Nelly Group AB (publ)

Welcome to Nelly Group First Quarter Report 2025. 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 quarter one presentation for Nelly Group. My name is Helena Kalinder Östlund and I am the CEO of Nelly Group and as usual I will be hosting today's call together with Niklas Lindblom, our CFO for Nelly Group. Today's presentation will be divided into four parts. We will start with a short video introducing the Nelly business. I will then provide some commentary on the first quarter. I will then hand over to Niklas who will provide us with a financial summary. And at the end of the call, we will once again be answering some of your questions. Now, let me remind you that you can, of course, send us questions throughout the entire presentation. However, we would like to ask you, if possible, to send them to us as early as possible. It just gives us the opportunity to answer more of your questions if we receive them during the earlier part of the presentation. So if at all possible, please do send them to us as soon as you can. Okay, so let's go ahead and start with a short video introducing the Nelly business. Okay, let's move on to take a closer look at the first quarter of 2025. So as we close the first quarter of 2025, we can conclude that we delivered a strong first quarter this year. And I will be going into a little bit more detail around the underlying KPIs in just a moment. And I will also then provide some comments just on the rest of the year and some of the initiatives we will be focusing on, which will, of course, be designed to continue to drive growth and also continue to improve efficiency. So I will give you a little bit more of an insight into that as well. But first, let's start by looking more closely at the first quarter. So historically, the first quarter has always been the most challenging quarter for Nelly. We, of course, have the natural post-Christmas slump that happens. And also, we tend to drive more sales through discounts in the early part of the quarter during January when we have our end of season sale, which typically impacts our margins. And just naturally during the first quarter, our customers tend to have fewer natural reasons to shop for fashion. So all these things taken together historically have meant that the first quarter typically has been the most challenging for us. It is pleasing, therefore, that during the first quarter of 2025, we delivered net revenue growth of 11.5%, and net revenue landed on 247.8 million crowns. We achieved an operating margin of 8%, which can be compared to the same quarter last year, where the operating margin was 0.6%, so a significant improvement on last year. And this resulted in an operating profit of 19.9 million crowns. So a strong first quarter. And with this now, we actually have generated eight profitable quarters in a row and four with net revenue growth. So a pleasing result. Now let's look at some of the underlying KPIs for this performance during the first quarter. Let's start with gross margin. So we saw a continued gross margin improvement year on year. If we make the comparison, we landed on 51.6% this year as compared to 49.1% last year. So this year on year improvement is driven by several factors. Firstly, we continue to see a very positive trend in our own brand share, and I will go into a little bit more detail on that in just a moment. And also, we saw during the first quarter this year that actually the stronger assortment that we now have led to both higher sell-through and lower returns, and that in turn meant that we had to clear less stock through our outlet than historically was the case. And for the same reason, we also saw that we actually were able to have a better offer during our end of season sale. So a stronger assortment even in the end of season sale meant that we could work with more differentiated discounts across the offering and also actually drive our end of season sale alongside releasing a number of very strong new products during the period. Taken together, this meant that we generated a stronger gross margin this year, which is of course very positive. And as I mentioned just now, we have continued to see our own brand share increase. And during the first quarter, our own brand share was 50.1% as compared to 39.9% last year. So really a very strong performance in our own brand assortment. And we saw that we really have established a very strong position in several categories. Some of the ones worth mentioning, I would say jeans, tops and also blouses. We have seen a very positive response from our customers to our Nelly brand assortment. Of course, our physical flagship store in Stockholm is also an important forum for us to showcase our Nelly brand assortment. And here, nearly 85% of the sales during the first quarter came from our own brands. One important factor that's also worth highlighting here is that we achieved the overall results in part because we actually managed to improve availability on top sellers during the first quarter. So this year we managed to secure stock depth by front-loading deliveries early on in the season. We saw during the first quarter 2024 that we actually were out of stock on a number of our best sellers for periods of time. And we really took that as a learning and changed the way we structured our deliveries this year to make sure we could improve availability. So that's also an important contributing factor to the overall results in the first quarter. Now moving on to our return rates. Here we also continue to see a very positive development and the return rate for the first quarter landed on 24.8% as compared to 33.4% last year. And this, once again, really is testament to our strong assortment. We have been working, as you know, for some time on our assortment and we really now see that customers love the products they buy and want to keep them, which is very positive. And also, in addition to the strong assortment, it is the result of our continued implementation of a truly cross-functional strategy. So this return rate strategy touches everything from our category mix, the design choices we make, the choice of fabric we decide to work with, what information we provide to our customers, as well as a number of other operational processes and also, of course, IT systems enablement. So it truly is a cross-functional strategy that has resulted in this very low return rates. Also, we saw during the first quarter that our physical store positively impacted our return rates. There, we have a return rate below 10%. So of course, as the store grows in sales, it has a bigger impact on the overall return rate as well. So once again, several key levers that have enabled us to really get rid of a lot of the unnecessary returns, as we say, and result in this strong return rate. So in addition to the very strong assortment that has generated many positive results, we