Marimekko Oyj (MEKKO) Earnings Call Transcript & Summary

Good afternoon, and warm welcome to Marimekko's Half Year Financial Results webcast. I'm Media Relations Manager, Anna Tuominen and I have here with me Marimekko President and CEO, Tiina Alahuhta-Kasko; and CFO, Elina Anckar. Shortly, you will have a presentation about our financial results. And after that, we have reserved some time for questions. You can post questions by using the chat function and please note that you can post questions already during the presentation. Tiina, please? The stage is yours.

Thank you, Anna. And good afternoon also from my behalf. Very excited to present to you today Marimekko's half year financial report. So let's get started. And starting from the second quarter of the year. For Marimekko, the second quarter went well. Our net sales grew, our operating profit improved from the record comparison period. And our net sales increased by 6% in total to EUR 40.3 million. This increase in net sales was in particular driven by growth in our international wholesale sales and licensing income. When it comes to the domestic market, Finland, in total, our net sales decreased by 3% when the weakened general consumer demand lowered our domestic wholesale, but our retail sales grew nicely. On the international front, we have some very good news. Our sales grew by 21%, very much in line with our scaling strategy then supported by our increased net sales and improved relative sales margin. Our comparable operating profit increased to EUR 6.8 million, equaling to 16.8% of our net sales. I must say that we're very happy of the good progress in the second quarter, and we continue our determined work to scale up, especially our international growth in the upcoming years. But let's have a closer look in the net sales and operating profit development. So as mentioned, in the second quarter, our net sales increased by 6%, driven particularly by our growth in international wholesale sales and licensing income. The international wholesale sales developed particularly well in the Asia Pacific region as well as in North America. On the other hand, then net sales in Finland, as mentioned, were weakened by the lower wholesale sales in the domestic market, which was a result of the weakened general consumer demand. The retail sales then supported the net sales growth in the domestic market. In our second biggest market, the Asia Pacific region, we saw really good growth, namely 28% in the second quarter. And the net sales in this region were increased as both wholesale sales and licensing income in the region grew. And as mentioned, in total, international sales growth was 21%. Then when looking at the half year development, our net sales increased by 2% to EUR 75.6 million, boosted by increased international wholesale sales a favorable trend in retail sales in Finland. Similarly, as in the second quarter, the weakened general consumer demand and press down wholesale sales in the domestic market. However, in total, again, supported by the good development in the retail has really kind of showing the continued pull of and desirability of our brand supported the total net sales development in Finland, which landed at minus 3%. Our international sales, on the other hand, grew by 9% in total despite the actions that we have continued to take on -- to control the gray exports that weakened wholesale sales in the EMEA region. Then when we look at our second largest market area development, Asia Pacific, in total, 22% growth. So really nice development. Again, thanks to the good wholesale sales and licensing income development. It is also good to remember that in the comparison period, the wholesale sales in the Asia Pacific region were supported by some of the wholesale deliveries in the fourth quarter of 2021 being transferred to the first quarter in 2022. Then when we look at our half -- first half year net sales development and it's split in the different market areas and product lines, no very major shifts in the net sales by market area. When it comes to the product line split, we can see that the share of fashion and bags and accessories grew. And here, we can really see that after the pandemic people are, again, drawn more and more back to also these categories. Today, the Asia Pacific has the greatest number of Marimekko stores and our online stores serves customers already in 35 countries. When we look at our brand sales development, that gives a good indication of the reach of our brand. On a global level, our brand sales pretty much kept at the same level as in the comparison period. 