Boozt AB (publ) (BOOZT) Earnings Call Transcript & Summary

Welcome to Boozt Q1 Report 2023. [Operator Instructions] Now I will hand the conference over to the speakers; CEO, Hermann Haraldsson; and CFO, Sandra Gadd. Please go ahead.

Thank you, and welcome all to our Q1 '23 webcast. Let's dive into the first slide, the key highlights. And -- yes, we would like to stress that the continued execution of our Nordic Department Store strategy has enabled us to continue growing the business profitably in the first quarter of 2023. And this was actually despite quiet consumer spending and also some late Spring/Summer '23 sales due to the cold weather conditions in the Nordics during March. Considering this as well as strong comps last year, the quarter is actually slightly better than we expected, both on revenue growth as well as adjusted EBIT. From the start, we expected the high promotional landscape that we experienced during the fourth quarter of '22 to continue into the first half of '23 due to quite elevated inventory levels across the industry. And during the first quarter, we -- the elevated promotional activity in the market continues and while we successfully offset part of the impact with selected campaign buys, the gross margin was slightly impacted. The underlying business drivers continued the trend from last year and all pointed in the right level. The shining star is the average order value that has continued to increase. We reached a new high for the first quarter with SEK 938 after VAT and returns for an average basket on Boozt.com this quarter. So this was quite strong. The development is mainly supported by our successful migration of multi-category customers who add more items per basket. And this serves as the best testament to the strength of our Nordic Department Store strategy. On top, we also saw some tailwinds from FX. Return rates are devoting positively and slightly down from last year. We are successfully diversifying our category mix, especially with strong growth in Beauty and Home and a comeback for Mens in the first quarter. All categories [indiscernible] than the average. As always, we continue to get more sophisticated with our unique Fair-Use concept to limit fraud as well as abusive return behavior basically -- effectively selling down customers who have no real intention of shopping with us. Our inventory position is attractive and healthy, and we have managed a satisfactory sell-through of the assets '23 season even this season has started late. We believe we are in a strong position to be opportunistic and to target accelerated market share gains for the rest of the year. So backed by a quite solid start to the year, we really reiterate our outlook for '23, and we expect to deliver accelerated market share gains throughout the year without compromising on profitability. So I said that going to the next slide. The customer satisfaction KPIs, the most important ones. During the quarter, we have maintained our 5-star rating on Trustpilot and we have managed to deliver an NPS at a stable and best in industry level. So I'm quite pleased that we continue to meet and exceed the expectations of our customers in terms of selection price as well as convenience. Going to the next slide, the order development. We can see that the number of orders were up 1.6% from Q1 '22 at Boozt.com supported by our historical cohorts and a solid intake of new customers. Average basket size continues to develop positively impacted by customers adding more items to these baskets due to the continued expansion of the Nordic Department Store, along with quite a successful migration of customers from single category to multicategory buyers. In the first quarter of '23, we had approximately [ 40,000 ] additional customers buying in 2 more categories compared to the end of '22. So this is great. So I'm excited to see that the ongoing work to build the best selection across all our department store categories is acknowledged by our customers as they're trying out more categories and ultimately putting more items in each basket. Moving on to the next slide, the cohort development. We ended the quarter with an active customer base slightly up compared to the end of '22 in a quarter where we were more successful in acquiring new customers in the last couple of quarters. The number of orders per active customers increased slightly during the quarter, driven by a higher share of net revenue from existing customers that on average shop more frequently. [indiscernible] continued at a strong level of 6.9 same as last time with cohorts displaying similar buying patterns as our historical was despite the ongoing pressure on consumers' disposable income. So having said that, I will now hand over to Sandra for some perspective on the financial performance.

