Emles Luxury Goods ETF (LUXE) Q3 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Mytheresa Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's call is being recorded. And we will have a lot - we have allotted one hour for prepared remarks and Q&A. It is now my pleasure to introduce your host for today, Martin Beer, Mytheresa's Chief Financial Officer. Thank you, sir. Please go ahead.

Thank you, operator and welcome everyone to Mytheresa's investor conference call for the third quarter of fiscal year 2021. With me today is our CEO, Michael Kliger. Before we begin, we'd 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. Also from my side, a very warm welcome to all of you and thank you for joining our call today. I am delighted to share with you that the third quarter of fiscal year 2021 was one of the strongest quarters we ever had, both in terms of financial as well as operational performance. We again achieved many records across all areas of our business. We clearly continued to benefit from the shift in consumer shopping behavior towards digital, which shaped the strong results of the third quarter. Even taking into account, the lower comparables of Q3 in fiscal year 2020, the accelerated growth is evidenced by the two-year growth rate of 66% in the third quarter, versus the two-year growth rate of 60% for the second quarter of fiscal year 2021. While we continue to benefit from store closures in many markets, as well as better deliveries versus last year in March, we also saw the positive effects of a rapidly improving consumer sentiment, as customers began to prepare for post-pandemic occasions, such as social events and vacations. Let me start my strategic review by clearly stating that our positioning as a curated multi-brand luxury platform gives us both strategically and financially a fantastic position to capitalize both on the short-term as well as long-term growth opportunities in our market. Our success continues to be based on a sharp luxury customer focus, strong brand partnerships, and a focused profit-making business model. Strategically, the most important driver for our business is the continued shift of consumer demand from offline to online, also in luxury, which has been significantly accelerated over the last 12 months. We believe this trend will continue maybe at a slower pace in the post-pandemic world, but it will continue. In fact, a recent research by McKinsey stated, that there's little reversal to traditional offline retail expected in fashion. The second most important driver for our business is the strong appeal and desire by customers for multi-brand offers. Even the Alexa Rankings show the popularity in terms of traffic and site duration of multi-brand offers and luxury. Furthermore, we believe that our focus on a highly curated multi-brand offer, attuned to the big spending wardrobe-building customer segments will continue to provide us with the best customer base, which is very difficult to attract the pure mono-brand offer.

Thank you, Michael. I will now review the financial results for the fiscal third quarter and I'll provide additional detail on some of the key topics previously mentioned. Unless otherwise stated, all numbers refer to euro. As Michael highlighted, we are very pleased with our performance during the third quarter, clearly above expectations. Where we delivered strong net sales growth due to robust new customer growth and strong existing customer core performance. With our proven business model, we could scale significantly in the third quarter without any compromise on the quality of our profits. During the third quarter, net sales increased by EUR 53 million or 47.5% year-over-year to EUR 164.8 million. It continued to see strong customer engagement and retention, as our active customers who shopped with us in the last 12 months grew by 34.1% to 621,000. And our total orders shipped in the last 12 months increased by 32.3% to 1,384,000.

Thank you, Martin. We are truly delighted with the strong third quarter earnings report, which was above our expectations. We see ourselves perfectly positioned to take advantage of the short-term opportunities in the market. That is, the strong shift to digital and the better deliveries by brand partners. We have thus raised our guidance for the full fiscal year 2021. And we also continued to see ourselves perfectly positioned to take advantage of the long-term opportunity in the market. We believe that the positive trend towards multi-brand digital platform will continue, maybe at a lower pace, but it will continue in the post-pandemic world. And therefore, we continue to see strong growth ahead of us with 22% to 25% per annum and with a stable EBITDA margin. And with that, I'd like to ask the operator to open up for your questions.

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

Okay, thank you so much. Fantastic quarter. Congratulations. I think this is your debut quarter. Obviously, we got the December quarter earlier, but really, really nice results here. I wanted to ask about what you're seeing here in the fourth quarter in markets that are reopening or that are fully opened. For example, I think the UK shops have now been opened for about five weeks. Is there a read that you can extract there from the way that you're seeing spending shift if luxury spending, for example, is going back to the shops? How is your business performing in that market? I'm just wondering as you're sort of watching Europe reopen if you can give us any color on how your business is ebbing and flowing through that?

