Björn Borg AB (publ) (BORG) Q2 FY2025 Earnings Call Transcript & Summary

Good morning, guys, and welcome to our Q2 presentation. Beautiful Friday. We're at Björn Borg are getting ready for the midnight run tomorrow. You should join us if you can. So we're partnering up with Midnattsloppet. And so tomorrow, in Stockholm, more than 30,000 runners will be wearing a beautiful Diva Pink Borg tee. And of course, everyone working for Björn Borg is doing the run as well. But enough of that. Looking at Q2, I think the clear highlights obviously is that our Sports Apparel and our own e-com is continuing to perform exceptionally well. So own e-com, growing 26% in the quarter, benchmarking that against competitors, we're clearly taking market shares. The growth is spread across almost all of our markets. So that's very, very reassuring. And of course, a clear sign that the brand is getting stronger and stronger and stronger. And of course, a combination with a very strong product offering, of course, is the reason for this very strong growth and, of course, together with a great team that is managing our e-com business. But of course, I think the highlight that is worth talking about over and over again is our ongoing very, very strong momentum with Sports Apparel, so plus 45% in the quarter. So those has been following us for a while. You know that this journey was all about taking this very beautiful, strong men's Underwear brand and moving that into a bigger arena, moving into sports, Sports Apparel, extending the categories and by doing so, growing in our already existing markets. That was the plan. And we can now conclude that we have 10, perhaps even 11 quarters of very, very strong Sports Apparel growth. So the clear highlight, obviously, plus 45% versus last year in a market that is very, very challenging. And again, these are comp numbers. So it's not like we have bought something or that we have added something that we had in the past. It's really comparable numbers. So I'm super, super, super proud over that development. And the highlights, of course, we're continuing to grow our top line, 6%, of course, I'm not really happy with that. We want to grow even more. Currency neutral, looking at total sales were actually above 10%, which I think is good in a fairly tough market. It's driven from wholesale. And of course, on e-com, I already talked about. Our retail operations, our own stores, of course, is declining because we're closing down here, but also those that we still have are getting smaller and smaller versus last year. Part of that is actually related to that we got some support last year, a payback from our COVID support back in the days. But nevertheless, on Retail, of course, that's not our focus. Wholesale and e-com is looking at the product categories, of course, Sports Apparel, plus 45%. Bags is doing really, really well. Underwear is also on a strong growth number. And yes, Footwear in the quarter is down. But we need to remind ourselves that last year in Q2, that's when we sold almost all of our products in the first half year due to the bankruptcy that happened in Q1 last year. So it's not really comparable numbers. Nevertheless, of course, we want to see stronger Footwear numbers. The highlight, obviously, is that we are still growing very, very good with Footwear in our own e-com, which is more sort of comparable numbers. Our gross margin is declining versus last year. And there's many different reasons for that. One is that we got a bit of a support last year, so it's hard comparable numbers. It's also product mix, also a bit category mix and the country split. And I think we also have to yet acknowledge that, of course, we have been a bit more aggressive when it comes to clearance on own e-com to continue to take market shares and drive growth. That's also, of course, impacting it versus last year's same quarter. Profit is increasing, which is fantastic, of course. And we have a very strong financial position, as always. Our long-term goal doesn't change. So this has been with us and me since I joined Björn Borg in 2014. We're here to build a sports fashion brand. Our long-term financial objectives remains the same. And the strategy obviously remains exactly the same. So really growing the Sports Apparel business, the Footwear business, the Bag business and moving us into a bigger arena. That's clearly the main objectives. And the good thing, of course, is that the brand, one of the things that makes us truly unique is getting stronger and stronger. And this slide probably would be my screensaver for the rest of the year. But when we look at Q2 data from all the markets where we're measuring this, which is Sweden, Finland, Denmark and Norway, Holland, Belgium, we ask 400 consumers every week, a bunch of different questions. And one of the questions is that out of this list of brands, which would you consider buying? And in Q2, we are at an average in those markets, #3. So this is absolutely incredible. And thanks, of course, to a great effort from the marketing team. But in combination, of course, with being in the right distribution and creating great products. So the only ones that are now bigger in terms of people considering buying them is Nike and Adidas. We're ahead of everyone else. So let's just hang on to this slide for a while. It's just very, very beautiful. If we dig a bit deeper into it, you can see that the push in Germany is actually going really, really well. Consideration for HIM is also increasing and purchase intent is also going up. So course in this brand track numbers, it's a number of different KPIs, but the main message is that the brand is getting stronger and stronger every quarter. And of course, that is what we also going to see in our e-com growth number as 1 example. The trick has always been how do you maintain a strong Underwear position being the market leader in underwear and at the same time, they're moving into this bigger arena of sports product. And we can see that purchase intent is going down a bit versus last year, but still, of course, very, very high on Underwear Him. We're maintaining a very strong position, Apparel, continuing to be on a very, very good trend. And looking at the top line, as we've seen, we want more. But with that said, we have never sold more in a Q2. But for the details, I'll bring in my CFO, Jens, so listen now.

