Marimekko Oyj (MEKKO) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for joining the Marimekko results webcast. We will first hear a presentation by our President and CEO, Tiina Alahuhta-Kasko. And after that, Tiina and our CFO, Elina Anckar, will take your questions. Tiina, please?

Thank you very much, and good afternoon, everybody, and welcome to hear a little bit more about the past year 2019 and how Marimekko did overall. So to start with the big picture, we had a very strong year. Our net sales grew in all market areas and our comparable operating profit then thereby improved significantly. Our net sales in total increased by 12%. Both in the Finnish market as well as in the international markets, we saw the same level of growth. And in particular, the growth was driven by the retail sales in Finland by the wholesale sales and licensing income in the Asia Pacific region as well as our wholesale sales in EMEA region. And obviously, then the great improvement in the net sales impacted positively the comparable operating profit performance. Then when we look at the Q4 in 2019, we also saw really nice growth figures in the last quarter. Our net sales growing 17% and thereby, our comparable operating profit improving by a nice 87%. Again, there, we saw a really nice sales trend from the domestic Finnish market retail sales, but also wholesale sales in Finland as well as our wholesale sales and licensing income increase in the Asia Pacific region. So our key market areas performed very strongly and was also boosted by the positively gone holiday sales. And as mentioned, the comparable operating profit grew very nicely in this quarter as well. And what I was thinking to do next is to sort of deep dive more in depth in these results, but overall, I can say that I think as Marimekko, we are in a very good position to start the new decade. We have got a nice swing, positive direction in our net sales development. As you know, we have a long-term international growth strategy, and our ambition is to really see markedly much stronger growth and through that profitability than before. And at the same time, we have reached a really nice level in our profitability, also reflecting on our long-term financial targets of over 10% annual net sales growth and a 15% operating profit margin. So good in our way towards this long-term financial goals and ambitions. Then when we sort of deep dive first to Q4 net sales, I already mentioned the key drivers there coming from the most important markets, the biggest market areas for Marimekko. But something that I would maybe in particular highlight here is the particularly strong retail sales in Finland, understanding that the market growth in general has not been in that level. Our like-for-like growth in retail in Finland was 21%. And at the same time, our wholesale sales also developed very nicely. As we had informed before, in the past year, we had substantially less nonrecurring promotional wholesale deliveries than the year before. But in Q4 -- well, Q4 was the quarter where the majority of these promotional deliveries sort of weighted. But what we can see in the domestic market figures is the strong position that we have in Finland. And because of that strong position, we can see that the long-term development that we have done both in the areas of our collection development as well as in the modernization of our brand, we can see those impacts faster in our strong home market. But as mentioned, also really nice development in international sales. And something that I could also highlight is that in almost all the other markets, also our retail sales grew in the last quarter. Maybe something that would be good to take into account when looking at the last quarter numbers in the Asia Pacific region, there's a timing-related factor there, meaning that the wholesale sales growth in the Asia Pacific region was partly due to the part of the region's Q4 '18 deliveries timing to 2019 Q1. So that's also something maybe good to take into account when reading the report. And then when we look at the big picture, 2019 figures, not to repeat the main drivers, but saying that they came from our key market areas as well as then the wholesale sales in the EMEA region. What makes me and Marimekko employees very happy is that we actually saw, as mentioned, growth in all of our market areas and in particular, from the most important markets. Also there, the retail sales like-for-like in Finland, 18% is a very strong result from our home market. And the wholesale sales, more moderate development in Finland is really relating to these nonrecurring promotional deliveries being on a substantially lower level last year than the year preceding. Licensing income was also something a factor that really impacted the net sales and also margin development positively this year. And I will talk about that later on, but something that we also saw in Q4 supporting our core business is very visible, Marimekko UNIQLO, Japanese global apparel brands, limited edition collaboration collection that really supports us in driving the Marimekko brand aware and hence, traffic around the world. Then we look at the split between all market areas as well as our product lines. Not so many big news there, but something that I would really highlight is the fact that we could see double digit, very strong growth rates, both in fashion as well as bags and accessories. Fashion growing by 20% in 2019, bags and accessories, 17%, and this is really a reflection of the work that we have done within these categories and collections within the past years. So fashion and bags and accessories as according to our strategy, they form the communication spearhead of the whole Marimekko lifestyle, and the good development that we have done there already for the years proceeding is starting to be visible also