed by Italy and Spain with 196% and 119%, respectively. This again shows that there is a perfect product market fit for Bike24 service proposition in Europe's biggest markets. Our adjusted EBITDA margin for the third quarter was 3.3% and primarily due to a lower gross margin given the before strong promotional activities around the yearly summer sale and following very high margins for Q3 last year. Marketing, as well as selling costs as a percentage of sales were more or less stable. These strong results in tough times allowed to reiterate our full year 2022 guidance with sales been minus 5% to plus 5% and an adjusted EBITDA margin of 3% to 6%. So much for the highlights of the quarter. Now I will hand over to Timm for the financials.

Yes. Thank you, Andrés. I would now like to share some details on the financial and nonfinancial KPIs of the third quarter. Our active customer base increased 14% and reached an all-time high at 914,000 for the last 12 months. This is despite an all-time low German consumer sentiment and again confirms that the demand for cycling products and services is here to stay as long as you provide a superior product offering at a competitive pricing. The high number was driven by outstanding new customer generation in our localized markets, Spain, France and Italy. While the number of new customers in Spain doubled, numbers in France and Italy increased by more than 8 times. In total, the number of new customers increased by 47% in Q3 alone. Needless to say that due to the high number of new customers, to repeat order rate declined slightly by minus 2.9 percentage points because less orders as a percentage of total orders were made by existing customers. In line with our expectations, the other active customer KPIs, revenue and average number of orders per active customer declined by minus 7% and minus 9%, respectively. This is due to the current weak consumer sentiment in our core market DACH and shows that certain nonessential purchases are postponed as customers wait for good deals. We expect that to change in line with improving consumer sentiment. On the other hand, average order value was slightly up by 3%, driven by a more favorable product mix towards full-bikes. Let's now focus on top line performance in our 2 segments, full-bike and PAC. We were back at growth with revenues being up 13%, mainly driven by a recovery in the DACH countries as well as PAC sales being up 8% due to promotional activities. As already mentioned previously, customer postponed some purchases of discretionary products at premium hammers or bike accessories. But when they see a good deal, they are willing to spend. While we certainly have to sacrifice some margin effect in the current environment, it helps us to normalize our inventory step by step. Another big positive during this quarter was the development of full-bike sales which were up 64% despite external worries that the trend might have peaked in the H1 and industry sales data stagnating. Our sales growth shows that the high demand for premium e-bike -- [indiscernible] e-bikes is here to stay. It also shows that when the supply chain normalizes and we are able to leverage on our full brand portfolio, we are a one-stop shop for everything around cycling. That sales -- full bike sales now accounts for 14% of total revenues, up from 9% in Q3 last year. Then looking at the different geographies, I would like to highlight already mentioned recovery in the DACH countries, still our most important market being up 11%. Sales growth in the localized countries accelerated again, now being up 209% versus 133% last quarter. Andrés will go into the details here later on. Rest of European economic area shows a decline of 12%, highlighting the importance of a local expansion strategy and local content and comparing the development to the 1 in the localized markets. Revenues of Rest of World went down 11% due to the Russia and Ukraine. Let's now turn to working capital and inventory in particular. Similar to Q2, the increase in net working capital can primarily be attributed to the increase in inventory. While I will get into more detail in the next slide, please allow me to touch on some details here. Full-bike inventory tripled compared to September 2021 from a very low base. PAC inventory increased by roughly EUR 21 million. And the main reasons are: Q3 is an intense intake quarter for the winter season and the Black Friday period. The majority of our procurement decisions are made on a strategic basis. So around 9 to 12 months ahead and back then, we decided to stock on as much as possible for goods. Supply chains for certain products recovered faster than expected on top, meaning that orders we expect to arrive next year arrived earlier. This slide highlights in which direction we expect the inventory to develop over time. As already mentioned, inventory peaked at the moment and we will end the year with an inventory position of below EUR 90 million. That said, for next year inventory is likely to arrive at 25% of total sales on a full year basis. And driver for that normalization will be, we already started to reduce orders and our preorders for the next season reflects our current inventory level. With normalizing supply chains, the preorder period will be shortened to the pre pandemic level. That means that we can balance out demand peaks through wholesale and reduce our preorder share overall. Finally, I would like to point out that 71% of our inventory are bicycles, bicycle parts and accessories such as air pumps, products with long life cycles. The remaining 25% consists mainly of closing. But again, the bicycle industry is not comparable to the fashion industry. Even in that only 25% the Black Bibs short is a Black Bibs short, and the goal for winter jacket stays in the range for more than 1 season. And focusing on profitability. The development is in line with Q2 and the drop in EBITDA margin was mainly caused by a significantly lower gross margin. This third quarter was characterized by intensified promotional activities like the summer sale and other price pressure due to the oversupply in the market. While last year's gross margin was on an extraordinary high level, this year, gross margin is on an extraordinary low level given the macroeconomic headwinds and other external effects. The increase in performance marketing spending is in line with the first 6 months to support the launch in the localized markets as well as the successful new customer acquisition in the DACH countries. Selling costs, which comprise primarily shipping and packaging were in line with last year's level. In line with our expectation, the increase in personnel expenses as a percentage of sales start to slow down. As some of last year's hiring begins to normalize as those colleagues are with us for 12 months by now. This step-up in personnel expenses will phase out over time with growing revenues. In order to weather upcoming storms, we started a proactive approach to cost management and budget alignment to put the company on a solid foundation without restricting further growth. So in total, we achieved an adjusted EBITDA margin of 3.3%, again, last year was a very high level, but we expect to return to a double-digit EBITDA margin on a full year basis in the medium term. Also, I believe being profitable on an operating basis is not a given in today's environment. So that was from my side. Now Andrés back to you.

