Westwing Group SE (WEW) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for our Q2 2023 Earnings Call. My name is Andreas Hoerning, I'm the CEO of Westwing. Joining me on this call is our new CFO, Sebastian Westrich, who joined Westwing at the beginning of the month. Looking at today's agenda, after I guide you through our general business update, Sebastian will present the details of Westwing's Q2 financial performance. We'll then be happy to take your questions. Let's take a look at the overall state of Westwing. Firstly, despite an ongoing challenging market environment, we were able to stabilize our top line in terms of GMV and active customers. We continue to expect to return to sustainable growth in the second half of 2023. Secondly, I'm pleased to announce that the second quarter of 2023 marks our third profitable quarter in a row. Our free cash flow performance was EUR 13 million, better than last year. Thirdly, we continue to make very good progress with our strategic initiatives. Our high-margin Westwing Collection reached a group GMV share of 46% in Q2 2023, and our OneWestwing initiative has again reached important milestones in line with plan. Fourthly, we confirm our 2023 guidance and currently expect to achieve revenue and adjusted EBITDA in the upper half of the guidance. Our Q2 results have again confirm that we are on the right track. Let's proceed with a closer look at our Q2 top line. The second quarter of 2023 was still characterized by a difficult market environment. We successfully stabilized our top line, achieving a GMV of EUR 109 million or 0% year-over-year growth. This also represents an increase of almost 70% compared to the pre-pandemic 2019 baseline. We were also able to stabilize the number of our active customers. As this KPI is calculated based on a last 12 months logic, we compare quarter-over-quarter development. In Q2 2023, the number of active customers amounted to 1.3 million, which is basically stable compared to the previous quarter Q1 2023. Overall, our top line is developing well in a difficult market environment. We expect to return to sustainable growth in the second half of 2023. An important top line KPI that I would like to highlight is our GMV per active customer. This KPI reflects how much each of our active customers purchased from us on average in the past 12 months. It is a great testament to our business model that we achieved plus 8% year-over-year in GMV per active customer in Q2. This substantial increase in share of wallet with our customers is driven by our love brand strategy and the subsequent loyalty of our customers, a strong focus on exciting offerings with our Westwing Collection and our shop and generally a great customer experience. Let's now look at profitability and cash flow. As mentioned beforehand, Q2 2023 marks a third profitable quarter in a row. Returning to financial stability and profitability was a clear priority of ours for 2023, and we are delivering on this commitment. We achieved an adjusted EBITDA of plus EUR 4 million with an adjusted EBITDA margin of 4.4% in Q2, which marks an improvement of EUR 7 million year-over-year. The improvement in profitability was accomplished through substantially better unit economics and the successful implementation of cost-saving initiatives across G&A, marketing and CapEx. Improvement in unit economics was driven by a positive development of the high-margin Westwing Collection and continued efficiency gains in fulfillment. In terms of cost savings, the measures that we initiated last year was successfully completed in the first half of 2023. Yet, it is important to note that we will continue to act costs consciously going forward. On cash, we continue to successfully manage down overstock and maintained a negative net working capital. The improvement in net working capital, combined with the operating profit resulted in strongly improved free cash flow and a strong cash position of EUR 76 million to end of Q2. However, in light of these positive results, I also want to emphasize that this is only the beginning of our upcoming phase of profitable growth, our strong contribution margins in combination with the proven scalability of our business will enable a target P&L of 10% to 15% adjusted EBITDA in the long run. Hence, while we are pleased with our performance in the second quarter, especially considering the challenging market conditions, we will continue to strive for further improvements in profitability. With regards to unit economics, I just stated that we are continuing to increase the share of our own Collection versus the total business. I'm delighted to refer that our reports that our high-margin Westwing Collection accounted for 46% of the group's GMV in Q2, which marks an 8 percentage point increase versus Q2 2022. With that, we are well on track to achieve our long-term 50%-plus share target. In order to get there, we're putting our Westwing Collection at the forefront of our next growth phase through further assortment expansion and greater visibility across all channels. One example of this enhanced visibility our exclusive Westwing Collection events. On the right-hand side of the slide, you can see some impressions of the launch of our new lounge chair called Fleur. I'm extremely proud of the quality that we have reached with these events. We consistently receive great feedback from our customers and influencers, and we generate massive reach across many channels for our Westwing Collection. Lastly, a brief update on OneWestwing. As a reminder, this strategic initiative aims at creating a seamless customer experience across our business models, shop and club, making our websites more convenient and attractive for customers. Following the successful test phase and rollout of the new web page layout with our unified domain for all our markets, we've now started the rollout of our merged apps. We are already live with our merged Android and iOS apps in one country and the rollout will happen within the next few weeks. Further steps include merging the cart and checkout for our customers and consolidating the back-end technology of shop and club as well as optimizing our traffic and other marketing drivers. Overall, it is great to see the pace at which the team is driving this important change, and we are excited about the potential of OneWestwing to create a much stronger foundation for our business. With that, I hand over to our CFO, Sebastian, for more details on our financial results.

