Bike24 Holding AG (BIKE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the fourth quarter and full year 2022 earnings call of Bike24. [Operator Instructions] I would now like to turn the conference over to Moritz Verleger, the Head of Investor Relations. Please go ahead.

Thank you, operator. Good evening, good afternoon, good morning from wherever you are joining us virtually today, and welcome to our Q4 and full year 2022 results conference call. Following the release of preliminary results in mid-February, we would now like to give you detailed P&L overview, update on our strategic initiatives, highlight the ongoing structural megatrends in the cycling industry as well as giving guidance for this transitional year 2023. Our presenters today, our Founder and CEO, Andrés Martin-Birner; and CFO, Timm Armbrust. Andrés, the stage is yours.

Thank you, Moritz. And also a warm welcome from my side. As always, please allow me to start with the general update on the quarter before I hand over to Timm for the business update. Finishing with an overview of the current megatrends in the cycling space, the outlook and a general summary. From a macroeconomic standpoint, Q4 was as challenging as the previous quarter. With the German consumer sentiment reaching new all-time lows and inflation rates being as high as never before, customers are more conscious with their spending. This also takes its toll on the cycling industry as a whole. However, the high number of newly acquired customers shows that the cycling trend is still intact and expected to continue. Our active customer base reached a new all-time high with more than 954,000 active customers during the last year. This was mainly driven by the increase of 32% to 131,000 new customers that we won during the quarter, thanks to our successful marketing campaigns, especially in the localized markets, France and Italy. Our total quarterly sales grew by 3% year-over-year, primarily driven by full bike sales, almost doubling during the quarter, despite being winter season. Full bike sales made up 13% of total sales during the quarter and clearly show that Bike24 has become the go-to shop for everything around cycling, not just for parts, accessories and clothing. It also shows that we are clearly taking market share here, thanks to the larger spread assortment in the market, whether online or offline. While increasing the full bike share was one of the strategic initiatives presented during the IPO, localization was another. It, therefore, gives me great right to see that our international team managed to accelerate growth rates here again. From 209% sales growth during the third quarter, we now managed to grow 226% during the fourth. France was up 446% followed by Italy and Spain with 317% and 88%, respectively. The hiring of local customer service agents as well as country-specific marketing campaigns is clearly paying off. Our adjusted EBITDA margin for the fourth quarter was at negative 3.1%. This was already expected given the expanded Black Friday sales period to support the sell-through of excess inventory. Across all retail categories, customers became more used to so-called smart shopping and wait for special deals, especially during today's difficult times. Lastly, our proactive approach in inventory management allowed us to reduce overstock from September 2022 as planned, albeit still being elevated, we managed to do our homework here by liquidating EUR 12 million of excess stock. So this was a short intro from my side. Timm, now over for you to the financials.

