SIGNA Sports United N.V. (NYSE:SSU) Q4 2022 Earnings Conference Call February 7, 2023 8:30 AM ET
Company Participants
Alima Levy – Head-Investor Relations
Stephan Zoll – Group Chief Executive Officer
Alex Johnstone – Chief Financial Officer
Conference Call Participants
Xian Siew – BNP Paribas
Randy Konik – Jefferies
Ygal Arounian – Citi
Operator
Hello, everyone, and welcome to the SIGNA Sports United Fourth Quarter and Full Year Fiscal 2021 [ph] Financial Results Call. My name is Charlie and I’ll be coordinating the call today. [Operator Instructions]
I will now hand over to your host, Alima Levy, Head of Investor Relations at SIGNA Sports United to begin. Alima, please go ahead. .
Alima Levy
Good morning. And thank you, everyone, for joining us. Today, we will review our fourth quarter and full year results for fiscal year 2022. With me are Stephan Zoll, Chief Executive Officer; and Alex Johnstone, Chief Financial Officer.
I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including outlook for the consolidated fiscal year 2023. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 20-F filing identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise.
Also, please note that during this call, we will discuss certain non-IFRS financial measures as we review the company’s performance, including adjusted EBITDA. These non-IFRS financial measures should not be considered a replacement for and should be read together with the IFRS results. Please refer to the Investor Relations section of our website to obtain a copy of our investor presentation, which contains descriptions of our non-IFRS financial measures and reconciliations of our non-IFRS measures to the nearest comparable IFRS measure. This call is being recorded, and a webcast will be available for replay on our Investor Relations website.
I would now like to turn the call over to Stephan.
Stephan Zoll
Thanks, Alima. And good morning, everyone. For today’s agenda, I’m happy to provide an overview of our fourth quarter and full year results for fiscal 2022 and share the progress we have made towards our priorities throughout the year.
Fiscal year 2022 was a tale of two halves with great achievements, but also extreme turbulences. Let me first remind you of our achievements this past year. As you are well aware, in fiscal 2022, we became a listed company on the New York Stock Exchange. We also closed two significant acquisitions: Regal CSC in the UK and Tennis Express in the U.S., which enabled us to tremendously increase our scale and more than double our revenue base and customer reach versus pre-COVID in fiscal year 2019.
We made great progress on our various strategic projects, reorganizing our logistics hubs to improve efficiency and better serve our customers and starting synergy implementation on the IP and commercial side. We readied ourselves to enter U.S. bike market, hiring an experienced team and setting up the right infrastructure through the year, which enabled us to successfully launch our U.S. bike business in Q1 fiscal 2023.
Additionally, we expanded our own brand portfolio with multiple award-winning bike models. We also partnered with renowned institutions to advance our brand recognition. For instance, SSU’s Tennis Point was the first ever retailer with an on-site presence at the U.S. Open this year. Beyond these achievements, like many retailers in discretionary category we were severely impacted by the fallout of the conflict in Ukraine.
Going into the year, the supply chain challenges brought about by COVID-19 were starting to subside albeit certain high-end categories such as e-bikes and componentry remained constrained. The inflationary backdrop that has been building globally since the start of fiscal 2022 accelerated dramatically with the onset of the conflict in Ukraine, resulting in all-time low consumer sentiment. This unexpected deterioration significantly affected the demand environment, resulting in significantly overstocked and competitive markets weighing heavily on margins, particularly in the bike business in non-core geographies.
These prolonged macro challenges persistent in fiscal 2023 has forced us to rethink our operating approach. We have launched a strategic realignment assessment to return to long-term profitable growth, aligned behind three principles. First, a sharpened focus on core geographies, where SSU’s banners enjoy strong competitive position; second, adapt our commercial and operating models to drive efficiency; and third, deliver transaction synergies. We are convinced that in the current environment, a sharpened focus on our core markets and an adapted commercial model will return SSU to run rate profitability in fiscal 2024 and best position SSU for sustainable growth and value creation. We will provide a fulsome update on our plans in the near future.
Whilst SSU needs to navigate the current turbulent environment, we continue to monitor the market in a disciplined way as we strongly believe current dislocation will create M&A opportunities at historically attractive valuations for SSU as a natural consolidator. We are convinced M&A will play a key role in the company’s future, both to further increase our scale on the retail side and to further verticalize by inorganically adding to our portfolio of brands.
