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

Good morning, everyone, and welcome to Global Fashion Group's Q1 2025 Results Presentation. 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 performance. LATAM and ANZ continued to drive top line momentum from Q4 last year to deliver our first quarter of group NMV growth since the demand downturn began in 2022. We generated EUR 226 million of NMV, representing a 1.3 percentage increase year-over-year on a constant currency basis. We continued our improving margin trend in Q1 with a 2.1 percentage point increase year-over-year in gross margin to reach 46%. Our adjusted EBITDA margin improved by 3.9 percentage points to negative 7.3%. Our results prove the effectiveness of our strategic initiatives and confirm we are firmly on the right path to deliver a sustainable financial profile. Let's take a closer look at our group KPIs. We've seen a continuous slowdown in the rate of customer decline for 4 consecutive quarters, driven by lower churn rates and increased reactivated customers. Our active customer base declined by 5.2% year-over-year in Q1. Our order frequency of 2.3x was stable compared to Q4, but down 2.2% year-over-year. 1.3% NMV growth represents a top line turnaround for the group, driven by LATAM and ANZ, which mitigated weaker results in SEA. Our Q1 average order value increased by 3.6% and was able to offset the 2.1% decline in orders year-over-year. The average order value increase was primarily driven by inflation, followed by shifts in regional mix as the ANZ business represented more of the group than in Q1 '24. Moving on to revenue and margins. Our revenues increased 0.9% year-over-year to EUR 146 million. Gross margin reached 46%, the highest level we've achieved to date. Two factors contributed to this: improved retail margins from less discounts and reduced agent inventory and stronger marketplace commissions. Our adjusted EBITDA margin saw a significant improvement of 3.9 percentage points year-on-year as a result of the gross margin increase plus ongoing cost initiatives. In quarter 1, we continued to realize annualization benefits from the integration of SEA's operation and warehouse management system into ANZ's fulfillment center, along with additional year-on-year head count reductions. Now let's turn to our regional performance. LATAM and ANZ continued their positive NMV growth from Q4 with LATAM growing 14% and ANZ growing 6.6% year-on-year on a constant currency basis. SEA has remained challenged across its top line as the business focuses on strengthening its overall market proposition. Most notably, in Q1, ANZ was the first region to return to active customer growth. This turning point follows a gradual improvement throughout 2024 where new and reactivated customers began outnumbering those lost in the latter half of the year. ANZ's success was driven by both the positive impact of the got you looking campaign, which enhanced brand visibility and customer engagement efforts in Melbourne, including improved delivery service and targeted promotions. All regions delivered improvement in gross margin year-over-year. ANZ recorded the strongest improvement with a 3.3 percentage point increase driven by both improved retail margins and the benefit from its growing fulfilled by marketplace offering. Now let's move on to our cash flow for the quarter. In Q1, our EUR 6 million improvement in adjusted EBITDA and EUR 3 million reduced CapEx investment was more than offset by an increased working capital outflow. Our working capital outflow was elevated mainly due to year-on-year differences from inventory intake timing and associated payments. Additionally, some marketplace payments that would typically have occurred in Q4 were instead made in Q1 due to Cyber Monday last year falling slightly later than usual. Our normalized free cash flow was negative EUR 61 million for the quarter. Due to our business' seasonal patterns, Q1 is our highest cash outflow quarter, while Q4 generates the most inflow. On a last 12-month basis, our normalized free cash flow was negative EUR 46 million. We remain committed to improving our cash flow each year. We continue to have a strong liquidity position as we closed Q1 with EUR 158 million of pro forma cash and EUR 98 million of pro forma net cash. Net pro forma cash excludes our outstanding convertible bond liability of EUR 55 million and other smaller loans. We remain open to opportunities to further reduce our outstanding convertible bond liability whilst considering our overall cash needs. The other cash outflow of EUR 4 million for the quarter primarily relates to our operational cash flow of our Chile operation and the associated closure costs. Now looking to the rest of the year. Our Q1 results were in line with our expectations with improving top line and margin trends continuing from quarter 4. Therefore, we're reconfirming our full year guidance as set out in March. As previously outlined, our primary objective for 2025 is to become adjusted EBITDA breakeven. We expect NMV to range from negative 5% to positive 5% year-over-year on a constant currency basis. Predicting our top line remains challenging amid evolving macroeconomic dynamics. However, Q1's return to NMV growth and our ongoing margin improvements reinforce our confidence in our positive trajectory across all key metrics. We acknowledge that the recent U.S. tariffs have introduced global uncertainty. Whilst we do not have direct exposure as a locally operated business, we are monitoring several key areas. This includes assessing shifts in consumer sentiment and the potential impact on demand, our inventory intake and the activity of our peers and brand partners for potential ripple effects within our sector and markets. Our experienced team is adept at navigating rapid evolving market dynamics and is prepared to mitigate any potential disruption. In an uncertain environment, we remain focused on delivering efficiencies through past and new cost initiatives, maintaining a strong inventory profile and strategically positioning GFG's offering with our brand partners. We'll now open the call to your questions.

