The Platform Group SE & Co. KGaA (TPG0) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the conference call of Fashionette AG. At our customer's request, this conference will be recorded. [Operator Instructions] I now hand you over to Daniel Raab, who will lead you through this conference. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining our webcast for our Q1 results of 2022. I am here today with Thomas, our COO and CTO, who will give you an update about our strategic initiatives later on in the presentation. Obviously, everyone knows that Q1 is very special more because of the geopolitical crisis than with the operational KPIs that we are presenting. But nevertheless, given the influences of the external factors, we are really proud to present our results today. First of all, the results are fully in line with the guidance that we have provided, obviously, and I will go into details later on. The business has taken a significant challenge in March based on the impact of the geopolitical crisis at the end of February and more details will be provided on the next slide. We've grown almost 54% on a consolidated basis, close to 8% on a pro forma basis. Have grown our average order value, which is really important to us, 5% year-on-year, which is driven by product category mix and also by the expansion of our product portfolio and revenue synergies we were able to realize on Brandfield. And most importantly, we've grown our number of active customers, also benefit of the investments we have initiated over the last years by 19%. And at end of Q2, we still had a solid position of liquidity of EUR 7.3 million. Before we go more into details of the financial performance of our company in Q1, I want to give you a little bit more insight of the revenue development over the last 3 years. Looking at chart -- at the chart on Page 4, you can see the development on the pro forma and consolidated basis. But also on the right-hand side, the key drivers of the development. What you can see there is that, obviously, handbags, our core category, is continuing to grow 13%. And we are also able to leverage the synergy on our Brandfield website with 56% growth in units sold of handbags, the fastest category growing -- growth within the portfolio of Brandfield right now. This is also the reason why we were able to grow our average order value on Brandfield almost 7%. For Fashionette, one of our core categories is nowadays sunglasses. I've been talking about this quite a while. Sunglasses are a typical entry product into the luxury segment, and we're very proud that we were able to grow 77%. Also on Brandfield, especially in Q2, I can give you an update on that. The growth of sunglasses is very promising and something that we are working hard on. What you don't see here is an update on categories and jewelry. And that's -- the reason is very simple. Because of the geopolitical crisis and the direct consequences on inflation, those categories are most challenged. And on both companies, those are the slowest growing categories right now and something that we're working hard on. But more details to follow later. Also regarding the development since the outbreak of the crisis in the Ukraine and Russia, I want to give you a little bit more insight on the development of Fashionette stand-alone as a retail platform. What we've experienced, starting with the 24th of February is a drop of 17% of traffic for the last 5 days of the month of February versus the average of the 24 -- 23 days of February. And that, as a consequence, is most visible in the growth of new customers, which you can see on the bottom half of the chart, which was declining year-on-year only 2%. Overall, we were able to grow new customers by 7%. But even more important, for the whole quarter, we were able to grow our returning customers by 23%. And also in March, definitely the most impacted month of Q1, we were able to grow our returning customers by 17%. And also an update on the average order value of new versus the average order value of existing or returning customers. We've always said that acquiring a customer is the start of the beginning of a life cycle of the customer. And over time, it's our goal to drive the revenue or the share of wallet of our customers, and that's very visible to see on this slide that already in the second year, we are able to grow the average order value of returning customers by EUR 100 versus the initial year. Switching over to the financial update. As said before, total net revenue grew 54% year-on-year to EUR 36 million in Q1 '22. That represents a 7.6% pro forma growth. What you can see on the right-hand side is that our core -- the region DACH is constantly growing on a very profitable basis. But especially the impact on Benelux is driven by more of the inflation and the impact on the core categories, watches and jewelry, than it's on the other categories that we are selling in the region. The sales growth of the first 2 months is almost 16%, which is obviously also a reference to the guidance we have given, which we're really comfortable with, but more update to that later. Importantly, again, the growth of active customers is almost -- is 19% and also an update and more details on the next slides. The number of new customers for the whole quarter declined by minus 4%, strongly driven by Fashionette, which was able to grow its new customer base by 7%. So the total active customer base has grown by 19%, driven quite similar by both companies, 20% in Fashionette and 18% in Brandfield. Obviously, that's one of the core initiatives that Thomas and his teams are working on, especially stimulating our results from CRM and et cetera, and Thomas has an update on that later on. Marketing cost per order also something we've always communicated as a target specifically for Fashionette, we were able to decline -- decrease our cost per order by minus 15%. As a result for the whole group, the marketing cost per order decreased by 3%. The marketing acquisition cost for Fashionette have decreased by 8%. For the whole group, it increased by 6%. Please bear in mind that those numbers obviously include a significantly higher own brand share with a significantly higher gross margin but also more efforts in -- from a marketing perspective on the Brandfield side. Overall, as mentioned before, the number of orders grew 4.9%, strongly driven by Fashionette, which has grown 17%. On Brandfield, what you can see on the right-hand side is we're actively working on the selection expansion, which results into a significant growth of handbags, growing its revenue share as a category from 8% to 14%, almost doubling it and having a significant impact on the average order value, which you can see in the chart -- in the bar chart on the right-hand side. The unit economics obviously play an important role in the overall profitability of the company and stimulating average order value by the product category mix but not necessarily within the categories is super important for the long-term success and the first sign of our revenue leverage from our synergies that we're going to stimulate further. The financial performance overall, we have seen a slight increase of returns. That's very much driven by a category mix. If you remember on the first couple of slides, I've shown you that, one example, sunglasses was growing 77%. Sunglasses has one of the highest return rates or the highest return rates of all categories. Also shoes has grown strongly. For categories like handbags and other core categories, we don't see a significant increase in returns over time. Gross margin impacted by the category mix but also by a little bit more competitive pressure, still strong at 41%. Something that I've always communicated is our core targets will remain north of 40%. Distribution costs per order only increased 1% for Fashionette year-over-year, which also shows some operational leverage and scale factors. Overall, the increase is driven mainly by the cost increases with Brandfield. Those are heavily impacted by the cost increase for paper. The packaging, obviously, for our own products, we have to pay the packaging separate, et cetera, but we don't expect further increases going forward. The marketing cost ratio has declined by almost 100% -- 100 basis points, again, mainly driven by Fashionette, which has demonstrated its efficiency gains over time with a strong decrease in customer acquisition costs. For the reported EBITDA margin versus the adjusted EBITDA margin, one important comment, there's a -- the total adjustment is a little bit more than EUR 500,000. However, EUR 400,000 out of those EUR 500,000 are pure accounting noncash relevant IFRS impact from the acquisition of Brandfield, which will repeat -- be repeated for Q2 but gone for Q3 and onwards They are pure accounting impact related to the PPA of Brandfield. Overall, the cash position, we have communicated our working capital facility, which obviously gives us enough room to continue our growth going forward and provides a buffer of EUR 7 million at the end of the quarter 1 in '22. And with that, I would hand over to Thomas, who will give you a little bit more update on our strategic initiatives, and I'll be back talking a little bit about guidance after Thomas finishes his section.

