Global Fashion Group S.A. (GFG) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Global Fashion Group's Q1 2024 results. I'm Helen Hickman, CFO of GFG. Today, I'll provide an overview of our first quarter results, followed by a Q&A session, where our CEO, Christoph Barchewitz, will join us. Starting with a summary of our Q1 2024 performance. At our Q4 results presentation in March, I shared that for the first 2 months of 2024, we observed similar top line trends to those seen in Q4 '23. This pattern continued as we closed out the quarter. In Q1, we achieved EUR 239 million in net merchandise value, a 16.5% decline year-on-year. We delivered a strong 44% gross margin, which is a 3 percentage point increase year-on-year. Our adjusted EBITDA margin also continued to improve, increasing 0.8 percentage points in the quarter despite top line pressures. Our results demonstrate how our platform transition strategy and ongoing cost efficiency program are supporting our main financial priorities to deliver profitability and cash flow improvements over top line growth. We have 8.4 million active customers. And in Q1, our customers made 4.1 million orders with an average order frequency of 2.4x. Now taking a closer look at the group KPIs. In Q1, our active customer base reduced by 18.5% in a similar trend to what we observed over 2023 driven by weaker consumer sentiment and intense competition in our markets, impacting customer conversion rates and retention. Whilst we maintained a disciplined approach to marketing in this uncertain environment, we continue to review our marketing efficiency and adjust our strategic investments accordingly to generate a healthier customer base throughout the year. While stable compared to Q4, our order frequency of 2.4x was down 5.7% from Q1 2023. Volumes continued on a downward trend in Q1 with orders falling 18.1%. This represented a slight easing to the steeper 20% drops we observed in 2023. We are actively implementing strategies to improve traffic and conversion, the key drivers of this decline. Average order value increased by 1.9% to EUR 58.9 with the majority of inflation impacts offset by lower items per order. Across our markets, we have started to see early signs of inflation softening. Now looking at our key financial metrics. Revenue declined by 19% to EUR 153 million. Gross margin improved by 3 percentage points, driven in broadly equal parts by stronger retail margins and increased share of higher-margin marketplace and platform service offerings. Our adjusted EBITDA margin increased more moderately by 0.8 percentage points to negative 11.3%. This difference was primarily due to our strategic marketing investments in Q1 to stimulate customer expansion. There was also some impact from fixed cost deleverage, which means the savings from our ongoing cost efficiency program did not fully offset the declines in volumes. Now let's turn to our regional performance. All regions delivered increases in retail margins and marketplace and platform service participation, driving gross margin expansion in each region despite top line pressures. This stemmed from our focus on careful inventory management throughout 2023, which positioned us to start 2024 with a healthier inventory profile and drove the improved retail margins. In LATAM, despite significant improvements to the user experience and a streamlined operating structure in place, the region continues to face headwinds from weak consumer spending and intense competition, especially from cross-border players. LATAM's adaptable strategy and further emphasis on cost control are addressing these demand challenges in the region. In SEA, after surpassing the group's longer-term goal for marketplace and platform services participation in 2023. SEA achieved the greatest improvement in gross margin of the regions, increasing 5 percentage points year-on-year. In ANZ, NMV decreased by 16.4%. It's worth noting that ANZ has a relatively stronger year-on-year comparator as the consumer spending slowdown