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

Good morning, everyone, and welcome to Lyko Group's Earnings Call for the Third Quarter. My name is Tom Thornblom, I'm heading up Investor Relations and Communications here at Lyko. Today, we will have a presentation from our CEO, Rickard Lyko, follow-up with a short presentation on the numbers by our CFO, Ylva Norlen. After the presentation, we will have time for questions. So please raise your hands when it's time for that. The call will be recorded and will be possible to reach and listen to at Quartr app. Thank you so much. I leave the floor to Rickard Lyko.

Thank you, Tom, and welcome, everyone, to the call. We are presenting Q3 today and going into our most hectic period going into Q4 right now. But we will start where we are. We have done 2 of the biggest investment in the history of Lyko and launching our new automation this summer. So for us, it's really now we are entering a new era of Lyko because now we have in place everything to go for growth again and also being prepared for the assortment that we need and we know is really important for us to keep on growing. I mean it has been quite some time since we had the capacity that we needed. I mean we could handle the volumes that we've gone to the last couple of years, but it has been a struggle because we have [indiscernible]. But now we're in place. We have the ramp-up. And as you have seen, there are some bumps in that ramp-up. even if it has gone really, really good with the ramp-up, and we have an automation in a full spin, I mean, it's not without some issues when you're setting off automation like that. And also now, we are preparing for going to roll out more store and rolling those faster. That, we don't say exactly timing of those 100, but there will come 100 more. And the first one will be Taby open up the 8th of November, and that's the blueprint of our new stores, which will be bigger. They are about 500 square meter, we think. And it's similar what we had before when we're looking into the footprint of hair care. But now we are also adding the skin care, the makeup and the fragrancy because that's what we're seeing our customers is wanted from us. And that's what they're buying online. And when we're looking into other markets, hair care is not our biggest category any longer. So we really need to present those other category in the physical meeting with the consumer. And also, as you know, brand building has been the key for our success in the past, and we think it really will be that in the future as well. That's why we still think it's super important with the brand building. And when we're saying doubling down on brand building, it doesn't mean that we're doubling down on investment in marketing, but we are doubling down talking about branding because we think and believe it's super important that we're not only talking about discount and promotion, we need to build the consumer awareness about Lyko because what we know is super important because we are selling products that running out and we don't never know when this is running out because it's product that you use up. We think or know it's super important that you think about Lyko. And that is something we have invested in for a long time, and we see a result of, and we want to keep on doing that. And as you know, we want to be the starting point of beauty. That means that we want people to come to us more than just when they are prepared to buy. We want them to come to us, to get inspired, to start in the journey, to start to learn about product, seeing the new products and putting us in the position that when you want to see the trendiest brand, seeing the new things happening in our segment, in the beauty industry, you come to us. And we're really starting to be in that position. Seeing this quarter, we grow even if the results are lower than we're hopeful. But when we are looking into what's happening in the quarter and you put that in, we're seeing the underlying growth is where we wanted to be and the result underlying also where we wanted to be. And now we're really setting the foundation to keep on growing, to keep on scaling with the new automation. And when we're entering the new automation, we had a testing before to see because we need some orders to try out a new system in this summer. We have tried that before. So we were quite sure of how that will roll out and we get enough orders to try out the new automation. So we put up some of our own products in the new automation because we wanted to try them, and we knew we had stock enough to handle that with those. But the problem occur because I made a misjudgment because I didn't thought that the willingness or the demand of those products was as high as they were. I mean it's something positive that people really love our own brands. So that is good. And then the other problem -- the other misjudgment I did was the viral effect on those social media. We didn't expect it to get that viral on TikTok and Meta. And that really took us by surprise, and we got very much -- we got too many orders into the order system. So we needed to shut that campaign off earlier than we were expecting, but also people bought other stuff as well. The plan was just to buy from the assortment that we had in the new warehouse, but that didn't work out and people bought from the whole assortment as well, which were positive in a way that they pay full price for those other products, but the negative part is that we need to do a lot of cross orders, which means that we are -- cross order means that we have our new system and we have our old system, and they are connected. So that works fine, but it doesn't work fine when it's getting too big volumes. So that means that we needed to set focus on getting those orders out, doing a lot of deliverings in two orders or three orders where we normally should send it in just one package. And also that is setting the problem in rolling out and keep on growing in the normal way because those -- the peak of orders we needed to handle and figure that out. The good part with that is that we really stress the system and try that out, and we have learned a lot from that. And also what we have seen as normal when we're going into a new automation, there are a lot of issues and a lot of software issues. The good part here is that we have taking a lot of the development of that system by ourselves. We can fix those things fast. And the ramp-up has working good, and you're also seeing that we're applying more people now, but that means that we need both the system and we also need more people to delivering in product. So everything is working, and it seems to be working as well with the efficiency that we were thinking of, of the system and also seeing record numbers, both in and out from the system. So that working good. And now we're really on our way going into the peak and having the system in place that we need to be able to handle the volumes coming up now. And this was a great success, and we have seen that here with all the new employees and all the old ones getting in, learning a new system, learning everything about that one and learning to balancing the system as well. But that is in place, we are still in a ramp-up and there will be a time even after this where we will find out more efficiency out of the system when we learn more about it, but we are in a really good phase now. Our own brands really got the peak of sales, and we find a lot of new consumer coming and learning about our brands. So we would know that, that will help us going forward because we're knowing that with our own brands, we really can get them to use those product again because back again, it is product that you're using up. And if you get the experience, which we know you will, of products that's working very well, you probably will come back and buy them again. Another success this quarter was our calendars. There were more calendar this year than last year, and they sold out much faster. And we're also showing that the logistics of the calendar, get them out of the warehouse also worked very well. So that one, we are starting to plan for next year already because it takes a lot of time and a lot of effort building up that to be able to handle that kind of sales and growth that we need from the calendar. But still, we have a lot of calendars from other suppliers as well, and those we will keep on selling going forward. We also launched MinLen, which was with the Princess of Sweden, works very well, and we got the opportunity to do that at Regeringsgatan, what we love to do, events at Regeringsgatan and our other fab stores that we know also really help us building in the brand awareness that we need where we're doing stuff other than just promotion and selling products. We also launched Mamonde, which is a new K-Beauty brand together with Amorepacific, which is one of the biggest player in Asia that have a lot of brands. This is really an important step for us partnering up with those kind of brand owners because we know that they will do more launches, and we want to be a partner to have those new brands because we know that, that drives attention from the consumer and also put up in the position showing that we have the new trendy brands coming into us. And something we keep on investing, but now really starting scaling is the Lyko community. And if haven't you been in there, go in and take a look. We are really, really starting to taking off now with the community. We launched this summer something called Story. That is content that disappear 24 hours. That means as you as a consumer, if you don't want to miss out, you need to go in there every day to see that kind of content. And it also creates a new way for the brands and our influencer to connect with the consumer to do faster content. So this is something we will keep on building on, and we're seeing really good numbers on. And on the other hand, this is also a great way to play out the retail media and play out all those kind of inspiring material that our brand is sitting on. And you need to find a way to find attention from the consumer to be able to play that out and that we're really seeing working well in the community as well. And looking into everything we do because all the connection and all the touch points with the consumer, that's what's built up the brand awareness. And looking into the brand awareness, it's huge steps we're taking in Sweden. So I mean, if you look into the past, we have been -- keep on getting those numbers up, but now it's really starting to taking off. And this has always been the best way looking into the future. So if you're following these numbers, you will probably know how the growth will look like going forward. And if it's coming directly or a little bit later that we see. But taking it from 43% to 49% in Sweden, we haven't seen those kind of steps before. And that is really a proof that we're doing something right and really taking those brand awareness to the next step. And now we really can say that every second woman in Sweden thinking about beauty, thinking about Lyko. And I think that was everything for me now, and I hand over to Ylva and come back at the Q&A.