Thanks a lot, Henrik. It's good to be back from summer holidays. Good to be back with Henrik. You're fired up. Maybe I should print the slide on the brand position and frame it for you. It's beautiful. I agree. On the top line, however, we can see that the Q2 is super strong. Never have we had a stronger Q2 in the history of this company. So really proud to see that we're growing. Yes, we want to grow more. We want above 10%, 6% is still good in a tough quarter. Breaking it down to the different markets, we can see that in our own subsidiaries, almost all markets are growing. We struggled a little bit in the Benelux but that is temporary and it will bounce back. In terms of the distributors, overall, going down. However, our biggest market in Norway is still just above the 0 line. If we combine that into our segments or channels, wholesale is growing 9% in the quarter. Here, we can see that the physical doors, the brick-and-mortar are growing with 16% while the online players are fighting a bit with minus 3%. And own e-commerce, you heard from Henrik is growing 26% in the quarter, super strong, while everyone else is losing market shares, we're gaining. Own retail is declining. Comparable stores, meaning the same ones we had opened last year, excluding contributions from any government on COVID, et cetera, it's minus 6%. So still declining but not really the focus either, as you heard before. Distributors, minus 11%, mainly the -- some of the smaller distributors have a bit of a catch-up to do. If we look at the online sales and when we talk about online sales, we talk about our own e-commerce, obviously, the wholesale e-tailers, meaning wholesale partners selling online only and marketplaces. Here, we have kept track of this for a while, and we can see that it's going up in absolute numbers and if we compare it to last year, even in percentage of the total sales. Obviously, if we were to see how much of our products are sold on physical players own websites, it should be an even higher number, obviously. Breaking down the sales to our categories. You heard from Henrik many times today that the Sports Apparel is up 45% in the quarter, super strong really comparable numbers as well. So very, very good to see. But also Underwear bounce back. For those of you remembering that Q1 had a timing problem, let's say, or challenge in the first quarter, it now bounced back in the second quarter with plus 11%. Bags back to growth of 38%. So yes, good to see as well. Looking at the bottom line. So gross margin is down towards end of the Q2. Mainly, you heard a bit from Henrik as well, but we have -- the biggest contributor to that is that the large key accounts are taking a bigger share of sales with slightly higher discounts, but also the D2C channel mainly in e-com is having slightly lower margins in the Q2. In the operating profit, it's increasing versus last year slightly, whilst net income is slightly declining. However, this is related to revaluation or FX revaluation of our accounts as well as some hedging impact that's impacting us negatively in the quarter. In terms of the balance sheet, the equity is still strong, very stable, around 50%. Net debt is increasing slightly. We have a slightly higher dividend. At the same time, the old e-com channel is taking a bigger share of sales, requiring a higher inventory, requiring that the net debt is increasing slightly compared to previous years. The working capital in relation to the rolling gross sales, we want to be around 20%, slightly up during the Q2 but not alarming. So it's 22%. But I think it's going to keep fairly stable around the 20% line roughly. With that, I'm very happy to be back to work. Very happy it's Friday. Henrik, should you round this up before we go to training.

Yes. So thank you for hanging in. A couple of key takeaways. So one, of course, in terms of the brands. We talked about that the brand is getting stronger and stronger. Of course, that's our most important asset, that what makes us truly unique. The stronger the brand, the bigger the price difference between what it costs to produce a product and what we can actually charge. So that's very important, and it's going in the right direction. Secondly, of course, we have a very, very strong momentum in own e-com, as you have seen. And also, wholesale is doing a very, very good job. Interesting enough, of course, we see that it's really the brick-and-mortar that is now growing whilst the e-tailers are declining. So even, of course, that the retail trend, we continue believes it's going to be fewer and fewer stores, we see that being where the consumers currently are is, of course, crucial for us. And that means, of course, the 1 big part of our business will still be based on physical retail. And the last of course, in terms of category, very, very strong momentum for Sports Apparel, that's fantastic. But also, we see good momentum in Underwear currently and Bags. When it comes to Footwear, well, it's declined in the quarter, as we said, hard to compare because, of course, last year's number was the full year numbers in Q2. But nevertheless, we have integrated that. It's a great potential, but of course, a lot of hard work to integrate that and turn that around and make that also contribute to our plans of growing even further. Overall, to summarize the whole quarter. As I said also in my CEO comment, I think it's a good quarter. It's not a great quarter. It's certainly not a bad quarter. The highlights clearly that we're growing Sports Apparel, own e-com and wholesale. The more challenging part where we need to dig into deeper is, of course, the margin development, but also, of course, the Footwear category. But to sum it up, again, a good quarter. I'm super proud of the team that in a very, very tough market reviewing some of our competitors. We believe that we are amongst the few ones that actually are gaining market shares and growing top line and actually profit. So I think with that, I'm sure that Hjalmar want to fire in as well.

