Netshoes Ltd., Latin America’s leading online retailer of sporting and lifestyle goods, reported sales rose 7.3 percent in its third quarter and 8.8 percent on a currency neutral basis.
Consolidated net sales reached R$444.6 million in the period. Sales were negatively impacted by an additional R$7.1 million in returns recorded in the B2B business, and lower B2B sales as management implements the corrective actions to rebalance inventories in the different sales channels. Excluding B2B business, Net Sales grew 11.7 percent or 13.3 percent on a FX neutral basis in 3Q-2017.
The net loss came to R$47.8 million (-10.7 percent net margin), compared to a net loss of R$30.3 million in 3Q-2016 (-7.3 percent net margin), representing a 3.4 p.p. margin decrease.
Consolidated EBITDA was negative R$20.7 million (-4.6 percent of net sales) in 3Q-2017, compared to negative R$2.3 million (-0.6 percent of net sales) in 3Q-2016.
Gross margins eroded to 32.2 percent fro 33.2 percent. The positive margin contribution from marketplace and the private label business as well as additional shipping revenues, which together contributed to a 2.3p.p. margin expansion in 3Q-2017, was offset by select product discounting initiatives resulting from a warmer winter season in Brazil and lower tax benefits due to the change in the online retail taxation regime during 2016 in Brazil.
Adjusted Selling and Marketing Expenses were R$131.1 million (29.5 percent of net sales) in 3Q-2017, up 22.7 percent compared to R$106.8 million in 3Q-2016 (25.8 percent of net sales). This YoY increase was primarily driven by the R$14.7 million recorded as a provision for allowance of doubtful accounts of the B2B accounts receivable as a result of the business extended payment terms to clients.
Adjusted General and Administrative Expenses were R$33.0 million (7.4 percent of net sales) in 3Q-2017, compared to R$38.4 million in 3Q-2016 (9.3 percent of net sales), representing a 1.8 p.p. improvement YoY due to expense reduction initiatives and operating leverage.
Marcio Kumruian, Founder and CEO of Netshoes, commented:
“Through September, we continued to deliver Gross Merchandising Volume (GMV) growth combined with an expansion of our market leading position in sporting goods, while continuing to scale in fashion and beauty. As we benefit from continued growth in e-commerce sales in the countries and verticals we operate in, we are simultaneously increasing our addressable market and building the foundation for long-term growth by improving the business mix among the company’s strategic pillars – 1P, private label and marketplace operations. These activities will generate additional operating leverage as we gain scale.
“Consolidated group GMV in 3Q-2017 increased by 17.0 percent (FX neutral basis), resulting in a 23.4 percent (FX neutral basis) growth in the nine months period ended September 30, 2017 on top of a resilient growth rate posted in 2016. This result reflects expanded market share and an increase in our customer base. In the 3Q-2017, the number of registered members increased 21.2 percent year-over-year (YoY) and our active customer base expanded 18.5 percent, despite lighter revenues. Importantly, we continue to be at the forefront of the mobile opportunity with 46.7 percent of orders placed from mobile devices, up from 33.5 percent in 3Q-2016, resulting in greater customer loyalty and purchase frequency.
“In Brazil, Netshoes and Zattini’s stores continued to show growth in 3Q-2017, fueled by (i) the robust performance of marketplace GMV – 419 percent growth YoY, reaching R$53.0 million or a 9.7 percent penetration over total GMV in Brazil (up from 2.2 percent penetration in 3Q-2016) and (ii) strong sales of private label products, which reached 11.0 percent of net sales in Brazil. The sporting goods category recorded a GMV growth of 15.7 percent, while Zattini’s fashion and beauty category increased 51.9 percent on top of a strong growth rate in 2016.
“In addition to these categories, we operate a B2B initiative in Brazil – mainly related to nutritional products – which represented 2.6 percent of the Brazilian operation GMV in 3Q-2017. Due to the adverse results in our B2B business that negatively impacted the company’s results, our management decided to substantially reduce the scale of the B2B business, while focusing on improving the segment’s economics, working capital dynamics and overall business model. Within this context, we extended payment terms to some B2B clients that we believe have good sales prospects, and took the decision to conservatively record a portion of our B2B accounts receivables as provision for allowance of doubtful accounts. The impact on consolidated results for the quarter was R$14.7 million (3.3 percent of net sales). Our management team is now focused on finalizing the necessary steps to develop improved controls in order to achieve better economics in what we believe is a strong business opportunity. Excluding the B2B business, GMV in Brazil on an FX neutral basis was up 20.6 percent over 3Q-2016 and up 21.8 percent in the accumulated nine months period of 2017.
“Consolidated Net Sales in 3Q-2017 increased 8.8 percent YoY on an FX neutral basis due to the significant increase in marketplace penetration and the negative impact of the B2B business resulting from lower sales and additional returns recorded during the quarter: Excluding the B2B business, Net Sales increased by 11.7 percent YoY in 3Q-2017 (13.3 percent on an FX neutral basis), leading to a 12.8 percent YoY growth for the nine months period (15.5 percent on an FX neutral basis).
“During the last twelve months, relevant improvements were made in our working capital cycle. We remain on target to achieve further improvements as we (i) work towards our goal to achieve a 90 to 100 days inventory level in 2018 and (ii) make additional changes to our client installment payment policy during the coming quarters.
“We are pleased with the development of our business as we build one of Latin America’s most important digital consumer platforms. We are maintaining a good growth rate on our categories through strong and accelerated customer metrics, while consolidating our leadership in the sporting goods category and moving fast in developing the correct environment for fashion. The rapid development of our high-quality marketplace operation, now being complemented by Netshoes Deliveries, shows that we are on the right track to help our vendors and partners in achieving excellence in the service they provide to our customers, keeping a very high customer satisfaction index. We are also investing a great part of our time and energy in our private label assortment to offer better products to our customers every month, more importantly, always respecting our partners.
“As a tech company, we are focused on increasing the customization, doing everything in our power to achieve maximum efficiency and boost the customer service perception. For example, we offer customers the option of collecting their purchases from almost 7 thousand pick up points in an innovative partnership with Correios.
“Important to highlight that we are now heading towards the most important quarter of the year, the fourth quarter, when historically we recorded an average of 35 percent of our total sales with relevant effects to profitability. The company has prepared itself for a great Black November campaign and year-end sales.
“Finally, we are building a solid tech platform, which is more complete, customized and robust every year. Our expectations for the long-term are optimistic and remain unchanged.”
