Earnings call transcript: Westwing Group's Q1 2025 results show resilience amid market challenges

Westwing Group AG (market cap: €160 million) reported a slight decline in revenue for Q1 2025 but showed improved profitability metrics and a strengthened cash position. According to InvestingPro support this outlook, predicting the company will return to profitability this year with an EPS forecast of €0.28. The company aims for a 10%+ adjusted EBITDA margin in the mid-term, with seasonal peaks expected in Q1 and Q4. Westwing plans to launch 5-10 new country operations in 2025, further expanding its European footprint. For detailed analysis and comprehensive insights, investors can access the full Pro Research Report, available exclusively to InvestingPro subscribers.

Executive Commentary

CEO Andreas Hernig emphasized the company's strategic direction: "We are developing the superbrand in design with high loyalty and true potential to grow further." CFO Sebastian Vestricht echoed this sentiment, stating, "Our ambition is to return to significant growth in 2026 while continuously improving profitability."

Risks and Challenges

• Continued dampened consumer sentiment could impact sales growth.
• Market volatility and economic uncertainty pose macroeconomic risks.
• Operational challenges in new market expansions may arise.
• Potential supply chain disruptions could affect inventory management.
• Competition in the premium design market remains intense.

Westwing Group AG's Q1 2025 performance reflects its strategic focus on profitability and market expansion, despite a slight revenue decline. The company's efforts to strengthen its brand and financial position appear to be well-received by investors, as indicated by the positive stock movement.

Full transcript - Westwing Group AG (WEW) Q1 2025:

Conference Moderator: Morning, dear ladies and gentlemen, and a warm welcome to the Westwing Group SE Q1 twenty twenty five Earnings Call. At this time, all participants have been placed on a listen only mode. The floor will be open for questions following the presentation. Please keep in mind that we can only accept questions from participants who provided their full names and their company information within the registration process. Now, dear ladies and gentlemen, let me turn the floor over to your host, Andreas Hernig.

Andreas Hernig, CEO, Westwing Group SE: Good morning, everyone, and thank you for joining us for our earnings call on the first quarter of twenty twenty five. My name is Andreas Hernning. I'm the CEO of Westwing. I'm hosting the call together with Sebastian Vestricht, our CFO. Looking at today's agenda, I will begin by providing key updates on our business for Q1 twenty twenty five, after which Sebastian will share the details of Westwing's financial performance.

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After our investment highlight summary, we will be happy to take your questions. Let's take a look at the current state of Westwing. Overall in Q1, even without scale effects, we improved our profitability significantly. Our revenue declined by 1% year over year due to shifts in our product assortment. We improved our adjusted EBITDA margin by three percentage points to 8%, delivering €9,000,000 in Q1.

Free cash flow was negative at minus €9,000,000 primarily due to a seasonal increase in inventories. Our net working capital remained negative at minus €2,000,000 at the end of Q1. The overall development is fully in line with our guidance that we published in March and which we confirm today. Strategically, we are well on track with the implementation of our three step value creation plan. Most recently, we successfully launched Sweden in April and continued our store expansion with the opening of a new store in store at Panton in Paris.

As always, let's have a look at our three step value creation plan, which we initiated in 2022. We're happy to report that we successfully completed the first two phases: the turnaround and strategy update phase and the building of a scalable platform. Before we move to the levers of the third phase, let's briefly stop here to see how the levers of the first two phases impacted profitability. What you see on this slide is the adjusted EBITDA in absolute terms and the margin of the first quarters of the past years. We've excluded the two years impacted by corona twenty twenty and 2021.

On the left hand side, you see the pre COVID figures. The second bar from the left shows Q1 twenty twenty two, just before we started implementing our three step value creation plan. On the far right, you see Q1 twenty twenty five. Within the roughly three years of our value creation plan, we've improved adjusted EBITDA from -two million to plus 9,000,000, or from -1.5 percent to plus 8.5% of revenue, a 10 percentage point increase in absence of scale effects from top line. We believe this is the strongest testament to the success of our strategy and its implementation so far.

We promised we would solve for profitability first and at the same time build the foundation for significant growth and further margin increase in the third phase of the value creation plan, which we will look at on the next slides. As during the last earnings call, I will briefly guide you through our progress on the levers of the third phase, beginning with the latest developments on the Western collection, followed by how we will continue to grow our share in existing markets, our brand positioning and finally, our expansion strategy. So, starting with the Western Collection. The Western Collection is our gorgeous, sustainable private label product brand, and we continue to be very pleased with its performance. Its share of overall GMV grew further by 11 percentage points year over year, to an all time high of 62% in Q1 twenty twenty five.

