Lanvin Group - Q2 2024

Transcript

Operator (participant)

Thank you for joining us, and welcome to the Lanvin Group's 2024 first half financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. Now, please take a moment to review the disclaimers. During this presentation, the company will be making certain forward-looking statements, including, but not limited to, future performance and industry outlook. Forward-looking statements are inherently subject to risks, uncertainties, and other factors, and they are not guarantees of performance. For today's presentation, I would like to introduce Eric Chan, the CEO of Lanvin Group, and David Chan, Executive President and CFO of Lanvin Group. With that, I'd like to turn it over to Eric Chan to start the presentation.

Eric Chan (CEO)

Thank you. Thank you all for joining us today. I'm Eric Chan, the CEO of Lanvin Group. This year, just like last year, we remain committed to growing our brand by driving awareness and heat through our products. We will continue investing in developing our brands and their products, and as such, I would like to welcome the new creative leaders who have joined our family, Peter Copping at Lanvin and Paul Andrew at Sergio Rossi. Both of whom are world-class creative icons and bring tremendous energy and excitement to our group. I would also like to take a moment to welcome Regis Rimbert, the new CEO of Wolford. He joined us in June 2024, and he brings us a wealth of experience in luxury, fashion, and operations, and I am excited for the path he will create for the brand.

The story of the first half was the macroeconomy headwinds, where our retail, our entire industry, faced ongoing political instability as well as bearish economic signals, were impactful in the first half of 2024, just as they had started to be in the second half of 2023. Additionally, the wholesale channel continues to be challenged globally, and the challenges was further compounded by the macroeconomy headwinds. Lanvin Group and our brands were not immune to the top-line challenges that prevailing market conditions presented in the first half. However, while the story of the market was about macroeconomy headwinds, Lanvin Group's story had not changed. We continue to focus to our product portfolio and generating brand heat, and we continue to tactically expand our footprint in new markets while pruning underperforming locations.

We not only continued to improve our cost structure, but also took a proactive approach by implementing more aggressive, cost-efficient initiatives to combat the macroeconomic headwinds. We continue to make progress on our path to profitability. We have improved our full price sell-through, as well as inventory management, to sustain our gross profit margin during a challenging environment. Additionally, we have remained focused on synergizing our fixed overhead to rightsize our platform for the future. With that said, our group revenue in the first half of 2024 was EUR 171 million, representing a decrease of 20%. Our gross profit margin for the year remained steady, down just 1%, with gross profit totaling EUR 38 million. We continue to refine our operations, and we plan to use this time to market ambiguity to further hone our cost structure.

At the same time, we plan to invest in marketing and product development to set our path for tomorrow, not only financially, but creatively, with the addition of the new talents who will help drive our group forward. With that, I would like to turn it over to our Executive President and CFO, David Chan, to go through some of the details.

David Chan (Executive President and CFO)

All right. Thank you. Thank you, Eric. Thank you for joining us today. I'm David Chan, Executive President and CFO of Lanvin Group. I'll be walking you through some of our brand's highlights to start. I'd like to direct everybody to page five of the presentation. The highly anticipated announcement of the new artistic director, as Eric mentioned, for Lanvin, was made in June of this year. Peter Copping, who will be joining Lanvin in September, brings a fresh view of couture and will help write the next chapter of a storied history of the brand. Additionally, in the first half, the second edition of Lanvin Lab was released with a sculpture collaboration with world-renowned modern artist, Erwin Wurm. The piece was designed incorporating a Pencil Cat Bag as well as the iconic Curb sneaker.

The monumental piece will tour five key cities in China throughout the summer. Moving on to Wolford. The brand opened its first location in the Middle East in Kuwait City. The brand has big plans for the region as it continues to expand its leisure and bodywear collections, and will continue to pursue opportunities in emerging markets. Additionally, in the Middle East, Sergio Rossi opened its first store in Dubai Mall and plans another store to be opened in 2025 in Abu Dhabi. This is a testament to the growth opportunities our brands see in the region and the resilience of the region in another challenged global market for luxury. Another significant piece of news for Sergio Rossi was the announcement in July of the new creative director, Paul Andrew.