[Operator Instructions]. Our first audio question is coming from Anne Critchlow of Berenberg.

I have a number of questions. So perhaps I'll just ask them one by one. So first of all, on tariffs, have you seen any sign of Shein or Temu trying to trade harder in any of your regions? And do you see deflation as Chinese suppliers perhaps flood non-U.S. markets? And also, perhaps do you see any opportunities in the current situation? I know it's difficult to read at the moment.

Yes. Thanks, Anne. I'll take that. So I think overall, we haven't seen that many changes in the competitive environment yet. I think the general thesis that obviously, some of the global players will revisit allocation of capital and marketing spend and all of that depending on ultimate outcome in the U.S. is a fair assumption to make. But I think it's not shifting quite as quickly. Most of our markets are quite competitive already. And so I wouldn't say we have seen a lot there. What we do see from a tariff perspective is certainly overall market being quite unsettled. So on the one hand, consumers being more nervous. Obviously, from a headline perspective, that's kind of pretty global. And then I think the bigger question mark around this is what is happening around the supply chain and existing inventory flows in the markets, especially from China outbound and to what degree that flows to other markets than the originally planned markets, primarily the U.S. I think we have not yet seen any significant impact in our markets when it comes to this, but we are definitely taking a more cautious stance and speaking very closely with our brand partners to re-evaluate brand by brand, country by country, what they are seeing and what they're expecting they're going to be doing in terms of their own supply chain into our key categories and key markets.

And then just a follow-up on that. You say you're taking a slightly more cautious stance. So does that involve perhaps reducing your orders at this point and perhaps relying on the marketplace more for flexibility should demand come through?

So we see obviously risks and opportunities from this. I think what we want to make sure is that we are not overcommitted on the retail side in terms of next 12 months commitments. So those are the ones that we are, I would say, more cautious on and trying to increase flexibility around this given the circumstances until there is a bit more clarity and visibility on what is happening on the supply side, but also what is happening on the demand side. And as a consequence, also, we think there may be more opportunities around marketplace, as you say, but also to buy opportunity stock in the market. And we want to make sure that we have the open to buy for that available should these opportunities materialize to then respond to what is available on the supply side, but also where the demand is really sitting. And so I would say the broader theme is increasing flexibility and marketplace clearly plays a big role. And with 40% share already, I would say we are very well positioned to play between the 2 business models in all of our markets.

That's great. And then if I could follow up on Helen's statement on free cash flow about the last 12 months, EUR 46 million outflow. How did that compare to the previous 12 months, the prior 12 months, please?

Yes. So that's a significant improvement over EUR 10 million from the previous 12 months.

Great. And then looking at average order value growth, you say that price inflation accounted for a lot of that. Are we talking about like-for-like price inflation? Or is this down to product mix and trading up?

A little bit of both. So we are seeing some inflation across all of our markets, but we're also then seeing -- it's more actually sort of regional mix within the mix element that's driving some of the AOV up as well, especially the growth in Australia, which has a significantly higher average order value than our other 2 regions.

