DNB Markets – Nelly: Profitability has to wait

Nelly issued a profit warning for Q2 last week. Despite a higher gross margin and lower warehousing costs, operating profit has been decreasing in Q2, mainly due to lower revenues. Nelly expects sales growth to decline by a double-digit percentage and operating profit is expected to be negative or close to zero in Q2. Accordingly, we have reduced our 2022–2024e sales and EBIT, and in turn lowered our fair value to SEK15–25/share (35–45/share).

Nelly issued a Q2 profit warning. Its expectations of weaker sales are primarily driven by fewer visits to its websites, and e-commerce saw weaker than expected trends during the spring, which is increasing the competition to drive traffic and attract customers online. Despite a higher gross margin and lower warehousing costs, the operating profit is decreasing in Q2, mainly as a result of the lower revenues. Sales growth is expected to decline by a double-digit percentage and the operating profit is expected to be negative or close to zero. We estimate that EBIT of zero in Q2 would also imply an end to consensus' expectation of profitability in 2022.

CEO change. Nelly announced today that CEO Kristina Lukes has resigned from her position in the company with immediate effect. Helena Karlinder-Östlundh, the Chief People, Communications & Sustainability Officer, will be the acting interim CEO.

2022 outlook. We believe the market and company had underestimated the impact from: the return to a normalisation of consumer behaviour (i.e. in-store purchases); shoppers downtrading; and weaker consumer sentiment. We have lowered our sales and EBIT expectations for 2022–2024. We believe cost savings should start to filter through towards end-2022, but this will not be enough to offset the weaker sales and consequent EBIT pressure we expect near-term. In our view, the focus on profitability over sales growth should become more apparent now and going forward than what we have seen previously.

Fair value lowered to SEK15–25/share, based on a c34–50% discount on 12-month forward EV/sales to global peer multiples, and a DCF. Nelly is trading at a 12-month forward EV/sales of 0.3–0.4x. 

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