Yes. Thank you so much. And I guess let's start a bit with the pricing pressure from the discount that you mentioned. Should this be a concern ahead? Or are you confident that this price pressure that you mentioned is temporary? What could we expect? I mean, going forward, I mean, looking back, you had quite a good pricing power, I would say. Is this just a temporary dip or what's like the current situation on the pricing?

And I think the pricing power is as strong as it has ever been in terms of the brand. But of course, we need to acknowledge what is happening around us. And of course, one of the levers that we can play with is just to increase the margin a bit, being slightly more aggressive in certain product groups, perhaps investing slightly different to continue, of course, to drive growth, predominantly in our own channel. So that is really the main thing we see in Q2. So if you want to grow, you need to be a bit agile and finding ways to enable growth. Still, of course, we want to improve profitability. So if we look at the e-com channel, well, yes, we are dropping in margins slightly, partly due to increased discounts, partly due to product mix, but of course, also the profit on own e-com is increasing. And of course, that's the balance we want to have because ultimately, of course, it's all about selling a lot and making a lot of money. What happens in between, less important. That's sort of our view on that. On wholesale, we are focusing on our bigger customers and the bigger customers buy bigger volumes, with that comes slightly higher discounts. So of course, the evolution, if that continues, is that the discount on wholesale will be slightly bigger simply because we're selling bigger volumes to bigger customers that has slightly higher discounts.

Yes, yes. So a little bit in the D2C channels. Lower margins to push growth than at least for the short term being, is this across all markets, if you look at your own online? Or do you feel this is particularly emphasized in certain markets?

No, it is a bit differently depending on which market we're currently in and where we see traction. So it could vary a bit between some of the markets. We've seen currently that the behavior in Germany, for example, they are very, very hesitant. There's a lot of worries about what's going on around them, which is also impacting their willingness to sort of spend money. But on the same side, we see that we have a very strong momentum in terms of selling to German consumers. So that's actually up 29%, almost 30% year-to-date. So sold into Germany to German consumers. So that's a mix, of course, of own e-com and German customers, but still very low volumes. So it's a bit different depending on market.

Okay. And I know you don't provide guidance, but if we look ahead, I mean, you have some, I mean, currency or FX related tailwinds looking into the second half here due to the purchasing terms and so forth. But then also, we mentioned some margin pressure here. How should we balance these 2 items? Are you confident that maybe you could have margin expansion looking ahead? And how do -- like the sort of -- how do these items like counteract each other?

Well, I think the easiest way, and of course, everyone listening are very smart and talented people. And as you say, of course, we are purchasing most of our products in U.S. dollar. We're selling, well, close to nothing in U.S. dollar. Well, actually right now, nothing because we closed down the U.S. business due to all the stuff that is happening. So of course, that will have an impact on our gross margin, for sure. So it's simply all about measuring what the currency is currently versus how it was a year ago. And then, of course, timing that in when we purchased the stuff, but also, of course, when we sell the stuff, but it's very, very clear that a weaker U.S. dollar is something that will help our gross margin. That's clear. But it's also a case where the SEK Europe plays into account. So of course, what we now see with -- I wouldn't say that the SEK is strong, but it's changing a bit in a direction where it becomes a bit stronger, of course, also impact our top line negatively. So it impacts our P&L in many, many different ways. And I think also, not to sort of overcomplicate things, but as we talked about in terms of our financial net, here, we are reevaluating our cash and loans at the beginning of the quarter versus how we are looking at the end of the quarter. So those fluctuation also will have an impact on most of then, of course, our profit after tax. But -- so there's a lot of different things that's impacting us due to the currency at least last, -- well, probably a year, it's been very volatile. So that's going to make it a bit trickier, of course, for people to see, okay, how is that going to impact the Björn Borg business. But from a gross margin perspective, that will definitely have a positive impact. All other things, the same.

Yes. Okay. Yes. And then on Germany, I mean, you mentioned the development, particularly maybe in Hamburg, which is your focus area here. Is the German consumer overall, I mean, putting pressure on your sort of development in this region? And how should we look at this? I mean, going ahead, are you confident that you can keep growing in this pace? Or is this maybe just sort of like a one-off?