Good morning, everyone. My name is Ylva Norlen. I'm the CFO here at Lyko, and I will take you through the details of our financials for the quarter. So starting off with the net sales of the group. We had net sales amounting to SEK 827 million in the quarter. That was an increase by 8.5%. And we also want to note that we had a negative FX effect in the quarter. So in local currencies, we had an increase by 9.8%. And as Rickard was already on to, we had a really strong start in July with this own brands campaign. However, it did impact our ability to sell later on in the quarter, especially during August. We then moved on to September, had a really successful calendar launch and also a super strong Club week. And the new warehouse performed really well during the period. And compared to last year, where we had quite a lot of orders from September being shipped in October, this effect was much smaller this year, around about half. And now we have a rolling 12 net sales of SEK 3.7 billion, approaching SEK 3.8 billion. Looking at the gross margin for the quarter, this was down quite a lot, unfortunately. And the main cause was the own brand campaign that impacted July and August. And if we look at September isolated, the gross margin then was 44.1%. Looking at our cost of operations, we also see the effect, the one-off costs that we are referring to SEK 11.7 million, impacting the OpEx and also the personnel side. So on the OpEx side, we had a one-off cost of SEK 5 million, mainly attributed towards these part shipments, so freight cost, but also the cost of consumables such as packaging. This was offset by us also lowering our marketing spend since we couldn't really sort of accelerate the selling in the way we wanted in August. On the personnel side, we had one-off costs around about SEK 6.7 million due to this. On the group function side, we have been more or less flat now since the beginning of 2024, and we keep on focusing on remaining steady in this way and generating scalability for the quarters to come. We will keep on investing in our group functions going forward, but it will be in a very sort of strategic way and focusing on where we make investments. And then on to the profit for the quarter. Of course, this is not the result that we would have wanted if you just look at the SEK 2.4 million that we generated. But as we have emphasized, we did take a hit on the gross margin this quarter, and we also had one-off costs of SEK 11.7 million. So that has been the main factors affecting the profitability in the quarter. And just to take a look at our rolling 12 performance, we want to emphasize that we keep and remain focused on the long-term sort of growth and the profit development in the company, of course. Looking at our segments shortly, the net selling in the Nordics remained steady, and we grew faster this quarter compared to Q2, 9.6%. And looking at local currencies, it was a growth of 9.9%, so a negative FX effect on the selling. And looking at the profitability, we generated SEK 72 million here in the quarter. And just to emphasize that this own brand campaign was offered to the Swedish and Norwegian customers. So the one-off costs are almost entirely taken here on the Nordic segment. Looking at Europe, we decreased the selling 16.1% in the quarter, negative FX effect. So it would have been 14.1% in local currencies. But here, we are hovering around the sort of SEK 135 million to SEK 140 million selling pattern. And just to emphasize again, we are doing our utmost to find a profitable business model for the European markets. And if we skip to the profit side, you can see that we once again lower our losses in the European segment and this quarter, minus SEK 6 million. And what we can also emphasize is that Poland now is the biggest market selling-wise for us and generating the highest growth. So it's now standing out in this segment. And then lastly, we have had this sort of reminder slide for a few quarters now with the logistic investment. We are now almost done with a big investment, and we are ramping up. When it comes to the sort of recap, it will give us 150% more capacity compared to before. We have been paying rent for the warehouse since the beginning of 2024. We have almost utilized the entire term loan frame, so now at SEK 377 million and the remaining to be paid now in Q4, but also SEK 12 million in Q1 next year. We will start to amortize in Q2 next year in installations of SEK 13.75 million per quarter. And once again, we are really also proud to share that we have not increased our stock levels. We are selling more and more, but in a more efficient way. So our stock-to-sales ratio this quarter was 13%. And with that, I hand over to you, Tom, and thank you.

