Nelly Group AB (publ)

Welcome to Nelly Group Full Year Report 2024. Today I am pleased to present CEO Helena Carlander-Ostlund and CFO Nicholas Lingblom. After the presentation, there will be a question and answer session. Participants are able to ask questions in written form on the audio cast page. Now I will hand over to Helena Carlander-Ostlund, please go ahead.

Thank you very much and welcome to the fourth quarter results presentation for Nelly Group. My name is Helena Kalinder-Östlund and I'm the CEO of Nelly Group and I will be hosting today's call together with our CFO, Niklas Lindblom. Let's have a quick look at the agenda before we get into commenting on the fourth quarter as well as 2024 as a whole. But before we look at the agenda, I would also just like to remind you that you're very welcome to send in your questions at any point during today's presentation. Here's a brief look at what we will be covering in today's call. We will first start with a brief introduction to the Nelly business in the form of a video. I will then provide some comments on both the fourth quarter as well as 2024 as a whole. Then I will hand over to Niklas, who will provide us with a financial summary, and then we will conclude the presentation with your questions and answers. Okay, so let's begin by showing you a brief introduction to the Nelly business. So just to briefly recap, as you saw in the video, Nelly has been a staple in Nordic fashion for 20 years. In fact, we were founded in 2004, so this is our 21st year. We offer fashion for young women, primarily in the Nordics, and we also added menswear to our assortment in 2008. We are mainly an e-commerce business, but we do have one flagship store in Stockholm, which has now been open for a little more than a year. We have 900,000 active customers, 1.3 million followers on social media, and we pick, pack and ship 1.8 million orders per year. So let's have a look at the fourth quarter as well as 2024 as a whole. Very pleasingly, we can conclude that we have built a stable, healthy core as we now close 2024. This is, of course, very positive for us as it means that we have made a great deal of progress. And it also means that we have reached a significant point in our journey where we can enter a new phase of development for the business. And I will comment on both of these parts throughout today's presentation. Firstly, as I just mentioned, we are very pleased that we have built a stable, healthy core since we started our transformation a little more than two years ago. In 2024, and in particular in the fourth quarter, we once again saw net revenue growth. For quarter four, we saw net revenue growth of 5.5% and for the full year 2024, 3.2%. We also further improved our operating profits with an operating margin of 11.4% for the fourth quarter and 8.5% for 2024 as a whole. This means that Nelly has now delivered seven profitable quarters in a row and three quarters in a row with net revenue growth. And this is of course something we are very, very pleased about. Now let's have a look at some of the key performance indicators behind this performance. So we start with a gross margin where we have seen a continued positive development. So for the fourth quarter, our gross margin amounted to 53.3% as compared to 50.0% in the same quarter last year. And this is once again, driven primarily by two factors. We have continued to see tremendous growth in our own brand share. And I will come back to that shortly. And we have also continued to increase our full price share. So in quarter four, again, we were able to drive our sales with continued lower discounting activity. This of course means that we have a strong assortment that our customer likes and is willing to pay full price for, which is absolute core to a healthy, sustainable business. We also see this positive development for the full year 2024, where our gross margin amounted to 53.1% as compared to 47.9% for 2023. So, clear positive development. Now, as I just mentioned, one of the key drivers behind our gross margin improvement is the growth in our own brand share. So for the fourth quarter, our own brand share was 47.2% as compared to 36.3% in the same quarter last year. And during the fourth quarter, we further strengthened our position in several key categories, jeans, tops, and knits to name a few. And these are very central categories for us as they together form the basis for our customers' everyday wardrobe. We also continue to really showcase our own brands in our flagship store in Stockholm. And we continue to see a very positive response from our customers there as well. So we've had a very strong year in our store in Stockholm. And again, similar trend for the full year 2024, where our own brand share amounted to 44.2% as compared to 38.2% for 2023. It's also worth noting here, if you look at the graph, that historically we have had a lower on-brand share in the fourth quarter, which was however not the case this year. So once again, this is a sign of strength in terms of our on-brand assortment. And in addition to growing our on-brand share, the very positive response from our customers to our assortment is also reflected in the development in our return rates. So here again, we have seen a continued positive development. For the fourth quarter, our return rate was 27.9% as compared to 33.0% in the same quarter last year. And as we have mentioned before, this is the