Paul brings a unique view as a, as a successful founder of his own footwear brand to the Italian superb flair of Sergio Rossi. His innovative styles will bring a lot of excitement and the heat to the brand. Now, moving to St. John. The brand held a number of successful marketing events in the first half of the year, leading up to and after the launch of its new New York flagship store. The brand's highly successful campaign, St. John 2024, dovetailed a fantastic year of generating brand heat in St. John 2023. The brand continues to grow its presence in the new demographics, and its performance has been elevated by new and younger clientele. Lastly, I'd like to talk about Caruso. The brand saw a strong first half with its own Caruso branded product line.

In the first half, the brand also continued to implement new business development initiatives to build its maison business and also continue its profitability trend. Next, I'd like to point you to page six to discuss our plans for the second half. Given the market headwinds for the foreseeable near term, all our brands will focus on cost efficiency initiatives to continue to drive margin improvements. To support our initiatives in the first half, we brought a new manager to facilitate operating cost efficiency measures. In the second half, we'll be adding new team members to our brands to affect changes and further adapt to market conditions. The group will further invest in marketing for four brands. Lanvin and Sergio Rossi, in particular, will focus on planning the highly anticipated first collections for Peter Copping and Paul Andrew, which will come in 2025.

Despite the conditions of the wholesale market, the additions of Peter and Paul provide a foundation for wholesale buyers and give creative direction and confidence to our upcoming collections. In the second half, the group and our brands will work on further synergizing the cost base, as well as aggressively culling the retail network. The plan to improve the ROI on marketing expansion initiatives with an eye towards new collections from Lanvin and Sergio Rossi. Now, moving to page seven, I'd like to highlight some of the group-level initiatives we are undertaking in 2024 to support our brands. The group has been working on a number of initiatives with strategic partners to develop product category expansion, as well as support our brands' global logistics. We are currently in development of a framework, so that all our brands can benefit from group-level service platforms.

Similarly, we have been in discussion with a number of partners in the Middle East regions to support our brands expansion in that region. The strength of the market in the Middle East and a strong brand awareness that our group carries in the region provide great opportunity for expansion. Lastly, we continue to find opportunity to synergize back office function to reduce overhead and improve efficiency. Overall, the theme of the second half is setting our brands up to have a successful future in 2025 and beyond. And now, going to the financial fundamentals. Please turn to page nine for a review of our revenue performance. The group's first half revenue was impacted by the global softness in luxury, which was further compounded by the continued challenge in the wholesale market.

For Wolford and Sergio Rossi, however, two non-recurring impacts to top line in the first half also added to declining sales. For Wolford, integration issues with its new third-party logistics provider caused shipment delays for an extended period of time during the first half. And for Sergio Rossi, planned reduction of third-party production contributed to the decrease in revenue. Moving to page 10. On a regional basis, EMEA and Greater China saw the largest decreases in the revenue at 27% and 24%, respectively, while North America saw a more modest 11% decline. By channel, D2C revenue decreased by 14%, and wholesale revenue, which continues to be challenging, challenged due to the global slowdown in the wholesale environment, was down 30%. From a margin standpoint, on page 11, gross profit margin held steady at just a 1% decline.

The top-line decrease was mitigated by better full price sell-through and improved channel mix. Our effort to improve and promote better quality at higher margin revenue continued to yield fruit. Contribution profits were down due to the continued investment in marketing, as well as reduced absorption of retail overhead from lower revenue. Reacting to a softer market in the first half, our brand took measures to selectively invest in ROI, maximizing marketing campaigns. Additionally, our brands made tactical expansions, particularly in the Middle East, of its retail footprint, while further culling underperforming locations. The group also took proactive measures to synergize G&A, and the brand also contributed to the reducing fixed overhead, as you can see on page 12 and 13.

This helped minimize the revenue impact, with adjusted EBITDA going down only EUR 1 million to a EUR 42 million loss for the period, a 3% decrease period-over-period. Turning to page 14. As I mentioned, we continued to aggressively cull our store network while opening stores in ROI maximizing locations. In the first half, we launched our first Wolford and Sergio Rossi stores in the Middle East and relocated our flagship New York City St. John store to a prime location on Madison Avenue. We reduced our overall fleet by about 21 stores and added, opened, or relocated 8 retail locations in the first half.