This strong development supports our top line as well as profitability, since the products are very desirable and they allow us to achieve a higher contribution margin compared to third party products. As we build Europe's premium one stop destination for home and living, we are creating a unique product assortment for design lovers, Consisting of our own brand Western Collection and the best third party design brands, we still have significant room for improvement on both sides. As outlined in our last earnings call, besides improvements in product assortment, we see offline store expansion as a lever for share gains in existing markets. For 2025, we have set the target of opening a mid single digit number of offline stores and we are well on track. In our last earnings call, we reported that in March we had opened a new store in Leipzig.

Since then, we successfully opened a store in store at Parenton in Paris. This marks our first store expansion outside of Germany. Looking forward, lease agreements for Munich, Berlin and Cologne have already been signed. Before I share an update on our geographic expansion, let me show you some impressions of our new store in store at Panton. Our store in store in Paris is located at the prestigious Panton Osemane.

Panton is known for its artistic and architectural heritage. It stands as one of France's leading retail destinations for lifestyle, fashion, luxury and beauty. With its iconic architecture and curated brand selection, Pantone offers the ideal setting to showcase our Westwing collection to a refined clientele in a prestigious international market. And that's what offline stores at Westwing are about. They help us to further strengthen brand presence and positioning.

And by providing a holistic shopping experience across the multi touch customer journey, Westwing will also gain market share. In Home and Living, many customers combine online and offline experiences in their journey, especially for large furniture purchases, the latter mostly for the touch and feel and simply because basket sizes in furniture are often very large and require many touch points for conversion. Let's move on from gaining market share in existing geographies to entering new ones. In the full year 2025, Westbank will launch online sites and apps in five to 10 new countries, and in the mid term we aim to be present in approximately all European countries. We've already expanded to three new countries so far this year: Luxembourg, Denmark, and, just last week, to Sweden.

On the slide, you can see a list of countries we are preparing for short term expansion, several of them to still come in 2025. As outlined in our earnings call in March, geographic expansion allows us to offer our existing global product assortment to customers in the corresponding market segment for design lovers in other countries. This means selling more of the same products. All continental European countries follow the same logic, with low marginal costs of serving them: translations supported by AI, onboarding of last mile delivery providers, local influencer marketing and performance marketing with attractive returns within a few months. We're looking forward to the next launches.

I now hand over to Sebastien for details on our financial performance.

Sebastian Vestricht, CFO, Westwing Group SE: Thank you, Andreas, and good morning, everyone. I'm Sebastian Maestrich, the CFO of Westring. Let me start with the details on our top line. Our revenue declined 1% year over year. As expected and communicated in our previous earnings call, the first quarter so far has seen the biggest negative top line impact from the switch to a mostly global and more premium product assortment.

In addition, consumer sentiment remained dampened. At segment level, revenue was at plus 1% year over year in the DASH segment and minus 4% in the international segment. The difference in segment performance was mainly caused by the changes in the assortment, which had a bigger impact on the international segment. Please note that GMV development in Q1 twenty twenty five was at minus 5% year over year. The smaller decline in revenue compared to GMV in the first quarter of twenty twenty five was primarily driven by favorable timing effects from orders placed back in 2024 that were now shipped in Q1.

This positive timing effect on revenue is limited to the first quarter of twenty twenty five. Let us now take a look at our P and L. Andreas shared with you earlier the development of our adjusted EBITDA margin since the start of our three step value creation plan, which is why we also included Q1 twenty twenty two on this slide. This serves as a reference and shows the main levers of our improvements. I will start with commenting on our Q1 twenty twenty five performance compared to the previous year and then add some comments on our development since Q1 twenty twenty two.

In Q1 twenty twenty five, we were able to improve all ratios across the P and L compared to the previous year. Both gross margin and fulfillment ratio slightly improved year over year, leading to an increase in contribution margin of 0.4 percentage points. Our strong Western collection share gains contributed well, but were partially offset by effects like higher container costs. Our marketing ratio improved by 0.9 percentage points year over year to minus 11.8% in Q1 twenty twenty five. This development was to a large extent driven by reduced investments into brand awareness in Germany compared to last year.

Our G and A ratio, which also includes other results, improved by three percentage points to minus 15.5% in Q1 twenty twenty five. This is a significant improvement year over year, showing the positive effects from our 2024 complexity reduction measures. This led to an adjusted EBIT margin of 4.9% in Q1 twenty twenty five, a remarkable improvement of 4.3 percentage points year over year. D and A in the first quarter of twenty twenty five decreased by 1.6 percentage points. This was primarily due to the fact that old technology assets have been fully depreciated with the successful go live of our SaaS based tech platform.

