MYT Netherlands Parent B.V. Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 28, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the My Telisa First Quarter of Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q and A. It is now my pleasure to introduce your host, Martin Beer, MyTeresa's Chief Financial Officer. Thank you, sir.

Operator

Please begin.

Speaker 1

Thank you, operator, and welcome everyone to Mytresa's investor conference call for the Q1 of fiscal year 2024. With me today is our CEO, Michael Kliger. Before we begin, we'd like to remind you that our discussions today will include forward looking statements. Any comments we make about expectations are forward looking statements and are subject to risks and uncertainties, including the risks and uncertainties described in our annual report. Many factors could cause actual results to differ materially.

Speaker 1

We are under no duty to update forward looking statements. In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non IFRS financial measures in our earnings press release, which is available on our Investor Relations website at investors. Mythesa.com. I will now turn the call over to Michael.

Speaker 2

Thank you, Martin. Also from my side, a very warm welcome to all of you Thank you for joining our call. We will comment today on the results and performance of our Q1 of fiscal year 2024. We are pleased with our results in a challenging macro environment. With our positive revenue growth And a small financial loss, we not only surpassed market expectations, but also outperformed almost all competitors.

Speaker 2

As expected, we saw a slowdown in demand with aspirational customers across all geographies and the high promotional intensity in the market Due to excess stock of fallwinter merchandise, even though the macro environment remains very challenging, we continue to prove Fundamental strengths of our business model. We saw strong double digit revenue growth in the United States, Grew our business with top customers over proportionately and managed to mitigate Significant margin pressures with cost adjustment. With our resilient business model and our focus on the high Spending, auto building customers. We will be best positioned to benefit and accelerate when market conditions improve. I want to highlight today again three aspects of our business that sets us apart in the sector and will give us a head start in improving market conditions.

Speaker 2

First, our unique focus on big spending water building customers enabled us to generate growth with top customers and particularly in the United dates in the Q1. 2nd, the strong relationships and support from our brand partners allowed us to offer our customers once more Many exclusive capsule collections and activations or experiences in the Q1 that drive top customer engagement and loyalty. 3rd, we continued to evolve and innovate our business model as evidenced by the successful launch of our new State of the art distribution center at Leipzig Airport in the Q1 and our expansion into fine jewelry, Sector leading growth, resilient financials and ongoing innovation for future growth set us apart from peers. Let me now comment in more detail on these three highlighted areas for today. 1st, In the Q1, we grew our net sales by plus 6.8% compared to Q1 of fiscal year 2023.

Speaker 2

This strong growth is above market expectations and above peer performance. It is highly noteworthy that the United States generated again And outstanding growth was plus 25.1 percent in terms of gross merchandise value compared to Q1 of fiscal year 2023. The United States continues to be a significant growth driver for MYTERISA and the market accounted for 18.7 percent of our total business in the Q1 of fiscal year 2024. The key driver for our growth is our continued focus on the big spending, water building top customers And now the aspiration, occasional luxury shopper. Our top customer base grew by plus 19% compared to Q1 of fiscal year 2023.

Speaker 2

In the U. S, our top customer numbers increased even greater by plus 56.1 percent in the Q1. Further evidence of our focus on top customers is that our average order value, LTM, increased once more by plus 5.4 percent to a record high of €660 in Q1 fiscal year 2024 compared to fiscal year 2023. 2nd, the Q1, so again, many high impact campaigns, exclusive product launches and events as well as Money Can Buy experiences, demonstrating our strong relationships and the support from brand partners. All of them further increased our brand awareness, brand equity and positioned us globally as the leading digital luxury platform.

Speaker 2

We have the exclusive launch of styles from Luebbe, The launch of an exclusive 27 piece capsule collection from Brunello Coccinelli, only available at Myterreza. The pre launch of the Alexander McQueen Cruise Collection ahead of anyone else. The launch of Manode Blanex shoes as a Key brand addition to our assortment and the launch of a Loro Piana capsule collection only available at Myterraiza. Please see our investor presentation for more details on brand collaborations. We also hosted again exclusive events for our top customers, providing them with Money Can Buy experience.

