RVRC Holding AB
STO:RVRC
Earnings Call Analysis
Q2-2024 Analysis
RVRC Holding AB
The company maintains a robust financial situation, having strengthened its cash position to SEK 353 million and showing net cash of SEK 340 million after considering lease liabilities. Even after distributing dividends worth SEK 97 million, the balance sheet remains solid. Net working capital has seen a decrease, primarily driven by an increase in short-term liabilities. Inventory levels are in line with expectations, poised to even out over the year, mirroring the previous year's pattern.
November was highlighted as a particularly strong month for the company, driven by successful campaigns and offerings. Although these aggressive campaigns slightly lowered the gross margin to 70.2% compared to the previous year's 70.7%, management views this small margin contraction as part of a strategic balance between growth and profitability.
The company continues to experience robust performance due to its core offerings of high-quality, multifunctional products at competitive prices. Even in a market challenged by weak consumer sentiment, they have managed to sustain growth thanks in part to these offerings.
While expanding its marketing efforts globally, the company has witnessed substantial growth in larger Rest of the World markets like the UK and the Netherlands, with the US market making strides, albeit from behind. The focus remains on a balanced approach to new market launches, weighing growth prospects against profit considerations.
The company prides itself on having a minimal proportion of slow-moving inventory items, ensuring a 'fresh' stock of products. Although inventory levels have decreased alongside a company growth rate of 21%, future inventory is expected to align with the company's overall expansion, suggesting a managed inventory strategy going forward.
With a sizeable cash position that provides stability in uncertain times, the company has exhibited financial prudence. After paying substantial dividends, it looks towards setting updated financial targets and strategies with the newly formed Board, with an emphasis on careful fiscal management and potential market investments.
The German market has become a crucial growth driver for the company, outpacing the overall DACH region. The combination of high customer demand, efficient new customer acquisition, and effective marketing investments underlies Germany's pivotal role in driving the company's success.
The new Alpine product segment has witnessed a reception similar to the successful footwear category launched a year and a half ago. While it remains a seasonal category unlike the year-round footwear sales, the Alpine segment's promising start positions it as a potentially significant contributor to future revenue streams.
Management has iterated the importance of balancing a gross margin of around 70% with EBIT growth, while maintaining competitive pricing for its customers. Despite variations in quarterly margins due to campaigning strategy, they aim to prevent brand dilution through overly aggressive discounting, underscoring the significance of striking a balance between sales, profit, and brand integrity.
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Welcome to the RevolutionRace Q2 presentation. [Operator Instructions].
Now I will hand the conference over to the CEO, Paul Fischbein; and CFO, Jesper Alm. Please go ahead.
Thank you, operator, and good morning, everyone, and welcome to this conference call where we will address the report for the second quarter for the fiscal year 2023-2024.
My name is Paul Fischbein, and I am the CEO of RevolutionRace. And with me for today's conference call, I have the company's CFO, Jesper Alm. To start off for those of you who are not familiar with RevolutionRace, I will give you a brief introduction. RevolutionRace is an outdoor brand, offering a wide range of outdoor products for the people with an active lifestyle. We operate with the digital D2C model, meaning that we skip the middlemen and sell our products directly to our customers. By doing so, we can offer quality products at unmatched value. RevolutionRace was founded in 2013 and launched in 2014 and has been listed on Nasdaq Stockholm since 2021, so a little bit more than 2.5 years ago. Our headquarters is located in Boras in Sweden, and we have approximately 120 employees. What really makes us stand out is our engaged customer community and also high customer satisfaction. We know how to communicate with our customers, resulting in more than 550,000 unique product reviews and more than 1.6 million followers and fans on our social platforms.
So how do we generate value? Well, our vision is to become the most recommended outdoor brand in the world. And our mission is to make nature accessible to everyone through our unmatched value. I already mentioned the D2C business model, and we create value by skipping the middleman and selling directly to our customers. And by doing so, we can secure our competitive offering and at the same time also maintain strong margins but also the model makes it possible for us to act fast and for example, react to changes in the industry, but it also makes it easier for us to enter new markets.
