Bike24 Holding AG (BIKE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. On behalf of [indiscernible] welcome, and thank you for joining the first quarter 2023 Earnings Call of Bike24. [Operator Instructions] I would now like to turn the conference over to Moritz Verleger, Head of Investor Relations. Please go ahead, Moritz.

Thank you, [ Alex ]. Good evening, good afternoon, good morning, to from wherever you are joining us virtually today, and welcome to our Q1 2023 results conference call. Following the press release earlier today, we would now like to update you on our nonfinancial KPIs, provide a detailed P&L overview and give some insights on the localization efforts in the Benelux area as well as the Southern European fulfillment sector in Barcelona, finishing with a summary of the first quarter of this transitional year 2023. Our presenters today are 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 financial update, finishing with the business update, including news on our recent localization efforts and a general summary. With the start of 2023, the cycling industry continues its second year with challenges it didn't face during the last 20 years. At Bike24, however, we continue to execute our proven playbook and a debit wherever and whenever necessary. Let's now have a look at the first quarter in a bit more detail. While the German consumer sentiment is improving from historical low levels, customers are still conscious with their spending. However, the high number of newly acquired customers shows that the cycling trend is still intact and expected to continue. Our active customer base is on a new all-time high with more than 970,000 customers having made at least one purchase during the last 12 months. In line with the fourth quarter, this is primarily due to new customers generated through our successful marketing campaigns, especially in the localized markets, France and Italy. Quarterly sales growth was at negative 11%, partly due to a very strong beginning of the previous year, given the first discounts in January 2022, after a long period of low promotional activities. Full-bike sales again proved to be resistant and grew 20%. Full-bike sales made up 16% of total sales during the quarter and clearly shows that Bike24 has become the go-to shop for everything around cycling, not just for parts, accessories and closing. With an outstanding sales growth of an average 109% in the 3 localized markets, France, Italy and Spain, we continue to take market share here. As the online penetration in these countries is lower compared to Germany, we also anticipate significant tailwinds from the offline to online shift for the next years to come. Our adjusted EBITDA margin for this quarter came in at minus 4.7%. This was expected given the already mentioned heavy promotional activities throughout the quarter. Lastly, reaching a positive operating cash flow already during this first quarter gives me great confidence that we will manage the ongoing headwinds out here. So this was the first intro -- it was the intro from my side. Now over to you, Timm, for the financials.

Thanks, Andres. I will now like to share some details on the financial and nonfinancial KPIs of this first quarter 2023 with you. As Andrés already mentioned, our active customer base increased by 16% and reached an all-time high and 971,000 customers. This is mainly driven by the success of our international marketing campaign in France, Italy and Spain as well as the localization in Belgium, the Netherlands and Luxembourg. Also this was materialized in the second quarter results. Needless to say, due to the high number of new customers the repeat order rate declined by minus 5.5 percentage points because less orders as a percentage of total orders were made by existing customers. In line with the KPIs in the last quarter, other active customer KPIs, namely revenue and average number of orders per active customer declined by minus 13% accordingly. Again, this is mainly a result of the strong new customer generation. On average, an existing customer orders more than 3x a year and new customers about 1.3x. This is simply because a new customer only joins by '24 within the last 12 months. And it is, therefore, an average only 6 months active. On the other hand, average order value was more or less constant driven by a product mix towards full-bikes. Let's now focus on top line performance in our two segments, Full-bike and PAC. It is encouraging to see that full-bike sales are up plus 20%. Besides a macro environment in which consumers are likely to postpone the purchase of large ticket items. This also confirms that the overall cycling trends, whether it's a enthusiast or the commuter, is still robust. And the shift towards sustainable mobility is more present than ever. Within the e-bikes category, city and urban e-bikes did exceptionally well, indicating that bike is entering new customer groups, city and urban e-bikes are primarily bought by an older customer group with a higher disposable income and better spending patterns on follow-up purchases. That said, full-bike sales now accounts for 16% of total sales, up from 12% in Q1 2022. In terms of PAC sales, revenues was down minus 15% due to ongoing depressed consumer sentiment and down-trading for certain products. In line what we have seen during Q4, customers are indeed willing to spend on PAC products, but the increasingly focused on promotional periods will only replace certain parts when really needed. When looking at the different geographies, we posted a decline of minus 13% during the first quarter for the DACH markets. Again, a depressed consumer sentiment and inflationary [indiscernible] causes certain reluctance to buy. On the other hand, our three localized markets, Spain, Italy and France performed, again, strongly. And sales increased by plus 109% in the fourth quarter. They are now stand for 16% of total sales up from 7% Q1 last year. The rest of the European economic area showed a decline of minus 29%, highlighting the importance of a local expansion strategy and local content and comparing the development to the one in the localized markets. Revenue of Rest of World were down minus 45%. There are two reasons. The euro currency became stronger again and with that made it less attractive for non-European customers to all our results. Second, we stopped deliveries to Russia last year with the beginning of the war. More than 50% of Q1 last year includes revenues to Russian customers. Let's now turn to working capital and inventory in particular. It is a great achievement that our procurement department managed to keep inventory intake during Q1 almost flat. Despite the first quarter of the year being the intake quarter for new seasonal products. That said, the small quarter-over-quarter increase is only due to additional full-bike supply, our best-performing segment. PAC inventory on the other hand, was lower as excess inventory could be cleared through promotional activities and set off the income of new seasonal products. In a year-over-year comparison, PAC inventory even decreased with full-bike inventory doubled. However, please keep in mind that last year's full- bikes were still in a very limited supply, and we set inventory [ unusual low ]. Similar to the previous quarter, the year-over-year increase in net working capital can primarily be attributed to the increase in inventory. Net working capital decreased by 7% versus December 2022. When focusing on profitability, the development is in line with Q4 and the drop in adjusted EBITDA margin was mainly caused by a significantly lower gross margin. In line with the previous 2 quarters, ongoing overcapacities across the industry are leading to intense promotional activities across all segments. As already mentioned, we expect this to continue at least until the end of 2023. While performance marketing spending was relatively constant, selling costs increased as a higher share of international orders and cost increases by carrier, is leading to an increased shipping costs. This is expected to normalize as more orders are shipped from the Barcelona warehouse. Personal costs and miscellaneous expenses are mainly fixed. So that's the profitability automatically goes down when sales fall. In total, we achieved an adjusted EBITDA margin of minus 4.7% for the first quarter of 2023. That's it from my side. Now Andrés, back to you.

