SIGNA Sports United NV

NYSE:SSU

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to the SIGNA Sports United Second Quarter and Half Year Fiscal 2023 Financial Results Call. My name is Alex. I'll be coordinating the call today. [Operator Instructions]

I will now hand over to your host, Jeremy Nelle, Head of Corporate Finance. Please go ahead.

[Jeremy Nelle, Head of Corporate Finance]

Good morning, and thank you for joining us. Today, we will review our second quarter and half year results for fiscal year 2023. 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 outlook for the consolidated fiscal year 2023. 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 in 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 a replacement 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 financial measures to the nearest comparable IFRS measure. This call is being recorded, and a webcast will be available for replay on our Investor Relations website.

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

[Stephan Zoll, Group CEO]

Thanks, Jeremy, and good morning, everyone. For today's agenda, I'm pleased to provide an overview of our second quarter and H1 results for fiscal year 2023, as well as provide an overview of our recent actions aimed at charting (ph) a clear path towards profitability in the coming years.

Before we dive into our results, I would like to provide a brief update on the market conditions that we have observed in the first half of the year across our core markets. Similar to other retailers and discretionary categories, our business has not been immune to a rapidly shifting macroeconomic picture.

As many of you will recall, H1 fiscal year ‘22 was marked by severe supply disruptions, resulting in unmet demand throughout the market. However, following the onset of the Ukraine war and persistently elevated inflation, a material downturn in consumer demand set in as our customers pulled back on spending while the economic outlook became challenged.

In conjunction with these macro developments, in the back half of 2022, we saw a significant easing of the supply chain pressures that have plagued their bike industry in particular. The result was a material increase in inbound stock, ordered 12 months to 18 months prior in a meaningfully lower demand environment.

To put this in perspective, among publicly listed bike suppliers, we saw an estimated 27% increase in stock position. with finished goods growing by nearly 40% [Technical Difficulty] of this supply overhang was felt acutely in the first half of our fiscal year as brands, distributors, and retailers across our industries work to reduce their inventory position, often at meaningful discounts, particularly in the bike industry.

In the midst of this market turmoil, we have noticed a clear disconnect between the operating conditions of the bike industry with a sustained interest and enthusiasm from our customers. Taking the UK, as an example, we have seen a boom in e-bike sales from pre-COVID levels, sizable growth in selling prices of bikes throughout the market, and a sustained uptick in activity with average daily bike participation currently at 1.4x the March 2022 levels.

I note these trends to help illustrate that while our business has been severely impacted by market conditions, the overarching megatrends that are driving our operating thesis have shown no signs of slowing. With this backdrop in mind, we engaged in a thorough strategic realignment process to ensure the business was best positioned to navigate the near-term market turmoil and more importantly ensure we are all prepared to capitalize and build on our market position over the long term.

Coming out of this strategic realignment process, we have identified and detailed our three clear actionable initiatives aimed at returning the business to profitability and cash flow positivity as soon as possible. Although, we touched on these points in our last call, I would like to take this opportunity to briefly walk through each of these points in a bit more detail.

First off, one area we are focused on is the repositioning of the business to prioritize our core markets. Our business has a dominant position across the DACH region, Southern Europe, parts of Scandinavia, the UK, and a growing presence in the American market. However, while we aim to serve our customers across the globe, our focus will be placed on markets where we have established infrastructure that allow us to serve customers with favorable unit economics. Across our core markets, we see a meaningful advantage in profit contribution and driving orders from these geographies will best position us for return to profitability.

Secondly, we have worked closely with each business across the portfolio to identify and outline a range of operational measures to create a more efficient organization with lasting financial and strategic benefits. On the organizational side, we have taken the painful step of reducing our employee base to right-size our organizational footprint with the level of demand in the market and operate with a leaner structure.

From a commercial and operational perspective, there are a number of initiatives aimed at driving efficiencies across our business model. These measures range from a much tighter inventory management program to reduce our dependency on pre-orders and improve our inbound flexibility to tweaking our commercial offering by optimizing assortment and our marketing and fulfillment activities for maximum margin contribution. The full impact of a wide range of initiatives identified will accrue over the coming quarters and will drive a lasting improvement in our operating performance.

