LuxExperience B.V. (LUXE) Earnings Call Transcript & Summary

Okay. Lights up, that means it's time for us to kick off the Mytheresa session. Good afternoon, everyone. Thank you for joining us here on the first day of the Morgan Stanley Global Consumer and Retail Conference. My name is Kimberly Greenberger, and I work with Lauren Schenk. Lauren is sad that she couldn't be here with us today. She is in London at the NASDAQ conference. So she had a conflict, and I'm very happy to stand in for her during the fireside chat. And we're really pleased to welcome Mytheresa and Martin Beer. This is Mytheresa's CFO. Thank you so much for joining us here stateside today and for making yourself available. Before we begin our discussion today, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchenclosures.

So maybe with that, we can just kick off the fireside chat session. Martin, could we just start bigger picture for investors who are newer to the Mytheresa story? Maybe you could start by talking about Mytheresa's market opportunity, how you differentiate the business and the overarching strategy.

Perfect. Happy to do so, Kimberly. Great to be here. It all starts with a Mytheresa customer. It's a completely different customer. It's a true customer focus. So we are rather a customer-focused companies rather than a tech or e-commerce or fashion company. The customer that targeted by Mytheresa is really a multi-brand customer that is supplying a multi-brand offering, a curated multi-brand offering, that -- at 11:00 p.m. at night, she wants to treat herself, wants to be inspired, wants to buy something for a couple of events that are coming up. So it's not sort of much a product focused by, I know exactly what I want and I now look for the best price. So it's a more curated multi-brand offer that I buy as a customer. And therefore, I go to Mytheresa, I see a lot of exclusives, in the last 12 months, we have 45 capsules or pre-releases, exclusive offering, and it's a curated offering. It's not 3,500 brands as other competitors have, it's really focused on the high-end luxury customer. And that's a differentiation. And that's how it all starts. It starts with the customer and with a strong customer core performance, because this customer comes back to Mytheresa with almost no promotional efforts, no marketing spend. And so we have a very strong existing customer cohort performance. And this is the secret sauce for Mytheresa on the strong profitability, because those customers, they come back and have a 100% net sales retention after 2 years. And this is also the key differentiator on the competitive side versus other peers in the marketplace.

Okay. Excellent. And I remember a number of years ago, when we were first -- when we first got to know the business, basically at the time, it was almost 100% wholesale. Since then you've introduced the CPM model or the curated platform model, and you've been going through transitioning certain brands to that model. I think you have 7 brands on that model now. Could you talk about what the brands like about the CPM model, some of the benefits to the brand, some of the benefits to Mytheresa? And what sort of percentage of GMV do you think the CPM model is likely to represent over time?

Yes. Let's talk about the last part, I mean the CPM share of my GMV is about 20% this fiscal year, it will not be in the next 3, 4 years above 30%, because it's a great model, it allows for better inventory management with the brand, it allows for in-season replenishment because it's an IT integration with the brand, but it's not for every brand, because you have to be really focused as a brand on transparency on the merchandise on wanting full responsibility on the pricing, also to have a certain retail network, because you just not only produce what has been ordered, but you have more merchandise, you have more stores, you have full transparency on the merchandise and also the ability to then shift that merchandise to Mytheresa. When we run out of certain style, size, colors, so key ingredient -- very focused on pricing, having a strong retail network, also the IT capabilities to enable this IT integration. And maybe the last key characteristics that you have to have as a brand is also the willingness from a cash cycle to go down that road. It's -- we still, and this is very important, with that curated platform model, which is not comparable to an e-concession model or a marketplace model, it's -- we still focus on curation. So we go to the brand fashion shows, we go to the brand, and we still pick, we select. So it's not an e-concession model where the brand decides, it's still us who decide, because we know exactly, everybody at Mytheresa knows exactly who our customer is, and we cater to the customer, that's why we curate, we pick, the brand delivers the seasonal merchandise to our warehouse. So it's not a job shipment model, everything is in my warehouse for me to enable the end-to-end service delivery with a high degree of excellence. We have the highest Net Promoter Score in the industry above 85%. And then I only pay the brand once the customer pays me. So that's a different cash cycle. And at the end of the season, I send everything back that I didn't sell, so there has to be also a big willingness of a band to accept that cash cycle and that inventory risk, because the inventory risk stays with the brand. But it is a lot of benefits on the integration side, on the IT integration side, we have forecasting models to have the in-season replenishment, that enables also an additional top line. And so it's a great model, the 7 brands that are now on the curated platform model. It's fully working, it's full integration, they're happy on the positive effects for them, full inventory control, pricing control, being able to still have the exposure to a multi-brand partner without giving that up and have the IT integration. It's a great, great model, the positive is we are able to offer both models, the wholesale model or the curated platform model, depending on the willingness and the capabilities of a brand, but it's great on a strategic level to have that. And so right now, 20% will go to 30%, right now, 7 brands, maybe in the medium-term to 12 brands. And therefore, the difference that we always talked about is Kimberly, the difference in the growth rates of GMV to net sales, because it's shifting, a brand shifts from a wholesale model to the CPM. And that shift is then an accounting effect that I don't book 100% of the GMV as net sales, but only the take rate as net sales. And that's why there is a difference in growth rates of GMV and net sales that I have, and that will narrow down. So in the end, I mean, the second half of the fiscal year, the growth difference of GMV and net sales will be more about 4% to 6%, and in fiscal year '24, it will come to 2%.

