Marimekko Oyj (MEKKO) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Anna Tuominen. I'm the IRO of Marimekko. It is my pleasure to welcome you to our Q3 webcast. Our CFO -- our President and CEO Tiina Alahuhta-Kasko, will first walk you through key developments during the quarter. And after that, she and our CFO, Elina Anckar, will be answering your questions. You can type in your questions using the chat function on the webcast platform already during the presentation. But without further ado, Tiina, please go ahead.

Thank you, Anna. Good afternoon, ladies and gentlemen. It's again my pleasure to walk you through our performance in the third quarter of 2021. So to get started, overall, the good development of Marimekko continued also in the third quarter and both our net sales and result increased. Our net sales actually grew by a nice 11%. The net sales grew especially by Finland -- by 25%, and those net sales were largely driven by a good development in wholesale sales, which were supported by nonrecurring promotional campaigns. Also, overall, we can see that our long-term work to develop the Marimekko brand and our collections also modernize them. We can see that, that long-term work shows the fastest in our strong home market. On the international front, our international sales declined by 10% due to our actions to control gray exports. Of course, as Marimekko is in the brand business, and we're an internationalizing brand, which has unfortunately meant in the past years that we have encountered some cases of gray imports. It is important for us to address these issues and take care of our brand image globally. To that end, we have now worked for, as mentioned, several years to control gray exports. And in the past quarter, such actions taken by us had a negative effect on these international sales. However, these actions that now in the third quarter show us a decrease in net sales our investments into building our brand in the longer term. As said, we are in the branded business. Then thanks to the good development in our net sales. Also our comparable operating profit improved significantly and landed to EUR 13.3 million. Also, the improved relative sales margin contributed to the results. On the other hand, an increase in fixed costs had a weakening impact in earnings and overall fixed costs are expected to increase, clearly, also during the fourth quarter as a result of changes in accounting principle as well as our investments in growth. As mentioned, Marimekko success in mitigating and navigating through these exceptional circumstances within the past 1.5 years, have even further strengthened our trust and confidence in our international -- long-term international growth strategy. And therefore, we believe that it's important that we have the courage to invest and to fueling the international growth. And while at the same time, we, of course, monitor the situation related to the coronavirus pandemic and adjust our operations if needed. But then if we have a more closer look into our net sales and operating profit development. So first, in Q3, our net sales, as mentioned, increased by 11% and especially the wholesale sales in Finland developed very favorably supported by, in particular, these nonrecurring promotional deliveries. On overall total level, our retail sales grew by 3%. As in the comparison period, the majority of Marimekko stores were opened during this time. Our wholesale sales continued really strong performance by -- with an increase of 23%. Then on the other hand, as mentioned at the beginning, our net sales were especially weakened by reduced wholesale sales in EMEA and lower licensing income in the Asia Pacific region. And these reduced wholesale sales in EMEA are connected now or related to the gray import control measures that I just briefly discussed. Maybe one more thing I would like to mention here. So when looking at the Asia Pacific market area development, the decrease there is driven by this lower licensing income. On the wholesale side, we slightly declined by 3% in the Asia Pacific region, and that decrease is due to the different kind of waiting of deliveries versus the comparison period. And also due to the somewhat worsened pandemic situation in some of the countries. But on a total level, overall, when we look at the full year, we estimate the Asia Pacific sales to increase. And when we look at the year-to-date numbers, we see really nice growth numbers. So in the year-to-date, first 9 months of the year, our net sales grew by 21%, and we saw growth in particular from wholesale and retail sales in Finland as well as from wholesale sales in the Asia Pacific region and Scandinavia. Sales in Finland in the strong home market grew by 29% and international sales increased by 11%. When we look at the net sales development in light or compared to the time prepandemic, so the first 9 months of this year compared to the first 9 months in 2019, the growth is plus 15%. So we're very happy about having bounced back to a nice growth trend even in these exceptional circumstances. Then some things to be noted. When looking at the year-to-date numbers. So of course, the wholesale sales in Finland is good to remember that they were partly supported by the nonrecurring promotional deliveries. And also sales growth in the Asia Pacific region was partly due to the transfer of some of the wholesale deliveries for the quarter 2020 to the first quarter of the current year. However, overall in the Asia Pacific region, as we saw their growth of 12% in the year-to-date numbers actually in the wholesale sales side, where we also recognized the sales to our Asian partners who run the Marimekko stores we saw growth of 24%. So the kind of the decreasing factor there was somewhat lower licensing income versus the comparison period. Then if we look at the net sales development, the first 9 months broken out into the market areas. And by product line, there are no major shifts in these breakdowns. So of course, Finland seeing the extraordinary strong growth in this