result of a truly cross-functional strategy. where we have really taken an approach that encompasses both the way we design our products, the way we provide product descriptions on our website to make sure that our customers can make well-informed decisions, and also, of course, the returns process in itself. So being able to work on all these factors in parallel and jointly has given us great benefits in terms of our return rates, and this does have a positive impact throughout the business. It positively impacts our sell-through. It lowers our costs. It, of course, is positive for the environment. And most importantly, it provides a much better customer experience. And for the full year, 2024, if we look at our return rate, it amounted to 29.9% compared to 35.8% for 2023. So a clear improvement year on year there as well. Now, in addition to improving our assortment and generating both a better gross margin a higher on-brand share and a lower return rate, we have also seen further efficiency improvements in our warehousing and distribution operations. So if we look at warehousing and distribution costs as a proportion of net revenue, for the fourth quarter, it amounted to 12.7% as compared to 15.1% in the same quarter last year. This is the result of several continuous improvement initiatives which we have driven throughout the year to both increase efficiency and also decrease freight costs in particular. Of course, our warehousing and distribution costs are also positively impacted by lower handled volumes, in particular lower return volumes, as previously mentioned. And this positive development is reflected for the full year 2024 as well, where our warehousing and distribution costs as a proportion of net revenue amounted to 13.1% compared to 16.1% for 2023. So as you can see, we have truly built a stable, healthy core from which we can now continue to develop the Nelly business. We are in many ways entering a new phase of our developments, but this doesn't mean that we have a completely new set of levers that we are working on. Some of the work that has started already will continue with full force going forward. And key here is, for example, our continued investment in profitable marketing, which we have spoken about before. And this, of course, becomes even more important going forward as we are really looking at developing and growing the Nelly business. So for the fourth quarter, our marketing costs as a proportion of net revenue amounted to 9.7% as compared to 8.6% in the same quarter last year. So as you can see, a very considered investment in marketing. And as a result of this investment, we have also seen improved profitability per order. So we have spent the extra marketing costs well. And we've also seen a growth in both traffic and orders. Now, of course, going forward, we absolutely have to make sure that we take good care of this additional traffic that we are generating. So we will very firmly be focused on increasing our conversion rates and also increasing average order value. So making sure that our customers check out with a bigger basket when they visit us. And if we zoom out and take a broader perspective than just marketing, entering this new phase of development is also very exciting because it enables us to really double down on elevating the customer experience even further. So what does that mean? Well, of course, we will continue to grow our own brands. As I previously mentioned, we have seen a very positive response from both existing and new customers to our own brands. And here, of course, we want to continue to build on the categories where we are already very strong. And there are a number of further categories where we see great potential for our own brands. We will also continue to work on unique collaborations with some of our external brands. Our external brand portfolio is, of course, a very important part of our strategy as well to complement our own brands. And as you can see from some of the images here, these are some of the unique collaborations that we delivered during 2024. And we really look forward to delivering more of these unique collaborations during 2025. We will also be launching a number of new brands that we believe will really continue to further elevate our brand portfolio. And they are brands that we know our customers love and really want to see at Nelly as well. So this is very exciting for us during the coming year as well. And of course, we will continue to refine and develop our flagship store in Stockholm and continue also to use it as a great eventing space for our customers where they can come and see our own brands, but also join various events that we often host together with our external brand partners. So we delivered some great customer experiences in this space during 2024, and we're really looking forward to doing the same and doubling down on this in 2025. So to recap, since we started our transformation journey in the autumn of 2022, we really have come a long way and built a stable, healthy core. And we really do. that we are now entering a new phase of development in many ways where we can focus even more wholeheartedly on elevating the customer experience. And of course, also continuing to simplify a number of internal processes, not least some of the IT systems changes that remain to be delivered in 2025. So with that, I will hand over to Niklas to provide us with a financial summary.

