Nelly Group AB (publ) (NELLY) Earnings Call Transcript & Summary

Welcome to Nelly Group's Second Quarter Report 2025. Today, I am pleased to present CEO, Helena Karlinder-Ostlundh; and CFO, Niklas Lingblom. [Operator Instructions] Now I will hand over to Helena Karlinder-Ostlundh. Please go ahead.

Thank you very much, and a very warm welcome to the second quarter results call for Nelly Group. My name is Helena Karlinder-Ostlundh, and I'm the CEO of Nelly Group, and I'm hosting today's call together with my colleague, Niklas Lingblom, who is our CFO here at Nelly Group. Today's call will be divided into 4 parts. We will start with a short video to introduce Nelly. Before I will then provide some comments on the second quarter of 2025. I will then hand over to Niklas, who will provide us with a financial summary of the quarter. And we will, as always, conclude today's call with questions-and-answers. So please send us your questions throughout today's presentation. You can send them all the way to the end of the presentation. However, of course, we do appreciate if you can send them to us as early as possible in the call to make sure that we can see all your questions and answer them at the end of the call. So without further ado, let's start with a short video to introduce Nelly. [Presentation]

So let's move on to have a look at the second quarter of 2025. We are very pleased to report that we have delivered another strong quarter. And I think this must also be seen in light of a relatively challenging market, which was quite volatile during this period. So we saw that April was -- April and May, in particular, were a little bit challenging. June was stronger. But taken together, it was quite a challenging and volatile market. So I think our performance during that period really is a clear sign that our spring and summer assortment was strong. And also that the Nelly brand continues to gain both lasting and resilient traction across our core markets. So a strong quarter in the context of a challenging market. Now let's look at some of the specifics. The second quarter is an important quarter for us, where our customers have many important reasons to shop. Both a number of celebratory occasions such as graduations and the like, but also, of course, everyday occasions, such as preparations for summer holidays and so on. So it is a very important quarter for us, and it's pleasing that we succeeded in both accelerating growth and improving profitability compared to last year. So net revenue grew by 15.1%, which can be compared to growth of 8.8% in the same period last year. And net revenue landed on SEK 361.7 million for the quarter. Operating margin increased to 15.3%, which can be compared to 9.7% in the same period last year. And we generated an operating profit of SEK 55.4 million as compared to SEK 30.5 million in the same quarter last year. So I think this is a really strong result, and it highlights the potential of the Nelly business with a clear and strong year-on-year improvement. Most pleasing, the second quarter also marked our third consecutive quarter with active customer growth in our core markets. So the number of active customers grew for the third quarter in a row. And we really see that this was driven by 2 elements. Firstly, we continue to effectively recruit new customers. And this is both through the changes we have made in our paid advertising and how we allocate our paid spend, but also importantly, organically through continuously building the Nelly brand and everything we do. So during the second quarter, we continue to see strong new customer recruitment. And alongside this, we also improved our repurchase rates among existing customers. So more of our existing customers returned -- enjoyed their experience previously with Nelly and returned to make another purchase. And I really do think this is a testament to both our strong assortment and the end-to-end customer experience that we have created. So growth in our active customer base is a very important KPI for us going forward as it absolutely is the foundation for growth going forward. So it's something we will be watching very closely, of course, in the coming quarters as well. Then let's move on. We also saw during the second quarter that our own brand continues to deliver. So our own brand share grew to 54.8% as compared to 43.8%. And this growth in the Nelly brand could be seen actually across almost all product categories. A few though are worth mentioning in particular. So we further strengthened our already strong position in jeans where we saw significant year-on-year growth in sales during the second quarter. And in addition to that, we also -- the Nelly brand also performed very well on tops, dresses and knits, in particular. And of course, knitwear is an important and interesting category for us here. It is a smaller category in the second quarter. But the result of the performance we saw in knitwear during the second quarter really is a very encouraging sign ahead of the autumn and winter season when knitwear takes a considerably larger share of sales. So encouraging signs there. And of course, our own Nelly brand is also absolutely core in our flagship store in Stockholm. So around 80% of our sales in Stockholm come from our own Nelly brand. And as we now take our flagship store concept to Denmark with a flagship store in Copenhagen later this year, our own Nelly brand will, of course, have an absolutely central position there as well. Moving on to have a look at our return rates. So our return rate is always in focus. And here, we continue to deliver a low return rate during the second quarter of 28.4% as compared to 31.3% in the same period last year. And this is the result of the continued implementation of our cross-functional return strategy. So just to highlight a few of the elements that we work with there. We continue to work very proactively with the -- both the design and the choice of fabric for our garments to make sure we both achieve that perfect fit, but also that fit that will actually work for many different customers. We also continue to improve the type of customer information that we provide, so the type of product information rather that we provide to our customers and how we do that. And we also continue to work with our systems -- IT systems enablement to manage our returns in the best possible way. It's important, again, to highlight here that easy and fast free returns are a very important service to our customers. So we have to make sure that our customers can, of course, in a very easy way, return products if they don't quite