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

Welcome to Nelly Group Third 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. Good morning, and welcome to the results presentation for Nelly Group for the third quarter of 2025. My name is Helena Karlinder-Ostlundh, and I am the CEO of Nelly Group, and I will be presenting our results this morning together with our CFO, Niklas Lingblom. So let's have a brief look at what we will be covering in today's presentation. We will start with a short video introducing you to the Nelly business. I will then provide some commentary on the third quarter of 2025 before I hand over to Niklas for a more detailed financial summary of the quarter. And as always, we will then conclude by answering some of your questions. And at this point, we would like to remind you again that you are most welcome to send us your questions throughout today's presentation, and we will answer as many as we can at the end of the call. So with that, let's start with a short video introducing you to the Nelly business. [Presentation]

Okay. Now let's have a look at the third quarter of 2025 in more detail. Overall, we are very pleased to report a strong third quarter for 2025 with both high growth and solid profitability. Underneath this result, and for me, even more pleasingly, we also saw that our customer base grew once again in the quarter and also importantly, that we continue to build our brand towards a stronger and more attractive position in the market. These improvements, as always, were driven by our assortments where we made further inroads and of course, also the effectiveness of our marketing. And in the subsequent slides, we will be diving into each of these points in a little bit more detail to give you some more context. So if we start with the overall performance during the quarter, I think it's also important to put this result into the context of the third quarter, which can be a precarious time in the world of fashion, primarily because it firstly is the transition from our spring and summer season to our autumn and winter season. So we have to ensure that we finish the spring and summer season in a good way and of course, get a flying start to the autumn and winter season. And it's also an in-between period from a customer perspective where both the summer period and Christmas come with more natural occasions to shop. So the third quarter can be a precarious quarter and all the more pleasing then that this past quarter, we succeeded in delivering both high growth and solid profitability. So net revenue grew by 18.4% to SEK 283.7 million. And we can compare this to our net revenue growth last year during the same period of 1.4%. Operating margin also increased to 15.3% as compared to 10.5% in the same period last year. And this generated an operating profit of SEK 43.3 million, which we can compare to SEK 25.1 million in the same period last year. So clearly, a strong result. This also means that so far in 2025, we have achieved net revenue growth of 15.1%, where during the same 9-month period last year, we achieved net revenue growth of 2.2%. We also have an improved operating margin for the year-to-date of 13.3% as compared to 7.3% for the same period last year. So I think it's important to note that this is a strong result, but it's also the result of our consistent focus on expanding the profitable core business in Nelly. So it's the result of a lot of work over a long period of time. Then if we look at the customer base, very pleasingly, we see that we are winning more new and returning customers. So for the fourth consecutive quarter, we saw growth in our active customer base. And here, we saw that we both had strong new customer recruitment, but also more customers returning. So we saw that new customer recruitment accelerated in the quarter. And here, we have really become much sharper in targeting both the most relevant segments of consumers, but also consistently with the very best products in our paid advertising, resulting in this good -- a good level of new customer recruitment. And we also saw during the quarter that more customers are now returning to make another purchase. So overall, online traffic increased by 9.9%, and the number of orders rose by 20.2% in the quarter. It's also worth mentioning that we achieved this while marketing cost as a proportion of net revenue decreased slightly to 9.4% as compared to 9.9% in the same period last year. So this really shows that we have improved the effectiveness of our marketing further. Now of course, paid advertising is an important part of our business, but we also continue to focus very heavily on our social media channels, both in paid, of course, but also from an organic point of view. And here, we were happy to see that during the third quarter, we reached 200,000 followers on TikTok, which is an important channel for us and one that we have actively been developing and growing over some time. So very pleasing result for us. And lastly, but very importantly, we also see in our brand tracking, which we conduct continuously that our brand position is strengthening and that we now have a growing share of our target audience naming Nelly as their favorite store. And this is, of course, something that we are very happy about, but it's also something that is important going forward as a sort of platform for continuing to develop and grow the business. Now as I said before, these improvements critically are always driven by the strength of our assortment. And here, we really feel that we have made further inroads in key categories, not least in our own brand share. So for the third quarter of 2025, we achieved an own brand share of 62.2%, which we can compare to the same period last year, where our own brand share was 45.2%. And as you can see in the graph there, it really is even historically when we look, a high own brand share that we achieved in this quarter. Now we really feel that there are some categories where we have now built a leading assortment. It doesn't mean that we are finished, of course, but it means that we feel we have a very strong position for our target audience. To name a couple, jeans and sneakers, we really have built a very strong assortment, both of our own products, but also importantly for us, we have been able to introduce new global brands that we know our target audience appreciates. So during the spring and summer season, we were able to add big names like Puma and One Teaspoon to our assortment, which we are, of course, very happy and proud about. In addition to jeans and sneakers, we