MYT Netherlands Parent B.V. (NYSE:MYTE) Q3 2023 Earnings Call Transcript May 13, 2023

Operator: Greetings, and welcome to the Mytheresa Third Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s call is being recorded, and we have allocated one hour for prepared remarks and Q&A. It is now my pleasure to introduce your host, Martin Beer, Mytheresa’s Chief Financial Officer. Thank you, sir. Please begin.

Martin Beer: Thank you, operator, and welcome, everyone, to Mytheresa’s Investor Conference Call for the Third Quarter of Fiscal Year 2023. With me today is our CEO, Michael Kliger. Before we begin, we would 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. 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.nytco.com. I will now turn the call over to Michael.

Michael Kliger: Thank you, Martin. Also from my side, a very warm welcome to all of you, and thank you for joining our call today. We will today comment on the results and performance of our third quarter of fiscal year 2023. Overall, we are satisfied with our results in the third quarter. Our business has shown once more financial strength and resilience despite significant macro headwind. Mytheresa stepped up its top line growth in the third quarter compared to the preceding second quarter. Gross profit margin was impacted by aggressive industry-wide promotions of competitors, but we remain profitable in contrast to most other players. We stay fully committed to serving the high-end wardrobe-building customer with the finest curated luxury offer, a clear focus on full price selling, and excellence in operations.

We believe maintaining this level of integrity is the best approach to weather the transitory challenges in the market and deliver the results for the full fiscal year 2023 as well as protecting the outstanding medium-term prospects of our business based on a superior business model and strategic positioning. Let me summarize the 3 key characteristics of our performance as evidenced in the third quarter of fiscal year 2023, so that you can fully appreciate the strength and resilience of Mytheresa despite significant macro headwind. First, our focus on the high-end wardrobe-building customer and thus also on true luxury brand partners makes us the best positioned platform to benefit from the ongoing growth in luxury and the expected consolidation of platforms.

This is clearly supported by our excellent top customer KPIs, our continued success with ‘money can’t buy’ experiences for them and the continued trust-based relationships we have with luxury brand partners. Second, we have built a very resilient and flexible business model that is profitable, even in challenging marketing conditions. We are global, active across many luxury categories, clearly focused on full price selling, and we have a high share of cost variability. Third, we are constantly innovating and laying the foundation for future growth in our business. As evidenced by some major milestones recently achieved that I will describe in more detail later. All of this happens while diligently operating our business. Let me now comment in more detail on those three characteristics.

First, let’s look at the success with high-end wardrobe-building customers in the third quarter. We grew our gross merchandise value, GMV, by 17.8% compared to Q3 of fiscal year 2022. On a 2-year basis, we grew our GMV by plus 33.4% compared to Q3 of fiscal year 2021. This growth in the third quarter is clearly an exception in the industry. It is driven by the clear focus on the true high-end wardrobe building luxury customers and not the aspirational occasional luxury shopping. In the third quarter of fiscal year 2023, our top customer base grew by plus 28.1% compared to Q3 of fiscal year 2022 and the average spend per top customer grew 6.7%. Overall, the business with top customers grew by 36.8% in terms of GMV compared to Q3 of fiscal year 2022, and our top customers accounted for 36.0% of total GMV.

The full number of customers grew by plus 14.4% and the average spend for all customers grew by plus 4.3% in the third quarter of fiscal year 2023. Also, the repurchase rates in Q3 of fiscal year 2023 of customer cohorts acquired in Q1 of fiscal year 2023 compared to Q1 of fiscal year 2022 cohorts were positive again. Please see our investor presentation for more details on the cohort repurchase rate. All the data mentioned shows the strength and quality of our customer base. We engage and serve our high-end customers, we partnered again with many leading luxury brands to create true ‘money can’t buy’ experiences for our top customers. Luxury brands are more and more interested in partnering with us or clienteling activities given the increasing importance of top customers in today’s environment.

