Emles Luxury Goods ETF (LUXE) Q2 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Mytheresa Second Quarter Fiscal 2021 Earnings Conference Call. Today's conference call is being recorded and we have allocated one hour for prepared remarks and Q&A. It is now my pleasure to introduce your host; Martin Beer, Mytheresa's Chief Financial Officer. Thank you sir. Please begin.

Thank you operator and welcome everyone to Mytheresa's investor conference call for the second quarter of fiscal year 2021. With me today is our; CEO Michael Kliger. Before we begin we would like to remind you that our discussions today will include forward-looking statements. Any comments we make about expectations are forward-looking statements and are subject to risks and uncertainties, including the risks and uncertainties described in our quarterly report.

Thank you, Martin. I'm proud to welcome you all to our first quarterly earnings call as a public company. Let me start first by thanking our teams, brand partners and foremost our customers for all their support cash and trust over the last years as Mytheresa developed into one of the leading digital platforms for luxury fashion in the world. During the IPO roadshow, we had the opportunity to share our story and describe our unique positioning in the digital luxury space with investors from around the world. We received very positive feedback and support from many of you for which we are very thankful. Our journey is still at the beginning and we are more excited than ever about the future business of Mytheresa. The IPO was a major milestone for us as a company, but I'm proud to say that we as management and all our teams are now even more focused than before to create a fantastic future for Mytheresa. Before I jump into the highlights of our second quarter of FY 2021, I would like to summarize again the fantastic investment story behind Mytheresa. First of all we operate in a rapidly expanding market. The digital share of global luxury fashion is projected to reach over 30% by 2025 representing then a €110 billion market or roughly 3x the size in 2020. Secondly Mytheresa is uniquely positioned in this market with our differentiated focus on the high end wardrobe building customers looking for curation. Therefore we believe, we will retain a strong competitive lead over other platforms. We are about inspiration and not just aggregates. Thirdly, because of our loyal customer base, strong business model and consistent execution, we have delivered continually high-growth combined with stable profitability over the last years which we believe we will continue to do so in the future. For our high end customers Mytheresa offers an unrivaled curated luxury added constant offer of products and capsules only available with us an outstanding in-house managed service experience and of course true access to the world of luxury through our exclusive events. For our brand partners, we offer visibility to a customer base that is not easily accessible through mono-brand sites or simple aggregators. We create partner specific marketing assets solely addressing luxury clients. We protect brand equity through the strong focus on full price sales.

Thank you, Michael. I will now review the financial results for the fiscal second quarter and I'll provide additional detail on some of the key topics previously mentioned. All financial figures that I reference will be in euros. As Michael highlighted, we're very pleased with our performance during the second quarter where we delivered strong net sales growth based on increasing new customer growth and strong existing customer cohort performance. With our focus on attracting and retaining the high end customers, we achieved the strong topline growth with a stable slightly increasing gross margin speaking to our ability on full price sell-through and our top brand positioning. The exceptional strong topline and the continuing online marketing efficiencies are driving bottom-line profitability. As Michael said, we're currently benefiting from COVID related tailwinds due to store closures and restrictions in several regions in the world. These tailwinds create at the moment results above our expectations both at the top and bottom-line. Those beneficial effects may slow down in Q3 and especially in Q4 with store re-openings. In addition, please bear in mind that our fiscal Q2 is always a strong quarter in terms of performance due to seasonality. Nevertheless, we believe that the performance of the second quarter without any COVID tailwinds would meet our clear expectation of continued low to mid 20s% net sales growth combined with consistent profitability as achieved in each of the last years. During the second quarter, net sales increased by €39.2 million or 32.9% year-over-year to €158.6 million. We continue to see positive momentum in our customer engagement as our active customers who shopped with us in the last 12 months grew by 28.2% to 569,000 and our total orders shipped in the last 12 months increased by 24.4% to 1.256 million during the second quarter. Cost of sales increased by €19 million or 31.2% compared to the prior year period, driven by the growth in total orders shipped. Gross profit of €78.6 million was an increase of €20.2 million or 34.6% year-over-year. We achieved a gross profit margin expansion of 60 basis points to 49.5% of net sales, driven by an increase in full price sell through. A strong gross profit margin is also typical for our fiscal quarter two and should not be taken as a trend for the whole fiscal year. Shipping and payment costs grew by €3.6 million to €17.8 million, driven by an increase in total orders shipped. As a percentage of net sales, shipping and payment costs in this quarter decreased from 11.9% to 11.2%. Due to Brexit and upcoming seasonal effects, we expect an overall stability in this cost ratio for the full fiscal year.