Current headwinds are transitory in nature, while our tailwinds are structural. The current turbulence will drive consolidation leading to a healthier market structure. The long-term mega trends of health and fitness, e-mobility and digitization, will resume enabling consistent steady growth in the online sports retail market. And combined with our scale position in this fragmented growing market, we are very optimistic about SSU’s long-term prospects.
With that, I would like to thank you all for your time this morning. Now I will hand over to Alex to walk you through our financial performance.
Alex Johnstone
Thanks, Stephan. And good morning, everyone. Today, I’ll take you through our Q4 and full year results for fiscal year 2022 and offer some additional insights on the key factors affecting our financial performance. Let me firstly remind you that there were three quarters of full contributions of our recent acquisitions, Wiggle Chain Reaction Cycles and Tennis Express, which closed on December 14 and December 31, 2021, respectively.
Additionally, we made the decision to discontinue stock operations in the Team sports business from the end of fiscal year 2022 and as such, have restated historical figures to present continuing operations only.
As you may have seen in our materials released this morning, Q4 2022 net revenue was €300 million and full year revenue was €1.06 million, a 28% and 31% increase year-over-year, respectively. This reported performance reflects the enhanced scale of our operations and the beneficial effect of our recent acquisitions.
Our pro forma revenue inclusive of a full year of acquisitions in the period, inclusive of the discontinued staff of operations was in line with the top end of our August guidance of €1.2 billion. However, on an organic basis, our financial performance was impacted by difficult market dynamics as the supply shock inflation dramatically impacted consumer sentiment in February 2022 onwards and supply constraints abated, resulting in overstocked competitive markets, in particular, in the bike category.
On the operating level, we took a meaningful step forward, thanks to our recently closed transactions in full year 2022 and on a reported basis year-over-year, active customers grew 40% to 6.7 million, visits grew 22% to 320 million and net orders grew 40% to 9.5 million. Net AOV was broadly stable due to the effects of M&A and the mix effect of the lower fallback contribution in fiscal year 2022, whilst all KPIs declined on a pro forma basis year-over-year active customers, net orders and conversion, grew strongly relative to pre-COVID levels, indicating market growth even against the challenging backdrop.
In fiscal 2022, gross margin declined from the pandemic highs by approximately 385 basis points to 34.7%, in part due to the sudden demand structure capitalized by the conflict in Ukraine. March onwards, organic demand was materially lower than prior year, just the supply chain constraints started to revert result in a lower stock highly promotional environment. This competitive environment, coupled with inflation across our OpEx space resulted in a reported adjusted EBITDA for the year of negative €66 million. The pro forma adjusted EBITDA margin, inclusive of discontinued operations was negative 6.1%.
To offset the deterioration in organic demand, the group’s companies invested heavily in marketing to drive with traffic and conversion. The competitive backdrop made it difficult to pass inflation and variable fixed cost to the consumer without further impacting demand. The company implemented various cost-saving measures to contain and reduce the impact of inflation. However, these savings were offset by lower-than-anticipated order volumes resulting in overcapacity and reduced efficiency across our operations. These results are wholly unsatisfactory and we have a focused plan to return the business to profitability.
Before touching on the plan, I’ll briefly cover our fiscal year 2022 cash flow and the current liquidity position. In fiscal 2022, net cash from operating activities was negative €191 million. Primarily driven by the lower level of adjusted EBITDA, a significant inventory buildup of approximately €14 million and material onetime transaction fees in connection with acquisitions and the NYSE listing.
Our net cash from investment activities was negative €238 [ph] million, primarily due to acquisitions, which closed during the year and an elevated level of CapEx of approximately €45 million as we invested in logistics consolidation and IT projects to replatform acquired companies. Taken together with net cash from finance activities and the cash flow from discontinued operations, we ended the year with €43 million of cash in highly liquid investments. Pro forma, the subsequent capital raisings and commitments received, the company’s liquidity position stood at €293 million as of fiscal year 2022 year end. This included €20 million of undrawn asset capacity, the proceeds from the issuance of the €100 million investable notes issued in October 2022 and a further €130 million investment commitment, both signed with an affiliate of our largest shareholder. Additionally, the company proactively negotiated waivers on various covenants of its €100 million bank facility, providing relief until June 2024. The company is confident this increased financial flexibility provides the run rate to pursue its strategic realignment plans.