Thanks a lot, Andreas, and hello from my side to everyone. My name is Sebastian Westrich, and I'm the new CFO of Westwing. I joined Westwing last week. I have had a great start with a fantastic team. I am very pleased to be able to speak to you today and present our Q2 2023 results. Before we take a closer look at the results of the second quarter of 2023, let me briefly introduce myself. I have now more than 10 years' experience working in the e-commerce industry, mostly in finance-related leadership and CFO positions. Before joining Westwing, I've spent 3 years as CFO of the e-commerce division of Hubert Burda Media and was also CFO of Cyberport, a large multichannel consumer electronics retailer. During my career, I've seen many different business models at different stages of maturity, both online and offline channels, as well as B2C and B2B customers. However, there has always been a strong focus on B2C e-commerce. With my experience and passion for e-commerce, I will contribute to the successful development of the company with a clear focus on effective financial management and driving Westwing's growth and profitability. I'm super excited to start working with Andreas and the entire team as I strongly believe in Westwing's huge potential as a consumer loved brand, [ providing, employing ] customers and creating value for its shareholders. Having said that, let us dive into the review of our Q2 2023 results. First up is top line development. As Andreas has already described, we achieved a stabilization of top line in Q2 2023, despite a continued challenging market environment. Revenues in Q2 2023 developed in line with GMV and amounted to EUR 102 million but only a slight decrease by 1% year-over-year. In these volatile markets, it remains important to also look at longer time horizons. Compared to Q2 2019, we increased revenues by 75%, which showcases the growth we have realized over the past year. Looking at segment growth, we can see that the International segment has already returned to a growth of 4% year-over-year to EUR 47 million in the second quarter of 2023. The DACH segment was down by 5% year-over-year in Q2 2023, but also here, we see a positive trend and stabilization of the top line. We can put the better growth of the International segment down to one specific reason as both segments follow the same strategy. But there are timing effects, for example, we were rolling out our OneWestwing initiative earlier in some international markets [indiscernible]. In the first half of the year, we achieved revenues of EUR 205 million for the group. This represents a decline by 4% year-over-year. Now we move on to our income statement. Starting with Q2, our gross margin increased by 1.9 percentage points versus previous year to 50.5% in Q2 2023. We continue to be able to compensate for all the stock and inflationary effects with a higher Westwing Collection share, and we see the full impact of last year's price increases, which we introduced to compensate for cost inflation. In terms of fulfillment costs, we will realize further efficiency gains in our warehouses. For instance, we closed a smaller warehouse to increase the utilization of our remaining warehouses in Q2 2023. As a result, we improved our fulfillment ratio by 1.7 percentage points year-over-year to 21.7%. The positive development of both gross margin and fulfillment ratio has a strong improvement in our contribution margin by 3.6 percentage points to 28.8%. Even more notably, we improved our contribution margin by more than 10 percentage points compared to 2019. Such an improvement in unit economics in our extremely competitive retail market, [ extraordinary ] and showcase the competitive advantages we have built with our Westwing Collection and efficient fulfillment platform. Moving down the P&L, our marketing ratio has improved by 0.7 percentage points to 9.4%. The reduction in marketing expenses is mainly driven by a more efficient setup which resulted in personnel and OpEx cost savings. We continue to optimize our marketing efficiency while setting up Westwing for sustainable future growth. In addition, the G&A ratio improved substantially by 1.8 percentage points versus previous year to 19.7 percentage points. As already mentioned, we have now completed our cost-saving measures and reduced costs in line with our expectations. Going forward, we will reduce the G&A ratio further based on the proven scalability of our business model and a strong cost discipline. This brings us bottom line to the third profitable quarter in a row and a strongly improved adjusted EBITDA margin of 4.4% in Q2 2023, an improvement by 6.6 percentage points versus the previous year. Looking at the overall results for the first half of 2023, we see that they are in line with the year-over-year development of the Q2 results. Although here, we improved all P&L lines substantially and closed the first half of 2023 with an adjusted EBITDA margin of 4.6%, which is an increase by 6.5 percentage points year-over-year. Let's take a closer look at profitability. In absolute numbers, we generated EUR 4 million of adjusted EBITDA in the second quarter of 2023, which is an increase by EUR 7 million compared to last year. The first half of 2023 amounts to EUR 10 million in adjusted EBITDA versus a EUR 14 million improvement year-over-year. In terms of segments, DACH delivered a very profitable second quarter with an adjusted EBITDA margin of 7.8%, while the International segment crossed an important milestone and achieved a breakeven result at 0.4% adjusted EBITDA margin. Let's move on to our cash development, starting with our net working capital position. At the end of Q2 2023, our net working capital was once again negative at minus EUR 5 million and EUR 29 million lower than at the same time last year. This tremendous reduction in net working capital was mainly driven through a continued reduction of overstock. Overall, we managed to reduce inventory by EUR 23 million compared to Q2 2022 without hurting our P&L significantly through aggressive discounting. In addition, we continue to work with the trade financing solution, which had an impact of EUR 7 million in Q2 2023. At this point, we are reviewing the further utilization of trade financing in the coming quarters. Based on our strong cash position, we may decide to reduce or stop the utilization of trade financing for the time being. For the remainder of 2023, we expect net working capital to remain at healthy levels. However, for Q3 2023, we expect net working capital to increase due to typical seasonal effects, and the development will also depend on the utilization of trade financing going forward. Next is CapEx development. Overall, our CapEx investments and CapEx ratio decreased significantly compared to last year. The improvement in the CapEx ratio was mainly driven by the successful cost reduction on our tech organization as we capitalize on a significant part of tech development costs. In addition, we didn't have to take any major investments into our warehouses as we have secured sufficient warehouse capacity in the past years. The CapEx ratio of 2% in Q2 2023, once again highlights our CapEx-light business model, which enables a high degree of cash conversion of profits going forward. Based on the positive developments in our P&L, net working capital and CapEx, Q2 2023 was slightly free cash flow positive and improved strongly by EUR 13 million versus last year. For the first half of 2023, we generated a strongly positive free cash flow of EUR 10 million which is a significant improvement of EUR 40 million compared to last year. Based on this development, we were also able to maintain our strong cash balance. We ended the quarter with a healthy cash balance of EUR 76 million, which gives us the ability to continue to steer the company with a long-term perspective as the opportunities are massive. And now to the outlook for the remainder of 2023. The results for the first half of 2023 have been consistent with the projections we set forth. This indicates that our strategic planning and execution are on track even amidst the challenges posed by the current market environment. Our financial priorities for this year have been and still remain to regain profitability and enable a free -- positive free cash flow. We are very confident to achieve these goals on a full year basis in 2023. Looking ahead, we remain confident based on the progress we have made and the positive trajectory we are on. We, therefore, continue to expect a return to sustainable growth in the second half of 2023. Based on this, we also confirm our full year 2023 guidance for March and expect currently to achieve revenue and adjusted EBITDA in the upper half of the guidance. The guidance from March indicates revenues of EUR 390 million to EUR 440 million and a positive adjusted EBITDA of EUR 4 million to EUR 13 million. In terms of outlook, please keep in mind that the seasonally weak third quarter is expected to be less profitable than the last -- than the first half of 2023. With that, let me hand it over to Andreas for a quick summary and Q&A.