Thank you, Martin. Mytheresa was started in 2006. With the IPO we achieved a major milestone for our company. I am extremely proud of our achievements, but we are only at the beginning of our journey. We are now in act two of our play. The key protagonists of our play will remain the customer. Our passion and analytical focus on customer value is the secret sauce for our company and defines also the core assets of our company. We believe, there's so much more opportunity for us. And we thank you for your support.

Your first question comes from -- Your first question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is open.

Thank you so much. Good morning in US and afternoon in Europe. Congratulations on a very nice debut here. I wanted to just start with a question on the brand partners. And Michael I think you hinted at this during your prepared remarks that maybe you're in discussion to expand assortments with some of your select brand partners. And I'm wondering, if they've talked about how to expand the assortment? And if any of them have discussed potentially a concession model with you?

Thanks. Yes. I clearly say that, we are in discussions with brands, also during the past months we always stress that our model I believe will evolve and the industry overall evolves. We are in discussions with some major brands that would allow us to have on a more continuous basis access to products more products. These are ongoing discussions. Nothing has been fully developed and also fully laid out in terms of financials. So there's nothing at this stage to disclose other than that we are in positive discussions, and we are keen on further developing our partnerships with key and major brands and brand partners.

Okay. Great. And then my follow-up is on the record-high number of first-time buyers here in fiscal 2Q. I think you said over 100,000 new first-time buyers. Is that – do you think that was helped because of brick-and-mortar store closures or even pre-COVID this potentially would have been the trajectory that you're on or maybe its improvement in marketing effectiveness. Maybe you can just unpack that a little bit for us and talk about the contributing factors? Thanks so much.

Sure. I will try. I think you correctly named the contributing factors. Unpacking them is a bit difficult. So we do believe that we are benefiting in some geographies from the pandemic COVID cost tailwinds. We would have -- I mean, our business is on such a trajectory that we are reaching records constantly. So this record of over 100,000 new first-time buyers in a single quarter, we would have hit anyway -- maybe not this quarter, maybe next quarter. There are obviously tailwinds with so many stores closed at least at some point of time during the second quarter, how large they are is pure speculation. What will happen to those new customers as stores are reopening, is pure speculation also. The good thing about all of that is the fundamental driver of our business is that last year 12% of the global luxury fashion was bought online. And in the next four years, this share will triple. So the fundamental driver has been in place before the pandemic will be in place after the pandemic and variations in between are what they are and we are living through quite a volatile time.

Great color. Thank you so much.

Your next question comes from the line of Matthew Boss from JPMorgan. Your line is open.

Great, thanks. And congrats on your first call. So Michael maybe to touch on the 12%, which was the online luxury penetration before the pandemic, I think forecast have been for 30% by 2025. I guess, my question is clearly, I think the crisis has accelerated or potentially even changed that target. Have you embedded any potential acceleration into your forward forecast? And more so, I'm curious what you're seeing on that time line in terms of the 12 going to 30 over that period. If we think about it by geography, potentially if we broke down, maybe what you're expecting or seeing in Europe versus Asia versus the US?

