SIGNA Sports United N.V. (SSU) CEO Stephan Zoll on Q1 2022 Results - Earnings Call Transcript

SIGNA Sports United N.V. (NYSE:SSU) Q1 2022 Earnings Conference Call March 2, 2022 8:30 AM ET

Company Participants

Jeremy Nelle - Head of Corporate Finance

Stephan Zoll - Chief Executive Officer

Alex Johnstone - Chief Financial Officer

Conference Call Participants

Anna Glaessgen - Jefferies

Xian Siew - BNP Paribas Exane

Operator

Hello, everyone. And welcome to the SIGNA Sports United First Quarter 2022 Earnings Call. My name is Nadia and I will be coordinating the call today. [Operator Instructions].

I will now hand over to your host, Jeremy Nelle, Head of Corporate Finance, SIGNA Sports United to begin. Jeremy, please go ahead.

Jeremy Nelle

Good morning and thank you for joining us. Today, we will review our first quarter fiscal year 2022 results. With me are Stephan Zoll, Chief Executive Officer and Alex Johnstone, Chief Financial Officer. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including guidance for the pro forma consolidated full-year 2022, inclusive of the recently closed acquisitions of WiggleCRC Midwest Sports and Tennis Express. We cannot guarantee that any forward-looking statements will be accurate. Although, we believe that we have been reasonable in our expectations and assumptions.

Our 20-F filing identifies certain factors that could cause the company's actual results to differ materially from those projected and any forward looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise.

Also, please note that during this call, we will discuss certain non-IFRS financial measures as we review the company's performance including adjusted EBITDA. These non-IFRS financial measures should not be considered replacements for and should be read together with the IFRS results. Please refer to the Investor Relations section of our website to obtain a copy of our investor presentation, which contains descriptions of our non-IFRS financial measures and reconciliations of our non-IFRS measures to the nearest comparable IFRS measure. This call is being recorded and a webcast will be available for replay on our IR website.

I would now like to turn the call over to Stephan.

Stephan Zoll

Thanks, Jeremy and good morning, everyone. For today's agenda, I'm happy to provide you with an update of our first quarter fiscal year 2022 results and touch on the progress we have made towards our strategic priorities throughout the quarter.

Before we jump in, I would like to say a quick word about the conflict unfolding in Ukraine. We're deeply saddened to see this crisis escalate and want to share that our thoughts are with everyone affected and we offer our sincere support to our colleagues in the region as well as to anyone on the call today who may have friends or family that have been impacted. And we join everyone in hoping for a peaceful resolution as quickly as possible.

With that said, I'd like to turn our attention to our quarterly results and begin by providing an update on the macro factors that has been impacting our industry. Through our first quarter, ending on December 31, 2021, we continue to navigate a change industry landscape. Starting with the consumer demand side, we began seeing the first impact of strong inflationary pressures on consumer discretionary spending, especially across the UK and US.

That being said, we have observed demand across all verticals that are significantly elevated above pre-COVID levels. We remained convinced that the global mega trends that were accelerated during the pandemic are sustainable, and that the consumer shifts towards active living and emobility will we may a powerful driver of growth in the mid and long-term.

In conjunction with shifting consumer preferences, we encouraged by continued government support for green initiatives planned over the course of the next decades. That will serve as further catalyst for alternative forms of transportation with e bikes playing a prominent role.

Looking towards the mid to long-term. These factors are expected to drive double-digit growth and e bike adoption over the next decade, with total bike sales expected to exceed 30 million units in 2030, a 47% increase over the pre-COVID levels of 2019.

Taken together the future industry and its growth opportunities look very bright. We look forward to enabling our customers passion for active living and immobility, and we are positioned ourselves to create significant value as the industry continues to mature.

Next, I would like to provide an update on what we have been seeing across our supply chain. As we have discussed previously, COVID-19 and huge supply chain disruptions coupled with heightened consumer demand over the last several quarters have created severe shortages across our supply partners. In the first quarter, we did not see signs of near-term improvement in the supply forecast with the full-bike category being especially hard hit.

The outlook for 2022 remains uncertain and is subject to changing conditions on the ground. But our current expectation is that we will see supplies constraints ease towards the end of 2022, allowing us to return to the levels of organic growth that reflected the true demand in the market.

Next, I would like to provide a brief update on our strategic pillars that we have discussed previously. As you know the strategic pillars our management team is focused on executing against are three-fold. First off, we are constantly aiming to grow our market share in our existing markets as well as expanding into adjacent categories and further developing our own brand portfolio. Secondly, M&A remains a critical element of our strategy and we expect to be active as attractive opportunities become available. Lastly, we're continually looking to expand it to third-party business that enable our brand partners and retail partners at attractive unit economics.

