Marimekko Oyj

OMXH:MEKKO

Earnings Call Transcript 2022-Q1

[Anna Tuominen, executive]

Good afternoon, ladies and gentlemen, and warm welcome to Marimekko's Q1 Results Webcast. My name is Anna Tuominen, I'm the IRO of Marimekko. With me, I have our President and CEO, Tiina Alahuhta-Kasko; and our CFO, Elina Anckar. We will first hear Tiina's presentation of the results. And after that, we'll have a quick Q&A session. If you wish to ask questions, please use the chat function of the platform. You can already type your questions in during the presentation, and we'll go through them after that.

But right now, Tiina, please go ahead.

[Tiina Alahuhta-Kasko, executive]

Thank you, Anna. And good afternoon also on my behalf, and it's my pleasure to share with you today Marimekko's performance in the first quarter of 2022. So let's get started. So after the all-time record year of 2021, Marimekko's good development continued in the first quarter when both our net sales as well as our operating profit grew. Namely, in the first quarter, our net sales grew by 24%, with both net sales in Finland increasing by 27% and international sales rising by 20%. The sales actually increased in all market areas in double digits. Then thanks to especially by the increased net sales, our comparable operating profit also improved by 18% to EUR 6.6 million.

Overall, the strong development of our business is a result of the long-term work that we have been doing to constantly increase the desirability of our brand, to develop the -- our collections and the way that they speak to an even wider international audience, and also the more agile operating methods that we've been able to develop in the last couple of years, to name a few examples. The strength and competitiveness of Marimekko and the profitable growth that we've been able to achieve is, of course, thanks to the great work done by all Marimekko employees.

In 2022, we are continuing our efforts to accelerate our long-term international growth. As our business model and strategy of profitable growth do not tie up significant capital and as the financial position of Marimekko is so strong, the AGM, after the review period, decided to distribute also on an extraordinary dividend in addition to the regular dividend for the year 2021. The AGM also resolved to split the company share in order to improve its liquidity.

But let's have a closer look to the business development in the first quarter. So as mentioned, our net sales increased by 24% to EUR 36 million. They were boosted both by a favorable trend in wholesale and retail sales in Finland, as well as the good development of international net sales, with sales growing in all market areas. Our retail sales increased by 22%.

As in the comparison period, nearly all of Marimekko's company-owned stores were opened in the first quarter, and we saw footfall in the stores growing clearly from the comparison period when the pandemic situation still had a stronger impact on the footfall. Sales developed well both in the Marimekko owned brick-and-mortar stores as well as the online store.

Then wholesale sales continued its strong development, with wholesale sales growing by 23% and also licensing income increased clearly by 48%. We saw, as mentioned, sales growth in every Marimekko market area and in all product lines. And of course, this was -- it was wonderful to also see nice growth in addition to the home products that have been seeing really strong growth in multiple of the previous quarters, but now also very good growth of over 20% both in ready-to-wear and bags and accessories.

Still today, Finland is our strong home market and the Asia Pacific region is our second biggest market. Today, the Asia Pacific region has the greatest number of stores already and the Marimekko online store serves customers in already 35 countries.

Then when we look at our brand sales that really give an indication of the reach of the Marimekko brand through different distribution channels, and which is an unofficial estimate of the sales of the Marimekko products at consumer prices, we saw a strong growth of 31% with growth coming both from Finland as well as the international sales.

Then as earlier mentioned, our comparable operating profit increased by 18% in the first quarter, and they were boosted especially by the increased net sales but also lower depreciation than in the comparison period. On the other hand, we saw an increase in fixed cost as well as lower relative sales margin had a weakening impact on the results.

So what are the factors behind here? The fixed cost increase as we made investments into the long-term international growth and increased, for example, our marketing spend, made investments into our IT systems as well as our digital development, and we also made new recruitments to support the long-term international growth. Also something good to keep in mind is that in the comparison period, fixed expenses were reduced by the timing of marketing investments, among other things.

Then to the factors behind the lower relative sales margin, those were due to the increase in logistic costs, which was a result of the general increase in transport costs as well as higher discounts that were due to the successful end-of-season sales as well as the clearance sales of 2 stores that -- the lease of which expired during the review period.