Thank you, Elena. So let me walk you through the financials in some more detail. Net revenue in the fourth quarter amounted to 318.4 million compared to 301.6 million last year showing a growth of 5.5 percent. The main driver for net revenue growth was a strong improvement in return rate but also a positive contribution from our flagship store Currency effects affected the growth rate of the quarter slightly negative, and net revenue in local currencies grew by 5.7%. The total number of orders in Nordics increased by 3.3%, but at the same time, we saw a decrease in average order value of 5.8%, which was driven by both lower average item value and lower average ordered items. And then let's look some more on the next slide. Fourth quarter is showing a continued improvement in our operating margin with 11.4% compared to 8% comparable quarter last year. Operating profit amounted to 36.2 million compared to 24 million last year. The strong operating profit was driven by the improved gross profit and lower warehousing and distribution costs, which were driven by operational improvements and lower return rates. And for the full year, we conclude a solid financial performance finale with an operating profit amounting to 93.1 million, resulting in an operating margin of 8.5%. And with that, let's give some more detail on the income statement. As mentioned, the net revenue amounted to 318.4 million compared to 301.6 million. Gross profit amounted to 169.7 million compared to 150.9 million. Also showing a good improvement in gross margin to 53.3% compared to 50% last year. Warehousing and distribution costs amounted to 40.1 million. sorry 40.5 million compared to 45.6 million improving both in absolute terms as well as relative to net revenue with the ratio improved to 12.7 percent from 15.1 percent last year and this was mainly driven by operational improvements and lower volumes marketing costs amounted to 31 million compared to 26 million Marketing costs relative to net revenue increased to 9.7% from 8.6% last year. And the increase was mainly driven by higher spend on performance marketing. Administration and other operating expenses amounted to 61.9 million compared to 55.3 million last year. Increase was mainly due to IT related costs. Depreciation also increased due to our newly implemented e-commerce platform. Admin and other operating expenses relative to net revenue amounted to 19.4% compared to 18.3% last year. And so overall, total operational expenses as a share of net revenue improved to 41.9% from 42.1%. And this showcases Nelly Group's continued focus on cost control. and let's move on so we end the quarter with a solid cash position of 196.9 million with no short-term credit utilized we we also finalized a new bank and credit agreement in the quarter increasing our short-term credit line to 60 million from 20 million none which were utilized in the quarter And we would also like to note that Nelly has no interest-bearing debt apart from government tax credits. And so cash flow from operations amounted to 71.8 million compared to 50.4 million last year. The improved cash flow from operations is mainly explained by the stronger operating profit. Investments in non-current assets amounted to 2.5 million compared to 11 million last year. And these were related to IT projects mainly. Cash flow from financing activities amounted to negative 32.8 million compared to negative 7.8 million. Where the lower cash flow was mainly attributable to dividend of 24.9 million that was distributed to shareholders in the quarter. And net cash flow finally amounted to 36.5 million compared to 31.6 million last year. And looking at the equity ratio, we see an improvement to 27.3% compared to 22.3% last year. And so to conclude, net revenue grew by 5.5% in the fourth quarter, while increasing our operating margin to 11.4%. Last 12 months, the full year are now showing a solid operating profit of 93.1 million and an operating margin of 8.5%. And so with that, I would like to hand back to you, Helena.

Thank you very much, Niklas. So this is the end of the formal presentation today. And before we move on to answer some of your questions, I would just like to take this opportunity to once again sincerely thank our wonderful customers, both our existing customers who have been loyal to us for a long time, as well as, of course, all the new customers we have had the privilege of welcoming during 2024. A big thank you to our customers and of course, also a thank you to the entire Nelly team who have made this journey so far possible. I'm really looking forward to continuing to develop the Nelly business during 2025. That is the end of the presentation. Let's move on to answer some of your questions.

Thank you Helena and thank you for your submitted questions. Let's start this Q&A session with answering a first one. This one is from Albin Eriksson. Do you perceive that the consumer has become stronger or should we expect further internal improvements for continued growth going forward? And can higher marketing costs as a percentage of sales be expected going forward as a result of better traction through your new IT systems to drive further growth? Helena? Yes, thank you.