Well, thank you very much. Now it's time for questions. So please raise your hand, and we will distribute the word from here. So we start off with Benjamin Wahlstedt from ABG Sundal Collier.

I have a few questions. So first of all, you've previously shared your own brand share of sales. I couldn't see it in your presentation this time around. Any sort of reason for that? I think that would help the understanding of the own brand campaign in July.

So rolling 12 at the moment, we are at 8.5%. And what we reported after Q2 was 7.8%.

Yes. Perfect. I was wondering as well if you could give us an understanding of current trading in terms of growth.

Right now, no, we don't comment on that.

Or any indication of what your -- or any indication of the growth impact might have been from cutting down on marketing investments in August? Trying to capture the underlying growth, excluding temporary events basically.

I think you have the answer if you're looking back, you have seen what we have been moving from in quarter in the past, and I think it will be similar.

All right. I was wondering as well, I've noticed your customers have not appreciated the longer delivery times after the July campaign. Do you see any sort of reduced interest for your sites after this or as a result of this? Or have you been able to reconvert the customers into Lyko lovers?

I think we have been able to fix that. But with that said, I mean, we have some quite slow delivering going back the last two years. And I think now we are in a place where we can start being really fast again. And that has been quite some time before we have been there. So I think it's a huge opportunity going forward where we have the possibility to being really fast on delivering again. But the ones that were experienced a long delivering on the summer, I think we have been able to handle. And yes, when I look into the data, it looks like they're coming back as well.