Examples of recent top customers events include a party to celebrate the new design of ETRO during Paris Fashion Week, the private dinner at the Schiaparelli to preview the Fall/Winter collection, and the 2-day experience in Venice including; a gondola tour, the privatization of an iconic ice cream shop, and a dinner in a private palazzo in attendance of Creative Director Sandra Choi. Please see our investor presentation for more details on our recent top customer activations. Our unique ability to excite and engage with true high-end luxury customers and build long-lasting relationships with them provides us with a strong competitive advantage. We have increased our top customer base by plus 120% since Q3 of fiscal year 2022. Our focus on high-end customer engagement is ultimately a key driver for luxury brands to continually partner with us.

We partnered once more in the third quarter like no other platform with many leading luxury brands for exclusive capsule launches or pre-launches of collections. Examples for exclusive brand collaborations from the third quarter include an exclusive bag launch with Bottega Veneta, exclusive menswear capsule collections from Loro Piana and Dolce Gabbana only available with Mytheresa. The launch of the exclusive spike collection of Christian Louboutin, several pre-launches from Givenchy giving Mytheresa’s customers first access, the exclusive Versace capsule collection only available at Mytheresa, and many more. Please see our investor presentation for more details on brand collaboration. Second, let’s look at the resilient and flexible Mytheresa business model.

In the third quarter of fiscal year 2023, we successfully continued our global expansion. We experienced high growth in Europe with plus 19.2% compared to Q3 of fiscal year 2022, while results in Mainland China were still impacted by the COVID pandemic. In the United States, which continues to be one of our key growth markets, we achieved again above average GMV growth with plus 27.4% compared to Q3 of fiscal year 2022. The share of the United States of our total GMV increased to 17.7% in the third quarter of fiscal year 2022. We drove this growth with a strong lineup of customer and brand events across the United States. One of many highlights was our physical pop up in Aspen, where we took over the retail space in Hotel Jerome and engaged with over 600 new high net worth individuals during our 3-day presence.

We also partnered with regional taste makers in Texas, Arkansas, and North Carolina to engage with approximately 200 new high net worth customers and drove brand aware. Please see our investor presentation for more details on our events in the United States in the third quarter of fiscal year 2023. Our average last 12 months order value increased by plus 3.9% in the third quarter of fiscal year 2023 compared to fiscal year 2022. This is driven by our continued expansion across luxury categories, most recently with the addition of home and lifestyle products. We will continue to expand our offer in terms of luxury categories to grow our share of wallet with top customers continue. The high-cost variability in our business model allowed us to keep cost ratios within our budgeted ranges in Q3 of fiscal year 2023 despite some inflationary pressures.

The number of first-time buyers reached over 124,000 in the third quarter of fiscal year 2023, while our customer acquisition cost actually declined by minus 2.4% compared to Q3 of fiscal year 2022. Our ability to decrease the CAC was the result of leveraging new lever performance of META as well as our continued success of applying AI algorithms in our building platform. Customer satisfaction, as measured by our internal Net Promoter Score was 72.1% in Q3 fiscal year 2023. Despite our ongoing focus on full price selling, the gross profit margin came in 320 basis points lower in Q3 of fiscal year 2023 compared to Q3 of fiscal year 2022. This was driven by significant industry-wide promotional aggressiveness of many competitors on both Fall/Winter but even already on Spring/Summer merchandise.

We view this as a transitory challenge until the excess inventory has been cleared and we see a strong medium-term advantage of staying fully focused on full price selling forward the best customers. Martin will talk in a few minutes about how all this translated into our bottom-line results for the third quarter of fiscal year 2023. Third, I mentioned above that we achieved major milestones in the third quarter, laying the foundation for future growth. We expect a strong recovery of the Chinese luxury consumer market with a focus on domestic consumption. We launched our China designer program last year to celebrate the best new Chinese luxury fashion designer and to coincide with the recovery. The four designers; Didu, Jacques Wei, Susan Fang, and Xu Zhi were chosen to create distinctive capsule collections exclusively available on Mytheresa.