74% of our brand sales already come from outside of our home market. Then when we look at our profitability. In the second quarter, we saw clear improvement in our comparable operating profit, again, supported by the increased net sales and improved relative sales margin. The operating profit was EUR 6.6 million. So the comparable numbers were EUR 6.8 million, which represented then 16.8% of net sales, which is a really nice good level of relative profitability. On the other hand, then an increase in fixed costs had a weakening impact on the results. So what's behind there, the fixed costs were growing, particularly due to the higher employee benefit costs resulting from our investments in the building blocks of our international growth, so in line with our strategy as well as the higher personnel costs in store now when the pandemic has reach a new phase and people are, again, shopping back in the physical stores as well. The relative sales margin was then strengthened by the significantly increased licensing income. And then when we look at the cumulative numbers, the comparable operating profit was at a good level, while below the high comparison period, landing at EUR 10.4 million. The comparable number -- the comparable operating profit totaled EUR 10.6 million equaling to 14% of net sales. The operating profit was decreased by the higher fixed costs and lower relative sales margin, while then the increased net sales, of course, improved the operating profit. Behind the fixed cost increase is the earlier recruitments that we have made, again, to support our international growth as well as the higher personnel costs in the stores as was the case also in the second quarter of the year. The relative sales margin was weakened, especially by higher discount than in the comparison period. However, then the lower transport costs supported the relative sales margin. And let's have then look at the key events in the second quarter. There's been quite a lot of activity in the last month. So firstly, the omnichannel Marimekko store network strengthened further. So in the second quarter, 4 stores were opened in Asia and 1 in Finland. So new Marimekko stores were opened in Beijing, Taipei, Taichung and Bangkok as well as in Tampere. Then at the same time, also, we had 3 pop-up stores, introducing our brand to new customers and existing customers in Seoul and also collaborations broad visibility in different markets. For example, we did a collaboration with the North America home decor chain, Westell, with a very summary collection. In June, we also announced that, together with our Lose franchise partner, we're going to be expanding Marimekko to Singapore later this fall. And actually, earlier this week, we also announced that with a new lose franchise partner, we are opening new markets, namely Vietnam and Malaysia and the first stores in those respective markets will also see light towards the later part of this year. So very much in line with our scale strategy, again really reflecting Asia as the most important geographical area for our future international growth. So very excited about these announcements and the progress that we have also made during the course of this year. Then when we look at more of the brand building events, so Milan Design Week undoubtedly is one of the most influential design events in the world every year. So this year in Milan, we showcased and presented our most recent artist collaboration containing ceramics and household textiles with Sabine Finkenauer and we also launched our new glassware series designed by Matti Klenell with a lot of nice visibility [indiscernible] reception. Then in May on the Marimekko day, we celebrated the beginning of the summer with our community and also opened our summer terrace in the Helsinki City Center in conjunction of our flagship store. So again this new Marimekko summer terrace, Marimekko Terassi, is a great way to deepen the relationship with our brand among our customers, existing and new. And of course, the Esplanade fashion show is an over 30-year tradition that really reflects our inclusive brand values and approach to lifestyle design. Also in the second quarter, we collaborated with Bright in Helsinki New York and Bangkok. And these kind of collaborations that we did really allowed us to reflect and really communicate our core values, the sense of community, equality and inclusion. And we were very happy to showcase the store window art, we're celebrating the right month in these aforementioned cities. Then some updates from our journey to develop the digitalization of Marimekko. So in the second quarter, we were also very excited to launch Marimekko Studio, that offers our customers in Finland, and at this point in time, also in other European countries, the opportunity to customize a mix of our products with our signature letters, bold prints and color. So again, this is a way for us to encourage for our customers to let lose with their own creativity inspired by our design philosophy. We, of course, took also steps towards a more sustainable future step by step. So in May, we joined the Ellen MacArthur Foundation Network to support our circular economy journey. Then in June, we were very proud to launch our first products that use partly the closed loop clothing production. And the aim of this pilot is really to study and explore more ways to reduce our environmental impact of