in these growth rates. So this is something that we would also expect to see. As to the global footprint, as already for some time, the majority of the Marimekko stores are already located outside our home market. And today, we have around 150 Marimekko stores around the world, e-commerce stores in 32 markets. In the past year, 5 new stores or shop-in-shops were opened and 7 were closed. This is part of the normal business as we constantly evaluate locations and their attractiveness and sometimes, leases might be also aging so we need to constantly -- it's a constantly moving mix. But as you see from the total picture over there, our overall sales, retail sales have increased quite nicely in the past year. And it's good to remember that in the retail sales figures, we also have our own e-commerce sales figures, and that's also where you see the productivity, so the improvements in the sales by square meters that we are very much also focusing on as a key growth lever. Maybe something worthwhile mentioning, as you know, we don't separate or open up separately our own e-commerce sales figures because we really develop e-commerce in a very integrated manner together with our retail sales. We want to ensure a seamless experience. But what I would really like to highlight is that the longstanding investment into the development of the digital business have really started to bear fruit. And again, in the past year, we saw very vigorous growth continuing in the digital e-commerce for Marimekko, and that's obviously development that we intend to grow. Yes. When we look at the brand sales, so Marimekko sales measured through consumer prices, so really kind of measuring the reach of the brand regardless of the business model through which we operate, our brand sales were approximately on the same level as last year, and it's good -- I mean, 2018, and it's maybe good to remember that in 2018, we had multiple bigger licensing agreements that also reflects in the comparison figures' strength. Then when we deep dive into the comparable operating profit for Q4, as mentioned, it grew significantly, really boosted by the sales growth. The higher fixed cost, especially investments in marketing sort of weakened the operating profit. And overall, the development was very strong compared to the previous period. And looking at the full year, also a very positive development, as mentioned. When you look at the operating profit figure for 2019, it's good to remember that in the comparison period, we actually had this nonrecurring taxable capital gain of EUR 6 million on the sale of our head office that sort of reflects in the strength of the 2018 comparison period. But looking at the comparable operating profit, it's a nice growth of 40%. And in addition to the growth in net sales driven by the retail sales in Finland, increased wholesale sales and licensing income in Asia Pacific as well as the growth in wholesale sales in EMEA, also another positive development that reflected in the comparable operating profit improving was the improved relative sales margin. So this is something that we take very much pride in working hardly on, and this is due to the fact that we have increased regular price sales. We have had more moderate discount promotions. You can see also the impacts of the positive product portfolio optimization work that we have already done for many, many years as well as the increase in the licensing income. As you know, it's a very attractive business model for us to operate. And then maybe talking a little bit about the key events in 2019. It was -- there were many of them, but I just like highlighting some of the key ones. So I already mentioned in short the limited edition collaboration collection with UNIQLO, the global apparel giant. And we had already done 1 limited edition collaboration collection with them in 2018, springtime, which led to be a very big success. And as a continuation of that, we joined our forces again for the holiday season and created a new limited edition capsule collection. So obviously, the reasoning behind doing this from Marimekko's perspective,has to do with the fact that these are amazing unique tools for us to increase our global brand awareness. And obviously, brand awareness is critical for us when we build our journey to internationalize and inject this even more ambitious growth than before. So they have proved to be a very good partner for us, and this obviously supported very nicely our Q4 overall, but also long-term brand awareness creation and introducing Marimekko to new audiences that might not have heard about us before. Something that also was kind of an exciting novelty in the past year that you can also see supporting the positive growth, the 20% growth of the ready-to-wear line in the full year was the introduction of our first ever unisex streetwear collection called the Marimekko Kioske. And this was for the first time launch in the market in the early Q3, and it was received with exceptional excitement. We had the preliminary launch at the Dover Street Market store in Ginza, Tokyo, which is one of these influencer, very reputable influencer doors, regarded very highly in the world. And the product to be sold out in a matter of hours and similar excitement we saw then when rolling out the launch across different market areas. So obviously, the logic in the Marimekko Kioske collection is to take something that people know. So the most iconic Marimekko prints from throughout the year, the most celebrated icons, and combine that with something that is utterly surprising, meaning here from Marimekko perspective, the streetwear. At the same time, we know that streetwear overall is enjoying a lot of hype around the world. It's sort of in the journey of kind of reshaping what the fashion industry is looking like overall, and so basically saying that