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

Good morning, everyone, and welcome to Lyko Group's quarter report for the third quarter. My name is Tom Thornblom, I'm heading up Investor Relations and Communications here at Lyko. We will today give you a short presentation of the report. First, it will be Rickard Lyko, our CEO, follow-up with some dig into the numbers by Ylva Norlen, our CFO. And after that, we will open up for questions. The call will be recorded and will be found on Quartr's platform, where you'll be able to listen to the entire call. So with that said, I leave the floor to Rickard Lyko.

Thank you, Tom, and welcome, everyone. Yes, let's jump into the presentation. If I am able to shift -- I shift the slides. Fix the magic here. Now I think we are into the slides. I think it's a quarter where we are meeting easy number from last year. We had some problem with the go-live of the automation. That means that the comparative number is not as relevant. But I think if we compare to the last quarter, we see that it's a steady volume of sales because those 2 quarters are quite similar. But compared to last year, I mean, 23% up on the sales, and we see the good part is that they're falling through in the result. And I think this is an example of what we hopefully will see continuously now when we are having -- taking down our cost, but keep on selling the product. We see the margin-wise, it's still tough competition out there, and we are able to handle that. And hopefully, we will be able to work on that one going forward, but we're also knowing that, that are shifting from quarter-to-quarter dependent on how the campaigns and how the competition looks like. Own brands is keep on growing. And then we should remember that we have a tough number to reach from last year because we have the go-live campaign, which drove a lot of sales on the own brands. So also here, if we look into back to the quarters that have been passing, we're seeing it's a steady growth of that. We also knowing this quarter it's less dependent on the calendars. I think the calendar sales has been good compared to last year as well. But this year, we have a lot of more calendars, but those will keep on selling in the quarter as we're going into. The cost saving program is in line with what we have talked about and what we should do on that. And we're also knowing that the biggest impact of the cost saving program will be when we're going into Q4 with higher margin. But with that said, it's the first quarter where we have more effect of that one. Own brands is a lot in this quarter and the coming quarter about calendars. Those ones are selling good, but we have increased the volume a lot to make sure that we can catch the sales from the consumer. We also want to build our position as a calendar destination. We have a lot of calendars from other brands as well. The automation is working very good now. We have a much better faith that we have than last year going into the peak period. And a lot of the automation is more efficient, the new one that we have built, but most important part is that we have built out the capacity. And the capacity is really come to use when we're going into the peak period like a Q4, that's when we're operating in the full level with our new automation. Up to that point, I mean, it has been built for bigger volumes, and that's what we're seeing coming now. So we will see improvement on the fixed cost side on the logistic part. Our community kept on growing, and we have added some more functionality. You know we can post in this community, we can make looks, we can make reviews and stories, and now we're also adding repost. This is a longer-term investment that we are doing into the consumer to make sure that we have a unique position in the market and building our own social platform at our app. And this seems to work very well, and this in a combination with retail media can be an important part going into the future, and we see good growth from that. What we also keep on doing is the event part and doing things differently and also building our position against the young consumer, both in Sweden, Norway and Finland, where we have done these activities for a year -- for some years now. And we see this year, I think we took it one step further, and we got so many organic spreads from this. So I think this is also something that's building our position for the long term. And talking about position and talking about our physical footprint and other important steps that we have taken is that we are launching [indiscernible] makeup now at Drottninggatan. The brand by itself will probably not make that big of a difference for us in sales-wise, but it makes a huge difference in the position wise that we're seeing that we can handle the more prestige part of the beauty business, and this is something we believe is important going into the future to make sure that we are the #1 position in the markets where we are when you look into beauty, and that needs to be included with the prestige part of the beauty business. We have also communicated that we will open our 38 stores in Black Friday at Orebro. The good -- and the interesting part with this one is that this will be our second place of a store in Orebro. So it will be interesting to see how that affects the sales and how that make possibility to have a double explanation in cities like Orebro. So I think that was everything for me. I will hand over to Ylva to go into the numbers. Thank you.

