ABOUT YOU Holding SE
XETRA:YOU
Earnings Call Analysis
Q3-2024 Analysis
ABOUT YOU Holding SE
In the third quarter of 2024, the company made significant strides towards its profitability goals in spite of looming external market challenges and a relatively flat revenue. The adjusted EBITDA soared by over 60 million euros from the previous year, achieving 19.8 million euros for the quarter. Revenue levels managed to hold steady around 551.9 million euros, a mere 0.5% dip from the preceding year, despite delays in the fall/winter season due to warm weather. However, gross margins improved remarkably by 490 basis points to reach 40.3%, mainly due to strategic profitability measures, favorable revenue mix, and more efficient inventory management leading to reduced discounts.
Across Europe, a slight slowdown in inflation and a subtle uptick in consumer confidence became evident in the latter part of the quarter. Nevertheless, the company opted to prioritize profitability initiatives over aggressive growth pursuits. The execution of the great Black Friday campaign was a pivotal moment, climaxing in the highest seasonal revenue recorded and a boost in campaign profitability, fueled by a mix of social media outreach and strategic cost controls.
DACH, the German-speaking segment, suffered a 7% decrease in revenue, with Germany witnessing a notable dip due to weakened consumer spending. This contrasted with Austria and Switzerland, which fared slightly better. In stark contrast, the Rest of Europe segment saw a 7.1% climb, bolstered by an uplift in consumer mood and vigorous Black Friday sales, offsetting the DACH slump. A varied growth rate was seen in the Nordics and Southern Europe, reflecting diverse market reactions to cost-reduction strategies. The Technology, Media, and Enabling (TME) segment told a mixed story of growth and decline, with Tech enjoying acquisition-fueled gains, while the Media wavered and Enabling faced diminishing returns.
The quarter marked a notable advance in operational efficiencies and cost reductions, with fulfillment costs shrinking by 300 basis points, thanks to elimination of one-time charges and gradual softening of inflation. Marketing expenses also declined sharply by 390 basis points as the company paused major campaigns and improved ROI management, partially offset by a slight uptick in administrative costs due to organizational measures. These concerted efforts enabled the group to boost its adjusted EBITDA margin by 1,140 basis points to a positive 3.6%, signifying a robust year-over-year elevation in profitability.
The company ended the quarter with a sturdy cash balance of 229.6 million euros, supplemented by an undrawn loan facility, putting it in a good position to traverse the currently volatile market. Expectations for the year-end cash position are cautiously optimistic, albeit anticipated to be a touch lower than the current level. Guidance for the coming year has been tempered, zooming in towards the lower end of the initially predicted 1% to 11% revenue growth range, as the third quarter delivered below expectations and the fourth quarter commenced on a variable note. Nonetheless, the adjusted EBITDA breakeven expectation is upheld, and investors can anticipate a marginally negative adjusted EBITDA in Q4 that still marks an improvement relative to the previous year's numbers.
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Good morning, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the conference call of About You. Throughout today's recorded presentation, all participants will be in a listen-only mode. [Operator Instructions]. Being my pleasure to turn the conference over to Frank Bohme, Head of Investor Relations and Communications. Please go ahead.
Good morning, everyone, and welcome to our Q3 2023-2024 results presentation. Today's conference call will be hosted by Hannes Wiese, Co-Founder and Co-CEO of About You. Hannes will walk you through our Q3 results and just a second. The corresponding slides to this presentation have been published on our IR website under the Publications section this morning. After this presentation, Hannes will be happy to answer your questions. And with this, I hand it over to you, Hannes.
Yes. Thanks, Frank, and good morning to everyone from my side. Today, as usual, we are focusing on the following topics: for a business update, followed by Q3 financials, the outlook section, and we'll close this call with Q&A. Let's directly jump into our business update, starting on Page 4 with the key takeaways of the third quarter 2024. We have delivered on our profitability targets for Q3. Group adjusted EBITDA improved by more than EUR 60 million year-on-year and which EUR 19.8 million in Q3. Revenues remained broadly flat at EUR 551.9 million despite a challenging market environment and a delayed start into the 4 winter season due to unusually warm weather conditions.
