Matas A/S
CSE:MATAS
Earnings Call Analysis
Q3-2024 Analysis
Matas A/S
Matas' Christmas quarter showcased resilience and marked success despite a tough macroeconomic backdrop. During this period, the company successfully integrated two businesses and reported significant increases in revenue and earnings. Impressively, organic growth soared to 9.2%, a clear indication of growing customer transactions across both physical stores and online platforms. This growth was not only driven by the inclusion of KICKS’ figures but also reflected the company’s own underlying growth.
The guidance for the full year remained steadfast with an expected EBITDA margin around 15%, while revenue predictions saw an optimistic revision upward. Capital expenditures are projected to be between DKK 500 million to DKK 525 million, underscoring the ongoing investment in infrastructure like warehouse construction. The merger with KICKS has been a blend of equality, emphasizing a robust collaboration across four markets. The joint force now boasts of 5 million club members, significantly contributing to the more than 30% online share of business and robust store network.
Core to the quarter’s success has been strategy execution. The expansion of the product assortment, a key strategic move, included the addition of 86 new brands, accounting for about half of the quarter's growth alone. This strategic direction was further reinforced by sharing popular in-house brands across the new combined markets, thereby maximizing cross-selling opportunities among their extensive customer base. Online commerce particularly excelled, with growth hitting 23% for the quarter and overshadowing the online shopping surge experienced during the COVID peak.
Financially, the company observed an 80% surge in revenues due to the KICKS integration, although gross margins faced a slight decrease related to the merging of business models. The online business expansion led to escalated costs, but this was counteracted by a robust growth in profitability by 43%. Inventories escalation also mirrored the expanded product range and KICKS acquisition. Cash flow remained strong, registering DKK 600 million for the first nine months, reflecting both ongoing operations and strategic investment activities.
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Welcome to the Matas Interim Report for 2023/'24. [Operator Instructions]. This call is being recorded. I will now turn the call over to your speakers. Please begin.
Thank you, operator, and welcome, everyone, to the call covering our all-important Christmas quarter. We consider this quarter a rock solid success in a quite challenging macro environment. We delivered standout growth and we delivered improvement in earnings while integrating 2 companies and while executing on our strategy. So we have an agenda for today, I will give some comments on the quarters and how we are progressing on strategy. I will hand over to Per to cover the financial results, and then we will be happy to take questions. Looking at the numbers, DKK 2.5 billion in revenues from the combined company earnings, DKK 424 million before special items, up from DKK 296 million last year and organic growth -- standout organic growth of 9.2% in the quarter and an EBITDA margin before special items of 16.9%, in line with our expectations. Driven by an increase in transactions, and that's not only KICKS numbers coming in, that is also underlying growth in the number of transactions, which we consider to be the healthiest way of growing more customers coming into our stores and our online business. We maintained the guidance for the year. We upped the guidance for revenues on our trading update on January 9, and we maintain our guidance for the full year on the EBITDA margin around 15%. And our guidance for CapEx between DKK 500 million and DKK 525 million, reflecting, of course, that we are investing heavily in the construction of our warehouse and in the core business. This was the first real quarter of Matas and KICKS joining forces. We consider this really a merger of 2 companies of almost equal size, 4 markets 4 currencies, 4 languages. This could be a distraction. But really, what we have seen are the 2 companies performing, and we have seen collaboration being very, very strong. So this is a company with 5 million club members across the Nordics, more than a 30% online share of business, more than 60,000 SKU base assortment, more than 500 stores and around 4,000 colleagues to deliver these standout results. And I think given the complexity that's always there in an acquisition, I think this actually underlines the performance of the quarter and it's really a symbol of a very good start to the collaboration between KICKS and Matas. Looking at the strategy, it is really the strategy driving the results. We are getting little or no help from macro, of course. So this is a matter of strategy and strategy execution, delivering the results that we are reporting. On the commercial side, our growth strategy is to expand our assortment. We added brands, and I will get back to that in the quarter. It is very much a case driven by e-com growth. I will dig deeper into that. It is also a matter of omnichannel of using our many stores to support our online growth and using online to support the performance of the stores. It is the matter of building a portfolio of strong brands on our own that we can share across our