Lastly, we've touched on the numerous transaction benefits in our prior calls, but we have made progress on delivering sizeable synergies from our Wiggle and US Tennis acquisitions and have a clear pathway to realizing the full potential of these Group benefits. We've begun to realize Group procurement synergies as a result of our enhanced scale and have teams in place to optimize our tech stack and drive efficiencies across our organizations. In addition, growing our own brand portfolio and cross-selling our brands across platforms remains a critical strategic initiatives and one that we are keenly focused on executing.

Taken together, we are confident these measures will result in a refined operating model that will provide the basis for our renewed focus on achieving profitability. In total, the initiatives across our strategic realignment process are expected to deliver EUR100 million of adjusted EBITDA benefit in fiscal year ‘25 when we anticipate the business will be free cash flow breakeven. Despite the turbulence we have experienced in the first half of the year, we are optimistic that we are now through the worst of this dislocation and are focused on delivering a stronger second half of the year.

Although, the near-term picture remains uncertain as the market still navigates to this period of disruption, we are focused on delivering a more resilient business that is poised to benefit from the lasting consumer megatrends that would drive the attractiveness of the sports specialist retail industry and our position within for decades to come.

With that, I would like to thank you all for your time this morning. Now, I'll hand over to Alex to walk you through our financial performance.

[Alex Johnstone, CFO]

Thanks, Stephan, and good morning, everyone. Today, I will take you through our Q2 and H1 results for fiscal year 2023 and offer some additional insight on the key drivers of our financial performance. As you may have seen in our materials release this morning, Q2 fiscal year 2023, net revenue was EUR195 million and H1 revenue was EUR441 million, a 23% and 2% decrease year-over-year, respectively, on a reported basis. As many of you know, our Q1 fiscal year 2022 did not reflect the full impact of our WiggleCRC and Tennis Express acquisitions.

When considering our results on a pro forma basis, our financial performance was impacted by difficult market dynamics and a softer demand environment than we saw a year ago, with pro forma H1 revenue down 17% from the prior year. In H1, fiscal year 2023 and on a reported basis year-over-year, active customers declined 15% to 6.1 million. Visits were down 9% to 119 million, and net orders fell 3% to 3.5 million.

Net average order value grew 4% due to improved product mix and the relative strength of the e-bike category, thanks in part to improved supply chain environment. While our year-over-year comparison was unfavorable on a pro forma basis, active customers' net orders and conversion were elevated against pre-COVID levels as interest to cost categories has sustained growth in recent years.

Moving on to our cost base. Our financial performance in H1 fiscal year 2023 was heavily impacted by the severe overstock presence in the market, particularly in the bike category. As retailers, distributors, and brands have enforced to aggressively manage stock position, heavy promotional activity has led to a material margin contraction. In the first half of the year, our gross margin heavily declined by a 1,000 basis points to 26.4%, mostly driven by deliberate inventory reduction measurements at high discount.

Though our financial performance suffered in the first half of the year, we were successful in our deliberate choice to materially reduce our inventory position and have returned to our target stock levels as we enter the second half of the year. To achieve this, we took an exceptional one-time inventory write-off in the quarter approximately EUR20 million, which is being sold to alternative channels.

The company now has a clean order book for fiscal year ‘24 and its position to take advantage of the overstocking market, and favorably manage our intake margin. A lower revenue base coupled with a contraction in our gross margin resulted in a reported adjusted EBITDA for the half year of negative EUR97 million. The adjusted EBITDA margin increases discontinued operations was negative 22%.

Our OpEx base was heavily impacted by inflation, which in the competitive environment could not be passed to the consumer. While some of this inflation will be permanent, there are signs that many input costs are at or below pre-pandemic levels, which we are starting to see a benefit from. It's important to note that these figures do not reflect the commercial operational measures that we have implemented such as the impact of our reduced personnel footprints, as an example.

Before covering our longer term outlook, I'll briefly cover H1 fiscal year ‘23 cash flow and our liquidity position. In H1 fiscal year 2023, net cash from operating activities was negative EUR136 million, and our net cash from investing activities was negative EUR17 million, corresponding to investments in logistics consolidation and IT projects for the re-platforming required asset. Taken together, with the net cash from financing activities and the cash flow from discontinued operations, we ended H1 with EUR35 million of cash and cash equivalents.

