Cettire Limited (CTT) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining today's first half FY '25 results call for Cettire. My name is Sam Wells from NWR, and I'm pleased to have joining me today Cettire's Founder and Chief Executive Officer, Dean Mintz; as well as Chief Financial Officer, Tim Hume. Both Dean and Tim will spend some time reviewing the results released to the ASX this morning, including some notable financial and operational highlights. Following the comment, we will have some time for questions at the end of the call [Operator Instructions] Thanks again, and I'll now pass it over to Dean. Please go ahead, Dean.

Thanks, Sam. Good morning, everyone, and thank you for taking the time to join Cettire's results briefing. Before we start, I'd like to call your attention to the disclaimer statement in our results presentation released to ASX. That disclaimer statement also applies to this investor call. I'm joined here today by our Chief Financial Officer, Tim Hume, and it's our pleasure to present to you our first half year results for 2025 financial year. Today's results reflect what we set out to achieve over the past 6 months. As we have stated in August 2024, our strategy was to deliver profitable growth with a bias towards profit and what we have delivered represents the shift in focus. In an environment with softer demand, inventory imbalances, heightened promotional activity and market consolidation, the level of return on investment and growth was subpar and inconsistent. Our strategy was borne out of the necessity to manage the business conservatively, while the global luxury market remained volatile. Our results reflect this approach. Sales revenue grew by 12% and profitability improved quarter-on-quarter, finishing the half with an adjusted EBITDA margin of 3.1% and delivered margin of 18%. Our net cash position was approximately $101 million, around $22 million higher than the last year, and we remain self-funding with 0 debt. Our customer base grew by 21% with paid acquisition spend sitting at around 6.9% of sales, well below our target range. Our focus on our existing customer base saw the percentage of revenue from repeat customers increase to 67% and a record average order value of $821. Our overall strategy delivered improved profit margins with a level of growth commensurate with our reduced investment. It further fortified the fundamentals of our business model, which enables us to remain self-funding with 0 debt and maintain a robust balance sheet with cash generation that provides the flexibility to adapt to market challenges and opportunities. Moving to Slide 4. During the period, we were highly focused on identifying and implementing strategies to further build on the strong foundational key drivers of the business. From a market perspective, softer demand in luxury continued. Global personal luxury goods sales declined by 2%, the first contraction in 15 years when you exclude the COVID period. However, we believe that the current challenges are relatively short term and the long-term outlook for luxury remains strong. From what we can see, there is greater stability emerging in the sector, which is expected to deliver a return to growth over the next 6 to 12 months. From a customer base perspective, we increased engagement with existing customers to drive loyalty. And pleasingly, we saw a 29% increase in sales from repeat purchases. On the supply side, we have seen continued very strong engagement with both luxury brands and third-party inventory holders alike. Our localization strategy continued to drive profitable growth, and we have seen an encouraging start for the China platform with minimal marketing investment to date. We continue to enhance organizational capabilities with the further investment in the commercial function as well as AI, data science skills on the technical side. Importantly, we delivered strong cash generation and maintained our robust balance sheet while remaining self-funding with 0 debt. Overall, we strengthened our business model in order to successfully deliver our profitable growth strategy as the market improves and drive long-term value to shareholders. Moving to Slide 6. We saw moderate growth in active customers with just under 695,000 customers purchasing from the platform over the last 12 months. This reflects our reduced investment in marketing and resulting new customer adds. During the half, we had a greater focus on our existing customer base, which resulted in the share of gross revenue from repeat purchases increasing to 67% and a 29% growth in sales from this cohort year-on-year and increasing spend per order, as you can see in the chart on the right. Moving to Slide 7. What is pleasing from this chart is that the lifetime value of a customer is continuing to increase year-on-year across both spend and frequency. This is a core driver of the business and in itself helps underpin the sustainability of our long-term revenue growth. Moving to Slide 8. As many of you are aware, our efforts to attract new and existing customers is supported by our marketing efforts that rely on both paid and unpaid channels. With our bias towards profitability, our reduced marketing spend year-on-year delivered a lower customer acquisition cost and a reduced rate of new customers. The marketing investment we did make during the period was heavily focused on traffic quality and conversion as opposed to traffic volume. Where we did invest in growth was through promotional activity, this was particularly important as we needed to remain relevant in an environment where there was a heightened promo activity by our competitors. Our high promotional activity impacted our delivered margins, which resulted in a lower delivered margin per active customer, which you can see in the chart on the right. Moving to Slide 9. Our revenue base continued to diversify during the period. Gross revenue from emerging markets grew by 32%, increasing its overall share to 37%, while our established markets grew a modest 2%. Moving to Slide 10. A key focus during H1 FY '25 was utilizing AI to enhance the company's tech stack to deliver opportunities for greater productivity and customer experience. This included initiatives to personalize shopping experience and grow the customer value proposition, further optimizations to logistics and enhanced search functionality. Moving to Slide 11. Cettire supply chain with hundreds of suppliers is one of the most important drivers of our business and pleasingly, it continues to grow strongly. Engagement levels remain very high as inventory holders and luxury brands seek new routes to market in the weaker demand environment. Importantly, we have seen a marked adjustment in inventory levels, which should improve the supply/demand imbalance, which impacted the sector last year. There has been a continued investment in the commercial team to significantly expand capabilities, which is enabling an increased level of pipeline opportunities, including luxury brands and third-party inventory holders alike. I'll now hand over to Tim to talk through the financial aspects of the business.