also achieved growth in knitwear, pants and shoes during the quarter. And here, we also see that we have significant potential going forward to take a leading position in these categories by further developing them both, of course, as I said, with our own products, but also the best external brands. Our own brands also have a leading role in our flagship stores, of which we now have 2, our flagship store in Stockholm, which has been open for about 2 years and our flagship store in Copenhagen, which we opened at the beginning of October, so has only been open for a few weeks. But here, of course, are 2 very important places where we can showcase our own brand in a very good way. All that being said, we are very happy about the high own brand share, but the magic sauce in our business is definitely to be able to offer a curated assortment of both our own products and the best global brands. It's the combination that we know our customer appreciates. So of course, this is something we will continue to work on as well. Now moving on to the return rates. This is an important metric in our business and something that we have been working very actively on for the last few years. Our return rate is always in focus. Pleasingly, we were able to achieve a further improvement in the third quarter, where we saw a low return rate of 26.1% as compared to 27.1% for the same period last year. But it is really important to emphasize that maintaining a low return rate requires constant focus to both protect and continue to develop our work in that space. And here, we have made a number of changes or implemented a number of initiatives as well during the quarter. It's worth mentioning that we have now moved the handling of our returns in-house. So most of our returns are now handled at our own warehouse in Borås. And this was, of course, an important move for us to achieve both more control, but also shorter handling times. And going forward, we have further initiatives underway that we are implementing to continue to work with our return rates. To name a couple, we are working both on being able to offer personalized size recommendations and also work with various forms of customer nudging. So definitely important to note that return rate doesn't stay low by itself. And this is, of course, also something that is very important as we expand our presence in other markets that have historically had high return rates. So return rate is something that we monitor very closely in each market where we are active. Moving on to the gross margin. Here, we also saw further improvement during the quarter. So we achieved a strong gross margin in the third quarter of 56.8%, which we can -- compared to the same period last year where we achieved a gross margin of 54.5%. So a further improvement there year-on-year. And this was, of course, positively impacted by the growth in our own brand share. I think generally, though, it is testament to our strong assortment. So we were able to maintain a strong gross margin during the start of the autumn and winter season as well. But of course, our own brand share is very helpful in terms of generating a strong gross margin. Now turning our attention to the future a little bit, building on the strong performance of this year so far. We are now working on a number of targeted growth initiatives in the context of our enduring high ambitions for profitable growth. Our assortment continues to be the most important growth driver in our business, given we're a product-centric business. So here, we will continue to work on refining our key categories. As I mentioned before, in jeans and sneakers, we already have a strong position, but these are both really key categories for us that we will continue to work on. And here, we also are very pleased that we have upcoming brand launches of -- for us, new global brands like Diesel and Nike. We're very happy and proud to be able to add these to our external brand portfolio, and we really feel that they will further elevate our offering in these categories going forward. As I mentioned before, we also have an opportunity to take a leading position in more categories. So to name a few, we have knitwear, tops and pants where we have made further inroads but feel we have more potential to take a leading position, and this will really reinforce our role as the go-to destination for our target audience. So the more categories where we feel we have a leading assortment, the better we're able to meet all of our customers' everyday fashion needs, of course. In addition to continuing to work on improving and expanding and developing our assortment, we are also now investing in expanding Nelly's presence in markets where we see strong growth potential. So we are strong in the Nordic markets, but we see that, for example, opening a second flagship store in -- on Stroget in Central Copenhagen in the beginning of October is also part of this initiative to expand our presence. So opening this store, key objectives, of course, increasing brand awareness and solidifying our position in Denmark, but also given the location of the store internationally. We have a lot of tourists on Stroget. And of course, this is a key way for us to help new customers discover our brand. Now the Nordics will remain our core markets, that is an important point to make. We have high brand awareness in the Nordics and a strong position. So this will continue to remain our core markets. But we do see growth opportunities beyond the Nordics. And we have chosen Germany as our next focus in terms of investing and expanding our presence. Very important to emphasize here is that our expansion in Germany is a long-term effort. Germany is not a new market for us. We have been active there for some time, but Germany is also a tricky market. So we see it as a long-term effort that will require both investment and time, but we are convinced that our offering has broad appeal in Germany as well. So to summarize, we are pleased to report a strong third quarter for 2025 with both high growth and solid profitability, definitely something we don't take for granted. And as I mentioned during the presentation so far, even more pleasingly for me, and I'm sure for many at Nelly is that we continue to see our customer base growing and our brands becoming stronger and stronger. Both our assortment and the effectiveness of our marketing have driven this improvement and will continue to be key focus areas for us going forward as well. So with that, I will hand over to Niklas to provide a more detailed financial summary for the quarter.