Okay.

And we always talked about this -- it's a very important point for you. And exactly those 12 months effect, then levels out and then fiscal year '24, there's only a 2% growth difference between GMV growth and net sales growth. And that also helps to understand the economics better.

Perfect. Okay. Excellent. And of course, we've talked about the P&L impacts of converting from the wholesale to a portion of the business on the CPM model. Can you just remind the audience what the sort of puts and takes are through the income statement as you convert some of the brands over to the CPM?

Yes. I mean the first aspect is the gross profit margin, we relate that to net sales, and that's why -- because of the CPM model has 100% gross profit in relation to net sales, because it's just a commission, that's why technically the gross profit margin increases. So we always had and we're really proud of this. The last 4 or 5 years, a very stable gross profit margin before the CPM. It's very stable at 47%, very stable gross profit margin, and that speaks to our approach to the market to which customer do we attract and retain and the ability for low level of promotion and the ability to really have a strong sell-through. That's why we have the very stable gross profit margin. And with the CPM, there is a financial effect that the gross profit margin goes up. So this fiscal year will be 53%, and it will stay maybe at 54% in the outer years. From the overall profitability, there are additional benefits on the SG&A side, because I sell more items per SKU, and we have integrated marketing campaigns. So the profitability dollars on the CPM are very comparable to the profitability dollars of the wholesale model. So bottom line, and that was also visible, once we started the CPM in the following quarters, more CPM coming on board, profitability levels staying constant, slightly increasing when we increased the EBITDA margin from 8% to 9%, and that is a very strong increase anyhow.

Okay. Excellent. If we can just turn to the sort of competitive landscape for a second. How do you think about the luxury e-commerce landscape evolving over time between brands own direct-to-consumer efforts, for example, in their own stores or on their own website as well as sort of the role in the whole ecosystem that some of the 3P e-commerce players have. In that competitive landscape, how does Mytheresa compete? And what are -- like what is it that Mytheresa brings to that whole ecosystem?