Thank you, Daniel. Good morning. I want to give an update on our strategic priorities in context of what we have worked on the IT side over the last several months. As you know, expanding selection is one key to our success. We added almost 25,000 new products into our catalog last year and have expanded the assortment by over 70%. We could achieve that by launching a new product information management system, which helped us in several ways. First, we are now able to create products in a semi-automated way, which is much faster and less people intense. In addition, we could increase the depth and quality of our product data. And with this new product data, does enable us to start working on automated tax generation, which has been fully using to create product description for several thousand products in the handbag categories. We will expand this functionality throughout the different other categories in the course of the year. The new PIM also helped us with our second strategic priority, the regional expansion. We are now able to automatically translate product attributes in different languages, which increases the customer experience on the non-German-speaking Fashionette websites. As you know, we made a big step into regional expansion last year with the acquisition of Brandfield. In Q1, we started to process with a migration work on inventory, which allows us to utilize inventory in a better way across the different warehouses of the group. This migration process enables us to manage inventory more efficiently and also expand selection faster. So it helped us on both ends of the -- on the first strategic priorities. This is almost possible by continuously investing into our IT platform. We mentioned that before, we integrated the Brandfield data into the group's data lake, which is an enabler for more customer experience and growth improvements over the next several months. The next big thing for us is bringing Brandfield onto Fashionette CRM technology stack, which will happen in Q2, and we also expect the first results to see from this initiative in Q2. A few insights into our own brand business. We're extremely proud of what we could achieve in Q1. Own brand business accounted for over 11% of the revenues of the group, with a strong growth of over 12% year-on-year. The unit economics are highly attractive. Also the average item price increased by over 12%. In terms of category mix, we started out with the jewelry category and have been put more focus on the leather goods category recently, which you can see on the gross figure, this category grew over 60% in the last quarter. Isabel Bernard is our most successful brand so far with a strong growth of 28% last quarter and we are really proud of that. Over 20% of the revenues from Isabel Bernard are already coming from the isabelbernard.com website. Back to Daniel.