Thanks, Dean, and good morning, everybody. Looking at the P&L here on Slide 12. As Dean mentioned, the business experienced continued growth in the first half with sales revenue of around $394 million, which represents 11% growth on the prior corresponding period. The growth rate reflects the challenging demand environment and our increased focus on profit during the half. Delivered margin of $70.8 million decreased year-on-year by 18%, reflecting the heightened promotional environment. Delivered margin as a percentage of sales improved in the second quarter versus the first quarter. Due to our bias towards profit in the period, total marketing spend decreased versus the same period last year. This was predominantly due to a reduction in paid acquisition, which reduced 200 basis points year-on-year to 6.9% of sales. This was partially offset by an increase in brand investment as we commenced initial brand building efforts in China. Adjusted EBITDA was $12.1 million, representing 3.1% of sales. Reflecting our strategy to increase emphasis on profitability in the period, we saw sequential quarterly improvements in margin percentage with Q2 margin of 4.2% of sales. Referring now to the balance sheet on Slide 14. The cash balance increased to $101 million at 31 December. The increase in cash since June reflects the underlying profitability combined with a working capital inflow. Our cash balance fluctuates with seasonality, and we see a peak in November and December, reflecting the seasonal increase in sales at that time. The year-on-year increase in contract liabilities is reflective of lengthier delivery times that we saw in the period leading up to the balance date. This resulted in a deferral of some revenue recognition until the third quarter. We continue to invest in adding new capabilities to our technology platform, which resulted in capitalized investments of $7.8 million, representing 2% of sales. There were no purchases into the employee share trust during the period. Now if we just turn to Slide 15. We remain laser-focused on self-funding our growth. This is made possible by several aspects of our business model. We're capital-light, and we have a low fixed cost structure, which utilizes a high degree of automation. We have an adaptable model, which enables us to deliver profitable growth through cycles, and we operate with a negative working capital model. These features enable us to efficiently scale, which has been a key pillar of Cettire since day 1. Now just looking at the industry backdrop. Short-term challenges in the global personal luxury markets persisted over the past 6 months. And as Dean mentioned, calendar year 2024 saw a 2% decline in the sector globally. Most of this was driven by macroeconomic headwinds and shifting customer preferences due to a deteriorating value proposition. Luxury brands have been highly focused on addressing these challenges and some signs of recovery are emerging in certain parts of the market. Now despite the short-term challenges, the long-term fundamentals of the luxury sector remain very strong. Growth over the 2025 calendar year is expected to be in the 0% to 4% range, growing to 4% to 6% per annum out to 2030. The return to a more normalized growth and the ongoing shift to online provides Cettire with significant runway to scale our business and drive value for shareholders over time. Now just a few comments on outlook. In the short-term, there continues to be uncertainty within the global luxury personal goods market. While we are seeing pleasing developments in some areas of our business, the impact of softening demand continues to work through the industry, which is offsetting some of these positives. For example, while the strength observed through the company's seasonal peak trading in November and December was very encouraging, it has preceded a period of slower sales growth in early second half 2025. This is somewhat consistent with industry trends we've observed in recent years. Over the past several weeks, however, we have seen some notable improvements in trading momentum. It's our expectation that Q3 will continue to be dynamic and a challenging quarter, particularly considering the elevated comparable period in fiscal year '24. Having said that, we believe Q4 is when we'll start to see greater stabilization and a clearer picture of the pace at which the luxury market will normalize. In the meantime, our focus is to prepare the business for an improvement in conditions in the global luxury sector by increasing our investment in growing our customer base. We're working towards achieving a greater balance between profitability and growth with the objective of gaining market share, while remaining profitable and self-funding. And we're focused on embedding all the enhancements we've made to our business model to start realizing the value. I'll hand you back to Dean now for some final comments.