began later than in LATAM and SEA. ANZ also delivered a strong gross margin increase of 3 percentage points year-on-year, thanks to an improved inventory position. Now let's move on to our cash flow for the quarter. The group's liquidity position remains strong. With this solid foundation, we remain committed to optimizing cash flow as we progress towards our longer-term ambitions. Looking at the breakdown of our normalized free cash flow, which is our measure of operational cash invested in the business. In Q1, we had an adjusted EBITDA loss of EUR 17 million, delivering a EUR 6 million improvement year-on-year. Our total cost base reduced by EUR 16 million contributing to this achievement, representing a 13% reduction year-over-year on a constant currency basis. This was a result of targeted initiatives across all cost lines, including a total headcount reduction of over 20% year-over-year. The adjusted EBITDA cash flow benefit was partially offset by increased working capital outflows that primarily resulted from the favorable renegotiation of payment terms in LATAM last year that saw some trade payables shift from Q4 to Q1. As is typical for our seasonal fashion business, our Q1 working capital outflow was primarily related to inventory investment to ensure a fresh assortment for the new season. We remain committed to managing inventory efficiently and our inventory levels were down EUR 52 million or 29% on a constant currency basis compared to Q1 2023. Additionally, we have maintained optimal aged inventory levels showing year-on-year improvements. We continue to apply capital allocation discipline, resulting in a broadly flat CapEx spend at Q1. This included the technology CapEx impact of capitalizing the payroll costs associated with delivering our key project for the year, the rollout of the SEA order and warehouse management system into ANZ. As highlighted in March, this strategic investment will unlock recurring productivity benefits and cost savings, which we anticipate to start to materialize in the second half of this year. After adjusting for operating tax and interest payments, we had a normalized free cash flow of EUR 60 million, which is EUR 2 million less than this time last year. It's worth reminding you of our business's seasonal nature, with Q1 being the most significant quarter of cash outflow. For example, last year, Q1 2023 made up over 90% of the full year cash outflow. We closed Q1 with EUR 321 million of pro forma cash and EUR 136 million of pro forma net cash. Net cash excludes the convertible bond liability of which there's EUR 178 million outstanding post repurchases and other smaller loans. The other cash outflow of EUR 16 million reflects the mix of reduced LATAM receivable factoring and net repayment of third-party borrowings. As we have done in the past, we continue to look for opportunities to reduce our outstanding convertible bond liability whilst considering our overall cash requirements. Now looking to the rest of the year. Q1 performance was in line with our expectations following Q4 top line trends. Our latest trade in April has also aligned with our expectations. Therefore, we are reconfirming our full year guidance as set out in March. Our cost actions implemented in 2023 will continue to deliver benefits throughout the year, supported by incremental initiatives taken in 2024. Our financial priorities for 2024 remain firmly on building a financially sustainable business. This will pave the way for us to achieve our longer-term ambitions of positive adjusted EBITDA and breakeven normalized free cash flow. We are navigating this dynamic environment with an open mind and remain prepared to explore strategic opportunities that could strengthen our financial position or deliver value to the group. Whilst we are focused on the near-term factors in our control, we acknowledge the challenges and remain committed to delivering value for all stakeholders. We will now open the call to your questions. [Operator Instructions] Thank you.