Thanks, Timm. Let's follow with the business update and the short outlook. It seems like quarterly, we're petitioned to praise our international team, but it's always a pleasure for me. As you can see on the right-hand side of the slide, sales growth accelerates and also taking a larger percentage of total revenues from 4% in the third quarter of 2021 to now 11%. This means that the 3 countries, Spain, France and Italy are already more than just a small portion of our business with a combined year-over-year growth of 209% and to now EUR 8.1 million. Our localization strategy and our investment in these markets are paying off. As I already mentioned, it also shows that there is a perfect product market fit for our offerings, product assortment, high availability, fast shipping and our expert customer service. Also the quick and broad customer acquisition, especially in France and Italy, lays a great foundation for future growth of BIKE24, aspiring to be the leading biking platform in Central Europe. This will further be supported by the opening of our Spanish logistics center later this year. Lastly, the fact that full bike sales in these countries are up 326% shows that we are not even just seen as only an expert for parts, accessories and closing, but as bike specialist, a great condition to enter and expand in these markets. The second strategic initiative was and still is to increase the share of bike sales. A quarterly growth of 64% especially with e-bikes sales doubling shows that we are on the right track. As supply challenges are easing, we are finally able to offer our customers access to the broadest product assortment, we will focus on medium and high-end bikes. Our product availability stabilized on a comfortable level. Government incentive schemes like company bike leasing and the unbroken trend towards green mobility supports the demand for premium bikes, and we further strive to participate in this. Please allow me now to summarize. First, our strategic initiatives are ahead of plan. The developments in full-bikes and localized markets are great fundament for the years ahead. Second, current elevated inventory position is only temporary. We had not enough inventory last year. The situation changed much faster than anticipated, and we are confident that inventory will lower as a percentage of revenues going forward. Third, active cost management and budget alignment are carried out while we still have financial flexibility for the next years ahead. We have already implemented the first measures to prepare the company for ongoing disruptions without restricting further growth. And the fourth important point: our full year 2022 guidance confirmed. While consumer sentiments around Europe deteriorated even further, we are confident to arrive within our previously mentioned guidance. Yes, it's a challenging environment. However, cycling market dynamics are intact. Cycling is an attractive market segment, and BIKE24 will benefit from the accelerating shift in mobility and the unbroken trend to stay healthy and fit. So now thank you for your attention, and we are now open for your questions.

Ladies and gentlemen, at this time, we will begin the question-and-answer session.[Operator Instructions] One moment for the first question, please. The first question comes from James Chartier from Montpensier Finance.

James from Montpensier. Just a quick question. How do you see the demand in -- for the bike market in 2023? Does it remain one of your main concerns for the upcoming year?

Maybe I can catch this question. So we see this -- all the mega trends are intact. So we see a similar demand in the -- for the coming year.

Also, we see bikes being a little bit less discretionary than, for example, an extensive helmets. And as Andrés already mentioned, with the mega trends being more cycling, we expect the demand at least for full-bikes to stay higher than for the accessories business.

And also the trend for the e-bikes, you see it also in our numbers is unbroken. So maybe the numbers are a little bit lower for bio bikes, but the e-bikes or the e-bike trend is unbroken.

The next question comes from Andreas Blom from MediumInvest. Mr. Blom, you can talk now. It seems like we can't hear you, please kindly check your microphone, please? Please register again for a question. We can't hear you at this moment. [Operator Instructions] Catharina Claes from Berenberg having the next question.

Yes. everyone, can you hear me?

Yes, we can.

2 questions from my side. Can you give us an idea of the margin development in the expansion countries. And then the what's -- can you give a comment on current trading?