Thank you. So as Hermann said, the net revenue growth was 7.1% in the first quarter for the group. Growth was positively impacted by currency effects of 2.9 percentage points due to the strengthening of the DKK and the euro compared to the Swedish krona. Growth was the strongest in Finland, where we continue to see great opportunities to grow significantly over the coming years. Denmark and Sweden also performed relatively well, while the development in Norway was a bit disappointing. Return rates were slightly lower than last year in the quarter due to product mix effects. Other revenues decreased slightly compared to -- The gross margin was 38.5% in the quarter, 0.8 percentage points lower than last year due to the higher promotional activity in the market. The lower gross margin in the quarter was in line with our expectations. By ensuring that we have an attractive inventory mix and satisfying availability of campaign stock, we were able to hedge against some of the negative pressure on product margins. The adjusted EBIT margin increased with 0.5 percentage points to 1.1% in the quarter. I will come back to the development of the cost ratios and the drivers for the improved profitability soon. However, we can conclude that the department store model stands robust in the environment that we currently experience. Despite high pressure on product margins, we are able to deliver improved profitability which is especially strong since the first quarter for most retailers in our industry is loss-making. To the next page, we can see that the net revenue growth for Boozt.com was a solid 12.3% in the first quarter positively impacted by the strengthening of the DKK and euro. Our inventory position allowed us to continue to gain market share in a market that was highly promotional driven by low consumer spend and high inventory levels across the industry. As the full quarter was winter like in the Nordics, Spring/Summer sales were delayed into the second quarter. The acceleration of sales was driven by a strong performance across categories and geographies with an increased average order value in all markets. Overall, the average order value increased 11.8% to SEK 938 due to lower returns and diversification of sales across categories. The increase is also positively impacted by currency effects. Beauty, Home and Mens were the best during the quarter where Beauty grew more than 60%, Home above 40% and the Mens category above 20%. The number of active customers decreased slightly, 0.9% compared to last year due to the macroeconomic situation with high pressure on disposable income, however, with an increase in the customer base compared to the end of '22. Buying patterns for our active customers was stable. The number of customers who now shop in 2 or more categories was around 20% higher than last year, displaying the loyalty of our customers and the great advantages of the department store strategy. The true frequency was in line with last year and slightly up compared to 2021. With the very strong growth of our flagship Boozt.com, we are more than definitely taking market share in this type of environment, showing the strength of our business model. The adjusted EBIT margin improved to 1.7%, which is to be compared to 1.4% last year as we gained operational leverage on the cost base. This leverage was partially offset by the high promotional activity impacting the gross margin. So if we move on to Booztlet, net revenue decreased 13.7% in the first quarter. Just as we experienced during the second half of '22, Booztlet was negatively impacted by the high promotional activity among online and offline players in the market. In addition, we saw a negative effect from the strong sell-through of the Autumn/Winter '22 season on Boozt, affecting inventory availability for Boozt. The average order value increased significantly during the first quarter, reaching the record high SEK 920 as the number of items per basket increased while the assortments on Boozt has broadened. While we are very happy to see that the average order value continues to grow, we believe that it's likely that the typical Booztlet customer has been hit harder by the pressure on disposable income as we have seen an increasing number of customers on average shop less often. Looking at profitability, the adjusted EBIT margin improved from a negative 2.4% to a negative 2% during the quarter. Despite this quarterly improvement, we have now for some time, worked on how to take action to fuel growth and profitability for Boozt. So when I have finalized this financial update, Hermann will talk you through how we now recalibrate the Booztlet concepts to achieve this. So if we move on to the next page, we see the development of the cost ratio. The fulfillment cost ratio decreased with 0.5 percentage points in the first quarter to 12.1%. Looking at the rolling 12-month number of 11.3%, it is in line with our short-term ambition of a cost ratio around 11%. We've seen increased productivity in our operations. However, some of those improvements are negatively offset by inflationary pressure on costs such as packaging material. The marketing cost ratio decreased 1 percentage points to 10%, which is in line with our historic average. We keep a high marketing spend in order to continue to attract customers and build a strong household brand in the Nordics. As always, we stare our marketing investments based on the principle of having customer acquisition payback period of 16 to 18 months. The adjusted admin and other cost ratio decreased slightly from 11.3% to 11.2% in the quarter. The depreciation cost ratio increased 0.2 percentage points to 4% as expected and as a consequence of the higher available capacity at the [ BAC ] after the investments made over the course of the last 12 months. As for January 23, the latest expansion of our automated warehouse capacity was taken into operation. We expect to gradually grow into the current excess capacity over the next couple of years. The increase was partially offset by the reassessment of the useful lives of selected parts of the group's fixed assets that mainly relates to the order store installation. So if we move on to the next page. We see that the net working capital was 9.7% of the net revenue for the last 12 months, which is 2 percentage points higher than last year. Free cash flow for the quarter was a negative SEK 731 million, that is to be compared to a negative SEK 502 million last year. Our inventory position was 11.4% higher than last year, driven by higher item value rather than number of increased items. Quarter with a lower-than-expected stock position as sales were stronger than expected in the fourth quarter of '22. Therefore, we have focused on attaining campaign stock to ensure an attractive selection and position to offer attractive price points to the consumer for the first half of '23. In addition, in delivery of the planned Spring/Summer '23 season goods has proceeded well and according to plan. So now we stand with a confident stock position coming into the second quarter, where we will be able to continue to gain market share even if competition is high. However, building this stock position impacted net working capital and cash flow negatively in the first quarter. In addition, the cash flow from operations is meaningfully impacted by the timing effect of payments. CapEx for the period was SEK 34 million, where SEK 23.6 million is related to development costs for our platform. As expected, we made limited investments in fixed assets due to the high level of investments in the warehouse automation during 2022. As communicated earlier, we expect CapEx for the full year in the level of SEK 150 million to SEK 200 million, and we also expect to be free cash flow positive on a full year basis. Our cash position at the end of the quarter was SEK 964.6 million, that is [ SEK 1,118.9 million ]. That concludes the financial update. And back to Hermann.