Speaker 2

Examples of events in the Q1 include a dinner and party in Warsaw, Poland to celebrate the launch of the exclusive Magda Butrint capsule

Speaker 1

The Creative Director of the sales attending

Speaker 2

a 2 day experience for top customers in Caracas and Figueres, Spain in partnership with Rabanne, as well as events in Chicago, Milan, Paris and Beijing. Furthermore, I'm proud to announce today that we opened the Holiday House, our 2nd truly immersive physical luxury shopping experience in partnership with Flamingo Estate in Los Angeles for the 1st 3 weeks in December. 1st, in the Q1 2024, we continued to drive innovation in our business for future growth. The 1st week of September, our new warehouse at Leipzig Airport successfully started to operate. As anyone who has gone through a similar large 55,000 square meter of building space will not only provide ample capacity for the future growth of our business, But it will also dramatically improve customer service, thanks to its unique location and direct adjacency to the international airfreight hub of DHL.

Speaker 2

We are now ramping up the staff and throughput of the warehouse and already In the second half of fiscal year twenty twenty four, we expect to see the positive impact of the new facility on our business. Our customers will benefit from significantly later cutoff times for international deliveries, additional flight options to the United States and faster return processing from customs destinations. Another initiative that we have kicked off in the last quarter Was the expansion of our fine jewelry offerings with item values exceeding €25,000 We already carry fine jewelry brands such as Reposi, Pomellato, Yaprim, or Marina B, and will add several more in the coming months. To deliver the high value pieces, we have set up a dedicated white glove courier This new category will further strengthen our offerings and business with high spending top customers. I would also like to mention that Myterisa published its 2nd positive change report.

Speaker 2

Some of the highlighted In this report for fiscal year 2023 include an 11% decrease of CO2 emissions per order shipped, 92% usage of renewable electricity in the company, 58% woman in leadership positions and more than €4,000,000 worth of pre owned products resold by our customers via our partnership with Vistia Colecti. Please see our investor presentation for more details on the Maiteresa positive change report. With all the above, it should come as no surprise that we are pleased with our solid performance in the Q1 of fiscal year 2024 Despite significant macro headwinds, we believe that our results demonstrate the strength and consistency of our business model Delivering profitable growth. We see ourselves as one of the few winners in the expected consolidating luxury e commerce space. This also drives our strong confidence in our medium term growth trajectory and profitability levels despite and short term uncertainties in the current environment.

Speaker 2

And now, I hand over to Maarten to discuss the financial results in detail.

Speaker 1

Thank you, Michael. We are pleased with our top line performance in a challenging macro environment and with persistent heavy promotions from peers. Despite these headwinds, we achieved net sales growth of +12 percent constant currency in the quarter. The slightly negative adjusted EBITDA margin of minus 0.4 percent in Q1, which is in line with our expectations, is a result of this heavy promotional environment and in our view is transitory. Looking ahead And despite these ongoing pressures, we expect to finish Q2 of fiscal year 2024 ending in December 2023 with a positive adjusted EBITDA margin.

Speaker 1

In addition, for the first half of calendar year twenty twenty four, Due to adjusted springsummer inventory in the market, we expect a slowing of this heavy promotional environment leading to improvements and the top and bottom line. Our performance in Q1 of fiscal year 'twenty four Despite the headwinds, it's a testament to our superior and unique market positioning, resilient business model and our ability to adapt even in difficult times. I will now review our financial results for the Q1 of fiscal year 'twenty four ended September 30, 'twenty 3 and will provide supplementary details on certain key developments that affected our performance throughout the quarter. Unless otherwise stated, all numbers refer to euro. In the Q1 of fiscal year 2024, GMV increased by +8 percent on a constant currency basis to $204,100,000 as compared to the prior year period of 197,900,000 Growth on an IFRS basis was at +3.1 percent.

Speaker 1

Our growth in this quarter is again a result of our focus on the highly valuable Top customer segment. Our top customer base grew significantly, increasing plus 19% throughout the quarter. Overall, customer engagement and retention is strong, with the number of active customers who made a purchase during the last 12 months increasing by plus 8.2%, reaching a total of 865,000 active customers. During the Q1, net sales increased by $11,900,000 a +12 percent on a constant currency basis, increased year over year to $187,800,000 Growth on an IFRS basis was at 6.8%. As of Q1 of fiscal year 2024, we continue to have 7 major brands operating seamlessly under the CPM.