Thank you, Helena. So let me take you through some of the financial details for the third quarter. Net revenue in the quarter amounted to SEK 283.7 million compared to SEK 239.6 million last year, showing a strong and accelerated growth rate of 18.4%. Growth was mainly driven by online sales before returns, improved return rates and increased store sales. The return rate improved in the quarter to 26.1% from 27.1% in the comparative quarter. And the currency affected the growth rate negatively, mainly due to the depreciation of the Norwegian krone and the net revenue in local currencies grew by 20.2%. Average order value in the Nordics decreased by 8.1%, which was driven by both lower average item value and lower average ordered items. And total number of orders in the Nordics increased by 20.2%. And with that, we move to the next slide. We conclude that operating profit in the third quarter amounted to SEK 43.3 million compared to SEK 25.1 million last year and operating margin reaching 15.3% compared to 10.5% same quarter last year. The third quarter showing solid operating margin then and a strong operating profit. Improved operating profit compared to the same quarter last year was mainly driven by higher gross profit through increased net revenue as well as the improved gross margin contributing. In addition, we maintained a good level of cost control in the third quarter, so improving the operating cost to net revenue ratio. And a quick look at LTM figures, and we can conclude a solid financial and operational performance over 12 months with both record high operating profit and operating margin. Operating profit amounting to SEK 154.8 million with an operating margin of 12.8%. So this showcases the continued momentum in improving both profit and margin in LTM figures even further through the third quarter. And now moving on to the income statement on the next slide. So again, net revenue in the quarter amounted to SEK 283.7 million compared to SEK 239.6 million last year. Gross profit amounted to SEK 161.2 million compared to SEK 130.7 million, with an improved gross margin of 56.8% compared to 54.5% last year. Warehousing and distribution costs amounted to SEK 31.3 million compared to SEK 28.0 million. Cost as a share of net revenue improved to 11.0% from 11.7%, driven by operational improvements, optimized distribution and an improved return rate. Marketing costs amounted to SEK 26.8 million compared to SEK 23.8 million last year, with costs mainly related to paid advertising. Marketing costs relative to net revenue decreased to 9.4% from 9.9% last year. And administration and other operating expenses increased to SEK 59.9 million compared to SEK 53.8 million, but improved as a share relative to net revenue amounting to 21.1% compared to 22.5% last year. And our operating profit increased to SEK 43.3 million compared to SEK 25.1 million last year, with an increased operating margin of 15.3% compared to 10.5%. And lastly, let me talk you through some additional financials on the next slide. So operating cash flow in the third quarter amounted to negative SEK 18.5 million compared to negative SEK 18.5 million last year. And as such, third quarter's cash flow from operating activities were in line with last year, where a stronger net result contributed positively to the cash flow and higher inventory levels ahead of Q4 contributed negatively to the operating cash flow. And as a general note, and as seasonality shows, higher inventory levels are expected in the third quarter ahead of Q4. And we also see a higher share of goods in transit by the end of third quarter, partially explaining higher inventory levels in relation to net revenue this compared to last year. And cash flow from investing activities amounted to negative SEK 5.6 million compared to negative SEK 3.1 million last year. This was primarily attributable to IT investments. Cash flow from financing activities amounted to negative SEK 8.7 million compared to negative SEK 7.9 million, mainly related to payment of lease liabilities. And so net cash flow amounted to a negative SEK 32.8 million compared to negative SEK 29.5 million last year. And by the end of Q3, we note that remaining tax deferrals amounted to SEK 69.6 million. This is down from SEK 105.6 million by the end of Q3 last year. We end the third quarter with a strengthened balance sheet with a solid equity ratio of 35.7%, improved from 26.2% and with cash and cash equivalents amounting to SEK 226.7 million. So concluding the quarter, net revenue growth of 18.4%, operating margin of 15.3% and operating profit of SEK 43.3 million. And LTM figures outperformed previous highs with an operating profit of SEK 154.8 million and operating margin of 12.8%. And with that, I hand it back to you, Helena.