For the rest of the year, we plan to implement additional initiatives to reduce costs and improve margins, while continuing our tactical approach towards marketing and footprint expansion, with a focus on maximizing ROI... And with the additions of Peter Copping and Paul Andrew for Lanvin and Sergio Rossi, in particular, we will help build the brand's stories for the next chapter with a, a new creative leaders. Overall, we plan to build our future and gain momentum to maximize our opportunities as the luxury market improves. Moving to brand level performance, I'd like to start with Lanvin on page 17. Lanvin continued to manage through soft first half market conditions without an artistic director. This top line impact was further compounded by a contracting wholesale network. Overall, the revenue decreased by 15% to EUR 48 million.

The market impacts were felt in all regions, but our efforts to further penetrate optimize opportunity zones in APAC were successful with the region, excluding Greater China, seeing growth of 9%. From a channel perspective, D2C decreased 10%, and as I mentioned, the biggest contributor to the decline was wholesale, which was down 23%. With the addition of Peter Copping, we believe the wholesale channel, despite its general struggles, will be revitalized for Lanvin moving forward, so we see a big opportunity. While revenue was down, I'm pleased to report the brand's gross profit margin increased from 56% to 58% from higher full price sell-through and strategic inventory management. The improving results are a testament to the efforts the brands have made to improve design, planning, and material sourcing.

Contribution profit remained at a loss of EUR 9 million, mainly stemming from the brand's continued commitment to strategically investing in marketing. However, below the contribution profit line, the brand improved its G&A by 29% and maintained its efforts to drive profitability. For the second half, the brand plans to drive retail foot flow and outline online traffic, as well as increase conversion and transaction value. Additionally, the house plans to further optimize expenses through operational cost efficiencies to improve D2C profitability and preparation for expansion into new geographies. The brand will reinforce its leather goods and accessory programs, expand its seasonless carryover items across product categories while activating, recruiting new clientele and capture market share. With the addition of Peter Copping, the brand will also introduce new product styles to capitalize on momentum of his arrival in Q3, in 2024.

Moving to Wolford on page 18. Wolford had a unique situation in the first half, which was a significant revenue impact driver. Integration issues with this new 3PL resulted in delayed shipments, spending months, and led to out-of-stock situations. The situation interrupted was, otherwise a very successful global launch of the brand's The W leggings, which show exceptional sell-through. The logistic issue has been resolved, and the brand expects to recover in the second half. Gross profit margin decreased to 63%, mainly due to the under absorption of fixed production costs due to the lower revenue, as well as the planned liquidation of excess stock to improve the quality of its inventory. Contribution profit fell to a loss of EUR 8 million for the period. Wolford's product evolution and increased growth has set it up for recurring success.

Already, the key legwear products account for 38% of revenue, and ready-to-wear and lingerie, 46% and 15%, respectively. These new product categories have revamped the brand's margin profile. However, we understand that the situation at Wolford requires a different approach to cost structure. As such, we're now joining our Regis as the new CEO of Wolford in June 2024. Regis brings a wealth of luxury brand operating experience. He will spearhead efforts to strengthen the workforce and key support function with stronger leadership, as well as implement sustainable cost model for transforming supply chain and distribution. For the second half, the brand plans to aggressively improve its cost structure as well as store economics, but we'll also explore opportunities for expansion. Wolford opened its first store in Middle East, in Kuwait City, and believes the region is ripe for expansion.

With Regis' expertise in international development, the brand will take a selective approach to capitalize on expansion opportunities. Moving on to page 19. Sergio Rossi saw revenue decline by 38% in the first half. The main driver was a decrease in wholesale revenue, which was down 60% overall, and it was impacted twofold by a general stagnation of the wholesale market, as well as a planned reduction of third-party production. The initiative to reduce third-party production stemmed from efforts to improve the overall white label offering and rebuild it in higher margin accounts. As such, while revenue was down, gross profit margins saw a much more modest decline of 2%. Contribution profit remains positive, landing at just under EUR 1 million.

For the second half, the brand will continue to improve the quality of its revenue and further drive cost reduction through operating efficiencies in manufacturing and supply chain. Additionally, Sergio Rossi plans to rightsize its overhead and retail network to benefit current market conditions. On the product side, the brand is extremely excited by the joining of Paul Andrew. Sergio Rossi will spend much of his second half supporting Paul as he helps to write the next chapter of the brand. Additional multimedia campaigns will be launched, with a universal theme celebrating Sergio Rossi's heritage and savoir-faire. To support current collection, as well as help prepare for Paul's first collection, launching in 2025. Next, I'd like to discuss St. John. Please turn to page 20. With less exposure, global markets saw a decrease in revenue of 14%.