I wonder if you could give a cost savings update. So what sort of cost savings we might be able to expect for the full year, please?

Yes. So if you recall, last year, we saw overall a cost savings of about 9% on an FX-neutral basis. Some of those obviously were delivered by the fact that we also -- not only we were delivering cost initiatives, but we also saw a volume decline, which reduced some of our variable costs. This year, obviously, we're hoping to mitigate that decline, but we've got a significant pipeline of cost savings planned that have both come through in quarter 1 and also for the balance of the year. To sort of give you a sense in quarter 1, we saw about a 6% year-on-year improvement in our overall cash costs.

Okay. Great. And do you have a sense where that might land for the full year, please?

Yes, a similar trajectory. So obviously, we've got more annualization benefits in quarter 1 from last year's projects. So they will start to wane as we go through the year, but we'll also then ramp up some of our new global initiatives over the course of the year. So it's a relatively flat profile.

So just to confirm, it's a mix of annualizing initiatives from last year, but also some new initiatives coming through?

Exactly, yes.

Great. Looking at fulfillment costs, should we expect those to fall in absolute terms this year due to the order and warehouse management system implementation in Australia? And if so, what sort of magnitude of step down should we see in either the absolute fulfillment costs or perhaps fulfillment cost of sales?

Yes. Good question, Anne. So maybe I'll take a little bit the specific question around Australia and maybe Helen can give you a little bit more color on the broader trajectory of the fulfillment cost. As you point out, obviously, the efficiency gains we have on the one side and then on the other side, we have volumes shifting into more positive territory in especially ANZ and LATAM. So there's a mix effect between the 2. But if you focus on ANZ as the biggest market and the biggest part of our overall fulfillment cost, the tech cost savings have now been fully realized. So they are basically in the numbers. We still expect further improvements in fulfillment center productivity in that region. So that has been ramping since the initial launch, but it is a ramp over time as there are improvements in manual processes that are being more enabled through the new technology platform. So I would say probably by the end of the year, we would expect to be largely there. It's a continuous improvement effort, obviously, but I would say the direct savings that are coming from this tech implementation, we should have fully ramped up by the end of the year. And then I think the most exciting part of this updated order warehouse management system is really around the platform services and the Fulfilled by THE ICONIC. And that's obviously more of a commercial ramp-up where as we're shifting more brands into the Fulfilled by ICONIC model, and we're launching further capabilities around that, that's really a strategic multiyear ramp-up of benefit that should really help overall shift towards marketplace and derisk inventory in Australia and New Zealand as well as leveraging the scale and the capabilities and therefore, driving down cost per item, cost per order in the facility in Australia.

Anne, from a sort of a costing perspective, obviously, we've got quite a broad range on our top line. So the absolute will be highly dependent whether we're in that sort of bottom end and marginally declining or obviously, the absolute would start to go up on a variable element if we return to growth. But if I think about it as a percent of NMV, we're definitely looking to see an improvement on a full year fulfillment as a percent of NMV sort of at about 1 percentage point. We've delivered slightly under that in Q1.

That's really helpful. And could you talk about the gross margin and the impact from lower markdown activity? What was the magnitude of that? And what's the outlook, please?

Okay. So in the quarter, we saw the 2 percentage points uplift in gross margin. So broadly sort of equally placed between improvement in retail margin and then a slight improvement in marketplace participation that actually increased marketplace commissions. And then obviously, within the retail margin, some of that being reduced discount, but also we've then got the benefit of just general better buying and mix. I think if we look at the overall outlook for the year, obviously, we saw the whole of last year sustained quarter-on-quarter improvement. We continue to see that this year, probably dampening slightly in magnitude as we go through the year. So probably I wouldn't be expecting sort of any more than 2% throughout the year.

Okay. Looking at Southeast Asia, that remained negative in the fourth quarter. Chris, could you talk a bit about the actions you're taking to strengthen that customer proposition? So what does that look like from the customer's point of view basically? And then also perhaps outline the cost and efficiency actions that you're taking?

