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

Good morning, everyone, and welcome to the quarter report for the third quarter from Lyko Group. Today, we will start with the presentation from our CEO, Rickard Lyko; and then our CFO, Ylva Norlen, will present the numbers for the quarter. And after that, we will open up for questions. The call will be recorded, and we will present on the Quartr app and on our website. We are today here at our office in Stockholm. We are about 120 people here at the moment. And we also have set up a little studio here. So we're super happy to have you with us today. And yes, we will start the presentation. But first, we will have a short video. [Presentation]

Thank you, Tom, for the introduction, and welcome, everyone. My name is Rickard and I'm going to present the Q3 report. Just to remind you, we are aiming to be a starting point of beauty, and we're taking a lot of steps going forward to becoming that. And I think the last quarter is really showing the proof of that as well with movement to the app and also all the engagement we're getting around the branding we are doing. We are changing the concept. We did that this summer and that we are keeping on rolling that out, and we're seeing really good impact on it. So we are measuring everything for sure and seeing if there is something to adjust or -- and so on, and we are seeing that it is really working into all the markets. So very positive feedback on that, and we are also seeing that our brand tracking keeps on increasing, and this is something we are investing in for the long term, and we have done for quite some time. And it's really nice to see that the jump in Finland and Norway as well, then it's taking longer time for sure when we're coming up to higher numbers is a little bit easier in the beginning. We are driving a lot of events, and this quarter hasn't been any exception of that. The last 2 event was the Halloween event that we did in Sweden, but also in Norway. And we are investing a lot in that, but we're doing that together with the brands. And we're seeing that they want this more and more. And also proof of that is that they are choosing to launch a lot of brands to us. And the last one of that was e.l.f. with [indiscernible]. We did the launch together with H&M. And we're seeing the impact of those kind of brands but also the impact that they are really seeing us as a platform to launching the brands, talking to the younger consumer. Because we know a lot of those brands, that's what they are aiming for. They need to find a way into the newer consumer, and we are really sitting on that key. We were also winning retail experience award here this quarter. So very proud of that and really good work from the retail team that are -- keep on delivering. And now the last which will open this Saturday in Bergen, which we're looking forward to. And I think the localization that we're doing now when we are entering Bergen is on a new level, and we're really seeing that it's working. We're really -- already seeing the impact in the Bergen. We keep on the journey in growing and being the fastest-growing beauty specialist, and we're really seeing that we are -- that in the Nordics and then we want to take that out in bigger European segment. But in the Nordics, it's really working. And if we look into the online, we're really seeing that we are taking a big loop from the rest of our colleagues in the business. We are also investing in our own brands, and we have been talking about that for a long time. We're seeing this quarter as well. We are close to 10%, and that is just to our own channel, then we have the business-to-business part which is moving quite big volumes, but even it's not as high on the turnover. And on the rolling 12, we're seeing that it's starting to increase as well. We have working a lot on these products and the brands, and it's taking time. I mean that's the downside in the beauty industry. If you're going to launch a new product, new brand, it takes about 2 to 3 years. And if you look into this picture, I have shown this picture before, but the new thing in this picture is all the products that you're seeing down there, they are new. And some highlights from that is that we are relaunching the By Lyko brand. It's going to be the Lyko and a little bit update in the look and also going more into the skin care part in that. And we're seeing this is a really important piece of the puzzle when we are building uniqueness but also profitability because the margins in this category is sure much better when we are producing a lot of this by ourselves as well. MAKE UP STORE, we did that acquisition a few years back. We are -- have been working with that a lot, and the launch of the new look of MAKE UP STORE will come in beginning of next year. And we did the relaunch of Rebecca Stella, and we're really seeing how that is improving and also keep on growing the brand. So we're seeing it's really working when we're doing this update on those kind of brands. The calendars was a big success. We have launched that one. We didn't manage to delivering everything in the quarter. So we have kept on delivering. We are now up in pace where we should be with that, but we see this is also improving year after year. And also, a lot of the brands are learning that this is working well for them as well, investing in putting in product into the calendar, but also selling other calendars. So this is something we have been optimizing and keep on doing, and it will be an important part of the business going forward as well. We are increasing the warehouse, as you know, and a lot of investment in that, that we have been talking for quite some time now. We are shifting all the software in the warehouse, and we have done that, and that is going live, and it's been working really well. So we are really preparing now to going live this summer with the new warehouse. And yes, right now, it is -- we are on the board of what we are able to handle in the warehouse, and it will be tough going into Q4 delivering on these volumes. We manage that, but if it hasn't been a problem, I will be more worried because then we have investing too early in this automation. But we're really looking forward going into the new warehouse, and that is also something that's holding us back a little bit on the stock levels and so on. We are optimizing that, but it's also restrained that we don't have any room in automation because we are maximizing the automation that we do have now. Something we're also investing and have put a lot of focus on the years to come. The years that we are going through is the Lyko community. We started that, I think, it's 5 or 6 years back, working with a lot of that. We relaunched the platform because we're able to handle the volume of the community. And we are also shifting a little bit. We have been inspired by the TikTok flows. So if you're going into that, you will feel that there are some similarities to TikTok just to be relevant in that, but that is also increasing and traffic to the app is increasing through that. And we are also seeing a possibility because when you're in the app and you're looking into our community, you are in a different mode. You are not just there for shopping. You are there to consume, looking for the next product and so on. And that is also giving us the possibility to interact and also delivering different message. And one of that thing that we can do and have been starting. So if you're going in there, you will see advertising. And now we will roll that out bigger with retail media going into the next year. And I will show just the short how that will look. And yes, I can say the brand love this when they can take over and delivering their message. And it's quite hard to do that in an optimized e-commerce flow. But if you are in the community, you're a little bit in a different mode to take in that, and we are also knowing in our industry, they like to see advertising. And here is just an example in something that we are rolling live now in the app. And this is a possibility for the brands to delivering really what they are all about, building that brand, building everything about the feeling around the that are so important to find into the new products, and that is a position that we do want to have. So that was everything for me. So I will hand over to Ylva going a little bit deeper into the numbers and telling us what's happening there.