RevolutionRace is today an international brand. We now have customers in around 40 countries with a total of 18 localized web shops. We are currently fulfilling orders at 2 main logistics warehouses or hubs in Germany and Sweden and with a smaller distribution center also U.S. We design all our products in-house and work together with more than 25 suppliers in the production in Asia.
Now let's take a look at the net sales development for the second quarter of the fiscal year 2023-'24. We are proud to report a successful quarter during the years seasonally larger sales period. During the quarter, our net sales amounted to SEK 630 million compared to SEK 509 million a year ago and this represents a sales growth of 21%. We continue to deliver growth in all our regions and note that the majority of this growth is driven by our strong international expansion. Sales growth in the DACH region continued to increase by 26% and in the Rest of the World region by 23% compared to the same quarter last year. The Nordic region showed positive growth during the last quarter and continues to do so this quarter with 8% growth. This is pleasing even though the market conditions remain challenging in this region.
Let's look closer at the highlights during the second quarter, and we are achieving solid growth and a profitable quarter in a time of continued macroeconomic uncertainty and subdued consumer purchasing power. And this demonstrates the strength of our business model. The adjusted EBIT for the quarter amounted to SEK 146 million, corresponding to an adjusted EBIT margin of 23.8%. During the quarter, the Annual General Meeting decided to introduce a new incentive program, which resulted in onetime costs amounting to SEK 3 million for the quarter, and that explains the difference between adjusted EBIT and EBIT. This is an operating margin that we are pleased with given the challenging market climate. And it is also worth noting the negative impact from net other operating expenses of SEK 2 million in this quarter. And this indicates that the underlying EBIT is actually a bit higher.
We are still observing substantial discounts in the market due to high inventory levels, but we managed to keep our gross margin at a good level and the gross margin came in at 70.2%. We are satisfied with the development of inventory levels during the second quarter. Ahead of the quarter, we implemented a planned buildup of our inventory to be optimally prepared for the stronger sales period. And even though the company has expanded during the quarter, the closing inventory value was lower than at the time last year at the end of December.
Further, our financial position is strong. The cash flow from operating activities during the second quarter was very strong, amounting to SEK 281 million. And we have a solid cash position of SEK 353 million. And this is despite a dividend payment of SEK 97 million during the quarter. And on top of this, we have undrawn credit facilities of SEK 600 million also in place. And as you know by now, customer dialogue is crucial to our success. The combination of reviews and our growing social media presence forms a vital asset and a key factor in our achievements. Our social media following is expanding rapidly, now exceeding 1.6 million implemented by over 0.5 million product reviews from our customers and they have given us an impressive average rating also of 4.6 out of 5.
It is strategically important for us to successfully develop and expand our range to include more categories within the Outdoor segment. For the winter season, we launched our Alpine collection, featuring everything from ski goggles to gloves, pants and jackets. The range has been very well received by our customers, and we have also seen a surge in new customers, thanks to this launch. The positive reception indicates a good opportunity for increased sales of the Alpine range in upcome winter seasons, fully aligned with our strategy to expand through new product categories. And we have many exciting products underway. And soon, we look forward to introducing new shoes and a new category of outdoor products developed in thinner and lighter materials.
We are actively also working towards sustainable growth and ensuring that sustainability efforts are an integral part of our operations at every level. Our vision is to become the world's most recommended auto brand, and we feel that we are well on our way. This is demonstrated, among other things, by our consistently high customer reviews. Our clothes are not only durable, but also designed to be multifunctional. We produce only what we can sell with minimal overproduction. And at the same time, our work continues to map and clarify the traceability in the supply chain. Our customers should be able to trust that we can meet the high standard throughout the entire value chain for our outdoor products.
The time frame for our current financial targets, it's also now growing too close and we can report net sales of SEK 1.7 billion and an adjusted EBIT margin of 21.3% for the last 12 months. We are now in the process of reassessing these goals, a task in which our large new Board is actively engaged, and we aim to announce revised financial targets before the existing ones expire in June this year 2024. And also in accordance with the Board's proposal, the Annual General Meeting in November decided on a dividend of SEK 0.86 per share corresponding to a payout ratio of 40% of our results, meeting our dividend policy.