Yes. Thanks, Andres. I would now like to share some details on the financial -- nonfinancial KPIs of this fourth quarter and the financial year 2022 with you. As Andres already mentioned, our active customer base increased by 16% and reached an all-time high at 945,000 customers. Our marketing and international team did a great job in attracting new customers, especially in France, Italy and Spain. While the number of new customers in Spain more than doubled during the fourth quarter, in France and Italy, we generated more than 10x as many new customers as during the fourth quarter of 2021. This confirms the functioning of our international playbook. And we are excited to have launched local online shops for the Netherlands, Belgium and Luxembourg as well. More on that during the Q1 results in May. Needless to say, due to the high number of new customers, the repeat order rate declined by 4.4 percentage points because less orders as a percentage of total orders were made by existing customers. In line with the KPIs of the third quarter, other active customer KPIs, namely revenue and average number of orders per active customer declined by minus 10% and minus 11%. The main reason is, again, the strong growth in the new markets and the resulting high proportion of new customers. On average, an existing customer orders more than 3 times a year and a new customer, about 1.3x. This is simply because a new customer only joins by 24 within the year. On the other hand, average order value was slightly up by 2%, driven by a more beneficial product mix towards full bikes and especially e-bikes. Let's now focus on top line performance in our 2 segments, full bikes and PAC. It's anchorage to see that full bike sales almost double with e-bike sales almost tripling. This rate has accelerated again quarter-over-quarter and is far above any industry average for the fourth quarter. It again shows that when we are able to offer our full brand portfolio, the demand for high-quality bikes is there and customers are willing to buy. That said, full bike sales now account for 13% of total sales, up from 7% in Q4 2022 -- 2021. In terms of PAC sales , revenues was down minus 4% due to the ongoing depressed consumer sentiment and down trading for certain products. We have seen that customers are indeed willing to spend on PAC products. However, in this macroeconomic environment, they are increasingly waiting for good deals like the Black Friday period or only replace certain parts when really needed. In sum, Q4 sales were up 3%, in line with our expectations in order to reach the updated full year 2022 guidance of minus 5% to plus 5%, while at the upper end at plus 5%. I would quickly like to show a pre-COVID comparison to highlight our previous statements, the COVID pandemic being a step-up and not a one-off. Full year 2022 sales were not only constant, but they also even increased by 5%. Customers around Europe continue buying bikes and accessories despite other sports restrictions being lifted, public transport being fully operational and there are other ways to spend money like traveling or vacations. That gives us great confidence that once the current external headwind fades customer will catch up with the postponed purchases and new customers are less reluctant to buy. With returning customers in the DACH region and the continuously high growth rates in the international markets, we surely believe we can return to double-digit top line growth rates. Also in terms of full bikes, we managed to continue growing mid-double digits and reviewed statements of the cycling trend being over. With the industry posting significant slower growth rates, we are sure to have taken market share from both, online and offline players. In addition, government and companies-sponsored bike leasing schemes gaining more and more traction among customers. While we have increased our share of leased bikes in Germany from 6% to 14% year-over-year, we know from industry data that there's a lot more to take. In looking at the different geographies, we posted a slight decrease of minus 5% during Q4 in the DACH regions. Again, a depressed consumer sentiment and inflationary have always caused a certain reluctance to buy. On the other hand, sales costs in our 3 localized markets, Italy and France accelerated for the fourth quarter in a row to 226% and now makes up 16% of total sales, up from 11% in the third quarter. Together with the newly localized countries, Netherlands, Belgium and Luxembourg, this share will increase even further and make us less dependent on the DACH market in the future. The rest of the European economic area shows a decline of minus 17%. In comparing the development to the one in the localized markets, this highlights the importance of a local expense strategy and local content. Revenues of rest of world were down minus 25%. On top of the suspended sales to Russia, the euro currency became stronger again. And with that, made it less attractive for non-European customers to order with us. digitally, I would like to quickly touch on full year localized sales in detail. While this journey is far from being over, it's impressive for me what we have achieved so far. This macroeconomics war is all over Europe, we have still almost tripled year-over-year sales growth. With Italy and France just being launched beginning of 2022, we expected very high double-digit growth rates in these countries for 2023 as well. Furthermore, lower return rates compared to the DACH market and a higher share of full bike sales already offer margin benefits today and in the future. Needless to say, once our Barcelona warehouse is running at full capacity, we will also benefit from being able to offer better service and more favorable shipping rates. Lastly, Bike24 was voted the second most feared competitor in the entire Spanish sports retail space by more than 700 local retailers. Just 2 years after launching our Spanish shop, that's a great job by the whole team. Let's now turn to working capital and inventory in particular. Similar to the previous quarters, the increase in net working capital can primarily be attributed to the increase in inventory. Inventory increased by 24% year-over-year to EUR 84.3 million at December 2022. That is higher than normal and reflects the overcapacities in the bike market. But let me remind you that the product lifetime in the bike industry is significantly longer than in the fashion industry. On the other hand, you might recall that during our Q3 release in November, we promised to reduce inventory to below EUR 90 million by year-end. With an inventory reduction of minus 12% or EUR 12 million versus September 2022. We managed to achieve this effectively through proactive inventory management and promotional activities. As already mentioned during previous releases, most of our procurement decision in the past were made on a strategic basis, so around 9 to 12 months ahead. With normalizing supply chains, we expect this preorder period to shorten and ultimately, inventory as a percentage of sales to decrease. Lastly, with the new seasonal products coming in during the first half of the year, pleased to expect inventory to slightly increase quarter-over-quarter. When focusing on profitability, the development is in line with Q3 and the drop in adjusted EBITDA margin was mainly caused by a significantly lower gross margin. This fourth quarter was characterized by intense industry-wide promotional activities, especially during the Black Friday period to clear the overcapacities across all categories. As already mentioned, we expect this to continue at least until the second half of 2023. Additionally, last year's gross margin was on an extraordinary high level. This year's gross margin is on an extraordinary low level, given the macroeconomic headwinds as well as already mentioned, industry-wide overcapacities in inventory. By performance marketing spending was relatively constant, selling costs increased as a percentage of sales given higher domestic as well as international shipping rates as well as higher packaging costs. Personnel costs as a percentage of sales increased by 1.5 percentage points during Q4. Given January salary increases across all departments, but especially due to the increased minimum wage in Germany. Higher miscellaneous expenses were caused by increased IT-related implementation costs as well as increased tax and IFRS-related consultancy fees caused by the internationalization of the business. In total, we achieved an adjusted EBITDA margin of negative 3.1% for the fourth quarter. That's for my side, and now Andres, back to you.