So I think we can definitely conclude that the consumer has become stronger or rather we have a different kind of customer now compared to when we started this transformation journey. We have a much more considered customer who's actively choosing our assortment and carefully selecting what to buy rather than being highly driven by discounted sales. So I think we can conclude that we have a stronger customer. And of course, there is also, I think, an optimistic outlook in the market. So we can hopefully look forward to to even more strong customer interest going forward. However, I would say that, of course, we will continue to drive internal improvements as well. We have several areas where we still see much more potential to improve, and that includes all the elements we've worked on already, including our assortment, but also some IT improvements that we're still delivering this year. I would say that we can both look forward hopefully to sort of stronger markets as well as benefiting from the internal improvements that we have still on the plan. And in terms of higher marketing costs, I mean, as we also mentioned in the presentation, investing in profitable marketing is an extremely central and important part of our plan going forward. And I think the key there for us is to continue to really invest in the right places and in the right way and making sure that every marketing crown we spend is well spent. So, yeah, definitely a focus for us going forward as well.

Thank you very much. The next question is from Daniel, and it is also for you, Helena. With ongoing IT investments aimed at enhancing customer experience, what specific improvements should customers expect to see, and how will these investments drive operational efficiency?

Yeah, so I would say that in some areas the customer has already seen a benefit. One example would be the returns process where we implemented a new returns platform, which has streamlined the process for the customer and made it extremely easy to return items if they ended up not being quite the right purchase. And we also have more opportunity there as well. As we have previously shared, we implemented a new e-commerce platform last year, which gives us completely different possibilities going forward to how we display the products, what sort of information we provide to customers so that they can make really informed decisions when they decide what to buy. So I think overall improvements in the whole customer experience, really, which partly have been realized already, but also many that are yet to come. Thank you.

We are moving on with a question from Carl. How much in MillionSEC did the problems with deliveries in Q4 affect the result? And do you expect any effect in Q1, Niklas?

Yes, thank you Anna. So we assess that the effects from operational difficulties in the end of November had an immaterial effect on our financials. However, in the sense that it affected the customer experience, we always take this very seriously and have taken proactive measures to rebuild customer confidence for those affected the most.

Thank you, Niklas. We are moving on with a question from Rowan Hage, and it's for you, Helena. Regarding your IT improvements, are you looking into how to implement AI, for example, warehouse management orders, returns, or customer service segments on the website for lower costs and higher profitability going forward? If so, can you please share some light on that matter?

So, I mean, we, of course, are always looking at various possibilities, including AI. And we already use AI in some areas of the business as well. For example, certain parts of translation, we already use AI tools. And we will continue to evaluate. I think what's important here is to make sure that you don't implement AI for AI's sake. It needs to... really fit into the process that you're trying to improve and sort of it has to be clear why we're doing it. But of course, with all the improvements that are rapidly happening in this space, that is always a consideration for us as well. And I think there are several areas where we could definitely benefit from looking at AI tools, but it has to always be of benefit to the customer. That's sort of the way we measure whether we should do it or not.

Thank you, Helena. The next question is for you, Niklas. Can you please outline the main drivers in the Q4 gross margin bridge compared to Q4 last year?

Yes, of course. So the main positive drivers of the improved gross margin was higher footprint share, or in other terms, less campaign driven revenue, as well as a higher share of own brands. And in addition, we also saw a small negative impact in gross margin from currency effects in the quarter. Thank you, Niklas.

All right. We are now wrapping this Q&A up with a last question. And this one comes from Johan. Given the current volatile market condition and competitive pressures in the fashion retail sector, what are the biggest challenges you foresee and how is Nelly Group positioning itself to navigate these headwinds?

I mean, I think in our industry and in our business, the biggest challenge is always to remain highly relevant to our target group. And, you know, the customer or the consumer rather has many choices of where to shop. So we have to make sure that we are relevant and attractive and are a natural part of our sort of target audience's life. And I think that will continue to be the biggest challenge going forward as well. We have seen a pretty tough market in the last year and we have performed well in that market. So I feel like we have over the last two and a bit years really positioned ourselves to, you know, weather any storm really. And we will continue to, as I said before, work on our own assortment. sort of work with our external brands to deepen our relationships, find new ways of creating interesting collaborations. We have some new brands on the horizon. So I feel like with sort of relevance and attractiveness for our customers, our guiding star will be well positioned for the coming year. Great. Thank you very much, Anna. That was our last question. And so we will wrap up today's call. Thank you very much for joining. And we will talk to you again soon. Thank you very much.

Thank you.