Earnings call transcript: Nelly Group Q4 2024 shows revenue growth

Nelly Group AB reported a 5.5% increase in net revenue for the fourth quarter of 2024, reaching $18.4 million. The company also saw its operating margin rise to 11.4% from 8% a year earlier. Despite these positive results, Nelly’s stock price experienced a decline, falling 1.83% to $38.35, possibly due to broader market trends or investor caution. According to InvestingPro data, the company’s stock has shown remarkable strength with a 146% return over the past year, and analysis suggests the stock is currently undervalued based on Fair Value calculations.

Key Takeaways

• Nelly Group’s Q4 net revenue increased by 5.5% to $18.4 million.
• Operating margin improved significantly to 11.4%.
• The company’s stock price decreased by 1.83% following the earnings announcement.
• Nelly plans to expand its own brand portfolio and enhance customer experience.

Company Performance

Nelly Group demonstrated solid performance in Q4 2024, with a 5.5% increase in net revenue compared to the same period last year. The company’s focus on own brand development and improved operational efficiencies contributed to this growth. Nelly’s strategic emphasis on the Nordic fashion market, particularly targeting young women’s fashion, appears to be yielding positive results.

Financial Highlights

• Q4 Net Revenue: $18.4 million (up 5.5% year-over-year)
• Full Year 2024 Net Revenue: $318.4 million (up 3.2% year-over-year)
• Q4 Operating Margin: 11.4% (up from 8% last year)
• Full Year Operating Profit: $93.1 million
• Gross Margin in Q4: 53.3% (up from 50% last year)
• Cash Position: $196.9 million, with no interest-bearing debt

Outlook & Guidance

Looking forward, Nelly Group plans to continue expanding its own brand portfolio and focus on increasing conversion rates and average order value. The company is also exploring the implementation of AI technologies to enhance business processes and maintain strong customer experience and relevance.

Executive Commentary

Helena Karlander Ostlund, CEO of Nelly Group, emphasized the company’s strategic focus, stating, "We have built a stable, healthy core." She also highlighted the importance of marketing, noting, "Profitable marketing is an extremely central and important part of our plan." Ostlund acknowledged the challenges of maintaining customer relevance, saying, "The biggest challenge is always to remain highly relevant to our target group."

Risks and Challenges

• Market Saturation: The Nordic fashion market is competitive, requiring continuous innovation to attract customers.
• Economic Conditions: Macroeconomic pressures could impact consumer spending and purchasing behavior.
• Technological Advancements: The need to stay ahead in e-commerce and AI implementation poses ongoing challenges.
• Customer Preferences: Shifts in fashion trends and consumer preferences require agile responses.
• Operational Efficiency: Maintaining reduced return rates and cost efficiencies is crucial for profitability.

Nelly Group’s proactive strategies and focus on own brand development position the company well for future growth, despite the challenges in the competitive retail landscape.

Full transcript - Nelly Group AB (NELLY) Q4 2024:

Moderator, Nelly Group: Welcome to Nelly Group Full Year Report twenty twenty four. Today, I am pleased to present CEO Helena Karlander Ostlund and CFO Niklas Lingblom. After the presentation, there will be a question and answer session. Participants are able to ask questions in written form on the Audiocast page. Now I will hand over to Helene Kahlinder Auslund.

Please go ahead.

Helena Karlander Ostlund, CEO, Nelly Group: Thank you very much and welcome to the fourth quarter results presentation for Neli Group. My name is Helena Karlinder Ostlund and I’m the CEO of Neli 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. Okay.

So 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 Neli 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 Neli business. So just to briefly recap, as you saw in the video, Neli has been a staple in Nordic fashion for twenty years. In fact, we were founded in 02/2004, so this is our twenty first year. We offer fashion for young women, primarily in The Nordics and we also added menswear to our assortment in 02/2008. 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, 1,300,000 followers on social media and we pick, pack and ship 1,800,000 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 point ’2 percent. 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 our 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% 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 developments. 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 trends 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 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 own 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% 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 design of 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 rates, 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 assortments and generating both a better gross margin, a higher on brand share and a lower return rates, 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 percent 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 handle 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. And this of course becomes even more important going forward as we are really looking at developing and growing the NOLI 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 Neli 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 twenty twenty two, we really have come a long way and built a stable healthy core. And we really do know 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 and 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.