textile production. So we're very excited to partake in these kind of R&D initiatives that allow us to learn more in this way, develop our circular economy journey. We also announced our sustainability review for the year 2022 in May, where we invite everybody to learn more about our holistic across the value chain sustainability development work. Then when we have a look into the outlook of 2023. So first, in general, of course, the uncertainties related to the general development of the global economy can influence consumer confidence, purchasing power and behavior. And therefore, can have an impact on our business in 2023, especially in our important domestic market of Finland. [ Good to ], of course, remember also that the different exceptional situations, such as Russia's war against Ukraine, can cause even significant disruptions in the production logistics chains and this way can have a negative impact on our sales, profitability and cash flow. But of course, we're closely monitoring the various situations and we'll adjust our operations and plans according to the circumstances, if necessary. Then looking at the net sales development. Finland traditionally representing half of our company's net sales. We expect our sales in Finland to grow on the previous year. And again, good to remember that in 2023, our wholesale sales in Finland will be positively affected by these nonrecurring promotional deliveries, the total value of which is estimated to be significantly higher than the year before. And a vast majority of these deliveries taking place in the second half of the year. Then in Asia Pacific, our second largest market area. The net sales in this region are expected to increase this year as are the total international sales. And we have, again, lifted our estimation on the new Marimekko shop-in-shop openings for the full year. And now our current estimation is to open 15 to 20 new Marimekko stores and shop-in-shops this year. And most of them as in the past year, we'll be opening in Asia. Then a few words about the seasonality. Many of you might already be familiar with this, that because of the seasonal nature of our business, the major portion of our euro-denominated net sales and operating results are traditionally generated during the second half of the year. Another update to the market outlook from today is the fact that for the full year of 2023, we estimate our licensing income to actually grow from the record level of 2022. So we're seeing good progress in development also on the licensing front, which is exciting. Then a few words about the growth investments and costs. As mentioned, we had a long-term view into the development of growth in our business and our new strategy term for the years 2023 to 2027 is all about scaling our growth, especially in the international markets. So in 2023, in line with our strategy, the fixed costs are expected to be up compared to the previous year. Also, the marketing expenses are expected to grow. Good to also remember that the general cost inflation continues to also affect our company this year. Typical in this industry is the early commitment to product orders from supplier partners, which then means that changes in cost effect also Marimekko with a delay. And these early commitments have been further emphasized by the exceptional situations, which weakens the company's ability to optimize product orders or respond to rapid changes in demand and consumer behavior, which then also increases risk related to the inventory management and relative profitability. And of course, the domestic nonrecurring promotional deliveries in wholesale also raise inventory risks. But it goes without saying that we are continuously actively working to mitigate the negative impacts in disruptions and logistic chains -- production logistics chains and also the increased costs and we also work to enhance our inventory management. Today, we also reiterate our financial guidance for 2020 year. So we estimate our net sales to grow from the previous year and the comparable operating profit margin is estimated to be approximately some 16% to 19%. The development of consumer confidence and purchasing power, global supply chain disruptions and the general inflation development in particular cause volatility to the outlook for 2023. With this word, I would like to end this little update. I can just say that we're very happy of the progress in the second quarter, which is very much in line with our strategy so we are very excited to continue on this long term journey to scale up our business and growth, especially in the international market in the upcoming years and we feel that we're very fortunate to be in the situation with very strong financial position and good development in our business, which allows us to continue making the necessary investments to fuel the growth in the long term. Thank you, everybody. Should then Eli not join me here on the stage, and we can look at some of the questions that might have received?