Hello, everyone. My name is Ylva Norlen. I'm the CFO here at Lyko since about 7 months back, and I will take you through the results for Q3. So overall top line was up 8.2% versus Q3 last year, and it's been a little bit of a while since it was a single-digit growth figure here at Lyko, and I will go through a little bit why that has been the case. Partly, we have really high grounds from Q3 2023 at 26%. And secondly, September ended up being a really intense commercial month for us with the Club Week Campaign, the E.L.F Cosmetics launch and an earlier Advent Calendar launch. And we can also see due to the warehouse capacity that we ended up with a significant backlog. In a normal month, we have about 2 days between order to delivery at the end of the month. But this time, we ended up with a 4x higher backlog. In general, we see that channel performance follows the market tendencies and we saw stronger growth in retail compared to online. The gross margin in the quarter was actually up versus Q1 and Q2, but we keep seeing a negative rolling 12 trend. And this is the same factors that we've talked about before, it's the category mix and mainly a pricing effect. When it comes to the other external costs, these were up a little bit share-wise in the quarter due to the -- that we have costs taken in September related to revenue that now will be attributed to October. And here, it was mainly performance marketing standing out. Before the September sort of backlog occurred, we were well on track to a lower OpEx level for the quarter. Personnel costs also follow the quarter size and the selling, but here, as Rickard was also saying, we consider that we now have a full organization on group level and on local level. And the difference, if we compare to 2023 on personnel side, is mainly that we have opened new stores. We have also now fully recruited the country team members, and we have increased the own brands team since we're investing a lot there, and we have also increased some group functions. And then the EBIT result for the quarter. Of course, due to the selling being lower, we ended up lower here and come in at 1.1% EBIT percentage level compared to 1.8% in the previous quarters. Coming on to the Nordics. We continue well here. We see really strong growth, 9% up for the quarter. And we have also here really strong grounds from last year with 25%. We see continuously that the omni model is working really well. So both stores and online developed really well. And we can also see now that the app share of business is up to 29%. EBIT in the Nordics increased by 16% on last year's quarter, and we're now on a profit level of 11.6%. And this is really something that we're looking forward to continuing to develop. What's different to Q3 in last year is that we've now recruited country managers in Sweden, Norway, Finland and Denmark and they joined us during spring this year. In Europe, we continue the focus since a couple of quarters back on profit, and this has taken a toll on the overall selling, so we've lost some selling in the quarter. On the other hand, we've been able to add some really important brands lately, and we look forward to seeing what that will take us. EBIT-wise, this focus is paying off, and it's the third quarter in a row that we're reducing our losses in Europe, and we see that cost control is really on a good level. So we're looking forward to now looking into the paths that we have for Europe in the future. When it comes to the group functions, meaning mainly the head office here and also part head office in Vansbro. We have a similar level to previous quarters. And this is, of course, due to some additions from the first half of the year in the organization, mainly within marketing, purchasing and in finance. And then a new slide for this quarter presentation. We get a lot of questions, of course, about the ongoing investments in the Vansbro extension. And just to further underline the project is going really well and on time. We will have 150% more capacity by this time next year. And here, we have chosen to outline now how the term loan distribution looks like between the years. We are paying rent for the property since the beginning of 2024, and at present, the term loan is at SEK 186 million. We have a flexible interest rate set up on the loan and amortization is planned to start from Q2 2026. And as Rickard was on to, we're focusing a lot on stock levels at the moment and securing selling with improved stock levels. And in this quarter, we had a 14% stock-to-sales ratio compared to 18% last year. So in summary, it is a lower net sales growth, but it's partly due to challenging grounds, but also affected by this backlog in outbound logistics. We do see that the long-term focus in the Nordics is really paying off well, and we will continue to open strategic store locations, next one coming this week in Bergen. We continue to tweak our business model in Europe towards profitable growth, and the warehouse extension project is progressing well. And in general, investments both centrally and locally in organization, we see that we will be able to scale that in a good way going forward. Thank you. That was all.