Sure, Anne. So from a customer-facing side, I think most importantly, we believe we have actually a quite solid customer experience. It's a very app-centric business. We have great reach. We have a bunch of brands, both global and local that are highly relevant. So I think we're coming from a strong starting point. Where we are really trying to sharpen the focus on the assortment side is to really make sure that for the top 30 brands, we are not only carrying a broad assortment from them, but we actually have availability of the most relevant product for each of the Southeast Asian markets. So this is really in the partnership with the brands, both in the marketplace brands where we have some of the big fashion apparel brands, but also on the retail side, which is a bit more dominated by sports and the kind of sports and leisure brands and really making sure that that is exactly right for the customer. We've made good progress there around, in particular, aged stock, but we still have more old stock than we would like. And so driving up newness and really make sure we bring that newest stock to the customer and articulate to the customer the newness and the relevancy of the stock in the right way versus a very discount-led old stock message is a big focus. What we've also done is we've removed a lot of noncore categories, some of which have been kind of lingering since COVID times, and we think we need to sharpen our sports, lifestyle and fashion credentials with the customers by not being in these categories. And as part of that, we've also removed a lot of the long-tail marketplace sellers who are not driving any significant NMV, but are ultimately leading to a very large number of SKUs on the platform and can drive a little bit of confusion with customers in terms of what we really stand for. And so we want to stand for a multi-brand fashion and sports of the most relevant brands. And so this all goes in that direction. On the cost side, we've also taken a range of actions year-to-date that should bring down or are bringing down our overall fixed cost base for the year quite meaningfully relative to last year. That should flow into the numbers from Q2 onwards. I think we should be at the fully, I would say, rightsized level of cost by Q4. So -- but there is going to be a step down in Q2 already. And then I think we're really looking at the marketing side very carefully as well in terms of making sure that we allocate marketing spend to the most promising customer segments in each of the key markets. And the key markets for us are obviously Philippines, Indonesia, Malaysia and Singapore. We're also in Hong Kong, we are no longer present in Taiwan, which was a negligible part of the business, but to really put all attention on those other 4 countries plus Hong Kong is where we are in terms of focus in the region. So these things all don't materialize in terms of headline results overnight, but we think we have enough actions underway to gradually improve the performance. One callout I would make is that the Raia seasonality this year shifted earlier. And so when we're going to come to report Q2 numbers, -- we'll talk about that a little bit as well. But what that will mean is that Q1 effectively looks a little bit better than it should and Q2 will look a little bit worse than it should if you would normalize for that seasonality. So maybe that's a good heads-up for the Q2 numbers to come.

That's a great. And just thinking about your comment on the app-centric business, what percentage of sales is now coming via the app in Southeast Asia?

It's over 90%. So it's merely an app business.

I'm sorry, could you repeat that?

It's nearly completely an app business. So everything we do, the way we think about it, the way we do marketing, it's all centered around the app.

Great. Thinking now about the trend through the quarter in the different regions. Could you comment, please, on whether you've seen any increase in volatility or decrease in Q1 and perhaps into April? And maybe talk a little bit about current trading. I know it's difficult to read given the timing of Easter in some countries.

Yes. I mean April, we're forecasting April to be slightly softer than March. And as Christoph said, some of that's to do with the seasonality in Asia. You're right, there's Easter and then also in Australia, they end up with Anzac Day as well in the same week. So we're navigating the timing of some public holidays, but we're on track and in line with our expectations for the month.

That's great. And then sort of linked to that, if you could talk a bit about consumer sentiment since the tariff topic kicked off in the different regions. And how you think the consumer is kind of feeling in the various countries where you trade, the most important countries?