Yes, we have actually quite many questions. So I will try to group them some how so it's easier for you to reply. Actually, I will take the first question myself. So the first one was related for that fact that now we expect the licensing income to grow from year '22, while you previously expected it to decline. And there was a question that where does it -- does this growth mainly stem from and from region and which collaborations it comes from? So that is unfortunately something that we don't disclose at this stage. But now I will ask some questions from you, Tiina. So you mentioned that -- we have mentioned that we are now opening new 3 markets in Asia. So could you tell us a little bit more about the new partner of the new opening stores in Malaysia and Vietnam? Has Marimekko cooperated with that partner earlier? And why Marimekko selected Jaspal Group as its partner for Malaysia and Vietnam?

Yes, very happy to. So if we take now the helicopter perspective, so as I've mentioned in my presentation, Asia really represents the most important geographical area for our future international growth. And already in the past years, we've seen a lot of positive development in this region because of the strong brand much with the local customer preference is because of the good business model with the lose franchise partnership and overall lucrative market for growth. And while we see, of course, still a lot of opportunity to grow in the existing markets in Asia where we already have presence, according -- and in line with our strategy, we are also exploring the opening of new markets to really build further the Marimekko ecosystem in Asia. And therefore, we're very excited to announce that together with Jaspal Group, who is a new lose franchise partner to Marimekko, we will be opening and launching our brand in Malaysia and Vietnam during the course of this fall. So why Malaysia and Vietnam? Overall, we see increasing -- constantly increasing interest to the Marimekko brand. We see that our unique and differentiating value proposition really resonates with local customers. So together with the partner, we have concluded that this is the right time to start developing the Marimekko business in these markets with the first stores. And Jaspal, they are a renowned partner in this region representing in 4 -- approximately 4 countries in Asia. They have a good track record in developing the business of the brands that they represent in this market. Some of the other brands that they represent include, for example, Diesel and ASICS. They also run their own brands in this market. And for us being a very value-based company, we take a lot of time and attention to the selection of our partners in the context of all of our business. So we are very happy to have a new partner in Jaspal to expand to these new markets.

And there is some continuation question regarding this as well. Partially, you already replied, but let me -- let us here. Like, how well Marimekko is known in the market areas of Singapore, Malaysia and Vietnam? And what are the actions that we are going to take to improve its brand awareness in the abatement countries?

Yes. No, this is a great question. And I must, again, now refer back also to two things. So first of all, the way that we develop our kind of international business is through an ecosystem thinking. So for example, in Asia, we approach the different markets through key cities. And at this way, build the Marimekko awareness and omnichannel business further. So we've seen that the increasing network of Marimekko stores in Asia, in the different markets where we already operate, has further increased the interest to our brands in these new markets, which has been then the second point, further amplified by the good visibility that we have also got it from the highly visible global brand collaborations. For example, with Adidas and in the previous years with Uniqlo and so forth. So I think that this is a great example to really showcase the thinking behind our strategy. So we feel that now it's the the right time to enter these two markets and start developing the business and growth also there.

And we continue to stay in Asia.

Yes.

So other players in the fashion industry have flagged a slowdown in China and the rest of Asia. So how do you see the expected slowdown in the region and its impact on Marimekko sales?

So when we look at the Marimekko presence in Asia, it's good to know that we have -- first of all, Japan is still today the most important market for us in the region. We have been developing the success of our business there together with our local partners for over 15 years, and we have today a network of around 40 stores, online store and wholesale presence. When it comes to our presence in the other markets in the Asia region, we are in earlier stages, but the business is constantly growing. But we have a more differentiated approach or diversified approach to Asia compared to maybe some of our peers. So let's say, that we have like a balanced network. And I think that something that also supports us very much in this journey regardless of the macroeconomic situation is that, in today's world, the unique value proposition of Marimekko, which is very much build on this idea of empowering people to be happy as they are, through our joyful prints and colors and bringing joy to their everyday lives, paired with a very timeless long-lasting design, which is considered a more sustainable approach. I think that this unique value proposition increasingly resonates. And there are always in the economy. There are general ups and downs, but I think the overall trend also in the fashion industry favoring brands that have a more -- philosophy of more longevity and sustainability is something that is a winning concept, and I think that we're -- that's why Marimekko is probably today more relevant than ever.

Thank you very much. And then there is a question related for our net working capital, which is still increasing clearly after H1 and after already a clear increase during '22. What was the driving -- what was driving this? And when are you expecting to be able to release some working capital? So if we look at our net working capital in comparison with the end of last year, we can see that the increase is coming from the higher trade and other receivables, but then also higher inventories had an effect to the net working capital. But I would still like to point it out that some of you might remember that we have mentioned that part of the inventory is related for so-called continuous collection products, which we have actually acquired in bigger quantities to ensure that we don't have any product delays with the product delivers or things like that. So it's like getting us more security on that side. Yes. And then we could continue, let's say which one I can take? Let's go for the -- talk about the Marimekko Pre-loved platform a little bit. So there was a question, how it has been received by the customers? And do we see any material impact on the topline from the platform now or in the future?