Last month, we celebrated the launch with a high-caliber physical event in Shanghai. The event and accompanying campaign attracted widespread interest by Chinese press and on social media. Main pieces of the capsule collections were sold out quickly. Today, we can also announce the expansion into another luxury category. Through our exclusive partnership with Bucherer, the world’s largest luxury watches and jewelry retailer from Switzerland. We will offer certified preowned watches with an international 2-year warranty and full-service package directly from the watch experts of Bucherer. The offer will first be launched in Europe and the most elevated selection of high-end and certified preowned time pieces from about 25 brands including; Audemars Piguet, Breitling, Cartier, IWC Schaffhausen, Jaeger-LeCoultre, and Omega will be on.

The continued build-out of our infrastructure is an essential foundation for future growth. In that vein, it is another major milestone to announce today that we have successfully concluded the multiyear project to upgrade our complete e-commerce technology stack. We migrated all our websites, apps, content management system, merchandising, and product information systems to a new service-based and highly scalable platform that will allow us to improve speed, flexibility, personalization, regionalization and cost of development. The transition to the new platform was achieved with minimal disruption of our business. Finally, I’m happy to report that the construction of our new warehouse in Leipzig is making good progress, and we have started the interior building and construction phase.

With all the above, it should come as no surprise that we are satisfied with our performance in the third quarter of fiscal year 2023 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. And now I hand over to Martin to discuss the financial results in detail.

Martin Beer: Thank you, Michael. I will now evaluate the financial results for the third quarter of fiscal year 2023 mid-March 31, 2023, and will provide additional color on the major factors influencing our performance during the quarter. Unless otherwise stated, all numbers refer to euro. As Michael already indicated, considering the continuously challenging macro headwinds, we are pleased with our plus 17.8% top line growth in the third quarter compared to our preceding Q2 of fiscal year ’23 with plus 7.8% top line growth. We saw a significant increase in promotional intensity by competitors during the quarter, which affected our gross profit margin and adjusted EBITDA margin. We expect this competitive behavior driven by access seasonal inventory to be transitory.

All of these factors combined created a unique and challenging environment that even Mytheresa was not entirely immune to. However, it is also more clear than ever that Mytheresa continues to be the most resilient player in the industry, achieving solid top line growth and continued profitability while delivering a superior customer experience and true value add for our brand partners. Our business model and differentiated focus on the concerning high-end luxury customer has proven its resilience. For these reasons, along with favorable long-term fundamentals for the luxury industry, we remain confident in our short-, medium-, and long-term outlook. Let’s look at the numbers in more detail. In the third quarter of our fiscal year 2023 ended March 31, GMV was at €219.8 billion, growing at 17.8% compared to the prior year quarter of €186.6 million.

At constant currency, the growth was at 15.4%. Our total active customer base grew by a solid 14.4% in the quarter. In addition, GMV per all customers grew 4.3%. We had a strong number of 124,000 first-time buyers in the quarter. And what’s most impressive is, again, our top customer growth. The number of our top customers grew by 28.1% in the quarter, as they appreciate the compelling experience we provide, in addition to a strong GMV increase per top customer of 6.7%. This is in line with our impressive results in the previous quarters. The 2-year growth rate of our top customer base was 65.9% in the quarter. During the third quarter of this fiscal year, net sales increased by €29.4 million or 17.3% to €198.9 million. As in preceding quarters, net sales reported is impacted by brands transitioning to our Curated Platform Model.

During the third quarter of fiscal year ’23, we continued to have seven brands operating seamlessly under the Curated Platform Model. With the revenues now fully transitioned to the CPR model and their switching period for most brands being longer than 12 months ago, the difference between GMV growth and net sales growth has narrowed as expected. In the third quarter, the growth gap was only 50 basis points. For Q4 of the current fiscal year, we expect the growth gap to range between 50 to 150 basis points as there will be fluctuation between quarters. As of fiscal year ’24 and beyond with incremental brands expected to be added to the CPM, we expect growth rates to continue to be close to each other. We achieved the 18% GMV growth was strong and increasing sales coming from the U.S. and the Middle East, among others.

