Netshoes Limited Announces First Quarter 2018 Results
SÃO PAULO--(BUSINESS WIRE)--May 14, 2018--Netshoes (Cayman) Ltd. (NYSE:NETS) (“Netshoes”), Latin America’s leading online retailer of sporting and lifestyle goods, today reported unaudited consolidated financial results for the three-month period ended March 31, 2018. The results are stated in Brazilian Reais (“R$”) and prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting”.
First Quarter 2018 Key HighlightsRegistered members up 21%, reaching 23 million members Active customers up 20%, reaching 7 million Invoiced orders up 13% to 2.8 million orders, of which 78% were from repeat customers Orders placed from mobile devices up 52%, accounting for 53% of total transactions Total consolidated GMV increased 5% Total B2C GMV increased 10% Marketplace GMV accounted for 12% of total GMV, up 2 percentage points (p.p.) sequentially and 6 p.p. over 1Q-2017 Consolidated net sales up 0.8% Adjusted EBITDA was negative R$29 million and net loss was R$60 million
Operating and Financial Metrics Highlights
Message from the Founder and CEO, Marcio Kumruian:
As previously discussed, in 2018 we will pursue a more moderate growth strategy in our B2C online operation as we prioritize short-term profitability and are still seeing a challenging consumption environment in Brazil which has not yet caught up with a slowly improving macroeconomic climate.
In turn, our B2C online operation grew 10% in 1Q-2018 and we continued the transition to a more profitable mix of sales (GMV). We continue to focus on the development of a high-quality marketplace operation, more than doubling the number of vendors year-over-year, and expanding the assortment of our private label brands in Brazil. A combination of these operations now represents a 25% share of Brazil’s GMV (22% of consolidated GMV) demonstrating the success of our shift in mix strategy to date. Additionally, the increased contribution from higher margin sales continues to more than offset the negative pressure from an unfavorable taxation environment in our core market.
Although the B2B operation still weighed on the Company’s consolidated results in 1Q-2018, we did not record any further charges related to returns or provisions. Also, sales gained traction in recent months as our biggest clients are starting to gradually increase volumes indicating our turn-around strategy is on track for this business.
With respect to our financial operations, we have chosen to take a more conservative approach to the factoring arrangements financing our working capital to more efficiently manage financial expenses. As a result, we recorded a R$170 million use of operating cash. This was an isolated event directly related to the transitory shift in financing strategy. This action also partially explains the Company’s R$18.9 million reduction in interest expense in 1Q-2018 compared to 1Q-2017 together with lower interest rates in Brazil and our lower average debt balance.
We continue to expect improved financial performance as we harvest the benefits of a more agile integrated IT platform, fully implemented since February 2018, and take more aggressive actions on bringing our B2B and international operations back on track to achieving profitability. The development and implementation of this leading edge proprietary technology took us two years of investments of financial and human resources. We expect an extensive contribution to both the customer experience and our ability to more accurately manage the business with a significant increase in trackable metrics. More importantly, we now have the most relevant part of our talented IT team focused on developing new features to increase the efficiency and expanding our ecosystem.
With a focus on reaching near term EBITDA profitability and sustainable long term growth, we continue to make progress against our strategic initiatives. Our team is committed to growing and building this company and I am confident we have the right team in place to do so.
Overview of First Quarter 2018 Results
The Company’s business is organized into two segments: (1) Brazil, which consists of the B2C ecommerce operations of Netshoes (sporting goods) and Zattini (fashion), and the business-to-business (B2B) operation mainly comprised of supplements sales; and (2) International, which includes Argentina and Mexico B2C ecommerce operations.
Registered members increased 21.3% year-over-year to 23 million in 1Q-2018, while active customers increased 19.8% year-over-year to 6.8 million.
In 1Q-2018, invoiced orders reached 2.8 million, an increase of 12.8% over 1Q-2017. 78.4% of invoiced orders came from repeat customers, which reflects the Company’s rigorous focus on customer satisfaction.
The Company continued migration of consumer purchasing habits to mobile devices, with 52.5% of total orders placed from mobile devices in 1Q-2018, a 13.6 p.p. increase over 1Q-2017.
Total consolidated GMV in 1Q-2018 increased 5.2% year-over-year to R$558.6 million, mainly driven by the 12.8% year-over-year increase in the number of invoiced orders, partially offset by a 2.7% decrease in average basket size and by the lower B2B sales.
GMV from the B2C operation grew 10.9% year-over-year (on an FX neutral basis) in 1Q-2018. GMV for Netshoes Brazil rose 9.0% year-over-year and Zattini’s GMV increased 29.1% year-over-year.
Marketplace GMV (Netshoes & Zattini in Brazil) amounted to R$64.3 million, reaching 11.5% of consolidated GMV (12.7% of GMV Brazil), an increase of 129.7% or 6.2 p.p. year-over-year. As of March 31, 2018, the Company’s total qualified vendor base was comprised of 818 qualified third-party B2C vendors, an increase of 118.1% year-over-year and an increase of 11.6% over 4Q-2017.
The Company’s private label collection brands and licensing products continue to grow as a proportion of our GMV, reflecting increased sales of the existing portfolio and new licensed products. Sales of products in these categories in 1Q-2018 represented 10.7% of consolidated GMV (11.8% of GMV in Brazil) representing a 1.1 p.p. increase year-over-year and positively contributing to gross margin due to its higher category margin.
Management sees an exciting opportunity to further develop the relevance of Marketplace for Netshoes and Zattini as well as the assortment of private label products as it further evaluates its potential in fashion in 2018.