many sales channels. And clearly, the big investment in automation, in making a logistics setup that will help us scale benefits when we grow e-com to see that business scaling even more nicely. So the commercial strategy to expand assortment. We added 86 new brands to the portfolio. We saw about half of the growth in Q4 coming from a new assortment introduced to our existing customers in the quarter, indicating that customers are actually buying into the new brands into our new offerings. And of course, that is the key driver of our growth, and that is one of those things that will help us grow despite economic cycles. We also started sharing some of our brands BeautyAct, one of the leading own brand in KICKS' portfolio was launched online in Matas. And of course, that is an indication of where we want to go to share our strong brands across markets. One number, just a nice number is 1 million unique Club Matas members shop with Matas during the month of September. That is an all-time high, again, highlighting that this is about deepening customer relationships, getting deeper and more intimate with each single customer by offering a wider assortment and just a great day-to-day experience in the business. E-com, again, standout growth for e-com, 23% in the quarter, 27% against the COVID peak, where everybody was at home shopping online. I think this just signals again that our strategy that our online performance is really outstanding. We are also getting market numbers indicating that across all e-comm categories, not only beauty, but across all e-commerce categories, Matas is really strengthening its position. And this, of course, goes for KICKS as well that this is an omnichannel model and we see the opportunity for assortment expansion with KICKS with the big assortment base that Matas has as an evident avenue for growth in the future. For KICKS, we saw strong performance in the quarter as well. All-time high revenues in KICKS growth in all markets, Norway, Finland, Sweden and all channels, both e-com and stores. We did the first operational move into the new warehouse in Rosersberg . The Skincity business was the pilot to go into Rosersberg. we saw flawless execution of the operational part of that move. As I mentioned, BeautyAct launched in Matas and the collaboration and the spirit of working together, I think, is beyond any expectations that we might have had. We have gained very good colleagues, very capable colleagues and the 2 companies have come together to deliver a strong Christmas result. And of course, that is really in a retail business, the best start that you can have to deliver results and build great relationships in the progress -- in the process. So for full year, revenue was actually upgraded as well for KICKS driven by the performance and also positive currency effects.
With that, I will hand over to Per to cover the financial results.
Thank you, Gregers. And let me just start with the usual overview we do of the business. But I just want to echo what Gregers said, a very strong quarter and delivering exactly the financial performance as we expected. So looking at the numbers, we, of course, as we don't have KICKS in the base, we are looking at 80% growth of our overall revenues. A slight decline in our gross margin, also reflecting the 2 businesses being added together with a little bit of difference in terms of the gross margin in a third quarter as we just passed. Highlighting here really is the fact that we were able to grow above 9% as an organic growth for the Matas. Moving to the cost side. And again, this of course, reflects the first quarter of adding 2 businesses together, not having KICKS in the base. Some of the key drivers, though, is, of course, KICKS but also some of the things that we need to take into account is growing our online business with 23% will increase our cost as some of the cost is below the line. Google Search, the people that we have on our webshop, et cetera, et cetera. So just to take that into account. And it also reflects our continued investment in our assortment expansion as Gregers just highlighted. From a profitability perspective, a 43% growth, of course, reflecting the KICKS acquisition, but also a strong growth in line with our expectations for the third quarter. Just want to highlight a few more things starting with our inventories. And as you will see a huge increase, of course, reflecting KICKS. We also have an increase in our existing business, so to say, in the Matas as we continuously grow our assortment and as the assortment hit our inventories, as a startup, you will have higher inventory levels, and that's basically what you see in our numbers, in line again with our expectations for the quarter but slightly higher when we compare to previous quarters. Then moving into our cash flow and very pleased with our cash flow this quarter. And when I come back to our gearing, I will comment a little bit more on that. But basically, this quarter, generating a -- or for the first 9 months, generating a free cash flow of DKK 600 million. And in that number, you need to take into account actually that we have $75 million of special items, and we're investing in the MLC. So from a comparable perspective, we are significantly higher than DKK 700, maybe DKK 750 compared to the DKK 540 last year. So just a very strong quarter. I will now highlight a part of it has to do with timing into fourth quarter.