also saw that we really managed to drive very efficient and effective marketing during the first quarter. Marketing costs as a proportion of net revenue rose slightly to 9.9% as compared to 9.6% in the same quarter last year. However, we did make very good use of this additional cost. So total traffic grew by 13.4%. And we also saw that the number of orders increased versus last year. So we managed to make good use of that extra traffic. We also saw a positive development in new customer recruitment. And for the second quarter in a row, we saw that the number of active customers on a rolling 12 months basis grew. So we really see a very healthy development in our customer base. Now, the marketing activity that we drove during the first quarter was, of course, as usual, both organic and paid. And we saw positive signs on both parts. In terms of our organic traffic, we actually saw a higher share of organic search being attributable to Nelly and also very positive results in our social channels and in particular TikTok, which we have been focusing on very intensively now for some time to really grow both our following and our reach. And in terms of paid marketing, we once again saw that profitability per order grew. So again, making very good use of that extra marketing spend. So going forward, there are two important focus areas that we will really be working on. That is to both increase conversion and basket size. So during the first quarter, we saw that with this very healthy increase in traffic, we managed to maintain more or less the same level of conversion. But of course, we want to continue to improve the customer experience to increase conversion. That's an important goal for us going forward. And also, while we see that the slightly smaller basket size that we've seen now for some time, it is really a sign of a healthy customer behavior, as it means that our customers are very carefully considering every purchase. But of course, going forward, we want to also make sure that we help our customers match, for example, a top to the pants that they're buying and thereby increasing the basket size. So going forward, we will be continuing to work on increasing both conversion and basket size. Now, the last area that I would like to comment on in a bit more detail for the first quarter of 2025 is our warehousing and distribution cost. So as a proportion of net revenue, our warehousing and distribution cost decreased versus last year to 12.2% for this quarter as compared to 14.6% last year. And this again is the result of various initiatives that we have driven in terms of the warehousing cost. We continue to drive various improvement initiatives there to constantly improve efficiency, which has really generated very positive results. And in terms of our distribution cost, we have been working for some time now on optimizing both our distribution network and also on actually optimizing the freight options and how we display those to customers. So again, both of those elements have resulted in this improvement in warehousing and distribution cost. And of course, last but not least, the lower return volumes that we are seeing are also positively contributing to the cost base in this area. So, of course, the fact that we have managed to maintain or manage our costs very carefully in this space is extra beneficial as we see net revenue growth. So if we turn our attention a little bit forward now from having looked at the first quarter for the remainder of the year, we have a number of initiatives that we really want to drive to continue to evolve the business in a positive direction. And we really see that there is much more opportunity for us to elevate the customer experience going forward. So firstly, we will, of course, continue to work with our Nelly brands. We've seen, as we were just looking at, a very positive development in our customers' response to our own Nelly brands. And we see much more potential there also in some of the categories I didn't mention before. So lots more potential we see there. Also, we launched a number of strong global brands during the first quarter of 2025. Some noteworthy ones are Puma, Scholl and One Teaspoon. And here we are working very intensively on strengthening and refining the whole external brand portfolio. So going forward for the rest of 2025 and of course beyond, we will continue to look at new brand launches and collaborations with various brands we know that our customers love. So really maintaining that magic mix we have of our own strong Nelly brands together with external brands that we know our customers really love. Also, one area we will continue to work on for the coming periods is our physical flagship store in Stockholm. We see that really it has gone from strength to strength and it performed very well during the first quarter. which really confirms that there is lots of demand in our target audience for engaging with us and our assortment in a physical setting and also enjoying the events that we've been running there. So we see more potential going forward in refining and evolving our physical store concept further as an important complement to our e-commerce business. Now, alongside these directly customer facing initiatives, there are also two areas that we will continue to work on intensively during the coming periods this year. The first one is that we are actually going to move the handling of our returns from a third party provider abroad that we've been using to our own warehouse in Borås. This really is for two main reasons. It will give us improved control over our returns handling, which is also part of our cross-functional return rate strategy. Also secondly, it will help us really work on lead times and improving lead times. This is especially important for highly seasonal products. For those, we typically have a shorter window to sell them and hence we want to get them back up on our digital shelves as quickly as we possibly can. In both of these areas, moving our returns handling to our own warehouse will really help. And the second area that will also be an important focus for us for much of the rest of 2025 is completing the remaining IT systems changes that we have previously communicated as part of a broader IT systems strategy that we have been implementing really throughout 2024 and into 2025. So lots more exciting work to do there. So to summarize, we have delivered a strong first quarter with both improved net revenue growth and improved profitability. We are seeing positive developments in both new customer recruitment and the number of active customers, which is really key for us going forward. And we have further initiatives planned for the remainder of 2025, which will continue to evolve the business in a positive direction, which is of course very exciting. Okay, so with that, I will hand over to Niklas, who will provide us with a financial summary.

