boohoo group plc (DEBS) Earnings Call Transcript & Summary

Good morning, and thank you for joining us at short notice. We've got 30 minutes this morning. So I just want to give everybody a heads up on that before we start. I'm joined in the room here today by -- with Neil, Carol and Mahmud. Today, we will be running through trading for the 3 months ending 30th of November 2021. Since we announced our half year results in September, gross sales have remained robust, up 28% across the period ahead of the growth achieved in each of the first and second quarters of the financial year. Demand in the U.K. has remained exceptional across the group's established and new brands, validating the strength of our business model, where our leading proposition across price, product and service continues to resonate strongly with customers across our brand portfolio. We have achieved 1- and 2-year growth rates in gross sales of plus 58% and plus 102%, respectively. However, we have experienced higher-than-expected return rates, which have now pushed ahead of pre-pandemic levels. They are around 12.5 percentage points higher than last year and 7 percentage points higher than before the pandemic. This has been driven by an exceptionally high dress mix. As a result, net sales in the U.K. grew 32% in the period on a 1-year basis and 78% on a 2-year basis, highlighting the group's significant multiyear gains in share in its core market, where the proposition continues to resonate strongly. In international markets, our performance has been impacted by significantly longer lead times, that it is taking to deliver parcels to customers as a result of the pandemic, with old products currently shipped globally from within the U.K. network. In key European markets, such as France and Ireland, demand has softened since October to our peak trading months due to the increased local restrictions, consumer uncertainty from the pandemic and continued delivery related impacts. Trading in the U.S. has been behind expectations as we continue to be affected by significantly extended delivery lead times compared to our proposition pre-pandemic. Our belief is that this will improve as airfreight capacity increases and lead times will shorten. Over recent months, global supply chain disruption has created significant inbound freight cost inflation, which has been more pronounced than anticipated, impacting gross margin in the period, which was down 100 basis points year-on-year. Whilst this cost is temporary and expected to unwind when the pandemic eases, it is estimated to impact EBITDA by approximately GBP 20 million over the course of the full financial year, with GBP 3 million incurred in the first half of the year, the majority of that falls into H2. Operationally, in the last few months, we have been really strong performance, having taken our 4 new brands through their first peak trading period, opened 2 new distribution centers, and having onboarded and commenced shipments to our first 2 international wholesale partners, with further partnership plans for next year, unlocking future growth opportunities. Moving on to guidance and outlook. We now expect revenue growth for the full financial year ending in February 2022 to be 12% to 14% from the 20% to 25% previously guided. Noting the higher-than-expected return rates in the U.K. and weaker international demand, along with our expectation that the ongoing uncertainty we have seen recently continues, and recent developments surrounding the Omicron variant could pose further demand uncertainty and elevated return rates. The adjusted EBITDA margin for the full year is now expected to be 6% to 7% from the 9% to 9.5% previously guided. This implies an adjusted EBITDA figure for the full year of between GBP 117 million and GBP 139 million. This is as a result of the significantly higher return rates impacting net sales growth and costs, with extended delivery times impacting international demand, both of which drive lower returns on marketing expenditure along with significant ongoing pandemic-related inbound freight cost inflation. We remain extremely confident in our future prospects given the exceptionally strong growth reported in the U.K., where we have maintained our leading proposition. We also continue to make significant investment into infrastructure for a network capable of delivering in excess of GBP 5 billion of net sales, with our first U.S. distribution center expected to go live in 2023, but options currently being considered to expedite this process, supporting a return towards our normalized growth rates of 25% per annum post pandemic. We are also confident in our medium-term guidance of a 10% adjusted EBITDA margin. Our financial performance this year contains pandemic-related costs that we expect to unwind along with investments into our recently acquired brands that will leverage as they scale. These costs consist of inbound freight cost inflation of approximately GBP 20 million and freight cost inflation of approximately GBP 45 million as a consequence of higher carriage rates compared to pre-pandemic levels. And start-up costs of approximately GBP 10 million into the brands we acquired earlier this year. Summarize, since we last reported, we have seen continued strong growth in our core U.K. market, which is where we have been able to maintain our leading proposition. Whilst the return rates have continued to increase above pre-pandemic levels, the strong performance clearly demonstrates how the proposition resonates with customers and how successful it is when the product, the price and the delivery are right. International, there continues to be delays to delivery times, and that has affected that leading proposition and we expect continued headwinds until international airfreight capacity returns to more normalized levels and the delivery times come back down to normal. This is clearly temporary, but uncertainty remains around exactly when we will start to see that ease. On the cost side, we have seen pandemic-related inbound freight cost inflation significantly above what we experienced in the first half of the year, and this is expected to continue for the remainder of this financial year and then to next. We have gained significant market share during the pandemic, and our focus now is on improving the international proposition through continued investment in our global distribution network to deliver in excess of GBP 5 billion of net sales capacity to support our future growth. Looking ahead, we are very positive about the post-pandemic outlook and the headwinds I've talked about begin to ease. As demonstrated in our international markets before the pandemic and as we continue to demonstrate in our core U.K. market, this is a great business with great potential, great growth ahead, and we are continuing to invest for the future to take full advantage of that potential. I'm now going to pass over and start the Q&A session.