Our net sales share outside Europe yet again increased from 41% in fiscal year-to-date ’22 to 44% in fiscal year-to-date ’23, strengthening the global reach of our Mytheresa brand and our diversified customer base. As a consequence of macro headwinds and significant promotional activities at competitors rely inventory levels, our gross profit margin in Q3 was at 45.6%, a decrease of 320 basis points compared to the 48.8% in the prior year period. Heavy promotional activities continued throughout Q3 and even in Q4, with Spring/Summer merchandise. With that, our full price share in relation to our share of sale activities was lower than expected and put pressure on our overall gross profit margin. We expect that these exceptional and significant promotional activities of our competitors are transitory.

As a result, in Q4 fiscal year ’23, we expect a similar contraction of the gross profit margin in relation to what we achieved in Q4 of the preceding fiscal year. For the full fiscal year 2023, we expect a gross profit margin of around 50% compared to the 51.5% of the preceding fiscal year 2022. With gross profit margin is around 50%, Mytheresa operates a superior business model and brand positioning, even within the current temporary market challenges. We are committed to our full price focused, high-end positioning, enabling us to keep growing profitably, and we believe that these unique market pressures are transitory and will decrease in the second half of calendar year 2023. As of March 2023, the new Spring/Summer collections have been fully delivered.

Although inventory levels are up 44% compared to March 2022, we are confident we will return to more normalized levels of inventory in the next quarters without exceptional inventory clearance activities. Our continuous double-digit top line growth, diligent new season buying, and disciplined pricing will enable us to leverage our inventory levels best and to fortify our market leadership position. The growth of inventory is driven by the current and upcoming season and due to our unique positioning, we are able to market the current season longer and with higher margins. In addition, being their preferred multi-brand partner for most luxury brands, we have the best curated multi-brand offering and with exclusive brand collaborations only available on Mytheresa.

As a reminder, in our CPM partnerships, the brands bear the inventory risk. As a result, Mytheresa has a more diversified risk profile in regards to inventory levels. Shipping and payment costs grew by €6.4 million to €31.5 million as compared to €25.1 million in the prior year quarter. The shipping and payment cost ratio in relation to GMV increased by 80 basis points from 13.5% in the previous fiscal year to 14.3%. The 80 basis points higher cost ratio mainly resulted from the aforementioned stronger growth outside of Europe and energy price-driven surcharges, which had implications for shipping and payment expenses. As a result of our implemented changes in our payment and customer setup, we expect that in Q4, we will mostly offset cost increases and will, therefore, achieve stability in the cost ratio at around 14%, which is in line with the cost ratio in Q4 of the preceding fiscal year.

During the third quarter of fiscal year 2023, marketing expenses increased by €2.4 million to €25.7 million as compared to €23.3 million in the prior year quarter. As a percentage of GMV, marketing expenses decreased from 12.5% in Q3 of fiscal year ’22 to 11.7% in Q3 of fiscal year ’23. The decrease of the marketing cost ratio is mainly attributable to our continued strong existing customer core performance, our continuous focus on acquiring high-quality new customers with expected strong lifetime values, and shifts of PR funds of our top customers between quarters. We were able to attract more than 124,000 new customers during the third quarter of fiscal year 2023 with lower customer acquisition costs even compared to Q3 of fiscal year ’22.

Adjusted selling, general, and administrative expenses grew by €6 million to €29.7 million in the third quarter of fiscal year ’23. Adjusted SG&A expenses as a percent of GMV increased by 80 basis points from 12.7% to 13.5% compared to the prior year quarter. The increase of the cost ratio is due to the increase in FTEs and related higher personal costs, especially in logistics as well as higher energy costs. In addition to our focus on attracting and retaining the best and high potential customers, we are also being judicious with expense management. We are committed to profitable growth and want to increase our profitability levels. We expect the adjusted SG&A cost ratio to go down in Q4 of this fiscal year from the Q3 fiscal year ’23 level.