Thank you, Sebastian. As always, we are closing the update with a brief summary of our investment highlights before we move on to Q&A. The opportunity ahead of us is massive. The European Home & Living market has a size of EUR 130 billion and is still in the early stages of e-commerce, which provides exciting growth momentum based on dynamic online adoption for years to come. In addition, Westwing offers public investors a unique investment opportunity into the very attractive premium segment of this market. Customer loyalty is at the core of our business. We create superior loyalty base on our differentiating and inspirational core. As a result, we achieved best-in-class repeat order shares of over 80%. Our Westwing Collection perfectly leverages the loyalty to our love brand at about 10 percentage points margin upside, and our strategic target is to bring our Westwing Collection share to greater than 50% of GMV. As of Q2 2023, it was already at 46%. We have a strong cash profile and our strong balance sheet provides us with ample liquidity and strategic optionality to navigate through the current challenging market environment. And finally, based on this highly profitable consumer upfront strategy, our best-in-class contribution margins and the proven scalability of our business model, we have an attractive long-term profitability target of 10% to 15% adjusted EBITDA. Those were our investment highlights. Before we get to Q&A, let me thank our Interim CFO and Director, Corporate Finance, Max, for the support during the transition period and the ongoing smooth handover to Sebastian. With that, Sebastian and I are happy to take your questions.

So the first question comes from Volker Bosse from Baader Bank.

Volker Bosse, Baader bank. Can you hear me?

Yes, we can hear you.