our launch was very well timed. And I think sometimes in order to make a big impact, the best recipe is actually to take something that people know, but then really portrayed in a completely surprising way. And obviously, this is something that we are now continuing in the coming years. And this is really a segment that has enabled us to reach also to the next generation, so the younger consumer segment. Another key kind of product area launch in the past year had to do with the new leather bag line. So overall, as kind of a key part of the collection modernization work has been that we have wanted to start building looks for customers to really kind of play with and have fun with. And in order to really round out the Marimekko style, bags and accessories really play a key role. Overall, in our industry, it's a known fact that for many fashion brands, our competitors, but also in the luxury segment, a key part -- a significant portion of the net sales actually come from bags and accessories. This is a product line that has, for the past years, already enjoying nice growth. And this year, we really saw it continuing on a great growth map, supported also by the leather bag launch. That sort of enables us to position that segment into a more premium offering as well. Continuing on the brand collaboration side in Q3, in the summertime, we were part of one of the kind of lead designer collaboration brands for the U.S. retailer Target's Anniversary Collection. So basically, they celebrate their 20 years of doing designer collaborations, and Marimekko was one of the brands whose part of the original collection was reissued to celebrate this birthday or anniversary. So again, the same message. These sort of initiatives obviously help us to really build the awareness and knowledge of our brand in our key market areas. Well, something that we're really excited about, as you know, we've discussed that before, is also the personnel share issue that we conducted in Finland in the past year. And as said, half of the portion of of the ones who were entitled to subscribe took part in the share issue and now a very big part of our employees also participate in creating our joint future also as shareholders. And I think that this is such a Marimekko cultural thing to do because we have a company culture that is very much built in this idea of entrepreneurship and a very passionate relationship towards our brand and the lifestyle journey that we're on. So it's -- I think it's a very exciting thing that our -- many of our employees also partake in this journey. Also in this way, in the springtime in the past year, we also piloted something new in the area of retail or on national retail experience. There's a lot of -- one of the biggest disruptions in our industry has to do with the disruption of physical retail and wholesale, and we believe at Marimekko that disruption is always a huge opportunity. And in order for really to capture the value that is opened up through this opportunity, it's really important to test and try new things and then inject these learnings to our way of working as fast as possible. So as 1 interesting pilot, during the Milan Design Week which is the most important interior and home design event in the world with maybe over 300,000 people visiting Milan during the time in April, we actually set up an authentic Marimekko Home in the heart of the city. So it was a fully created Marimekko Home experience where the shopping could be done digitally through an application. So with no-inventory digital shopping, but paired with an extremely inspiring physical experience that really generates emotions and connection. So these learnings will definitely now utilize as we have already started in early 2020, the creation of and planning of our future experimental omnichannel customer experience. Then talking about 2020 about our outlook. So if we take this in bite, so starting from our strong home mark at Finland. As before, Finland represents around half of our company's sales, and we expect our sales in Finland to grow in 2020. Also, the domestic wholesale in 2020 are -- will be boosted by nonrecurring promotion deliveries that will be in their value, much higher, substantially higher than last year. We also expect that the vast majority of the deliveries will take place in the second half of the year. So that's for Finland. Then talking about Asia Pacific, our other main market area. So as we -- as you know, as according to our strategy, Asia Pacific is our second biggest market and really represents an important role in our international growth strategy in the longer term. And we also see that in the longer term, there's even growing demand for a brand like Marimekko in the market. Japan is the single most important country in this region. And the other countries, combined share of the company, sales is still relatively small as operations compared to Japan are still in a more earlier stage. As we know, already know, with the some 40 stores and e-commerce and wholesale channels, the Japanese market for Marimekko is more mature in its status. There's already quite a network of points of sale, but we constantly work together with our partner to support the sales by developing the operations of the stores, by increasing digital commerce and optimizing the product portfolio to be further relevant for the local consumer and also help acquire new customers in the important market. However, as we've seen, there's been a lot of news lately about the impact of the coronavirus. And at the moment, as we know, the impacts concern, in particular, the Asia Pacific region. But overall, the final impacts are still very uncertain, but they may have a negative impact on the sales, profitability as well as the operational reliability of the supply chain. At the same time, it's good to keep in mind that of