Thank you, Thomas. So overall, everyone has to understand that obviously, the world has changed dramatically and this has a significant impact on consumer sentiment. The consumer sentiment is significantly more impacted in different categories. For example, in watches and jewelry across all our retail platforms, we see a stronger decline in revenues than we see in our core category handbags for an example. Therefore, the Benelux region, given the fact that Brandfield's revenue is heavily depending on jewelery and watches, we have more work to do to get back to the pre-geopolitical crisis levels. But we are really comfortable with the development we are seeing on Fashionette, specifically on our core categories, leather goods. Overall, everything we know today, we are comfortable with the guidance we have provided also given the fact that Q3 last year was a very challenging quarter for us with the logistics move and the impact on revenue we have seen. So we expect a significant increase of growth in the third quarter of this year. Overall, the focus is very much on a continuous and strict working capital management for us. That's very much a communications with our suppliers. Obviously, a significant decrease of the inventory commitments for the second half of the year and a continuous focus on profitability, which is one of the core messages. Even in a challenging quarter like the Q1 of '22, we were able to operate on a profitable basis. And the result of that is a continued profitable outlook, which you can see in the unchanged guidance that we provided after the full year results. Just a quick update on the financial calendar. At the end of June, we will host our Annual General Meeting, and we have expected to announce our H1/Q2 results at the end of August. The date of 24th of August might change. It's still preliminary mainly because of potential start of my potential successor, which we are still confident is going to happen latest on September 1, but there will be an update down the line from the Supervisory Board when we have agreed the signing of a -- has agreed to signing with my successor. And with that, I would hand over to you for questions.

[Operator Instructions] We have the first question is from Christian Salis of Hauck Aufhäuser.

It's Christian from Hauck. I've got a couple of questions, please. First of all, on the cash generation. So free cash flow was minus EUR 11 million in Q1. So I know that Q1 is typically the lowest quarter in terms of cash flow and cash generation. And I assume that an increase in the inventory position was the major reason for that development. So could you please talk about your expectation and working capital? You just mentioned it in the last slide, your strict working capital management strategy in the coming 2 quarters, please. And last year, in Q2, I think operating cash flow was almost breakeven, so there is also a significant seasonality, I guess, between Q1 and Q2. So would it be also fair to assume an almost breakeven operating cash flow for this year in Q2?

So Chris, those were the 2 questions?

No, I have a couple of more.

Okay. I answer one by one. Yes, sure. So look, just as you said, Q1 is also is always the most capital-intensive quarter simply because of the inventory buildup for the summer season and the dynamics of our revenue concentration. If you look at the historic data, basically, Q1 and Q3, the inventory building quarters and Q2 and Q3 are the kind of more sales versus inventory buildup quarters. Overall, we will see a significant improvement of the operating cash flow in Q2. And I'm expecting not a significant buildup in Q3 because, obviously, we significantly adjusted our buying for the fourth quarter. depending on the consumer sentiment that we are seeing. The second part of the question was regarding the breakeven of cash flow in Q2. There is no guidance on that, but again, a significant improvement versus Q1.

But again, on the first question. So what's your strategy now going into the next quarters, given that you're a little bit running out of cash. So are you cutting down on CapEx? Are you -- inventory is expected to look like in Q2? And also maybe in terms of marketing spending, are you going to cut back on marketing to support short-term cash generation?

Yes. So first of all, we are not short on cash. We are comfortable with the working capital line that we're using for the inventory management, yes? If needed, we are happy to go and work with the banks on expanding our working capital line, but we are not cutting down on marketing spend. We've always wisely invested in marketing, and we'll continue to do so as we have done since we're talking about this topic. What has changed significantly is the revenue growth outlook from the very beginning of the year, given, for an example, that January was an extremely strong month in growth. just on a monthly basis, the growth in January in Fashionette was the strongest in many, many quarters. And that outlook is currently not as positive anymore. Therefore, our inventory commitments, so the purchasing commitments to suppliers have been significantly decreased. And therefore, specifically for the end of the year, you can expect a significantly lower inventory that we are showing today. There will be a significant change there.

Yes. Okay. That was my next question. So what's the total inventory position at the end of Q1? And then also, could you talk about the structure of the inventory. So how much is related to the categories maybe that are not selling that positive or that well at the moment, like watches, for example?

Yes. So the inventory position of watches is irrelevant in the total grand scheme of things. For jewelry, actually, our inventory technically is even worth more because of the rising gold price, the majority of the jewelry inventory is gold. Therefore, this is not a risk for us. The focus is on the long-term buying commitments and the reduction of the long-term buying commitments, which are more of the leather goods categories, which have a significantly longer lead time, as you know. And therefore, the full focus is on the reduction of our buying commitments for the second half and obviously also going forward for the second half of the year in those long-term buying commitment categories like handbags and shoes for example.

Okay. And what's the total inventory position now at the end of Q1. So in 2021, it was EUR 44 million, right? So how does that number look like?

Yes. The total inventory right now is EUR 51 million.

Okay.