Hello. Good morning, everyone. My name is Ylva Norlen. I'm the CFO here at Lyko Group, and it's my pleasure to take you through some further highlights of our Q3 results. So of course, starting with the net sales growth. We had a really strong quarter and grew once again above the SEK 1 billion mark and delivered SEK 1.024 billion in sales. That's a 23.8% growth against last year. And we had in local currency, a growth of 21.4%, and we had some nice tailwind, especially in the NOK. And of course, the growth in Q3 was quite considerable, but that was due to a more soft Q3 last year. But also stand-alone, this is a really good quarter, and it's the first time the third quarter is bigger than the second quarter. And of course, this growth was enabled through strong campaign execution, good calendar start and also new stores. Especially Sweden and Norway delivered in the quarter and growth year-to-date is at 8.7%. Coming on to the gross margin. Here, we are almost level to last year. And actually, on the product margin, we are on par with last year. The headwind here has been in FX and also some stock scrappings that were taken in the quarter. When it comes to the external costs and also the personnel cost, this is where we now see a really big impact from the cost savings program. We come in at 18% share of sales on the OpEx side. And this is, of course, due to the bigger sales volume and especially a big cost saving on the freight cost side. Personnel costs decreased as per plan, and we are now starting to really see the effects from our cost savings program done in the spring. And then coming into the EBIT side. This is the second most profitable quarter for Lyko in history and of course, super strong. We delivered SEK 58 million. This is a little bit more than in the previous quarter, and we are super proud to present a 5.6% margin. And of course, the main underlying reasons are the strong growth and also the effects from the cost savings program. Coming into our segments, the Retail segment grew by 25%, up once again above the SEK 1 billion mark, and this was mainly attributed to Sweden and Norway. And on the EBIT side, SEK 111 million was delivered. This is a substantial growth from last year and corresponds to 10.9% margin. Coming on to the group functions and other. Here, we have the sales from our external overcapacity in production and 3PL. And we decreased slightly from last year, delivering SEK 12 million, and this is due to us scaling down those external services and focusing more on our internal needs. And here, as you can see on the cost side, we continue to decrease the group function cost. It's now at SEK 52.6 million in the quarter. And this is, of course, as per plan and a consequence of the cost savings program. And then as we usually share, when it comes to investments and cash flow, we have approximately SEK 70 million planned in CapEx for the year. And during this quarter, we were at SEK 9 million. We recently announced that we will open the second store in Orebro, and this will happen on Black Friday in Q4, and we also communicate that we have an appetite to open around 8 or invest in 8 more store projects during next year. If we look at the inventory side for the quarter, we finished the quarter with SEK 536 million in stock value, and this is a very steady level we have been on now for 4 years. But with the growth in this quarter, this means it was the first time we were below 13% stock-to-sales ratio. So now 12.8%, which is really a strong result from having a much faster and more efficient automation in Vansbro. Cash at the end of the quarter was at SEK 220 million. And with that, I hand over to you, Tom.

Then it's time to open up for questions. And we will be happy for everyone to raise their hands. And we start with a question from Magnus Raman.

First of all, congratulations. I think it's worthy to say this. Surprisingly strong growth, in my opinion, even considering the easier comparables that you just mentioned, especially since you have been very clearly pointing out your emphasis on profitability. So perhaps this is my first question, if you can elaborate a little bit on how you could end up with this strong and sort of more historic number growth when you had this profitability focus.

I think a lot of the growth is coming from our Sweden and Norway market, which we always have had a good profitability from and that in combination with lower cost. I think that's what sums up the results.

Sure. And I mean it's also impressive, I think, to see that you made this strong operating margin improvement, especially now in the light that you still have declining gross margin and rising marketing to sales, which we might typically think of as the margin driver. So it's a very impressive leverage on the sales increase from that perspective. Maybe I can try to ask you if you would -- I mean, since you have the ability to steer a little bit the magnitude of top line in investing in price and investing in marketing, if you would have settled with, say, 5% or 10% top line growth in this quarter, would you care to give a guess of the gross margin difference and the marketing to sales difference in that case?

I think a big impact also is that we're seeing that all orders are more profitable due to that average order value is keep on staying on a higher level than it were a year ago, and that has also impacted it. But I don't know if it's very hard to say if we will go for a little bit less growth, how would that affect the margins and so on. I think it's a mix. So I think we have -- we are on a place where we are operating on a balancing where we see we're choosing the more profitable orders and staying low to the ones that are at least profitable, which is a lot of times means that they are really small orders where we're seeing less profitability.