year. There is a strong home market and largest market and the second biggest region for us is Asia Pacific. When we look at the product line development, as mentioned, we have seen growth across all the product categories with the strongest category in terms of growth being home. And naturally, when we look at this development, it's sort of easy to explain. It also connected to the interior decoration trend that has further ignited during these exceptional circumstances when people have spending more -- have been spending more time in their homes. And we think that it's also a fantastic opportunity to Marimekko to really capitalize on our strong lifestyle concept. Then when we look at our omnichannel footprint. So today, there are, in total, 152 Marimekko stores around the world with Asia Pacific region having the greatest number of these stores already, and our online store serves customers in already 35 countries. Our Marimekko brand sales developed in the first 9 months positively by growing 18% to almost EUR 250 million. And in this -- in the third quarter, already 62% of our brand sales came outside of the whole market. And there, when we look at the numbers within the first 9 months, we can see that especially a strong development in the brand sales size in the EMEA region. Then when we look at our comparable operating profit first, in the third quarter, I mean it goes without saying that the results developed very strongly and landed to EUR 13.3 million. As already mentioned at the beginning, the -- naturally the increased net sales contributed to the improved earnings, but also the improved relative sales margin supported the result. Behind improved relative sales margin are the strengthened product margins as well as lower discounts. So very healthy factors impacting the improvement. On the other hand, an increase in fixed costs had a weakening impact on earnings. And when we look at the fixed cost, where did the increase come from, especially, for example, marketing costs. So these are again investments into our growth as we have stated. And then when we look at the first 9 months comparable operating profit development, we saw a significant improvement in our results, the comparable operating profit landing to EUR 24.4 million. Very similar contributors also when we look at these first 9 months versus the Q3. So especially the increased net sales contributed to the strengthened earnings but also the improved relative sales margin. And actually, in the relative sales margin, the factors driving that good development include the strengthened product margins, but also relatively lower logistic costs than in the comparison period. It's good to remember that in the comparison period, we saw larger relative logistic costs due to the temporary store closures that pushed us or where we made the decision to actually take all of our promotions online. And on the other hand, then an increase in fixed costs had a weakening impact on results. Then if we look into some of the key events in the third quarter of our 17th anniversary year, we're extremely excited about our collaboration with Adidas. Earlier in the summer, we announced our first-ever collaboration -- limited edition collaboration with Adidas. And now in September, we announced our second limited edition sports apparel collaboration collection. And we really see that this capsule collection embraces both of our brands' commitment to sustainability, originality and empowerment. And these kind of brands -- top level brand collaborations really allow Marimekko the unique opportunity to build our global awareness and acquaint even completely new audiences to our brand. And this is the way that the brand collaborations actually support the core of our strategy. Also in the third quarter, we organized a very, very exciting pilot namely our first ever second-hand pilot that we launched on our revamped online store called Marimekko Pre-loved. This pilot was extremely enthusiastically received. And it is our plan in the future to overall offer more comprehensive services to lengthen our product lifetime as well as support our community to resell and recycle our products. So this initiative is very much part of our values. This initiative is very much connected to our even heightened ambition in our sustainability strategy and approach. Also in the third quarter, we collaborated with another exciting party called Bukowskis, the auction house. And we actually created together a special auction honoring our timeless and sustainable design. So this way, also this auction gave a very practical possibility to, again, lengthen the life cycle -- life cycle of our products, and at the same time, provided a unique opportunity to tell the story and celebrate the timeless and lasting Marimekko design and the creators behind it across the years. In August, we also presented our debut spring/summer 2022 collection made under the Creative Director -- creative direction of our new -- relatively new creative director, Rebekka Bay, at the Copenhagen Fashion Week and in conjunction, we also opened an experiential, continuously evolving pop-up space in the city. At Marimekko even in the digital world, we believe that physical stores have an important role. They just need to redeem their role a new in this new reality. And the focus in the physical experiences will be very highly concentrated on providing inspirational and experiential meeting places and really centering around personal service and seamless connection across channels. So this remains a key development area for us, and we see that our brand has a big potential in building these and creating these meaningful customer experiences. Also in the third quarter, we gained visibility from several pop-up stores, both in Japan and in Hong Kong. So for example, in Tokyo, the Marimekko Co-created special collection at the famous Dover Street market, Ginza store. And also in September, an experiential pop-up concept was created together with Japan's largest bookstore Tsutaya in Tokyo, to present