Marimekko's manufacturing, only 15% of our products are in China. Most of them are manufactured actually in Europe. However, at the moment, we expect Marimekko sales in 2020 to further grow in the Asia Pacific region according to our current estimates and expectations. Then also something to be noted is the fact that, as mentioned last year, it had come to our attention that there had been gray imports from Marimekko products out there, and we have taken due measures and the controlling actions will have a clearly kind of weakening impact on our net sales and earnings this starting year. Also, licensing income that grew substantially in the past year, it's expected to be markedly lower than the previous year. Then when we talk about the measures that we're taking this year to really kind of boost further our journey on our strategic roadmap, so we believe that now we have come to a stage where we've gotten kind of a good trend in our net sales development. Our companies from a financial point of view, we're very healthy. We have a good profitability level. And we can see that the megatrends, meaning the overall trend regarding sustainability and changes in people's values, the overall women's empowerment movement, digitalization, all of these trends are supporting the further growth story or Marimekko. Hence, we believe that now is the right time for us to further increase our investments to enable our even more markedly stronger growth than before. And for that reason, the fixed costs are estimated to be increasing significantly relating -- or versus the previous year. So where will we be then investing? So we will be further strengthening our international business competencies needed for growth, and we expect our personnel expenses to be substantially higher than the year before. Obviously, we will be boosting our investments in marketing as we know it's so critical to build the awareness, and we believe that now is the time for really for us to further increase our investments here to really speak to a wider global audience. I think good steps are already taken, and it's really a matter of time for us to just ramp up our efforts there. So we expect our marketing expenses to grow versus the previous year. Also, we will be investing more -- significantly more this year, especially on revamping and expanding our store network as well as we will be investing more in further developing our digital business and IT systems in order to strengthen our overall international competitiveness. So basically, as we know, for example, digital commerce is a key -- one of the key engines for our future growth, so we're really putting our investments in the areas that help us achieve in the long term, the markedly stronger growth and profitability than before. Also something to be noted is that the estimated effects of the long-term bonus system targeted the company's management will depend on the trend in the price of our share during the year as it's connected to the share price movement. Then maybe just to recap on the key drivers of growth in 2020. So as before, the key drivers of our growth are e-commerce, increasing the sales by -- per square meter of existing 150 Marimekko stores around the world as well as partner-led retail in Asia. As mentioned before, in the domestic market, the nonrecurring promotional deliveries, wholesale deliveries will have a significant impact on the company's growth. And in addition, we have an aim to open approximately 10 new Marimekko stores and shop-in-shops in 2020, with the main thrust being focusing on the retailer open Marimekko stores. Then a few words about seasonality. So as typical or traditional in the line of our business, the major portion of the net sales and earnings are usually generated during the last 2 quarters of the year, and this is what we expect to be the case also in 2020, especially to a particularly large extent for the earnings due to the timing of these growth investments that I discussed in the previous slides. And obviously, in the final quarter of the year, we know in our business, holiday sales are very important, and hence, the holiday sales make up a significant portion of the sales -- net sales in Q4. Then looking at the financial guidance. We expect our net sales -- we forecast our net sales to be higher than the previous year. And our comparable operating profit is estimated to be approximately at the same level or higher than the year before. Last but not least, the proposal on the 2019 dividend, as we know -- you know, we believe very much on the steady dividend policy and our aim is to pay an annual dividend and at least half of the earnings per share. And the Board of Directors of Marimekko will propose to the AGM that a dividend of EUR 0.90 per share will be paid in 2019. And here, you can see the development in our dividends within the past years. Maybe something to be noted is that in 2018, due to the sale of our headquarter building here, the financial position of Marimekko improved and thereby, our Board of Directors -- or therefore, we actually paid out an extra dividend of EUR 1.25 last year on top of the regular EUR 0.60 per share dividend. But I would say that that's maybe the story of the year 2019 for Marimekko. As mentioned before, I think that we have a very solid ground now to continue in our long-term international growth map, seeking even more market growth than before and through that profitability. And obviously, in this journey, we will constantly keep an eye on this -- on the development of these particular exceptional circumstances like the coronavirus and the Hong Kong protests that we're seeing impacting. So I think I would just say that I'm very proud of the work that Marimekko employees have done, and it's a great place for us to continue this journey. And I think that we're ready for questions.