Thanks, Tim. To summarize, we have a large growing customer base with increasing loyalty. We have high-quality suppliers providing more than $2 billion worth of products, making us one of the largest selections of luxury inventory in the world. We have a business model that was built to deliver strong profitable growth and is self-funding with no debt, a balance sheet with cash generation that provides the flexibility to adapt to any market situation. We have a wholly owned, highly automated and scalable proprietary tech stack that continues to provide opportunities to enhance business performance. And most importantly, a highly capable global team that is dedicated and laser-focused on executing our strategy. With the fundamentals of our business strengthening each year, Cettire is extremely well positioned to deliver on its objectives for the remainder of FY '25 and for the many years to come. On that note, I'll now hand you back to Sam.

Thanks, Dean. Thanks, Tim. [Operator Instructions]. We do have a couple in the queue. First is Chami at Bell Potter.

Yes, a few questions from me, if that's all right. I think a very good growth to see in the emerging markets there. Perhaps elaborate a bit. Is it more penetration story we are seeing here? Or I mean, that you're still maintaining the repeat customer rate here, but the growth from these markets have definitely very much exceeded the very modest U.S. growth. Any color here?

Yes. I think, we're still very early in these markets, which is part of the reason that we're growing very strongly. And also consider that in part what we're seeing is a normalization of our revenue, our geographic revenue base in line with the opportunities in the market. And that's why we're seeing some very, very strong performance in these emerging markets, which actually have a massive population and demand for luxury goods. And I think that's part of what's playing through at the moment.

And Dean, and the second one would be, I mean, good to see the second quarter revenue growth maintained at that 5% where you started the quarter at. Thinking about the third quarter, I know you won't give guidance or any sort of quantitative outlook here, but would you be able to achieve a bit better than 5% and sort of get margins back up to 5% as well, given that the second quarter has been around that 4% mark?

Take that, Tim.

Sure. So I think, Chami, as you know, we haven't provided guidance today. So I probably won't get -- be able to comment with precision around your question. What I would say is that, the trading in the first -- in the sort of period to date in the calendar year, it's been sort of -- the revenue momentum has been patchy, so we've been -- we've had periods of softness. And in the last several weeks, we've seen some really good momentum. So I think what we're going to see is some continued volatility throughout the course of this quarter. And I think what we'll look to do just given the market is a bit of a moving feast at the moment, is provide investors with a further update at the end of the third quarter to keep people abreast of momentum.

And the last one is on the potential U.S. tariff regime. I think you earlier had an announcement earlier this month on some strategies for mitigating any potential impacts. Any further explanation on this would be appreciated as well.