Thanks, Timm. I would now like to focus back on our recent localization efforts in Western Europe. After localizing France and Italy in early 2022, the team did a fantastic job again and launched local online shops for Belgium, the Netherlands and Luxembourg mid-February this year. This time, the launch also included rolling out local payment methods like ideal as well as hiring local service as soon as possible to get ready for the upcoming season. The graph on the right-hand side shows the month-by-month revenue development in these 3 countries. Sales accelerated quickly with the launch, indicating again that our playbook works in making us confident for future localizations. The use of local lending, which also improves our search engine visibility, which in turn leads to higher organic traffic. Offering local content and local payment methods on the other hand, facilitates the overall shopping experience for the customer and increases conversion rates. With the launch of these 3 additional countries, our total addressable market with local online shops is now worth around EUR 24 billion. The third round of localization gets us, again, one step closer to our final goal, becoming the leading platform for biking in Europe. Needless to say, we are already reviewing further localization targets to increase this addressable market even further. We also wanted to give you a quick glimpse of the development of our Barcelona fulfillment center. While the warehouse is almost fully stocked with products most demanded in the Southern European markets, also the number of shipments leaving the warehouse is increasing day by day. Once the auto store is running at full capacity, we can deliver at a faster pace while freeing up capacities here at the Dresden fulfillment center. We are already mentioned that in March 2023 will be a year of transition, not only for us, but for the industry as a whole. Depressed consumer sentiment and ongoing promotional activities throughout the rest of this quarter and the next quarter are taking its toll. Nonetheless, it's great to look back at the following points on what we have achieved during this first 3 months of 2023. Firstly, localized markets and full bike demand is up holding well. I can only repeat what I already said many times during the last year. The installed base of bikes in the market continues to increase. And with that, the total addressable market for Bike24. Secondly, although we are still away from the targeted 25% of full year sales as inventory, we managed to keep this position stable quarter-over-quarter, while still taking a new product of the summer season. This does not only protect our cash position but also allows us to continue offering our customers the largest assortment of the latest collections. Thirdly, the positive operating cash flow at the beginning of the year allows us a certain financial flexibility going forward. We know how important it is for investors to see e-commerce companies generating positive cash flow in today's environment, and it's up to us to show proof that we return to being able to do so. Lastly, we confirm our guidance for the full year 2023 and are confident to achieve sales growth of 0% to 10% and while generating an adjusted EBITDA margin of 0% to 3.5%. Thank you now for your attention, and we are now open for questions.

[Operator Instructions] We will start with the questions from Olivia Townsend.

I have three. The first is on inventory. So I'm wondering if you could comment on both your own position and the broader market, do you think that we could end up in a position where there is actually a shortage of inventory as we head into next year, given cancellations of orders and such intense inventory clearance. My second question is on the weather and the impact that the recent colder weather has had. We've seen this from other players across the industry that there's been this headwind. I'm just wondering, could you comment on your sales growth in April and whether you have -- you saw actual year-on-year growth and what your expectation is into May? And then my final question is on OpEx. So regarding personnel costs clearly, a significant increase in terms of percentage of sales year-on-year. I'm just wondering if you could give us some flavor of how you're expecting this to trend through the rest of this year in terms of that year-on-year percentage of sales?