fit. But all of our work on reducing our return rate is focused on eliminating what we call unnecessary returns. So returns that could have been prevented through, for example, clearer or better or more information about the products to the customers. So very, very focused on eliminating unnecessary returns. And this has resulted in this low return rate. Also worth mentioning here is that in addition to our cross-functional strategy, during the second quarter, we also were able to, in a much more efficient way, replenish styles that have shown early signs of success, so we have made some changes there as well in the way -- in our ways of working, essentially, to make sure that we can very early on tell which styles will be successful, and we'll have a good return rate and then replenish those, which, of course, also then has a positive effect on the overall return rates. Now moving on to have a look at our gross margin during the second quarter. So we delivered a solid gross margin of 54.5% in the second quarter despite price pressures in the markets and also some cost pressures, which I will come back to in a minute. Now the gross margin was, of course, positively impacted by the growth in our own brand share. However, if you have followed Nelly for some time, you will notice that the link we have historically seen between growth in our own brand share and an increase in our gross margin was not quite as pronounced in the second quarter as we have seen historically. We -- as I said, we achieved a gross margin of 54.5%, which can be compared to 54.7% in the same period last year. And the reason why this link was not as pronounced in the second quarter was because we did actually take a very conscious decision to maintain attractive and dynamic pricing towards our customers despite a number of sort of cost pressures. So we had higher production costs, especially among the styles that are produced in Turkey. And we also made a number of improvements in the quality in some of our best sellers, which, of course, impacted production costs. So despite this, we decided to maintain up our key price points on some of our best sellers towards our customers, given that the market was a little bit more challenging during the second quarter. Now it's also worth mentioning that there were some both calendar effects around Easter and our mid-season sale, which also meant that more of Easter and more of our mid-season sales fell into the second quarter rather than the first quarter, but the impact of this was relatively seen smaller than of our decision to maintain pricing. Nevertheless, a solid gross margin in the second quarter once again. Now let's move on to have a look at our marketing activities during the second quarter. So we can conclude that our marketing activities during the second quarter were both efficient and impactful and represented a significant investment in building the Nelly brands long term. So our marketing costs as a proportion of net revenue decreased to 10% as compared to 13% in the same period last year. Our online traffic in our core markets grew by 8.5%, and the number of orders increased by 14.3%. And importantly, if we look at our paid advertising, we could also conclude that profitability per order grew once again compared to last year. So really solid results from our marketing spend. It's also worth highlighting here, again, that we further increased our focus on our social channels, so Instagram and TikTok, in particular, alongside also starting investment in some new channels, and this was -- our focus on our social channels was both in terms of paid and also organic. And the reason why we continue to increase our focus on the social channels is because we have seen that they do tend to build deeper relationships with our customers and also more solid loyalty long term to the Nelly brand. So important, of course, that we build the Nelly brand in a sustainable way, and that is best done through our social channels. So let's have a little look ahead as well. And there are some really exciting times ahead. So as I was talking about just a minute ago, we have seen really strong growth in many categories in the second quarter, both in our own Nelly brand, but also in our external brands. But we do believe we have yet more potential to capture there, both in terms of establishing an even stronger position in some of the categories where we have already performed incredibly well, but also in further categories where we have not yet made as much inroads as we have in, for example, jeans and tops. There are additional categories where we see significant potential going forward. And this, again, is both in terms of our own Nelly brands, but also our external brands, which, of course, are absolutely critical and go hand-in-hand. And establishing leading positions in all of our key categories will, of course, enable us to also expand the average basket size going forward. So we are very proud and pleased of the inroads we've made on many categories already, but there is more work to do there on further categories. Going forward over the coming quarters, we also have several new brand launches already planned with well-known international brands that we are really, really pleased to be initiating collaborations with. And we are also in further discussions with brands to hopefully launch them a little bit more longer term. So I think we have a very strong external brand portfolio already, which will become even stronger with these brands added. So very exciting for us. And of course, last, but not least, as I mentioned a little bit earlier, we did announce at the end of the second quarter that we are expanding our flagship store concept, which has been very successful for us in Stockholm to Copenhagen to Stroget, to be precise, which is Copenhagen's busiest shopping street. And there, we will be opening a new flagship store in this very beautiful old building that we see in the picture here later in the year. So to summarize the second quarter, we have delivered a strong result with both accelerated net revenue growth and increased profitability compared to last year. Importantly, we are also winning more customers. We are growing our customer base through both new customers and more customers who enjoyed their experience and are returning, which is very pleasing. And we see significantly more potential ahead of us. So our focus over the coming quarters will, of course, be on capturing even more of the potential that we see in Nelly. So with that, I will hand over to Niklas, who will provide us with a financial summary of the second quarter.