Sure, Kimberly, happy to do so. As just commented, what we have seen over the last couple of weeks, and particularly, also already in Q3 is that, on the one hand, the shift to digital, there seems to be a permanent shift in behavior. So, while we may not see that acceleration going forward and see the shift to digital and more pace, I think we believe the overall judgment is the shift to online is a permanent shift in consumer behavior. And the second element of what we saw and see at the moment is that, so if there was always the positives about pent-up demand, there is significant pent-up demand for event clothing, vacation clothing, bridal clothing and I believe the whole sector is profiting from that. So, the stores benefiting from that as they open, but also us. And so what we currently view and therefore what we extrapolate as from the behavior of Q3 into our - this year guidance which, and in June that this shift to online, but also this positive consumer sentiment is clearly also driving our Q4.

That is really, really encouraging. Just a quick follow-up on that. Do you feel like your inventory is well positioned for the reopening, for the pent-up demand that you're seeing? Are you able to chase into any style? And then as we think about sort of medium-term growth over the next one or two years, should we look at the, you know, let's say 60% two-year stacked growth that you saw, for example, in fiscal second quarter and think about that as a good guidepost for the upcoming year? Or I'm not sure if you have any sort of color preliminarily that you would like to share with us on how you're thinking about revenue growth in the upcoming year as you're lapping what has just been an absolutely astounding year this year. Thanks.

Will try my best, Kimberly still we're very much deep into the current fiscal year as we still have a couple of weeks to go. Regarding chasing inventory, that's we made in our high end luxury world, inventory has to be secured much more in advance. But nevertheless, we feel we're very well prepared for those shifts, because we always continue to buy without an assumption that we will never come back. We always, I mean the - fall winter buy coming in, our teams were buying on the basis of, we will be back into a world where social events will take place, where weddings will take place. So we continue to buy with that attitude, of course, not being able to predict precisely when the vaccination rates will be of sufficient level, but we feel well prepared for this rebalancing back to high heels to dresses. And so we should be able to take advantage and benefit from this renewed spending on those category. Going forward, our best view is that, the last 12 months have really created a new base, because we pushed a bit the fast forward button in terms of online share growth. And so this is, we don't predict the reversal, we predict that we will go from that base onwards with the healthy growth rate of mid 20s as the medium-term view. Next 12 months that we will maybe still have impacts of COVID hopefully not, in worst case, yes. But the long-term view is absolutely rock solid, mid 20%, 22%, 25% growth every year with strong profitability, we are absolutely confident to deliver that.

Fantastic and good luck here.

And your next question will come from Matt Boss from J.P. Morgan. Your line is open.

Thanks, and congrats on a nice quarter. So -

Thank you.

Maybe as a follow-up on the top line, Michael, could you maybe just elaborate or speak to drivers that you believe fueled the 600 basis point two-year stacked improvement relative to last quarter? And that's despite brick-and-mortar reopening? And then I guess with that, just as we look forward, have you seen any notable step down in the stacked growth rate 4Q to date, that would support the lower implied two-year stack in the fourth quarter that you've embedded in the guidance? Just and maybe any puts and takes that you've embedded in that fourth quarter revenue forecasts, I think would be helpful.

Sure. I mean, the pandemic still makes predictions a very tough job. But as always, we want to be transparent in our thinking at least and not claiming we know exactly how the future plays out. So, the strong growth of Q3 really showed that in addition to another record number of new customers, we also saw significant uptick in average spend of existing customers, which was an additional element that drove the extra performance of 66% as a two-year growth rate. And that we really tie back to the improving sentiment and the clear kind of expectation of being back in the public, be it vacations, be it bridals and so forth. So that's something which we clearly expect to continue that as even more vaccination rates happen, that this positive view on needs and occasions to buy clothing is definitely a trend that will continue to be so. The drive or the positive driver of the new customers coming to online, we still assume that there is a component of tailwind in this as closures and lockdowns are relaxing, but maybe some customer segments sort of feel a bit shy of going back into stores and department stores. So that is probably still a component where we could and should expect a bit of a lower rate of increase in online share than what we have seen, as I called it, fast forward over the last two years. But it is a trend to stay. It is a base to start from. So we continue to believe we will see significant uptick and spend, we continue to believe we will acquire significant new amounts of new customers, maybe at a lower rate compared to what we did to 12%. And therefore, what we are predicting is a super strong Q4 in terms of our full year guidance, which is, of course, an implied guidance also in Q4, but at a slightly lower pace.

