SIGNA Sports United N.V.
Q2 2022 Earnings Call Transcript

Published: 2 Jun 2022

[Operator:]

Good morning. And thank you for attending today's SIGNA Sports United Second Quarter 2022 Conference Call. My name is Austin and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions]. I would now like to turn the conference over to our host, Alima Levy. Alima, you may begin.

[Alima Levy:]

Good morning and thank you everyone for joining us. Today, we will review our first quarter fiscal year 2022 results. With me are Stephan Zoll, Chief Executive Officer, and Alex Johnstone, Chief Financial Officer. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including guidance for the pro forma consolidated fiscal year 2022, inclusive of the recently closed acquisitions of WiggleCRC, Midwest Sports and Tennis Express. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 20-F filing identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. Also, please note that, during this call, we will discuss certain non-IFRS financial measures as we review the company's performance, including adjusted EBITDA. These non-IFRS financial measures should not be considered replacements for and should be read together with the IFRS results. Please refer to the Investor Relations section of our website to obtain a copy of our investor presentation, which contains descriptions of our non-IFRS financial measures and reconciliations of our non-IFRS measures to the nearest comparable IFRS measure. This call is being recorded, and the webcast will be available for replay on our Investor Relations website. I would now like to turn the call over to Stephan.

[Stephan Zoll:]

Thanks, Alima. And good morning, everyone. For today's agenda, I'm happy to provide an overview of our second quarter fiscal year 2022 results and share the progress we have made towards our strategic priorities throughout the quarter. To start, I'm pleased to say that, despite the macroeconomic challenges the industry is currently facing, we have continued to make meaningful progress against our three pillar strategy and are continuously optimizing our platform for more and more efficiency over time. As you're well aware, the macroeconomic challenges present in today's market extend well beyond our industry. Our thoughts remain with everyone impacted by the continuing war in Ukraine, and we have been heartened by the outpouring of support and kind donations from across our organization. As we turn towards our own operating environment, numerous factors have contributed to our continued challenge since we spoke at the end of last quarter. As the geopolitical situation has worsened since mid-February and inflation has reached new highs across our core markets, the result has been a softening of consumer sentiment over the quarter. This effect is especially true across Europe where consumer sentiment indices are down to levels not seen in a very long time. However, despite the current headwinds in the market, we have observed demand in our categories to be well in excess of pre-COVID levels and supportive of our long-term thesis. We are convinced that favorable structural megatrends such as health and wellness and the shifts towards e-mobility and sustainability remain key growth drivers in the mid and long term. This trajectory is evidenced by the European e-bike market where certain geographies recorded sales growth of nearly 30% in 2021 despite the supply chain disruptions in the market. Across our bike and auto segment, we clearly see strong demand in the full bike category, with e-bike inventory in particular turning within days when being made available across our web shops. Turning to supply challenges, we did not see material improvement in supply imbalance in the second quarter yet. These disruptions were widespread and set across industries as evidenced by the recent all-time high in the global supply chain Pressure Index in January 2022, even surpassing the previous year in March 2020. When looking at our own inventory levels across key categories, inventories remain meaningfully depleted across the full bike category. However, signs of improvement in mechanical bike inbound emerged towards the end of the quarter. Our current expectation is that we will see supply constraints, especially in e-bikes, persist largely throughout fiscal year 2022 and ease in fiscal year 2023, allowing us to return to organic growth more reflective of the demand. In the meantime, and in face of these prolonged supply chain disruptions, we worked diligently throughout the quarter to drive sales of alternate categories as well as our own brand portfolio to offset inventory shortages in our higher AOV full bike and e-bike items. Next, I would like to touch on a few of our operations achievements as we made steady progress against our three pillars strategy. First off is our goal of driving market share organically in our core markets. In Q2, we were able to expand our connected retail footprint to an incremental 126 shops, enabling us to better serve our customers across the value chain. In addition, we successfully grew our market share in key geographies, such as the UK in bike and tennis, and took meaningful steps towards growing our US footprint with the hiring of an experienced leadership team to grow this key geography. Our own brand portfolio also continued to develop with multiple new lines and product launches, including the introduction of OUTFITTER OCEAN FABRICS, a sustainable apparel brand made from recycled plastic bottles. We are also pleased to share that our 3P logistics facilities serving DACH and Southern Europe went live, providing a state-of-the-art facility that would enable us to increase efficiency and expand reach while better serving our customers with fast and effective delivery. Moving to our second pillar of inorganic growth, our recent acquisitions enabled us to gain significant scale and start unlocking synergies. As a result, our active customer base increased substantially by 62% versus Q2 of last year. The cross selling of own brands across the group and the alignment of supplier term for the bike and tennis businesses are underway and will offer substantial benefits on a group level. As we look towards future inorganic growth, we continue to monitor the market as we believe current dislocations will create opportunity for us as an acquirer. We continue to believe M&A will play a key role in SSU’s future, both in broadening our reach and consolidating market share in key geographies, as well as exploring brand opportunities to deepen our own brand portfolio. Lastly, we were able to continue our momentum in developing our third strategic pillar of leveraging our assets to extend the complementary 3P business models. Throughout the quarter, we were able to hire top talent to oversee the launch of our retail media sales offering, and we've already delivered our first sponsored ad campaign with great outcomes to our brand partners. It is early days, but we’re excited by this proposition and see great opportunities to further support our brand partners with a margin accretive business model. Another emerging business we are very excited about is our marketplace platform. In Q2, we took an important step towards the introduction of our marketplace business with the onboarding of experienced hire and we remain on track to launch the MVP in Q4 of this fiscal year. In addition to our operational momentum, I'm pleased to announce that we have also released our first ESG report today. Over the past several years, we have steadily increased our commitment to sustainability across various initiatives, and we are very proud to have been certified as a climate neutral company for the third consecutive year. However, we recognize that we can do much more. As a company, SSU is committed to promoting fair play for our people and our planet by encouraging a sustainable and active lifestyle. We believe now is the time to take this commitment one step further and turn our vision into a clear plan of action. To that end, we have set ourselves five medium term goals – contain our carbon footprint, increase our assortment of sustainable products and materials to enable conscious buying, encourage recycling, increase diversity and promote employee development. We will share more details on our progress going forward. Before I turn over to Alex to touch on the financial performance, I would like to say that beyond the current macroeconomic factors affecting our business and industry in the short term, we are and remain confident in the industry’s mid and long-term growth opportunities and the mega trends underpinning sustainable consumer demand. Our clear strategic roadmap and the investments we're making in the near term will position SSU to emerge stronger and best suited to capture meaningful growth in the years to come. With that, I would like to thank you all for your time this morning and I will hand it over to Alex to walk you through the financial performance.

