Verkkokauppa.com - Not the time to jump in yet
The market environment continued challenging and Verkkokauppa.com’s Q1 sales declined mainly driven by the consumer and export segments. With the company’s valuation stretched, we retain our HOLD rating and adjust TP to EUR 4.3 (4.7).
EBIT fell short of expectations
Verkkokauppa.com’s Q1 net sales decreased by 6.9% y/y to EUR 124.8m beating our expectations (Evli: EUR 120.1m). As expected, the drivers behind the decline were the poor performance of core categories in the consumer segment as well as the exports segment. The company ended exports to Russia and the segment declined by ~30% y/y in Q1. Though market environment increased the price competition which correspondingly reduced the gross margin to 15.4%. In addition, the sales mix within core categories harmed the gross margin. Fixed costs saw an increase due to personnel investments and inflationary pressures in the other costs. The combination of lower gross margin and increased fixed costs downgraded adj. EBIT stronger than we expected to EUR 0.9m (Evli: EUR 2.1m), implying an adj. EBIT margin of 0.7%. Poor profitability pressed the bottom line near zero and EPS amounted to EUR 0.00 (Evli: EUR 0.03).
Evolving categories performed well
While core categories saw a decline of 7.9% y/y, the sales of higher-margin evolving categories evolved, and the product segment grew by 10.2% y/y, representing 12.4% of total Q1 sales. The growth of the evolving categories was driven by toys, baby & family, sports equipment, and luggage product categories. In Q1, online sales decreased by 4.8% y/y following lower total sales and represented 63 % of the total sales. The consumer segment represented 68% of total sales while with sales growth of 10.4% B2B segment was 26% of total sales. With Russian exports ended, the export segment represented only 5% of total sales.
Growth requires a recovery of the consumer segment
Although, evolving categories and B2B delivered double-digit sales growth in Q1, in order to achieve topline growth, Verkkokauppa.com needs the consumer segment to recover. Consumer trust in Finland further decreased in April which reflect in the company’s demand explicitly. The outlook for H2 is still blurred and it might take a while for a recovery of demand for durable goods. The company noted that it sees inflationary pressures stemming partly from personnel investment but increasingly from Verkkokauppa.com’s service providers. Logistics costs are set to rise, but on the other hand, commissioning of automated warehouse offset increased costs somewhat. The company also invested in its IT capabilities by recruiting ~10 new employees which increased the personnel costs in Q1. We expect 22E fixed costs to increase to 12.6% of net sales. We also expect material costs to increase due to global supply chain problems and inflationary pressures.
HOLD with a target price of 4.3 (4.7)
We revised our short-term estimates, reflecting increased cost pressures, uncertainty, and low visibility of H2’22. With the consumer segment’s poor performance in H1 and Q3, we expect Verkkokauppa.com‘s 22E revenue to decrease by 2.4% y/y to EUR 560.8m. Driven by increased fixed costs and low volumes, we expect EBIT to be near the lower bound of the company’s guidance, at EUR 12.7m (2.3% margin). In our estimates, the company faces topline growth of 6.5% and 8.3% during 2023-24. Driven by scalability and investment into efficiency, we expect the company to report EBIT margins of 3.4% and 4.1% during 2023-24. Furthermore, in Q2 we expect a good performance of evolving categories to soften the decline of consumer electronics. We also expect the B2B segment to continue double-digit revenue growth while expecting the export segment to decrease significantly due to the end of exports to Russia. We expect the Q2 topline to decrease by 5.2% y/y to EUR 123.7m. We expect Q2’22 gross margin (16.7%) to improve q/q but be below that of the comparison period. Q/q improvement is driven by an increased share of evolving categories. Our Q2 EBIT estimate lands at EUR 2.4m (2% margin). With our revised 2022 estimates, the company trades with a premium to its peers. With the EV/EBIT multiple taking balance sheet into account, Verkkokauppa.com’s valuation starts to seem moderate in 2023 (23E EV/EBIT of 8.6x), but we find no reason to hurry as long as the consumer market environment seem uncertain. With Verkkokauppa.com's valuation stretched and uncertainty concerning the near future, we retain our HOLD rating and adjust TP to EUR 4.3 (4.7).