our 70-year-old brand. This collaboration with Tsutaya and the concept actually was extended to 4 further cities in October. And in addition, also a new Marimekko pop-up store was opened in Hong Kong. I think altogether within the first 9 months have taken place or have been launched in Asia. And we do believe that pop-up stores and other kinds of creative retail concepts play an important part of the omnichannel customer experience. And actually, those kind of creative concepts role will be even further magnified in the new post-pandemic reality. And then if we have a glimpse into our outlook for 2021. So just in short, as we know, the coronavirus pandemic has been the worst crisis experienced by the global fashion markets does continue. But as mentioned, we're closely monitoring the development of the situation in each of our market areas, and we will adjust our operations and plans according to the situation. Then if we look at our 2 biggest markets, Finland and Asia Pacific a little bit more carefully. As we know, Finland traditionally represents around half of our company's net sales and we expect sales in Finland to clearly grow on the previous year this year. Just maybe worthwhile still mentioning or repeating that the domestic wholesale sales this year will be boosted by these nonrecurring promotional deliveries that we also saw supporting our sales and results in the third quarter, and the total value of these promotional deliveries is estimated to be substantial phase in the second half of this year. Then if we look at the Asia Pacific region, which is our second largest market and plays a significant part in our international growth. Net sales in the Asia Pacific region, as mentioned, are expected to increase in 2021 and also most of the planned Marimekko store and shop-in-shop openings of 2021 will be in Asia. And I think that what I also mentioned about the several pop-ups in addition to new stores opened, it really kind of demonstrate that both our wholesale and retail sales will increase this year, and the growth is expected to be particularly strong in wholesale sales, which is good to remember, also includes our sales to partners operating Marimekko stores. All the Marimekko stores in Asia are partner operated. Good to also note that the development of the coronavirus situation, vaccine coverage and possible restrictions and recommendations in different market areas during the year. On the other hand, they influence footfall in stores and hence, the outlook for both retail and wholesale. The pandemic situation has also led to disruptions in global supply chains. And unfortunately, Marimekko has neither been immune to this. We've experienced some coronavirus-related supply disruptions, which have resulted in delivery delays. If the disruptions continue, they can impact profitability. Also, net sales and earnings depend on maintaining the operational reliability and efficiency of our distribution centers and logistics in these special circumstances. As mentioned before, we will continue our actions to control gray exports. This is actually work that we have done now for several years. And now in this third quarter, those actions became very visible, which -- and this will have a clear weakening impact on the company's sales and earnings in 2021. But as I said, these are investments to our brand and our brand image ensuring its desirability and strength also in the future. Licensing income is forecast to be approximately at the same level or lower than in the previous year. As mentioned, we are very confident when it comes to our long-term international growth strategy and our success in mitigating in these special circumstances has further strengthened our confidence. And therefore, fixed costs are expected to be up on the previous year, especially during the second half of the year and the growth of the fixed cost is estimated to be especially strong in the fourth quarter of the year. It's also good to remember that last year in 2020, fixed costs were reduced by partly also temporary cost savings as well as subsidies granted in different countries to mitigate the negative business impacts of the coronavirus pandemic. Also, as part of the investments to the future international growth, marketing expenses are expected to grow and take place, especially in the second half of the year. And what is also good to note is that IT costs are expected to increase clearly due to a change in accounting principles. Overall, we are estimating preliminary that the change in these accounting principles will increase our fixed cost and accordingly lower the company's investments of approximately by some EUR 1 million during the financial year of 2021. We will -- we are working and will finalize the calculations during this fall and the possible impacts will be accounted for retrospectively at the financial statements of 2021. But due to this, as a result, the total investments are estimated to be clearly lower than the year before. And because of the seasonal nature of our business, the major portion of our companies, euro-denominated net sales and earnings are traditionally generated during the second half of the year. And what is also good to note is that the relative growth of the net sales is expected to slow down during the second half of the year as the coronavirus pandemic has such an exceptionally negative effect on the net sales during the first 6 months of 2020. And then last but not least, the financial guidance of Marimekko for 2021. So we expect our group's net sales for 2021 to be higher than in the previous year, and our comparable operating profit margin, we estimate to be higher than in the previous year as well. It's good to still remember that the instability caused by the coronavirus pandemic in our market continues, and therefore, there still are significant uncertainties associated with the trend in our net sales and earnings. But with these words, with this -- to our like a short recap of our Q3 performance, and I think that the floor is open for questions.