Great. And then maybe just a follow-up on the gross margin. Martin, could you just break down the drivers of gross margin in the third quarter? And just any puts and takes or how best to think about the development of gross margin in the fourth quarter?

Yeah. Sure, Matt. The gross margin is a bit slower completely due to seasonal shifts between the quarters also related to IFRS. We have on the nine-month development are 20 basis points below the previous year figures. And as I said in the call in the preceding section, that we clearly target and expect with at least a fully stable gross margin for the full fiscal year.

Great. Best of luck.

And your next question will come from Oliver Chen from Cowen. Your line is open.

Hi, thank you. Michael, the US opportunity sounds pretty substantial. What are your thoughts on what's ahead with local access and what could be you know very positive for you? Also, if you could update us on the pipeline ahead for China and key priorities there in terms of strategy and talent, may or may not be different from your existing approach to marketing and awareness and distribution? Thank you.

Thanks, Oliver. Sure, I fully agree, we do see the significant potential in US with our current share of 13% in the total Group net sales. We firmly believe there's significant headroom. And therefore, as explained in previous calls, we are increasing the investment in terms of adding resources to the US market. We have announced recently the appointment of Heather as the new President of Mytheresa North America and her leadership role, one of her core task is to increase the number of local personal shoppers being available to our local customers, orchestrating and organizing brand awareness campaigns, orchestrating and organizing customer events on the ground in US. We continue to see very good traction with customers that buy very high satisfaction rates of customers that buy. So, the bottleneck is really bringing customers for the first time onto the platform. And that's what she and her team will focus on. And as she starts on June 1st, I mean, she will already join - running a high velocity shift, but we firmly believe and we are very excited and very well been able to secure that she can make this even faster. And this is always what we stressed. This is about a global product. It also really acquires customer intimacy, customer proximity in terms of services, in terms of having someone in your same time zone that you can reach out, particularly for our top customers you are aware of how important those are. And we were already in this calendar year really ratchet up the speed up putting resources and events onto the ground, of course, also having now the opportunity to organize those. So it's really a perfect timing as the pandemic retreats and there is continuous relaxation of you can organize such events. The opportunity in China, we always stressed is, at least as big as our opportunity in the US, in North America. Of course, the challenges or the requirements for this market are very different. It's a completely separated ecosystem in terms of technology, in terms of legislation, we have to clearly state that our brand awareness is probably even lower in this market, which makes the opportunity even bigger, in terms of really putting resources on the ground, we are, of course, still hampered by the very strong restrictions of travel into Mainland China. We hope that also there, the relaxation will take place, current guidance by officials is more beginning of next calendar year than earlier. And so the route of increasing our local business is mimicking the same. And while we haven't anything to announce on partnerships, we, of course, continue to invest. So just last week we had a very successful VIC event organized at Beijing, because of course, these events are already possible in Mainland China. So we are working hard on brand awareness, we're working hard on establishing tighter and more intimate customer relationships. The timing for putting more resources on the ground is a bit later than what we do currently for the US.

Okay, thank you. And, Martin, the customer acquisition cost momentum has been quite impressive. As we model this longer-term, what do you see happening there, particularly as you think about events and how this may evolve over time? Thank you.

Yeah, Oliver. I mean, this is clearly in line with what we've seen in the past quarters. So we've seen decreasing online marketing costs in relation to the customer acquisition costs. So, improving the marketing efficiency there without compromising on the quality of the customer that we are attracting, but also as said in the previous calls, we want to reinvest those online marketing cost efficiencies into other marketing activities, especially in increasing the brand awareness in regions where we are underpenetrated, for example, US or other regions. And therefore, we guide towards a more stable marketing cost ratio. And we've seen here in this quarter as we guide you know for the full fiscal year, a decreasing marketing cost ratio, but that is driven as I mean than the past quarters and also what we see in the last weeks, the opportunity to do physical events which are inherent also in our business model that we desperately need to do to be even more effective on the customer acquisition, we will continue and increase that ratio. So the overall guidance is to reinvest the online marketing cost efficiencies into brand awareness campaigns, and therefore guide towards a stable marketing cost ratio.

Very helpful, thanks. Great quarter. Best regards.

Your next question will come from Michael Binetti from Credit Suisse. Your line is open.