Now turning towards the outlook for this fiscal year, the challenging macro backdrop continues to impact our operations as inflation is forecast to remain stubbornly high in fiscal year 2023, in particular, in our core markets of DACH and the UK. We anticipate the promotional environment persists throughout the year until the excess stock, in particular, in the [indiscernible] works its way through the system. Stephan outlined against this backdrop the necessity to change our operating model to focus on our core markets and adjust our commercial approach. These changes are designed to return the business to adjusted EBITDA profitability on a run rate basis in fiscal year 2024. Together, we anticipate these changes will result in lower sales in fiscal 2013, albeit to a relatively higher contribution.
We are experiencing significant gross margin contraction throughout Q1 [ph] as many market participants struggle for liquidity and the environment is increasingly competitive. We anticipate that this will start to reverse as seasonal demand picks up in the spring, summer and the stock situation sequentially improved. Against this backdrop, it is essential that we focus on lean operating processes with the benefits of various technology and logistics investments starting to kick in towards the end of this year and accelerating throughout fiscal year 2024. The market environment has pushed transaction synergies from the Wiggle and Tennis acquisitions, in particular, in procurement and in the cross-selling of our own brands into fiscal year 2024 but the opportunity remains significant.
Finally, the company is focused on releasing capital from targeted inventory reduction of €30 million to €40 million in the year or managing CapEx in the €35 million to €40 million envelope.
As Stephan discussed, we do see significant opportunity for M&A at very attractive valuation, but we will remain highly selective and disciplined refer tuck-in and brand opportunities with limited integration requirements in the near term. We remain confident SSU will emerge from this period of dislocation positioned to grow profitably in a consolidating growing market.
Thank you very much for listening.
With that, Stephan and I will be happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Xian Siew of BNP Paribas. Xian your line is open. Please go ahead.
Xian Siew
Hi, guys. Thanks for the question. I was just wondering about revenue growth. I don’t think I saw how necessarily like what your expectations for revenue are in 2023? And maybe you mentioned gross margin pressure in 1H, is it fair to assume revenue pressure in 1H as well and then maybe some stabilization in the back half? Any help would be helpful. Thanks.
Stephan Zoll
Sure. Thanks for the question.
Alex Johnstone
Hi, Xian.
Stephan Zoll
Alex, sorry, do you want to take the question? Sorry.
Alex Johnstone
Please, Stephan, you please go ahead.
Stephan Zoll
Go for it. Go for it.
Alex Johnstone
I do. So I think the way that we’re looking at it is that we expect that will be slower in the first half of the year relative to last year on a pro forma basis. And we expect that that will sequentially improve really from kind of March onwards as we start to map and the impact of the Ukraine conflict. And on a gross margin basis as well we’re seeing highly promotional environment at the moment as we see many competitors struggling for liquidity, but we do anticipate that in the second half of the year that will sequentially improve. And we think that probably the overstock situation by the end of the year should be more normalized and then will be set up for a better year in fiscal year 2024.
Stephan Zoll
And yes, maybe just to add to that yes, the headwinds that we face right now we believe are transitory. So if you look a little bit further out there, our megatrends that we talked about, right, mobility the health and life fitness trend, the digitalization of our sports all these trends are structural. So they will move their way up again. So we see very positive growth in the midterm coming back.
Xian Siew
Got it. Yes, that’s very helpful. And then maybe just on the profitability you mentioned getting back to run rate profitability in potentially 2024 or fiscal 2024. What does that mean for 2023? Are we still making progress versus 2022? Or could we take a step back just because of a deleverage? Or how do we think about – is it 2023 kind of in between 2022 and 2024? Is that the right way to think about it?
Alex Johnstone
So I think it will – it depends on really when the recovery and demand kicks in, but we would anticipate that deleveraging will certainly have a significant impact in the first half of the year and will start to get better. Where we end up relative to 2023, it’s tough to say but we’re very focused on controlling what we can control. Levels, and obviously managing as much cost out of the business as possible, and we will start to see in a significant benefit in part due to the transaction synergies between Wiggle and our existing bike business in the second half of the year, but really that will really ramp up in fiscal year 2024.