[Alex Johnstone:]

Thanks, Stephan. And good morning, everyone. Today, I'll walk you through our Q2 fiscal year 2022 results and offer some additional insights on the key factors affecting our financial performance. Let me remind you that Q2 fiscal year 2022 represents the first quarter of full contribution of our recently acquired businesses, Wiggle Chain Reaction and Tennis Express, which closed on December 14 and December 31, respectively. As you may have seen in our materials released this morning, Q2 fiscal year 2022 net revenue was €269 million, representing 48% increase year-over-year and H1 fiscal year 2022 was €481 million, an increase of 29%. This reported performance reflects the enhanced scale of operations and the benefits of our recent acquisitions. On a pro forma basis, our financial performance was impacted by challenging market dynamics on an industry and macro level. Well documented supply chain disruptions resulted in missed sales due to inventory shortage in higher priced [indiscernible] products, mainly full bikes and especially e-bikes and high end components. The geopolitical situation in Ukraine and the surge in inflation significantly affected consumer confidence. Additionally, Q2 fiscal year 2022 was competing against a strong lockdown driven spike in demand in Q2 fiscal year 2021. In Q2 of our fiscal year, [indiscernible] was the most affected by supply chain disruptions, while other businesses showed organic growth with tennis, for example, growing 33% a year-over-year on a pro forma basis. When looking at performance versus pre-COVID 2019, total net revenue experienced 36% organic growth on a pro forma basis with the bike business up 25%, reflecting increased demand across our categories and as a step function in online penetration. On the operating level, we took a meaningful step forward thanks to our recently closed transactions. As of Q2 and on a reported basis year-over-year, active customers grew 62%, 7.4 million, visits grew 28%, 79 million, and net orders grew 55% to 2.2 million. Net AOV declined 4% due to lower full bike contribution. These KPIs declined on a pro forma basis year-over-year due to supply constraints and lapping spikes due to COVID-driven lockdowns. I would like to highlight the active customers net orders and net AOV grew strongly versus pre-COVID, indicating SSU’s ability to effectively take advantage of the underlying megatrends with active customers increasing 35%, net orders 25%, and net AOV by 5% versus Q2 fiscal year 2019. Next, I'd like to discuss our performance further down the P&L. In Q2 2022, gross margins declined 292 basis points to 36.3% due to the elevated promotional activity required to drive categories and offset supply chain constraints. Our adjusted EBITDA for the quarter was negative €17 million as inflationary pressures are felt across cost lines. Personnel costs increased 299 basis points to 14.8% of net revenue due to a lower contribution from bike sales, but also due to the acceleration of key hires to support our strategic growth initiatives. Logistics expenses increased 160 basis points to 12.4%, again, in part due to the mix effect of selling less bikes, but also due to increases in carrier pricing. Looking forward, we expect to mitigate these inflationary pressures by passing on much of these increases in logistics and personnel expenses in the coming months through higher shipping thresholds to our customers. Continuing down the P&L, we remain focused on customer acquisition in Q2 and continue to utilize targeted investment to realize market share gains and capture the full extent of demand in the market despite the lack of full bike supply. Marketing efforts for the quarter represented 8% of net revenue for the period, an increase of 145 basis points versus the previous year. As a result of this investment, we saw net conversion increase by 49 basis points versus the prior year and by 37 basis points on a pro forma basis. Moving on to the balance sheet and cash flow, we ended the quarter with €69 million of cash and highly liquid investments. In Q2 fiscal year 2022, net cash from operating activities was negative €52 million and free cash flow was negative €62 million after factoring €10 million of capital expenditures primarily associated with the new 3PL logistics facility. Change in net working capital was negative €25 million. The swing was driven by a deliberate decision in Q4 fiscal year 2021 and in Q1 fiscal year 2022 to increase inventory in non-bike categories and mitigate against the risk of further