Thank you. Great question and I also thank you for the congrats. We have not built any acceleration in and have not seen any further acceleration being published by analysts or market researchers about this forecast that you correctly quoted by 2025, the share should reach -- should go beyond 30%. Again, we have over the last 12 months had consumer behavior that was heavily impacted by the epidemic. It is hopefully something that will end soon. It may have accelerated a general trend. It may not have accelerated a general trend. We have not changed our forward-looking expectations just on the basis of one or two strong quarters. So that's the answer to number one. Number two differences by geographies. There have always been some differences in geographies. The interesting -- or not interesting that's the wrong word -- the dramatic characteristic of this pandemic was and is that it is unfortunately a global pandemic. And it has hit many, many markets maybe by different times, but it has hit everyone. And our market is a global market. So we clearly have seen that the buying patterns in Asia have come back to the same patterns that we have seen before, meaning the difference between buying bags and high yields and evening gowns versus just "uncomfortable loungewear" clearly driven by the fact that in many Asian markets and Asia Pacific markets even the social calendars have restarted. There is the ability to organize parties and events, which unfortunately we have not seen in Europe and many places in the Americas. On the other hand, retailers reopened it was never as long impacted in Asia as it was bricks-and-mortar retail that is than it has been unfortunately in Europe and the US. So I think what we see in terms of recovery in Asia and that's a general comment not related to Mytheresa. The rebound of luxury consumption has been quite significant in Asia, so that has been seen in many of the numbers published by brands. And so that has been -- is a good precursor of what may come or may not come in Europe and the US. The preference for online is -- has been traditionally actually lower in some of the European markets in the past. The consumer in the US, the consumer in the UK, the consumer in Asia has been actually more digital frontrunner or unrelated to pandemic, just general trends before. So we may or we may not see actually a little exploration for online adoption in Europe based only on that. But again, a lot of ifs, a lot of whats a lot of speculation. This is not driving our business planning. This is not driving even our business management. We are basing all our decisions on attracting the right kind of customers with the right offers. I think one of the key highlights for me in Q2 is not only the fact that we've seen good top line and customer acquisition. One of the key highlight for me is again stable gross margin which is a key characteristic of our business model.

It's funny you say that that was going to be my follow-up question. Martin...

I knew that.

Could you just walk through the drivers of gross margin in the second quarter behind the strength? And just help us to think about maybe some of the puts and takes of gross margin to the back half of the year?

Yeah. I will do so. I mean bear in mind the gross margin has always been stable in our business model. And the last three years, we achieved a stable gross margin. So our gross margin speaks to our positioning of our business model. On the high-end side on the customer side and on the high-end brand side. And so stability of the gross margin we've always achieved that and it's obviously in focus also going forward. So this quarter is no different to other quarters focusing on the high-end customers and on the high-end brands and continuing where we do so successfully. A big uptake in the gross margin as reported is due to a higher full price sales share. That is the key determinant of the gross margin.

Great. Best of luck.

Your next question comes from the line of Michael Binetti from Credit Suisse. Your line is open.

Hi, guys. Thanks for taking all the questions, and congrats on the first quarter out of the gate here. I'd love to ask you about the forward guidance on margins. I know you've said a number of times through the process and today that you want to bake in some conservatism in the second half to reduce visibility as luxury stores around the world start to reopen. But on the EBITDA margin from what we can tell in the second half of the fiscal year in the past three years that EBITDA margin looks like 6.9%, 6.5%, 7.9%. I think your guidance pencils out to about 4.4% to 5.2% in the second half. So I just want to know how your thoughts on how much conservatism is baked in there versus investments that you do want to make to fund the next growth you're seeing right now that we should think about as we look through the different lines in our models.

Yes. Maybe I can answer and then Michael can add to that. So bear in mind that the first half of the fiscal year so July to December there's always a stronger EBITDA margin than compared to the second half. And so given a decrease in the COVID tailwinds from the top line paired with what we outlined in the cost lines that we will increase offline marketing events that we will have additional being public costs on the SG&A side, we clearly expect and that's why we put this guidance, the 8.0% to 8.3% EBITDA margin. With our focus not so much on the EBITDA margin, but more on attracting and growing with the right customer base. And with this focus, we're very comfortable and stick to clear guidance that we give for the fiscal year 2021.