Xian Siew
Okay. Very helpful. Thank you guys. Thanks all.
Operator
Thank you. [Operator Instructions] Our next question comes from Randy Konik of Jefferies. Randy your line is open. Please go ahead.
Randy Konik
Hey thanks guys. Just back on the outlook for, I guess, first for gross margin. Can you give us a little bit of color on how to think about the extent of the gross margin declines that you expect, I guess, either in the first half or throughout the year? Is it going to be more similar to the gross margin declines exhibited in the fourth quarter? Or how in this past fiscal year, the gross margin declines were obviously less worse? So I’m assuming that it’s more closer to what you saw in the fourth quarter. Is that fair? And if that’s fair, when do you start to see that inflection in gross margin? Is it back when the comparisons get easier in the fourth quarter? I just want to get a feel for the extent of gross margin decline and then the shape of the flow of the declines and if they inflect towards the back half of calendar 2023?
Alex Johnstone
Hi Randy. I would say that sequentially, gross margins have worsened in Q1, we anticipate that we will continue to do so in Q2. We are starting to see – we expect an uplift in gross margins as we go into the seasonally stronger spring and summer months. So we would anticipate that we’ll be kind of back to pre-COVID levels of gross margin by the end of this fiscal year.
Randy Konik
Okay. And then just can you give us some perspective on the demand environment, the U.S. versus Europe across bike versus tennis? Just give us some more kind of flavor there would be super helpful?
Stephan Zoll
Maybe I’ll start, Randy. So from a U.S. versus EU perspective, U.S. is definitely less hit, right? There’s less consumer sentiment decline versus in the EU and especially in our core markets in Germany and the UK, we saw that most advanced. So U.S. is in a much happier place there. And from a tennis and bike perspective, there’s not a very big difference there. Our tennis business is slightly more seasonal, right, but there’s not a massive difference in terms of consumer sentiment.
Randy Konik
Okay. And then I guess lastly, how are you thinking about just the cost structure of the organization. If you think about the SG&A number in 2000 that you put up in 2022 calendar. How do we think about that number in calendar 2023 and beyond? Is that a number you can kind of keep bringing lower? Or is it going to be flattish or how do we think about the – it looks like you want to kind of obviously sharpen to get towards – to get to run rate profitability in 2024. Just want to get a sense of how we think about the SG&A?
Alex Johnstone
Thanks, Randy. So we’re currently working through our kind of strategic realignment work. And what we will see is that, firstly, the change in commercial approach will sequentially improve and the contribution of the sales that we’re generating across with a more focused approach towards our core markets. And then in terms of our approach towards our overhead, we’re being very, very focused in trying to reduce an aggregate cost, and it will probably tread water this year due to the lower sales level and the deleveraging effect, but we anticipate that once the level of demand in a position to pass more of the inflation of cost base to consumers, and we expect that, that will start to pick up materially fiscal year 2024.
Randy Konik
Got it. And then just on the strategic realignment assessment, is that something – I guess something you’re working through now? And you plan to communicate some sort of outcome to the market in the next quarter or two quarters from now? Or how do we think about the outputs of that assessment and when we should hear about what we learned from that assessment that you’re working on now.
Stephan Zoll
Yes. So Randy, you see in our presentation there’s already a couple of items mentioned, right? The three areas that we cover with it and also some of the areas within those three buckets. And it will be, let’s say, like that, it will be published in the near future. TBD exactly when, but it won’t take very much longer.
Randy Konik
Got it. Okay. All right fair enough. Thanks guys.
Stephan Zoll
Thank you.
Alex Johnstone
Thanks Randy.
Operator
Thank you. [Operator Instructions] Our next question comes from Ygal Arounian of Citi. Ygal, your line is open. Please proceed.
Ygal Arounian
Hey good morning guys. Thanks for taking the question. I guess, just one thing is you didn’t give full year guidance, and I understand there’s a lot of moving pieces here. But we’re kind of through the first three or four months of the year; presumably you’ll be reporting 1Q soon. But any more granularity on what you’re seeing in 1Q that was one-data point kind of in one of the charts on organic revenue in 1Q? And know we’re talking about it in the big picture, but anything from what we’re seeing so far and then how to think about guidance, we could expect guidance again in the future. I’ll start with that one.