Speaker 1

In our collaboration efforts with brand partners, we are able to provide them with full flexibility offering both models and we expect to have 1 to 2 brands transition from the wholesale model to the CPM each fiscal year. We once again saw growth in various regions of the world during the Q1 of fiscal year 2024. In the U. S, in particular, we continue to build our leadership position with continuous double digit growth. We grew GMV in the U.

Speaker 1

S. By plus 25.1 percent. The number of top customers in the U. S. Grew by an impressive plus 56.1 percent during the quarter.

Speaker 1

The number of first time buyers in the U. S. Increased by plus 18.9 percent. As of the end of the Q1, the U. S.

Speaker 1

Makes up 18.7% of our total GMV. Our average order value LTM increased by 5.4 percent to an industry leading €660 In absolute figures, The increase in AOV represents plus €34 per shipped order. The continuous increase in AOE in the past quarters years improves order economics and reflects Our successful focus on full price selling and operating in the sweet spot of high end luxury. In Q1 of fiscal year 'twenty four, our gross profit margin continues to be affected by the intense promotional environment that we mentioned earlier. We still witness unusual level of promotions as competitors are trying to balance their inventory levels.

Speaker 1

Consequently, our full price share in relation to our sale activities continues to be lower than anticipated, leading to a decrease in gross profit margin of around 400 basis points due to this mix effect, similar to what we saw in the prior quarters. A few other factors contributed to another 3 40 basis points decline in gross profit margin. Among those factors were 1, an exceptional provision for expected inventory depreciation and 2, Certain financial effects driven mostly by a stronger performance of several wholesale brands in relation to individual CPM brands. Rima, that only the commission with CPM Brands is accounted for in net sales with 100% gross profit margin. If certain wholesale brands perform better than individual CPM brands, then the gross profit margin decreases mathematically.

Speaker 1

On the other hand, if CPM rents would increase their share in the upcoming quarters, then the gross profit margin would increase Mathematically due to this effect, all factors considered, we achieved a gross profit of $79,800,000 representing a gross profit margin of 42.5 percent during Q1. Shipping and payment costs increased by $4,300,000 or 17.8 percent from $24,000,000 for the 3 months ended September 30, 2022 to $28,300,000

Speaker 2

for the

Speaker 1

3 months ended September 30, 2023. The increase in the shipping and payment cost ratio from 12.1% to 13.9% in Q1 was mainly due to a one time positive effect in GDP costs in the previous year quarter. 13.9 percent cost ratio was also the ratio we achieved in the preceding quarter, q4 of fiscal year 2023. For the full fiscal year 2024, we expect a similar ratio. Marketing expenses decreased from $25,400,000 in last fiscal year's Q1 to $23,700,000 in the Q1 fiscal year 'twenty four.

Speaker 1

The marketing cost ratio in relation to GMV decreased from 12.8 percent to 11.6 percent as we continue to focus our marketing efforts on the most promising new customer acquisition and top customer tension strategies and aligned our marketing efforts with an overall softer market sentiment. Adjusted selling, general and administrative expenses increased by $2,800,000 to $29,500,000 during Q1 of fiscal year 2024. Adjusted SG and A as a percentage of GMV increased modestly by 100 basis points from 13.5% in the prior year period to now 14.5%. The increase in SG and A expenses is mainly due to higher personal expenses, especially for staff in operations and logistics. We anticipate a continued reduction in the adjusted SG and A cost ratio throughout fiscal year 2024, targeting to reach a lower level than in the preceding fiscal year.

Speaker 1

As already anticipated during the last earnings call, adjusted EBITDA during the Q1 of fiscal year 'twenty four was at minus $800,000 slightly negative and already reflected in our full year guidance for fiscal year 2024. As seen in prior years, the quarterly performance varies due to seasonality with Q1 being one of the weaker quarters. For Q2 fiscal year 'twenty four and despite an ongoing heavy promotional environment, We expect to end the quarter with a positive adjusted EBITDA margin. In addition, for the first half of calendar year 'twenty four, We expect a slowing of this heavy promotional environment leading to improvements in the top and bottom line. In addition, we will be able to leverage our new technology platform and the new LiveSeq Warehouse for growth and margin improvements.