Maybe I'll start with the second question, then we come to one and three. So we see, despite the bad weather and I would say, mid-Europe or whole Europe, I would say, a good start in the second quarter. Despite this bad weather, I would say, it's very similar to the last year and better than expected, to be honest. The first question was how we see the inventory, maybe there's a shortage to be honest. I think we have very good experience for more than 20 years our purchase department. So we are very good prepared for the coming months, quarters and years. So we do not see a shortage in the next quarters.

And for the market shortage?

Yes. Maybe I could also jump in here. So I think you are right, Olivia, that you see a lot of promotional activities in the whole market. And everyone at the moment has really a lot of inventories and too much inventories and everyone is trying to convert that inventory into cash. But if you go more in detail, you see a different picture between different brands and product types. So we call it brands that's also very important for bike manufacturers like Shimano and Sram for all the parts and also brands like Continental and Schwalbe for tires and wheels. And where we see still over capacities in the market. But on the other hand, we see brands with normal stock. And what we expect now is that on the one hand, we will see also increase in margins in the coming months for the brands that are not impacted by over stocks, and that we don't see any shortage end of the season because all the supply chains are fully intact now, yes? You see that bringing products from Asia to Europe is -- it's working again, and it's cheaper than doing in the pandemic. And on the other side, also the wholesaler in the market do know again the job and, I would say, like a tougher from the inventory so that if the demand is higher then we could source also product from the wholesaler.

And third one on OpEx?

Yes. So personnel expenses, we don't see any expansion in personnel expenses. We are very carefully in hiring new persons. And what's also very important is that we did, I think, a step up in our second and third management after the IPO. And that is the main reason for the increased personnel expenses, but all the positions are filled. So there is no need for further positions there. So that we see that will phase out with higher revenues in the future.

We will continue with the questions from Andreas Blom.

Guys, can you hear me?

Yes, we can hear you.

Great. Just to make it a little bit more simple, I will give you the questions one by one. First off, your gross margin was hit very hard. Can you elaborate on what happened? And why this is happening? And then why do you expect the normalization of the gross margin to come at the end of the year?

So what's happened? It's a promotional environment. So the market prices goes down. Because everyone, as I already mentioned, try to get rid of our stock. What you have to see is that in the bike industry, and I said also in some other industries, you order 9 to 6 months -- 12 to 6 months before the season starts. So for the winter season and also part of the summer season, we have to order before the war begins. And before I think the consumer sentiment is -- was going down significantly. So that's the reason why in the whole industry, there are overcapacities, but that changed for autumn and winter collection, everyone, and we expect everyone in the market is also taken into account the new situation the consumer sentiment and lower demand byproducts. So that will help that everyone as a normal stock and that you then would see also that the market prices go up again.

If I could add -- if I could quickly add to that, Andrés already mentioned it, we are in the business for 20 years. And for 19 years, we always had gross margins around 28% to 29%. During the pandemic, and we always commented on that, we had unusually high margins above 30%. Now you saw it for Q1, we have also for Q4 last year. We had unusually low margins. But if you take the difference from today to the 19 years in business before the pandemic, you see there is a discrepancy of like 7 percentage points. So as soon as gross margins normalize, those 7, 8 percentage points may drop down to EBITDA margins, and that's why we are so confident that we can return to those higher margins, right? It looks like a hockey stick right now. But on the other hand, the gross margins also dropped like hockey stick, right? So at some point, it will return and then it will ultimately have an effect on the EBITDA margin as well.

Yes. Great. Thank you. And just to keep on furthering down the road, is your gross margin hit by any unit cost that has increased in your inventory? Or are you seeing that it's basically just fully price decreases? And on top of that, are you seeing differences in the gross margin across different geographies? Or is it just the same level all over?

Yes. So the last part of the question, the easy one is the same level because we have one European pricing. So there's no only the products mix is causing different gross margin level to geographies. And by far, the main reason for the drop in gross margin is the market prices at the moment.

Great. And then the last question for me. In terms of your covenants on your financial debt, can you elaborate anything on that? Is that something you are reporting on?

No, we don't reporting on that, but -- so as you already know is that we negotiate our debt and now we feel comfortable and had enough headroom to the governance.

[Operator Instructions] We will continue with the questions from Tim [indiscernible]. Tim, please go ahead.

