Lyko Group AB (publ) (LYKOA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the interim report for the second quarter for Lyko Group. We will have a short presentation of our CEO, Rickard Lyko; and our CFO, Ylva Norlen. After the presentation, we will have a short -- you will be able to ask questions. We have a Q&A. I remind everyone that this call is recorded, and it will be shared on quarter after the presentation and on the Lyko website. So welcome, and I give the stage to Rickard.

Thank you. Yes, this has been a quarter with continuous growth, and we are also adding one more store. So now we have 31 stores, and we are operating our 2 warehouse. I'm here in Vansbro, where we are building out the new automation, which are on the way, where a lot of the hardware is on place, and we are starting with installation. So we can jump to the next one. We are growing continuously and growing faster than we did in Q1, even though we met quite tough numbers, and we also know that we have some sellout, which added to topline last year, but also we're decreasing the profitability last year. So I think even though we had Easter, which helped us this quarter, but we were continuously growing in the Q1. So I think it's also showing that it's keep on performing. We see that the retail is performing better and online is a little bit tougher, but we're also knowing that that used to change in between months and so on. I can jump into the next. We have a new brand concept that we have launched this quarter, and we are seeing a good result of that, but we're also knowing when we are changing a concept like this, we don't get that much of a boost in the same quarter. It used to come a little bit later. But what we have seen so far, it looks really good, and we think this is a concept that we will live with for quite some time, and it's also a very international concept that we think should really working well in all the markets. We opened up in Turku in Finland, the store, and it keep on performing, and we have a good welcome there. And we're also seeing that the stores -- store rollout in those new countries is working really well. So I think there are a lot of opportunity going forward for more rollout of those kind of stores. And this is the new warehouse where the automation is in the full installation part. So now we have some moving part as well in the automation, but also a lot of the hardware is on place. We are working really hard on the software-wise and testing that. But also there, we are just in where we should be, and we are also developing a big part of that software by ourselves. And in the quarter, we also see that on the rolling 12 numbers now, we're up in 7% of our own brands, which will be an important puzzle -- part of the puzzle going forward for more profitability, and it's really good to see that that keep on performing, and we know that the margins in this assortment is much higher than in the rest of the assortment. And we are still looking into Europe. We are also seeing that even that Europe are growing a little bit in the quarter, but we have some tough number meeting in July, but then we know it will be easier growth number for Europe. And we're seeing that we are finding the right customer now, but we are -- still have a lot to adapt and working together with the suppliers and that it is taking time, but we're seeing we're taking the step in the right direction quarter-by-quarter now.

Thank you for that, Rickard. You will come back later for some questions, but I give the numbers to Ylva Norlen, our CFO.

Hello, everyone. So as you've all been able to see, the selling in the quarter continued really strongly. SEK 880 million and a little bit higher growth figure compared to Q1. And more details on the quarter. We had an Easter calendar effect in April, a positive one, and we also had a big mid-season sale. We also opened the store in Turku, Finland, in April. And then in May, we reopened our renovated store -- flagship store on Karl-Johan in Oslo, and we also relocated in Emporia in Malmö in June. And as usual, we had a big birthday campaign in June, which we met against last year, but we also had quite a big warehouse sale in 2023 that we met. When it comes to gross margin, we upheld quite nicely against Q1. And when we look at the operational segments, Nordics and Europe performed really well. The big drop is really in the other business segment. And here, the change is mainly due to an internal transfer price margin change. When it comes to the other external costs and personnel costs, we can see on the external cost side that we are continuing to see scalability in some of the important parts, especially in freight. We also had marketing costs that are lower compared to 2023 and also almost on the same level as in Q1, but we have this big brand campaign launch. Personnel-wise, it's in line with our expectations, and we have now fully recruited market teams in 7 markets. EBIT for the group, we managed to increase the margin compared to last year, 1.9% against 1.7%, and it gives us a 32% increase in monetary terms. And when it comes to the Nordics, which almost stands for 94% of our turnover, we continue really strongly, and it's a 22.7% increase in sales. And here, we see that Norway and Finland has the highest growth rate, whereas Sweden grows the most. And our omni model here is really delivering strongly, and we see strong growth in all sales channels. EBIT in the Nordics continues to develop really well and solid contribution from both online and retail sales. When it comes to Europe, which is a 4% share of our business, we're back on growth in this quarter, 2.3% and it's Poland and the Netherlands that grow the most. And when it comes to EBIT and profit levels in Europe, we managed to keep it on quite a steady level now since almost a year back, and we make a lower EBIT loss in the quarter, minus SEK 9 million. And we can really see that we have good cost control and stabilizing results. Other business is 3.5% share of our business, and this consists of Lyko Production and Lyko Professional. And here, we have internal sort of including internal elimination. So this is really just the external selling that we have in these 2 business verticals. And here, we are quite impacted at the moment. We're in a bigger fusion and also restructuring of our organization and also ways of working. So we have a little bit of an impact there on the margin-wise. And then on group functions, here, we are almost level to the quarter before. This is, of course, consisting mainly of staff costs from group supporting functions. And in this last quarter, we're now fully launched in a matrix organization. So we are well underway with the central teams when it comes to supporting the local market teams. So all in all, in summary, impressive momentum continues throughout the first half of 2024, and our long-term focus in the Nordics is really paying off well. We are opening strategic store locations across the Nordics and see really good effect from these. And we continue to tweak the business model in Europe. The own brands share of selling is now 7% rolling 12, and the EBIT increases really well during the quarter. And also importantly, Vansbro extension is on schedule.