GMV for the B2B operation amounted to R$7.5 million in 1Q-2018 (1.3% of total Consolidated GMV), a 74.5% decrease from the same period last year as a result of a more conservative sales strategy to build a sustainable off-line distribution network for supplements.
Consolidated net sales were R$399.3 million in 1Q-2018, an 0.8% increase year-over-year (+1.9% on an FX neutral basis) and up 4.5% year-over-year on the B2C operation, on an FX neutral basis. This level of growth reflects the Company’s 2018 strategy to prioritize short-term profitability in Brazil and International markets. In 1Q-2018, B2B net sales were 60.2% lower year-over-year.
Net sales for Brazil increased 1.4% year-over-year to R$360.4 million (+4.2% year-over-year for the B2C operation).
Reported net sales for the International operation in 1Q-2018 was R$38.9 million, a 4.4% decrease year-over-year on an as reported basis and up 7.0% year-over-year on an FX neutral basis, mainly supported by growth in Argentina.
Gross profit in 1Q-2018 was R$120.6 million and represented a 7.1% decrease from 1Q-2017 which included a positive R$10.1 million effect related to VAT tax credits 1. In addition, the B2B operation negatively impacted gross profit by R$1.4 million in 1Q-2018 compared to a positive impact of R$3.6 million in 1Q-2017, a R$5.1 million negative impact in the year-over-year comparison.
The gross margin for 1Q-2018 was 30.2%, 2.5 p.p. lower than the 32.8% gross margin in 1Q-2017 and 0.9 p.p. higher than 4Q-2017.
During the quarter, unfavorable changes in the e-commerce taxation regime in Brazil (in place since 2016) and lower B2B margins (due to the ongoing corrective actions) were more than offset by the continuing higher mix of sales derived from marketplace and private label products, amongst other initiatives to maximize product margin.
1 During the first quarter of 2017, the Company reviewed and changed ICMS tax positions taken on past transactions and recorded ICMS tax credits as a reduction of the cost of product sales.
Operating expenses, net of depreciation and amortization, were R$149.5 million in 1Q-2018, 18.5% higher than 1Q-2017. As a percentage of net sales, operating expenses were 37.5%, compared to 31.8% in 1Q-2017 and were mainly explained by:
Selling and marketing expenses, net of depreciation and amortization, increased 8.1% year-over-year in 1Q-2018 to R$108.9 million, representing 27.3% of net sales versus 25.4% of net sales in 1Q-2017. This increase was mainly attributed to (i) higher marketing investments for the accelerated growth of the marketplace operation, (ii) the new branding campaign, and (iii) an increase in sales commissions expenses related to the higher mix of sales from partner branded stores.
General and administrative expenses, net of depreciation and amortization, were R$39.5 million in 1Q-2018, 62.3% higher in comparison to 1Q-2017, representing 9.9% of net sales, versus 6.1% of net sales in 1Q-2017. The increase was mainly attributable to a positive R$12.9 million effect recorded in 1Q-2017 related to the remeasurement of the Company’s stock option plan.
Adjusted EBITDA & Net Loss
Consolidated Adjusted EBITDA loss was R$29.0 million in 1Q-2018 (-7.3% Adj. EBITDA margin) compared to positive R$3.6 million in 1Q-2017 (0.9% Adj. EBITDA margin). 1Q-2017 Adjusted EBITDA was positively affected by the above mentioned effects totaling R$23.0 million in the Brazilian operation.
Adjusted EBITDA loss for the Brazilian operation in 1Q-2018 was R$18.3 million (-5.1% Adj. EBITDA margin), including R$5.0 million negative impact from the B2B operation. This compares to positive R$14.0 million Adjusted EBITDA (3.9% Adj. EBITDA margin) in 1Q-2017, including R$3.6 million positive contribution from the B2B operation and the already mentioned positive effects amounting to R$23.0 million.
Adjusted EBITDA loss for the International operations in 1Q-2018 was R$7.1 million, a R$1.5 million increase (+2.9 p.p. in Adj. EBITDA margin) when compared to 1Q-2017. Both Mexico and Argentina operations improved year over year.
Consolidated net loss was R$60.3 million in 1Q-2018, with negative 15.1% net margin, compared to net loss of R$37.7 million and negative 9.5% net margin in 1Q-2017 that included R$23.0 million positive effect related to the remeasurement of the Company’s stock option plan and ICMS tax (VAT tax) credits on past transactions. During 1Q-2018 the Company reduced interest expense by R$18.9 million compared to 1Q-2017, due to a lower volume of financial factoring arrangements and lower interest rates and average debt balance.
Balance Sheet and Cash Flow
Cash and cash equivalent at March 31, 2018 were R$60.7 million, compared to R$84.6 million at March 31, 2017.
In 1Q-2018, the Company consumed R$260.5 million in net cash flow from operating activities versus R$78.5 million consumed in 1Q-2017, mainly related to a more conservative use of factoring arrangements to more efficiently manage interest payments, negatively impacting operating cash flow by R$169.8 million in 1Q-2018, compared to a positive impact on cash flow of R$5.6 million in 1Q-2017.
Cash used in investing activities amounted to R$28.6 million in 1Q-2018, of which R$27.3 million was capex, mainly related to the development of the Company’s Information Technology infrastructure and regular maintenance capex of the Company’s distribution centers.
Cash used in financing activities amounted to R$45.6 million in 1Q-2018 and was mainly related to principal amortization and interest payments on the Company’s financial debt.
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