Gross margin increased by a strong 490 basis points to 40.3%, driven by self-help profitability measures, revenue mix effects and an improved inventory composition, leading to lower discount levels. This, combined with strict operating cost control has led to a significant profitability improvement across all our segments. In that, the adjusted EBITDA margin increased by 590 basis points and an ROE by more than 1,000 basis points year-on-year. In TME, the adjusted EBITDA margin more than doubled to 38.3% in Q3. We are also reporting a strong free cash flow generation of EUR 93.1 million, driven by the improved EBITDA and measures to optimize working capital and CapEx.
Seasonality of the business with the sell-out of the [ for winter ] collection and revenue peak around Black Friday, further supported free cash flow generation in Q3. On the back of the positive adjusted EBITDA of EUR 11 million in the first 9 months of FY '23/'24, we confirm our adjusted EBITDA guidance to reach breakeven on group level. Considering the relatively muted revenue growth in the first 9 months of FY '23/'24 and a continuously volatile market environment, we now have expected revenue growth to come in around the lower end of the initially guided 1% to 11% growth range. Let's dive into our business update on Slide 5 with another look at the macro environment. We've seen moderate slowdown in inflation rates across Europe. Consumer confidence, however, further contracted in September and October and only slightly improved in November.
In this challenging market environment, we continue to focus on driving gross margin and operating cost control measures instead of chasing growth opportunities. We delivered a substantial improvement in our group adjusted EBITDA of more than EUR 60 million year-on-year and the EBITDA improvement is entirely driven by efficiency measures as revenues remained broadly flat year-on-year. An important driver of our Q3 results was the successful execution of this year's black period in November as summarized on Page 6. The record of the highest Black Friday season revenue ever, while at the same time, increasing the profit contribution of the campaigns. During the 2-week campaign period, we reached more than 50 million users via social media and record around 2 million orders.
The strong KPIs were the result of a flawless execution from our teams cold weather conditions across Europe during the black period and the high number of price-sensitive customers seeking their [ tried ADS ]. The tight cost control also on the marketing cost line, we decided to continue to invest in brand building also in the third quarter with several new and mostly digital initiatives as highlighted on Page 7. For example is the About You Shoppery campaign in October. In several European markets, customers had the chance to become a millionaire by ordering in our online fashion stores during the 1-week period. For every net euro ordered, customers will automatically enter into a lottery for a chance to win EUR 1 million. The campaign created a lot of buzz in social media, produce incremental high basket orders and more than regained the lottery invest. Additionally, we've been inspiring customers at home with large-scale branding campaigns across numerous TV stations and digital channels.
The traditional campaign formats were accompanied by numerous new core launches in Q3, including supermodel [ Tony Garen ] and the creators [indiscernible] . Let's now move on to our financial update, starting with our top line on Page 9. Revenues came in at EUR 551.9 million, which is a slight data of a negative 0.5% versus Q3 last year. The revenue development at the beginning of Q3 '23/'24 was negatively impacted by unusually warm weather conditions, leading to a delayed sellout of the fall/winter collection. A dynamic improved throughout Q3, supported by cooler weather conditions and the successful Black Friday campaigns which we discussed in the business update section. Let's now take a total look at our segment and our top line dynamics in Q3. At DACH, where revenues declined by 7% in the third quarter. This development is largely driven by the German market with low consumer sentiment weighed on spending. Austria and Switzerland in turn, showed a better top line performance.
Across all DACH countries, however, revenue dynamics in Q3 have also to be seen in the context of a significantly improved EBITDA versus last year and the various profitability measures, which drove this improvement. Rest of Europe segment revenue increased by 7.1%, compensating for the decline in DACH. Revenue growth was fueled by the CE region, driven by improving consumer sentiment in key markets and successful Black [ week ] campaigns. In the Nordics and Southern European markets, we again observed a relatively broad range of country growth rates due to different impacts of the cost reduction measures on [ country ]. Moving on to our TME segment where revenues declined by 3.6% in the third quarter.
Top line performance, however, were right across the different TME divisions. Tech, revenue developed positively driven by the acquisition and go-live of new business customers for scale. Media, revenues were flat to slightly declining as brand partners reduced their marketing campaign budgets and rather focused on measures to drive immediate revenue growth. Our Enabling revenues, however, showed a moderate decline year-on-year, largely driven by the relatively soft volume development on About You as well as the elimination of loss-making and aiding revenue streams.