Speaker 1

Depreciation and amortization expenses in Q1 of fiscal year 2024 increased slightly to $3,400,000 or 1.7 percent of GMV as compared to $2,500,000 or 1.3% in the prior year quarter, mostly due to higher depreciation in light of use assets related to the new warehouse in Leipzig, Germany. The low level of depreciation and amortization expenses is also a key strength in our business model. Adjusted operating income or adjusted EBIT during the Q1 of fiscal year 'twenty four was at minus 4,200,000 with an adjusted EBIT margin of minus 2.3 percent. We ended the quarter with an adjusted net income of minus 2,900,000 and an adjusted net income margin of minus 1.6%. During the 3 months And at September 30, 23, operating activities used $33,300,000 of cash for the typical seasonal inventory buildup of current fallwinter merchandise.

Speaker 1

We finished the quarter With no long term bank debt, dollars 7,500,000 cash and $16,400,000 of borrowings under our $60,000,000 revolving credit facilities. Due to the seasonal deliveries and the slower top line, Our inventory levels increased plus 44% year over year, which is below the inventory buildup during the preceding quarter of +57%. End of October, inventory was plus 36% to previous year. We continue to tactically manage our inventory levels, while our overarching focus Is to attract and retain the right customer cohorts with focus on full price, being mindful of brand relationship and preventing undue inventory aging. We are carefully managing our inventory levels from a position of confidence, Leveraging our cash and balance sheet strength.

Speaker 1

Given all this, we are confident in our business model and remain assured to continue our profitable growth story even in a very challenging environment. While we expect the macroeconomic uncertainties to continue, we expect a slowing of this heavy promotional environment in H2 of our fiscal year leading to improvements in the top and bottom line. We therefore confirm Our guidance for the full fiscal year 'twenty four, but at the lower end of the guided ranges of GMV and net sales growth between +8 percent to 13 percent gross profit growth between +8 percent to 13% and Adjusted EBITDA margin between plus 3% 5%. Based on the current trends of this Q2 Running from forward to December, we expect a similar top line growth, what we saw in the preceding Q1, and a positive, but low single digit adjusted EBITDA margin. At the gross profit margin level, we expect similar pressures compared to Q1.

Speaker 1

We remain very confident in the medium and long term outlook for our business. We are currently gaining market share and have completed 2 major infrastructure milestones. We will thus benefit more quickly and over proportionately when the luxury market recovers from the current economic challenges. Our market positioning is getting stronger every month. During this fiscal year and beyond, you will see a fortification of our leadership position in multi brand luxury, building the most successful powerhouse for The top luxury customers and the top luxury brands.

Speaker 1

I will now turn the call back over to Michael for his concluding remarks.

Speaker 2

Thank you, Maarten. We are pleased with our Q1 fiscal year 2024 earnings results. We see ourselves well positioned We will continue to benefit from the ongoing shift to online and luxury spend, the increasing importance of the big spending customer segment and the desire by brand partners to work with only the best digital platforms in the market. We are confident that Myterraiza offers high value consumers the best multi brand digital shopping experience there is. And with that, I ask the operator to open the line for your questions.

Speaker 2

Thank

Operator

Your first question comes from the line of Matthew Boss from JPMorgan. Please go ahead.

Speaker 3

Great. Thanks. So maybe, Michael, just to start off, could you speak to changes in consumer behavior that you saw as the Q1 progressed. And then maybe just elaborate on what you've seen more recently as we've moved past the summer travel and leisure demand, particularly if you've seen any material differences in behavior from your top customers relative to the aspirational customer.

Speaker 2

Sure. Thank you, Matt. The story of after summer of Q1 was of course Different elements. I mean, one very traditional retail comments, but September was very warm And so winter merchandise had a late start. In terms of differences By behavior, by customer segment, the top customers continue to spend well.

Speaker 2

They did spend substantial time of amount on holidays in August, but as they were coming back, They continue to spend on ready to wear. They continue to spend on high price. So we grew the top customer base By 19%, we grew it by 56% in the U. S, the AOV is going up. So that trend is absolutely holding up, while the other trend is also holding up, which is aspirational customers Much slower in demand.

Speaker 2

They are, of course, now enticed to buy with Offers already hitting discounts, I mean, already hitting the market as of October. So They may be enticed to now spend what they haven't spent for quite a while, but that is, of course, very discount and sales focused. And so We also, of course, with our top customers see already starting interest in spring summer merchandise as they Start to plan for vacations beyond the Christmas holidays. So the current months Obviously, on the one hand, for winter merchandise sale, season end sale and the start of springsummer and I think the start of springsummer is of interest for our top customers and is also of interest to us as it is a full price business.