I think at this stage, it's very early. No one really knows what may or may not happen. I think the most important thing to keep in consideration with the tariffs is that, whatever does happen will be the same for all players in the market. And it's not anything that particularly impacts the title compared to competitors when you have the biggest players in the industry all shipping cross-border.

I think it's worth also just highlighting here, Chami, that there's obviously some unique discussion points around the U.S. at the moment. That the U.S. is an important part of our business, but the rest of our business -- in most of our markets, the business is already subject to tariff. And we're growing very strongly ex U.S. as we just talked about on one of the slides today.

Next question comes from Wei-Weng at RBC.

So just want to follow up a couple of questions from Chami. So it looks like U.S. revenues grew 1%, Australia went backwards about 4% and then other, kind of, went up 27%. So what are the specific markets that you grew in? And was that as a result of a change in, I guess, management focus?

Hey, Wei-Weng. So, I think what we're seeing is the emerging markets, the growth has been not as strong as it has been, right, over the previous years. Within the emerging markets, we have seen some improvements in the U.K. Beyond the top 3 markets, so we're now focusing on our emerging markets. I think generally, the performance has been quite strong. And particular markets where -- which are very relevant luxury markets, where our business is early stage, but has got some good momentum, you should think about parts of Asia, which are ex-Mainland China. So big luxury markets like Japan, Hong Kong, Taiwan, Singapore and the Middle East, these are also -- it's another important growth area for us. So you will always have country-level variations in momentum and growth. But generally, the performance across all of our emerging markets is -- remains interesting at the moment. That said, we have talked over the last several months about the slowdown in the luxury sector that's been prevalent, not just in any one particular market, but globally. And you see that as well in the growth rate in our emerging markets, which has also not been as strong in this half versus prior periods. So I think the comments on the industry as a whole are global. But we have strength from a growth perspective in virtually all our markets and -- all our emerging markets, I should say, and coming off a very low penetration level. I think the other interesting thing is that, just to bring you back to some of Dean's comments earlier about our Mainland China platform. So this is obviously a very significant opportunity for Cettire given China is -- remains the largest luxury market in the world. Our business is operational there, but we have yet to sort of meaningfully invest in marketing in that market. So we're very much in experimentation phase at the moment, trying to find the right path to the customer. But that remains a very significant opportunity within our emerging market segment going forward.

And then you last gave a trading update, I guess, October being up 5%. Today, nothing was disclosed. I guess, where I'm sitting right now, I'm directionally not even sure how to think about 2H. Should we be thinking about sort of revenue growth or revenue decline in 2H?

So again, Wei-Weng, we haven't provided guidance. And I don't know that this is the right forum to do so. But what I think is -- what I think -- just to provide us some more color on the outlook language that we have provided is, we have seen some variability month-to-month. So I'm not sure that providing a precise data point at this stage, it would be directionally appropriate for people to think about what to expect for the half. I mean, we're certainly -- we're a growth business at heart. We are very early in our penetration of a very significant global opportunity. And so I think it's reasonable for you as an analyst and for all of the investors who are interested in Cettire to be -- that for us as a management team, we're very focused on continuing to grow as quickly as we can, and doing so in a way where we preserve profit and we remain self-funding. So that's our focus. And with that as our focus, I would certainly hope that we're talking about good growth figures this year.

And then just last question from me. I guess, historically, you've been quite reticent to discuss key aspects of your business in order to protect your competitive edge. I guess, unfortunately, in the last 12 months, it's brought about a fair bit of unwanted focus from the media, short sellers and competitors. Do you feel this focus has impacted your competitive edge at all?

I think that focus is very important to our success. But I think -- and no doubt, there has been a lot more things to handle over the last 12 months. But I think overarchingly, the issues right now stem from a widespread weakness in the luxury market. And that more than anything else is what Cettire and the whole industry is dealing with.

