SIGNA Sports United N.V. (NYSE:SSU) Q3 2022 Earnings Conference Call August 16, 2022 8:30 AM ET
Company Participants
Alima Levy – Head of Investor Relations
Stephan Zoll – Chief Executive Officer
Alex Johnstone – Chief Financial Officer
Conference Call Participants
Xian Siew – BNP Paribas
Operator
Hello, and welcome to the SIGNA Sports United Third Quarter Fiscal 2022 Financial Results Call. My name is Alex and I’ll be coordinating the call today [Operator Instructions].
I will now hand over to your host Alima Levy, Head of Investor Relations. Alima, please go ahead.
Alima Levy
Good morning, and thank you everyone for joining us. Today, we will review our third 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 Wiggle CRC, 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 20F filings 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 replacement for and should be read together with the IFRS results. Please refer to the Investor Relations section of our Web site 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 Web site.
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 third quarter fiscal year 2022 results and share the progress we’ve made towards our strategic priorities throughout the quarter. Before we start, I would like to thank all of our employees across the organization for the continuous support and kind donations as our thoughts remain with everyone impacted by the crisis in Ukraine. As we turn towards our operating environment, you’re well aware of the macroeconomic challenges present in today’s market and extending well beyond the whole industry. Numerous factors have contributed to continued challenge since we last spoke at the end of our second quarter.
As supply constraints were starting to somewhat ease on the lower end of our range, they remained on the higher end of our range with continued inbound shortage, especially [ebags] inventory affecting growth potential. In addition, consumer sentiment was strongly hit by heightened inflationary pressures and the worsening geopolitical situation, especially in our core markets in Europe, materially impacting discretionary spending. In the face of these prolonged macroeconomic challenges, the company adapted its operations with a focused approach to growth, an emphasis on the existing customer base, as well as enhanced cost discipline, while prioritizing projects around our three pillar strategy to accelerate competitive advantages and come out more agile and stronger position from the current environment. Indeed, despite these continued headwinds, SSU has consistently gained market share organically and scaled inorganically in Q3 2022. When available, [ebags] was still in high demand and turning within days.
Let me give you some more examples of this quarter’s achievements on the operational side. We continued localizing inventory to serve our customers faster and more efficiently with our new Hockenheim state-of-the-art logistics facility serving DACH and Southern European customers going into full execution after most target product lines and SKUs successfully and smoothly transferred to the warehouse. Our US tennis business concluded successful partnership to expand its reach with the ITA and the PTR and will have on site presence at the US Open this year, bringing the first pro shop ever to over 800,000 US Open visitors and Tencent. I’m also pleased to share that two of our renowned bike owned brands Vitus and Nukeproof won multiple awards such as the MBUK, BikeRadar 2022 Bike of the Year Award, the Road CC Editor’s Choice Award and the Cycling Weekly Editor’s Choice Award as a testimony to the superior quality and customer centric approach of our in house by brand.
Moving to our second pillar of inorganic growth. We continued gaining significant scale and unlocking synergies thanks to our recent acquisitions. As a result, our active customer base substantially increased by 42% versus Q3 of last year. The cross selling of owned brands across the group, integration of IT platforms and alignment of procurement term for the bike and tennis businesses are underway, and will offer material benefits on a group level starting to unfold next fiscal year. As we look towards future inorganic growth, we continue to monitor the market in a disciplined way as we believe current dislocations will create opportunities for SSU as a natural consolidator. We continue to believe M&A will play a key role in the company’s future, both in broadening our reach and gaining market share in key geographies, as well as further developing our own brand portfolio. Lastly, we were able to continue our momentum and leveraging our assets to extend it to complementary 3P business models as for our third strategic pillar. Throughout the quarter, we remain focused on accelerating the retail media sales activity and delivering successful sponsored ad campaigns with great outcomes for our brand partners. The operational and financial KPIs we have seen with this business are very promising and we look forward to expanding campaigns to further brand partners across more SSU online shops in the near future. Additionally, we continue developing our marketplace functionality that we expect to come online in fiscal year 2023 and saw additional connected retail momentum as our partner network grew by more than 50 stores in the bike business over the quarter.
Before we turn towards this quarter’s financial performance, I would like to reiterate that despite the temporary shifts in supply and demand patterns and a certain degree of uncertainty around the timing of the following market improvement, we are confident that our current disciplined approach to growth and investments combined with our strategy, meaningful scale and unique position among competitors, are powerful driving forces behind the company’s long term profitable growth trajectory. We are focused more than ever leveraging on our deep relationships with our new and existing customers and long term suppliers as customer satisfaction and a wide selection of products is crucially important in moments like these. Being in an industry where scale matters and in an expanding addressable market, supported by several positive mega trends, we’re truly excited about the opportunities lying ahead for SSU. As the turbulent environment drives further consolidation and structural megatrends of health and fitness, immobility and digitalization accelerate, SSU will leverage and scale to emerge from this period in a winning position and best suited to capture meaningful value in the years to come.