To adequately address the business' near term cash flow requirement, we've taken important steps to ensuring the long term liquidity of the Group that will allow the business to weather the near term disruption. We are very pleased to have reached an agreement [indiscernible] of our major shareholder to provide the financial resources to execute on our long term strategy with an incremental EUR150 million in available liquidity to fund the business to cash flow breakeven.

With this additional investment, the business is well positioned to execute against our organic and inorganic ambitions in the coming years. Pro forma for subsequent capital raises and commitments received, the company's liquidity position stood at EUR273 million, as in H1 fiscal year 2023. This liquidity position includes EUR88 million of undrawn convertible note capacity, as well as the incremental EUR150 million commitment previously mentioned.

Looking ahead to the back half of the fiscal year, we anticipate a continued, but slow improvement in macroeconomic conditions and have shown signs of recovery recently as consumer sentiment starts to rebound from the recent layers. That being said, the overstock in the market will likely take another 12 months to 18 months to fully clear, and we'll continue to weigh on gross margins for fiscal year 2023.

As a result, we anticipate revenue growth of between negative 9% to negative 11% on a year-over-year reported basis, as well as an adjusted EBITDA margin of negative 16% to negative 18% for the full fiscal year 2023.

In conjunction with our 2023 outlook, we would also like to provide some visibility to the long term horizon. In the medium term, we anticipate the market to further consolidate and for SSU to return to 12% to 15% top line growth in the coming year. With the EUR100 million run rate EBITDA benefit a strategic realignment process enabling the business to be breakeven on a cash flow basis by fiscal year ‘25.

For fiscal year ’26 and beyond, we expect the full benefits of our recent acquisition, as well as the benefits of operating leverage would allow the business to be cash generative for fiscal year ‘26 as we approach our target financial profile of 7% to 10% adjusted EBITDA margins.

In closing, I would like to thank our teams [indiscernible] and resilient displayed across our business, as we navigate a very challenging period in our industry and the willingness to take all the necessary steps to position SSU for a successful future. As Stephan mentioned earlier, an improving market and economic picture, as well as our solidified financial footing, leave us encouraged that our performance in the back half of the year will compare favorably to H1.

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

[Operator]

Thank you. [Operator Instructions] Our first question for today comes from Ygal Arounian from Citigroup. Your line is now open. Please go ahead.

[Ygal Arounian, Citi]

Hey. Good morning. Good afternoon, everyone. Maybe just a couple of questions. First, if we can get a little bit more color on -- there are some comments around economic indicators beginning to improve and I understand that on macro side with inflation and certain things starting to get better. Talk about you’re -- the confidence level as we get through the remainder of the year on how demands can improve from the consumer side. And then, I want to talk a little bit more about the finance and as well, please. I'd like to follow-up.

[Stephan Zoll, Group CEO]

Right. Thank you, Yigal. So I think maybe firstly, just to address your questions in order. So on the economic outlook, we've seen, the core CPI inflation start to come down in our core markets, in particular, Mainland, Europe and consumer confidence is also starting to improve off the lows in the second half of last year. In the UK, that picture is slightly -- taking slightly longer than anticipated. Core inflation is higher than expected, taking longer to come down. So I think we're starting to see ultimately, inflation abates and you've seen now at least two quarters of private sector wage growth exceed inflation. So we do anticipate that will results in a healthier consumer in, as we go into next fiscal year.

And I think your second question was regarding our confidence levels for the second half of the year. So we're in May now, right? Our business is seasonal in the sense that about 60% of our revenues are typically recognized in the second half of the year. And so, we'll be somewhere in June now and so we've got good visibility on Q3. So trading is in line with our expectation because we took such dramatic actions to clear an inventory that was kind of we took over into this fiscal year.

We're now in a position where, I've got open to buy again and we're inbounding (ph) in demand items. And so that's resulting in, we suddenly see an up-tick in adjusted gross margin and that will ultimately result in, at the end of the stock and the market starts to clear and the levels of demand on stock are aligned obviously, healthier gross margins. So we're starting to see the green shoots in terms of gross margin improvements, and we anticipate that to continue into next year.

And I think your last question was regarding the financing.

[Ygal Arounian, Citi]

Yeah.

[Stephan Zoll, Group CEO]

Yeah. So maybe if you could just repeat the question for me.

[Ygal Arounian, Citi]

Yeah. Actually, maybe just before we -- before we jump into the final thing, since we're basically through your fiscal third quarter here, with any more specifics on what expectations are for this quarter. I think, I'm going to put you on that?