Let's now move on to Page 10, where we see our customer engagement metrics for the commerce segments. The number of active customers declined by 0.9% to 12.4 million in the last 12 months. The decrease is broadly in line with expectations and primarily driven by the shortening of breakeven targets for newly acquired customers and the measures introduced to increase the profitability of existing customers. Average order frequency increased by 1.6%, reaching 3.1 transactions per active customer over the last 12 months. This development is supported by [ age ] structural effects of the customer cohort. The ATM average order value increased by 1.2% year-on-year to EUR 56 per order. The increase is largely due to our unit economic measures as well as higher RRPs and lower discount levels.
With that, let's move on to our bottom line on Page 11, where we can see the profitability improved strongly across all our segments. But let's start again on the left-hand side of this chart showing our group adjusted EBITDA. As expected, our adjusted EBITDA margin turned positive again and reached 3.6% in the third quarter of '23/'24. Driven by our efficiency measures, the total year-on-year improvement of our group adjusted EBITDA amounted to more than EUR 60 million in Q3. Let's take a closer look at the key drivers from a segment perspective. Our DACH business improved profitability by 590 basis points, reaching an adjusted EBITDA margin of 4.3% in Q3. Increase was the result of a lower level of discounting compared to the prior year period and continued tight cost control. Moving to our RRE segment, where we increased our adjusted EBITDA margin significantly by 1,310 basis points year-on-year. The main drivers for the improvement were lower expenses for marketing measures as well as the nonrecurrence of onetime costs related to the rollout of the European distribution network.
On B2B, our TME business more than doubled its adjusted EBITDA margin to 38.3% in Q3, up from 15.6% last year. The margin increase is largely the result of positive mix effects with a higher share of Tech and Media revenues as well as general cost discipline and the elimination of loss-making revenue streams. Let's now move on to Page 12 and take a closer look at the key cost lines of the group. Starting with the gross margin, which increased 490 basis points to 40.3% from admittedly low levels in Q3 last year. The increase was mainly driven by a lower need for clearance given an improved inventory position at About You and a reduced promotional intensity in the online fashion industry more broadly. Introduction of a new commission model for brand partners, price adjustment for the [ FA ] business model and the increased share of high-margin Tech and Media revenues in the TME segment further supported the gross margin increase.
Next, our fulfillment cost ratio, which declined by 300 basis points to 20.4% in Q3. The decrease was primarily attributable to the absence of onetime costs relating to the rollout of our European distribution network. Further, our measures to improve [ unit ] economics and softening inflationary dynamics help us to realize these efficiency gains. Let's move on to our marketing costs, which declined by 390 basis points to 12.4% in Q3. The decrease was mainly due to the pausing of large-scale marketing lands as well as a more conservative ROI steering. Partly, our admin and other cost ratio increased by 50 basis points to 4%. The increase is largely due to organizational measures as well as positive onetime effects in the prior year quarter. These factors combined in the increase of our group adjusted EBITDA margin by 1,140 basis points to a positive 3.6% margin in Q3 2024.
Let's now take a look at our cash flow drivers on Page 13. Our net working capital turned to a negative EUR 46.5 million at the end of Q3 '23/'24 which is a decrease of around EUR 40 million versus last year. This results from [indiscernible] working capital measures as well as cut off the defects around Black Friday. CapEx amounted EUR 3.7 million in the third quarter which has a significant reduction versus last year levels. The development is partially driven by the net representation of loans where partial loan repayments contributed to the reduction on top of lower investments in software and infrastructure. Moving on to our cash position on Page 14. Let me first look at our operating cash flow, which is at a positive EUR 96.8 million in Q3. The development largely results from the positive EBITDA as well as seasonal working capital effects through the sell-out of the [ for winter ] collections and Black Friday revenues.
Even though CapEx in Q3, operating cash flow almost entirely translates into a high free cash flow of EUR 93.1 million for the quarter. Rising cash flow is at a negative EUR 11.7 million largely driven by payments for leasing agreements relating to our logistics network. We ended the third quarter with a very strong cash and equivalents balance of EUR 229.6 million. This cash position in combination with the undrawn back up loan facility of up to EUR 97.5 million gives us enough liquidity buffer to effectively navigate to the current environment. [ Net ] of the business with the inflow of the Spring Summer '24 collection in our Q4, we, however, expect the year-end cash position to be below the level reported in Q3. Let's now move on to the final section of the presentation before financial outlook. Let's start with top line where we are further narrowing our guidance today to around the lower end of the 1% to 11% growth range in FY '23/'24.