Thank you Helena. So let's have a closer look at the financials for the quarter. Net revenue in the quarter amounted to 247.8 million compared to 222.2 million last year, showing a strong growth of 11.5% in the quarter. The main driver for net revenue growth A continued improvement in return rate, which decreased to 24.8% from 33.4%, but also a positive contribution from our flagship store. Currency effects affected the growth rate slightly negative, and net revenue in local currencies grew by 12.4%. Looking at seasonality trends we may also mention that the first quarter is generally a bit weaker than the second and fourth quarter as demonstrated in the graph. Commenting on the total number of orders in the Nordics, they increased by 8.1%, but at the same time we saw a decrease in average order value of 7.2%. This was driven by both lower average item value and lower average ordered items. Moving on to the next slide. Operating profit in the first quarter amounted to 19.9 million compared to 1.4 million last year. Operating margin increased to 8.0% compared to 0.6% last year. The stronger operating profit was driven by the improved gross profit, lower warehousing and distribution costs, which were driven by operational improvements. optimization of distribution and an improved return rate. Lower administration and other operating expenses also contributed to the improved operating profit. And as such, we see a solid improvement in both operating profit and operating margin in the first quarter and conclude a consistent financial performance over the past eight quarters. And if we move to the next slide, looking at the last 12 months, operating profit amounted to 111.6 million with an operating margin of 10%. And as demonstrated, we continue to increase operating profit and operating margin per ruling 12 months, showing a sustained positive trend. And now let's take a quick look at the income statement on the next slide. As mentioned earlier, net revenue amounted to 247.8 million compared to 222.2 million. Gross profit amounted to 127.8 million compared to 109.1 million with a gross margin of 51.6% compared to 49.1% last year. Warehousing and distribution costs amounted to 30.3 million compared to 32.4 million, improving both in absolute terms as well as relative to net revenue, with a ratio improved to 12.2% from 14.6% last year. This was mainly driven by operational improvements, optimization of distribution, and improved return rate, as mentioned. Marketing costs amounted to 24.4 million compared to 21.3 million with costs mainly related to paid advertising. Marketing costs relative to net revenue increased to 9.9% from 9.6% last year. Administration and other operating expenses amounted to 53.1 million compared to 54.1 million Improvement here mainly explained by lower personnel expenses and consultancy costs. As a share of net revenue, administration and other operating expenses amounted to 21.4% compared to 24.3% last year. And so we conclude the quarter with an operating profit of 19.9 million up from 1.4 million last year with an operating margin of 8.0% compared to 0.6%. Lastly, let's have a look at some additional financials on the next slide. Overall, a healthy balance sheet where we improve our equity ratio to 29.9% compared to 22.1% last year. Cash and cash equivalents amounted to 172.6 million per the 31st of March 2025. Operating cash flow amounted to negative 13.0 million compared to negative 4.6 last year. The lower cash flow from operating activities for the quarter were primarily contributable to a higher build-up of inventory ahead of the second quarter, partly offset by the improved operating profits. And as shown by the graph, the first quarter is generally a weaker quarter in terms of operating cash flow, we might mention. Cash flow from investing activities amounted to negative 3.5 million compared to negative 9.6 million last year. This was primarily attributable to continued IT investments. And looking at net cash flow, amounted to negative 24.2 million compared to negative 25.2 million last year. So even though the first quarter generally is a bit weaker in terms of cash flow due to inventory buildup ahead of Q2, we conclude a very strong first quarter, both with good net revenue growth of 11.5%, the solid operating margin of 8.0%. And with those final comments, I'd like to hand it back to you, Helena.

Thank you very much, Niklas. This concludes today's presentation, and we will shortly move on to answer your questions. But before we do so, I would just like to take this opportunity once again to really express my deepest gratitude to firstly, all of our customers, new and loyal, those who've been with Nelly for a long time, But also, of course, a big thank you to the entire Nelly team. It is really such a joy to work alongside colleagues who genuinely love and are passionate about our customer. So thank you to the Nelly team as well. Okay, then let's move on to the final part of today's call and answer your questions.