Okay. And then I'd ask one follow-up. We've heard from a few other global retailers some all digital, some are big digital, both digital and brick-and-mortar. And we've heard that places like Australia, you're starting to see sales really accelerate even in digital and that's a market where I think COVID has been fairly well contained would be the consensus view. And it's summertime so perhaps they're celebrating a little bit. Maybe we're seeing some of those early signs of pent-up demand that people are wondering about for the rest of the world. Do you have countries in your model that you would consider to fit a similar characteristic where COVID is fairly contained -- is there -- are there any leading indicators that tell you, we need to be more conservative as global luxury stores reopen versus the digital trends in these markets where COVID is getting well controlled are still seeing strong trends in digital? I'd love to know any perspective you have on some of the leading indicators you see in the business.

Yes, happy to take that question. I mean, I think it's very interesting to go through the factors all of the factors. What I think that would happen is hopefully the pandemic stops in the sense of customers and people feel comfortable again. On the one hand, a lot of bricks and mortar a lot of department stores will reopen. So you could argue that is maybe driving customers back to a high degree to physical. On the other hand, a lot of events, social, red carpet, you name it will start to be back on the calendar, which is as we know a big driver of luxury goods shopping particularly on gowns and ready-to-wear, which is a big part of our business. A component of the pandemic coming to a stop, which we haven't seen because the areas that have been under control have continued to isolate themselves. So travel, leisure travel, holiday trial is still even in Asia or Pacific where the pandemic seems to be more under control it's still not possible, because the great results they have achieved have been mainly achieved by strict border controls. And travel is also not only a big driver for demand but also for luxury goods. But also in the past at least a lot of luxury sales were done through travel, retail or travel destinations. So there are many factors. And again honestly it is probably an endless game, of which would be more which would be less benefiting us. Our buying team is now preparing the buy for winter 2021. And the guidance for them is -- expect that consumer behavior is what it has been in the past years. Making any speculations about, there will be a revenge spending something we have seen in some Asian markets there will be a new modesty because of the social crisis, it's pure speculation. And we refrain from that because we have a very clear strategic growth there. And we just consistently follow it. We have seen not as big crisis as we have seen last year but we have seen crisis the last six years. And the best thing we always did was stay on course, guide the system, the business model on a consistent growth level, guide the system to stay true to full price. And leading indicators -- I mean, predictions are tough and they have always been tough but right now, I don't rely business management on predictions or leading indicators but on a clearly laid out strategy. And consistency we believe is a key driver for our long-term financial success.

Thank you so much guys, and congrats again.

Your next question comes from the line of Eric Sheridan from UBS. Your line is open.

Thank you so much for taking the question. And maybe if I can follow-up with a two parter on the brand discussion we've been having so far. In terms of where you see the discussion with brands going over the medium to long-term, do you -- how do you think about the output of those conversations between you getting more flexibility about what inventory you can pull into your platform versus the brands putting more of what they want into your curation model over time? And then the second part would be as you expand into the new categories you've talked about like men's and children, how do you think that gives you more flexibility in terms of deepening the relationship with the brands? Thanks so much.

Thanks, Eric. Brand relationships are key to our business and we are always taking the approach to make it work for both sides and really create true partnerships. So at the end, all our discussions are focused on is there something we together with the brands can do to excite customers to buy luxury products of the brand in question. And so what we are trying to achieve with further involvement of business models is exactly that, improve the value proposition that we as a platform and as a brand can have for our special customer base. Because in the end we were talking a lot about that we are serving a customer that is really looking for inspiration. It's one important, but it's one segment. We are driving our business with inspiration, with capsules, with special edits and that's where we are partnering. And of course, more access to even more selection, more access to items that are already sold out items that are with limited distribution is highly interesting to our customers. So when we're working on our business models that allow us to create, allow us to really perform the excellent service that customers are known for and allow us to create the marketing angle, the marketing stories that we seem to be also quite good. And that as I always said, can be done with owning inventory can be done without owning inventory that's not the point. The point is how do we create a partnership. And extending into menswear and into kidswear, yes, of course, it also improves our value proposition on both ends, on the customer side in particular with kidswear. I mean this is an extension of the core women customer that we have served for more than a decade. And we have seen very positive reaction to -- in certain customer groups to offering also luxury kidswear. Menswear is a new customer. I mean it's probably a customer that lives in the same sort of community and social fabric as our womens customer, but it's a new customer. But that of course also strengthens our value proposition towards brands. And our ability to present today the brand story across women, mens, kids is a unique feature. And we have already used that for partnerships. We have in the last year launched capsule collections that actually cut across menswear, womenswear and kidswear. And while we believe this will not always be the case, it does create additional angles and also that can solidify and more importantly also broaden the partnership with brands. So there is a revenue growth potential with these new categories, but there's also as you rightly pointed out the strategic value by being present in all three categories at least for the moment.