Yes. Let me take the question, thank you for the question. So the margin in our localized countries, and so it's -- that we have a European-wide the same pricing. So on the gross margin level, that is the same only they are slightly different due to the product mix. But on the contribution level, so that's revenues after cost of goods sold, after marketing expenses and after payment, shipping and packaging, we are still profitable. So that's a little bit above our expectation. So there you can see that it was around about 5% marketing expense at the moment in localized countries, we reached that revenue growth of more than 200%. And the second one was current trading. The current trading is not so strong at the moment as it was in Q3. Yes. So October was around about on the same level as last year. But what we noticed already is that consumers are waiting for Black Friday. So even in the microeconomic headwinds and the consumer sentiment, we really have the feeling that they're looking for a good deal and that everyone also in Germany now is aware that there is Black Friday coming with heavily discounted season. So that will be very important for us what's happened during the Black Friday week.

Okay. And then if I think about Q3, I mean you also had the summer sale, right? So can you give us an idea of the trajectory throughout the month in Q3 of demand? We're talking about Black Friday, this way, I would assume that, that would have been a similar trajectory in Q3 with big demand being shifted towards the summer sale periods.

Yes. So that will be shifted due to the sales season. So I think for Q4 on the gross margin level, we don't expect any improvement compared to Q3.

Okay. And then just for me to understand, so the summer sale was early Q3, right, I think, and then -- so the end of -- the end of Q3 probably was similar as October in terms of top line growth.

Yes, it was similar. So October was round about a flat growth compared to last year, October.

The next question is coming from Andreas Blom, MediumInvest.

Am I going through?

Yes.

Yes. Great. So sorry for the technical difficulties just for a moment ago. We've seen a significant increase in your [ privacy plan ] and equipment size compared to your sales. Can you give a little bit of flavor on what does this relate to? Is this primarily just your warehouse in Spain? Or do you have any other particular investments done during the period?

So the main driver is the warehouse in Spain, yes, we almost done with the warehouse. So we took all the investments, and that was around about EUR 8 million. And on the other hand, what's adds coming on top is software development. So we capitalized some of the investments in IT but the main driver is the warehouse in Spain.

All right. Great.

If net to that, obviously, you don't have that coming next year, yes, because we postponed the third warehouse. So there will be less additional spending next year.

Yes. And in terms of your expenses for merchandise, we've seen that, that also increased and that's implied a lower gross margin might have been answered before, might not have. But are you seeing that your prices on your products is just naturally elevated from a period where you've had difficulty sourcing stuff? Or are you experiencing that you just have a higher volume in your inventory? I'm worried that in the future, we'll see that you have a natural pressure on your gross margins, primarily due to just unit prices being higher.

So I would say, first of all, what we see now is a historically low level of the gross margin, yes. Because if you look to our history and also before pandemic in the 20 years, it was never been so low as it is at the moment. So that's, for us, really a temporary effect caused by the external effects. I think the macroeconomic headwinds, consumer sentiment, and on top of that, that the supply chain really eases and we have an oversupply at the moment in the bike market. That's the reason for the historically low gross margin. At the moment, we don't see any significant price increases because, as I said, the sourcing was 9 to 12 months before, yes? So we still have no inflationary pressure on the prices, so that will also help us in the future to maintain the gross margin. But we expect at least for Q1 as well a pressure on the gross margin due to the oversupply in the market. But in the medium term and if that, I would say, a little bit [indiscernible] the oversupply, then we expect coming margins back to 29%, 29.5% or 30% that was our pre-pandemic margin level. Hope that answers your questions.

The next question is coming from Nicolas Kieffer from Montpensier.

Can you hear me?

Yes, we can.

One more question from our side. On your inventory, how do you see the current level for the rest of the year? And what do you expect in terms of orders for the next biking season, I think, in spring 2023.

Yes. So as I already mentioned, I think we now -- we see the peak in inventory that will go down until the end of the year below EUR 90 million. That's our expectation at the moment. And again, we will see that it's coming back to 25% of revenues end of 2023. And the reason I think what's very important is we ordered 9 to 12 months before and there was no war in Ukraine and the demand was very, very high. And so for the coming season, we already adapted our order volume due to the -- and we take into account our current stock levels. So that's why we order less than this year. And Yes, I think that's the main reasons why we would see that the inventories will decrease next year significantly. That's very important. And the normal level is the 25%, and we are confident to reach that end of 2023 again.

And again, to follow up with the previous question on inventory volume, it's purely -- our inventory increase is purely based on higher volume, not on higher prices. As Timm already mentioned before, of course, there is a risk with high inventory, although most of our inventory is non-seasonal, but all of it was acquired at all price points, yes, so previous year price point.

There are no further questions at this time. So I hand back to Moritz Verleger for closing comments.

Okay. Thank you very much for joining us. Also thanks for the questions. And if you have any follow-up questions, I would like to schedule the meeting to free to follow up to IR for BIKE24 results. Thank you very much, and have a nice day.

Thank you. Bye-bye. Bye.