Let me just comment on -- I just want to clarify one thing because it's very complicated with the consolidated pro forma view and the IFRS change. If you or anyone else is looking at our debt position because of the IFRS change the debt has also increased because of the accounting impact from IFRS. For example, there's roughly EUR 4 million of short- and long-term leases in our debt position which is simply the rent of our buildings, which in the past were not shown as a debt position. So that's very important to -- and I understand it's extremely complicated. There's pro forma, there's guidance, the pro forma consolidated and there's the IFRS change. If you have any questions regarding those changes, please reach out to Arena, and she will help you get the data aligned because it's very complicated. And I'm sorry for that.

So what's the total net debt position at the moment?

One second. The total net debt position right now is EUR 20 million, including EUR 4 million for the rents.

Okay. And then I have 2 questions left from my side. Again, on the cash situation. So could you please talk about how much cash do you have access to at the moment? And do you have any agreements to extend your -- yes, your credit facilities with the existing banks? I think you just signed an agreement with a couple of banks at the end of last year. So is there any -- yes, anything you can share?

Yes. So the liquidity, we mentioned before is roughly EUR 7 million. And obviously, we have expanded our portfolio of banks we're working together. There's now a pool of 3 banks we are working together. And it's one of the conversations that we are having, yes. But it's not -- for the continuation of the business, it's not critical that we expand our working capital facilities. It's operationally super important that we continue to manage our inventory position, which we doing, especially with the long-term inventory commitments, yes, but it's not essential to extend or expand our working capital facility. We are comfortable with the working capital facility we're having. And the working capital facilities for the stock up of the inventory needed for Q4, which, again, has been reduced significantly.

Okay. And then final question, maybe a comment on current trading. You mentioned January and February were quite strong. Also, I guess, above the guidance range or at least at the top end of the guidance range of 16% to 21%, then March was obviously weaker. So would it be fair to assume that your sales growth has returned to the 16% to 21% organic growth range in the last, let's say, maybe 4 weeks.

So the -- you have to separate the impact a little bit on the 2 different brands. First of all, with Fashionette, given the average order value, we are addressing somewhat of a different consumer group, right? Given the fact that the average order value is significantly above EUR 200 versus the average order value of Brandfield of EUR 85 different customer clients here. Based on what we are seeing, we believe that the impact from inflation, which obviously is also a consequence of the geopolitical crisis is significantly harder on Brandfield than it is on Fashionette. Fashionette, the impact was more visible with the initiation of the war at the end of February, but not longer-term impact. So the current trading that we are seeing is a continuation of the inflation impact on the lower-value spendings of Brandfield. And flat development since April, which is a better development than in March at Fashionette given the focus on leather goods, specifically on handbags. So there's no change in consumer sentiment visible to us since the beginning of March.

The next question is by Catharina Claes of Berenberg.

Yes. Actually, it was also on current trading. But did I understand this correctly now that you've seen a flat line since April? My line was a bit patchy. I'm sorry, could you maybe clarify that a bit?

Catharina, so look, I'll go back in hand and repeat what I said about current trading, starting with January. January was the strongest growth in Fashionette, we have seen in a long, long time. The impact on Brandfield was already visible in January, which we believe is more driven from the inflation. The negative impact from the war obviously was hitting at the end of February, which I demonstrated with the impact of the traffic that we're seeing, which for the 5 days -- starting with the 24 was negative 17% compared to the first 23 days of February. That decline was visible throughout March, which we have demonstrated with a negative growth of new customers by minus 2%, but still double-digit growth with active customers on Fashionette. The scenario or the development of Brandfield hasn't changed throughout Q1 and also not in Q3. So customer behavior on Fashionette is very comparable. For brand -- for Fashionette, April and May are flat and are significantly improved versus March, but not back to the pre-initiation time of the war in the Ukraine. Overall, we are committed to the guidance we have provided, which also includes the lower base of Q3, given the logistic challenges we were facing last year. So you can expect an uptick in growth in Q3.

[Operator Instructions] The next question is by [ Werner Friedmann of Ace and Ice ].

Just one clarification, please. Did you give the number of EUR 20 million for net debt or interest-bearing debt?

The EUR 20 million is net debt and the net debt includes an IFRS understanding also more than -- let me check more than EUR 4.1 million rent.

Yes. So that would mean that your interest-bearing debt is EUR 27 million?

No, that's not correct. The interest-bearing debt is basically the net debt minus the rent. So it's 16 -- roughly EUR 16 million.

I mean the cash position, usually, you should also deduct the cash position.

It's not the cash position. But I guess, let's take this off-line. We'll send you the data afterwards and transfer it because again, with pro forma and the consolidation and the IFRS changes, it's easier to send you the data afterwards. Yes.

For the moment, there are no further questions. And so I hand back to you.

Thank you very much for joining. Again, if there are any questions, please reach out to Investor Relations. Most of you I know [indiscernible] come back to me with your questions, and we are happily provide you with the answers and the data you are looking for. And then we will see you back in August. Thank you so much. Bye-bye.

Dear ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.