boohoo group plc (DEBS) Earnings Call Transcript & Summary

Hello, and welcome to the boohoo group plc Trading Update. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present John Lyttle, Chief Executive Officer. Please go ahead with your meeting.

Thank you, operator, and good morning, everyone. Thank you for taking the time to join us this morning for our peak trading update call. I'm joined by Carol, Mahmud and Neil. I'm going to take you through our update. And after that, we'll open up the call to Q&A. So on to the results. We feel that these demonstrate yet another great trading performance for the group with sales up 44% for the 4 months to December 31. We're delighted with the headway and market share gains that we're seeing in all of our markets, which is exactly what our platform of brands are focused on delivering. In the U.K., sales grew 42% with growth accelerating from what we saw in the first half. We believe this to be well ahead of the wider market, especially when we look at what has been reported recently. Our international markets took another great step forward with sales up 47%, accounting for 46% of group revenues in the quarter. By region, Europe grew 57%; U.S., 57%; and rest of the world, 13%. On to our brands. boohoo delivered another period of strong growth with sales of GBP 233 million, up 42% and gross margins down 20 basis points. Retail again delivered an exceptionally strong trading performance. And this is across both our womenswear and menswear brands, reflective of our strong customer offer and competitive proposition. At PLT, we're continuing to see great levels of growth. Sales came in at GBP 191 million, up 32%. Gross margins of 55.1% were down 130 basis points year-on-year. But it is worth noting that this performance is in line with our plans and consistent with what PLT delivered in the first half. Nasty Gal's performance remained very strong with total sales of GBP 41.5 million in the period, up 102%. Its gross margin of 54.3% was down 10 basis points, having now annualized a series of price investments made in the previous year. We're really pleased that its growth remains strong in its home market of the U.S. and its continued build on the great progress that has been made in the last 2 years in the U.K. And for our emerging brands, Coast, Karen Millen and MissPap, we've really been quite busy in the last few months. In early September, we integrated MissPap on to our platform, and in October, relaunched Karen Millen and Coast, having completed the acquisition of these 2 brands in early August. We're really pleased with the progress to date. We remain excited about their potential going forward, particularly pleased with Karen Millen and Coast opening the group up to a different target market. On to guidance. We're delighted with how we've performed over the first 10 months of the year and this morning are upping both our sales and EBITDA margin guidance for the current financial year. We now expect sales growth to be between 40% and 42% for the year, having previously guided 33% to 38% growth, with EBITDA margins now between 10% and 10.2%, having previously guided to margins being around 10%. Within this, we continue to see operating leverage in our more established brands, and we'll continue to invest into them and our newly acquired brands as we look to capitalize on the market share opportunities that lie ahead for all our brands globally. All other guidance for this financial year remains unchanged as does our medium-term guidance to deliver sales growth of 25% per annum with a 10% EBITDA margin. So in summary, it's been a fantastic trading period for our platform of brands. We're delighted with the integration and relaunch of our newly acquired brands, which are all showing great promise. We're continuing to take market share across our focus markets, and we'll continue to invest to capitalize on the global opportunity for our platform of brands. And with that, thank you very much for listening. And now we'd like to open up the call for any questions you might have.

[Operator Instructions] And our first question comes from the line of Charlie Muir-Sands from Exane BNP.

Congratulations. Just one actually. Obviously, you've raised your full year guidance. But it nevertheless implies quite a sharp slowdown in the final 2 months of the year. I wondered how much of that reflects tightness of inventory having had such a phenomenal performance over the 4-month peak. Or how much is that just a degree of prudence on how you expect the outturn to play out?

Charlie, it's Neil here. It's completely around guiding as we have done, which is the reasonable level of conservatism in the guidance. We're not expecting any slowdown as a result of inventory issues or anything else for that matter. But it's sensible to be conservative on the guidance for the last 2 months of the year as we have been. But obviously, we're narrowing the guidance and it's getting pretty accurate for the full year. But that's where we are. I think the stock is in a very clean position, but there's no shortage of stock for the new season as we open up spring and summer at the moment. And we still got reasonable levels for the sales in January. So we're kind of in a good place inventory-wise across all of the brands.

And the next question comes from the line of John Stevenson from Peel Hunt.

I've got a couple of questions, please. Can you comment on how gross margin sort of fared against your expectations? I guess it feels like the market was pretty competitive. But your margin looks, I suppose on the level of margin investment is quite modest. I don't know if that was -- in terms of, how that stacked up against plan really. Second question, if you can just talk about the performance of the DCs over peak. I don't know if you have any efficiency metrics you can quote or how long you're able to hold next-day delivery against prior years. And then finally, on the boohoo brand performance, which obviously has been fantastic, how much of that came from new customer recruitment versus sort of reactivations?