And I think -- yes, Wei-Weng, I think what are our -- there's, obviously, plenty of discourse about some of these topics with the financial community here in Australia. Our focus is on doing the best service we can for our supply chain and for our customer base and continuing to invest in what will sustain our advantage over time, which is those supplier relationships, those customer relationships and the very strong team that we have, which has built and underpins the technology platform, which is a key enabler for our business. So we're focused on that and servicing that group of stakeholders, which will propel the business forward.

Next question from Sam Haddad at Petra.

My questions are around the promotional backdrop. You talked about November, December were pretty encouraging. Just in terms of the Northern Hemisphere winter product and the inventory supplies, what are you seeing in the market? How much is there a need to further clear that winter product through the next few months? And what's the visibility there?

I think that fall/winter, I think, where we are in the season right now is towards the tail end of fall/winter, right? And really, we're focusing on the new season. I think the vast majority of the important fall/winter goods have been sold, especially in the high promotional activity that's in the market. And where we stand right now is we have the arrivals of the spring/summer inventory starting. It's probably too early to understand the inventory levels of spring/summer given that a lot of the goods is still being received by our suppliers from the brands. But I think, important to consider where we are in the cycle at this point.

So that's encouraging that the winter products both have been cleared and moved where we stand today. Are you seeing any early promotional activity in the new seasonal product? Is it still too early to say?

Well, I think in general, the promotional activity across the market remains very high.

And just you talked about some signs of recovery. Can you sort of expand on that? Like, is that also -- can you just expand by market? And is it just the demand side, not the promotional side that you're talking about that -- those encouraging signs of recovery?

Tim, maybe you want to talk through that.

Look, I think it's -- the performance across all markets at the moment is uneven, Sam. So I think, one of the things that we've been very focused on -- when the market started to turn more volatile in the fourth quarter of fiscal year '24, that came on quickly as we talked about at our prior result. What we have since then is the benefit of 6 or 9 months of trading and an enormous amount of data. And whilst the demand dynamics on a market-by-market basis remain really quite mixed. We have the benefit of the data across the last 6 to 9 months, and that's enabling us to take a much more nuanced view on a market-by-market basis going forward. So when we talk about improved momentum, I think what you're seeing is some of the benefit of us putting that -- those insights to work at a more granular market-by-market level. So I think that we will continue to see variability across all of our markets, both established and emerging. But we have a much more informed view of the best way to execute in those shifting market conditions. But we've seen a decent response, particularly in the last few weeks that we flagged in the trading update that we've seen some more encouraging signs through the course of Feb. But we remain sort of generally cautious on the balance of the quarter, just given we're seeing quite variable performance market-by-market. And that's -- as I said in my earlier comments, we'd look to keep our investor base updated with an update at the end of the third quarter.

With those additional data points, are you able to optimize your marketing spend across markets better? Because obviously, your -- I'm looking at your active customer base, it's sort of similar to 6 months ago. There's an opportunity to grow market share when customers are shopping around more. So can you talk around marketing spend and try to optimize the outcome there given those additional data points that you've now seen across markets?

Look, I might have the first go at this, Dean. So I think the short answer to your question is, Sam, absolutely yes, right? So you will see some degree of variability in our level of marketing investment by market, but also the shape of that investment. So -- and of course, that's going to flex up and down given sort of the responsiveness to that investment. I think, what we're working through is -- look, it's not our aspiration for the customer base to be stable, right? We want to have a growing customer base. And as I said previously, we're a growth business in terms of our mindset. And so I think there were some very specific reasons in the first half why we focused on with a greater degree on profitability. Market conditions were quite variable. But as things -- with a bit of luck if things start to improve in the coming months, then we would certainly look to focus on driving customer acquisition again. And part of that would be about -- a component of that is the level of investment. But a component of that is also the shape of that investment. And we have the -- we're very much in a phase in terms of our localization strategy where we will take a market-by-market approach, not just in terms of the level of investment, but also the particular channels that will resonate most in each of the markets that we're in.

Next question from Julian at E&P.

Another question on the marketing side. When do you expect to start ramping the spend? And are you happy with where sort of CAC costs are at the moment?