Thank you. [Operator Instructions] We'll now take our first audio question from Matthew Abraham with Berenberg.

First one is just in reference to the active customer decline. I was just wondering if you had a sense for which competitors these customers might be shifting towards. And at a higher level, what confidence do you have that you'll be able to win these customers back when you refine your marketing strategy if and when consumer demand picks back up? Second question is on margin expansion, which you provided some helpful color on. Just wondering where you think margins get to if marketplace NMV reaches the 45% target you've previously outlined and continues to expand from the 41% that it's at right now?

Yes. It's Christoph. I'll take those. So on the active customer side, it's obviously very frustrating for us to see the continued decline. I think fundamentally, as we look into those numbers, we are seeing that the churn rates are slightly elevated and we're losing more customers and we're able to acquire, obviously, but also to reactivate. And I think one thing that's important is over the last few years, we've certainly shifted our marketing approach very much towards customer reactivation and also to CRM-driven customer retention, i.e., ensuring that customers do not lapse. And we certainly know that customers who have gone from the first purchase to the second purchase relatively quickly, so let's say, within 3, 6 months of the initial purchase, we have a very good chance of retaining. I think the broader challenge that we're seeing is that when we look at order frequency, we're obviously still quite a way behind where some of our more developed market peers are. And I think that obviously then plays into the active customers numbers as well, given that we're still on a relatively low frequency. So our focus is on driving CRM-led customer retention and reactivation as well as overall increasing the frequency and the share of wallet from the customer. When we look at customer overlap analysis with other players in the market, I think we generally see the most overlap with the Brand.coms and with other players that are in a similar price points that we are in. But I think we cannot ignore the fact that there's also competition from the low price Asian cross-border players that has taken a lot of share in terms of the customers at the lower end of the price points, and there's definitely some overlap there as well. So I would attribute some of the share loss in terms of the customer numbers that we've seen towards that, to some degree, but also to an overall more crowded online field where many of the historically more online -- more off-line players have built a more competitive online offering, and it's on us to make sure that we are really evolving our proposition of multi-brand, of excellent delivery and overall amazing customer experience in a very app-centric world to be very clearly superior to what is more broadly available in the market. So there's some work on our side to do here as well. So on the second part of the question, I think we've guided towards the 45% roughly of expected medium-term target around marketplace share. We're obviously well underway in that direction. We don't necessarily think it's a straight line to always continue growing that share. We don't see it as a really metric we're kind of driving hard at in terms of the objective. We're more trying to balance retail and marketplace in the optimal way, thinking about margin assortment for the customer, partnership with the brands and overall customer experience also around delivery. So it's much more multivariable, I would say, in terms of the optimization. What is important here is that we think that if we were at a 45% share of marketplace, we would be somewhere in the 47% area or so around gross margin. Obviously, this is not super scientific and it depends a bit of the mix by regions of how we get there. But I think that's broadly the direction I would give as a full year target gross margin for a 45% NMV share.

Thank you. [Operator Instructions] We'll now move on to our next question from Volker Bosse with Baader Bank.

First question is on current trading. You said April was in line with expectation. What does it mean also Q1 was in line to expectation? Does it mean April was on a comparable level as Q1 was with double-digit decline on NMV in all 3 regions? If that's true. The second question is on your expectations regarding the second half of this year, [ mean asset ] NMV was down in all regions. So which region do you expect to have seen the trough first? Or in other words, which region do you expect to kick start first to come out of the -- or to show improvement on the top line performance? And the final question is on EBITDA. I mean, right, Q1 is always due to the seasonal pattern loss-making EBITDA quarter. However, do you expect an improvement in EBITDA in Q2, Q3, but it should remain negative, would be my expectation before then Q4 could be slightly positive again. So an indication on your expectation in regards to EBITDA volatility throughout the year would be helpful.

Volker, it's Helen here. So with regards to your first question about April, yes, April does reflect our sort of Q1 performance we are seeing double-digit declines across all regions. It's worth noting, of course, there is some seasonality shifts and things like the timing of Easter and the Rio festival in our SEA business, but the general trend is what we have been seeing across all of our regions. With regards to the second half, so view for the group as a whole is that we anticipate with if you can think about our guidance range, so we anticipate the consumer pressure to start to ease in the second half. However, we do acknowledge that it is very competitive out there at the moment. We're looking for improvements across all of our regions across the board. So I would say Australia is one where we are anticipating to see that improved sentiment start to flow through more quickly. But as you're aware, there's a lot of macro issues out there that we need to be mindful of. And I think on your adjusted EBITDA question. So I mean, our profile is relatively similar each year where we have historically tended to be loss-making at the start of the year, but then adjusted EBITDA profitable in Q4, which obviously is our largest trading quarter. We expect a similar profile. So what you've seen in the past, actually Q1 and Q3 are usually most loss-making quarters, Q2 less [ sold ] and Q4 is usually adjusted EBITDA generative. So we expect a similar profile into this year following our seasonal cycle.

I just add one point Volker to this just on the EBITDA, right? I mean, clearly, we are a bit dependent on the second half and how the top line plays out there. But I would say with the range we've given, right, we are effectively given a EUR 13 million to EUR 33 million year-on-year improvement on EBITDA. We've delivered EUR 6 million of that in Q1. So we feel like we're reasonably well on track. But obviously, we're within that range, we then sit will be determined quite late in the year, depending on how the trading really looks from, I would say, September onwards as we're heading into the peak trading of the year. So I think that's where I think some of the uncertainty is coming from that you hear from Helen as well.

Thank you. There's no other question in audio. Over to you.

As we not received any further written questions, thank you all for joining today. If you have any additional ones, please reach out to the Investor Relations team.