And let me just move into that because I can share that with our leverage. When you look at our leverage in Q3 2022/'23 last year, you also saw a drop in the overall leverage, which is basically the same effect you see this quarter. The impact of basically going from 2.8x to 2.2x is driven by a couple of factors in addition to, of course, a very strong cash flow quarter. We have some timing in terms of payments of our suppliers due to the very huge deliveries that we have in the month of December, and that moves into the fourth quarter. And then the other piece you need to be aware of, once we get to the fourth quarter, that's where we have the strategic review of all our leases, all our stores. And there, we would rebase the liabilities we have in the stores, so you will get the IFRS 16 debt into the Q4 numbers. So you should expect also when we move into fourth quarter that you will see a similar pattern as you saw last year. But overall, a very strong quarter also from a cash flow perspective. Last but not least, as we did the acquisition of KICKS, we had a bridge facility and that has been financed or refinanced and put into place in January, including an increased amount available in our RCF which basically gives us a little bit more flexibility from a cash perspective. That concludes the financial presentation, and we will hand over for Q&A.
The next question will be from the line of Sebastian Grave from Nordea.
Very impressive growth in the quarter, but obviously, we knew that already from the trading update. So allow me to put some focus on your margins instead here. On KICKS gross margin, it was 47% in September and now it's 43% for the quarter here. In comparison Matas stand-alone gross margin was sort of flattish quarter-over-quarter. So can you help me please explain some of the deviation here? And on that note, what was the KICKS gross margin in Q3 last year? That would be my first question.
Yes. So we are going to share comparable numbers in the coming weeks. So I won't go into the comps for last year for KICKS. We want to share that with the entire market at the same time, of course. But the 47% in September, which was 1 month of KICKS, of course, and we indicated that the time is not the level of KICKS. So we are not seeing an underlying -- or the performance of KICKS in Q3 was in line with our expectations. It's the Black Friday. It is all the Christmas campaign, the Christmas box, all that. So this was really as expected. So no surprises for us internally on the gross margin of KICKS or Matas. And also reflecting, as you know, our investments in the strategy that is expanding assortment, making offers a new assortment that is driving down margin in the first couple of years when you introduce new assortment.
But have you also introduced your assortment in the KICKS franchise at this point?
No.
Okay. And fair on the comparables, looking forward to see them soon here. Then on -- you touched a bit upon it, I guess, on the demand picture in general and maybe in Sweden, in particular. I know -- I mean you saw KICKS sales grew year-on-year. But could you maybe put some more color to the underlying mix here. So I mean share of high-end revenue versus mass marketing KICKS and also, I mean, share of sales from promotion, et cetera. What are you seeing out there in terms of the Swedish consumers at this point?
So we are seeing a Swedish consumer in general holding back less growth overall in retail, but Beauty, as you know, is not really exposed to the economic cycles as much as other categories. And we're seeing that in the Swedish market as well that Beauty seems to be not I wouldn't call it a safe haven because, of course, we see effects. But also, I think it's very strong performance on the KICKS part. I think good execution in stores, good execution online, of campaigns and on the operational side. So I think there is both sort of a favorable environment for Beauty and good performance in KICKS to explain the KICKS numbers in Q3.
Okay. But are buyers seeking more sort of promotion sales now compared to earlier you think or is it the...
We're not seeing any sort of material shift in -- and of course, KICKS is mainly and much more high-end skewed than the Matas business. So you don't see these kinds of trading down effects that we have been discussing with Matas. For good and bad, we don't see that in KICKS. So it's really core performance delivering the results.
Okay. And then just my last question, and I will go back to the queue. So you have your revenue guidance in connection with the trading statement, which, I guess, should imply some kind of margin leverage. You had to restate the 15% margin guidance. So basically a twofold question here. Generally speaking, what is the wiggle room in your around 15% EBITDA margin guidance? Or is it everything above 14.5% and below 15.5%? Or how should we think of it? And second, all else being equal, with you upping your revenue guidance, that should in isolation will drive more margin. Is that the right way to think about it?