Then if we flip on and have a look to the key events in the first quarter. In February, we presented our winter '22 ready-to-wear collection, again at Copenhagen Fashion Week, which we've chosen to be the fashion week where Marimekko showcases the new collections because of its strong sustainability orientation. The collection that we presented was designed with a focus on combinability and layering. And why these are important is also due to the fact that the kind of improved combinability between seasons and the new block fits and archetype silhouettes that draw inspiration from the Marimekko archives, they further strengthen the timelessness and sustainability of our design.

We also announced our third limited edition collection with adidas in March. The collection arrived on market then in April. These global limited edition brand collaborations with the top brands in their respective industry really help us increase the global brand awareness of Marimekko, and this way support our growth strategy. In March, we also launched a limited edition brand collaboration with a Chinese lifestyle brand, the Beast. And this collection introduced special home products as well as Marimekko's first perfume to the Chinese market, to the Chinese consumers.

In addition to these highly visible global brand collaborations, these sort of more targeted local partnerships are also an important way to introduce an increasing number of new customers to Marimekko.

We also took our first steps toward a value chain in line with the principles of circular economy. When at the beginning of '22, we started a cooperation concerning the recycling of end-of-life textiles. Rester Oy's recycling facility in Paimio in Finland makes new textile fibers from the end-of-life textiles of Marimekko's own productions, namely from our textile printing factory in Helsinki and a sewing workshop that is also located here. At Marimekko, we continuously work to reduce the amount of waste from all of our operations. And this work naturally begins already in the design process. We strive to reuse and recycle the generated waste as efficiently as possible.

Then to the outlook of -- for the full year of 2022. The development of the pandemic situation in different markets, the political tensions and the increased inflation impact the global economic trend as well as consumers' purchasing behavior. And as a result, they can have an impact on Marimekko's business. Russia's attack on Ukraine has deeply shocked us at Marimekko, and our thoughts are with the people of Ukraine. Then when it comes to the business implications of the war in Ukraine, the war does not directly affect Marimekko's business as Marimekko's products are not manufactured or sold in Russia, Belarus or Ukraine and the company does not source raw materials from these countries.

However, the war in Ukraine does cause disturbances in global supply chains and this way contributes to the -- and also contributes to the general economic situation and consumers buying behavior and power. And these factors then may affect Marimekko sales and profitability as well as operational reliability and efficiency of our value chain. Naturally, we are closely monitoring the impacts of the war as well as the coronavirus pandemic, and we'll adjust our operations and plans according to the situation.

And then a few points about the seasonality. So because of the seasonal nature of our business, the major portion of our euro-denominated net sales and earnings are traditionally generated during the second half of the year. In percentage terms, net sales growth is expected to be stronger at the beginning of '22 than in the second half of the year. In 2021, the pandemic had a negative impact on the footfall of Marimekko's owned stores at the beginning of the year, and the net sales in the second half of 2021 were supported, for example, by the sort of substantial nonrecurring promotional deliveries in wholesale in Finland.

Then if we look at the outlook to our 2 key markets, Finland and Asia Pacific. So Finland traditionally represents about half of our company's net sales, and we expect sales in Finland to grow on the previous year. What is good to note is that the total value of nonrecurring promotional deliveries in wholesale in '22 is estimated to be substantially lower than the year before.

Then to Asia Pacific, our second largest market, playing a significant part in our company's international growth, we expect the net sales in Asia Pacific region to increase clearly in '22. And as our company's aim is to open approximately 5 to 10 new Marimekko stores and shop-in-shops in '22, most of the planned openings will be in Asia. We also estimate both our retail and wholesale sales to increase in '22. Also, the licensing income is estimated to be higher than in the previous year. And we are continuing actions to control gray exports also in 2022, but these actions will have a significantly lower weakening impact on Marimekko's sales and earnings this year than the last.

The pandemic-related restrictions and the war in Ukraine caused disruptions in the global supply chains. And these disruptions have resulted in delivery delays and, thus, can impact our net sales and profitability. In addition, disruptions in supply chain increased logistic costs, which have also grown overall worldwide, as we know, Furthermore, the net sales and earnings essentially do depend on maintaining the operational reliability and efficiency of distribution centers and logistics in the exceptional situations.