Thank you, Helena. And now let me give you a closer look at the financials for the second quarter. Net revenue in the quarter amounted to SEK 361.7 million compared to SEK 314.1 million last year, showing a strong growth rate of 15.1%. Main driver for net revenue growth was a combination of increased online sales before returns, improved return rates and increased store sales. The return rate decreased to 28.4% in the quarter, down from 31.3%. Currency effects affected the growth rate negatively, mainly due to the depreciation of the Norwegian krone. Net revenue in local currencies grew by 18.2%. And total number of orders in the Nordics increased by 14.3%. Average order value decreased by 6.8%, which was driven by both lower average item value and lower average audit items. Now moving on to next slide. We conclude that operating profit in the second quarter amounted to SEK 55.4 million compared to SEK 30.5 million last year. Operating margin increased to 15.3% compared to 9.7%, same quarter last year. So the second quarter showing record high levels for both operating profit and operating margin. Improved operating profit was mainly driven by higher gross profit through increased net revenue and maintained the high level of cost control. Let's also have a look at LTM figures on the next slide. Nelly is showing strong financials on LTM figures with an operating profit of SEK 136.6 million and an operating margin of 11.7%, increasing both operating profit and operating margin further. Nelly has over a sustained period of time performed both net revenue growth and continuously improved our profitability, showcasing good momentum and cost control. And now let's take a quick look at the income statement on the next slide. So once more, net revenue amounted to SEK 361.7 million compared to SEK 314.1 million. Gross profit amounted to SEK 196.9 million compared to SEK 171 million with a gross margin of 54.5% compared to 54.7% last year. The warehousing and distribution costs amounted to SEK 42.7 million compared to SEK 42.1 million, and costs as a share of net revenue improved to 11.8% from 13.4% last year. This was mainly driven by operational improvements, optimization of distribution and improved return rates. Marketing costs amounted to SEK 36.2 million compared to SEK 40.9 million with costs mainly related to paid advertising. Marketing costs relative to net revenue decreased to 10.0% from 13.0% last year. And administration and other operating expenses increased to SEK 62.6 million compared to SEK 58.5 million, but improved as a share relative to net revenue amounting to 17.3% compared to 18.6% last year. So concluding the second quarter, we showcased a record-high operating profit of SEK 55.4 million, up from SEK 30.5 million last year, with an increased operating margin of 15.3% compared to 9.7%. And lastly, let me talk you through some additional financials on the next slide. Operating cash flow amounted to positive SEK 104.1 million compared to positive SEK 105.8 million last year. And second quarter showing a strong cash flow from operating activities, somewhat lower than last year, affected by changes in working capital, but also affected by repayment of tax deferrals amounting to a total of SEK 25.7 million in the quarter, and this was made in accordance with the approved payment plan. So by the end of Q2, we note that remaining tax deferrals amounted to SEK 69.5 million, down from SEK 105.6 million by the end of Q2 last year. And cash flow from investing activities amounted to negative SEK 9.2 million compared to negative SEK 7.2 million last year, primarily attributable to continued IT investments. And net cash flow amounted to a positive SEK 87.1 million compared to positive SEK 93.9 million last year. And we concluded the quarter with a healthy balance sheet with a solid equity ratio of 33.5%, improved from 23.8% last year. And cash and cash equivalents amounted to SEK 259.6 million for the 30th of June 2025. So overall, we are happy to present the quarter with strong financial performance for Nelly Group with a record high operating profit and margin. And with that, I hand it back to you, Helena, for some last comments.