Yes. So we're not going to comment on the wiggle room on the 15% because we have guided around 15%, so we should leave like that. And I think what's key to understand is that when we see the growth being driven by online. We don't get the same operating leverage that we used to get when we were only stores. You can imagine when you sell more in a store, you don't have to call in new people to execute on that. So it's really the margins go straight to the bottom line, if you will, whereas for online, as Per alluded to, you will have much more variable cost elements going into the P&L. So you see ad spend growing, I'll get back to that. You see, of course, all the fulfillment costs, both the picking and packing in the warehouses, which is still manual and you see the shipping go up. And this is one area where we would like to add more transparency over time. So this is understandable. But when the growth is driven by online, you don't get the same margin expansion that we got when the world was not digital at all. And as for the ad spend, this goes to strategy, and this goes into the philosophy of running the company if we see opportunities to capture growth, to win new customers by spending more marketing than budgeted, we will do that. We absolutely think there is an opportunity in the market now to win market share and buy market share cheaply. So we are not obsessed about just maximizing profitability at this point. This era is really about executing on our growth strategy, getting those customers on board, enticing them to buy into new categories and of course, winning market share. So we do that from just a business point of view, we think that's the right way to run the business.
The next question will be from the line of Poul Jessen from Danske Bank.
I have a few of it in the same area as we just had. About the gross margin in KICKS with the difference between [ Q3 '23 ]. Can you indicate what should we see as a run rate for the KICKS business going forward?
Yes. So again, we will share the historical numbers that's going to give you some more transparency, but we won't be guiding specifically on the gross margin for KICKS, I'm not able to help you there.
And then on the Nordic markets, you have 3% but KICKS so all on organic growth. Anyone outperforming or underperforming that average number of the 3 markets.
And I think we -- there's different growth rates in the different markets. But we're not doing that segmentation across the different markets. I think what you do get is that we have seen growth in all markets and all channels. So this is not a matter of 1 market or channel driving the growth. It's really broad-based. And I think that is, again, a healthy sign that it's not 1 winner and a couple of losers. It's really winning across the board.
And I guess you won't give the organic growth in the online sales in KICKS either.
No, it's not at this point.
That was not much help. Then a question, you mentioned on the business that you have provided this digital color to point of sales based on AI. Can you give a little more color on what actually is supporting the sales process though?
Yes. So we consider AI to be a game changer for how we can operate the business and how we can increase productivity, both efficiency but also sales productivity by equipping our customers with digital tools. I think this is one thing that both KICKS and Matas have been doing for many years to make sure that we don't live in a digital world in headquarters and live in a physical world in the stores, but rather try to use technology and get it out in the hands of our close to 4,000 colleagues. So what we're experimenting with, and this will be experimentation. This is how can we use AI to speed up customer interactions. So in customer service, when there is someone making a chat request that AI actually gives our colleagues up front, how can they answer this question without having to go into the database and similarly for our customers or our colleagues in the stores that they can give advice based on all the data we have from Club Matas, all the sales data across channels and enhance and power that by AI to make it even more personal and even easier to use for our colleagues in the stores. But this is a theme we will get back to again and again because, of course, there is a lot of promise for a data-driven company like Matas to use AI to gain efficiency and stimulate growth.
And the final question is on the cash flow. Are there any impact from consolidation here, I think, on inventories, working capital. You saw -- you made the bridge, but are there any one-off like from consolidating the 2 business or should it be seen as a more steady normal cash flow levels?
Poul, in terms of our cash flow for this quarter and the way that the business is operating right now is that we're running KICKS and Matas inventories and deliveries to the market as 2 separate entities. So in the numbers that you've received for the third quarter, there is no one-off special item in terms of pooling inventories together at this point.
Okay. So it's only the special items, which should be seen as vision.