With that, I would like to thank you all for your time this morning. Now, I will hand over to Alex to walk you through our financial performance.
Alex Johnstone
Thanks, Stephan and good morning, everyone. Today, I’ll take you through our Q3 fiscal year 2022 results and offer some additional insight on the key factors affecting our financial performance. Let me remind you that Q3 2022 represent the second quarter of full contribution of our recently acquired businesses Wiggle, Chain Reaction Cycles and Tennis Express, which closed on December 14th and December 31st last year, respectively. As you may have seen in our materials released this morning, Q3 2022 net revenue was €324 million and nine months 2022 revenue was €806 million, both a 29% increase year-over-year. This reported performance reflects enhanced scale of our operations and the beneficial effect of our recent acquisitions. However, on a pro forma basis, our financial performance was impacted by difficult market dynamics on an industry and macro level, both on the supply, as well as on the demand side as outlined by Stephan already. On the operating level, which is a meaningful step forward, thanks to our recently closed transactions, as of Q3, 2022 and under reported basis year-over-year, active customers grew 42% to 7 million visits grew 16% to 84 million and net orders grew 29% to 2.6 million. Net average order value declined 4% due to a lower contribution of higher priced items, including full bikes. These KPIs declined on a pro forma basis year-over-year due to the softening consumer demand combined with lingering supply constraints. I would like to highlight that active customers net orders and conversion grew strongly versus pre-COVID despite a stable net average order value, indicating SSU’s ability to effectively take advantage of the underlying megatrends despite higher priced inventory shortage. Active customers increased by 27%, net orders by 11% and conversion by 99 basis points versus Q3 fiscal year 2019.
Next, I would like to discuss our performance further down the P&L. Despite being hit by the current environment, the company has adapted to the prolonged challenges and focused on actionable measures in order to drive growth while restoring margins and preserving our cash. In Q3 2022, gross margin declined just over 500 basis points year-over-year to 35.5%, as per the anticipated normalization after the exceptionally high levels seen last year during the pandemic boom. This is mainly due to the heightened promotional activity required to drive categories and offset supply chain constraints, while managing inventory overstock, as a result of the unanticipated sharp deterioration in consumer sentiment. Going forward we will partly mitigate the downturn with a sharp focus on customer unit economics by targeted promotional activity towards our existing customer base, expanding our own brand offerings and focusing on core markets with a lower cost to serve. We also expect to unlock significant acquisitions synergies by leveraging our scale to improve supply [terms] over the medium term.
Our adjusted EBITDA for the quarter was a negative €13 million as inflationary pressures impacted the majority of our cost [sides]. Personnel costs increased 233 basis points year-over-year to 12.5% of net revenue due to warehouse inefficiencies in a lower top line environment and to strategically [highest] to support the company’s long term profitable growth plan. Additionally, the lower top line adversely affected the cost ratio as evidenced by the quarter-on-quarter 228 basis points improvement in [staff] cost ratio. We expect it to improve as logistics efficiencies will increase with revenue and strategic projects start contributing to the top line. Logistics expenses increased 74 basis points to 11.4% due to the mix effect impacting the level of returns and increases in carrier and packaging costs. Looking forward, we expect this cost line to normalize in line with the assortment. We will also further optimize our fulfillment network and mitigate inflationary pressures by passing on much of the increase to our customers through updated shipping thresholds and return policies.
Continuing down the P&L. We were disciplined in our approach to customer acquisition in Q3 focusing our efforts on targeted customer segments. Marketing costs represented 8.7% of net revenues for the period, a moderate increase of 29 basis points versus the prior year. As a result of this investment, we saw net conversion increase by 32 basis points versus the prior year. IT and other expenses were up 80 basis points year-over-year to 7% in Q3, primarily due to IT integration projects and the run rate costs of being a public company and at the lower revenue base negatively impacting our cost ratios. The benefits of IT synergies will start to accrue in 2023 as the integration will enable an even swifter rollout of various functionalities for enhanced customer experience. Moving on to the balance sheet and cash flow. We ended the quarter with €55 million of cash in highly liquid investments. In Q3, net cash from operating activities was negative €27 million and free cash flow was negative €33 million after factoring in €6 million of capital expenditures. Change in net working capital was positive €2 million supported by the company’s inventory management policies to align stock with demand,a s well as the usual seasonality effects seen in Q3 as we stock up ahead of the high outdoor sports season in the summer months.