Thank you very much, Niklas. This concludes the presentation part of today's call. But before we move on to answer your questions, I would, of course, like to take the opportunity to once again express my gratitude, both to our customers, new and returning for following our journey and continuing to support us. Thank you so much. And also, of course, a heartfelt thank you to the entire Nelly team. Hopefully, most of you are on a well-deserved break now, getting reenergized ahead of a very intense and fun, I hope, autumn ahead of us. So with that, let's move on to the final part of today's call and answer your questions.

Thank you all for joining our presentation of quarter 2 this morning. We will continue with some questions that we have received. And the first one is for you, Helena, from [ August ]. Can any additional long- and short-term sustainable return rate be provided? We have seen a steady decrease in return rate, but a barely increase in net sales. The current 25% seems low when comparing to peers.

Yes. Thank you. Good question. So I think when it comes to return rates, once again, we haven't set an absolute target. We're very focused on implementing all of our -- all the different elements of our return strategy. But I think what is important to remember here is that return rate is not something that you can address and then leave it and it continues to be low. Return rate is actually something that you have to work with every day as part of your day-to-day business to keep it lower. So I think it's difficult to say exactly what the return rates will be going forward. But what I absolutely can say is that we will continue to work with it very proactively every day and in all the different sort of both assortment, customer information, IT systems and so on to make sure that we -- yes, that we see it as a key part of managing our business, essentially.

Thank you, Helena. Another one. The last year, the return rate was much lower in quarter 2 compared to quarter 1. Can you elaborate on reasons for this? And what the underlying existing seasonality in return rate is?

Yes. So I think if you also look historically, we tend to have a slightly higher return rate in the second quarter compared to the first quarter. And that is very much due to a number of factors, including the category mix, so we tend to, for example, sell more dresses in the second quarter, which tend to have a slightly higher return rate. So I think generally, the pattern is that we do have a little bit higher return rates in the second quarter than the first quarter. However, I think if you look at the last couple of years, we've been working so intensively with our return strategy that actually -- that pattern has been a little bit different because we've seen such steady improvement in the return rate. So I think probably what we're seeing now is a little bit more of a stabilizing of the return rate and a pattern that we've seen historically, actually. So yes.

All right. Thank you. Another 1 from Johan to, this time, Niklas. Congratulations on a very strong quarter. I have 2 quick questions. First, should we expect a similar margin structure in coming quarters due to your operating leverage or where there are any onetime factors this quarter that helped profitability? And second, I noticed that inventory levels were slightly elevated in the quarter 2 compared to the same period last year. Could you provide some color on what's driving that?

Yes, of course. Thank you, [ Alishan ]. And thank you very much for the congratulatory comments, Johan. I can comment that we do not account for any significant onetime effects affecting the quarter in a positive way. And regarding inventory levels, a fair question as we do account for higher inventory levels in absolute terms, Q2 2025 compared to last year. However, looking at inventory levels as a share of net revenue LTM, it amounts to 14.7% compared to 14.5%. So we maintain this ratio in relation to sales. And inventory balance for Q2 2025 also includes a bigger share of goods in transit compared to last year, which also implies current goods. And in addition to that, we monitor sell-through closely against the target levels. So overall, we feel confident about our inventory levels.

Thank you, Niklas. Another one from [ Albin ] at [ Calkin ]. Another congratulations and well done on an expecting quarter. Is stabilized gross margin as a result of more attractive prices to our customers to be expected going moving forward in order to continue growing at the gross level?

So I think, again, here, it's important to highlight that we obviously constantly optimize across a number of different factors in our business. And gross margin is one of them, price is another one. So I think we will continue, of course, to do the same going forward. And it depends on so many factors, and you have to sort of adapt and make sure that you listen to the customer and sometimes the right answer is to accept a little bit of a hit to gross margin in order to maintain the customer offer. So there's no general answer to this, but I think it's key, as I said, to remember that we constantly optimize on a daily basis, really. How we make sure we have the right customer offer and balance that against our business essentially.

All right. Thank you, Helena. Another question from Johan at SEB. Despite a soft consumer sentiment and colder weather during quarter 2, you provided solely year-on-year growth and note that Spring Summer collection was well received. How does your assortment strategy differ in terms of seasonal goods? And what do you believe enable you to outperform in quarter 2 despite colder weather and softer sentiment?