[Operator Instructions]. And we'll take our first question from John Stevenson, Peel Hunt.

Apologies, I missed the start of your call, but I'm wondering if you can just give a little bit more information around sort of the brand versus market, your possession of that, certainly in Europe. I think you talked about September being normal. So as sales have deteriorated towards the back end of the quarter and into peak, can you draw any sort of data or just your experience in terms of why you perceive this to be sort of more market-driven, the extent to which your service proposition has deteriorated against what it was before behind the sales drop?

Thanks, John. Hi, there, it's Neil here. I think we can give you some of the shape -- I think we can give you some of the shape as to what's happened since we last updated in September. So back at the end of September, we were seeing positive trajectory changes in the U.K. and also in Europe in our major markets of France and Ireland. The U.S. was not so much. But the -- what we saw in the U.K. then, as you can see from the numbers that we saw that continue to accelerate. So we saw a good acceleration in gross sales year-on-year increases, from the mid-30% year-on-year to the mid- to late 50% year-on-year. And we've seen that through the period in the U.K. That's been accompanied with a sharp continued increase in returns rates. So in the U.K., the return rate has been the big factor, but it's all at the net level continue to perform exceptionally well. And the returns rates we -- back at the end of September, we expected would continue to be at pre-pandemic levels because they've returned to that level in Q2. And what we saw on returns rates in the U.K. from there on in was that they continue to increase and actually increased more sharply towards the last few weeks, actually, and over the peak Black Friday weekend. And now those returns rates have started to moderate a little bit, but seasonally not as much as they would normally do. And I think you've got that Omicron effect there. Now the big miss is around the international sales and Europe as well as the U.S. And what we've seen in Europe was that trajectory that we've seen through September continued into October, but then reversed. So those key markets went into growth in September, that flattened off in October and then went into reverse to decline again. Now looking at the market, I think we did see correlations around not lock down restrictions, but just restrictions generally around COVID. So when things opened up a bit, and we came into the new season in September, we saw that positive trajectory. Now we expected that to continue through October, November and December, but it flattened off and then started to reverse in November, and we saw the 11% decline over the whole of Europe during the quarter. So that was the European dynamic. I think it -- well, there does seem to be a correlation with market factors around whether people were as buoyant in their purchasing for going out, et cetera, in Europe. We didn't see that the same level as we saw in the U.K. But then the big factor there is our delivery proposition in Europe isn't as competitive as the U.K. So a different dynamic. But of course, you've got the full high street competition set there, and we're competing against that from a same-day delivery as opposed to our extended delivery times, which in Europe have been around 7 to 8 days pre-pandemic that would have been 3 to 4 days. So that's the factor that we have been there, but we didn't see that buoyancy and the demand continue that we did see in September through the peak period. And then similarly, in the U.S., we were expecting the market factors to be more buoyant too in the holiday season, we'd expect to have led to higher levels of demand for us relatively year-on-year, and that hasn't manifested as well. While we did see an improvement in the U.S., which was in decline at the end of the quarter, the previous quarter, we didn't see that improvement come through to the extent that it did. And again, as we got closer to the end of the calendar year, we've seen that soften again. But we have seen times of good improvements in the U.S., and we've seen that in recent weeks as well. So you can get from that, there's also a lot of volatility in the demand, which we have seen through different periods around the pandemic. So it's those factors, which are all transitory, in that we firmly believe that they will change once we're in the wake of the pandemic, rather than in the midst of it, which we seem to have been for the last 2 years now or 18 months now.