In Q1 fiscal year 2022, our team was able to continue our momentum across each strategic pillar. To start we were able to continue making progress and expanding market share organically with continued growth particularly in the Southern European region, as well as making further inroads into the US market with our US Tennis business. This expansion allowed us to successfully add new customers onto our platform with over 25% organic active customer growth.

Secondly, as we have discussed previously this quarter marked an important step forward in our inorganic growth path as we close the acquisitions of WiggleCRC and Tennis Express. In the near-term, we are eager to begin driving top-line synergies from the WiggleCRC acquisition and are focused on fully integrating Tennis Express.

As we look towards future inorganic opportunities, we remain diligent throughout the quarter in assessing the various opportunities ahead of us and continue to believe M&A will play a key role in SSU future in the years to come. Whether it be through broadening our reach and consolidating market share in key geographies we’re looking to verticalized and further develop our own brand portfolio in areas that is particularly attractive.

Lastly, we were able to continue our momentum in developing our third strategic pillar, our expansion to third party businesses. Throughout the quarter we remained on developing our marketplace functionality that we expect to come online in late 2022 and saw additional connected retail momentum as we reached over 500 connected stores in the bike and auto vertical alone.

Before we turn towards the financial performance in the quarter, I would like to give a brief update on our outlook for 2022. As I touched on earlier, the biggest factors affecting our fiscal year 2022 results remain the macro economic environment and inflationary pressures, as well as the supply chain bottlenecks that have already adversely impacted our Q1 results. While we would like to reiterate that we view these issues as temporary in nature and not reflective of the level of passion and demand from our customers, we also have to recognize a degree of uncertainty as it relates to the timing of improvements and the return to normality for our business.

In line with our previous comments around these issues, we remain consistently engaged with our partners across the industry. And the current expectation is that supply chain disruptions will likely continue into the second half of 2022 before normalizing.

Despite the industry-wide issues that we were experiencing, we are encouraged by the resilience of our business model as we have been able to achieve outperformance in less impacted verticals to compensate for the lack of supply. We are positioning the business to return to double-digit organic growth as soon as the supply situation allows, and remain confident in our ability to deliver this performance going forward.

With that, I would like to thank you all for your time this morning. And I would hand over to Alex to walk you through the financial performance.

Alex Johnstone

Thanks, Stephan, and good morning, everyone. This morning, I will take you through our Q1 fiscal year 2022 results, and offer some additional color on the key factors affecting our financial performance. As you may have seen in our materials released this morning, Q1 fiscal year 2022 net revenues worth €213 million, representing an 11% increase year-over-year, and LTM revenues of €892 million an increase of 17%.

As Stephan mentioned, our financial performance was impacted by difficult market dynamics on an industry level, within the bike vertical that were partially compensated by strong performance across our other verticals.

For Q1 fiscal year 2022, we are competing against a very strong Q1 fiscal year 2021, which is driven by COVID induce lockdowns. However, we achieve top line growth through impressive performance in the tennis and outdoor verticals, as well as some inorganic growth stemming from the inclusion of WiggleCRC for the last two weeks of December.

On the operating level, we took a meaningful step forward when looking at our core KPIs, pro forma for our recently closed transactions as of Q1 fiscal year 2022 on a pro forma basis versus reported Q1 fiscal year 2021, active customers grew 7.4 million, representing an increase of 76% year-over-year, 25% of which was achieved organically within legacy SSU.

Total pro forma visits were 31% year-over-year after being heavily impacted by a lack full-bike assortment in Q1, and net orders grew 62%. Average order values declined 1% for the quarter with this effect, primarily being due to lower full-bike sales, which contribute a significantly higher average order value in other categories.

Next, moving past our top line metrics, I'd like to discuss our performance further down the P&L. In Q1, we maintained steady gross margins with gross margin reaching 37% for the quarter. This margin performance was aided by the mix effect of sales favoring higher margin categories. And that was the case in the last quarter we have successfully passed inflation in cost of materials to the customer without compressing gross margins.

Personnel costs returned closer to pre-pandemic levels, coming in at 13.9% net revenues per quarter, in part due to a lower contribution from bike sales, but also due to an acceleration of key hires to support our key growth areas.