So on the gross margin versus expectations, if you take yourself back to when we spoke to you back in October, end of September, October, things have panned out pretty much as we've expected. And then -- we guided to a little bit of a margin investment in the second half, and that's what we've seen. And in terms of how much of that is promotion, the levels of promotion were similar to what we've expected. And what I would say is that promotions-wise, we've followed the very same pattern that we followed for a number of years, which is participate in the big discounting period. But obviously, we won't try and minimize the amount of margin we're giving away. And that seems to work quite well. It's a bit different patterns, trading patterns this year. Singles' Day was a little bit more important than it has been. And then there was a gap between then and Black Friday, which made things a little bit different. But overall, things went pretty much as we expected. The DCs performed really well, as we said in the release, in both Burnley and Sheffield. And there's not really specific performance [indiscernible] that I can quote right now. But what I would say is both were a bit more efficient than last year. boohoo, we were very pleased with because it was our first peak with automation and that performed very well. And of course, you get an efficiency gain with the automation. And then Sheffield was more efficient than last year. It was early days at this point last year, so we would have expected that. So again, kind of in line with our expectations. But...

How did the next-day offer compared to last year in terms of how long you were able to hold it for?

I think actually with the later Black Friday, things got spread out from earlier than Black Friday. And so it was, if anything, quite helpful and we were able to get next day come quite quickly in both Sheffield and Burnley. So if anything, I think that was just the different type calendar that was helpful in that respect. And then the boohoo brand performance has been existing customers and new customers. So we've seen in the year-to-date an increase in new customers. But also we've seen better frequency from our existing customers. So it was a -- you can tell from the numbers that it was a great, great performance [ mix ]. It's come from engagement with all customers, new and returning.

Okay. But what do you think the new customer run rate looking like in terms of new actives at boohoo?

It's been -- the active customers has increased. As we've seen before, you get an increase in actives that's below the sales growth rate. And we're getting more spend to the customers. So those -- all those are engagement KPIs has been very -- have shown similar trends. But just a good performance in the peak in the last 2 periods for boohoo, fantastic performance.

And the next question comes from the line of Tushar Jain from Goldman Sachs.

A couple of questions on my side. Just wondering if you can give us a sense of your average basket size trend by brand or on the group level, that will be very helpful. Second question on PLT gross margin. I'm just trying to understand where is the floor. Do you still expect gross margin to decline in the next fiscal year? And a final one, if I may. The cash generation is strong. Just wondering, is there any alternative use of cash apart from acceleration in CapEx that we should be thinking?

Okay. So on the average basket size trends, we don't break out the KPIs at this point in the year. So we'll disclose those in detail for the full 6 months period. What we've seen across the brands is similar trends to what you saw in the half year results. So you've seen the order frequency picking up nicely. Average order value is up in a reasonable way. And average selling price is up slightly. But there's a very mixed picture, different trends in different markets with different brands. So there's an awful lot going on there. But note, the healthy trends that you saw at the 6 months continued into the second half of the year. For gross margin for PrettyLittleThing, again it's exactly as we said back in September, October, that the gross margin for the established brands has been normalizing in that mid-50s area. PLT has a slightly higher gross margin with low levels of markdown. But its levels of markdown are more normal than they were last year, for instance, and that was what was driving the year-on-year decline. But it feels like it's in a more normal area. But I'll caveat that with that we'll always look at where we're -- how the price elasticity is going and price accordingly to the time frames. And we look at every single hour of every day. So -- but what we've seen is that the margin for all the brands is in that kind of mid-50s area and it feels fairly stable. And then on the cash generation side, again it is the same message that we've been growing cash or we've been generating cash nicely, but we've got a lot of the investments to make. And we're -- at the rate we're growing at, we wouldn't want to be looking at any alternative uses of cash. But we've got the flexibility there to make acquisitions, to invest in different markets and different brands, so we're quite happy with the cash position.

And the next question comes from the line of Ben Hunt from Investec.

Couple of questions. Firstly, where was the focus of your deployment of your marketing spend across the brands? Is there any particular focus on one of them? And secondly, obviously you've got a bit of margin improvement, you upped the guidance there. Where are you getting the efficiencies from?