We are narrowing the top line guidance due to the weaker than anticipated revenue growth in Q3 and the trading pattern observed to date in Q4. We've recorded top line growth in December, but trading remains relatively volatile and it's still too early to commit to the substantial acceleration in growth, which will be needed in Q4 to post meaningful growth in FY '23/'24. For the adjusted EBITDA, we are confirming our breakeven guidance for the full year on the back of EUR 11 million adjusted EBITDA generated in the first 9 months. For Q4, we expect adjusted EBITDA to come in slightly negative, but with another healthy improvement year-over-year. Let's move on to CapEx and net working capital, while our guidance remains unchanged. CapEx is expected to be around EUR 30 million to EUR 50 million in FY '23/'24 in net working capital is expected to remain broadly around the level at the end of our FY '22, [indiscernible] .
With this, let me close our Q3 presentation. Thanks for joining us on this exciting journey to become a profitable growth company. Now looking forward to answering your questions. So moderator, handing it back to you.
[Operator Instructions] Our first question today is from Anne Critchlow.
I've got 2 questions, please. The first one is on gross margin. Please, could you quantify the impact of business mix within the gross margin increase? And then secondly, just on the pricing outlook for spring/summer '24. Do you still see this as flat to slightly down.
Yes. Thanks for the question. So on the gross margin, I would say, 3 factors drove the improvement. One is indeed mix, which I would say roughly contributed 1/3 of the improvement and then secondly, lower discounts due to improved inventory composition, which is another 1/3. And then the last 1/3, I think, comes from self-help measures to the many measures that we actively implemented. Improved gross margin and profitability. On the pricing outlook, yes, I think we can confirm that. So broadly flat to maybe slightly declining RRP levels for spring/summer '24. That's our current view. We're seeing some third-party brand suppliers, some categories where we indeed would expect a slight decline in RRPs, but remains rather flattish.
The next question is from Emily Johnson from Barclays.
I've got 2 questions, please. So the first one is you referenced the positive trend in December. Is there any color that you can give in terms of the size of the improvement in November and into December by kind of DACH and Rest of Europe to get a sense of the exit rate and the momentum that you have nor the kind of unseasonable weather and the consumer sentiment has improved slightly helpful to get a gauge of the size of the improvement there. And the second question is, can you talk about your inventory build into spring/summer potential disruptions in the [ Med Sea ] and increased freight costs? Are you seeing any disruption already do you have any plans to change anything around the size or timing of your inventory build to mitigate any potential problems here.
Yes. Thanks for the question. So on the first piece, trading dynamics more recently, in November, we've indeed recorded healthy growth of high single-digit percentage rates. So that looked quite good in December. We've also recorded growth, but here more like in the low to mid-single-digit percentage range. And this pattern, I think, is consistent broadly across regions, although, of course, on reportedly lower levels, so the spread between DACH and Rest of Europe, of course, also translate. And for inventory in spring/summer '24, we would actually expect our inventory position to continue to improve growth in absolute terms and also in terms of the composition. We're not seeing any major risks on the third-party side, where our business is somewhat protected versus the short-term volatility in freight. So nothing really to call out here and also the current context in the Med Sea. I think this will rather have minor impacts and moderately less expected from that. I hope this answers the question.
Our next question is from Yashraj Rajani from UBS.
Congratulations on the results this morning. I have 2 questions, please. So the first one is just a follow-up on Emily's question. So I think, again, given how we've seen Germany trading in Q3 and also following that into December, do we still remain confident that we can return to double-digit growth in calendar '24? And if so, I mean, again, any color on the drivers would be super helpful. And the second question is on marketing, right? So again, how do we think about marketing in calendar '24 because obviously, with a return to growth, I mean, we probably have to stand a little bit on marketing. So I think, again, should we sort of expect that to stabilize at the 9-month run rate of between 10.5% and 11%. Or do you think there'll be some improvement from there as well?
Yes. Thanks for the question. So our ambition remains to get back to double-digit growth rates in the future for the group. And that was always tied to an improvement in the market environment. It is not really what we're seeing at present, as discussed so that makes it challenging to get to these double-digit growth rates very near term. However, even in this unsupportive environment, our ambition would remain to accelerate growth into next year and also to deliver on a further improvement in profitability. But please excuse that we can't give very specific guidance on this at this point. This would then happen in the course of our full year release in May 24. And on marketing, we would actually expect a slight step up, so a slight increase in the marketing cost to revenue ratio for next year.