Thank you, Tiina, for the presentation. We actually have quite a lot of questions this time. First, there are a few questions related to development of international sales beginning with the gray export situation. Could you clarify a bit what's happening? What's ongoing control means and also to what extent do these controls continue?

Yes. So as mentioned, so over these some years ago, it came to our attention that these sort of gray imports came to our attention, and we have been actually ever since working on controlling gray imports. So what gray imports basically means is that Marimekko has a selective distribution model, and this selected distribution model is managed by our partners in Asia within the regions that they operate. So for some reason, in those markets, we have found our product in channels which are not authorized to sell Marimekko products. So gray exports are not copy products. They are real authentic Marimekko products, but they're just distributed in channels that do not apply to our criteria. So in order for us to foster and take care of our global brand image, we've taken measures to control. So first find the sources and then control these gray imports. And we have been working on this for many -- for already quite a long time. But now in this third quarter, the measures were especially visible and then caused the decline in the EMEA wholesale sales. And what's the main driver for the decrease in the international sales in the third quarter. However, it's good to remember that these control measures are also investments in our brand and to ensure the lucrativeness and desirability of our brand in the future.

There's also a question of their impact on sales and profitability, but you already mentioned that they will have a negative impact.

Yes, as we have said, and I think we also said that in the previous year as well, what I would just like here to sort of lift is that, in this particular quarter, these measures were especially large, and therefore, they're so visible, but we have been actually working on this and doing the controlling measures also in the past quarters.

Also in the text when discussing the wholesales sales in the Asia Pacific region, it was mentioned that there are differences in the waiting of deliveries. The question is, is this a case where Q3 deliveries this year were delayed to Q4? Or did the comparison period just have some extra deliveries, which increased revenue then? Or is it something else?

So I can imagine this question because, of course, as we know there have been some disruptions and hurdles in the global supply chains that have been causing like delivery delays as well. And as mentioned, we have also acquainted some unfortunate delivery delays. But partly is delay related, partly it is just like basically pure waiting of, it might be that a market has place compared to the comparison period, higher orders in a different quarter than just this year. So it's more -- this kind of a timing issue. And also, when it comes to the Asia Pacific in Q3, it's good to note or remember that actually in Q3, the coronavirus situation due to the delta variant worsened quite a bit. And for example, in Thailand, the Marimekko stores were closed temporarily. So that worsen situation also had an impact in some countries, which then reflected in the Asia Pacific wholesale sales. But as I said, when we look at the full like 9 months performance, the Asia Pacific wholesales sales, which include the invoicing to our Asian partners, it has grown by 24%. So really strong development there. And we also estimate our Asia Pacific and net sales to increase this year.