Speaker 3

Great. And then maybe a follow-up for Martin. So as we think about The guidance relative to 3 months ago, what led to the revision to the lower end of the prior ranges? And then Could you just elaborate on the timeline from here to see inventory levels more aligned with GMV growth?

Speaker 1

Yes, Matt, happy to do so. The guidance for the full fiscal year is still, I mean, a strong guidance of +8 percent to +30 percent for the full fiscal year, given A flat or slightly positive Q1 with for the full fiscal year, A positive adjusted EBITDA margin of +3 percent to 5%. We guide at the lower end. As We in this unprecedented situation, we have to see how the situation evolves and Q2, as expected, we see a continuation of this heavy promotional environment. And we therefore have a prudent guidance on the overall outlook Because as you well know, there are a lot of uncertainties in the market that we cannot fully account for a capture in the full year guidance.

Speaker 1

But overall, I think our expectations for the full fiscal year and beyond It's very positive.

Speaker 3

Great. Best of luck.

Operator

Your next question comes from the line of Oliver Chen from TD Cowen. Please go ahead.

Speaker 4

Hi, Michael and Martin. Gross margins came in Lower of this may be more transitory. And also, as we think about the gross margin components, what components were Mix impacted relative to merchandise margins. As we model gross margin

Speaker 2

Thank you, Oliver. You were a bit cut off, but I think it is really about the gross margin involvement in this Q1. So maybe Martin, you take it.

Speaker 1

Yes. Happy to do so. Thanks, Oliver. I mean, we saw It's kind of in this quarter an unprecedented 7.40 basis points decrease in the gross profit margin. The operative gross profit margin to exactly what you're referring to, a more Heavy promotional environment and a lower share of our full price in the quarter was again 400 basis points Exactly what in line what we've seen in the preceding quarters and what we expected.

Speaker 1

And also the gross profit margin in this quarter was driven by an exceptional provision for expected inventory depreciation that we took, looking at the inventory levels to reflect that And the certain and the second driver of this additional 3 40 basis points With this mathematical effect of CPM brands with a lower performance compared to wholesale brands and they have a 100% gross profit margin. So we this is the key drivers of Q1. In Q2, we see a continuation of this heavy promotional environment, therefore, a continuation of this operative Gross profit margin effect, the CPM effect, we have to see, but obviously this one time Exceptional provision for expected inventory depreciation is just a one time effect. And as stated in the second half of the fiscal year, So from January to June 2024, due to a different expected situation In springsummer 2024, in the market, we expect a lower promotional intensity and therefore, a decrease in that, operative gross margin slippage.

Speaker 4

Okay. A follow-up. Why would you expect a lower promotional environment, we hope so, but we're seeing deteriorating trends in different ways. And second, Michael, as you zoom out, Is there a way to future proof your business against these dynamics or things that may be in your control as you think medium and longer

Speaker 2

Happy to take that. So I mean the logic of improvements in H2 on springsummer is Spring, summer 'twenty four was the season that was bought when the slowdown in Demand was present. Up to now fallwinter2023 was still bought back in October November last year when it was not Crystal clear where the market was heading. Spring summer 'twenty four, it was crystal clear where the market was heading. And we know Many platforms, many retailers also because of cash constraints took a much more conservative approach to spring summer 'twenty four.

Speaker 2

So While it is not easy to predict the demand for spring summer 'twenty four given the uncertainties that Martin was talking to, it is It's just so clear that there will be less merchandise in the market. There will be less spring summer 'twenty four merchandise in the market, which is a driver for more disciplined, more Focus on full price and instead of promotions. And your second question, of course, our ongoing efforts to, A, Focus on the top end, top customers. B, focus on capsules, exclusive collections, focus on ready to wear. All of these efforts are exactly to allow us to compete not on price, not on discount, but to compete on newness, On exclusivity and combine that with superior service for our best customers, that is the approach that has Allowed us to grow in a market where most people rank, has allowed us to still deliver Solid results are not falling to big financial losses, but The current situation needs to be seen as the worst market conditions since 2,008, 2009.

