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Verkkokauppa.com - High importance of sales mix

Verkkokauppa.com was able to make a turnaround in profitability in Q3 but at the same time sales growth decreased. Profitability improvement was mainly due to sales mix and better terms with suppliers. The management had a good control over the business in Q3. We keep our rating “HOLD” with TP or EUR 3.3.

Profitability improvement driven by sales mix

In Q3, Verkkokauppa.com focused more on profitability and achieved EBIT of EUR 4.3m vs. EUR 3.7m/3.0m Evli/cons. EBIT margin increased to 3.6% vs. 2.9%/2.4% Evli/cons driven by higher gross margin (15.7% vs. 14.7% our expectation). Gross margin improvement was mainly due sales mix (smaller product categories with higher gross margins) and better terms and conditions from suppliers. The company’s sales in Q3 were below expectations and the growth (3%) was only slightly above the market growth of 2.5% (GfK), reflecting the tight and price driven competition in consumer electronics. The company was also able to keep good control over the costs (~8% y/y) in Q3.

Support from other product categories

Verkkokauppa.com has sought growth over profitability and as the company has aggressively competed in a highly competitive consumer electronics market, the company’s earnings development has been weak. In Q3, the company shifted more focus towards other categories with higher margins. We see this as a positive change as the aggressive competition in consumer electronics market is expected to remain tight, and the growth might become too expensive. After Q3, the pressure on EBIT has eased, although Q4 is critical for the business as Black Friday and Christmas are important sales drivers for the company.

“HOLD” with TP EUR 3.3

Verkkokauppa.com updated its outlook for FY19 and expects sales of EUR 500-525m and EBIT of EUR 11-15m (prev. sales of EUR 500-550m and EBIT of EUR 11-17m). We expect 19E sales of EUR 513m and EBIT of EUR 12.8m. As we expect the aggressive competition to continue we have decreased our 20E-21E sales expectation by 3-5%. On our estimates Verkkokauppa.com trades at 19E-20E EV/EBIT multiple of 9.0x and 7.8 which translates into ~80% discount compared to the peer group. We keep our rating “HOLD” with TP of EUR 3.3.

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