And also as mentioned in the past, the cost of raw and other materials have increased globally. The early commitment to product orders, which is typical of our industry, means that any changes in raw and other material prices affect Marimekko with the delay. And in addition, this sort of early commitment to product orders, that is even further emphasized in this sort of exceptional situation, it undermines our ability to optimize the product orders and respond to rapid fluctuations in demand, which can happen especially in these sort of exceptional situations. But at Marimekko, we are actively working across our teams on mitigating these disruptions in supply chain and the negative effects of the increased cost.

As mentioned earlier, we are continuing to accelerate our long-term international growth in 2022, investing especially in brand awareness, in digital and omnichannel business; in developing sustainability, where we have high ambitions; and in recruitment, supporting our growth as well as in IT systems. And therefore, fixed costs are expected to be up on the previous year and also the marketing expenses are expected to be up.

So we do reiterate our financial guidance for 2022, which says that the Marimekko Group's net sales for 2022 are expected to grow from the previous year and the comparable operating profit margin is estimated to be approximately some 17% to 20%. Global supply chain disruptions and generally increased material and logistics costs, in particular, do cause volatility to the outlook for 2022, as discussed also earlier.

So with these thoughts and information, I would like to thank you for your attention, and I think that we're ready for questions.

[Anna Tuominen, executive]

Thank you, Tiina. [Operator Instructions] I have a few questions related to the store network and the role of physical stores. At this point, do you think your shops or the stores work mainly as a sort of image building tool and most of the sales growth comes from online or other channels? Or how do you see the role of stores? And the background for this question is that the number of stores in the first quarter declined a bit.

[Tiina Alahuhta-Kasko, executive]

Yes. So naturally, the kind of -- the pandemic has further expedited digitalization and moved even more consumers to shop online. But what we can also see is that now starting to recover from the pandemic, with societies opening up and lifting restrictions, as human beings, we also have a need for the human interaction. And we, for example in the first quarter, saw really good development both in the physical stores as well as in online stores. So for us at Marimekko, of course, the stores do play an important role as the kind of heart of our brand culture, where we can really focus on personal service, meaningful emotional experiences and kind of sense of discovery. But of course, we see an important role for the physical stores also from the net sales part as well. Where we focus our efforts at Marimekko is the omnichannel customer experience, also across all channels and across retail. And therefore, we continuously invest in adding to our omnichannel capabilities, creating a seamless shopping experience for our customer.

[Anna Tuominen, executive]

You mentioned that there's plans to open new stores during this year as well.

[Tiina Alahuhta-Kasko, executive]

5 to 10 new stores and shop-in-shops. When it comes to the closures of the stores, that is a natural part of chain management. In some quarters, there might be more closures, then some more openings. This is a regular retail store network management. And we see that while digitalization has definitely been expedited, we do see, also in the future, an important role for the physical stores.

[Anna Tuominen, executive]

For the online store then, are there any differences between the online store availability? Or how do you choose which new markets then will be opened, the online stores for example?

[Tiina Alahuhta-Kasko, executive]

So for example -- I mean, I mentioned in the earlier response that, at Marimekko, we strongly believe in creating a seamless online channel experience. So today, for example, in all the markets where we have Marimekko retail stores, there's also an online store that serves the customers, and this way providing this omnichannel experience. So basically, our online store serves all those key markets, Northern Europe, North America and the Asia Pacific region, where there are also Marimekko stores. But of course, for example, in Europe -- in European countries where we don't have owned, freestanding physical stores, the online store also serves there.

Then the other kind of physical touch points for the consumer are maybe in physical wholesale channels, like department stores, or then through e-tailers. So again, the omnichannel perspective is the key.

[Anna Tuominen, executive]

Serving customers in all possible points, so to say.

[Tiina Alahuhta-Kasko, executive]

Correct, yes.

[Anna Tuominen, executive]

We have no further questions at this time. So I would like to thank you, Tiina, and thank you for joining us.

[Tiina Alahuhta-Kasko, executive]

Thank you very much.