Yes, of course. So some of you might remember that it was around 1 year ago when we launched, actually in Finland, the first ever Marimekko's own second cycle peer-to-peer platform. And this is now still like operating in Finland. I think it's very early days, but what we can say is that we see that the customers have really welcomed this service. And when there was also the follow-up question, like how do we see that impacting our business? We see that -- first of all, of course, us to have an active role in the second cycle peer-to-peer market, from us is also sustainability action because we know that the longer the life cycle of the product the better it is also from a sustainability point of view. And as one of our core promises is to create products that bring long-lasting joy to people even for generations. This is a very natural step for us to provide a platform -- trusted platform for our customer than give and buy used Marimekko products. Then at the same time, what we can see is that, of course, this platform highlights to our customers that when you buy a premium, like new Marimekko product, that it also has a second cycle value. So I think that this will also help in showing the true value of the Marimekko products overall. So we believe that this is a natural natural part of our business model and complements well our regular business.

And then we have two questions here still. And let me see. I will choose the one where we actually going to talk about the larger discounts. So there is a question that -- you mentioned that you had larger discounts on products in the comparison period, which affected the relative sales margin. Do you see that larger discounts where will be necessary due to the general market situation or, for example, from inventory management perspective? So if you start and I might continue.

Yes. So I think what is very clear for anyone following the fashion and textile and design industry in Finland. I mean there's been also a lot of articles written about the general state of this industry in Finland and like overall market sentiment during the last months. So it has been -- the consumer confidence and purchasing power has been lower because of the general economic situation. So it's been also a more tactical environment for brands to operate. But I think that what is really key is that the most important factor to hedge against any kind of recession or downward general trend in this industry is actually the desirability of the brand and the product. That is the single most important factor. And then, of course, in more uncertain and volatile times like these, it is equally important to then supplement and complement that with commercial excellence and agility. So of course, we need to ensure that we're competitive in the marketplace.

Yes. And I continue there. So of course, like the sort of tactical campaign, but also we can impact with our pricing strategy, making sure that we have products for different sizes of wallets. And then inventory management perspective was asked here, and of course is part of the normal normal way of us working with the inventory turnover rates and making sure that the products are flowing according to our expectations. So we make sure that we have a healthy inventory levels.

Yes, we would definitely see that Marimekko being a lifestyle brand with three product lines: Clothing, bags and accessories and home with different price points, really provides good opportunities for us to serve customers in this also more challenging general economic climates.

And then last but not least, it's actually -- there is a question regarding the next steps in the digitalization of Marimekko, but maybe you would start with a couple of examples what we have done quite recently in terms of the digitalization.

Yes. And maybe, again, starting from the helicopter perspective. So when it comes to Marimekko digitization, within the last years already for many, many years, we have made upfront investments to develop competitiveness of our digital business. And a great example of this is our e-commerce that has performed extremely well also during the pandemic years. It was really one of our key success factors actually navigate through the volatility and the times when the physical stores were close due to pandemic. So of course, we constantly continue developing our digital experience and like online store experience. But now in this new strategy term, we have also widened our view to develop the digitalization of Marimekko's value chain because we believe that technology and data provide unique opportunities to both increase the efficiency of our value chain as well as the seamlessness of our customer experience. So some very concrete examples to mention of the work that we have been doing on this front lately, 3D in design, which speeds up our process, facilitates our design work. Another example is what I already referred to in my presentation, the launch of the Marimekko Studio. So being able to offer personalized products our customers. And then, of course, we constantly develop the capabilities for omnichannel retail, which enhance the seamlessness of our business. And constantly also, develop and open new relevant digital sales channel. So this is continuous work and those are just some examples.

And you said it well, this is continuous work. So we keep on investing and digitalizing the company, and we have many projects ongoing. But those were the questions we were in a chat so. Thank you very much.

Thank you very much. START