Very important question, Kimberly. And it comes back to the first question, we cater to a different customer. It's a multi-brand customer that looks for a curated offer. And obviously, the brand makes the highest profit on the brand.com, and would love to only do business there. But unfortunately, not every customer has the time to go to Valentino, Prada, [indiscernible] Gucci, saintlaurent.com. They don't have time. They want to be inspired, they want an efficient curated offer. And that's why they come to Mytheresa. So brands love to work together with us, because they realize, I want to talk to this customer that is not coming or with a lower probability coming to a brand.com, that enables me -- I mean, I want to work with -- together with Mytheresa to have a digital visibility to this customer, to speak to that, and especially, if I have a designer change, then I want to have this new tonality of the brand positioning. And I can portray that and speak to a different audience. I mean for this one brand on the CPM model, we were able to show that 60% of the brand purchases at Mytheresa came despite the customer not typing in the brand name. So it's through a development process, an inspiration process. And that's why the brand realizes, okay, I want to partner with somebody that really adds value. And this is giving visibility to a different customer group than a customer that looks for product, goes to a brand.com or goes to a marketplace to find a better price. But this brand perception -- I mean, the brand realizes that Mytheresa adds something different to the party. And that's very visible for everybody on the intensity, and the high caliber of the brand collaborations that we are having. So we -- I mean, we used to have 12, 15 brand collaborations per year. Now we have 45. And the brand produces exclusives for us, and these are multi-billion dollar brands. Why are they doing this, talking and investing so much money in that collaboration with Mytheresa, because exactly due to that reason, because they want to speak and address this customer. That's why they do this exclusive just for Mytheresa. They do a prelaunch, work together very intensely with Mytheresa to be able to expose the brand to that multi-brand customer that loves a multi-brand curated offer and is a Mytheresa customer. And that's why D2C, yes, the brands love it, but there is always a very important need for a strategic partner on a multi-brand side.

Great. Okay. Well said. 2 of the large 3P competitors, Farfetch and NET-A-PORTER have announced a partnership that could ultimately end up in an acquisition in a few years' time. How do you think that -- how do you anticipate that, that might affect the competitive landscape?

That's -- I mean this is very open. I mean, the last 3 years, we took a lot of share from Net-A-Porter, because they -- what we heard from customers have not been doing a great job on the curation side and on the execution side. And so -- and there was also a public data, they were not growing that much in the U.S., also loss-making. And now Net-A-Porter moves from Richemont to Farfetch only a minority stake, it's completely open, how that will change the offering on Net-A-Porter. I mean, right now, they have to wait for anti-competition approval anyhow. So they have to wait another 9 to 12 months, not allowed to talk to each other and then they want to do this re-platforming, which is also inside looking and for another 2 years. So for me, it's my growth trajectory, my success in the market does not depend on them doing good or bad. So it's really -- it's unclear how this will evolve, but it will not affect Mytheresa.

Okay. Great. Obviously, it could take several years before we sort all that out.

Exactly.

Okay. Turning to the macro for a second. There's been a lot of focus on the health of the consumer. How would you describe the health of that sort of true luxury consumer that Mytheresa has as compared to maybe the occasional luxury buyer?

Exactly. And you basically also -- already gave the answer. Thank you. The high net worth individual that shops at Mytheresa, obviously, is not the bag buying customer, who saves up for 2 years and then it's more aspirational and really they might postpone that purchase for another year. We cater to ready-to-wear wardrobe building customer. Our ready-to-wear share is 45%, much -- I mean it's the highest in the industry. And this is what we're building and you need every season, you need a new wardrobe. And that type of customer on the ultra-luxury side is not at least what we're seeing, is not changing their spending behavior, their spending patterns due to fear of recession or energy prices or the inflation. They also probably see their net worth going down on their stock portfolio. But -- and you can see that yourself, you go to the restaurants and vacation spots and all this, they are not changing their spending behaviors. They still want to do all this. And so that is reflected in our very strong growth numbers. Last quarter, we grew 21%. That speaks to -- we're not 100% insulated from those trends, but luxury is much more resilient. And the high-end luxury that Mytheresa caters to is even stronger -- has a stronger resilience.

Okay. So really no discernible change in the spending behavior of that like true luxury customer. And I don't -- I mean, do you even get any of that sort of occasional buyer on your website? So that you would even have an observation of what that customer is doing?