Speaker 2

So This is really a test, and we believe the numbers we are posting right now, the numbers we are guiding Full evidence of the resilience of the business model and the tough conditions out there, unprecedented at least For the last 10 years, we'll or are a test for business models and we believe our created multi brand Business model is performing much, much better than other business models, which are much more focused on aspirational customers, much more focused on endless aisle Product choice, and that's very important at the moment to understand that Difference in business model, that difference in customer base we are focusing on, that difference in how we approach merchandising and product choice, Because that is the key differentiator, that is the armor against The promotion intensity that is out there.

Speaker 4

Happy holidays. Best regards. Thank you.

Operator

Your next question comes from the line of Ashley Helgans from Jefferies. Please go ahead.

Speaker 2

Hi, good morning. It's Blake on for Ashley. Wanted to first ask about The U. S. Strength, you saw top customer spend up there very nicely around 56%.

Speaker 2

I was wondering if you could unpack And the key drivers of this and then how you view that rate throughout the rest of the year? Are those drivers sustainable? We do believe these drivers are sustainable. So we do believe we can continue to grow double digit in U. S.

Speaker 2

As we have done for almost 5, 6 quarters now consistently, the drivers for that is coming back to We have a different go to market approach. We offer things others don't or at least don't focus on. We have a very curated offer. We are focusing very much on the high end. If you look for product on our website, you are not confused, distracted by products at Very low price points with brands that are not in your vote set.

Speaker 2

We are very much focusing on inspiration and we offer products which last just in this quarter. I mean, We had exclusive product with Brunello Cucinelli, one of the best performing brands. We had exclusive product with Novo Piana, one of the best performing brands. We offer our customers uniqueness, and that is what seems to resonate very well with the U. S.

Speaker 2

Consumer. And we will continue to do that and will of course continue to build market presence The 4 week presence was a pop up in East Hampton for a multi brand retailer gave us a unique access to High end customers, we clearly see that this resulted in acquiring new customers And getting into new customer cohorts and as of next week, we will start again with experiential pop up Holiday, the Holiday House in LA, again, something very unique, something that underlines our focus on emotional Inspiration created offers and we will continue exactly on that track with our great U. S. Team, With our great personal shoppers based in the U. S, we do see that this can be sustained against the That's helpful.

Speaker 2

And then a model question. Know you mentioned you expect positive EBITDA margin in the second quarter. Did you say where you think gross margins could shake out in Q2 as well?

Speaker 1

We don't guide for gross margin in the immediate quarter And we usually don't also give quarterly guidance, but in this exceptional situation, we wanted to at least Lead you a bit to the next quarters how they evolve, especially while the second half Our fiscal year 2024 is driven by a significant improvement in the gross profit margin due to what Michael referred to given the different buy in the springsummer 2024 season.

Speaker 2

Got it. Thank you very much.

Operator

Your next question comes from the line of Kunal Madhukar Hukar from UBS, please go ahead.

Speaker 5

Hi, thanks for taking my questions. One, when we are talking about the top customers, can you talk about what percentage of GMV do the top customers represent and How is that different from fiscal 1Q 2023? And then in terms of AOV, How was AOV for top customers versus AOV for non top customers? How did that kind of perform on a year over year basis?

Speaker 2

Thank you for the question, Kumar. On the top customer, The share of the business in terms of GMV for Q1 LTM was 39.4%, so another increase In the last earnings report, we reported 38.4 or 5, I don't recall exactly. So we added another percentage point As we went from the last quarter to this quarter, so it's expanding. The continued spend of the top customers versus the continued Slow down aspirational customers make that share of business bigger. We don't Break out in our reports the specific AOVs for top customers, for standard customers, but We have repeatedly stated that the top customer AOV is more around 1,000 Compared to the average that we achieved in this LTM, euros 660.

Speaker 5

Got it. And then, one of the things that you kind of talked about was, hey, when it comes to the springsummer 2024 That the buying levels were determined after the slowdown started. So what if the luxury market Continues to remain weaker overall and so even at the lower level of expenses, Is it possible that retail end up with like more inventory than even what they feared?

Speaker 2

I mean, obviously, the answer to that is an equation. And one part of the equation is for sure smaller. Inventory for springsummer will be smaller than the Combined inventory of fallwinter in the market or the combined inventory of spring summer 'twenty three, so that's certain. The other part of the equation is, will we see demand levels comparable to the last 12 months or will they be up and down? The best guess is they will be similar because the rest will be speculation.