Logistics expenses rose to 11.2% of net revenues in part as the percentage of orders shipped outside of that region increased. As part of our efforts to offset the lack of full-bike supply with market share gains across our verticals, we again remain focused on profitable customer acquisition in Q1. The continued success in acquiring new active customers, achieving 25% organic growth within the legacy SSU for the period we continued our targeted marketing investments, representing 9.9% net revenue for the period.

Looking forward over the course of the next few quarters, as the supply situation eases and our assortment is replenished. We expect this investment to come down and become a key factor in the margin expansion we anticipate in the years to come. Taken together, our adjusted EBITDA for the quarter was negative €11.7 million.

Moving on to the balance sheet and cash flow, we ended the quarter with €139 million of cash and highly liquid investments. In Q1 fiscal year 2022, net cash from operating activities was negative €81 million and free cash flow was negative €92 million after factoring €11 million of capital expenditures.

One item to note that our net working capital cycle is negatively impacted by more stricter payment terms, as well as our typical cash outlays to replenish our assortment in our seasonally quieter H1 period.

Now turning towards our outlook for the upcoming year. We continue to be acutely aware of the macro-economic and geopolitical situation and the factors that limit our ability to accurately forecast business. In line with Stephan's earlier comments, inflationary pressures, potential COVID-induced measures and the timing of improvements in our supply chain will be critical to achieving our previously disclosed financial goals for the year.

At this moment, our expectations remain unchanged. My view is that we expect to see progress on the supply chain front in the second half of calendar year 2022, with the potential for real improvement largely coming in the back half of the year.

With this in mind is the most significant variable in our financial performance for fiscal year 2022, we reiterate our previously provided guidance of net revenues for the period in the range of €1.4 billion to €1.5 billion.

We do not expect to achieve positive organic growth on a pro forma basis in the second quarter of our fiscal year, which will be comping against very strong lockdown-induced spikes in our season the quieter H1 in fiscal year 2021.

This effect will be exaggerated by the lack of full-bike inventory. However, we anticipate a return to organic growth in the second half of our fiscal year as we start to comp against quarters that were supply-constrained in fiscal year 2021 and the full-bike situation starts to normalize.

For full year reconciliations of our pro forma Q1 fiscal year 2022 operating KPIs, please refer to the materials released this morning.

In summary, fiscal year 2022 will be a challenging environment to navigate, but we are confident in the platform we have assembled and are looking forward to expanding our offering with the arrival of Wiggle Chain Reaction and Tennis Express.

Thank you all very much for your time. With that, Stephan and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question today comes from Anna Glaessgen of Jefferies. Anna, please go ahead your line is open.

Anna Glaessgen

Hi, good morning. Thanks for taking our questions. I guess starting off, you talked about how you're seeing some impact from inflationary pressures on the consumer in the US and the UK. Can you shed some light on what you're seeing, has this been concentrated in certain product categories or pricing tiers, or has it been more broad based?

Stephan Zoll

Hi, good morning and thanks for the question. So, it's in general more broadly, right in the UK, we see higher levels of inflation from December I think onwards, similar to the US which has now gone up I think 7% or more. So, that's more broadly. It's not effecting certain categories, at least we don't see that yet. That might happen in the future, but we don't see it yet.

Anna Glaessgen

Okay, got it. And then obviously the bike supply has been a challenging dynamic, continue to see pressure there. Could you give a little bit more perspective on what you're hearing from industry contacts that gives confidence that the issue will improve in the back half?

Stephan Zoll

Right. So there’re a couple of elements that play into the constraint. The first element in the beginning was partly raw materials, then production capabilities and capacities. And then, obviously, also transportation, right, from the middle -- from the east, Eastern Asian region to Europe into the US.

Now the first one has faded. The second one is still party there. Some parts are still not produced at the amount necessary and they -- or/and have arrived at the at the assembly stations where they need to be to -- in order to kind of fully assemble the bikes before they get shipped out. So that's the remaining issues that we have right now.

And the transportation also remains challenged in some of the corridors. Not so much from Asia to Europe yet, but from Asia to US, we still see some limitations there. That's kind of the current situation.

And what we hear is, nobody can really predict yet when this will fully normalize, right? We see some signs of improvement, but very slight signs of improvement. But it's too early to call this a trend change, if you wish. That's what we still are waiting for to see, that it's really starting to normalize.

Anna Glaessgen

Great. Thanks. And then turning to the customer acquisition investment made in the quarter. Could you provide some color on where the key spend buckets were here and how the efficiency on the spend compared to the historical trends you've seen?