Thank you, Tina. Do we have any questions here at the Marimekko house? [Operator Instructions]

I'm Anna Rissanen from Evli Research. So have you gotten any sales figures from the UNIQLO collaboration? How well it was received, the autumn-winter line?

So obviously, those are confidential, but I will say that on Marimekko's behalf, we're very happy about the collaboration, also in 2019 with UNIQLO. And we can really see that collaboration with partners like UNIQLO, with whom we share similar values and with whom we have complementary strengths, we can really create something of value for the global customers and at the same time, really significantly build the Marimekko global brand awareness that supports our core business, which is to do with the international expansion and growth.

Okay. And then do you have a more specific estimate of the investments for 2020?

So we have said that compared to 2019, we -- the investment level will significantly grow. And maybe we will go here -- yes. So basically, the investments will be going into revamping and expanding the store network as well as developing digital business and IT systems. So basically, fueling our future growth in the longer term.

Do we have any questions over the phone?

There has been no audio questions.

Okay. We have a few questions online. These are all related to outlook.

Okay.

And the first question is whether we could a bit talk more about the gray export issue. What is going on there? And what is the impact might be?

Yes. So I think that overall, one could say that the gray -- for any company that operates in a global market, these are not unusual phenomenon that come across. And we have a selective distribution kind of strategy. And basically, our partners manage these selective distribution systems in different markets. And it has come to our attention that in some markets, there have emerged goods that have not been part of the selective distribution system. And hence, Marimekko has started to really, in the past year, deep dive into this topic to understand where do these unauthorized sort of deliveries come from, and we have taken due action.

Petri Kajaani from Inderes would also like to know if we would like to talk more about the 2020 sales outlook in other markets, Scandinavia, North America and EMEA because here, we've talked about Finland and Asia Pacific.

Yes. So we have sort of approached the outlook from the point of view that we give more kind of in-depth view on the 2 major markets, so Finland and the Asia Pacific. And as said, for Finland, we expect the Finnish market to grow in 2020. And with the current knowledge that we have, we also expect the Asia Pacific market to further grow in 2020. At the same time, we need to keep constantly monitoring the impacts of especially the coronavirus and the Hong Kong protests, so we will keep an eye on that.