Okay. Perfect. Sorry. Yes. First of all, congratulations to the great achieved earnings swing again, I can say, fortunately, same quarter after first quarter already. And welcome Sebastian to the new position, and all the best and a good start. So with that, I would like to start with the question. First of all, on your guidance regarding the second half, you said sustainable growth in the second half. What does it mean? Does it already include that you expect to return to positive sales growth in Q3, Q4? And does it also mean a positive EBITDA contribution in both quarters of the second half, so in Q3 and Q4? This would also lead me already then to the second question regarding the current trading in July. I mean if you are so confident in -- for second half, does it also mean that you saw back to sales growth in July already, basically? And third question would be on the gross margin, yes, very great achievement to see 190 basis point improvement year-over-year. Could you give some more granularity about the reasons, so the components of the gross margin improvement here, please? And yes, last but not least, my question on the inflationary cost pressure, which you saw or you're basically seeing, but my question would be on how do you already see the cost pressure evolving? So would you say that you have seen already the peak in material costs and freight costs? Do you see any easing on the cost front already? Or yes, just your most recent observations on that would be helpful.

Thanks a lot, Volker, for your questions. Thank you once again for congratulating. So the first 2 questions, basically, on growth, July outlook for the rest of the year, I will be answering and then the second 2 questions on gross margin and inflationary cost development, Sebastian will be taking that one. So on growth and the outlook, so far, Q3 growth is in line with our expectations and in line with our guidance. But growth rates are still quite volatile, and it's too early to provide a good indication on Q3 2023 growth yet. We expect to report positive growth in the second half of 2023, for 2 main reasons: the baseline of 2022 is a bit weaker in the second half and we expect to see a growing positive impact of our strategic initiatives that we mentioned beforehand. This is obviously based on the overall assumption that we will not see further deterioration of consumer sentiment. And we also believe that this return to growth will be profitable in general. I can't tell you whether -- we have no indication whether both quarters will be profitable. But overall, H2, that's our assumption will be profitable. So the return to growth will be exactly that profitable. Let me mention besides the uncertain market environment, we've been implementing a new strategy, and we do not yet have full visibility with regards to top line impact. And then, of course, as always, for the second half of the year, single events such as Black Friday, play a huge role in top line. So it really depends on just a few days to a certain extent. And that's why we are a bit cautious with regards to a proper forecast in that. Hope that answered it. And now over to Sebastian for questions on gross margin and inflationary cost development.

All right. Volker, thanks for your question. With regard to the gross margin improvement, it was improvement by 1.9 percent points year-over-year. There are different effects. First of all, we were able to compensate for overstock and inflationary effects with the higher Westwing Collection share. And we also see now the full impact of last year's price increases. So these also range to compensate for inflation. And we also expect further share gains of our Westwing Collection share and our shops. So we are confident to be able to even further improve gross margin. And yes...

And the inflationary cost development?

Yes, I think, with regard to cost development, I think we have reached a peak, but it depends on the different costs that you are looking at. So overall, I think now it's stabilized a lot, but some costs are increasing still. Some others are declining. But overall, it's much easier for us to negotiate on these items.

May I come up with a follow-up because you did mention it in the press release, it's regarding your brick-and-mortar store in Hamburg, which you opened recently. Could you provide initial feedback on consumers' reaction? And how do you look at, as you said, it's a pilot store and maybe we roll out the brick-and-mortar concept. So what are your -- what is your thinking in that regard currently?

Yes. Thanks, Volker, for that question. So on the Hamburg store, we are very pleased actually with the overall performance and the initial feedback we received from customers on the store. We are currently fine tuning and optimizing our commercial model for the store to meet the commercial targets we set ourselves and that takes a while. I mean, we opened a store in November, and it is simply -- it's something that you have to learn if you're an e-commerce company and you want to provide an offline customer experience. So but we are actually really happy with the development so far. With regards to kind of where does this lead us to, we wouldn't rule out the opening of 1 or 2 more stores over the next quarters, but it's unlikely that, that will happen in 2023.

So the next question comes from Christian Salis from Hauck Aufhäuser Investment Banking.

Yes. Good morning, everyone. Also congrats from my side. I would like to add a couple of questions, one by one, please. So the first one is on the top line development again. I mean, Volker already asked about it, but I wanted to focus a little bit more on the active customer numbers, which was quite a surprise for me. And good to see that the number of active customers or the decline in the number of active customers now flow to minus 1% quarter-over-quarter, which is basically the slowest decline we've seen for, I think, probably 2 years now. So there seems to be a bottoming out effect following the normalization period, I would call it. So my question would be, yes, would you confirm that this is -- this could be the bottom in terms of active customers? And i.e., have you seen further sequential improvement or even slight growth in this number quarter-over-quarter now in July? And then also related to this, as Zalando last week mentioned an improvement in terms of consumer climate. And they also expect to return to growth in the second half, so in line with your H2 guidance basically. So could you confirm that statement? Or what is really driving this sequential improvement in your opinion? That would be the first question.