Thank you, Sandra. Yes. As Sandra has pointed out, the mothership Boozt.com is doing very well, growing with 12.3% with an adjusted EBIT of 1% -- 1.7% is actually best in industry metrics. For us, that is the most important thing as it is the basis of everything we do. But in some ways, the success of Boozt.com has come slightly at the expense of Booztlet. And as many of you know, Booztlet was launched back in 2016, initially as a means to handle inventory risk and to improve unit economics for clearance of stock for Boozt.com while also increasing the addressable market. Since then, a lot of growth has been achieved. And honestly, at a pace that has exceeded our initial expectations. The business today is plus SEK 1 billion and with the current size, combined with our business as well as customers' demand [indiscernible] outlet we have initiated the next phase of Booztlet's growth journey. So going forward, the Nordic outlet will be a strong multi-category shop, reflecting the same core categories as Boozt.com. Opportunities -- Booztlet has mainly operated as a fashion outlet. Going forward, we will take the next natural step and transform Booztlet into a full assortment outlet covering fashion, kids, sports, beauty and home. Also, we will introduce new brands mainly focused on the enterprise level, catering to customers looking for more affordable price points. So in short, we put our focus going forward on creating more width and depth in terms of selection and assortment on Booztlet.com. With the new mix and more focus on delivering a 365 offer to the consumer, we intend to improve Booztlet's gross margin, which has been under pressure in the last 2 years due to the innovative promotional activity in the market as well as less availability of higher margin goods. We have taken some quite immediate steps to initiate this next phase and we expect to see a gradual positive effect from it in the coming quarters. So moving on to the next slide. What is kind of the Nordic Outlet Fashion Kids, Sport, Beauty and Home. The next phase of the journey will focus on 5 core elements in terms of selection and assortment. We will be adding new and improved tools to our toolbox in terms of basic volume offers and spot deals. This will increase availability of goods to make sure that we have a full 365-offers. On top of that, Booztlet will still focus on stock clearance both during and at the end of the season as well as attractive selection of campaign goods. The increase of width and depth of the assortment will cater to both our so-called Double Store customers, the most profitable customers in our business as well as the off-price enthusiast looking for affordable price points, inspiration and good bargains. We are positive that the market for a Nordic outlet is very attractive in terms of growth as well as profitability. So our ambition is to grow Booztlet with double digits, both in the Nordics and rest of Europe while gradually delivering profitability that will be margin accretive for the group as a whole. So now we move on to the outlook for 2023. As expected, the market for personal lifestyle items has had a slow start to 2023, along with a promotional environment that is somewhat heavier, you must say, than normally. On top of that, we have had some weather conditions in the Nordics that considering historical patterns delays the sale of Spring/Summer. In our view, we're talking about a delay of some 2 to 4 weeks. Still, the outlook and priorities for 2023 are unchanged and well within reach. We will continue our efforts to secure continued [indiscernible] best in industry margins. The midpoint for both revenue and EBIT is still our best, but to reflect the volatile and more muted consumer spending we reiterate the widened range for both net revenue growth and adjusted EBIT. As the year progresses further, we expect to narrow the range as we get more visibility. So for the group, we expect net revenue growth in the level of 5% to 15% as we continue to cement our position as the leading Nordic Department Store with a growth well ahead of the market. In terms of profitability, we still expect to deliver adjusted EBIT between SEK 275 million to SEK 375 million, implying a margin of 4.4% at the midpoint of the outlook. For 2023, we still expect a modest level of investment in fixed and intangible assets with CapEx between SEK 150 million and SEK 200 million. So this concludes our presentation, and I would like to hand over to the operator to get the Q&A session.