Thank you, Timm. Before we head into a detailed outlook for 2023, I would like to emphasize the ongoing megatrends that will support the cycling industry around Europe for years to come. First, increased government initiatives all over Europe. Better tax incentives on bike leasing in Germany, subsidies for bike repairs in France or a new ring road cycling highway in Italy. Governmental support better through infrastructure projects or financial incentives has never been stronger and expected to increase over the next couple of years. Second, new commuting habits, especially during the pandemic, many commuters have found new ways of getting around. With the rising popularity of the e-bike, it's easier than ever before to replace the car or public transport by an electric bike. Once people change a habit like cycling to work, they are likely to stick to it. Given the stickiness of our existing customers who order around 3x per year, this offers great further potential for Bike24 in the future. Third point, higher e-bike share. E-bikes sales grew significantly faster than sales of bio-bikes. While this ultimately translates into higher average sales prices, e-bikes users are also likely to cycle longer distances and spend more on follow-up purchases. Fourth, premiumization across all product categories. Rather EUR 400 for GORE-TEX jacket or EUR 2,000 from entry-level e-bike, regardless of current inflation rates, the demand for quality products with the higher average sales prices for bikes or cycling related products has risen exponentially over the last couple of years. This point, ongoing shift in mobility with car ownership in larger cities becoming more expensive people look for sustainable alternatives. Studies have shown that especially couples and families replace the second car through e-bike. With that in mind, I am more than excited for the next couple of years for Bike24 to come. 2023 will be a year of transition for Bike24. But we will make sure we put the company on a solid foundation to benefit from the above-mentioned initiatives. Let's now turn to the short term and with that to the 2023 full year guidance. The current macroeconomic environment is something we have never experienced in more than 20 years of Bike24. However, I'm confident that we will still achieve a modest revenue growth of 0% to 10% and continue to grow for the 22nd year in a row. Additionally, in terms of adjusted EBITDA margin, I'm also confident that we continue to stay profitable on an operating basis and achieve a margin of between 0% and 3.5%. We have been doing this for more than 20 years, and profitability has always been a focus for Bike24. And it also is in this challenging environment. However, the quarterly split will be rather uneven. We expect sequential improvement on both, top and bottom line over the course of the year. That said, the current depressed consumer sentiment and pricing pressures during the first quarter of 2023 are already factored in the full year outlook. For Q1 2023, we expect the contraction in total sales compared to the previous year, leading to a negative EBITDA margin. Nonetheless, given liquidations of inventory and order cancellation across the industry, we expect healthy inventories by the end of the year and with that, improving margins. On the other hand, we are very confident to return to positive cash flow generation as inventory is converted into cash and with that, improving our liquidity position. Please allow me to quickly summarize what we promised earlier during the year and managed to achieve. Despite a significantly worsening environment with plus 5% revenue growth, we managed to come in the upper end of our guidance range. Also in terms of adjusted EBITDA margin, we managed to deliver within expectations. In November, we promised that our inventory will be reduced from an all-time high of above EUR 96 million to something below EUR 90 million. With EUR 84 million at the end of December, we managed to achieve this. Lastly, I cannot repeat it often enough, but it's always great to see the efforts we made with our localization strategy so far. It's not only about the triple-digit growth rates over there, but also seeing the very dynamic and motivated international team in Barcelona developing. I personally visit our Barcelona office in the warehouse earlier this month, and it's really incredible what we achieved in this short time over there. So now we are coming to the end. Thank you for your attention, and we are now open for questions.