Hey guys, congrats on a great quarter. Just want to ask about margins, continuing the questions here on margins. I'm curious you know as you're guiding for the high end in the fourth quarter of almost 10% EBITDA margins, but staying, you know, 7% to 9% is still though the rate long-term to think about. Is - you know, is that the right rate to think about for next year? And if so, is there some kind of reinvestment that your - that it seems like there's might be some discrete reinvestment that you'd be able to speak about today, as you're guiding this year to you know, 9.9% at the high end of your guidance, but, you know, 7% to 9% is still a right range for next year? And then I have a follow-up, please.

Yeah, Michael -

Martin, let me take that?

Yeah, definitely I will just kick it off and then you can add. I mean, there's two effects obviously in this fiscal year that led to adjusted EBITDA margin exactly as you said on the top end of 9.8%. And first of all, it's, coming back to the marketing cost ratio, where we are not being able to invest as much in brand awareness campaigns that we would like to have done. And so, we will, in the next quarters and years will want to increase that ratio to increase brands and markets where we are underpenetrated to capture. And this is the core essence to capture top line growth in the strongly developing market to attract and retain the right customers for us. And the second is, obviously, a ramp up of public company costs that we didn't see in this quarter, which we'll continue to see in the corporate governance setup and SOX compliance setup and all those public company costs that we expect to have with the following quarters. So there's nothing to worry about, regarding our EBITDA margin. But obviously, the 9.8% on the on the top end of our guidance for the full fiscal year is also a bit driven by COVID for the special situation of this year. So the overall trend that we target is the 7% to 9% adjusted EBITDA margin, obviously, we want to continue to grow profitably, and to continue to strongly have this diligent growth and be very professional about our unique business model going on a profitable basis. But we also want to focus on attracting the right customers, growing the top line capturing share in this highly attractive market. And that's why we kept the mid-term guidance of 7% to 9% adjusted EBITDA margin, also to give us flexibility on the following quarters.

I guess as a follow-up on the commentary about the new cohorts. That was very interesting to hear. I'm excited to hear, you know, but you said the new customers acquired are showing repurchase rates, you know, up to - up 20% relative to prior cohorts, you know, as we think about customer growth, you know, in the near-term in the fourth quarter, obviously, you've got, you know, one-year and two-year rates that are well above where I think you thought it'd be at this point, you know, in your conservative modeling, but you since you already have, you know, three of the four quarters that influenced the fourth quarter active customer rate, can you just tell us, is that something you expect to decelerate in the fourth quarter? And if so, could you marry that with the, you know, the new cohorts coming in at much higher frequency? I'm trying to think about what metrics might slow and the puts and takes within the revenue guidance into your stack that Matt asked about earlier, slowing in the fourth quarter, please.

Sure, absolutely. Valid and insightful questions. The performance of better repurchase rate, we believe will continue. We truly believe we have acquired a strong quality of new customers. The area where we are taking a bit more conservative view is, the amount of new customers coming in. And so that is in your modeling, if you look at Q4 and if you take the implied full year growth rate, that is where we are a bit more on the conservative side, because we have seen in Q2 and Q3, massive influx of new customers and we believe part of that is driven by lockdowns store closures. The good news and this is the best news to us is that, all those customers that came in have at least the same quality, if not even better, and as you rightfully said, there is this ongoing effect of all the course driving business next year as the year after, so that will remain. We took a bit more conservative view on how many new customers will come in in this last quarter. And therefore, the two-year growth rate is still in line with the full fiscal year, but it's not matching the exceptional and extraordinary result of Q2.

Okay, thank you very much.

And your next question will come from Flavio Cereda from Jefferies. Your line is open.

Hi, hello. Good afternoon, Michael and Martin. So, three quick questions for me. Number one, regarding the US that you mentioned in the release about further investments in the US and you touched on it in - answering previous questions. Do you have another new hires going to be as well? Do you have a better idea, better visibility that you can share with us? What stage do you get critical mass in the US, whereby you need to have a local hub as opposed to shipping out to Europe? Because it's you - how much should be your company far from that today? Second question I had was, in the end, at Q3 which was, of course, exceptional, as we were hoping it would be. You - in the end, you sell what you previously bought. So I was just wondering, if it was a stage in the quarter perhaps earlier in the quarter where you have to replenish perhaps more aggressively than you expected with some brands, maybe with some bestsellers in particular, to basically keep up with demand? And number three, quick question, in terms of menswear how is menswear ramping up relative to your expectations? Thank you.