North America, by far its largest market, saw a more moderate decrease of 10%. This decline was seen relatively even across all channels.... St. John, being a few steps farther away, our other brands. On our strategic path of operating efficiency, show a significant improvement in gross profit margin, going from 62% to 69%. The strategy that have been implemented since 2023 have proven successful, resulting in higher full price sell-through and better gross margin from improving channel mix. Contribution profit margin was also up from 11% to nearly 12%. The brand's efforts to revamp its product and image have paid off. The story of its first half of St. John was a highly successful campaigns and events that were held, as well as the launch of its new flagship location in New York City.

The brand refresh and effective marketing campaign have attracted a whole new younger demographic to the brand and can be seen by the marked increase in social media followers. For the second half, St. John will continue to stoke its brand heat while driving its basic product lines. Additionally, the brand will optimistically hone its cost structure by right-sizing its retail network and overhead. Lastly, moving on to Caruso. Please turn to page 21. Caruso had an impressive first half. Despite macroeconomic challenges, the brand held the ship steady with only a slight decline in revenue, which was down only 1%. The brand saw a reintegration of its eponymous Caruso product line, which grew by 21% with a robust performance at both ready-to-wear and made-to-measure service.

The Amazon business faced a slight slowdown due to current global conditions impacting its clients. Gross profit margin increased from 26% to 29% from improved in-house product production efficiency and reduction of outsourcing. Contribution profit margin also increased from 22% to 24%. For the second half, Caruso plans to revitalize its Amazon business with additional business development initiatives. Additionally, it will implement new employee initiatives, including the three hundred and sixty organizational review and ESG action plan to enhance team member loyalty, participation, and growth. At this point, I'd like to have Eric provide some final remarks.

Eric Chan (CEO)

Thank you, David. To close our results call, I would like to highlight some key takeaways. First, we face a challenging first half of 2024, both externally and internally. However, we remain resolved in our mission to grow our brand and to grow our profitability. Our proactive approach mitigates some of the impact, but we plan to drive continued improvement in the second half. Second, we welcome some exceptional leaders into our family, both on the creative and the business side, and I'm extremely excited about our future. Thirdly, while I anticipate continued softness in the luxury through the second half, we will be positioning our brands to capitalize on improving market conditions by continuing to strategically invest in marketing and product development. Fourth, our approach to our retail network will continue to be tactical.

We have located a number of opportunity zones for each of our brands, and we look to expand our footprint aggressively but judiciously. I would like to conclude by saying that Lanvin Group is committed to its brands and our strategy to improve our top line and profitability. On behalf of the Lanvin's entire management team, thank you for listening to the presentation.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Tracy Cogan with Citi. Please go ahead.

Tracy Kogan (VP)

Thanks, guys. I was wondering if you could talk about how business trended through the quarter, if there was any difference in performance I mean, through the half, if there was any difference in performance as the period went on, if you ended on the lows or the highs, just any comments you could make on trends by month. Thanks.

David Chan (Executive President and CFO)

Oh, thank you, Tracy, for your question. Good to hear from you. Yeah, I think I can provide some general remark. I think we obviously, as we mentioned in April, our pressure point started in, you know, second half of last year. We saw a little bit of, you know, uptake in the, I would say, the first quarter, but I think we do see a pretty clear path in terms of kind of pressure in the second quarter, starting probably sometime in end of April, kind of early May, that type of period.

Tracy Kogan (VP)

Was that pretty consistent by region? Which... Was there one region? It seemed like the North America held up better, better overall, but just wondering by region if there was any difference in performance by months.

Eric Chan (CEO)

Hi, this is Eric. In fact, it's pretty consistent across most of the regions. I mean, from the Asia Pacific to the EMEA, to the American market. We seeing actually the macroeconomic headwinds actually hit all the regions, I would say, except some very particular markets, we may see because of particular reasons. I mean, there's less hit. For example, like Japan, because of the currency or the Middle East, which is up-and-coming markets. Other than that, basically, it's pretty consistent.

Tracy Kogan (VP)

Great. Thank you, guys.

David Chan (Executive President and CFO)

You're welcome.