That is also somewhat visible now in the Q3 '23/'24, where we've seen a higher cost to revenue ratio versus Q1 and Q2. And this, on the one hand side is driven by improved unit economics and improved CRE projections from that always when we see higher CRE production, we can invest more into customer acquisition in our steering at a breakeven horizon for new customers. So that's one factor. And the other is, of course, also that we are in other cost lines generating savings from our [ risk ] profitability measures, which also gives room for a slightly elevated marketing spend versus this year given also somewhat improved market.
The next question is from Georgina Johanan from JPMorgan.
I've got 2 as well, please. The first one, just following on with regards to improved profitability into next year and, of course, completely appreciate that it's an early stage to be getting sort of the detailed guidance. But just in terms of what would be driving that, if you're expecting marketing actually to sort of move up a little bit as a percentage of sales next year. Is it kind of ongoing recovery of the gross margin that will be driving that? Or is it something else, please? And then the second question was just I know you've talked about sort of obviously changing some of the rate cards with partners and so on which has been one of the drivers of improved profitability. How are your partners feeling about that at the moment? And what's the latest kind of dialogue with them in that regard, please?
Yes, sure. Thanks for the questions. So on the profitability part, that would be driven by several factors. On the one hand side, slide operating leverage from moderate growth expectations into next year, then we will also have full year effects from the profitability measures, which we've introduced over the course of this year, which will then have their full effect in the next financial year. To your point, we also expect further improvement in the gross margin from a further improvement in the inventory position and then there are also further measures, which we have on our mid- to long list that we are executing right now and that we plan to execute for the next year to further drive improvements in unit economics and fixed cost lines. It's a mix of external factors, but mostly [ sets of ] measures.
And then I assume the question relates to 3P partners and the changes in the commission and pricing scheme that we've implemented. Our discussions here are going definitely in a very good direction. So I think our partners are happy with operating models that we provide. They also see their own P&Ls happy and sustainable. We're also providing a very flexible tool set in terms of marketing visibility measures, so they can steer their contributions also to a large extent by themselves, contribution in campaigns, participation in campaigns and so on. So I think with the overall tool set and with the commission and pricing scheme that we provide, our partners are happy overall at least that the feedback that we're getting at this point.
[Operator Instructions] And our next question is from Nizla Naizer from Deutsche Bank.
Great. I hope you can hear me. I just have 2 questions as well. The first is on the competitive environment. I'm just trying to understand the region growth in Q3 was down 7%. Was there a step-up in competition that contributed to that as well? Or the entire market sort of see a similar sort of trajectory? Any color you can give us there would be great. And also whether competition is still highly promotional? Or has everyone sort of reached a sensible inventory level? Any color you can give us there in the current condition would also be great. And my second question is on seasonality in Q4 when it comes to the cost items. Could you remind us again how margins could trend in Q4 versus Q3, so where we have an idea about the sequential sort of developments that we should anticipate. Thank you very much.
Sure. So on the first part, the competitive environment, I would say, amongst onliners given broadly improved inventory position need for discounting and hence, also promotional intensity has somewhat declined versus Q3 last year. So that's, I think, a positive. At the same time, we're also seeing continued pressure from new entrants like Asian players, for example, which are relatively aggressive on price and that, on the other hand, I think drives up competition a bit also in online marketing channels. The net, I would say, neutral, so nothing that really stands out, at least in the online world. And in terms of seasonality. So the second question, our expectation would be that EBITDA margin turns to slightly negative territory again now in Q4 which is the seasonal pattern now with the end of season sale in our financial Q4. However, this will be of a low impact, so only slightly negative, and hence, we continue to be very bullish on achieving our breakeven guidance for the full year.
There are no further questions at this time, and I hand back to Frank for closing comments.
Let me close our presentation by saying thank you for your support and for joining us today on our conference call for Q3 2023/2024. If there are any further questions, please feel free to contact the IR team directly. We are looking forward to seeing some of you during the upcoming virtual road show and conferences. Have a good day. Bye-bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you very much for joining, and have a pleasant day. Goodbye.