Yes, excellent question. I think there's a few different parts to this answer, actually. So firstly, I mean, I do really think that we had a very strong assortment this spring and summer. And we see that almost regardless of how the market is performing if we have very, very strong products, our customers respond well to them and want to buy them. So I think we did have a great sort of collection of products on offer during this spring and summer season. So that was, of course, an important part. We also, last year, had some challenges around availability because we did not quite anticipate the demand. This year, we were much better prepared and had secured much more depth in our assortment early on. So we were able to meet the demand during that period, which was positive. And then I think also the changes we have made in our marketing have meant that we more effectively target the right customer, essentially. So I think the combination of all of those things coming together enabled us to deliver a good result despite a little bit of a challenging market, essentially.

Thank you again, Helena. Another one from Johan at SEB. You're already seeing strong growth in our own brands, but you mentioned that there's still significant potential to expand into more categories and increased basket size. Could you elaborate on which specific category you see the most opportunity in? And how you plan to position your own brands in relation to your external brands offering?

Yes. So one important point to make here, before I go into the category-specific question, is that having our own Nelly brand in combination with our external brands is absolutely core to our business. So we're not looking to have one or the other. We're looking to have the combination of both because we think that, that is incredibly strong and important for our customer. Generally, our target audience doesn't walk around dressed head to toe in the same brand. It's important to be able to combine the right set of brands, and that's what we're offering. And I think in terms of categories, as I mentioned earlier, I think we have a lot more opportunity in categories where we are already strong. We have a very, very strong assortment coming, I think, in tops this autumn and winter. We also have some exciting external brand news coming both in terms of the jeans category and also the sneaker category. But I think also, as I mentioned, knitwear is very sort of interesting for us and promising going forward, given how well it performed during the second quarter when that is typically a smaller category, and that then only grows as the year goes on. So yes, I think opportunity really in multiple categories going forward.

Thank you again. From Johan at SEB, to you, Helena. Marketing costs decreased with -- marketing costs decreased both in absolute terms and as a share of revenue in quarter 2, giving your plans to expand into new categories and launch additional stores, do you anticipate stepping up marketing spend in the coming quarter? Or is 10% of net revenue a sustainable level going forward?

Again, excellent question. Again, we don't really manage our marketing spend in that way. We manage it very much on basically profitability. And so if we see that there is more opportunity to drive marketing profitably then we will increase our marketing activities. And if we see that there isn't that opportunity, then we will dial it back. So it is an incredibly dynamic sort of factor for us that we manage according to the market, the customer sentiment, our assortment, where we are in the season. So of course, the one and only KPI really that is absolute for us is that we drive marketing activities profitably.

Thank you, again. Another one question and this time to you, Niklas, from [ Karl ]. Approximately, how large part of sales comes from the physical store?

Well, thank you, a good question there. But our flagship store has obviously been an important venue for us to meet with customers in a new way, host events and expose our brand. As a share of total sales, however, sales from our physical stores still amounts to a smaller share, but obviously, we've seen a lot of other positive effects from having a physical store.

Thank you, Niklas. The last and final question to you, Helena, from [ Karl ]. What have you changed in your marketing more specifically to make it more effective?

So really, if you look at our marketing, obviously, it importantly consists of our paid marketing and our organic marketing. And in terms of the paid marketing, I would say the key factor is that we have completely changed our way of working and manage our marketing spend based on where we can generate profitable transactions. We have some very strong -- we've had some very strong additions to the team over the last year. And so I think that team is really managing that marketing spend incredibly well for us, constantly adapting and adjusting based on the situation. So I think that's made a big difference. And then in terms of organic, as I said earlier, we have focused very much on our social channels. We have stepped up our activities in some pretty well-established channels like Instagram and TikTok, but we've also started to sort of work a little bit with some new channels that we see growing going forward. And we've just increased our activity there, and we see that, again, we have an incredibly positive response from our target audience. They enjoy our content. They engage with us. And yes, they build a relationship with the brand and the products in a way that only really social channels can. So I think a number of changes is the answer, have taken together, made our marketing really, as I said, effective and impactful, which is, of course, very pleasing to see. Okay. That was the last question. So I think with that, we conclude today's call. Thank you very much, everyone, for listening. And hopefully, we'll be talking to you again next quarter. Thank you very much.

Thank you.