supply shocks in Asia. We expect this trend to continue in the short term through rebuilt bike inventory as the imbalance situation improves. Once the inventory profile is fully normalized, we anticipate a one-time rebalancing benefit. Now, turning towards the outlook for the rest of the year, along with the fiscal year 2022 guidance that we announced on May 3, in short, the imbalance situation has taken longer than previously anticipated to begin to normalize, coupled with dampened consumer sentiment, driven by the geopolitical situation and renewed lockdowns in China. Taken together, these factors will weigh on demand in the near term, require more promotional activity and marketing spend to drive sales and are expected to have an adverse impact on fiscal year 2022 revenue and profitability. As such, the company anticipates net revenue in the range of €1.25 billion to €1.4 billion for the year and an adjusted EBITDA margin of negative 3% to 0% at current state. The company's undertaking various near-term measures, including performance management initiatives, the benefits of which will start to accrue in fiscal year 2023, along with the first wave of the WiggleCRC transaction synergies. We are confident in our objective to emerge from this period stronger. And as such, we continue to invest in on technology platform, logistics networks and core strategic initiatives. It is with this backdrop that the company entered into a working capital facility for up to €100 million with SIGNA Holdings, an affiliate of our largest shareholder, to ensure ample liquidity for the upcoming year. As announced on Tuesday, we successfully finalized the amendment to our revolving credit facility to take into account the current operating environment. The company continues to evaluate various sources of funding and is confident of securing additional liquidity to meet our long-term growth objectives. Whilst unclear on the timing of the normalization in supply chains and the macro environment, we remain convinced of the long-term opportunity and the company confirms its long-term financial targets. To conclude, in the current conditions, we're focused on navigating the short-term challenges and preparing for mid to long-term success by continuing to invest against our strategic priorities to drive long-term shareholder value. Thank you all very much. And with that, Stephan and I will be happy to take your questions.

[Operator:]

[Operator Instructions]. Our first question is from Xian Siew from BNP Paribas.

[Xian Siew:]

Maybe can you talk about new customers versus returning active customers who are about flattish quarter-on-quarter. Maybe just some breakdown of new versus returning and churn within that.

[Alex Johnstone:]

When we look at that breakout, so relative to – on a 12-month basis, so our last published split of returning versus new customers, it's slightly lower. So, I think it's about 50% returning customers, 50% new customers for the trailing 12 months, whereas for the full fiscal year, it was about 55% returning and 45% new customers.

[Xian Siew:]

On the bike, you talk about inventory shortages and if you have the availability, maybe that demand would be stronger. But are there any other kind of data points to kind of point to that? Do you guys offer pre orders, for example? Or indications of demand ahead of time? Or how do we think about some of the data points that kind of show that in action?

[Stephan Zoll:]

Obviously, we look into comparables, Google Trends, and the stats that you can see there. So if you type in the words like ebike or bike, you see how the trend on search traffic has evolved. For e-bike, it’s been very stable over the last months. So that's one indicator. Another indicator is that when we get inventory in, right, we got inventory in at the end of April, for example, some chunks of third-party bikes from Cube, we got some more e-bikes in and we then sell it very, very quickly. So, the Cube bikes that we got were sold within days. So that's another indicator for strong demand out there for full bikes and for e-bikes. Those are the two sources of data that we have for estimating the current demand versus the supply shortage that we still have.

[Xian Siew:]

If I can squeeze one more, I think before you had talked about getting back to organic growth in the back half of fiscal 2022. Is that still the case? Should we expect Q3 to be positive revenue growth on an organic basis or maybe not yet, given the supply chain and all these kind of consumer confidence issues?