Okay. So I mean the focus of the marketing spend was very much across the brands. We've got -- the more established brands are still very, very small in the international markets. So we've got marketing campaigns across the piece. And then we've got the new brands coming in that we've started to make some -- do some early marketing campaigns for those. So again, it's been very, very broad. We've guided the marketing spend as being quite high as a percentage of sales as it has been. And that's been where we've -- what we've done in the 4-month period. So we've had some pretty high profile marketing campaigns. But we've also covered all of the other channels in the same way that we do. So that's been pretty broad-based. And then the EBITDA margin guidance. Obviously, you've seen the strong sales performance. So we've been able to marginally upgrade the EBITDA margin at the same time that we're investing in the new brands, MissPap, Karen Millen and Coast, which is great. And we're seeing a little bit of leverage on the distribution costs. And again, that was what we've alluded to back in September. And then as we overachieve on sales, you get some fractional leverage coming through, more on the central costs. And that was, as we said back then, enough to offset the investments in the new brands. So we're really pleased that we've been able to maintain that and actually upgrade the EBITDA guidance at the same time as starting to make those investments in the new brands.

All right. And just one quick final one. On Nasty Gal, do you feel you've come to the end of your price realignments there and that 54-ish gross margin is probably where it lies? Or is there probably still more to go?

It's the same comment as I was just talking about with PrettyLittleThing that we're seeing those -- that price point at the mid-50s gross margin in there. But with Nasty Gal, you've still got potentially investment to make in its most mature market in the U.S. But in the U.K., where we've been investing a lot, we may be able to ratchet up the gross margin. But again, it's the same comment that we look at that every day, the dynamics can change day-by-day. But longer term, that mid-50s margin feels fairly stable.

And the next question comes from the line of Greg Lawless from Shore Capital.

Just one for me. Just on Coast and Karen Millen, I just wondered if you could give us a little bit of color on how big the ranges are and what the kind of consumer reactions to the new ranges have been.

Greg, it's Carol. Yes, we've gone from just launch in early October there just a few runs to start up to about 1,000 on Karen Millen now, a little bit less on Coast. Reactions have been great and quite remarkable from about running a value business previously. We've seen different reactions in different areas. I mean we've seen great reactions to cashmere in terms of jockstraps. We've seen shearlings. We've seen leather really performing very well, suiting and some of the workwear that Karen Millen has a very, very strong name for previously that we've reintroduced into the brand and has done very, very well. So it's been a bit of a mixed bag in terms of bestsellers. But yes, very promising in terms of that range development but still a long way to go in terms of broadening that out.

And just in terms of how big can these ranges get, you obviously got spring/summer coming and then autumn/winter. How -- where...

I think it's just development of new areas really. Currently, if you looked at the site, you'll see how it's made up. And it's workwear, some going-out, lots of coats and knitwear. There isn't -- there's lots of areas. If you look at our other brands that we've grown into, athleisure, beachwear, stuff for holidays, vacation wear, all of that stuff, there's a load of areas that we still need to grow. And including fatigues and plus and all of those other things as well. So that range will continue to grow over the next 12 months as well as at the same time integrating a new supply chain into that brand. So I think that it's -- I wouldn't say it's been slow and steady. It's been fast, but it's been steady and it's been really well executed.

And the next question comes from the line of Szilvia Bor from Crédit Suisse.

A couple of questions from me, please. Firstly, could you give us some color on how the supply chain is shaping up for Karen Millen and Coast? And then secondly, could you talk a little bit about how far you have gotten in terms of rolling out the pay data solutions to new markets since the first half of the year? And perhaps finally, is there an update that you can give us on the supply chain transparency from an ESG point of view, please?

So first of all, from a supply chain, John here, from a supply chain point of view for Karen Millen and Coast, as Carol has pointed out, sort of early days at this stage. But we're really, really pleased plugging in a new supply chain into Karen Millen, very much so around the test and repeat, which has worked very, very well across the other brands. So Carol talked about 1,000 options at this stage in Karen Millen and a little bit less than that in Coast. So early days, a lot to do. If you think about it in terms of Nasty Gal, when we launched Nasty Gal over 2 years ago, that was just around 400 options. Today, that sits over 10,000 options. That will give you some sort of feel about where we have to go yet on Karen Millen and Coast. In terms of the other piece around supply chain, on transparency and ESG, we continue, as we always have, in terms of our audit process. And that's 2 routes, really. One is our internal auditors, visiting our factories and ensuring that the highest standards and our code of conduct is executed. And secondly, third-party auditors, whether it's here manufactured in Europe or whether it's in Asia, again just validating the audits and checks that we do ourselves. So we continue that journey. And as the industry does, we have more ranges in terms of recyclable ranges across boohoo, across PrettyLittleThing, and we just see that increasing as we go forward.

And then on the payment, pay data solutions?

Yes. Szilvia, on the pay later solutions, I mean, all we really say is that getting the right payment types in the right geographical markets is very important. And we've been really making sure that, that's been happening. So we've rolled out other solutions, I think, in most markets. And there's lots of different pay later solutions. Customers seem to react positively to it. And I think we're just going to continue to make sure we've got the right payment types in the right markets.

And the next question comes from the line of Adam Cochrane from Citi.

