Netshoes (Cayman) Ltd.: Third Quarter 2018 Results
SÃO PAULO--(BUSINESS WIRE)--Nov 13, 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 nine and three-month period ended September 30, 2018. The results are stated in Brazilian Reais (“R$”) and prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting”.
Comparative information for the nine and three-month period ended September 30, 2017 were restated for the purposes of applying IFRS 5 “Non-current assets held for sale and discontinued operations” after approval by the Board of Directors of the sale of its operations in Mexico.
Third Quarter 2018 Key HighlightsGrowth in net sales: R$417.8 million, up 0.5% year-on-year on an FX neutral basis Discontinuation of B2B operations to focus on core B2C business with a write-off of R$78.0 million Further increase in GMV: R$605.1 million, up 5.5% year-on-year (FX neutral), with Marketplace GMV up 48.1% year-on-year, accounting for 13.0% of total GMV (+4 p.p. YoY) B2C GMV increased 7.4% year-on-year (FX neutral) Improvement in operations: Total net working capital cycle reduction of 32 days to 13 days over 2Q-2018 Operating cash flow generation of R$72.3 million, without contribution from factoring arrangements
Subsequent EventsClosing of Netshoes Mexico sale to Grupo Sierra Capital in October 2018.
Operating and Financial Metrics Highlights
(1) As Mexico operation was discontinued during the third quarter of 2018, operating and financial figures exclude Mexico in 2017 and 2018.
(2) For a reconciliation of net sales to GMV, see page 11 below.
(3) For a reconciliation of net loss to Adjusted EBITDA Margin, see page 12 below
Message from the Founder and CEO, Marcio Kumruian:
The third quarter of 2018 marks an important turning point for Netshoes, as we took some decisive steps to streamline our operations and focus on our core B2C business in markets where we are better positioned to secure medium-term profitable growth.
As part of that strategy, we recently announced our decision to discontinue our B2B operations. This difficult but necessary step is a recognition that this diversification attempt generated lower than expected results. In order to minimize further negative results, we adjusted the margins of nutrition supplements products, accelerating sales through our B2C channel. This resulted in a provision of R$59.3 million in existing nutrition supplement inventory. In addition, we terminated our commercial agreement with Midway Labs, filed a lawsuit against them and recorded a provision of R$18.7 million for Midway receivables that may not be collected. This impacted our gross profit and adjusted EBITDA in the quarter, but we believe this discontinuation puts Netshoes on a sounder footing going forward.
In addition, in October we concluded the sale of our operations in Mexico. This will allow us to be even more focused on our core operations in Brazil, where we believe there is significant growth potential, as evidenced by our Q3 performance in those markets.
This quarter also saw us increase our financial flexibility with the successful completion of the renegotiation with banks of our working capital and debenture credit lines, increasing the original maturity of the contracts by one year, to 2021, and obtaining a 12-month grace period on principal amortization. With this renegotiation, the Company eliminated R$107.7 million in debt amortization through the first half of 2019 and brought short-term debt down to 5% of total debt, compared to 46% in 2Q-2018.
These important developments were accompanied by some further advances in our operations that attest to the strength of our underlying business. The number of active customers was up by double digits, to more than 6.7 million. Our net sales rose 0.5% and total GMV rose 5.5% on an FX neutral basis, with higher orders and average basket, reflecting the 48.1% year-on-year increase in marketplace GMV. Thanks to a strong reduction in working capital requirements, we generated a solid R$72.3 million in operating cash flow (without contribution from factoring arrangements).
We remain focused on executing our new strategy aimed at achieving profitability in our B2C online operations, and our teams are fully mobilized to deliver a strong Black Friday and Christmas period with a superior customer experience.
Our actions during the third quarter reaffirm our commitment to our renewed strategy, turning a page to continue to build our medium-term growth on a more solid foundation.
Overview of Third Quarter 2018 Results
(1) Due to the sale of Mexico’s operation in October 2018, Mexico is presented as discontinued operation in 2017 and 2018 figures.
(2) For a reconciliation of net sales to GMV, see page 11 below.
(3) For a reconciliation of EBITDA and Adjusted EBITDA, please see page 12.
(4) For a reconciliation of financial income/expense to Certain Other Net Financial Result and Net Adjusted Financial Result, see page 11.
(5) Inflation accounting in accordance with IAS 29 Financial Reporting in Hyperinflationary Economies in the Argentinean subsidiary.
(6) Consolidated financial figures for the nine-month period ended September 30, 2018 include the hyperinflation impacts in P&L for the six month-period ended June 30, 2018. This adjustment was not included in the unaudited condensed consolidated financial statements for the six-month period ended June 30, 2018.
The Company’s business is organized into two segments: (1) Brazil, which consists of the B2C e-commerce operations of Netshoes (sporting goods) and Zattini (fashion), and the business-to-business (B2B) operation, mainly comprised of supplements sales (discontinued in 3Q-2018); and (2) International, which consists of the B2C e-commerce operation in Argentina.
Registered members (excluding Mexico) increased 18.2% year-on-year to 23.8 million in 3Q-2018. Active customers reached 6.7 million, up 11.6% year-on-year.
The shift of consumer purchasing habits to mobile devices has continued, with 58.1% of total orders placed from mobile devices in 3Q-2018, an 11.4 p.p. increase over 3Q-2017.
GMV from the B2C operation grew 7.4% year-on-year on an FX neutral basis in 3Q-2018 (3.7% on a reported basis), mainly driven by:a 1.8% year-on-year increase in Netshoes Brazil GMV, mainly impacted by the strategic mix of product shift from 1P to 3P (products with lower margin or slower replacement cycle); a 14.8% year-on-year increase in Zattini’s GMV, reflecting the success of the Company’s new strategy in fashion portfolio management. Both Netshoes and Zattini showed GMV growth acceleration throughout the quarter:
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