[Stephan Zoll:]

So that really depends on how quickly we can refill our inventory, especially in bikes and e-bikes, in the bike category, right? We see that already – and tennis, for example, is positive, right? So in our other categories, we see positive organic growth. So, that's continuing, we believe. And the bike category, it really depends on how quickly we can replenish and how quickly we get, especially the e-bike and also some of our full bike assortment getting replenished. And then, as I said, it's selling off very well. But when that gets delivered to us in terms of inbound, that's the question that's out there when we can replenish our inventory.

[Operator:]

Our next question is with Randy Konik from Jefferies.

[Randy Konik:]

I just want to go back to thinking through the different demand types of indicators you're seeing. You talk about the sentiment, obviously, weaker because of the geopolitical issues that are going on. Can you talk a little bit deeper about how demand is perhaps the same or differently across the different regions or countries of Europe? Maybe give us a little more granularity there, please?

[Stephan Zoll:]

So, if you wish, take inflation as one of the drivers of consumer sentiment decrease. That has obviously started in the US and came to levels in the US that we now see in Europe as well. So, here Europe was following the US in terms of inflation rate increases and the consumer sentiment kind of downgrade from that. And then on top, obviously, in Europe, and that's across Europe, you would have the war on Ukraine, obviously, weighing in on it, too, as of the 24th of February, right, and then from then onwards. So those are the factors. And Europe, it is pretty evenly spread. You probably would have a little bit more in the UK in terms of demand coming down earlier because of earlier inflation rates hiking. But across Continental Europe, it's a pretty similar evolution, as we see it right now. If you look at the consumer confidence indices across Europe, you look at them from a global perspective, OECD consumer confidence index and so on, you see it's pretty similar. There's not an outlier in a positive or negative sense I've seen in the European countries at this point in time.

[Alex Johnstone:]

But maybe to answer that, when we think about the US versus Europe and the types of inflation, both territories are on the go, I think in the US, the consumer is in better shape, and it's more of a demand pull type of inflation, whereas in Europe it's very much cost push. And so, because of that, I would say that the – when we see it, the demand in US business, even though it's a much smaller piece of our business, remains robust and is growing nicely year-over-year. Again, some supply constraints in some categories in the US tennis business that's still growing nicely. Whereas in Europe, I think the consumer is more impacted by the rise in the way that the – in the type of inflation. And so, the sentiment and their approach to discretionary spending is slightly dampened. I'd say in the US that is not as evident.

[Randy Konik:]

When you look at your annual revenue outlook, the €1.25 billion to €1.4 billion, can you give us some perspective on what are the different parameters around the low end versus the high end, and kind of what – any risk would be to meeting the low end of that guide?

[Alex Johnstone:]

Randy, I think the risks are – obviously, the macro environment. So, a material worsening in inflation, in particular, in Europe or an escalation of the geopolitical situation, that would evidently have an impact. And that's really what we're trying to capture at the low end of the range, I think. And then, of course, it's the inbound situation. So, if there was another severe supply shock, which we don't currently envisage, we're starting to see materially better inbounding in the bio-bike category. E-bikes still, as Stephan alluded to in the prepared remarks, we don't anticipate will normalize until next year. So that's not a benefit that's factored in. So, right now, I think it really comes down to a worsening of the current expectations in terms of the macro environment.

[Randy Konik:]

It sounds like on the supply chain side, it doesn't foresee to get worse right here. It's kind of starting to stabilize. Is that kind of the key point?

[Stephan Zoll:]

At least in full bikes, take the exception of e-bikes where it has not started to stabilize. Yes, there's very early signs that that might happen, but it's too early to call it an improvement. On the full bike side, it has and there's no worsening of the horizon at this point in time. Yes.

[Randy Konik:]

My last question then, just to kind of follow up on that. What discrepancy is that in terms of ebike versus full bike in terms of the supply chain differentials? Is it components that are causing those differentials in supply chain timelines lengthening or not getting better for e-bikes, just give us a little more color there.

[Alex Johnstone:]

It’s chip, it's batteries, and it's slightly more components. So, the e-bike has more components and some of them are still missing to a degree. But those are the three main drivers – chips, batteries and some components. Like, for example, the brake set, the hydraulic brake sets that are on – especially on e-bikes all the time, those are missing to a degree. And again, batteries, 500 to 600 watts, and the chips.

[Operator:]

At this time, there are no further questions. [Operator Instructions]. There are no further questions. So, I would like to hand the conference back to the management team for any closing remarks.

[Stephan Zoll:]

Listen, thanks, everybody, for listening and follow-up. Very much looking forward to our next conference. And thanks and have a great day. Thank you.

[Operator:]

That concludes the SIGNA Sports United second quarter 2022 conference call. Thank you for your participation. You may now disconnect your lines.