And with that, I would like to hand over to the company's CFO, Jesper Alm, who will present and walk through the financial performance.
Well, thank you, Paul, and good morning, everyone. I will talk you through our financial performance during the second quarter. Gross profit amounted to SEK 431 million for the quarter, which is a growth of 20% compared to the SEK 360 million a year ago. This equals a gross margin of 70.2% compared to 70.7% a year ago. The gross margin is slightly below that of the comparison period due to an increased campaign pressure primarily during November, which includes the Black Friday period. On a rolling 12-month level, gross profit exceeded SEK 1.2 billion.
Moving on to operational expenses. We see a slight decrease in personnel expenses compared to the same quarter last year. Staffing levels have, at the same time, decreased slightly due to being careful in replacing staff turnover. The quarter included the SEK 3 million in personnel expenses relating to the AGM approved long-term incentive program that was launched during the quarter, and the comparison number is SEK 12 million a year ago. Both these numbers, the SEK 3 million for the quarter and SEK 12 million a year ago. They are treated as onetime expenses and have been adjusted for. Other external expenses increased to SEK 252 million compared to SEK 207 a year ago, which as a share of net sales is at the same level as the same period last year at around 41%. The cost increase in absolute terms is explained by these costs being primarily being variable in relation to net sales.
EBIT for the quarter amounted to SEK 143 million compared to SEK 105 million a year ago, of course, but an EBIT margin of 23.3% compared to 20.7%. And the increase in absolute -- well, in -- the increase in absolute terms has been 36%. That's relative terms. The adjusted EBIT, excluding expenses relating to the incentive program amounted to SEK 146 million at a margin of 23.8% compared to SEK 117 million and 23% a year ago. So the adjusted EBIT increased by 25%.
The balance sheet has remained solid, also after paying the dividend of SEK 97 million during the quarter. Net working capital decreased to SEK 84 million, primarily driven by an increase in short-term liabilities. The development of the inventory levels followed our expectations during the second quarter ahead of the upcoming peak season, we carried out the band inventory buildup and we expect the inventory levels to continue to flatten out over the year, which is in line with last year. The total inventory amounts to SEK 438 million, of which SEK 322 million or goods in warehouse compared to a total inventory of SEK 445 million a year ago.
Our financial position has continued to strengthen, and we had a cash position of SEK 353 million at quarter end or net cash of SEK 340 million when adjusting for lease liabilities. We have a credit facility of SEK 600 million available, and that facility expires in 2028. So in conclusion, revolution rates has a strong financial position and continues to deliver solid growth and profitability.
I think that sums up my part, and I'll hand back over to you, Paul.
Thank you, Jesper. So to sum things up and also an update on current trading. RevolutionRace is very well positioned for the future, backed by a strong core offering and a strong financial position. We come out of the second quarter stronger with notable sales growth and a solid performance. We also see a strong start in the third quarter with sales growth in line with the growth being reported today for the second quarter. And that concludes our comments on the result and before we finish, I would like to take the opportunity to thank the whole team at RevolutionRace, our customers, shareholders and partners. I look very much forward to continuing to build on RevolutionRace success together with all of you.
And with that, we are now happy to answer questions. So I ask the operator, do we have any questions?
[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABGSC.
Paul and Jesper. So a couple of questions from me. First one, you mentioned -- you talked about a good campaign period, despite not making any -- as far as I can tell at least, major differences to your discount strategy. Could you elaborate on why you think the campaign period was so successful for you, please?
Well, what we did see is sort of in the quarter, we saw that November was a very strong month. And obviously, that month is very impacted by different kind of offerings and campaigns, and it turned out very well. So -- and November actually grew a little bit more than the quarter in total. So that is how we can see that the November was strong. And that, I think, is also one of the explanations that the gross margin is slightly lower than last year and that sales was a little bit more generated during November with aggressive campaigns or competitive offers, even though it's still is -- it's a very small difference, as you can see the gross margin is 70.2% compared to last year, 70.7%. So I think it's within the same range still.