Now turning towards the outlook for the rest of the year. Since the latest outlook released on May 3rd and confirmed on June 2nd, consumer sentiment has strongly deteriorated to an unforeseen scale on the back of heightened inflation and geopolitical tensions in our core markets. While supply chain constraints are being improved are still lingering. As such, the company update its guidance for fiscal year 2022 and now anticipate the pro forma net revenue will be in the range of €1.15 billion to €1.2 billion, and adjusted EBITDA margin will be between negative 4% and negative 5.5%. The company expects the current challenges to [stay] with wage growth and lower inflation in the medium term, absent any exogenous events, such as cyber lockdowns or escalation of the geopolitical situation. In this environment, SSU focus on a more prudent approach to customer unit economics and prioritize realizing the various transaction synergies to achieve run rate breakeven on an adjusted EBITDA basis from the second half of fiscal year 2023.
We are confident that our focused approach to unit economics, targeted investments and disciplined strategy execution will enable SSU to emerge stronger from the current market and be well positioned to take advantage of various opportunities. It is with this backdrop that the company secured €150 million financing commitment to fund our organic growth. SIGNA Holding GmbH, an affiliate of our largest shareholder agreed to provide SSU with €150 million of liquidity, satisfying the company’s requirements under the May revolving credit facility amendment. The commitment is made up of a second €50 million revolving credit agreement with SIGNA Holding signed on July 25th, as per its previous commitment to make this amount available at the latest during our fiscal year 2023. For the second €100 million component of the commitment, SSU will issue €100 million of senior convertible unsecured notes to SIGNA Holding to support its strategic initiatives as per binding term sheet signed on August 15th. The company is confident the €150 million of new liquidity will be sufficient to fund its current organic growth plans through to the end of fiscal year 2023. In addition, the company may receive up to €200 million of incremental liquidity to pursue its strategic inorganic growth opportunities by issuing incremental senior convertible notes to SIGNA Holding at the noteholders’ sole discretion, as announced today. In such an event, the terms and conditions of the new notes under the upsize option would be aligned with those with the initial €100 million convertible notes.
To conclude, SSU is confident that it will emerge from this period of dislocation better positioned. We are 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 significant long term value, supported by the global megatrends of health and fitness, online shopping and e-mobility. Thank you all very much. And with that, Stephan and I will be happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question for today comes from Xian Siew from BNP Paribas.
Xian Siew
Maybe first on the categories. Could you give some more color on how you did — maybe ex-bikes, I know there’s more issues with the bike category. Do the other categories hold in like Tennis, et cetera or is the slowdown more broad based now?
Alex Johnstone
So the other categories that performed materially better relative to bike, and those categories more so active partially by knock down in Q3 in fiscal year ’21. So they did come pretty well year-over-year but not as well as maybe we would have liked, still up very strongly relative to the pre-pandemic period. But I would say that, as I think about what was in our guidance and then relative, it was certainly a slowdown that really accelerated throughout the quarter. And so whilst the performance was good from a cost perspective, it was not anticipated.
Xian Siew
And then on gross margin, seems like there’s headwinds accelerating, sound like it’s mostly from promotions, maybe supply chain getting a little bit better. Could you maybe give us a bridge in terms of how much of the gross margin decline was due to promotions versus supply chain?
Alex Johnstone
So I would say that just maybe, firstly, as an industry, you saw what I was saying that you had a pretty — consumer in a pretty good place going into this fiscal year, as an industry we tend to have to order by far in advance. And so ourselves and many other industry participants were ordering growth in this area, and so subsequently there is in the categories where there is supply that tends to be an overstock. And so what we’ve seen is very promotional activity as the season — the summer season wore on. And so it’s really the season starts really in April, there was some large amounts of promotional activity by competitors in market where we enter the [Indiscernible] policy. So I would say that whilst there is an overstocking market that was going to be in near term, margin pressures. However, I anticipated that this could normalize into the next fiscal year where I think more leading industries now taking a more prudent view given the macroeconomic backdrop.
Stephan Zoll
And maybe worth to add that the supply situation has eased out [actually] already, not to the degree necessary [Indiscernible] or e-bike [Indiscernible] bikes and still strained, but everything else is [Indiscernible] quite well. So that’s good and so that’s good light at the end of the tunnel, I think, looking into the next quarters from a supply perspective.
Operator
[Operator Instructions] We have no further questions for today. So I’ll hand back to the speaker team for any further remarks.
Stephan Zoll
So no further remarks. Thanks everyone for joining, and looking forward to talk soon. Thank you. Bye-bye.
Alex Johnstone
Thanks, everyone.
Operator
Thank you for joining today’s call. You may now disconnect your lines.
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