Thanks, Ylva.

Then we will open up for questions. So please raise your hand, and I will give the words around. And we will have the first question from Johan Fred, SEB.

Starting off with the effects on the -- or sales effect from Christmas calendars. Is there any chance that you can quantify or give us a rough estimate on the effects from sales being pushed into Q4, please?

Not more than the guidance that I just gave in the results section.

Okay. But percentage-wise, you stated that your biggest launch was pushed into Q4, for example, were booked in Q4? What does that imply? Is that 50% of the calendar? Or how should we think about that?

Well, the guidance we can give is that in a normal month we have 2 days of backlog at the end of it between ordered and shipped, and this time, it was 4x higher.

Okay. Got it. And the second question on sort of campaign activity and price pressures. It's been high for quite a few quarters now. Could you elaborate on what you've seen in terms of the trend during the quarter. Are the pressures less pronounced than compared to earlier this year? Or are they persisting?

It is a similar pattern, but we're also seeing, I think when you're having a little bit tougher consumer, they are prioritizing, putting their orders on the campaign period and so on. So that's, I think, the pattern we have seen, and I think that will probably been keeping for quite some time.

Got it. Is this concentrated to specific product categories? Or is it more broad-based?

More broad-based.

Okay. Got it. Got it. And in terms of private label sales performing well and continue to account for a larger share of your sales. Is this due to channel mix with higher retail sales during the quarter? Or are you also seeing similar kind of growth in your online channels?

Similar kind of growth in both, but for sure, it's helping that retail is going strong, but we see it in total. And I think that is lot due to the launches of the products and that we are working with that assortment.

Okay. Got it. Very clear. And the final question on sort of capacity constraints. We are heading into the sort of high season with Black Friday campaigns and Singles Day and what have you. How are you feeling in terms of your current capacity? Will you be able to sort of deliver the volumes you intend to? Or how should we think about the capacity going into the high season?

It will be -- [ really sweat in ]. We will handle it. It could be that we need to have a little bit longer delivering times and so on to consumer. But if -- what I've seen from the past, is there is some time when the customers are fine with that, it's under the Black Week campaigns and so on. So I think we can handle it, but it will be on the limit where we are because, yes, we need a new automation, but we have a plan for handling it.

Then we'll leave the floor to Benjamin Wahlstedt from ABG.

And I'd first like to follow on the previous question on capacity. You appear to be at least slightly worried about Q4 capacity. You see sort of a longer order backlog already in Q3? Like what is the normal order backlog going out of Q4 roughly in terms of days?

I think when we're going out of Q4, we will be able to empty the stock because, I mean, it's more about what's happening in December. I mean the Black Week will end before this quarter, the campaign was in the end of the quarter, and we are now on track again. So now the backlog is -- we have handled it. So I don't see any problem with that going out of Q4.

All right. Perfect. You also note that online growth picked up the pace in September. And I was wondering if you would like to share, like did you grow online throughout the quarter, please?

I think we have the big campaign in the end of September. We saw that, that was good volumes on. And I think that due to the consumer choosing to buy a little bit more when we are doing campaigns but also that we were able to launch the ELF and also some Calendars. So that was a mix there where we saw really good volumes.