Thank you.

Your next question comes from the line of Oliver Chen from Cowen. Your line is open.

Hi. Thank you, Michael and Martin. Congrats on a great quarter. Our surveys indicate a lot of great opportunity in the US and China. How do you see the mix evolving over time? And what are your priorities in terms of building awareness -- is there a big awareness opportunity? As we think about marketing going forward and brand ambassadors that's something you've used in certain regions, how might the marketing spend composition change in the context of the reopening and also how you continually seek to innovate marketing spend that's relevant with what your customer wants?

Thanks Oliver. Yes. I mean, it is clear that we have as a company opportunities both in the US and in China or even in Asia, as we know that brand awareness is far lower than in our sort of more traditional markets in Europe, while we see that customers shopping on our website actually do express same high level of satisfaction that we see in Europe. So there is an opportunity to generate first trial and to convince and retain customers with great services and offers. The marketing strategy is as discussed in the past is really directed at boosting upper funnel awareness, upper funnel brand familiarity and reputation. So that's why we believe there is still more opportunity to improve online marketing efficiencies. We will not bring that to the bottom line. We will bring that to invest in up the funnel marketing. And up the funnel marketing can take many forms, some of which we were, of course, we were of course constrained over the last couple of months, because a lot of what you do up the funnel are sometimes events or outdoor postings with no traffic in the big metropolitan areas, it didn't make sense. So, some of what we had in mind with upper funnel marketing will hopefully be possible again as the pandemic retreats. But also on the digital end, we have strategies that are moving away from the pure last step conversion marketing spend, but also on the digital side with all the different social media platforms both in western markets, but also the different social media platforms in Asia, we do see opportunities of increasing awareness increasing reputation for our value proposition. That will be a focus as we go forward. And that's why we clearly guide that we drive growth at very stable cost ratios. What you don't see in those is there are constantly shifts within the different cost buckets market, moving from one sub-bucket to the other to really drive the growth in -- still in Europe but particularly in the US and Asia.

Thank you. And Martin a follow-up on Q2 seasonality that you called out. What's within your control? And what should we pay attention to when we're modeling that for timing and how the marketplace may evolve with promotions or not in timing? Thank you.

Yes. Thanks, Oliver. I mean, we talked about the quarterly performance of Mytheresa in the past years and also talked earlier on the upcoming years. And we see stability on obviously Q2 and Q4 being strong quarters with two seasons fully delivered. The upcoming season mostly delivered. So, once we've fully delivered -- the upcoming season is mostly delivered and achieving good sell-through, full price sell-through with that, and the quarter one and three being a bit weaker on that end. And this trend, I mean, modeling it forward will continue. We -- I mean, obviously, there's always minor shifts from certain brands delivering earlier or later. And as outlined earlier we obviously are very happy to receive the merchandise as early as possible, because it targets to our high-end to the best customers that we have. They want to have the seasonal merchandise early to buy. And from what we see right now in Q2 and then looking forward to Q3, Q4 and then the next fiscal year, there's no major shift in what we have seen -- what we expect due to COVID or due to a different brand behavior. So, far there's no change in that quarterly behavior that we see.

Thank you very much. Best regards.

There are no further questions at this time. I would like to thank everybody for joining the Mytheresa second quarter fiscal 2021 earnings conference call. We appreciate everybody for joining. You may now disconnect.