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

Welcome to Nelly Group Third Quarter Report 2026. Today, I am pleased to present CEO, Helena Karlinder-Ostlundh; and CFO, Josefin Dalum. [Operator Instructions] Now I will hand over to Helena Karlinder-Ostlundh. Please go ahead.

Welcome, everyone, and thank you for joining Nelly Group's presentation of the third quarter results. My name is Helena Karlinder-Ostlundh. I'm the CEO of Nelly Group. And with me today is Josefin Dalum, our CFO, here at Nelly Group. Let me start today's call by giving you just a brief overview of what we will cover in the call. We will start with a short film that introduces Nelly, and then I will give my comments on the third quarter. Josefin will then take you through the financial summary, and we will then round off with some learnings from the year-to-date. And after that, as usual, we will open for questions from you. Some of you have already sent in your questions. Thank you very much for that. If you have questions and you haven't yet sent them to us, you are very welcome to send them to us at any time during the presentation. However, we appreciate if you send them as early as possible, of course, so that we can plan for the time we have today in the best possible way. Okay. So without further ado, let's start with a short video introducing the Nelly Business. [Presentation]

Okay. So let's move on to look at the third quarter in more detail. So let me start with the overall picture of the third quarter. It was a mixed quarter that we handled with discipline, and we made some very carefully considered trade-offs. We delivered a well-executed end-of-season sale in July. And this supported growth and also drove sell-through importantly, of the outgoing spring and summer assortments. But of course, it impacted our margins in the period. And as we then transitioned into the autumn and winter season across August and September, the assortment did achieve a slightly higher conversion rate than we saw in the first half of the year. But it's important to note that the assortment still carried traces of some of the challenges that we saw in the first half. So importantly, we also continued our work to further develop Nelly's whole business model, but with a particular focus on both assortment and also our brand positioning. The effects of this work are not yet fully evident in our results, but we did see some early positive effects during the quarter actually, and we will come back to those a little later in the presentation. Looking at some of the key numbers specifically, net revenue in the quarter increased by 10.3% to SEK 313.1 million. And this can be compared to the growth last year in the same quarter of 18.4%. Operating profit amounted to SEK 42.4 million compared to SEK 43.3 million last year. So operating profit just below the previous year. And this corresponded to an operating margin of 13.5% compared with 15.3% in the same quarter last year. So overall, we achieved growth in the quarter, and we generated a profit just below last year despite significant pressures on margins. And there are some further underlying dynamics underneath this result that are worth a closer look. So let's move on to look at active customers. The number of active customers in the Nordics, as we measured over the last 12 months, was up both on last year and also on the second quarter. Now the growth was driven mainly by returning customers rather than new customers, though, and also by higher marketing intensity. And this shows in the marketing costs, which rose to 10% of net revenue compared to 9.4% in the same quarter last year. So although the number of active customers and orders increased, traffic in the Nordics fell during the period, and the decline was more pronounced in our organic channels. And based on this, looking ahead, it is absolutely critical for us to grow organic traffic again and also to reignite new customer recruitment. And we know that this absolutely depends on having a highly sought-after assortment season after season. So that continues to be our absolute focus. Also worth highlighting here when we look at active customers is that outside of the Nordics, customers in Germany continued to grow in the third quarter, which, of course, was pleasing to see. Moving on to gross margin. Gross margin amounted to 56.5% in the third quarter compared with 56.8% last year. So it was slightly lower this year, which was mainly due to higher campaign activity in the period. A higher share of own brands, which we will also look more closely at shortly, contributed positively and also currency effects were positive overall. However, even taken together, these did not fully offset the increased campaign activity that we had to employ. The autumn and winter assortment converted slightly better than the assortment in the first half, as I mentioned before. It did, however, as I said, require deeper discounting to get there, which is what you see here in the margin development. Next, let's look at own brand share. Now own brands accounted for 66.9% of sales in the third quarter, which can be compared to the same quarter last year, where the own brand share amounted to 62.2%, so another increase year-on-year. Own brands continued to resonate with our customers, and this response was most notable in key categories like pants, jeans and knitwear. Pants grew as a category compared with last year, and this was driven both by a broader fashion trend that we see, but also by a strong product offering in the category this season. And Nelly knitwear and jeans also contributed positively to the growth in own brand share. Now it is worth highlighting here, we have said this before, but it's worth highlighting here that the own brand share is impacted by the category mix. And in the third quarter, own brand share was helped by the category mix. But this, of course, the category mix varies between quarters. And so therefore, the own brand share also can fluctuate over time. I also want to emphasize here that offering a carefully curated mix of our own brands and the very best external brands remains strategically important and core to our business model also going forward. So while we're very pleased, of course, that the customer likes and appreciates our own brands, it is important that external brands also continue to be highly visible and a core part of our offering to our customers. Next, let's look at the return rate. So the return rate improved slightly in the third quarter to 25.6%, down slightly from 26.1% last year. And like own brand share, as we just said, the third quarter return rate was also helped by the category mix, which shifts between quarters. And when it comes to the return rate, fashion trends also play a part since certain silhouettes, for example, tend to carry higher return rates. And hence, the return rate can also fluctuate between quarters and seasons. Nevertheless, that being said, preventing unnecessary returns remains an absolute top priority for us going forward as well. And this is something that we have and continue to drive cross-functionally across the whole business. We have improved the return rate significantly over the past years, as we can also see here in the graph. But it is important to understand that continuous work is required just to maintain this level going forward. So return rate is something that we need to work with continuously even just to maintain that level that we have achieved. Moving on. I will not comment on the operating margin in too much detail as Josefin will come back to it shortly and go through it in more detail. However, as you can see in the report, higher gross profit in the quarter was offset by higher operating costs, which resulted in an operating margin of 13.5% compared with 15.3% last year. Marketing and distribution costs both rose as a share of net revenue and the increase in operating costs also reflected some deliberate investments in new roles and also our Copenhagen flagship store, which opened in the fourth quarter of last year. Next up, Josefin will now take you through the financial summary in more detail, and I will then come back afterwards to reflect on some learnings from the year so far.