Two questions from my side. Firstly, on the localized markets. You had a slight decrease quarter-on-quarter in revenue in the localized markets. Maybe could you comment on, is that a typical seasonal effect or because from those strong growth rates, I would have expected maybe a quarter-on-quarter increase also. And the second question also on geography. In the other European markets, you had another sharp decline there. Could you maybe give some flavor in terms of -- is that a sort of a broad development overall markets? Or are there any specific markets where you see some higher tensions?

Yes. So maybe the quarter-over-quarter development, what you have to take into account is that last year, we have the Black Friday. That's a very strong period in time and that was performing very, very well in the localized countries. And as well, as Olivia already mentioned, the weather condition that have an impact on our business. So the March was compared to previous years, much lower from the consumer sentiment because it was not a proper seasonal start for the bike season. And the second question, could you repeat it again?

Yes. On the other European markets, except the localized markets where you had quite a steep decline. You mentioned the rest of the world was influenced by Russia pretty strongly. But -- yes, could you give us some more flavors that sort of a broad development over all countries or other specific countries where you see some challenges?

No, no, we see that overall. And I think that makes -- it's more important -- it's a strong proof that our localization strategy works. So what we assume, we see that during the pandemic and a lot of local players in markets that offer local language that offer a local customer service that offer local payment methods they're running out of stock during the pandemic because it was smaller players. So the customers in these countries are looking for an alternative and they find them at Bike24 or maybe at Signa Sports United, the bigger European player, but it was not comfortable for them to order there. So because it was not the mother language and everything as what longer lead times, longer shipping times. So they're going back because now the supply chain solve, they're going back to the local players. But if we -- and that shows, I think that's a big proof if we localize our offer to the customer, Spain, Italy, France and also Belgium, Netherlands, then the customer says, okay, there is a big player in Europe. They offer me all the comfort that also a local player does, but they have -- on top of that, they have the biggest assortment that have very fair prices. They have all when I need, and that works. So I think it's very important to see what really the impact of the localization is. It's more than the triple-digit growth -- it's -- I assume, I would assume if we don't localize our business there, we would see also a decrease in sales in Italy, France and Spain.

Maybe I can add. The most important point is convenient shopping that's what Timm mentioned. And that's why we see in the localized markets with our largest assortment I think, really, yes, good points for the customers took a side for Bike24 and to buy from Bike24. And if you don't offer it, we have to challenge to other competitors with local language, local payment method.

Maybe just as a quick follow-up. Now you launched Benelux, what's on the road map for localization maybe this year or next year? What are the next steps? Maybe you could shed some light there if you could share that?

It's not decided yet, to be honest.

We now continue with the questions from [indiscernible].

One question on the aftermarket. You mentioned that full-bike and especially e-full bikes let's say, an increasing on the increase. What about the aftermarket, I would assume that these type of bikes require some more maintenance going forward? Are you prepared for such a development?

Yes, I think that we are prepared. You mean maybe that an e-bike is more often used and you need -- and take it for longer distances, maybe. When I understand it correct. So that's right. That's also what we are expecting when the share of e-bikes is increasing year by year, so that we have a positive impact to our business, yes.

And if I may add to that, it's important to note that we only sell third-party bike rents. And every brand has some kind of service network around Germany or around Europe. So when you buy a branded third-party branded bike with us, you also get -- you can be sure to also receive off-line service, although you bought it online. And what we also noticed is if you buy an e-bike for EUR 4,000, EUR 5,000 that customer is also more likely to spend more on follow-up purchases, right? So they don't go with the cheap EUR 20 light. They rather pay EUR 100 for a more higher quality lamp, whether you need it or not, but it's more or less the same for cars or other goods.

That leads us to the questions now from [indiscernible]

I hope you can hear me?

Yes, we can.

Perfect. I just bought one question with regards to the shipping cost development, which went up for, I think, approximately 2% with the explanation due to a higher share of international orders. And could you somehow give your expectations especially throughout the year, taking into account the ramp-up planning for your location in Barcelona?

Yes. So we will see there a cost decrease in the coming months because if you compare the difference between shipping a parcel to a Spanish customer from Germany and from Barcelona. So the difference is EUR 7 to EUR 10, so that's big for each parcel. That will have an impact, but what you also see is -- two reasons. It's a higher share of international shippings. On the other hand, it's also an increase of the shipping expenses by the carrier. So -- but that we anticipated also in our budget. That's nothing that comes unexpected. And also what has an impact on profitability is our, I would say, lower AOV due to the price pressure in the market.

As we did not receive any further questions in the meantime, it appears that everything is answered for the moment, which why we are coming now to the end of this earnings call. Thank you very much for attending your interest and your questions and especially thank you to you, the Board of Bike24 for the presentation and taking the time answering all the questions. I now hand over to you for some final remarks before closing.

Thank you very much, Alex, for hosting the call and any one still has follow-up questions, feel free to reach out.