Stephan Zoll

Sure, thing. Maybe I'll take that one. It’s Stephan. So I think we were successful in a kind of broadly following how we kind of stayed at the business, which is, we're trying to acquire the last customer that is contribution margin positive. And so, all of our business units kind of adhere to that logic.

And in terms of relative to last year, the last year there was a surge in demand related to the lockdown and getting spikes. And so, we would view the marketing spend in this quarter being more in line with the historical spends in prior pre-pandemic levels. And we would anticipate that this is kind of the level that we would anticipate on a go-forward basis.

Anna Glaessgen

Okay, great. Thanks.

Operator

Thank you, Anna. [Operator Instructions] And our next question comes from Xian Siew of BNP Paribas Exane. Xian, please go ahead. Your line is open.

Xian Siew

Hi, guys. Thanks for the question. I want to ask about the difference between, I guess, legacy and pro forma. It looks like legacy online revenues were up something like low single digit. Pro forma, I guess, is down something like mid-teens, implies I guess the acquisitions are doing worse. How do we think about that? I guess, Wiggle is more exposed to bikes, but maybe if you can help bridge the difference. Thanks.

Alex Johnstone

Thanks, Xian. So I think it's -- so firstly, of the three acquisitions, both Midwest and Tennis Express are a growing healthily. There's no impact to Tennis Express in this quarter. The transaction closed on the 31st of December.

However, with Wiggle, Wiggle has a large international business, and due to some of the carriers surcharging -- 40% of their revenues historically were international, because of the carrier surcharging is not economic to ship some categories into Europe and into the US and more broadly, Asia Pacific. So they've seen their international business come down pretty dramatically. And this has been a steady trend throughout the back half of last year. We do anticipate that when the carrier surcharging comes off, dispatch are in the air again, that this will over time come down and international business will pick up for we will again. It's also worth noting that in the UK there was a relatively larger uptick in the bike category in the first half of the year relative to other markets. And so, from a demand – based-demand perspective it was slightly lower relative to Europe as well. So, there's a little bit of a demand impact for Wiggle company against what were very strong periods last year, which of course, we fully anticipated and understood when we acquired the business.

Stephan Zoll

And just to add to that maybe if you look into the slightly longer horizon, we are super confident still that the Wiggle transaction specifically has been very complimentary to our business. Right? Also from an international perspective, so there's all kinds of work streams going on now between Wiggle and our other bike businesses to leverage the synergies that we have foreseen. And hence we are very confident that this has been a very good acquisition here to add to our portfolio, our group, especially in the bike business.

Xian Siew

Okay, got it. And then it looks like conversions still really strong, which was impressive. I would have thought that if, as you mentioned, there's supply chain constraints. So I would have thought if people come to the site, maybe they're out of stocks and then there's no conversion or something, I guess. How do you think about how the availability issues are impacting the consumer journey? Because it seems like once they get to the site, it's strong. Yeah, I'm just trying to reconcile that?

Stephan Zoll

Very well spotted. So the conversion has gone up about 40 plus bps in the quarter, right, quarter to quarter. So that's a very nice development. By the way that has been the case over the last year as well. We've consistently improved the conversion over the years, and the journey has really, as you almost said, it has really been impacted in full-bikes. When you look at Google Trends, for example, there's less people looking for full-bikes because they already are aware of the supply chain constraints that have been going on for quite some time. Right. But if they come to the site to buy other things across the other categories and also across the other bike categories, the conversion has been very strong, hence the 40 bps on average uptick.

And then there's one more detail to keep in mind. Right. People that buy bikes typically don't buy it at the first time, but they come in, go out, come in, go out, check for the frame sizes, check all kinds of other materials they want to do or maybe assemble around it and then convert. So the typical journey of buying a bike has also a lower conversion than our other categories. So that also is a little bit of favorable effective on our conversion rate

Alex Johnstone

And I would just add to that if you think about the paid traffic that we're driving, we're not seeking to drive as much full-bike because of the inventory situation, so not driving traffic to a lower conversion category. So, there's a little bit of a mix effect as well.

Xian Siew

Okay. Got it. Yeah, that makes a lot of sense. Okay. Great. Thank you, guys.

Alex Johnstone

Thank you.

Operator

Thank you. We currently have no further question, so hand the call back over to Stephan for any closing remarks.

Stephan Zoll

All right. Thanks, everybody, for joining and hopefully everybody keeps safe and again, our thoughts go to our colleagues and every family that's affected by the Ukrainian conflict. Very much looking forward to talking to you the next quarter. Thank you very much. Bye-bye.

Alex Johnstone

Thanks, everyone.

Operator

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.