Yes, thank you all for joining our presentation this morning. Let's start with a question from Albin. Can you explain what is expected to reverse the negative trend in gross revenue, Helena?

Yes, absolutely. So as I also talked about in the presentation, we have some elements that are really very sort of promising and positive for us. So as I mentioned, we have seen a great development in new customer recruitment and also our number of active customers on a rolling 12-month basis. increased for the second, very important prerequisite for growth, of course, that we have a positive trend in our customer base and also are able to generate higher traffic. So, you know, I think that the prerequisites are there, but as we also talked about, Of course, we want to continue to improve and elevate the customer experience, which will help us improve and increase the conversion rates to make sure that not only are we getting more traffic, but we're also converting more of that traffic into sales. And also basket size is important for us. So we know that our customer doesn't make all her purchases with us at the moment. And so we want to get a bigger share of her purchases, thereby increasing basket size. So yeah, I think some very positive prerequisites already in place, more work to do. And yeah, I mean, the only way really to growth is to offer a great customer experience.

Thank you, Helena. We are moving. So that's all I can say really, that we will continue to work on it.

Thank you. We also received a question from Albin regarding what effects we expect from moving the return handling to Borås.

Yeah, again, we talked about this a little bit in the presentation as well. So there are really two important elements here. One is that we do understand our returns well already. But of course, if you handle your returns yourself, that enables you to have even more insights and more control. So that's an important reason why we're doing this. We really want to understand and manage this process or flow end to end. And secondly, we do have a number of categories that are more seasonal, where we have a shorter period of time to sell our stock before it becomes less relevant basically to the customer because of seasonality. So being able to actively work on lead times and optimize those lead times for the returns we do get is very important. So yeah, I think it just overall, it it will give us more insight and control, which is always a good thing.

Thank you, Helena. All right. We are moving on to the next question and I turn to you, Niklas, for this one. Inventory levels as a share of sales increases from 16.6% to 18.1%. Could you comment on current inventory levels and if you see an increased inventory risk?

Yes, thank you, Anna. So, yeah, we naturally see an inventory build up in the first quarter ahead of the second quarter. But inventory levels by the end of Q1 are also explained by strategic decisions to front load some purchases to avoid out of stocks on expected best sellers for the spring and summer season. And compared to the historical average for the past years, we also see that we maintain a healthy inventory level, both in terms of aging and seen as a share of net sales.

Thank you, Niklas. We have also received a few questions about how the lower dollar will affect Fineli.

Yes, of course. So some of our purchases are made in US dollar. So for that reason, we expect positive effects on our gross margin from that. We do not have any significant exposure to the US dollar on the sales side. So we mainly expect a positive effect from the weak dollar going forward.

Thank you. All right, we are moving on. The next question is from Axel. Is the level of warehousing and distribution costs a percentage of net revenue, something we should expect going forward also?

Yeah, so I think similar to the way we think about the return rates, we also in our warehousing and distribution costs, this is work that is continuously ongoing to all the time optimize, improve efficiency, see where we can improve our processes and the way we work. So again, we don't want to limit ourselves by setting a lowest level that we can possibly achieve, but rather just focus on actually working with it and making sure that it's just part of how we do things to constantly improve efficiency.

Thank you. Okay, it's time to wrap up this Q&A with one last question, or it's actually two, and those are from Fredrik Johansson. Great Q1 report. Should we expect share of own brand to continue... Excuse me. Should we expect share of own brand to continue increasing from the 50% of sales? And a second question. Is the opening of more stores at all an option going forward? Thank you.

yeah so let me start with the on-brand share question so we're of course very happy and excited and pleased that our customer is really loving our Nelly brand assortment we do however we want to grow of course the Nelly brands but or the Nelly brands rather but it is also very important to us to have that mix of our own brand assortment and our external brands we know that our customers expect and love coming to us because we have those external brands as well. And we work with them very closely. They truly are our partners in crime. So I think, yes, we want to grow the Nelly brands, but as a share of total sales, we want to maintain that magic mix of both our own brands and external brands, as I said. And then the second part of the question was about opening of more stores. So there, no decision has been made on any further stores beyond our Stockholm store. However, of course, we have been really pleased with the way that the store has performed in Stockholm and the way it's developed. And it has given us so many benefits in terms of meeting customers, talking to them, asking them questions, understanding more about our products and our customers. Yeah, we're definitely not saying no, but no decision has been made as of this point in time. Yeah, so I believe that was the last question. So, yeah, before we wrap up, we just also want to say thank you to Marcus, who didn't send us a question, but sent us a very lovely comment with lots of kind words. So thank you, Marcus. We always appreciate people rooting for us out there. OK, thank you very much. That concludes today's call. Thank you.

Thank you.