Okay. And Neil, was the delivery proposition for Europe, did that -- was that running at that level really from autumn, or did it actually deteriorate into speak?

It didn't significantly deteriorate. It's been at those levels for the last 15 months, at least.

John here. What we did see, John, is back in pandemic in the early stages, when people were spending more time at home, and actually, it was all about athleisure and hoodies and joggers. Actually, that waiting time wasn't so bad for them because they weren't doing anything. But as actually fashion has switched back on again, and as we've seen that mix of dresses go right back up, actually suddenly now, I'm going to out of the weekend and actually that sort of 7, 8 days is just not good enough. And equally, in the U.S., to wait 10 days for that dress is not good enough for a fashion consumer.

Next question comes from Adam Cochrane in DB.

A couple for me. I'll do one at a time. In terms of the returns rate, is this all a mix impact towards the dresses as you say? Or is each seeing higher returns, please?

The main driver here is really dresses. So if you go back to the early stages of the pandemic, you had that massive swap from sort of athleisure and people not wearing dresses anymore. We've seen -- obviously, that's completely flipped towards the end of summer and as we went into autumn and dresses actually back and above pre-pandemic levels. And then the interesting thing within that is actually the mix of the dresses that we're selling within the dresses category is again very much around going out and equally in terms of fabrication very much around woven fabric. So it's absolutely the key driver here is dresses and then within that going out dresses.

Okay, fine. So the other categories are staying roughly the same rate of returns. It's just a movement towards -- is that because people are buying 3 dresses, sending 2 back. Another way of thinking about it is the net demand. So we've been covering online stocks for best part of 10 years. And we've always talked about net and never really about growth. The returns rate was some kind of trade secret the company didn't want to discuss. And now it seems to have become really relevant. Is net sales the best way to think about underlying demand rather than gross sales?

Net sales is the bottom line, and that is the best way to think about demand. But I think understanding the dynamics of how things have changed, I think we definitely also did see in Q2 a situation in the U.K. where the returns rate went up, and that net sales growth rate came down quite a lot, but there was a lag then between people returning and then reordering should we say. So there's also that timing impact, and that becomes relevant in times like this where you've got exceptionally sharp changes in the returns rate. But you're absolutely right. The bottom line is the net sales demand, and we saw that being very strong in the U.K., but we felt it's good to show you that the impact of the return rate from the gross sales. But of course, there's still a differential on gross sales to net sales from the 2-year stack as well because we've got now higher returns rates from the pandemic. But you're absolutely right, the net sales is the key metric because people could order more things and then just select and return. We don't tend to see much of that behavior, but we see an underlying returns rate that is relatively low compared to other than in the industry, but we've got an acceleration in that returns rate in the quarter, and that's been generally driven by that dresses mix impact. And the dresses mix, as John said, was higher than pre-pandemic. And that's largely around fashion, rather than people just ordering more and sending more back.

And then on the outbound GBP 45 million of additional freight costs, should that be a bit lower in volume terms because you've actually distributed less product to the U.S. than you were expecting, but the rate card has gone up per order to keep it at GBP 45 million.

That GBP 45 million is the impact of this year's volume. So we're still seeing growth during the year on the U.S. And although it hasn't been as strong as we expected, but the rates have not come down. If anything, we've seen higher rates. And you've seen the other impact there is that returns rates are higher as well from the U.S., but not anything like has significantly increased in the returns rate compared to, say, the U.K. market.

So the last one, you talked about the marketing being less effective. Does that mean in this situation, as a strategy, you cut the marketing because it's less effective or you keep spending to maintain as much demand as you can?

We're definitely focused on keeping the strength of the brands going and that's why we've got that high marketing spend. We were anticipating that to come back into a lower percentage of sales. And it indeed it did do at the start of the quarter. But then as we moved through the quarter, the increase in returns rate. So if you're looking at your returns on marketing versus gross sales, we should do to a certain extent on a day-by-day basis. We've been pushing that to where we think the point of diminishing returns is. But generally, with the lower levels of demand at the net sales level, it's been a higher percentage of sales. So it's been very competitive for the demand that's out there. And of course, this year compared to last year, you've got the full set of competitors, including the High Street brand. And I think that meant that it's been pretty competitive and the returns on marketing have been lower.

Your next question is from Georgina Johanan in JPMorgan.

I have 3 questions, please. Should I ask them separately or together?