Perfect. And if, or in the unlikely event that someone listening might have missed the release dates of all the different calendars, could you remind us which ones sort of fell into Q4, please? Which ones were delivered in...

Some of our own calendars, we were releasing a little bit earlier than we did last year, but then again, we were not able to be delivering most of them. The Make Up Store we launched earlier, that one has sold out everything is delivering. We are also increasing the volumes compared to last year. And then we have other brands calendars, but that's coming in similar time as last year, I would say.

All right. And then one final question. The other segment, I was wondering if you could talk a bit about that softer profitability versus Q2 as well, I believe.

Yes. And this segment is a little bit special, especially at the moment. So selling was partly down in this segment, which due to the internal eliminations only include the B2B export sales and 3PL sales. On the cost side, though, it carries the whole organization for our own brands team, our B2B team and production team. So the profit and sales in this segment, which isn't like a real segment in a sense, doesn't entirely follow. So during this year, we have added more colleagues in the own brands organization. So yes, this segment is a little bit tricky to follow for sure.

Perfect. And then perhaps one final one. On own brands, the penetration difference year-on-year in the quarter is somewhere between 3 and 4 percentage points if my calculations are correct. This should -- with a 20 percentage point higher gross margin give like a gross margin report of 70 basis points. And if you have any flavor on the gross margin at all that would be helpful, please.

Yes. We see that the own brands will be a really important mean for us going forward in terms of gross margin mitigation both due to the share of business but also the positive margin development. More guidance than that is not possible to give right now.

Then we'll leave the floor to Daniel Schmidt, Danske Bank.

Just a clarification, maybe. I don't know if every sort of previous question, I think it was a bit strange the way they were sort of put. When it comes to the calendars related to Christmas, that was a launch that was -- they were in the market earlier than last year, correct? If you look at last year, every -- the entire launch was at the beginning of October, right?

Right. Yes.

So you actually had some support from that launch when it came to Q3 revenues, even though it sounds like it was fairly small given the lead times in deliveries. Is that a fair statement?

Yes.

But you won't sort of -- you don't want to provide any numbers on, is it sort of very little? Or is it anything worth mentioning?

I think the ones that Ylva has already given is the one -- the flavor we can give on that question.

Okay. Okay. But you're making a point in connection to that, that you took a lot of costs when it comes to performance marketing in connection with that launch in the report. Do you want to quantify that number?

No, not in relation to that either. I think the flavor we're giving there is that we were well on track on coming in lower than the Q2 OpEx levels before this occurred. So marketing as a share of revenue is down compared to Q3 last year, but this trend looked even better before this.

Okay. And was there a late decision then that you decided to launch the calendars a bit earlier this year? It sounds like that.

No. It was in the plans. But I think September ended up being an exceptional month due to not only the calendar release, but also the E.L.F. Cosmetics release. It was on the last days of September as well and a really well-performed Club Week. We also changed our warehouse management system right at the beginning of September. So in terms of planning and the result being an outbound backlog, yes, the planning could have been better there. But on the other hand, we -- I think we made a lot of customers happy during the month.

The reason why we released it earlier was because that's what we were seeing in the market a year before that the release calendar was earlier, so we wanted to be in line with the other competitors in the market.

Okay. But speaking about the market, I don't see you're writing anything about it, but you do -- delivered the lowest growth since you became a listed company for a single quarter. And it's a quite big step down. Is this sort of a reflection of the market being weaker in general or more sluggish? Or is it your own performance, are you seeing more competition coming through in your core markets?

I think we are meeting tougher numbers, as you've seen, but also that we are not growing in Europe, which has been helping us earlier. But then I think also that we were not able to deliver in all the orders, which are also playing in that. So I think those are the reason more than we're seeing that the pattern has changed that much.

Sure. But the orders are also related to an earlier launch of the campaign, which you didn't have last year. So just thinking you've had more difficult comps earlier and we've seen sort of Matas saying that KICKS is going to be more aggressive on price starting this summer in Sweden and Finland. Has that impacted you at all?

Yes, we see that they are active, but I haven't seen that it has impacted our numbers. The campaign was in the same time as last year. So we haven't changed that. So it was just a calendar, but then also the release of E.L.F. which we cannot choose when to release, we just get the release date when to do that.

Okay. So you don't think that it's tougher competition that's slowing your growth is just basically comps that are difficult?

I would say.

I think weather wise as well compared to last summer, last summer was quite ideal for sales.