No, definitely. I mean you cannot prevent -- I mean, that would be an ideal world. You could just put [indiscernible] of the customer on your website. So -- and that's why we also have a difference in the growth rates. I mean the customer growth at Mytheresa in the last quarters was more 15%, 16%, and we had GMV per customer growth. So increasing customer, but GMV per customer increases. And that's why we always had in the last 5 years, first time buyers that drop out, that churn after the first year. And in the second year, I have 100% net sales retention, because then the customer that is a true luxury customer stays on and has a very strong loyalty, does not come back because of the promotion or marketing efforts, but has a high loyalty. And that is the strong existing customer performance. So right now, instead of -- from 100 customers going to 50, I go from 90 to 50. So yes, I see that this occasional trouble also is in the Mytheresa customer basket, is lower, that's why we have a lower customer growth. But the overall top line growth is still fully intact, because of a 12% to 15% customer growth and additional GMV per customer growth. And you saw that also in the last quarter where we reported a 22% growth in top customers. So our top customer cohort grew 22%, which is very strong. And we talked about the GMV per customer, but also AOV-LTM -- LTM-AOV increased 5.4%, which is huge, because my AOV is EUR632. And so, if you have an increase of $30 per average basket, that enables a lot of cost increase to buffer a lot of cost increase there.

Leverage. Excellent, okay. We've heard some commentary about the luxury industry starting to see some increasing promotional activity here in the third and fourth calendar year of this year. Are you responding to that? How do you think about your promotional strategy more broadly? And how do you expect the promotional backdrop to evolve as we head into calendar year 2023?

Well, Mytheresa -- and it comes back to what I said before, the last 5 years, stable gross profit margin of 47%. So despite -- and we had FX buying, mattress fashion, we had strong promotional activity in the U.S. in the past years. There's always been shifts in promotional activities. And we stayed always true to our top customer and to the right level of marketing and promotional activity. So we always are not so much related to promotional activities of our peers, because we have this different offer. We -- customer comes for curation, comes for exclusivity and not for price hunting. That's why we are a bit more insulated. My -- I mean the answer is, we will not change our promotional strategy. We don't see it. And also good is that we have a -- if I look at my inventory and I looked at this morning, it's really on target. It's really on target, it's on budget on different seasonal deliveries, upcoming spring/summer, fall winter delivery right now. And I have the right amount of inventory to not be forced for promotional or have inventory depreciation, but also to enable the growth, because you need the fresh merchandise to also in the upcoming spring/summer season to sell that. And it also comes back to the focus on the customer, because if you have a focus on the brands, the 250 brands, not 1,000, as NET-A-PORTER or 3,500 as Farfetch. And you have a clear view on the customer that you're catering to. It's also easier to buy. It's also easier on the merchandise level. And in the last 5 years, we had a 95% sell-through after 21 months on average. So that shows also the track record of us having the right merchandise and the right level of buy.

Okay. Great. The right curation. Maybe we can talk about marketing for a second. We've been in a pretty dynamic and changing marketing environment. Could you speak to what you've been seeing from a customer acquisition cost perspective? And have you adjusted your marketing spend by channels at all, given potential changes in returns?

I mean there is no major changes to call out. I mean in the last 3 years, we were the only one in the marketplace that were able to decrease marketing cost ratio, able to decrease the CAC, the customer acquisition cost, despite IDFA because coming from a more European GDPR logic, we always have that in place, sort of the [indiscernible] communication, first-party cookies, so it's really that ability. Then we saw also in the last quarter, a bit increase in CAC, 6% increase in CAC, and we see how that will evolve further, because there is maybe lower demand on Google AdWords because of the fear of recession, less promotional activity of other peers. We'll see how that evolves. But the key driver for us on the ability to have a stable marketing cost ratio, and this is my guidance to have a stable marketing cost ratio is more everything what we do. There is more of a curated offer and the strong reputation on customer and service excellence. And that is a key element on also enabling a stable marketing cost ratio. And the second element is we truly have an AI-driven bidding algorithm. So really predicting where does the customer come from, what is the first buy, multi-variant on the predicted lifetime value of this customer. And obviously every month, we improve that and we get better and better. And that is a key enabler of lower CAC, because I bit lower on 80% of the keywords and a bit higher on 20% that are relevant for me, for example. And so that enables me to keep the CAC stable and my overall marketing cost ratio stable. And -- yes, and also, we'll focus on event PRs and more brand-building initiatives and maybe less performance marketing due to the efficiencies, and therefore, we guide for a stable marketing cost ratio.