You mentioned the supply chain disruptions. Is it possible to give more details on that, how big delivery delays there has been or categories they have impacted or anything else?

So this, first and foremost, I mean, this is a real global supply chain issue. So unfortunately, we haven't been immune to this. I think in 2020, we were very lucky that our supply chain was not impacted so largely. But unfortunately, this year, that is not the case. So it has basically meant that in some of our suppliers' factories, the capacity has been lower due to the pandemic, and that has then caused delays. But of course, our teams are working really hard on this and finding ways working together with our partners who are our strategic partners to mitigate those impacts and basically diminish the possible delays. But as I said, should these delays continue, there is a possibility that they impact our product availability and this way also our net sales and profit also this year. But our team is working on this very hard. But it's a global issue and unfortunately we're just not immune to that either.

Also, the price pressure on materials is a global issue that many companies are facing. Is it possible to give any update on what kind of impact Marimekko is expecting?

Yes. It is, of course, very clear that when it comes to the general development of material prices. We're not immune to that either. We're work in the global business. Maybe something to be noted is that when it comes to Marimekko, which is quite also typical in our business is the early commitment to inventory. So basically already now today, we're working with our 2023 collections, so it means that some of these impacts might then occur at some time in the future. But let's just put it that way that it's our team's normal work to always manage and mitigate possible impacts in material prices. So our team is -- I think that it's fair to say that during the course of the pandemic, our teams have found also completely new kinds of ways to work in this volatile environment and mitigate the possible negative impact. But of course, when it comes to global trends in these matters, we're not immune either.

Of course. There's one more question related to international sales. The licensing revenue in the Asia Pacific region came also down during Q3. what is the behind of that development?

So unfortunately, we can't open any kind of specific contracts, as I said. But when it comes to licensing revenue, so at Marimekko, we have 2 streams of licensing revenue; one is the brand collaborations. And when it comes to the brand collaborations, they also have different kinds of contracts, different kinds of revenue recognition timing, so that really can vary pending on quarter. When it comes to more traditional licensing which probably has a little bit of a smaller role in our business at the moment. Traditional licensing refers to products that sort of complement the Marimekko lifestyle concept, but where we don't have the distribution or production knowledge, let's say, Marimekko eyewear or they relate to products that require really high localization, for example, bidding in some countries. In those -- that's the other stream of licensing income, and there we might have a little bit more stable revenue streams in general. But again, licensing contracts really vary and the timing of the revenue recognition vary. So that can cause also some volatility overall.

Is that also a reason in the changing outlook for licensing income. In Q1, the outlook was pretty similar as now. But in Q2, it was temporarily raised.

So the reason is really that, as mentioned, in the licensing agreements, the revenue recognitions really vary pending on contracts and so forth. So there might be this sort of variation between the overall, we have -- like last year, we had very strong licensing income development, and we have a good solid outlook also for this year.

While the reported net sales outside Finland declined during Q3, brand sales outside Finland grew 40% almost. What is the reason behind these numbers selling such a different story?

Yes, it's a business model question. So actually, in the brand sales, all the sales from all the kind of Marimekko resellers are converted into retail sales. So brand sales give an indication of the reach of the brand. So basically, if all the business was basically Marimekko's own retail in other words. So this is, of course, an estimation. But basically, I think that really tells the story of the real kind of international impact of the Marimekko brand today and also helps shed light into the business model impact. So for example, in Asia, all the Marimekko stores are operated by our loose franchise partners, which translates to Marimekko as wholesale sales. So a big part of our international sales growth, even if -- even when that is also -- where we also focus on Marimekko omnichannel retail, but the big part of that is it translates Marimekko into wholesale sales.