Overall, our Q1 adjusted EBITDA margin improved by 2.7 percentage points year over year to 8.5%. Adjustments in Q1 were minor and included three main effects. Firstly, an adjustment of €400,000 related to the non cash related reclassification of SAPIES income as stated in our annual report 2024. Secondly, 400,000.0 for subsequent restructuring expenses in connection with our complexity reduction measures of 2024. And thirdly, we had adjustments of €1,900,000 for share based payment obligations, primarily driven by a fair value adjustment to the related liability reflecting the development of the company's share price.

An overview of our adjustments as well as unadjusted consolidated income statements can be found in the appendix to this presentation and in our financial report for Q1. While our adjusted EBITDA is our main profitability KPI, I also want to mention our net result. With a positive net result of €2,500,000 in the first quarter of twenty twenty five, we are proving that our company is finally turning to real profitability. Now let's compare our 8.5% adjusted EBITDA margin of Q1 twenty twenty five with adjusted EBITDA margin of Q1 twenty twenty two shortly before we kicked off the transformation. It is an impressive improvement of 10 percentage points within three years in a period of challenging market conditions.

We can see two main levers for the turnaround. The first lever is the massive increase in contribution margin of seven percentage points based on the strong improvements in unit economics as we grew our Western collection business. This improvement clearly allows us to invest more into marketing compared to Q1 twenty twenty two as a premium design brand. The second key one is the significant improvement in GNA ratio of almost five percentage points, an absence of any scale effect so far. To me, this is strong evidence of the success of our strategy and the excellent work our teams have done over the past three years.

Let's move on to profitability on segment level. In Q1, we saw a strong improvement in adjusted EBITDA margin in both segments. In the DAS segment, adjusted EBITDA margin improved by 3.7 percentage points to 9.4%. This is the best result our company achieved so far outside of peak COVID times. The international segment also improved its profitability.

With an improvement of 1.3 percentage points, the adjusted EBITDA margin was at 7.4% in Q1 twenty twenty five. The improvement in profitability shows the positive effects of our three step value creation plan in both segments. The stronger improvement in the DAS segment compared to the international segment was driven by the reduced investment into brand awareness in Germany compared to last year. Let us now move from the P and L to our balance sheet and take a look at our net working capital. By the end of Q1 twenty twenty five, net working capital remained negative at minus €2,000,000 The year over year increase was mainly driven by inventory buildup as well as positive timing effects, which we saw in the previous year.

Let me comment on the inventory increase. Net inventories increased by €19,000,000 year over year. The increase was driven by two main effects. Firstly, our inventory levels beginning of twenty twenty four were still quite low after the reduction of overstock from COVID times. Secondly, we had several timing effects in the first quarter of twenty twenty five as we introduced a significant number of new Western collection items early in the year, prepond order placements to minimize availability impacts of Chinese New Year and secured stock for important Western collection sales days which took place earlier this year compared to last year.

And we also improved overall availability year over year. While we aim to maintain good availability, inventory will decrease towards the end of the year due to the timing effects mentioned before, with a positive impact on net working capital. On the next slide, you can see CapEx and CapEx ratio for the first quarter of twenty twenty five compared to 2024. CapEx year over year decreased by €3,000,000 However, when comparing Q1 twenty twenty five with Q1 twenty twenty four, it should be noted that in 2024, there was a temporary positive impact on CapEx of €3,000,000 from the change in a warehouse equipment lease. This effect was reversed in Q2 twenty twenty four.

We reported this in the respective periods. With CapEx of €2,000,000 in Q1 twenty twenty five, which equals a CapEx ratio of 2% of revenue, we kept CapEx at a very healthy level. One important difference for this was that we reduced investment in internally developed software, which we reduced by more than 40% year over year. This is a result of our complexity reduction and the migration to our new tech platform. Let us now take a look at our net cash position.

In terms of net cash, we are pleased to report a strong net cash balance sheet position of €57,000,000 at the March, which is €12,000,000 less compared to the end of twenty twenty four. The decrease in our net cash position was mainly due to the increase in inventories, which I explained earlier. We also had a small impact of approximately €2,000,000 in restructuring expenses related to our complexity reduction initiatives. These were recognized in Q4 twenty twenty four, but the associated cash outflows occurred in Q1 twenty twenty five. Overall, free cash flow was at minus €9,000,000 in Q1 twenty twenty five.