Certainly, it's probably easier.

Right. Cool. So I guess the first one is just following up on Adam's question, please, around the return rates in the U.K. I understand the point on mix. I guess I just wanted to cover off whether you're confident that there's no product issue here or through the kind of comments you're getting from consumers in terms of, say, quality or something like that. I'm not sure if you have pushed some price increases through. Is there any question from consumers that the value is not there, how it was previously, for example, please?

No, we're getting no feedback from consumers in terms of anything to do with quality, pricing, et cetera. So we have a full, obviously, quality control process as well that examines all returns when they come back in. So that's definitely not an issue.

Great. And then second question was on the U.K. performance, which obviously continues to be very strong. I just wondered if you could share within that growth number, what the established brands in the U.K. were doing, please?

So I think if you think of the U.K. as being a 10 percentage point differential in the growth rate from established brands versus the acquisitions. So we've seen strong organic growth in the U.K. from the established brands and then the organic growth from the recently acquired brands and then grow from the new acquisitions this year, which is Dorothy Perkins, Wallis, Burton and the Debenhams marketplace as well.

So boohoo [indiscernible] in the U.K. growing by something like 15% to 20%.

Round about that level, yes. And it varies, but that's the differential.

And then just on a final question, please. I appreciate this is a sort of an unscheduled update and so on. But just given how close we are to your new financial year, how should we be thinking about like the EBITDA margin rebuilding or not as the case maybe into next year? Because I imagine certainly in the first half of the year and as you've alluded to, a high number of these pressures will continue into the start at least of next year.

Yes. I mean, first off, I'd say that we're not giving guidance for the next financial year right now. You can see the visibility as a result of the pandemic is problematic. But that's clearly not that helpful. But I think what we've factored into the guidance for the rest of the financial year is a conservative view based on that. And you can see that from the implied growth rates for December, January and February for the final quarter. So for next year, I think while the real return of our EBITDA margin to the double digit depends on the unwind of particularly the international distribution costs and then those inbound freight costs, which together are around about 300 or more basis points or 3 percentage points. So that's the bridge to the 10% if those pandemic factors unwind. And we really can't say that. So I think conservatism is sensible to think of growth rates for next year in a similar area to what we've seen in the second half of the year. Obviously, if there's any unwinding of demand or lead times for us, then that -- there's an opportunity to reaccelerate the growth in overseas market. And then on the EBITDA margin, I think it's conservative to think of the EBITDA margin for next year being in a similar place to this full year, so in that 6% to 7% range. And again, if the pandemic factors unwind, that would be accretive to that.

Next question from Anne Critchlow in Societe Generale.

I've got 2. So first of all, given the challenges in getting the product into overseas markets. Did you early on in the 3 months, decide to promote more strongly in the U.K. or discount, or whatever you want to call it, just to sell stock through faster because you knew that you'd have a lot of stock left over.

No, we've always managed our stock. Yes. No, we've always managed our stock quite closely as you're aware, in terms of our test and repeat model. So there's obviously times at the end of the season where you've got a promo a little bit more, but we haven't been driving promo any more than what we would have planned.

Okay. And then secondly, just looking at the stronger pound year-on-year, has that fed into the slowness in overseas sales, given that the product would look more expensive to overseas customers, do you think?

No. I mean, we hedge our currency cash flows well in advance to make sure that we don't have to price through any changes in exchange rates. So that's not been a factor, and you'll be able to -- you can see that earlier in the year, the reported numbers where we've not got much of a difference between constant currency growth rates and local currency growth rates.

Our next question is from Charlie Muir-Sands from BNP Paribas.

You gave some of the figures before, but I wondered if you'd just clarify around what your current delivery promise is and how that's trended. I think you gave the Europe one has been just stable and the U.S. is now around 10 days, I think you said. Is that -- is the U.S. getting worse or better or staying the same? And finally, the same question for Australia on the delivery side. And then you sort of alluded to perhaps being able to bring forward the localization of warehousing in the U.S. How much earlier do you think that might be feasible to do? And would you consider doing that into Continental Europe as well, given consumers clearly don't seem to willing to wait very many days [indiscernible] to social occasions?