There's a few questions related to the brand collaborations. One question relates to choosing the partners. Why Adidas, wouldn't Nike have been more sort of better fit for the U.S. market or maybe even in Japan, where Nike's popularity is quite big, especially among the younger?

It's been like a long dream come true for us at Marimekko. What we see connecting in the collaboration is both of the companies, both Marimekko's and Adidas' commitment into sustainability, into originality and into empowerment. And that really kind of bridges to the other part of my answer, like who do we -- how do we choose our partners, who do we partner with? We only partner with brands with whom we share values, we only partner with brands where we see that the other brands -- the partners own expertise complements ours. And together by both of us kind of contributing, we're truly able to create something exciting and engaging and even surprising for the global customers. This is the way that, together, we're able to build brand equity, we're able to build brand awareness. And this way for Marimekko, we can support the core of our strategy.

How would you describe the success of Adidas collaboration? Have you seen an impact, for example, in your own collections or store traffic or some other KPIs?

Dream come true. And of course, when it comes to the second collaboration, a big part -- or part of that actually is being launched now in the fourth quarter side, but we're very content.

Unikko, the Poppy print is one of the prints used in the latest collaboration. There's a question related to that. It seems to the person asking the question that Unikko is almost like Marimekko's new logo. How long do you think you can use Unikko in different ways before it becomes sort of like not so interesting anymore?

I have to say that the fact that we have these strong design icons like Unikko in our red attire in our collections, that is one of the biggest trends. In the global fashion industry, having a recognizable handwriting, visual language is one of the strategically most important levers and drivers for success. So for us, you have Unikko and also at the same time, other renowned and recognizable prints that is one of our key success factor. And of course, probably what you have -- many of you have noticed, the way that we work with the prints is a way -- in a way where we actually always ensure that the prints are sort of celebrated to their like authentic experience, but also that they are also translated in exciting surprising new kinds of ways. And we believe that's really kind of the recipe of ensuring the longevity of our brand and ensuring the kind of -- well, ensuring basically, the thriving of the Marimekko brand also in the future. But the fact that we have this almost like symbolic, very highly recognized prints is one of the key strengths and how we work with them is the key to maintaining the relevance and meaningfulness.

And there's a question related to the margin levels in Q4. What needs to be done in Q4 that you could maintain this good gross margin level that you had in Q3?

So of course, in Q3, just to sort of recap, when we look at our comparable operating profit, it was really the net sales and net sales that contributed to the improved profitability. And in addition, also the strengthened relative sales margin had an impact. And there, as mentioned, the key drivers. Key drivers, for example, in Q3 were the improved product margins as well as lower discounts. What we've also said is that due to the investments into our international growth in the long term, we will be increasing our fixed costs. And these fixed costs will especially grow in the fourth quarter. They have been growing also in the second half of the year. And this is really key for us. And of course, these investments are such that we believe that they are also target towards a longer term view. But this is key for us to be able to capture those fantastic, unique growth opportunities that we can see for Marimekko in the international market.

Then a question related to the stock or the share. Do you think that splitting the stock would attract more smaller investors? Is there any discussions to split the share?

So naturally, these kind of discussions are our Board of Directors topics. And at the moment, there is no such plans, yes.

And you mentioned the investments in the future. What can you tell us already about 2022 after the anniversary year, will you be taking a break from these big campaigns? Or are there any plans to have similar campaigns next year?

Well, of course, we will then guide the market of 2022 when the time comes from that. But I don't think that our efforts will be in any ways diminished when it comes to building our brand awareness and building our internationalization story. So we're very passionate and excited and confident about the long-term international growth opportunities for Marimekko. So this is long-term work, just like we started our brand and collection modernization work some years ago, and now it's really showing the bearing of the fruit. Internationalization works in a similar way, so it requires longevity and determination, and we're making now the investments to further fuel it in the long term.

Thank you, Tiina. That was all the questions. Thank you for everyone joining us. Thank you very much.

Bye.