These payments amounted to €3,000,000 This led to a negative free cash flow after these payments of minus €12,000,000 Our balance sheet remains strong with no debt other than IFRS 16 lease obligations.

Volker Bosse, Analyst, Baader Bank: On the next slide,

Sebastian Vestricht, CFO, Westwing Group SE: I comment on the financial guidance for 2025, which we published at the March in our last earnings call. Our Q1 performance in terms of both revenue and profitability is in line with our guidance for 2025. In terms of top line, we had, as expected, headwinds from our changes in the assortment, but saw also positive timing effects from 2024 orders in Q1 twenty twenty five, which we won't see in Q2 twenty twenty five. The negative effects from the changes in the product assortment are expected to bottom out towards the end of twenty twenty five. In terms of profitability, we expect a typical seasonal development in 2025, with peaks in Q1 and Q4.

Please also keep in mind that Q1 twenty twenty five has seen only minor ramp up costs for our expansion. Related ramp up costs will increase as we open additional stores and launch new countries during the year. To summarize, we are well on track to deliver on our guidance in terms of revenue and profitability, but also in terms of a clearly positive double digit free cash flow. This brings me to our mid term outlook, which was shared in our last earnings call. I want to highlight again that our ambition is to return to significant growth in 2026 while continuously improving profitability.

Significant growth means a high single to double digit growth rate driven by our expansion measures and bottoming out of the negative effects of changes in the product assortment towards the end of twenty twenty five. In terms of profitability, we expect scale effects as we grow as well as positive effects from our improving product assortment. We remain focused on executing our three step value creation plan with a clear objective of driving continued improvements in profitability and cash flow, unlocking the full value potential of Westwing. With that, I'm handing over to Andreas to conclude our presentation with our investment highlights.

Andreas Hernig, CEO, Westwing Group SE: Thank you, Sebastien. Let me briefly recap the investment highlights. First, we have a unique relevant customer value proposition through the specific assortment and the way we serve our customers. Second, the market potential is huge, especially in our existing geographies but also beyond. Third, we are developing the superbrand in design with high loyalty and true potential to grow further.

Fourth, we have high and increasing margins, as well as operating leverage while we scale. Fifth, we have a great balance sheet with a strong cash position and no debt, strong net working capital and low CapEx. All of this will lead us in the mid term to 10% plus adjusted EBITDA with a continued strong cash conversion. Sebastian and I are now happy to take your questions.

Conference Moderator: Thank you very much. So, dear ladies and gentlemen, if you would like to state a question, please dial into the conference call and then press 9 and the star key to enter the queue. Once your name has been announced, you can ask a question. I repeat, the combination to state a question is nine and the star key. So the first question comes from Falka Wasser of Baader Bank.

Over to you.

Volker Bosse, Analyst, Baader Bank: Hello, good morning. Yes, Volker Bosse from Baader Bank. Thanks for taking my question and congratulations on the great earnings results. I would like to start with the first question on the overall consumer environment. Reading your press release and hearing your talk, is it right that you sound a bit more cautious on the overall consumer environment?

So I would have expected from the call we had earlier the year that second half, you expect an improvement of the overall market situation. Now your speakers that you do not expect a rebound of consumer demand in total year 2025? And yes, if so, does that have any impact on your international expansion plans or your physical store expansion plans? That would be my first question. And then I have two more, but perhaps we go step by step.

Thanks.

Andreas Hernig, CEO, Westwing Group SE: Good morning, Volker, and thank you for your question for your first question. Super happy to take it. So what what's our view on overall sentiment development, and what does it mean for expansion? So you mentioned that we previously had said that the second half of twenty twenty five would look brighter in terms of top line than the first one. We continue to to believe that, but it's not related to consumer sentiment.

So consumer sentiment, there's been in some countries maybe some slight improvement in consumer sentiment, but it's not a game changer, to be honest, what we've been seeing so far or what the data shows. And to be honest, we also have no with all the uncertainties that we see in the political economic environment, we also can't base our forecast on any improvements that we expect for the second half in terms of consumer sentiment. Why we believe that for Westwing the second half will be better than the first, and therefore that also then explains our guidance on top line. It's actually for two reasons. The first reason is that last year we changed our product assortment to a mostly global and more premium product assortment.

And this, as Sebastian also said beforehand, this effect that we this is a negative effect on top line year over year right now that will bottom out towards the end of the year. So the effect is the strongest in the first half and will be weaker in the second half, that negative effect. And the second reason why we believe that the second half of twenty twenty five will be better than the first for Westwing is that we are now expanding into new countries and opening new stores. So stores, new stores in new countries typically have a ramp up, stores over actually several years, by the way, in countries typically as well. So if you launch a country like Sweden, which we now did in May, you hardly don't see any top line in May, June, July, but then over the next quarters, it actually starts to become material also for the overall top line.