Okay. Great. A discussion of luxury would not be complete without a discussion on China. And I know that China is still sort of a smaller share of the revenue. Could you just share with the audience today your strategy in China? Do you think having a partner there is sort of necessary longer-term for Mytheresa's scale? And what other initiatives are you focused on in that region to differentiate yourselves?

Yes, China. China is very important. A couple of quarters ago, it was -- you can only go in China than it was [indiscernible] in China. And so both are wrong. So you -- China will be -- is and will be an important market. And we went there early on 2015, we introduced a Mandarin website. We have a fully owned subsidiary in Shanghai. We have all the local payment methods, the local licensees for social media and marketing. And we see China as key, because at some point in time, China will surpass the U.S. as biggest online luxury market of the world, just a very important part. So we will grow above average in the U.S., but also in China. And right now, we see it as an excellent point of time to invest in China to -- and invest for us is OpEx, building up resources on the ground. We have Steven Xu from Ralph Lauren. He is since July our President, APAC. We have now a team of 15 personal shopper, PR events to even have a local touch there. And we just announced that we will do this Chinese designer program, which is quite a smart way of going about China, showing appreciation for the country localization and with the jury and then setting up those competition and with the winning, with the 2 winning designer, we have exclusives that they produce for us, and it's a very intense communication strategy that we were doing that will peak in April, so very long-term. And that enables us to increase brand awareness. And obviously, you said that, we are very small in China, so we have to increase brand awareness. We have this partnership with JD.com, but it's more like on also marketing aspect, not so transactional, because I think it's difficult to make money there. So you have to more guide the traffic towards your app and website there. So China is really important, and especially our focus works there, because nobody needs another person to sell bags in China, nobody needs that. With our ready-to-wear focus, 45% now is ready to wear. We also have a great entry into that, also -- because, I mean, if you look at a lot of stores and China still has a very big and traditional store and very good stores, even in the Saint Laurent store in Shanghai, you hardly find ready-to-wear, in their own store, they have mostly bags. And so with that ready-to-wear focus, I think we also have a great positioning and obviously, exclusives and our curated offer to also be successful in China. Last quarter, we grew 22% despite all the lockdowns, we see an opening up, everybody talks about that, about the lockdowns, it will come in Q1 or Q2. And then we were set for great growth also in China. So we're really happy to continue to focus on China.

Okay. Fantastic. And I didn't realize I was running out of time, but let me end on this question. Martin, what are you most excited about and looking forward to in calendar year 2023 and into your fiscal '24?

I think this Chinese designer program is for me key, and looking at China, and seeing how China will evolve. I know everybody is a bit hesitant about China due to multiple reasons, but for us, this will be a great chance because as you said, we have a low base, which is great because, I mean, I'm growing from that base, and we talk about growth rates. And with that, in this huge market, if you have a much better or higher brand awareness then it's an inflection point also on GMV and net sales. And I'm really happy to have that. But there are so many other highlights that on 2023 that might be coming up. So it's really -- I'm happy on that.

Okay. Fantastic. We have about one minute left. I don't know if there is a quick audience question. We're really happy to take it. I'm so sorry if there's anything pressing. Yes, please, go ahead.

I was just asking, Martin, if you could please talk about the different category trends you're seeing and how that's evolved with the reopening and maybe with the brands, any brands you'd highlight where you're seeing particular strength as well?

Yes. I mean for us, we still see very strong enjoy the life going out, so gowns, dresses, clutches, high heels, celebrate yourself, in addition to vacation wear is key. Right now, skiwear starts, which we also have. So I think the fundamental shift away from loungewear and Kashmir is still there. But it's not a single call-out category. We have a broad selection there anyhow and with a strong focus on ready-to-wear continues. And for the brands, it's a mix. I mean, it all depends on the season, but it's interesting to see the dynamic in the brand performance. So one season, the brand is top and then it's more -- but it's nuance. I mean the top 30 brands are still the top 30 brands.

Okay. Great. And that is the end of our session today. Thank you, everyone, for joining us. And a special thank you to Martin for traveling all the way over. We really appreciate your time today.

Thank you, Kimberly.

Thank you.