Marimekko Oyj (MEKKO) Earnings Call Transcript

Good afternoon, ladies and gentlemen. My name is Anna Tuominen, and I'm the IRO of Marimekko. It is my pleasure to welcome you to our results webcast for the financial year 2020. With me, I have our President and CEO, Tiina Alahuhta-Kasko; and our CFO, Elina Anckar. We will first hear Tiina's presentation and the results. And after that, we'll have time for questions. [Operator Instructions] Without further ado, Tiina, welcome.

Thank you, Anna, and good afternoon, everybody. It's my pleasure today to elaborate and open up more Marimekko's financial statements for 2020. So let's get started. It is for sure that the year 2020 will go into the books of history as a truly exceptional one. With the coronavirus pandemic causing a real human crisis affecting all people around the world. The pandemic also ignited the worst crisis in decades in the fashion and specialty retail sector, and it definitely still heavily impacts our industry this year. However, in spite of these extremely challenging circumstances, we at Marimekko were able to achieve good performance in 2020. Our net sales for the year amounted to approximately the same level as the previous year, with both our online sales and wholesale sales performing well. And thanks to the swift operational adjustment measures, our comparable operating profit increased by 18% and landed at a comparable operating profit margin of 16.3%. We can definitely see that the long-term work that we have at Marimekko what our teams done in the past years in the area of our brand, our digital business as well as our comprehensive range of lifestyle products, diverse business and distribution channel model, and the long-term and our ability to react quickly were among some of the key factors that supported us in successfully navigating this crisis. It is -- it goes to all Marimekko employees to thank for this great performance. Our teams around the world have really in a determined manner worked together during the course of this year and made Marimekko one of the fewer and fewer success stories in our industry that is undergoing a huge transformation. Our good performance in the past year has also further strengthened our confidence and trust to our long-term international growth strategy. And at the same time, we can see that the pandemic has intensified megatrends such as digitalization and changes in consumers' values, especially the growing importance of sustainability, which all contribute to Marimekko's lifestyle, the timelessness, value-drivenness and long-lastingness of it being even more relevant than ever, this way, also supporting our growth targets. Therefore, we believe that we must have the courage, the size and the opportunities available for us and invest in international growth. And we believe that now is the right time. And therefore, in 2020, our plans include strengthening the building blocks of our international growth, and we will be investing in digital business, in seamless omni-channel experience, in sustainability and brand awareness. Combined with the work that we have already done in the past years, we believe that these investments will create an even stronger stepping stone for us in our next phase of international growth, which will be especially targeting Asia. Naturally, it goes without saying that the pandemic situation continues, and we keep monitoring the situation and should then be necessary, we will adjust our plans accordingly. But then if we have a closer look at our performance in detail. So in the fourth quarter, despite the difficult circumstances, our net sales grew by 8% to 37.8 million -- EUR 37.4 million, thanks to a favorable trend, especially in the wholesale sales in Finland, EMEA and Scandinavia. In the fourth quarter, the coronavirus pandemic situation worsened, and the restrictions and recommendations tightened, and that naturally caused a negative impact on the foot traffic to the physical stores. However, our strong growth continued in our online sales, plus supporting our retail sales that declined only moderately considering the circumstances. Our sales in Finland in the fourth quarter grew by 6%, supported by exceptionally strong wholesale sales, which were impacted, especially by strong nonrecurring promotional deliveries. Our international sales grew by 11%, also supported by strong wholesale sales. And maybe one thing still to be noted is that on the international front, some of the wholesale deliveries in the Asia Pacific region in the last quarter, transferred to 2021. Then when we look at the full year level, despite the impacts of the coronavirus pandemic, our net sales were almost at par with the previous year's levels, declining only 1% and landing at EUR 123.6 million. When we look at the full year, our -- almost all Marimekko stores were temporary closed, either in the fourth -- first or second quarter, and naturally, the pandemic caused a negative impact to the footfall in the stores also in the latter half of the year. Therefore, it's quite self-explanatory, that the net sales were weakened, especially by a decline in retail sales. And in Finland, North America and Scandinavia as well as a decrease in the wholesale sales in the Asia Pacific region. However, there the relative trend was impacted by some of the deliveries transferring to 2021 as well as an exceptional delivery pattern in the comparison year. On