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    Nelly Group: DNB Markets – Nelly: Profitability from Q2e

    2022-02-09 11:52

    Nelly reported Q4 sales 1% above our forecast but EBIT SEK2m below. However, we are more optimistic about the sales growth and EBIT margin trend following upbeat management comments on the near-term outlook. As a result, we have raised our fair value to SEK35-45/share (SEK30-40).

    Q4 results. Sales of SEK407m (1.2% above our forecast of SEK402m) were driven by 9% growth in the core Nordic operations, in part due to more customers. Gross profit of SEK177m (1% below our forecast of SEK179m) was affected by cost inflation and supply-chain disruptions. Nelly reported a gross margin of 43.4% (versus our forecast of 44.4%), a 70bp improvement versus 42.7% in Q4 2020. EBIT was SEK-3m (below our forecast of SEK-1m), with an EBIT margin of -0.8% (versus our -0.3%), versus 0.1% in Q4 2020. The miss was driven by more meaningful cost savings from investments in the automated warehouse coming through slightly later than we expected (guidance of SEK35m annually, with a full run rate in 2022), a lower gross margin due to higher return rates and lower sales of own brands, and higher personnel and IT costs.

    Key takeaways. We find it encouraging that management believes the warehouse cost savings (SEK35m targeted) and efficiency improvements should take full effect in the next few quarters – successful execution will be key to regaining profitability in combination with topline recovery, especially within the party-fashion segment. The strong growth in the core Nordic operations in Q4 was driven by robust demand for everyday fashion and sales of party fashion, which grew YOY but were still significantly lower than before the pandemic. Given the easing of restrictions in Sweden from 9 February, management expects a continued recovery in partywear and continued growth in everyday-wear, which should be key for sales growth, in our view. Q4 was the second consecutive quarter with increasing customer numbers, driven by new channel initiatives, while the upcoming initiatives, such as the new website, should boost customer growth near-term, in our view.

    Fair value raised to SEK35-45/share based on a c38-50% discount to 2022-2024e peer multiples, and a DCF. Nelly is currently trading at a 2022e EV/sales 0.5x-0.6x.

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    Best regards,

    Ebba Bjorklid | Retail and Consumer Staples Equity Research Analyst | DNB Markets 

    DNB Bank ASA, Filial Sverige 
    Regeringsgatan 59 | Stockholm| Sweden
    Email: ebba.bjorklid@dnb ( |