Okay. Perfect. Also strong performance in the Nordics, yet again, despite a rather soft sports market. I acknowledge that the competition is a factor here, of course. But regardless, could you tell us about what you're doing differently now versus, say, a year ago operationally, please?
I think looking at the performance, I think the main explanation behind our strong performance is actually sort of our general core offering. I think we are very well positioned in the market now, where we see that the consumer sentiment is a bit weak. We sell products with many functions at high quality, but at the same time, also at competitive prices. And I think that position is very well.
We are very well positioned in the market compared to many maybe other players. So I think that is the main explanation to why we can actually continue to grow for the second quarter in a row, even though the market -- in the Nordics, even though we see that the market climate is challenging.
Perfect. And then one...
Maybe I can also add just to give some -- a little bit more flavor in it. And so the coring is strong, of course. But on top of that, within that core offering, we've been successful in launching also new categories and that we can highlight the Alpine collection, which was a very successful launch. I think that also adds to the growth in the Nordics, but not only in the Nordics, but also in all markets.
And that actually ties into my next question pretty well. Your comments on the Alpine product segment is very good for acquiring new customers specifically. Is this a typical pattern with previous launches as well? Or why do you think the Alpine product category is different?
That's a really good question. We have actually seen that when we launch new categories, we've been able to attract a new customer category to some extent. One would maybe expect that adding new products is a way of capitalizing on existing customer database which is, of course, true. But we have also been able to attract new customers with some new content and new collections, which -- yes, which is, of course, very promising. And we will continue to develop our assortment. As you know, we try to balance what we call the running assortment towards new products. So with an 80% to 20% split, 80% being the running assortment. So it's still the vast majority of what we sell.
But we see that new categories are helpful for making existing customers that have given us high customer ratings and are satisfied with what our brand can deliver -- continue to buy new products, but it's also a way of attracting new customers who have not been exposed to familiar with the brand before.
And a follow-up as well. So the new customers, how long does it typically take for these customers to become customers of the core offering as well then, assuming that they do become customers of the core offering as well?
Yes. So we haven't disclosed like KPIs of how often a customer buy from us on an annual basis or any KPIs like customer acquisition or lifetime value. So I'm afraid that's some numbers that we don't disclose at this point.
The next question comes from Niklas Ekman from Carnegie.
Yes. We talked about the Nordics being very strong, but we also note that the Rest of the World segment, which used to grow very strongly has seen a bit of a slowdown. I think you had more than 40% growth in previous quarters, now it's just over 20%. Can you tell us a little bit here about what's happening or which market -- which markets are performing very well? Or are there any markets that -- where you've seen a slowdown in the quarter?
Yes. So I think the main reason why it's a bit -- I mean, it's still high growth numbers, but the main reason why it's a bit lower than the last quarter, is that we always try to balance growth versus our profits. So we sort of almost on a daily basis, try to tune in how much mainly marketing investments we do on the different markets. So we do see continued good growth in the bigger Rest of the World countries such as U.K., for example. I think that stands out as a good market, also in the Netherlands is a good market in that region. U.S. continues to grow with high growth numbers even though it's still a bit behind U.K. and the Netherlands. We just launched in the U.S. a year ago. So it will take some time. We always take a balanced approach to our new launches and try to balance growth versus profit. So I think that's the main explanation that we have balanced growth versus profit.
Okay. Fair enough. We talked about new products here. I'm curious, is there any way to break out how much product segment that you didn't have at the time of the IPO. And I'm thinking about shoes, bags, [ skis ], pants, Alpine, how big part of your sales does that make up now? Just to understand how dependent you are on kind of the old products and the entirely new collections.
Yes. So that's a good question. I'm afraid I don't have a clear answer. But what we can see is that pants is still -- definitely still the biggest category, accounting for still more than 50% of sales. However, that number was much higher before. Jacket is the second biggest category accounting or amounting to almost half of the pants category. So that adds up to the vast majority, of course, of our sales. So one could then quite easy calculate that it accounts for very roughly between 15%, 20% of sales on these new categories you mentioned.