Two questions, if that's okay. Firstly, on the U.K. minimum wage, seeing some regional increases coming through again looking forward, does that have any impact on your sort of supply chain costs given the U.K. sourcing? Is it something that you will need to mitigate? And then secondly, as the sales performance has come in better than expected, does this make any acceleration in terms of your international DC plans or your future capacity?

So the first one, in terms of the U.K. wage rates, what we're seeing now, the factories are looking at better efficiencies. And that's around perhaps, it could be better machinery, et cetera. So we're working with that, as I'm sure most industries in the U.K. are that are faced with these increased hourly rates. But in principle, we see it being dealt with through efficiencies. So we're still very much a supporter of made in the U.K. and U.K. jobs. And we'll continue to support that as we go forward in the future. In terms of the DC, we've got Burnley and we've got Sheffield. We have works going on in Sheffield at the moment, where we're building in mezzanine levels. And we're looking at a level of automation in Sheffield also. Including that and some further works in Burnley, by calendar year 2022, that gets us to about GBP 3 billion of net sales. Like anything, warehouses don't sort of spring up overnight. Usually, you need sort of 18 months' to 3 years' planning. So as you can imagine, we are sort of looking at sort of '22 and outwards. And that would indicate at this stage that potentially [indiscernible] for the boohoo group would be internationally. But we're working through that at the moment. And that work should be complete in the next couple of months.

And the next question comes from the line of Anne Critchlow from SG CIB.

I've got a couple of questions on Karen Millen and Coast, please. First of all, on customer acquisition, how are you acquiring those new customers? Do you know where they're coming from? As in, are they previous customers of those brands? Or is there any overlap with your other brands? Or are you just getting them by target marketing, social media and so on? And then a broader question really about your Karen Millen and Coast experience to date. Is there something that makes you think that the boohoo business model could be applied successfully basically to any fashion brand? And does that affect your interest in or confidence regarding any future acquisitions?

Well, do you want...

Sorry, John here. So I think in terms of the boohoo model kind of be applied to any fashion model, yes, it can. And for those, it's really around which fashion models we might think are appropriate to the group and adds value to the group in terms of our strategic platform as we go forward. So principally, yes, the model fits. But it's really about which brand may fit with what we want to do as we go forward.

And on the customer acquisition, you can imagine, we really just started up with Karen Millen and Coast in October. So we've seen quite a lot of sales coming from the existing Karen Millen and Coast customers. But we've got limited intelligence on that because going from high street brands to now online pure-play as you kind of exactly tell. But from the data that we've got, we can see that we've seen a good response from the Karen Millen customers from before we took over the brand. But also we've acquired some new customers as what the data is showing. And the marketing that we've done, we've not done big marketing campaigns yet for those brands a la what we've done with the other brands in the past. So a lot of it has been digital marketing, but we are acquiring customers. And so as Carol said, the reaction has been very pleasing.

And a quick follow-up to that. Are you now planning a bigger marketing campaign for those brands?

I'm sure we will be doing.

Yes. I can answer that. I think, yes, just a clarity on when it comes to marketing, the principal job for both Karen Millen, Coast and MissPap really has been building that inventory and getting that stock proposition right. So that's what we've really been doing. We will be looking to launch some smaller campaigns on the spring season. But I think bigger, big campaigns maybe in the second half.

[Operator Instructions] Our next question comes from the line of Simon Bowler from Numis.

It's only a quick one for myself actually and a little bit kind of modeling-related. But just thinking about the minorities and how that's likely to kind of finish up for the year. And I don't know if there's a kind of a hard number or a range you can kind of point towards. Or how we should think about from maybe kind of a margin profile aspect? It sounds kind of PLT's margins kind of moved forward year-on-year despite the gross margin decline. Is that a fair way to think about it?

Basically, I mean we've said that all other aspects of the guidance remain the same. So you could stick with that. I think the strong performance of boohoo has been -- meant that there's a little bit of a mix effect on the minority, but -- so it should be positive. But I'd assume that, as we've said today, that just the other guidance remains the same. You can look at it in terms of the sales growth on your own models and work it out like that. But otherwise, it's only a couple of months to what we had previously.

And the next question comes from the line of Paul Rossington from HSBC.

Well done. Sorry, just a question, can you remind me what the split is on sourcing, U.K. versus international versus Asia, and also what your lead times are now looking like out of China, please?

So roughly, it's about 40-20-40 in terms of as the sourcing split stands. And we don't disclose our sourcing times out of China. But wherever in the world, we're fast.

And as there are no further questions, I'll hand it back to you, John.

Okay, guys. So thanks very much, everybody, for joining the call this morning. And as I stated earlier on the call, a tremendous set of results over the period. So thanks very much, and talk to you all again soon. Thanks. Bye-bye.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.