Thank you, Flavio. So quick answer to your three questions. Number one, local hub is on the roadmap, but nothing for the next 12 months. So, we will, of course, announce if we're getting closer to that, but we're not as close as you may think in terms of setting up an additional hub in the US. So this is still further out. But it is on the roadmap. Number two, the - sorry, let me start with three, the ability to replan - the pandemic has created very unique opportunities, because as you know, replenishing during the season is usually very difficult, particularly if you're interested in bestsellers, because everyone is interested in bestsellers. The pandemic had some unusual effects, because while a lot of the online channels where were going very well, of course, retail channels suffered. And so there was an imbalance of stock availability. And we were able to get hold of additional merchandise in channels that did not perform as well for the brands. So that allowed us, because as you rightfully say, in our model, in the current model, you can only sell what you bought. And so we were able, also thanks to our exceptional brand relationships, to stock up and feed the demands that we were exposed to. And sorry, your third question, just remind me?

Menswear. Menswear how that was ramping up.

Menswear. Menswear, we are extremely happy with the ongoing performance. I mean, we shared with you that at the end of the first calendar year, we were at 10%. And we continue to see very strong growth. And so we continue to expect and believe that also for kids we actually that the share of these businesses in our total business will continue to increase.

Super. Thank you very much.

The next question comes from Alexandra Steiger from UBS. Your line is open.

Thank you very much for taking my questions, and congrats on the great quarter. So as a follow-up to Michael's question earlier, you had very strong growth in the top customer segment was plus 28% year-over-year. Could you maybe unpack some of the drivers and also share some of like the initiatives you're focused on to attract more top customers and also drive revenue per top customer? And then second, any updated thoughts on further category expansion as we noticed that there's a beauty pop up on your site right now? Thank you so much.

Thank you, Alexandra and good to see that you follow our website closely. On the first part, if I unpack the strong performance of our top customers, we clearly see that there have a much wider range of spending opportunities. I mean, this is a customer that did not suffer financially over the last 12 months. But, of course, the occasions and the reasons to buy wardrobe were somewhat more limited than usual, and as the opportunities to go on vacation, as the opportunities for invitations, for events coming are expected by these customers, as they look ahead of the year, we see that they started again to buy also in categories that they a bit neglected. And that is one key driver of the very strong performance of average spend per top customer. And so this is really driven by improvement in consumer sentiment. One key component, of course, of our top customer relationships is, are the personal shoppers. And also there, we have an ongoing plan to increase the footprint. I mean the US, of course, also a target for that. And that is one of the levers for those top customers that one that relationship we always see, it's very beneficial to fulfill their needs to make them happy and customer satisfaction clearly drives business. And the third component is, we were able, as stated in Q3 to do virtual events, we had the designers of Roger Vivier, I mean that to join our stage. And so we did provide as good as possible and a ticket to this amazing industry. But we are looking forward to really organizing events. So our pipeline is really filling up, and we have announced recently that we are in support of the Centre Pompidou in Paris, which is giving its last exhibition before, a longer closure for refurbishment. And then we will have opportunities there in Paris to invite top customers. And clearly, at least based on the current view, we have to be careful, but based on the current view, we are looking ahead for a September Fashion Week cycle in New York, London, Milan, Paris that should have physical events, again, should have physical shows. So we also ramping up for that. In terms of new categories. We are always ongoing the review opportunities. And as you rightfully said, we have launched a pop up recently, we're in collaboration with Estee Lauder, presenting some of the high end skincare products of La Mer, but also products from Kilian and this is just efforts to understand, will the customer accept us, because our whole logic of category expansion is always driven by the customer needs to give us the right to do this. This is not based on the spreadsheet and this is understanding how there's huge revenue to the gained. No, it all starts in our case with the customers, and if customers say, yes, Mytheresa you're the right play in this category, then we will pursue it. And this is exactly what those pop ups, these test balloons are serving to really understand what our customers looking for, when they shop and like to reason definitely believes there are many more opportunities in the wider luxury lifestyle. There's been a concrete decision on adding a new category at the moment.

Great, thank you.

This brings us to the end of our Q&A session for today. And thank you for everyone who has joined us today. This concludes today's conference call. You may now disconnect.