[Operator Instructions] The next question comes from Daniel Ovin from Nordea.

Yes. Hermann and Sandra, my first question is on the slide of other revenues, which after being up now for a while, it seems to be down around 6% year-over-year. I think you have BooztPay, et cetera, in that line. Can you talk a little bit about that? And is there any particular reason for this slowdown? That's my first question.

Yes. So if we start with that one, it's -- in relative terms, it's something, but if you look at the actual million, it's around [ SEK 5 million ]. And there are some of it that is related to Booztlet being a lower share of our total revenue, which decreases the share of freight income because you pay for parts to a higher extent there. And then there are some millions related to marketing. But as I said, it's just a few millions. So it's -- I don't think you should interpret too much into that number.

Okay. Perfect. And then another question also on the Spring/Summer start here. So March apparently was weak, very cold month. But here during April, we had a few weeks with quite more Summer/Spring-like weather. Can you say anything about the start on Q2? Have you seen -- has that been developing in line with your expectations, if I put the question that way. That's the second question.

Yes. But this is where we always looks and says we don't comment current trading, so I can't say that. But obviously, if it's like freezing in March, you won't buy summer clothes or the spring clothes, so I kind of -- just when you walk in Copenhagen, Stockholm and the sun is shining, you can see that the mood is increased. I think you should expect that, of course, influences the mood and the buying behavior. So obviously, as I said in my closing remarks, I believe that the start of the summer fixed business has been delayed like 2 to 4 weeks. So and -- as far as summer outfit sale.

Okay. Perfect. Great. And then also one question on this cash flow, this negative cash flow from payments, it looks like almost SEK 460 million. Is that something that we should expect to reverse in Q2 already? Or maybe you can talk a little bit about how the reasons for that? That's my last question.

Sorry, it is timing effects. And as I said, we have the cash flow or free cash flow expectation for the full year. So it is a timing effect of the payment. It looks more different or stranger than it actually is. So you shouldn't interpret too much in that either.

Okay. All right. Maybe also one last question just for this expansion in Booztlet to other categories. I -- the thinking -- my thinking was that apparel seems to be unusually good category for this markdown or discount business as you have this different seasons. But when it comes to Beauty, Home and Sports, et cetera, I guess you don't have the same kind of seasons there. So do you really -- do you see the same kind of potential in those other categories as you do in apparel. Perhaps you can talk a little bit around that?

Yes. I think that Beauty and Home stuff, that's a part of it, but also kind of -- that we would be offering a basic destination, meaning that you can buy your T-shirts, your underwear, your socks in the outlets as well as we will have some enterprise brands that maybe doesn't kind of -- where it doesn't make sense to sell it in a shop that is charging. That is the way of free shipping and returns but where your can get a good deal. So I think that is kind of -- it's the full mix of being able to offer all the categories as well as making sure that you can have your basics covered as well as some entry price brands. So I think that's kind of -- it's a more rounded and a full-scale department store than only buying leftovers from the industry.

The next question comes from Benjamin Wahlstedt from ABG.

Sandra, going back to the working capital timing effects and payments. When you say timing effect in payments, are you referring to the Q4 Q1 effect? Or are you referring to the Q1, Q2 effect there, please?

Mostly the beginning of the year. And as you remember -- I guess, you remember that the cash flow in the fourth quarter was strong, maybe a little too strong, actually. So yes, it's mostly there.

Yes. Okay. Could you perhaps also touch a bit more on inventory levels? Obviously, impacted by a higher purchasing price. Is it possible to say anything about where you are in terms of number of items compared to like a preferred level here?

Well, looking at the inventory position overall, I think we stand very strong. And the reason for that is since -- if we look where the most inflation is in the seasonal goods. And looking at the market development, we want -- we see that people are turning more towards this never -- the items that we talked [indiscernible] stuff. So we have handled our risk by taking from the upfront buy. So looking at the inventory mix, it's more flexible now than it usually is which is very good in this environment. There's some available stock in the market. We made some pretty heavy investments in the campaign stock during this quarter which makes us attractive going into the second quarter. That also impacts the cash flow that we bought quite a lot during this period. Normally, we do had used that [ guide ] a little earlier. But due to the security, we waited basically to the year-end and the beginning of this year. So that impacts both the stock levels but also the cash flow. But we believe that our inventory position is...