Super. That's very helpful. And can you tell us -- you talked about the competitive environment here. Have you seen this changing at all? I think in the past, it's been a problem with excess inventory in the market and lots of campaigns. And obviously, you've just gone through black week but is -- are you seeing any signs of that excess inventory situation easing and campaigns may be dropping back to more normal levels?
That's hard to say because we are active in so many markets, and it differs a lot between the different markets. We can, of course, see that in Sweden, it's still very competitive. We see reports that the market or the sector is still weak. I saw a report of, I think it was spot index showing that the sales in this category is declining for several quarters in a row. So it's still competitive, and we do see some -- still see some excess inventory that other players are trying to clear out. However, in other countries, we definitely see that it's sort of looks more normal compared to what it used to be like 2 years ago.
So it's difficult to give one answer to that question because it differs so much to the different markets. But if the question is related to Sweden, for example, we haven't really seen it maybe a little bit -- it has eased up a little bit, but we are far from what it used to be a couple of years ago.
Okay. Very clear. And also just following up on the cash flow. Obviously, very, very strong in this quarter. Is that sustainable? I'm wondering, have your inventory levels been drawn to too low levels now. And besides the normal seasonal buildup and then sell-down. Are you at unusually low levels? Or are you at pretty sustainable levels with your inventory right now?
I mean just a comment on the cash. I mean, our balance sheet is quite easy to understand. And the cash flow is a result of a couple of things. The most important thing is obviously to generate results. And so that is the major component of our cash flow increase. And then the second component is, of course, how working capital or how inventory and payables are shifting. So it's, of course, helpful that inventory is decreasing compared to a year ago, even though it's almost in line, but still it's a bit lower. And then we are working on payables as well, and we do see a smaller increase in the payables compared to a year ago. So that, I think, is also an explanation to a strong cash flow.
Very good. But you don't have a problem with too low inventory at the current level?
We always try to be balanced. I think we are pretty satisfied with the inventory we have at the moment. And one must understand also that it's not only the size of the inventory. It's also the composition of the inventory. And we do see that we have a very small share of, how should I call it, slow movers in the inventory. So it's a very fresh inventory. And -- but I mean, I'm speculating a little bit. And well, maybe we should not expect inventory to continue to decrease, well, at the same time, the company increases by 21% as we saw in the last quarter that is maybe not something to expect. But one should maybe expect it to grow in line with inventory? In line with the company's expansion.
The next question comes from Daniel Ovin from Nordea.
The first question is on the gross margin that came down a tad from last year. And you also mentioned that doing a bit of more campaigning seems to have been beneficial, especially here in November. I'm just thinking -- I can remember you had a target to stay above 70% in gross margin. And thinking ahead here, if this strategy continue to work, would you consider to go below that 70%? Or is that still a target to stay around that level? And perhaps also talk a little bit about the campaign levels now in Q3 or has that changed noticeably from previous quarter? That's the first question.
I think there were 2 questions there. So well, first, we always try to balance growth versus our profit. And we have seen historically and also for the moment, that 70% gross margin is a sort of good level for us to -- because we want to balance sales some profit, but we also need to balance brand. We have to secure that we don't dilute our brand too much with aggressive campaigns in the market. And so I think around 70% is a good level for us to operate on. Now how -- whether that should be like 70.5% or 0.2% in this quarter or 69.8% that -- I can't really guide on that. I think the most important thing is to secure that we are growing EBIT and at the same time, can secure a good competitive offering for our customers. We are very reluctant in increasing prices.
I think it's extremely important that we can stay put with our competitive offerings, selling high-quality products at competitive prices. I think that's sort of the main reason to high customer satisfaction and continued growth. So that is important. But I don't want to guide on an exact gross margin level that we are satisfied with. I think this level is good. And also it was -- I mean, it was very competitive in November. We think that our campaigns and offering they -- we resulted in good ways, and that also impacted the gross margin slightly negative in November compared to December, where we do have higher gross margins. So intra-quarter, we saw some fluctuations at gross margin, but I think we are well positioned.
The second quarter also. Maybe I address both of them. I don't remember actually.