With the cost containment measures and despite the slower top line growth and cost inflation, we expect stability in the adjusted SG&A cost ratio for the full fiscal year at around 13%, in line with fiscal year ’22 levels. As a fast-growth company with a relentless focus on delighting our customers, prudently capturing market share, and fortifying our leadership position, we will continue to invest in the quality of our personnel and won’t compromise in our service excellence. Despite the macro headwinds affecting customer sentiment and the highly promotional short-term focused actions of our competitors, we achieved 18% top line growth with positive adjusted EBITDA performance in the quarter. The adjusted EBITDA margin was at 1.6% as compared to 6.4% in the prior year quarter, mainly due to a lower gross profit margin.

Given the seasonality throughout the year, our Q3 usually has a weaker adjusted EBITDA margin than other quarters. For the full fiscal year 2023, we expect adjusted EBITDA in the range of €34 million to €43 million as an adjusted EBITDA margin between 4.5% to 5.5%. Depreciation and amortization expenses in Q3 slightly increased to €3.1 million or 1.4% of GMV as compared to €2.3 million or 1.2% of GMV in the prior year quarter. Adjusted operating income or adjusted EBIT and adjusted net income in Q3 were positive at €0.1 million and €1.4 million, respectively. For fiscal year-to-date ’23, adjusted operating income was at €25.2 million with an adjusted operating income margin of 4.5%. Fiscal year-to-date adjusted net income was at €19.6 million, representing a 3.5% adjusted net income margin for fiscal year-to-date ’23.

Moving to the cash flow statement. During the 9 months ended March 31, 2023, operating activities used to €83 million in cash. The main driver was the usual seasonal inventory buildup of current Spring/Summer collections. During the last 9 months, net cash used in investing activities was at €18.9 million, driven by the setup of the new warehouse in Leipzig, which will enable us to better serve our customers through quicker shipping times. Around 2/3 of the total cost of the new warehouse have already been paid in accordance with the outlined setup plan and the remainder of the €14 million to €17 million will be paid in the coming quarters throughout in fiscal year ’24. We ended the third quarter with cash and cash equivalents of €13 million, no long-term bank debt, and €60 million in credit facilities as of March 31, 2023.

Our equity ratio is at 69%. This balance sheet situation gives us more flexibility than what we see at many competitors. In line with our press release on April 19, we confirm our expectations for the current fiscal year ending June 30, 2023, as follows: GMV in the range of €845 million to €860 million, representing 13% to 15% growth. Net sales in the range of €750 million to €765 million, representing 9% to 11% growth. Gross profit at €380 million to €36 million, representing 7% to 9% growth and adjusted EBITDA in the range of €34 million to €43 million and an adjusted EBITDA margin between 4.5% and 5.5%. We delivered solid results in Q3 of fiscal year ’23 despite the ongoing macro headwinds and peer promotional activities, and we will remain focused on continuing to execute and deliver value to our customers and brand partners.

We remain confident that we will achieve our updated guidance expectations for the full fiscal year 2023. As an industry leader in growth and profitability, we will continue to build on our unique customer positioning, strong brand relationships, and excellence in execution. I will now turn the call back over to Michael for his concluding remarks.

Michael Kliger: Thank you, Martin. We are satisfied with the solid quarter of fiscal year 2023 earnings results. We see ourselves well positioned to achieve our short-term targets despite a challenging macro environment. We will continue to benefit from the ongoing shift to online in luxury spend. We also expect further market consolidation among digital platforms, and we see continued global market share gains for us based on our very attractive value proposition as well as a superior business model. We are convinced that Mytheresa 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.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Matthew Boss from JPMorgan.

Operator: Our next question comes from the line of Oliver Chen from TD Cowen.

Operator: Our next question comes from the line of Kunal Madhukar from UBS.

Operator: Our next question comes from the line of Lauren Schenk from Morgan Stanley.

Operator: Our final question comes from the line of Abhinav Sinha from Societe Generale.

Operator: Thank you, ladies and gentlemen. This does conclude today’s call. Thank you for your participation. You may now disconnect.