the other hand, strong continued -- strong online sales supported the retail sales and mitigated the decline from the physical retail. And also the wholesale sales in Finland, Scandinavia and EMEA developed positively. And maybe one more thing to mention is that in the Finnish wholesale sales, the increase was partly due to the nonrecurring promotional deliveries. In the full year of 2020, we can definitely see the strength of Marimekko's lifestyle concept, and our profile being as one of the first -- world's first real lifestyle brands. With this, I mean that when people started to spend more and more time in their homes, that definitely triggered a boom in home decoration, which we were also able to then serve with our home products. And our home products grew 17% year-on-year. And this impact, we can definitely then see also in the division of our net sales by product line. The Asia Pacific region has today the greatest number of stores, and obviously, with our strong home market, Finland, the Asia Pacific is the second biggest market area for Marimekko. Our online store presence grew in 2020 to include 34 countries already, when some of our partners in Asia developed their omni-channel experience and opened Marimekko online stores in their own countries, namely in Thailand and in South Korea. Definitely, we can see that the importance of digital business is further increasing, and therefore, also reflecting in our future channel choices. Marimekko's brand sales grew 14% to EUR 285 million. Our brand sales, which consist of the estimated sales of our products at consumer prices were especially supported by strong performance and development in the Asia Pacific region. And already 67% of our brands has come out of our home market, and this is all reflective of our increasing presence around the world. Then when we look at our operating profit development, our operating profit in the fourth quarter was boosted by increased net sales and the adjustment of our operations, and eventually, our comparable operating profit landed to EUR 5.8 million, representing a 92% growth. We -- the operating profit itself included EUR 800,000 restructuring costs, and the operating profit totaled EUR 5 million. What then had a weakening impact on the operating profit was a decline in the relative sales margin, which was largely due to the higher logistic costs resulting from an increase in online sales. And on the full year level, the swift adjustment measures that decreased our fixed costs and improved results was the main driver behind the strengthened comparable operating profit. And as mentioned earlier on, the comparable operating profit amounted to EUR 20.2 million, representing an 18% growth and equaling a 16.3% comparable operating profit margin. Then what had a deep weakening impact on the operating profit was the decline in the relative sales margin, mainly due to the higher logistic costs resulting from the strong online sales as well as reduced net sales had also a weakening impact. Then we had also a lot of exciting events in the year 2020, building our future. As we then spend a lot of time naturally mitigating the coronavirus crisis. But just to highlight some of these positive events. So we were very excited to launch in December 2020, our new sustainability strategy. In line with our values, we see it our duty to strongly promote sustainability across our value chain. And we believe that by the power of our own example, we can do our part in moving the entire industry towards a more sustainable future. We really want to be at the forefront of developing more sustainable products and practices and our new sustainability strategy and ambitious related targets are built around 3 guiding principles. First of all, timeless design brings joy for generations to come, the products of tomorrow leave no trace, and thirdly, positive change through fairness and equality. We believe that it's important that these principles are deployed throughout our value chain, and this is the way we can not only lengthen our products' lifetime but also minimize any negative impacts. And ultimately, our goal is to reach a circular value chain that brings long-lasting joy in balance with the environment, and that is fair to everyone. Our long-term vision is that our operations leave no trace on the environment. And late in 2020, we took a step towards achieving this goal when our own operations became carbon neutral, thanks to our continuous development work as well as emission offsetting. During the second half of the year, we also opened a revamped flagship store in Helsinki with digital services. We -- in this highly digitalizing market, we do still believe that the physical store have an important role in building a holistic customer experience. We believe that they have a really important role in the area of personnel and expert customer service, and we are increasingly also introducing new types of digitally enriched services, such as virtual and private shopping and collection presentations. This store revamp is part of our constantly evolving seamless omnichannel experience and we are very excited about the fact that our revamped online store will be opening later this spring. In the autumn of 2020, we also reorganized and streamlined our operations in order to strengthen our future competitiveness. And as a result, a new even more customer-centric organization based on