Perfect. And going back to the preseason versus in the season discussion, I guess some of the reduction in payables can be year-on-year, I guess, can be explained by different allocation in purchasing. Am I correct in thinking that?

There is a timing effect. So yes.

Yes. And then one final question on Booztlet, obviously Booztlet declined slightly in the quarter. Could you discuss the possible dynamics or the possible development for the rest of the year, please? I guess, what I'm asking is how quickly can you ramp up online.

With the kind of the change that we're doing, basically, it's in effect now. So we can act quite fast. As we said that we have been buying -- basically buying campaign goods, and we are adjusting kind of the -- or recalibrating the differences, but we are -- we have started and are gradually seeing good improvements. So it's actually -- no, it's not something that we have to be [indiscernible] to before we can start with anything. It's basically...

The next question comes from Aurore Tigerschiöld from DNB Markets.

I had a few. First one was about the high promotional activities that we saw during Q1. Is that likely to remain or continue into Q2 as well? I know that [indiscernible] you've had a campaigned any...

Yes. Yes, I expect so. We have -- of course, all -- I think, the entire industry is coming out with numbers basically, I think this week, more or less. So we will see kind of how inventory levels are. But I would be positively surprised if inventory levels had come down and if the promotion level would kind of subside. So we are still expecting the promotion level to be quite high. And I think that as long as the financial outlook is as it is, it would probably be high during the entire year.

Okay. Perfect. That makes sense. And then regarding the share-based compensation, is there more to come in the following quarters? Or should we just want to look at for Q1, how does that like...

Well, share-based compensation, we have that in every quarter, and that is fluctuating and it's kind of unrealized cost because it's based on the assumptions, on the outcome. And also it's related to the share price. So that goes up and down between the quarters. It's very hard to predict.

Okay. And then last question. I know, Sandra, you mentioned it, but could you possibly repeat. You said you had positive growth in all categories with best performance in Beauty. How much was Beauty up?

Beauty was more than 60%.

[Operator Instructions] The next question comes from Nicklas Skogman from Handelsbanken.

I'd just like to go back to this other revenue question. I thought I heard you say that the decline was partly due to lower freight income at Booztlet. Was that correct?

Yes.

Okay. Other income for Booztlet is down 2%, while other income for Boozt.com is down 10%. It's broadly flat...

But it is -- for Booztlet, that's part of it, and the other part is marketing, but it's -- we are now looking at the actual millions. It's not too much.

Yes, sure. It's not that much, but I mean, historically, it's been going up. So I was just wondering if you could maybe -- since it's very high margin on these revenues what is driving the decline?

Well, if you look at the upfront price, as I mentioned in the -- regarding the stock position, we have hedged our inventory position due to that we expect the promotional activity to be quite tough going forward also. So we reduced our upfront buy for the season. And some of the marketing income is related to -- so that part is -- has been reduced in the same way.

Okay. So it's purely that's driving the lower marketing income. It's not that brands are less keen on advertising or marketing with you.

No, we haven't seen that in the numbers. But obviously, if the brands have a hard time, there might be. If you look at marketing investments overall, it's probably something that they consider. But we believe that our offering and also offering this [ BDI ] that -- where they did get the data insight. We continue to build our strength and that we -- if you're going to choose to place your money somewhere, it should be with us. So, I guess, we believe that they will continue there. But obviously, we are affected if the brand's financial health is suffering, that might also impact us.

Okay. Great. And then I don't see a number of site visits anymore. Does that have to do with -- I think you mentioned on the Q4 call that it's not really representative or something like that.

Yes, yes. With the new cookie direct, it's like yes, you -- basically, you can't trust the numbers anymore. So this is why we stopped giving them because it doesn't know this is conversion rate, it just doesn't compare more so. I think it creates more confusion than anything else.

There are no more questions at this time. So I hand the conference back to the speakers for any questions from the web.

There doesn't seem to be any questions from the web. So this is a short and sweet call. So thank you for your questions and for listening in. And have a good day, and we'll see you again in 3 months' time. Thank you very much.