[Stephan Zoll, Group CEO]

So I'm just -- we're struggling to hear the question you go, but I think you said something about our expectations for the second half of the year.

[Ygal Arounian, Citi]

No. Well, I mean, the fiscal third quarter is were just a few days from that being finished. So maybe just the trends for the quarter specifically, if there's anything you could share on that?

[Stephan Zoll, Group CEO]

Sure. I think it can be inferred from the H2 guidance that we provided this morning. But, generally, again, year-over-year, we will see year-over-year declines reported revenue declines in the kind of high-single digits. And we start to improve in the third quarter, so in the fourth quarter, that's our expectation really because the -- as we look at just the lapping effects of when demand started to slow last fiscal year, the overstock in the market really picked up in our Q4.

[Ygal Arounian, Citi]

Okay. Right. And I'll actually maybe just ask -- some more clarification on the kind of updated strategy and it seems like there's pulling back in some markets and others, you're not. You kind of, you noted in the press release still looking for potential M&A, and I think you'll see some dislocation there. Maybe just help us understand kind of how to think through the strategy, the market, like, where the M&A focus is now or why there even is really an M&A focus [Technical Difficulty] given the dynamics in the industry and way through why not just kind of buckle down and figure it out before you get back to thinking about M&A. Thanks.

[Alex Johnstone, CFO]

Yeah. I think, let me take that. So the focus of our organization of our companies are busy (ph) to deliver and to execute against the plans that we lay down. That's the core focus that the company is basically driving that. And as we mentioned, right, there's the four areas of focusing on a core market adjusting our operational and commercial models and also delivering on the transaction synergies of the transaction we've done in kind of the core focus.

Now having said that, the turmoil is a market and the distortion, especially the bike market, but obviously, have a flipside for that, which is opportunity in terms of buy and build continuation, right? That's always been our strategy, right, long term. We are buying and build strategy and then company. So we do look and explore opportunities in that market. But, again, that's not the focus. The focus is to really nail and then execute against the plans that we have laid out.

[Ygal Arounian, Citi]

Okay. Sorry. If I could ask one more, I'm not sure if there's other questions to maybe on the liquidity side. So you've gotten now kind of a number of infusions from your kind of core holder, I guess. Can you talk to the level of commitment is a kind of like, an unlimited runway if things continue to go, if improvement continues to take longer than expected, if the environment continues to be more challenged, maybe just a little bit more color around the expectations there? Thanks.

[Alex Johnstone, CFO]

Sure. So, certainly, we have exchanges with our core shareholder. And in this environment, we obviously put forward the requirements of the businesses we see them to get to free cash flow breakeven, which is intended to be, on a full year basis in fiscal year ‘26. And so the commitment that has been put in place, we'll see the company into fiscal year ‘25 on a relatively conservative scenario in terms of the continuation of this market and obviously, a rightsizing of our inventory position. So the way that we look at it is that, we have a frequent exchange, and ultimately, it's ultimately going to be dependent on the outlook for the business, but we're confident that the commitment today and will enable the business to execute against our -- for the core pillars, as Stephan laid out and enable us to return the business to adjusted EBITDA profitability in subsequently free cash flow.

[Ygal Arounian, Citi]

Right. Thank you.

[Operator]

Thank you. [Operator Instructions] Okay. At this time, we currently have no further questions. So I'll hand back to Stephan Zoll for any further remarks.

[Stephan Zoll, Group CEO]

Yes. Thank you. And let me just reiterate one more thing, which I think is the key takeaway here. We're very confident while we continue to execute against the plans that we laid out that the results that we showed today will improve already in H1, as Alex alluded to as well.

And also second point, like, if you look through this, in the midterm, right, the megatrends that drive the consumer behavior that drive eventually the growth of our markets into segments that we're operating in, are very positive and they're continuously to be positive.

So next to that plus consolidation that's happening in the market in this time of the season, at this time, we're very confident that we get out of this with a stronger setup and even more opportunity ahead for us to continue to build our business.

So with that final remark, thank you very much for listening to us, and we're looking forward to the next update. Thank you.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.

[Stephan Zoll, Group CEO]

[Technical Difficulty] for listening to us, and we're looking forward to the next update. Thank you.