Thank you, Helena, for the introduction. Let me share a few more details on our Q3 financial performance. Let's start with the net revenue, which for the quarter amounted to SEK 313.1 million compared with SEK 283.7 million in the same quarter last year. This corresponds to reported growth of 10.3%. In local currencies, the increase was 8.9%, meaning that currency movements had a positive impact on the reported figures. The increase was concentrated in the Nordic markets and was mainly driven by campaign activities, reflecting softer demand and a focus on sell-through during the end of season sale in July. We also saw an increase in paid traffic, which correlates with higher spending on performance marketing in the quarter, and we experienced high activity in our markets and tough competition for customers, while the quarter was positively impacted by a favorable product mix, which varies from quarter-to-quarter. Average order value in the Nordics increased by 1.2% to SEK 774 and the number of orders in Nordics increased by 2.8%, although this growth was driven by marketing activities rather than organic traffic, which continues to decline, as Helena previously said. The return rate, which has been a key area of focus in recent years, decreased again year-on-year by 0.5 percentage points, ending at 25.6%. And this was also primarily driven by a more favorable product mix. Gross profit for the quarter amounted to SEK 177 million compared with SEK 161.2 million in the same quarter last year, which is an increase of 9.8%. In margin terms, gross margin came in at 56.5%, down 0.3 percentage points compared with the same quarter last year. The higher own brand share, together with positive currency effects supported profitability, while increased campaign activity had a negative impact. Moving on to operating expenses. This increased by SEK 16.6 million year-on-year. Fulfillment and distribution costs were SEK 36.2 million, up from SEK 31.3 million. As a share of net revenue, they rose slightly to 11.6%, mainly driven by the mix of delivery options chosen by customers, but also changes in the market mix. Marketing costs were SEK 31.3 million, up from SEK 26.8 million last year, mainly due to higher paid advertising in our core market and continued investment in them and growth. Paid advertising in Nordics carried a higher cost per order on a weaker demand. As a share of net revenue, marketing was 10%, up from 9.4% last year. Administrative and other operating costs were SEK 67.1 million, up from SEK 59.9 million, driven primarily by higher personnel costs in the Copenhagen flagship store, which opened in the fourth quarter of 2025. As Helena has pointed out earlier, these are investments in the company's continued development and growth. Operating profit for the quarter amounted to SEK 42.4 million, SEK 0.9 million lower than last year since higher gross profit was offset by a higher cost base. The operating margin was 13.5%, down from 15.3% same quarter last year. Turning to cash flow and the balance sheet. Our financial position remains strong. Operating cash flow for the quarter was minus SEK 30.1 million, which is mainly due to changes in the working capital, where inventory buildup was the largest component. Cash flow from investing activities was minus SEK 8.7 million, mainly related to the new office and store in Gothenburg as well as some smaller IT and technology investments. Cash flow from financing activities was minus SEK 40.7 million, mainly relating to the share repurchase program and amortization of lease liabilities. Inventory was SEK 248.7 million at the end of September, up from SEK 227.8 million a year ago, corresponding to 19.5% of rolling 12-month net revenue. The buildup mainly reflects autumn/winter season stock and also reflects somewhat softer demand towards the end of the quarter. As usual, the fourth quarter includes periods of high promotional activity across the market, and our focus will continue to be disciplined sell-through so that we enter 2027 with a healthy and salable inventory position. Our cash balance was SEK 221.4 million at the end of September, down 2.3% from SEK 226.7 million a year ago, affected by the SEK 30 million share repurchase program. This leaves us with a balance sheet that remains strong and an equity ratio of 44.6%, up from 35.7% last year. During the quarter, we initiated and completed a share repurchase program. And the purpose of the repurchase was to optimize the company's capital structure. It started on 17th of August and ended on 25th of September. A total of 836,000 ordinary shares in the company were repurchased for SEK 30 million. The Board intends to propose that the repurchase shares will be canceled through a reduction of Nelly's share capital at the next Annual General Meeting. And the further information about the repurchase program, including press releases and a complete repurchase table is available on Nelly Group's website. That concludes the financial highlights, and I will now hand back to Helena for some closing remarks.