Okay. So thanks, Christian, for your question. Sebastian will answer the part on active customers. And I, in the end, will answer to your question regarding Zalando's outlook and whether that's in line with ours.

Okay. Thanks, Christian, and nice to talk to you. With regard to the improvement of the active customer development, yes, I think you're right that it's kind of normalization after the COVID impact. And if we look at active customers, we also have to keep in mind that's our last 12 months number. So Q2 2023 -- 2022 was still impacted by COVID. And I think this effect now becomes weaker and weaker. And yes, overall, we are quite happy with this. And we are quite confident that this is the bottom and that we will be able to improve the number of active customers going forward.

And then regarding the second half of your question, Christian, whether the consumer sentiment is improving, to be honest, if it is, then it's a very -- then it would be a very recent development, to be honest. We don't see it in that way. We believe our guidance that we have for the second half of the year and why we are generally rather confident to return to sustainable growth is more based on things like that the H2 baseline is a bit weaker from last year, so it's easier to actually grow year-over-year. It's not so much driven by our belief in increasing or improving consumer sentiment.

Okay. And then the second question would be on -- again, on top line growth but the International business, which returned to growth in the second quarter. So could you maybe provide a little bit more color what has been driving that and which countries and which initiatives have been driving this improvement?

Yes. Thanks again, Sebastian will be answering that question.

Sure. So overall, as I already mentioned, the better growth of the International segment, we can't put it down to one specific reason. So International follows the same strategy as our DACH region, but we are rolling out the OneWestwing initiative earlier in some countries. We are live in Netherlands. We see good progress there. So business is one very positive aspect and we are rolling out in DACH later. So this might be one reason why we see a better growth in the International segment. Yet, but there are also baseline effect from previous year when you look at the different markets. So that will be my answer to that.

Okay. So that's interesting. Could you maybe provide a little bit or maybe some figures or indications on operating KPIs of this OneWestwing initiative? Was -- yes, which KPIs have improved following these launches in Netherlands, for example?

[indiscernible] So we don't report specific numbers OneWestwing initiatives. There's a variety of parts of this initiative that have different effects, and there's also several KPIs that we look at. But generally, what our belief is, and that is confirmed is that it's easier for customers to navigate, and we see increased traffic between our business models. That's actually the main thing that we, as an initial KPI, look at. So between our shop and our club there, we see increased traffic because it's easier to navigate between the 2. Now you just need to click on a button and you're on the other side. Beforehand, it was on 2 different domains. And now what we're doing with the app rollout is, for example, all of those that have club app installed, they will now, also with the rollout, have the whole shop at their fingertips, which was not the case beforehand because for that, you needed to have both apps installed. So these are the things that we're looking at. Overall, we are very happy with the KPIs, but we don't report on specific ones individually.

Sure. Okay. And then last question on profitability. So regarding your cost savings measures, what do you think have been the 2 key drivers of the strong profitability improvement in terms of G&A and marketing and in Q2? And then again, on the price increases you mentioned, could you maybe remind us when and to which extent you have rate price over the last 12 months?

The first one was just some background on how we did the -- or what's the main driver in the cost reduction, right?

Yes. In terms of operating costs, yes.

Operating costs. And the second one was on pricing. How we achieved or why we are able to achieve price increases? Is that right?

No. Just a quick reminder and when you exactly implemented the first price increases and by how much in percent and what has been the trajectory since then? Just to calculate maybe a little bit of a gross margin expectation for the second half, whether we should still expect a positive impact from these price increases in the coming quarters or not?

Yes. Okay. Thanks, Christian, for those 2 questions. So the cost savings that we did across G&A, marketing and CapEx, those were the EUR 30 million that we actually announced in -- I think it was at the beginning of Q3 of last year, and we've completed those EUR 30 million. When you look at G&A and marketing, the main driver for that is actually a decrease in FTEs. So that's the strongest driver on that side. And with regards to the price increases, overall, the price increases amount to about 10%, something like that, and in 2, 3 steps, actually. So obviously, what you then test is the elasticity, et cetera, et cetera. But overall, the price increases amounted to roughly 10%, and they were mostly put in place in the second half of last year. All right. Thanks a lot. Thanks for the questions. With that, we are closing today's earnings call. Thank you for joining, and I wish you a great remaining week. Goodbye.