And just to clarify, Julian, do you mean across the board? Or are you focused on any particular market?

Well, across the total number.

I think -- so I think as we've indicated in the outlook language today, we have -- I think, we will look to try and grow share again in the second half. The marketing investment in terms of paid acquisition or brand investment is one aspect of that. We've taken a pretty conservative approach to that in the first half. We've talked in the past about an 8% to 10% of sales investment envelope for marketing. We've been well beneath that in the first half. So spending more marketing dollars is one lever. The structure of our promotions is another lever to -- which is in the marketing category. I think what we need to be at the moment is nimble in terms of how we approach the different tools in the kit bag as regards to acquiring customers. So I think you can expect us to apply a range of different strategies there. But certainly, in the second half, we probably have a bit more of an eye to growth again, having focused very much more on the profit side in the first half.

So given the fourth quarter you start to lap much easier comps, would that be the period where you start to sort of pull the trigger a bit on that?

I think that's -- I think there's a couple of things to think about, Julian. So one is, yes, the comps get easier in the fourth quarter from an absolute growth perspective. To the comments that Dean made earlier around the sales mix in terms of season. But as we kind of head into the fourth quarter, the bulk of our sales will shift to spring/summer. So if we feel like the spring/summer collections are resonating with the consumer, and there were some particular challenges last year around spring/summer. If it seems like there's a decent resonance there, then that's also something to lean into. And I think the other element here is, as I mentioned previously, China is obviously a very significant opportunity for us. And we have not really started to market meaningfully in that market at this stage. So we're very much in experimentation phase in China right now as we sort of explore different channels and receptivity of our business to different channels. But over time, I think it makes sense for us to lean into the opportunity in China as well, but we're taking a very cautious approach.

And with the manufacturers cutting back production this sort of calendar year, do you think that in any way impinges on your ability to source inventory?

I think our supply chain is growing very, very quickly, and that's with our third-party inventory holders as well as brands directly. So I think this is a part of the business that we're, obviously, very, very focused on. And we're seeing continued momentum in the supply chain and the pipeline that we have is very strong.

And just finally, just on the tariff situation. So can you just sort of put it a little bit in context? So if they do put a 25% tariff on the Europeans, what does that actually mean at the retail price in the U.S., because presumably it's not put on the final prices on the input cost. So what's your sort of feel of what it actually does to the retail price?

I think like it's very, very early to speculate what can or won't happen here. But I think -- just as I said earlier, bear in mind that all the biggest players in the market are shipping cross-border, including the brands themselves. So whatever is done will, however, we choose to adapt will likely be the same way that the rest of the market has to adapt and it would be an even playing field.

No, I understand that. But does that mean given there are so many markups along the chain from factory, at what level do they apply the 25% tariff, if that's the one they go with? Is it not at the landed cost in America, is it?

I don't think they've specified yet, Julian, right? So it will ultimately be -- so when goods cross the border, right, whether it's an individual parcel or a large container, if you will, right? Ultimately, if there's a duty or a tariff, it would be applied to the value of the goods that are crossing the border. In terms of where the cost ultimately lands, whether it's the consumer who pays for that, or some intermediate step in the supply chain or the OEM, I think it's too early to call on that. There's a lot of moving parts here. And as we've seen in the last few weeks in the U.S., right, rules are made and then unmade in fairly short order because there's some degree of complexity here. So I think that this will be an ongoing topic for some time. But to Dean's point, whether it's a brand or a third-party inventory holder or an online platform, everyone will be subject to the same rules and will be dealing with the same complexity. And ultimately, how it all falls out, I think, will be in part driven by what any rule changes are, right, but also driven by how the various participants in the food chain react and they're both at the moment are unknowns.

I think that's all the time we have for questions today. If there are any follow-ups, please feel free to send them through and we'll endeavor to get back to you. And with that, it concludes our session. Thank you, everyone, for joining today's first half FY '25 results call for Cettire. Enjoy the rest of your day. Thank you, and goodbye.