Speaker 2

And if they are similar, Then it leads to improved sales throughs, it leads to less promotions in the market, thus it leads To a better top line and to a better margin. Of course, if the market rebounds suddenly quickly, it Gives you an extra boost if the market goes south, it could very much be that the reduced inventory is sort of Heaten up by even further reduced demand, but that's speculation.

Speaker 5

Got it. And then one last one, and I'm sorry, I just keep going On the liquidity side, can you help us understand how we should think of like free cash flow for the rest of the year in order to understand Whether the $60,000,000 revolver that you have is sufficient to meet liquidity needs for the near term?

Speaker 1

Yes, happy to do so Kunal. So in the quarter, dollars 33,000,000 use of cash, very typical as we Build up the seasonal fallwinter2023 merchandise and pay for that, we ended the quarter With no long term bank debt, which is quite unique in our balance sheet, dollars 7,000,000 cash and $16,000,000 Use of the revolver, so a net utilization of $10,000,000 of the $60,000,000 revolver. And We expect that our revolver is fully sufficient, fully sufficient because we now have the fallwinter merchandise all In the warehouse, we expect that the rover is fully sufficient to cover the seasonal peaks. And so we are very comfortable

Operator

Your next question comes from the line of Abhinav Sinha from Societe Generale. Please go ahead.

Speaker 6

Yes, hi, thanks. So two questions. 1, On the top customers, you said that it grew to 39% of the GMV. So my question was like, Is there a critical number beyond which it will start showing on the EBITDA margin as well? So that's one.

Speaker 6

And second is On the gross margin, I mean, was the one I mean, if I remember correctly, you're in a normalized scenario, you have a 46%, 47% gross margin for the 1P business. So how was that? Was it also down like 6%, 7% or Was it worse or better than the rest of the business? Thank you.

Speaker 2

Well, let me take the first question and then Mark, I guess, is the margin question. I mean, Is there I understand this like the tipping point or number 1, as you rightfully assume, Profitability with top customers is higher than with aspirational customers. And so if we would surely theoretical, of course, 80% business with the top customers, it would of course also impact the EBITDA of the overall customer Of the overall P and L. So in that sense, your logic is absolutely right. But as you see, We are continually expanding our share of top customers having gone from 34 to 36 to 38 over the last 3 years, but that is the organic speed.

Speaker 2

So there is no expectation and there is actually Also no organic way to boost the top customer share with So within 1 quarter or within 2 quarters to something close to 50, that's not possible. Therefore, the improvement in EBITDA Continue focus on top customers, but reduce promotion intensity in the market.

Speaker 6

Okay.

Speaker 1

Yes, happy to do the gross profit margin question. Exactly, as you pointed out, Avina, I mean, the last years, We have consistently achieved the 47% gross profit margin due to our focus On the sweet spot in online luxury, due to our focus on top customers, due to our the core elements

Speaker 5

of the business

Speaker 1

model. And right now, we are in this unprecedented transitory situation where we see The 300 to 400 basis points operative gross margin dilution Due to the situation, due to the separate promotional environment driven by excess inventory. And so this phase is transitory and We then expect in the next quarters and especially then fiscal year 'twenty five, A normalization of this gross profit margin slippage To again achieve the gross profit margin levels that we

Speaker 2

saw before.

Speaker 6

Sure. Thanks for that.

Operator

Your next question comes from the line of Yaowen Gao from CICC, please go ahead. Okay. Thanks for taking my questions. I have one for China and Chinese causes. I saw luxury companies say they're still waiting for the demand recovery in China market.

Operator

I'm just wondering what about your observations

Speaker 2

Thank you. Happy to address that question. Our observation is very much in line with the Luxury Brands. We have seen a rebound over the last 6 months starting in March, April, but it's a very slow one. So the recovery for us in China is slow and we Contribute this to two factors.

Speaker 2

1 is, we saw initially, also by our on the ground teams, a high propensity, high explanation of Chinese consumers to spend on going out, spend on Travel within China, travel within the region, and so that It's actually a similar pattern that we have seen in other markets. And then the second one, there is Also in China, an aspirational customer segment that is much Slower in rebound than the top spending customers. So overall, the market is improving, but at a

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Earnings Conference Call
MYT Netherlands Parent B.V. Q1 2024
00:00 / 00:00