omni-channel thinking was created, and we believe that this new organization strengthens our competitiveness in this highly transforming market. There were also some changes in our management group, namely Sanna-Kaisa Niikko started as our CMO, and management group member on the 8th of October; and Dan Trapp started his role as our Chief Sales Officer and member of the management group on the 2nd of November. In addition, we were extremely excited to welcome to our team Rebekka Bay as our Creative Director. Rebekka previously served in the Marimekko Board of Directors. So Marimekko was a very familiar brand to her. Rebekka is a true visionary in our industry, and we believe that her ability to combine this strong creative vision with commercial thinking here then with her long experience and strong knowledge of, especially also the Asian markets, will further support us in developing even more inspiring and appealing collections for our customers around the world. We also started our 70th anniversary celebrations with a digital presentation of our pre-spring '21 collection at Copenhagen Fashion Week, which is currently seen as one of the forerunning global fashion events. Our digital presentation was filmed at our textile printing factory here in Helsinki. And what is really fantastic is that this digital format allowed us not only to present our point of view to our industry professionals and media, but also our customers, and this way, further strengthen our important values of inclusivity and equality. Many of you may know that we have a decade-long tradition of opening the summer with a public fashion show in the heart of Helsinki in May. Due to the pandemic, naturally organizing a physical event was not a possibility this year, in this past year. However, we didn't want to let go of this beautiful tradition with our community. So our innovative teams went along and eventually, our event was organized virtually, and we invited all our community to participate and model the show themselves on Instagram. So this really became probably one of the most inclusive runways ever seen in the world this far. We also continued building our international brand awareness through our collaboration collections. So as a continuation of some of our earlier collaborations with the Japanese apparel brand UNIQLO, we launched 2 limited edition collections for women and children in 2020. The collection launch in April was inspired by the Finnish summer and then the autumn and winter limited edition capsule was themed joyful together. And both of these capsule collaborations were among the leading collaborations for UNIQLO in 2020. And as I said, while these collaborations help Marimekko build our global awareness, this way also support our core business. And in the early part of the year, Marimekko and our collaboration with the Finnish fiber technology company, Spinnova, presented the first ever printed cloth made of Spinnova's wood-based fiber containing no harmful chemicals. And later in the fall, this collaboration was chosen as a finalist of Fast Company's innovation by design awards. This example is a great one, illustrating our unique opportunity to actively participate in the development of -- development projects in the area of sustainability, thanks to our own Helsinki printing factory, allowing us this flexibility. Then if we look at our outlook in 2021. It goes without saying that the coronavirus pandemic is still the worst crisis experienced by the global fashion industry and specialty retail sector in decades, and it will be impacting our sector also in 2021. It has taken the uncertainty over the global economy to a completely new level and is changing consumers' purchasing behaviors. And these exceptional circumstances can have an impact on Marimekko's sales, profitability and cash flow. They may also affect the operational reliability of our value chain. The duration of the pandemic, new infection ways and virus variants as well as how the crisis is handled in different countries impact the depth of the economic recession in different markets. Then if we look at our 2 main market areas, firstly, starting with Finland, which traditionally represents about half of the company's net sales. In 2021, we expect our sales in Finland to grow on the previous year. And our wholesale sales in Finland will be boosted in 2021 by nonrecurring promotional deliveries, the total values of which we estimate to be substantially higher than the year before, and with the vast majority of these deliveries taking place in the second half of the year. Then in Asia Pacific, the region is our second-largest market area, playing an important part in our international growth. And what is good to keep in mind is that all the Marimekko stores in Asia are partner-owned. Japan is still clearly the most important country in this region for us with a comprehensive network of Marimekko stores already. The other Asian countries' combined share of our net sales is still clearly smaller, but operations in these countries are constantly growing. We do expect our net sales in the Asia Pacific region to increase in 2020. And what is also worth mentioning is that our aim is to open approximately 5 to 10 new Marimekko stores and shop-in-shops this year, and most of these plant openings will be in Asia. Both our owned as well as our Asian partners online channel Marimekko, retail is a key driver of growth. And