Thank you very much for that presentation, Ylva. We are now moving over to questions. So please raise your hand if you have a question and I will deliver the word. So first, we have a question from Daniel Schmidt from Danske Bank.

I hope you can hear me. Just a question on Europe, Rickard. You mentioned that you are seeing that you're finding your customer in Europe. And -- but you still said you have some more work to do when it comes to suppliers and so on. Can you shed some more light on that? What is sort of the key to getting the European customer to pick up on your business basically? Could you give us some more details?

It's more about both assortment-wise to finding the right assortment, the right partner to go with in those countries supplier-wise, but also finding the right customer in the segment. How we have entered the market in Finland and Norway and Denmark as well is finding a younger customer. And I think in the beginning, we were going broad in the assortment, but now we're setting more focus on that. That seem to work, but take some time to adjust and getting on the right path there. But I think we're starting to find that.

And you've talked about sort of the need of physical presence in these markets and you talk about the young customer. And it's sort of my understanding that actually younger people are more omnichannel in their shopping behavior than older people, especially in your category, which sounds strange, but that was my understanding looking at some data. Do you feel that you need to be physically present in these markets to really get the attention from the younger customer?

From the beginning, I think it's more about showing what we are and differentiate us against other e-commerce players in the Europe, but also have a chance to attract the right brands. And for that, we need one store in each market. But in the long run, for sure, we need to be present as an omni player to be able to go against the bigger player in the long run in those markets.

Yes. Okay. And what do you think is the timeline to have one sort of store present in each market? Is that for '25?

We haven't decided and depending on what we are seeing, what we are finding, but it could be an option that we have one store in 2025 in somewhere outside of Nordics, but that we will see and we will see what we are finding as well.

Okay. And then maybe just for Ylva or maybe Rickard and Ylva, sort of inventory came down quite a lot and the cash flow was really good actually. But if you look at inventory to sales, I think it's down to all-time low basically since you became a listed company, and it's 300 basis points lower than sort of the average that you've had since then. Is that just a timing effect of the end of the quarter, just happened to be that way this time around? Or are you entering Q3 with too little in terms of inventory?

We have optimized on the A and B articles because we don't have the room and the space up in Vansbro as well, and that is also why we are building out the automation. So it's something that we have chose to do, but it's also showing that we can go lower both assortment-wise, but also stock-wise in total.

And you don't feel that that low level is going to impact sales growth in the coming quarter?

I mean it's affected the growth, and it has done because it has been low in Q2 as well, but we're still performing on the right article, and we are choosing which one we are not -- which one we are running out of stock. So we're not running out of stock on the right article. But for -- until we have the new automation, we need to optimize that continuously.

Okay. And then finally, maybe on the gross margin, which came down a little bit versus Q1 and especially versus Q2 last year. But it sounded like you are seeing sort of a stabilization in the gross margin. Is that the right interpretation? Or how should you -- how should we think about the gross margin in the coming quarters?

Do you want to answer that, Ylva?

Yes. I mean there are many things playing into the gross margin. One tangible aspect that we tend to underline is the category mix, where the share of hair care is going down for us, which impacts the margin. We have full focus on mitigating the situation through a number of initiatives. And it's something that we're working very intensively on in the buying teams.

And is that a trend that you see in the market in general when it comes to hair care versus the other categories? Or is competition, for some reason, tougher in that particular area now compared to previous years?

I think it's more related to Lyko's past where we were 100% hair care brand from the beginning and have been adding more and more categories. So it's more about the sales mix rather than maybe losing out to competition.

Then we give the floor to Benjamin Wahlstedt from ABG Sundal Collier.

Perfect. All right. You can see the top of my head at least. So for a couple of quarters now, you've been reporting Finnish growth separately, but you don't today. Could you give us an indication of the Q2 growth in this call, perhaps?

Yes. I mean we continue to see really strong growth in Finland and in Norway. We didn't detail the growth in this quarter since we opened another store in the middle of the quarter, which, of course, makes the sort of noncomparability factor. But we can get back to you on that if you are curious on Finland.

Yes, that would be interesting. I was wondering as well if you could elaborate on the category mix you speak about in the CEO statement, more specifically, perhaps the other businesses. Why are they struggling, please? Or in what way are they struggling perhaps?

Yes, it's -- the businesses we have in the other segment, so our own brands, our production units and also the professional B2B selling, it's parts of our business that are fairly new in terms of acquired to the group, and we're making quite a lot of adaptations in business models, et cetera. And then since the Lyko production part is mainly producing for our internal own brands, it's -- we're also in the midst now of setting up a new transfer price model internally. So it's more that we are in a period of change rather than a struggle, I would say. Our 3PL production is working out really well for us. So it's a little bit more this year that we're in now with intense changes in those businesses.

All right. Perfect. You also note increasing property costs. Could you give an indication of the incremental costs from, I guess, Sergels Torg, Turku on a run rate basis?

So you said property cost?

Yes, exactly. And just an indication of incremental costs from Sergels Torg and Turku. How much is rent in perhaps Stockholm's best retail space?

Yes, I haven't got it isolated for the 2, but we have -- I don't have those 2 broken out since we've also taken on more cost in terms of Vansbro and also a couple of other offices that we've opened in the quarter.

Correct. Very well. Final one then maybe. Could you give us more information on Europe in general, please? Is it the change in inventory that drove your growth in the quarter and also the sequential margin improvement? Or is there something else that you could add on Europe, please?

Do you want to answer this one, Rickard?

What was driving the growth of the sales? Or that's the question...

Yes, exactly. Like are we seeing the other end of the inventory changes or the inventory rebasing that you did in the previous quarter? Have you found a replacement for the [indiscernible] product in Germany? Is there anything else?