[Operator Instructions] The first question is coming from Jean Fourika from JPMorgan.

Just a question on inventory. Could you touch base on the outlook. When do you think they are going to go down on a year-on-year basis this year?

Yes, for sure. So we -- as I mentioned already, in the first quarter, we will see a slightly increase because all the incoming goods are now for the summer season, and that's normally happened in the first quarter, but it's compared to other quarters much lower than normal. In the second quarter, we would see a drop in inventory because the summer season is over. And then in the third quarter, again, a slightly increase, but we expect that to the end of the year that we could -- are at a normal level around about 25% of the total revenues.

I didn't catch. What did you say over the summer, in Q3, what should we expect?

Summer Q3, the inventories will go down -- in Q2, the inventories will go down, in Q3 it will go up again because then -- it's good for the winter season coming in. And then end of the year, we will be at a healthy stock level of around about 25% of the revenues.

And just a follow-up, if I can, on the fragmentation of the industry. It still very fragmented at the beginning. Do you think it's still going to remain the case? Or should we see some -- do you expect to see some consolidation? And do you know like how the small retailers are doing at the moment?

Yes, you're right. It's still very fragmented market. And so far, we don't see any consolidation efforts in the market. But again, I think it's for all market players, is it offline or online, very tough situation at the moment. Because everyone is it the offline or online retailer have these overcapacities combined with -- yes, with customer sentiment that's going down. So I should -- I think we could expect something, but so far, we don't see any efforts.

The next question is coming from Andreas Blom from MediumInvest.

Congratulations on your fiscal year results, even though you had some economic hardship. I wanted to know what kind of companies or countries are dominant in the rest of the European economic area segment.

Yes. So we are reporting last year. So in that segment, the Nordics are very strong. And for sure, Benelux. That was also the reason why we choose Benelux for the next step in localization. So that's the 2 biggest regions under West of economic area.

All right. And in those 2 regions, where have you seen the largest decline in your demand? And also because this is the segment where we've seen the revenue gone down significantly?

So it's really in all the regions, in all the countries, it's the same pattern, in the rest of European economic area. And what we see or what we saw during the pandemic that was also part of our communication that -- in the pandemic, there was a lot of users from the countries where we are not localized. They're looking at local dealers. There was no supply. So then they're looking around for European-wide players like Bike24, that gave us a boost during the pandemic in these countries. And what we now see is that if you not offer a local language and local brands, then they're going back to the local dealers again. That's the reason also why our localization is so successful. And again, if you look really at the growth rate, or the growth pattern between localized countries Spanish, Italy and France. And the other countries that shows how important localization is. And that the initiatives of the strategic initiatives is so important for Bike24 for the future.

All right. And then just a single question on your revenue growth that you have an outlook of 0% to 10%. How much inflation do you account for that in your guidance?

So we have, in our guidance an AOV that's almost flat, yes. So no big inflation rate, but that's the reason why we now see the market price are so down. So there will be inflation in the second half of the year. But what we now see is that the market prices are down. And therefore, we don't see a significant increase in the AOV over the full year.

[Operator Instructions] It seems like there are no further questions at this time. I hand back it to Moritz Verleger for closing comments.

Yes. Thank you, everyone, for joining for our full year results conference call. Feel free to reach out to arrange follow-up meetings. Otherwise, see you on May 3 for the Q1 results. Thank you very much. Bye.

Thank you. Have a nice day.

Thank you. Bye-bye.