Thank you very much, Niklas. This concludes the presentation part of today's call. And before we move on to answer some of your questions, I just would like to take the opportunity to, first of all, thank all of our amazing customers. We have very discerning customers who I'm happy that they inspire us to continuously raise the bar and set very high ambitions for ourselves. So a big thank you to all of our customers. And of course, most importantly, the Nelly team. It's such an incredibly committed team, and I see everyone working so hard every day to create the very best experience for our customers. So it really is a joy and a privilege to be working alongside such an amazing team. So big, big thank you from me and Niklas as well, of course. And with that, we will move on to answer your questions.

Yes. Thank you, Helena, and thank you all for joining our third quarter presentation this morning. We will now start with 2 questions from Alvin from Kalkil. And these 2 are for you, Helena. So congratulations on another strong quarter. Do you see a correlation between sales in your flagship store and your online sales.

Yes, that's an excellent question. So I think it is always tricky to pinpoint exactly what is an effect of what when you do so many things at the same time as we tend to do. I would say that we can't see a sort of a clear correlation between the 2. But of course, we have seen very high traffic in our Stockholm store. I mean, our Copenhagen store only just opened. But in Stockholm, we have seen very high traffic, and it's been growing over that 2-year period that it's been open as well. So I mean, I think it would be strange to me if it didn't positively influence our brand position and our online sales, but it's something that is tricky to prove in numbers, so to speak.

Thank you. And the other question is, do you see a reason to increase the marketing budget in relation to sales given the improved traction you're seeing?

So the way that we manage our paid marketing is, of course, extremely dynamic day by day, but sometimes hour by hour. And we drive our marketing now. We didn't do that historically, but now we drive it entirely on profitability, which basically means that we are able to increase our spend when we can do it profitably, but we're also very careful to manage this closely and pull back on our spend when we're not seeing the results that we're after. So I think it's difficult to give a general answer to this question because we do manage it so dynamically and closely every day.

Great. We continue with you, Helena. And this time, it's a question from Michael. I noticed that you've been out of stock of high requested items like the green puffer jacket. So how do you work on ensuring sufficient supply of high-demand products.

Yes. Excellent question as well. This is, of course, for a fashion business, always a challenge to find exactly the right quantity to buy, given also that we buy quite far in advance. We have made very significant improvements in quantifying demand for our products, I would say. If we look at many of the periods in 2024, we were out of stock much more frequently on high sellers than we have been this year. Now with the green puffer jacket in particular, there was a lot more demand than we had anticipated. But I think this is something that we continue to work on going forward and that we also -- I mean, given that we have seen good growth in this period, yes, we are improving our ability to forecast as we go along as well. But of course, it's -- yes, it's our ambition to make sure or our sort of goal to make sure that we can meet demand, but with something like seasonal products like jackets, we also don't want to have too much stock when we move out of the season. So yes, it's a delicate balance to get exactly right.

Thank you. The next one is once again for you, Helena, and this time it is from an investor. So what about the U.S. market since you are adding some major names into your company like Nike and Puma. What is the plan to expand the U.S. market, knowing that the sentiment is shifting away from -- as website related and better take advantage of that.

So I think as we now carefully and very systematically are turning our attention a little bit outside the Nordic market. We have to do it in a very controlled and careful way. We know the Nordic market really well. Some of the other markets in Europe where we have been active for some time, we don't know them as well. And we also know, as I mentioned during the presentation, that we have struggled with certain elements of other markets such as return rate, for example. So I think it's important going into this that we want to do it in a very controlled and sort of purposeful way. And I think the U.S. market is it's a tricky market. It's a big market for sure. It's also made up of a lot of many markets within the U.S., so really not to be underestimated. So I think at this point, we are focused more on Europe and as I said, Germany in particular, and of course, making sure that we don't lose sight of our core market, which is the Nordics. So I don't see the U.S. as a focus in the near future.

Yes. And then we have another question from Julius. Congratulations on the great result. Will you be able to maintain this level of growth and profit going forward?

Also an excellent question. I mean we are, of course, happy and pleased about this third quarter, but I think it is Important to remember and sort of stay humble about the fact that we are in a tricky and volatile industry with a customer who is very discerning and very careful with where they spend their money. So I think apart from the fact that we obviously don't give forward projections, but I think it's fair to say that we try and do our very best every quarter, but it is a tricky industry and one that is both, as I said, volatile, but also sort of changes continuously with trends and so on. So yes, we will do our best, but I think it's difficult to say from quarter-to-quarter exactly what it will look like. But we hope that we have built a sort of a healthy and sustainable core as a platform for -- yes, going forward as well.

Great. Thank you, Helena. I think that was actually the last question we had.

Okay. Well, in that case, thank you very much, everyone, for listening, and we will, yes, be here again next quarter, hopefully. Thank you.

Thank you.