Thank you, Josefin. So let me just briefly summarize what the year has shown us so far. So Q3 specifically was managed in a disciplined way, as we said, but the growth required higher marketing and discount intensity as our assortment still carries some traces of the same challenges that we saw in the first half of the year. In Germany, the targeted investments we've made continue to yield a good response, which is encouraging. However, if we look at the Nordic markets, which are still our core markets and where customers are more trend conscious, it is clear that the assortment appeal and the brand positioning, the Nelly brand positioning still need further sharpening. The assortment is not yet sufficiently compelling on its own and the brand positioning needs more precision. And these really are key learnings from the year so far that we take with us going forward. Now the intensified work that we initiated in the spring to strengthen Nelly continued during the third quarter, and the management team and the Board worked closely, and continue to work closely together through the committees that we established earlier this year. Within the assortment committee specifically, more structured ways of working have been developed to systematically increase both precision and also importantly, fashion relevance, and this affects both buying decisions and, of course, also our creative expression. New processes have also been established to identify trends even earlier than we have been doing so far and also critically to translate them faster into the right assortment and the right stock sets. So early in the autumn and winter season, for example, we saw some tangible results of this work as we were able to -- this is one example, but we were able to add trend colors to some products that were already planned, and this was thanks to shorter lead times that we have already been able to achieve in our supply chain. So some small positive signs there, and this work needs to continue over the coming quarters as well, but critical that we also see effects of this gradually going forward as we continue this work. This also brings me back to our strategy and our continued transformation agenda, both of which hold firm and have the full support of both the Board and the entire Nelly management team. It continues. We've said this many times before, but it continues to be crystal clear for us that offering a highly sought-after assortment remains absolutely central to our ability to grow profitably. The assortment, of course, is renewed ahead of every season. So we need to buy consistently well with precision and a high degree of fashion relevance. And the key next step in this work is also building a faster and more integrated supply chain, which allows us to respond faster to emerging fashion trends, both ahead of a season, but also importantly during the season. In September this year, so very recently, our head office also moved to new premises in Gothenburg, where we are reporting from right now. And at the same time, office-based working was introduced as the new norm for us. And this, too, is part of our ongoing improvement efforts with the aim to strengthen cross-functional collaboration even more and further reduce the time between decisions we make and implementing those and seeing results. We have now entered an important fourth quarter with ongoing development efforts, as I said, and they are focused particularly on the Nordic markets. Nelly's brand positioning will continue to be refined, and this will be supported by the opening of our third flagship store in Gothenburg. And the targeted initiative in Germany will also continue, but as we said before, at the same deliberate and controlled pace as we have been doing so far. And of course, overall, profitable growth remains the North Star that guides everything we do. Now before we move on to answer your questions, I would like to take a brief moment to just thank all of our customers and of course, also all of our Nelly colleagues for their commitment and hard work. Our focus is now fully on delivering during this key trading period ahead and of course, on driving the ongoing transformation agenda as we have been for some time now. With that, let's move on to answering your questions.

Yes. Thank you, Helena and Josefin for the presentation. And also thank you, everyone, for calling into our Q3 presentation this morning. We have received a few questions this morning, so let's start answering those. First, we have 4 questions from Johan Fred at SEB. The first one is for you, Josefin. It goes own brand share rose, but gross margin fell 0.3 percentage points. How big was the campaign drag and how big the FX tailwind?

As we said, the focus was on sell-through of the spring and summer season in the beginning of the quarter, which impacted the discounting levels, but also a tough market climate during the quarter. We have had some positive effects mainly from the Norwegian krona during the quarter, as we also pointed out in the report.

The next one also from Johan then, also to you, Josefin, is what drove warehouse and distribution costs up to 11.6% of sales, shipping rates or market mix?

It's primarily the market mix, but we also see a slight shift in with shipping out alternatives the customer actually chooses on the site, which can differ between quarters and seasons.

The third question from Johan is to you, Helena. How much of Q3 growth was bought through marketing and discounting given weaker Nordic traffic? And what marketing to sales level should we expect going forward after 10.0% in Q3?

Yes. So I mean, as we said during the presentation, we did definitely see higher levels of both discounting and marketing during this quarter. And that is the case when we also see that the assortment still has some challenges. We don't really -- at the moment, we haven't really managed to establish the same level of these sort of viral products that we saw last year, which is, of course, a key focus for us. But when we don't have those, we see that we have a little bit less sort of organic demand, which means that we have to employ marketing and discounting to deal with the reality we see. So we've followed the principle very clearly that as long as we can do so profitably, we will employ those methods. And so we can't say exactly which percentage, but of course, it is our absolute intention to start and creates that organic demand again, which means that especially on discounting, we have to employ less of that.

Thank you. And the fourth question from Johan is to you, Josefin, and it goes, what is the underlying admin cost run rate? And will the new Gothenburg office and flagship add costs in Q4?

Yes. So as we said before, we have invested in some new roles that will affect the admin cost also going forward. The new Gothenburg store will add cost in Q4 and coming quarters, of course. But just to be totally clear that cost discipline is still at top of our agenda going forward and every added cost is picked and choose very carefully.