So those are the two reasons. The baseline effect from the change in product assortment and the expansion. Those effects will kick in starting in the second half of this year and then, of course, become stronger in next year. That's why also we are much more bullish on next year. But this is not linked to consumer sentiment, which then also answers the second part of this question of yours.

Outlook on consumer sentiment has no impact on our expansion plans.

Volker Bosse, Analyst, Baader Bank: Yes. Crystal clear. Well understood. Thanks for that clarification. Then I would come to the next question, and this would be related to the strong average order where you increase I think it was 28% or so out of my head.

So could you give us here a bit of background and the drivers, I mean, 28% average order value increases, strong figures? What are the structural changes, I think, that is not just a one off, there are some structural drivers behind that? What are your thoughts on that? Yes.

Andreas Hernig, CEO, Westwing Group SE: Volker, thank you for the second question of yours. So indeed, over the past two, three years, we've been seeing, on the one hand, a very strong increase in average order value or basket size. On the other hand, what you also see now because of the this in the past past quarter and also in q four is a reduction in active customers. So we have less active customers, slightly less active customers, but a significantly higher basket size. And the drivers behind this are actually the drivers that also push for profitability.

The main driver is the change in product assortment towards the Westin collection. The Westin collection has typically higher purchasing prices because it's also more present in furniture than the other assortment that we have. So that's the one reason. And the other reason is actually the shift generally towards a more premium and more global product assortment that we've been driving over the past one, two years. And especially last year, we did this big change in product assortment.

So that also led to smaller basket sizes, unprofitable orders actually not being placed anymore, while we actually shift our focus fully to profitable orders by customers. So we have a slightly lower frequency in purchasing. We have a slightly lower active customer base, but the orders that are placed by this customer base are significantly more profitable than they used to be.

Volker Bosse, Analyst, Baader Bank: Yes. That's understandable. I mean, consumers order less tea lights and more sofas, so that's a product mix shift, which then leads to higher orders, I think. Great. And that leads me to the last question.

You already mentioned in your answer the Western collection share is a phenomenal increase here, above 60% here in Q1. This is, of course, far beyond your midterm target of higher than 50%. So isn't the time to provide here a new guidance, so to say, your new target? I mean as you see also the underlying structural trend, which you just have mentioned, I mean, this indicates that potentially the Western collection share will not drop again to, yes, around 50 or below 50 or so. I mean, isn't it time to give a new target also here in that regard?

Andreas Hernig, CEO, Westwing Group SE: Thank you, Volker, for the third question. So it is true that we have not issued a new target after the 50% plus target that we issued. What is also true is that we do not believe that the Western collection share will go below the 50% again. What we also believe is that we not only have potential to grow in the Western collection, which you see now in the share gain, but we also have a lot of potential to grow in the other focus area of our product assortment, and that is third party design brands. What has been so this part is also growing at the moment.

What obviously is being pushed out is what I mentioned beforehand, and that is less premium and less profitable products. Typically, those products are rather white label or no name products, while we are growing our brand product part, which is Western Collection branded or third party design brands. So this is our product assortment strategy. And while I can understand that you would like to see a new midterm target at the moment because we are improving both of those areas, third party design brands and Western Collection, we not issuing a target. Obviously, Western Collection share typically means also growing contribution margin, but you also see in Q1 twenty twenty five that it's not always a linear development because you have all sorts of other effects also in there, like, for instance, changes in container prices and so forth.

So answer your question very bluntly, we are not issuing a new target right now, but we also don't believe that the Western collection share will actually go down significantly again.

Volker Bosse, Analyst, Baader Bank: Yeah, thank you. Thanks for your answers and your time. All the best. Thanks. I'll jump back into the queue.

Thanks.

Andreas Hernig, CEO, Westwing Group SE: Thank you so much, Volker.

Conference Moderator: Thank you, Arthur, from my side. At the moment, there are no further questions. So a last reminder, please press 9 now if you are dialed into the conference call and wish to state a question. The combination is 9 and the star key. Alright.

There seem to be no further questions. So with that, I am closing the q and a session and handing the floor back over to Andreas Hoehnning.

Andreas Hernig, CEO, Westwing Group SE: Now as we haven't received any additional questions, we're ending today's earnings call. Thank you for joining, and goodbye.

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