I mean, I would say in most countries, consumer sentiment hasn't been that strong even starting the year. So we're coming generally from a more cautious, slightly pessimistic position already pre some of these U.S.-driven headlines in the last 30 days or so. So what we've seen as a result is that most of the markets that have been in, I would say, pessimistic territory already have turned a bit more pessimistic. That's true for Brazil, Colombia, Philippines, et cetera. So I would say it's a slight worsening on an already fairly cautious, pessimistic view. Brazil, for example, one thing to call out is also we do have very high interest rates, and they've actually been going up further. So that has always a big impact on consumer sentiment. So I wouldn't over-index on just the global environment really driving the sentiment. There's a lot of local factors at play as well. I would say we have not yet seen a sharp turn in any direction that would really change our outlook for the year, obviously. But we're cautious, and I think we're a little bit more risk off or watching for these kind of indicators of a change in sentiment. And I think with the upcoming beginning of the spring/summer season in Australia and Brazil, our 2 largest markets, that will be a really important indicator. So I would say May is an important month for us. It's going to be out of that Easter timing and all of those things and really the beginning of the new season. So probably by the end of May, we'll have a better read of where we stand.

That's helpful. Moving now to AI. I think you're doing something on AI-backed personalization. So if you could talk a bit about what's in place, what's coming on stream? And then more generally in AI, what kind of features you've got in place, what's looking interesting for the future? And then including also your AI pricing system in Southeast Asia, how that's working and whether it needs a period of time before it can produce benefits?

Yes, that's a very broad question. So I think broadly, and we are deploying a range of AI tools in every part of the organization, be it on the marketing side in terms of content creation, product descriptions, visuals, AI-generated imagery, all those types of things, video, that is all happening on that side. So I would say what the customer is receiving is increasingly AI-powered. Also, the personalization and segmentation we can do around content, CRM, et cetera, is increasingly powered by AI as some of the tools that are also third-party tools are increasingly embedding these functionalities. Then the system you call out in terms of Southeast Asia, which is around pricing, has already been trained on a lot of historical data. So that is very good. And so I think we're at a quite good level in terms of really generating pricing decisions based on current stock and historical behavior. What we're trying to build into it is more forward-looking information, in particular, what stock is incoming in the future because as you can imagine, it's one thing to kind of set prices based on the sell-through curve and existing stock. But if there's a replenishment of that same stock that's expected 30 days later, that changes the whole equation. And no AI can make a perfect pricing decision if it doesn't have that piece of information. And so in those areas where we are still not able to provide the machine learning tools, the right full level of information, we obviously have a degree of human intervention into it to make sure that we are not making bad pricing decisions that are automated, but based on incomplete information. So I think this remains a work in progress, but we are seeing great benefits also for productivity of our teams. And I think maybe that's the last point around that. We have now very broadly deployed access to AI tools to all of our teams, and they're being adopted pretty rapidly. So I think that is then benefits in terms of productivity and efficiency that are gradually ramping up across all of our activities. And I think Helen talked about some of our efficiency and cost initiatives. And certainly, AI plays a role in making sure that everyone at GFG is as productive as possible, leveraging these tools to support them in what they're trying to achieve every day.

That's really interesting. Great color there. And then one final question from me, please, on marketing. You've already had a sort of very successful campaign in Australia for some time. I think you mentioned last time you were starting a second campaign. But just wondering if you could talk about return on advertising spend and also whether you can put through any learnings from Australia into the other regions at some point?

Yes. So you're right, we had a second round recently of our -- got you -- looking campaign in Australia with a variety of consumer engagement activities. So we have things like treasure hunt and things, which were incredibly successful. We've also done a lot of specific marketing actually for Melbourne, which we were relatively underpenetrated. So we've seen significant improvements in the Melbourne district. I'd say with regards to learnings to the other regions, yes, very much so, but I think it's when those regions are ready. So as Christoph described, there's a lot of work to do in Asia, Southeast Asia at the moment to be able to sort of stabilize the business. But yes, there are a lot of learnings that we then will be able to take. And I think with regards to investment as sort of a percent of NMV, whilst there will be sort of puts and takes across different regions, we'll be looking broadly to keep our investment relatively constant year-over.

[Operator Instructions]. We do not appear to have any further audio questions at this time. I'd turn the call over back for the webcast questions.

As we have no further questions, thank you all for joining today. If you have any further questions, please reach out to the Investor Relations team directly.