And how does that work? Have you had to sort of compensate any customers for the longer delivery times or anything like that.

Yes, definitely. For those that experienced the longest we have compensated.

Then we go to Daniel Schmidt, Danske Bank.

A couple of questions from me. It was a big surprise, at least for me, that you are really sort of pushing the accelerator on store growth. Could you tell us more about that? You're saying future 100 stores. Is that new stores? Or is that basically what you think you will be in total from the store base that you have now? And it does sound like you're pushing the accelerator really from '26 and onwards? And how is that going to be financed? What's the thinking behind this? And is this basically a different focus? Are you abandoning the European efforts? Or how should we view this? This is quite a big step?

I think by purpose, we haven't such a time frame of it. And the good thing with stores is a different compared to investing in automation and the warehouse is store by store. So I mean, we don't say that we will roll out -- we will roll out faster than we have done in the past, but that has been quite slow, but we don't say which pace. And it's depending on what results we see and what's happening in the market. So we're just planning and setting the target for that to do that communication with landlords and brands and so on that we are going for that, but then we will see what time frame it will be. And when we're talking about -- we talk about new stores, but sure, it will be probably some rebuilding. But if we rebuild a store today that is smaller, then we will rebuild it as a bigger one. We will not keep on opening those smaller ones. But we have, by purpose, not setting the time frame. It doesn't mean that we will get out a lot of stores super fast next year. We will start rolling out the Taby one, starting to learn about that and starting to open up more ones, but we will keep you updated as we're going into that phase.

Okay. But I think the wording is quite dramatic, but it sounds less dramatic when you talk about it. So -- but is it a shift in your focus, you would say, because you have been focused on trying to be successful in the European market has been difficult. At the same time, you have seen quite good success with stores in neighboring countries. And I think it's been a couple of stores per year. Are you looking at sort of tripling that pace or to get to 100, if it's not a tripling, it's going to take forever? Or is this sort of a 40-year plan? I think we need to get some more clarity around this.

I mean if we see a super good result next year of the opening we do next year, then we will probably look at how can we roll that out faster, but it's really depending on that. So I mean, when we're looking into the future and we say today is online penetration at maybe 23% or something like that here in Sweden, going up a few percent in the coming years, that mean that most of the business will be in the physical phase. And we see that our brand awareness is going up super high. So we see that we are left a lot of money on the table if we are not present in the physical room, then I mean, it will still be profitable stores we want to open. So we need to learn store by store and see what phase we will take and how fast that will go. I mean the easy answer is we don't know that yet. But as long as we have set the plan and we know which phase or what speed it will go, we will communicate it. Now it's just that we see we need to be prepared or starting preparing for rolling out more stores.

Okay. And the focus, is that really on the 3 countries where you have stores now? Or are you envisioning sort of opening stores in Denmark and Continental Europe as part of this plan as well? Or where is the focus?

We have said that it could be possible that we open a store next year outside of the Nordics, and then we will see.

And it's financed through your own cash flow, basically. Is that what you're saying when you're basically taking it step by step?

It's the intention.

Yes. Okay. And then maybe another question on the gross margin. The fact that it is down quite a bit and it's down quite a bit versus Q2. Is that basically a function of you being very, very generous in that offering that you had during the summer? Is that how we should view it, although it is private label, which has a higher gross margin?

Yes, it was an impact from that campaign where we offered 75% off. And just to emphasize, we had, of course, tested this campaign in a test environment prior to the summer. And we sort of thought that we would be able to continue it a little bit more. But then, yes, I mean, fortunately, for the customers now when we went live with the campaign, it ended up being much, much bigger. So it has had the main impact on the gross margin in the quarter.

Would you say that the gross margin would have been unchanged if you didn't have that campaign year-over-year?

Hard to say, but it's also, of course, intentionally that we announced the September gross margin of 44.1%, just to show that the sort of underlying business is as healthy as before.

Okay. And you did have difficulties when it came to deliveries last year and quite a few -- quite a bit of your sales sort of ran into October instead. It's different this time, and you said it was half the impact. To me, my understanding back then was that, that was actually a couple of percentage points. So is it fair to say that sort of more in line deliveries this year gave you a couple of percentage points back on the sales growth in Q3 instead versus Q3 last year?