So this is tied to your strategic refocus on how you give discounts, so to speak, and tie it more to basket size or number of products in basket, correct?

Yes.

Right. Then I just had 2 very quick maybe to a little bit more detailed question. You mentioned here FX affecting gross margin negatively and that underlying it should have actually been rising. Would you care to say roughly the FX effect on the gross margin?

There are several factors impacting the gross margin, the 0.7 points down. It's partly stock scrapping, partly lower other sales revenues, such as freight revenues, but the biggest effect came from the FX side and the NOK that we then saw a sort of tailwind on the top line.

But do I understand you correctly that the negative FX effect is still less than 70 bps?

Yes. It's a major part of the 70 bps.

Right. Great. And then the final one for me is you mentioned also that this is the first quarter where you see a material effect on white collar staff reduction in terms of staff costs, but that it will continue. I think you wrote to something into Q4 or I read it as increasing into Q4. Can you elaborate a little bit on this? How much more sort of staff cost reduction potential do we have in Q4 compared to what we saw now?

I won't give you a sort of financial steady steer on that, but we still have some colleagues working in this quarter that left in this quarter. But now that side of the cost program is executed. So yes, that's what we'll communicate.

Then we go over to [indiscernible].

Perfect. And sort of following on the previous speaker's question. Would you care to give a sort of estimate of the run rate savings on the personnel cost line in isolation? I think your initial comments on savings were like taking every cost line together, if I'm not mistaken. So what would be the sort of run rate impact on personnel costs specifically?

So we will summarize more on that when we close the full year. So it's nothing that we have decided to communicate firmly on in this quarter.

Right. Rickard, you mentioned a larger focus on the AOV perhaps or at least that was my interpretation. Could you give us any indication what part of growth is volume and what part is AOV?

We don't disclose that, but it's a mix for sure of it. The thing is when you're driving higher average order value, you are missing some orders, so you need to compensate that with more sales. But it's a balancing act, but I don't have the exact number on which part has affect how much.

And I'll try to -- I'll give you another impossible question maybe. You grew very well in this quarter, and you're saying you actually left some sort of orders on the table because they were, I guess, less profitable. What would you have grown had you not given up these less profitable orders, do you think?

I think on the online side, it's super easy to grow more all the time because we can just lowering the prices and go for all orders and buy a lot of traffic. So you can always do that, and it's quite easy. The hard part is balancing it and make it profitable.

I guess in the last sort of 3 quarters or on a year-to-date basis, your marketing ratio has been 8.5%-ish, representing quite a big improvement from the year prior. And is it possible to give us any idea or any sort of indication what a good guess for marketing ratio is Q4 2027, something like that? Is this a temporary lower marketing ratio? Or have you found ways to just market more efficiently? Or what's happening here?

I think it's a mix depending on what the volume will be with some part of it being a fixed investment going into quarter. So then it's affecting depending on how the sales will go. But we have also pushed some of the marketing investment in front of us and part of them we will take. But then seeing what those will fall out in numbers, we don't comment now. But we think that we should be on a -- we want to keep on investing in the marketing side. So it's not a cost that we see should keep on decreasing, then we hopefully can take that in other part of the business in that is to keep on investing in the marketing.

You don't really seem to need these postponed marketing investments, so to speak, considering today's result?

Building a strong brand, you can always decrease it in the short term. But in the long term, you need to keep on investing. And then it's just a matter of which is the level for that. But exactly as you are on to, I mean, sometimes we invest in that and you have a higher growth and the marketing ratio will be lower. And as we go, it probably should be lower, and it has been lower in the markets where we are strong like Sweden and Norway. And now when the bigger part of the sales and we're not as focusing on growing other markets, then we can see we can drive it down and still keep on investing it in -- I mean, in cost, we put more into the market.

Perfect. Final one on marketing perhaps. Is it possible for you to give us a rough indication on let's call it, top funnel versus bottom funnel marketing. So top funnel being like bottom funnel being variable with revenue? What share...

We have exactly in detail, but it's nothing that we disclose. I think also not to make it as clear for all our colleagues in the business as well. So it's nothing that we comment on.

We are handing over to Johan Fred at SEB.