Niklas Lingblom, CFO, Nelly Group: Thank you, Elena. So, let me walk you through the financials in some more detail. Net revenue in the fourth quarter amounted to $18,400,000 compared to $301,600,000 last year showing a growth of 5.5%. 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%.

Total (EPA:TTEF) 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% compared to quarter last year. Operating profits amounted to $36,200,000 compared to $24,000,000 last year. The strong operating profit was driven by the improved gross profits 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 for NLE with an operating profit amounting to 93,100,000.0 resulting in an operating margin of 8.5%. And with that, let’s give some more detail on the income statement. As mentioned, net revenue amounted to 318,400,000.0 compared to 301,600,000.0. Gross profit amounted to 169,700,000.0 compared to 150,900,000.0 also showing a good improvement in gross margin to 53.3% compared to 50% last year. Warehousing and distribution costs amounted to 40,100,000.0 sorry 40,500,000.0 compared to 45,600,000.0 improving both in absolute terms as well as relative to net revenue with the ratio improved to 12.7% from 15.1% last year.

This was mainly driven by operational improvements and lower volumes. Marketing costs amounted to $31,000,000 compared to $26,000,000 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 $61,900,000 compared to $55,300,000 last year. Increase was mainly due to IT related costs. Depreciation also increased due to our newly implemented e commerce spectrum.

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 percent from 42.1%. And this showcases Nedgroup’s continuing focus on cost control. And let’s move on. So we end the quarter with a solid cash position of 196,900,000.0 with no short term credit utilized.

We also finalized a new bank and credit agreement in the quarter increasing our short term credit line to 60,000,000 from 20,000,000, none of which were utilized in the quarter. And we would also like to note that Medley has no interest bearing debt apart from government tax credits. And so cash flow from operations amounted to 71,800,000.0 compared to 50,400,000.0 last year. The improved cash flow from operations is mainly explained by the strong operating profits. Investments in non current assets amounted to 2,500,000.0 compared to 11,000,000 last year and these were related to IT projects mainly.

Cash flow from financing activities amounted to negative 30 2 point 8 million dollars compared to negative 7 point 8 million dollars where the lower cash flow was mainly attributable to dividend of 24,900,000.0 that was distributed to shareholders in the quarter. And net cash flow finally amounted to 36,500,000.0 compared to 31,600,000.0 last year. And then 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 twelve months full year are now showing a solid operating profit of 93,100,000.0 and an operating margin of 8.5.

And so with that, I would like to hand back to you, Helena.

Moderator, Nelly Group: Thank you, Helena, and thank you for your submitted questions. Let’s start this Q and A session with answering our first one. This one is from Alden Eriksson. Do you perceive that the consumer has become stronger or what should we 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?

Elena? Yes. Thank you. So I think

Helena Karlander Ostlund, CEO, Nelly Group: 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 is actively choosing our assortments 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 even more strong sort of 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 assortments but also some IT improvements that we’re still delivering this year. So I would say that we can both look forward hopefully to 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, 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 that we spend is well spent.

So yes, definitely a focus for us going forward as well. Thank you very much.

Moderator, Nelly Group: The next question is from Damian 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?

Helena Karlander Ostlund, CEO, Nelly Group: Yes. 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.

Moderator, Nelly Group: Thank you. We are moving on with a question from Karl. How much in Williamsburg did the problems with deliveries in Q4 affect the result? And do you expect any effects in Q1, Niklas?

Niklas Lingblom, CFO, Nelly Group: Yes. Thank you, Anna. So we assess that the effects from operational difficulties in the 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.

Moderator, Nelly Group: Thank you, Niklas. We are moving on with a question from Rauan 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?

Helena Karlander Ostlund, CEO, Nelly Group: 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, 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 the 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.

Moderator, Nelly Group: Thank you, Elena. 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?

Niklas Lingblom, CFO, Nelly Group: Yes, of course. So the main positive drivers of the improved gross margin was higher foot pressure or in our terms less campaign driven revenue, as well as a higher share of owned brands. And in addition, we also saw a small negative impact in gross margin from currency effects in the quarter.

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

Helena Karlander Ostlund, CEO, Nelly Group: 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 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 audiences 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 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, yes, we’ll 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.

Moderator, Nelly Group: Thank you.

Niklas Lingblom, CFO, Nelly Group: You too.

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