Alex Johnstone
Hi Ygal. So I think the chart you’re referencing is kind of indicating kind of mid-teen year-over-year organic declines in Q1, and that’s about right. And as we just alluded to and answer on Randy’s question in terms of gross margin compression we’re seeing similar levels as we witnessed in Q4. In terms of the timing of when we see the reversal of those trends, we think that Q2 will follow a similar trend. But then Q3, as we start to comp sequentially against the start of the conflicts in March last year, we saw a significant drop in organic demand.
The advent of Russia’s invasion of Ukraine, that obviously persisted and got worse as the inflation situation developed throughout the year. We anticipate that you’re starting to see some data points that indicate that inflation in our core markets is starting to decline. Consumer sentiment is starting to improve slightly warmer winter than anticipated. So there’s a few data points that indicate that H2 will be better, in particular as you’re starting to see stock [indiscernible] to move a little quicker as we get closer to spring.
So I think we’re being very prudent, but we are optimistic that the second half of the year will be materially better, but there is a lot of distress, in particular in the bike industry right now where we’re seeing both with the OEMs and the suppliers will have a lot of stock, and that’s resulting in a competitive market. But the situation will normalize in time. We just don’t have a crystal ball of when exactly that will be. And so we’re trying to really focus on controlling what we can control in the coming months and quarters.
Stephan Zoll
Okay. And then – sorry, just to add to that, if you look out there a little bit, next to the normalization that Alex just described, there’s also a consolidation happening in the market, right, that will take place. So we’ll see a more cleaned up, if you wish a market structure over the next years to come, which also will have a tremendous impact we believe in our business and a positive set.
Ygal Arounian
Okay. All right one on the supply constraints. So does the supply chain back to normal fully? Is that how you would characterize it? And then within tying that to the markdowns and inventory controls, any learnings from the markdowns you’re expecting that to kind of dissipate fully by the second half and get back to normal pricing? Or would that potentially continue throughout the course of the year, maybe just less than it is right now?
Stephan Zoll
So that depends a bit on a couple of factors, right? So first of all we do see an easing of the supply chain disruptions, right? We still have some left and especially our higher-priced items and e-bike, for example, in bike. So that’s still not normalized, but we expect that to normalize in the course of 2024. In terms of the promotional levels, that obviously depends how it’s a bit by category, how quickly the overstock fades out of the market likely to take a little bit longer in bike than in tennis, for example, our categories. But that’s something that we obviously watch very carefully.
Ygal Arounian
Okay. And last question, just on the commercial change and the focus on the core geographies. Presumably, U.S. is included in that but I just want to make sure. And then talking about M&A here and continued focus there. Does this understanding there will be a continued focus on M&A and there should be good opportunities in the market in the coming months or so? But does it change your M&A strategy at all? Are you focused on different things than you were before, just tying all those pieces together? Thanks.
Stephan Zoll
So U.S. obviously remaining a very key part and our tennis business, as you know, Tennis Point and Tennis Express in the U.S. are very strongly positioned and we are currently working on driving the synergy. So basically bringing these businesses closer together and work the market even harder. That’s a very important piece of our growth strategy moving forward. Our U.S. bike business particularly well started. I mean that’s a nascent business, right? We hired a team in the beginning of last calendar year in February 2022. We launched our first jobs with our own brands in November 2022, so less than nine months after the first hire. Very, very strong start, and that’s also part of our growth strategy moving forward.
In terms of M&A, not a real shift in focus in terms of target. We still target online retailers to complement certain geographic reaches but also brands to complement our own brand portfolio. The shift is that we obviously look much closer and as Alex outlined, very disciplined in terms of looking at the best opportunities out there. However, right now, it’s obviously time where renovation came down heavily, and it’s a good time to look at those targets again and to see there’s good deals to be struck. So target is not very different disciplined increase for sure.
Ygal Arounian
Thank you.
Operator
Thank you. At this time, we currently have no further questions. So I hand back over to Stephan Zoll for any closing remarks.
Stephan Zoll
So thank you very much everybody for: a) joining; and b) your questions. And we’re very much looking forward to the next update. Thank you.
Operator
Ladies and gentlemen, thank you for joining today’s call. You may now disconnect your lines.
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