Verkkokauppa.com’s Q1 net sales decreased by 6.9% y/y to EUR 124.8m beating our expectations (Evli: EUR 120.1m). As expected, the drivers behind the decline were the poor performance of core categories in the consumer segment as well as the exports segment. The company ended exports to Russia and the segment declined by ~30% y/y in Q1. Though market environment increased the price competition which correspondingly reduced the gross margin to 15.4%. In addition, the sales mix within core categories harmed the gross margin. Fixed costs saw an increase due to personnel investments and inflationary pressures in the other costs. The combination of lower gross margin and increased fixed costs downgraded adj. EBIT stronger than we expected to EUR 0.9m (Evli: EUR 2.1m), implying an adj. EBIT margin of 0.7%. Poor profitability pressed the bottom line near zero and EPS amounted to EUR 0.00 (Evli: EUR 0.03).
Evolving categories performed well
While core categories saw a decline of 7.9% y/y, the sales of higher-margin evolving categories evolved, and the product segment grew by 10.2% y/y, representing 12.4% of total Q1 sales. The growth of the evolving categories was driven by toys, baby & family, sports equipment, and luggage product categories. In Q1, online sales decreased by 4.8% y/y following lower total sales and represented 63 % of the total sales. The consumer segment represented 68% of total sales while with sales growth of 10.4% B2B segment was 26% of total sales. With Russian exports ended, the export segment represented only 5% of total sales.
Growth requires a recovery of the consumer segment
Although, evolving categories and B2B delivered double-digit sales growth in Q1, in order to achieve topline growth, Verkkokauppa.com needs the consumer segment to recover. Consumer trust in Finland further decreased in April which reflect in the company’s demand explicitly. The outlook for H2 is still blurred and it might take a while for a recovery of demand for durable goods. The company noted that it sees inflationary pressures stemming partly from personnel investment but increasingly from Verkkokauppa.com’s service providers. Logistics costs are set to rise, but on the other hand, commissioning of automated warehouse offset increased costs somewhat. The company also invested in its IT capabilities by recruiting ~10 new employees which increased the personnel costs in Q1. We expect 22E fixed costs to increase to 12.6% of net sales. We also expect material costs to increase due to global supply chain problems and inflationary pressures.
HOLD with a target price of 4.3 (4.7)
We revised our short-term estimates, reflecting increased cost pressures, uncertainty, and low visibility of H2’22. With the consumer segment’s poor performance in H1 and Q3, we expect Verkkokauppa.com‘s 22E revenue to decrease by 2.4% y/y to EUR 560.8m. Driven by increased fixed costs and low volumes, we expect EBIT to be near the lower bound of the company’s guidance, at EUR 12.7m (2.3% margin). In our estimates, the company faces topline growth of 6.5% and 8.3% during 2023-24. Driven by scalability and investment into efficiency, we expect the company to report EBIT margins of 3.4% and 4.1% during 2023-24. Furthermore, in Q2 we expect a good performance of evolving categories to soften the decline of consumer electronics. We also expect the B2B segment to continue double-digit revenue growth while expecting the export segment to decrease significantly due to the end of exports to Russia. We expect the Q2 topline to decrease by 5.2% y/y to EUR 123.7m. We expect Q2’22 gross margin (16.7%) to improve q/q but be below that of the comparison period. Q/q improvement is driven by an increased share of evolving categories. Our Q2 EBIT estimate lands at EUR 2.4m (2% margin). With our revised 2022 estimates, the company trades with a premium to its peers. With the EV/EBIT multiple taking balance sheet into account, Verkkokauppa.com’s valuation starts to seem moderate in 2023 (23E EV/EBIT of 8.6x), but we find no reason to hurry as long as the consumer market environment seem uncertain. With Verkkokauppa.com's valuation stretched and uncertainty concerning the near future, we retain our HOLD rating and adjust TP to EUR 4.3 (4.7).