And then the timing of payables. As you also saw last year, we are increasing payables in the months of -- in the later part of the third quarter every year due to the amount of products being delivered and shipped and supplied to our customers. So that's the normal impact you'll see there also. Of course, having KICKS support...
Year-over-year, that's normal then.
Yes. But having KICKS onboard, it just makes that a little bigger as well. Just so you're aware of that.
The next question will be from the line of [ Mr. Chris codd ] from Carnegie.
I have 2. So far as go to KICKS, can you tell us the -- how much of the sales in KICKS that came from the high-end Beauty?
So you'll find that in the report. I don't have it right here, but you can find that in the report. Around 70%.
Then another question. I guess your competitors are very focused on what you're doing across the Nordics today. Have you just seen any responses so far from your other competitors in terms of pricing, more promotion or similar in order for them to secure the market shares?
Not something of note. I think they are each pursuing their strategies. We're seeing quite a shift in retail, if you look broadly into the food sector, discount has been winning. Discount has less of a beauty offer. So that plays to our advantage. Some of the online pure players who have enjoyed a lot of growth during COVID and got a lot of setback after COVID. They are retreating a bit on their spend and their aggression in the market and other players, omnichannel players who are pursuing the same kind of strategy that we are, they are on their journey. I think what I take note of is that we are seeing our strategy, deliver results both in KICKS and in Matas despite what the competitors might be doing. So we're not seeing a disruptive shift or an increase or change in the competitiveness in the market, lots of movements going on, but not one thing that I can say is a game changer.
Okay. Then maybe just a final question. I can see the BeautyAct has been launched in Matas. What has been the initial feedback?
This is a brand that nobody knows in Denmark, and it's selling. So I think that's the beauty of the Beauty business that novelty and brands, they have a way of finding an audience. And of course, this is a brand we have to build from scratch. From a financial point of view, it shouldn't be on the slide. This is nothing significant in numbers. but it is significant to our idea of being a Nordic group with a portfolio of own brands that we can share across our different channels to gain differentiation, but also, of course, as good support for our margins. But for now, the business, the numbers are very small.
The next question will be from the line of [ Christian Godin ] from SEB.
A number of questions from my side. So maybe first of all, could you walk us through the implied growth in Q4, both for Matas ex KICKS and for KICKS as well? Yes, I'll just do them one by one. That's the first question.
Yes. So implied growth, if you do the math for Q4 is lower than the run rate growth we have seen over the last 4 quarters. And of course, you have to take into account that for the first couple of quarters for those 4 quarters, it was only Matas and KICKS coming in. So what we're not seeing. We're not seeing any material changes in the demand picture or in the market. We are not starting to question the efficiency and effectiveness of our strategy that is still working. We are up against tougher comps, both in KICKS and in Matas in the fourth quarter. And we are changing the warehouse in KICKS.
So moving all the products from 1 way of running logistics into Rosersberg, and we need a bit of a safety buffer on to make sure that, that goes smoothly, that would be an ordinary thing. And the final thing, just technical. We're missing 2 trading days in this quarter because of the timing of Easter. So you should take that into account as well across 3 markets. Sorry, 4 markets.
Yes, that's I had as well. So maybe back to the buffer in revenue on KICKS, what is it the implied both for KICKS for Q4, you have 3% growth in Q3. But obviously, as you're used to, we don't have any comparison numbers. What is the expected -- obviously, you guided for the full year revenue I don't have any comparison numbers. So.
No, this is not the time. We should share the numbers, and then we can have that conversation.
Just -- but we are completely in the dark whether you expect growth or you expect a decline in revenue? Or can you give some kind of indication on what's the expectation for Q4?
And we guide for the total group taking into account those 5 factors. Positive demand signals from the market, a strategy that is working, 2 fewer trading days, a shift of logistics and up against tough comps. And those 5 factors pulled together is the reason we got the way we do.
Then maybe jump to, can you maybe comment a bit on how you did compared to competitors in the various markets?