So I'd say on the first one, delivery times are stable. So they're not getting any worse. So I suppose like we would have thought November 8 in the U.S. with international travel reopening that would have improved things, but we haven't seen that from a lead time and equally from a cost point of view. In terms of the U.S. warehouse, we're looking at a number of options. We're looking at the timing of that. We had spoken previously about that's been live for 2023 calendar year. And we're looking at lots of options currently in terms of how we can expedite that and how we can make that as quickly as possible. Perhaps we'd start off there with a returns option in the U.S., which we could get into earlier. But obviously, the pick, pack and dispatch is the key one. But we're looking at all options there to see how quickly we can have that operational name. And in terms of Europe, that is on our map. And Europe was always planned to follow quite quickly after the U.S.. Clearly, the U.S. from an overall business point of view is our real priority, but both U.S. and Europe are for sure on our critical path and looking at all of our options there at the moment.

Your next question from Simon Bowler in Numis.

I was just wondering in terms of the impact of returns, as the cost of actually kind of getting returns back to yourselves, also kind of gone up? And is that part of that cost ended now the returns rates higher, you have to send out items more to make the same net sales and also receive them back in more?

So that cost, Simon, is factored into the guidance, but it is an increase in cost as well. So we'd anticipated that returns rates would go back to prepandemic levels. They're above that at the moment. But it costs around GBP 2.50 per unit to ship out more units and then bring them back. So that cost is in there, but we would normally expect to have that cost of returns factored in, but it's been slightly higher in the second half of the year than we would have anticipated when we planned for the year, and that could have added up to about GBP 10 million higher in the second half of the year.

Okay. And I thought kind of John's comments earlier were quite interesting around the delivery proposition hasn't changed, but given the nature of what people want to buy has changed, it's become more important and more impactful. And just -- in light of that, with the impact you've seen that having, are the routes to improve that delivery proposition beyond local warehousing, which is going to take a while it's come through well beyond the pandemic kind of moving through? Are there more expensive or different routes to getting products through to consumers that you would consider?

They're quite expensive actually in terms of -- so obviously, you're going to go for more of an express service. So if you look at even our standard shipment to the U.S. has sort of gone from pre-pandemic about sort of GBP 6 a parcel to almost double that level. When you go to Express, you go really up on that again. So it's quite an expensive option. I think really the coming out of the pandemic and the warehouse are really the best options that we have as we look forward.

Next question from Simon Irwin in Crédit Suisse.

Just one question, which is on freight availability and costs. How confident are you that we are going back to where we were before. There are studies out there that would suggest that airfreight rates were underpriced and are going back to a significantly kind of higher level in the medium term. Does that affect your supplying around your business or the underlying economy?

The biggest issue we have on airfreight is that most of our airfreight flies in belly of passenger planes. So we don't actually use a lot cargo planes to moving our freight. So really, the real deal for us is when international travel gets back and it becomes more normalized. And equally, that puts more capacity into the market, therefore, more supply, and that will drive down costs. We're quite confident this is all about passenger aircraft going back in the air, particularly in international.

Yes, there are studies, which suggest that the 747s where most of the excess -- the big spaces will be the last to come back in and more modern planes where there's much less capacity will be used first. So there's certainly a concern that passenger kind of belly capacity doesn't increase as fast as air freight overall -- sorry, as passenger traffic does. Is that something you considered?

Absolutely. I mean if you think of -- it's quite rare to see a passenger 747 at the moment if you've been doing any international flying. So it's mostly been around the new Boeing Dreamliners and around the Airbus aircraft that are on those long haul. And again, if you think of a 747 probably in a cargo plane carries about 100 tonnes roughly of clothing cargo, whereas as a 777, as an example, carries 50 million tonnes. So there is a big difference, of course. But actually, if you look at any of the international travel, it's mostly made up now of non-747 aircraft and has been for some time.

And we will take our last question from Tony Shiret in Panmure Gordon.

It's a really simple short question following up on Adam's question earlier. In terms of marketing costs, can you just tell us what you think it's going to be as a percentage of sales for the current year, please?

For the current year, it's going to be above 11% of sales, and that's based on those lower returns and the lower levels of net sales that we've seen.

Okay. Is that sort of just above 11% or materially above what you say?

If you think 11.5% to be conservative.

And just passing the call over to the speaker today, Tony -- Please John, please go ahead with closing remarks.

Okay. So listen, really thank you, everybody, for joining us this morning at such short notice. We strongly believe we've got a fantastic business with great growth potential, and we're continuing to invest for the future to take full advantage of that potential. So thanks, everybody, and speak to you all soon. Thank you.