Yes. Okay. Great. And then just a question on your personnel expenses here also. I noticed that both the average FTEs and also personnel -- adjusted personnel expenses were actually down year-over-year and still you're growing top line here. So how does that situation look going forward? I mean, is there any risk here of becoming understaffed? Or basically, do you have -- do you feel has sufficient of personnel here to keep growing this way without personal costs coming up in line with sales? Or how should we think about that development going forward?
I think we always aim to be more and more efficient, not only when it comes to staff but also in marketing and operations such as logistics fulfillment. And so there are many cost components in the P&L that we are always working on getting more efficient on. We will definitely continue to invest some in our team. We want to continue to develop more product categories and more products that will require some extra resources for sure. But I think we are all in a pretty good situation, maybe we will add a couple of FTEs to the organization, but one should not expect any big shifts in our strategy.
The next question comes from Emanuel Jansson from Danske Bank.
I -- most of the question has already been answered at this moment. But obviously, you have built an impressive cash position looking at your balance sheet. I wonder could you maybe provide some insights into how you would use the cash besides dividends? Could it potentially be used for maybe geographic expansion? Or how should we view it?
Thank you for your question. Well, so yes, we're very satisfied with our cash position. I think it's very -- it's a good position to have in a world with a lot of uncertainties. We are, of course, humble about that situation. We recently paid out the dividend that was decided by the AGM in the last quarter amounting to almost SEK 100 million. And we now -- we also have a new -- fairly new Board. We have many new Board members that just joined recently joined the company at that AGM in November. And we have initiated some work with the whole Board to and with the ambition to present some updated financial targets and strategy also for the company before the current financial target expires during this year, as I'm sure you are aware of.
So whether we can discuss any potential investments in market entries and so on, I think I have to -- I think I cannot comment on that at this point. But rest assured, we will come back to you before June with an update on that.
Well enough and could we maybe look somewhat on the German market, I mean strong development in both Germany and DACH region. But can you maybe say something about how the development has been throughout the quarter. I mean, as external data point maybe have not been the strongest quite recently presented at least.
Yes. I think the German market has been -- or is sort of nowadays, it's our big engine. It's serving us very well. We see that we have continued high demand from our customers, both existing customers and new customers. We see that we are efficient when it comes to recruiting new customers and our marketing spend also in total in the German market. And yes, we also see that the German market, if you want to add specifically on the German market within the DACH region, it's actually growing even better than the DACH region in total. So that is definitely the big engine in -- for the whole company.
So it has maintained more or less the same pace throughout the quarter? Or how should [ we view ]?
Yes, it has been really strong during the quarter and also continues to be strong also after the quarter. We today also comment on current trading, seeing that the growth level for the company is continuing in line with the growth that we saw in the second quarter. And yes, it's -- we can say that Germany is definitely continues to be the strong engine behind the whole growth.
Yes. Good. That's clear. And then maybe a last question from my side. Just touching on the new [ Alpine ] collection, which we already talked a bit on. But I mean, it has been well received, you're stating. And can you maybe compare it somewhat compared to the -- when you launched the new shoe collection, how the reception has been compared to that product launch? Has it been more successful or similar or...
Pretty similar. The difference is that our shoe collection is a category that runs -- it's not so seasonally impacted as the Alpine collection. So we will -- we have now placed our orders for the next Alpine collection, where we have more doubled our purchases to facilitate higher volumes. But the start has been very similar to the footwear category that was launched 1.5 years ago. And so yes, I would say it looks very promising if it can continue to be on par with the footwear launch, then it will have some significant impact on our total in upcoming years. But it's a seasonal product category compared to footwear that we can more or less sell the entire year.
[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions.
Thank you, operator. So then before we wrap up, we note that we have not received any more questions online. So just to conclude, all in all, we look forward for the coming months focusing our energy and commitment to keep moving forward in the same positive direction that we have seen in the past quarters. Thank you all for participating today and for your interest in us. We look forward to speaking to you again over the coming weeks and months. And may I also remind that our Q3 report will be announced on May 7. And with that, thank you, and goodbye.