Certainly not one-off and we're very persistent. So of course, I've been doing this now since 2014, and there was many reasons to give up along the way when things didn't go as planned. So we simply do not give up. And it's clear. If we look at Germany, that market is as big as all our other markets combined. So massive, massive potential. With that said, of course, not an easy market. And that's what we said, let's aim small. Let's start with 1 city and then slowly built a strong community, and that's what we've done in Hamburg. When we look at some of the KPIs, so brand track data from Hamburg or our own e-com into Hamburg, we can see that we are now doubling our sales on our own e-com, 2 people living in Hamburg. So that's the quickest growing city now in our own e-com. Of course, that showcase that the investment is really paying off. So we are in Germany to stay. And then, of course, how long will it take until the German business will be a substantial part of our overall P&L. Hard to say because, again, of course, when you look at the P&L, it looks like it's already big, but that's due to the Zalando business, which is not really to German consumers. So now we're trying to build a strong brand towards German consumers. And then Zalando plays a role, but predominantly, own e-com is our key channel to win German consumers. And that in Germany is going so far, good, and those investments will continue.

Yes. And you mentioned some -- I mean, we've spoken on the reduced pricing in order to maybe like drive growth ahead. Maybe that is indicating somewhat the challenges in the market driving growth currently. Considering that, what should we expect in terms of marketing looking ahead? Are you feeling that you have a good yield on the marketing spend right now? And how do you see that developing?

Well, I think we found a fairly good balance in terms of how much we need to spend. I would say, roughly between 7% and 9%. That's what you could expect from a company like this to invest into marketing. And then, of course, when you benchmark with other companies, you don't really know always what they put in into their marketing working budget, whether it's showing up elsewhere in the P&L. But I think that's a good starting point. And then, of course, out of that big chunk of money, how you spend it is going to differ. And very, very clearly, if we talk about performance marketing, so the stuff that is then driving e-com business as 1 example, that's very easy to measure. So you know that I put in something here, then this is what I get out. But of course, a big chunk of our marketing is still in formats where the benefit in terms of P&L impact in terms of revenue or profit, it's hard to calculate. So one, of course, example is the Midnattsloppet, the midnight run we do on Saturday, absolutely incredible. So yes, imagine in the middle of the night, so more than 30,000 people running in our Diva Pink Borg tee, incredible. Of course, it's going to have a massive impact for the brand. The event is perfect for us. That's where people are there are not [ predominantly ] runners, but they run because they want to do something else potentially. That's where we want to be. But of course, if you try to translate that into revenue, then it's going to be very hard. We don't know how much stronger the brand will be because we're there. So it's not an easy question to answer. Do you get the money back from your investments? I believe we have a very strong team in place. I believe that when we look at the brand track data, us being #3 is 1 example, it showcased that we are spending the money where it needs to be spent to continue to drive the brand. That's my assessment of it.

All right. And then finally, on the sports development naturally. I mean, still solid numbers in this quarter. Like just how far can this reach do you feel? What are your ambitions looking ahead? And what -- can you maybe remind us again of the drivers of the portfolio.

So to describe 45% growth was solid, Hjalmar. I'm probably more thinking extraordinary. But hey, that's just me then. But again, we believe that Sports Apparel will be our biggest category. And looking at own e-com, year-to-date June, it already is bigger than Underwear. So of course, that is where we are heading in our mature markets, so without opening up a new market. So of course, Sports Apparel will continue to grow if things go as planned, more than double digit. I'm sure there will be exceptions here and there because things doesn't always go as we plan. But of course, that's where the volume growth, that's where the big potential is. We can certainly do SEK 1.5 billion, perhaps even SEK 2 billion in Sports Apparel in existing markets already without that being very strange. And of course, currently, rolling 12, we're just above SEK 300 million. So huge potential. But again, it doesn't always go as we plan. So I'm sure that 1 quarter will be 45% again, another one, perhaps will showcase something else. It's hard to know. But long term, our view is very clear. We have not changed our long-term ambition, and that is to be a global iconic sports fashion brand.

Perfect. Thank you, Henrik and Jens, for coming here today, and I'll leave it to you for any concluding remarks.

Yes. Thank you. Well, it's Friday, so make sure you do a bit of a workout. And if you can, I'm not sure if there's any spots available, you should come and join us tomorrow for the midnight run if you're living in Stockholm. It's going to be absolutely incredible. And actually, our biggest shareholder, Martin Bjäringer is joining as well. So that's going to be worth a visit just to meet him. So with that said, have a fantastic Friday. We're happy with the quarter, and I'm just so happy to be back from vacation, can't wait to dig in and continue this growth journey with Björn Borg. So thanks a lot.