I can't and won't comment for market by market. And you should know that we don't have super trustworthy market data. So everything about market share is a judgment call, looking at how we monitor the competitors, what we can gain of intelligence. And so our sense is that we are definitely winning share online and that overall, we have sustained market share or at least gained a bit of market share, looking at the total market. So that's as far as I can go.
Okay. That's fine. I'm aware in the lack of data. Then maybe coming to the margin question as some of my -- the competitors colleagues have alluded on. So maybe can you maybe elaborate a bit on the incremental margin on the online business, as you alluded to in some of the additional variable costs in enhancing online orders. So assuming that they do comment on and that for the physical stores, the incremental margins, I would assume it's around 40%, then what would the incremental margin be on the online?
So we can't give you the full transparency, but it's a very different number from 40% because you have all those variable elements. And then, of course, in our reporting come into, some of it comes into salary cost, which is the staff in our logistics facilities and some of it comes into our other external costs. And we are trying to give as much transparency as we can in the report. And this is an area where we will increase transparency going forward. But again, I think it's also important to take into account what we're actually thinking and doing. This is about driving growth. It's about winning market share. It's about gaining customers. It's about educating customers to buy into the wider assortment. So this is not something happening to us. This is something that we are actively pursuing. And of course, the 2 big investments that we're making in Rosersberg and the 1 MLC here, it is all about getting efficiencies and effectiveness in our online business to get those variable costs down. So that business case of building those facilities has just gotten better with the e-com growth that we're seeing. But right now, and it's really simple, right? We just have to bring in more hands when online grows this much.
Yes. Got it. But what you're saying is also that this incremental revenue and from the revenue upgrade guidance that you're reinvesting, you can say, so to say, some of the margin expansion in...
That is correct. Summary.
Accelerating some of these -- okay. And then maybe on the -- you have mentioned that you talked about the disclosure. Have you decided on how you want to report going forward in terms of the degree of disclosure both and how we want to -- how you want to report and also -- and the deepness of the disclosure?
Yes, we have decided, but we have not shared and we will, of course, share that with the market in due time.
Okay. So will that be in connection when you provide us the numbers next week or coming weeks? Or will that be...
No, we are going to share the numbers, the historicals and offer educational sessions to walk through those numbers, but it will be when we give our forward-looking guidance.
Okay. Then maybe another question on the margin. Can you comment a bit on how much margin is it gross margin? Is it that you sacrifice when you do this investment in the product assortment expansion.
I can give you some flavor. So if you look at Matas numbers for last year, if you look at Matas numbers, the original guidance for Matas, we said that we would be investing around 1 percentage point of margin into our growing Matas Group strategy and that, of course, is both marketing and gross margin. So I can't give you the exact gross margin amount because it will vary across categories. Some categories, the investment is in the gross margin. Other categories, it might be on the marketing spend or the logistics. So it is really a combination of many factors. But as we've talked about before, when you introduce a new category, it is margin dilutive. That's just the way it is because you just have to market more, promote more. And it tells you nothing about sort of the average margin structure of the new assortment. We are very mindful that our business is selling relatively high-margin stuff, so we are not looking into becoming a commodity e-com player. We are looking into relatively high-margin stuff that fits with our customer proposition and what we think people will buy from us. Mother Child is one example. [ Cause ] Professional Hair Care is one example. Beauty -- sorry, Health products is another example.
Last question from my side. And maybe could you comment a bit on how the -- how is the performance on harvesting, especially because if you comment a bit on you're starting to try to get some of the revenue synergies. But on the cost synergy side, how is that faring?
So we will update on the cost synergies at a later stage, but we are progressing according to our general plan. We are confident that the number we have shared with you on the improvements of DKK 40 million and the synergies of the deal of DKK 100 million fully phased in by '25/'26. That is confirmed. We are moving ahead according to plan across the work streams that we have and of course, right now, we are focusing on the cost synergies and haven't really added any revenue synergies into that perspective. So I think that is a matter for our forward-looking strategy.
As no one else has lined up for questions, I will hand it back to the speakers for any closing remarks.
Thank you so much for joining our Q3 earnings call. We will see you soon. Thank you, operator.