in 2021, also the nonrecurring promotional wholesale deliveries in Finland are also estimated to have a significant impact on our company's growth. These nonrecurring promotional deliveries may also increase our inventory risk this year. The development of the pandemic situation, paired with the possible tightening of restrictions in different market areas as well as changes in traffic numbers in stores do influence the outlook both for retail and wholesale, including these nonrecurring promotions. It's also good to keep in mind that any rapid fluctuations in demand due to this exceptional situation can have an impact, for example, on the availability of products and this way, have an influence on our net sales. Also, the operational reliability of our distribution centers and logistics in this pandemic situation is essential. We will be continuing the control of grey exports, which will have a clear weakening impact on our sales and earnings in 2021, and a licensing income is forecasted to be lower than last year. As mentioned at the earlier part of this presentation, we believe that now is the right time for us to invest in tapping into the opportunities that we can see for Marimekko internationally, and hence, accelerating international growth is part of our plan for 2021. Therefore, our fixed costs are expected to be up on the year of 2020. It's good to remember that in the last year, the fixed costs were reduced by partly temporary cost savings as well as subsidies granted in different countries to mitigate the negative business impacts of the pandemic. The marketing expenses are expected to grow, same for the investments, that are also estimated to increase. Most of the investments will be devoted to IT systems to strengthen our digital business. And what is also good to remember is that the estimated effects of the long-term bonus system target at the company's management will depend on the trend of the price of the company's share during the year. And then a word about the seasonality. So because of the seasonal nature of our business typical in our industry, the major portion of our net sales and earnings are generated during the last 2 quarters of the year. Then if we move into our financial guidance for 2021. So we expect our net sales for 2021 to be higher than in the previous year, and our comparable operating profit margin is estimated to be approximately on par with the long-term goal of 15%. However, it's good to keep in mind that the instability caused by the pandemic in our markets does continue, and therefore, there are significant uncertainties associated with the trend in net sales and earnings. As it pertains to our Board's proposal for dividend for 2020. The Marimekko Board of Directors proposes that the AGM in April authorize our Board to decide on the payment of a maximum dividend of EUR 1 per share in 1 or several installments at the later stage. And this proposal from our Board reflects the uncertainty caused by the COVID pandemic in general economic conditions. Today, we also announced that our Board of Directors has decided that a dividend of EUR 0.90 per share will be paid on the financial year of 2019. It's good to remember that Marimekko's result in 2019 were among the best in our company's history. And in addition, we have an excellent equity ratio. Our balance sheet is in good shape, and there were no extraordinary items impacting the 2019 results. And therefore, our Board of Directors have now decided to pay a dividend for 2019. So with these words, I will say thank you and open up for questions.

[Operator Instructions] We have a one question related to the products, especially the products targeted at younger generations or men. Would there be any details that you would be able to give on these kind of products and how they are growing, anything related to demography-related information?

So some of you may remember that some time ago, we launched our new streetwear segment called the Marimekko Kioski. And this streetwear segment, which marries unisex or genderless streetwear items with our most iconic prints is definitely a segment that has gotten also a lot of male following, which we're very excited about. And this year, which is our 70th anniversary year, we also have some exciting projects and collaboration projects in the loop. And a good example of this is our co-created capsule special collection. And what this co-created is all about, it is about us inviting young generation designers from various countries to interpret the Marimekko design philosophy and DNA in a completely unique and surprising way. And the first co-created capsule has just now arrived to the market. And there will be 3 more of those kind of capsules to come during the course of this year. And we believe that this is another segment that also caters for the male audience.

There's a question related to nonrecurring campaigns. One of the investors wants to know why does those campaigns -- why do they increase inventory risks?

Well, thank you. That's also a good question. So naturally, the reason why we lift these nonrecurring promotional campaigns that we estimate to have in the Finnish wholesale sales supporting this year is because of their significant size. And when we when we speak about significant size of campaigns, there is a natural inventory risk, especially when we remember that we live in the year of still a continued pandemic.