Signa Sports reported a steeper loss in its fiscal second quarter ended March 31 as sales fell 23.5 percent. The operator of niche sports e-commerce websites also warned of further sales declines and margin compression in coming quarters as it believes another 12-to-18 months is needed for elevated bike inventories to fully clear.
The Berlin-based company’s websites include Tennis-Point, WiggleCRC, Fahrrad.de, Bikester, Probikeshop, Campz, Addnature, TennisPro, and Outfitter.
“Similar to other retailers in discretionary categories, our business has not been immune to a rapidly shifting macroeconomic picture,” said Stephan Zoll, CEO of SSU, on a conference call with analysts. He noted that in FY22, “severe supply disruptions” caused SSU to scramble to meet “unmet demand” in the marketplace. However, the onset of the Ukraine war and elevated inflation has resulted in a “material downturn” in consumer demand and a “more challenged” economic outlook.
The consequent significant easing of the supply chain pressure has driven elevated inventories and created margin pressures within the bike industry. He noted that publicly-listed bike suppliers saw an estimated 27 percent increase in stock position with finished goods growing by nearly 40 percent. He said, “This supply overhang was felt acutely in the first half of our fiscal year as brands, distributors and retailers across all industries worked to reduce the inventory position, often at meaningful discounts, particularly in the bike industry.”
On the positive side, Zoll noted that despite the supply imbalance, “there’s a sustained interest and enthusiasm from our customers.” He pointed to the UK market, which has seen “a boom in e-bike sales from pre-COVID levels, sizable growth in selling prices of bikes throughout the market and a sustained uptick in activity with average daily bike participation currently at 1.4x March 2022 levels.”
Zoll added, “I notice these trends to help illustrate that while our business has been severely impacted by market conditions, the overarching megatrends that are driving our operating thesis, have shown no signs of slowing.”
Also on the positive side, since SSU’s fiscal Q422, input costs for suppliers, particularly in freight and commodity prices, have begun to normalize. Inflation is also anticipated to continue a downward trend into calendar year 2024 as conditions for consumers improve.
However, though economic headwinds are forecast to ease in the mid-term, market overstock is anticipated to take 12 to 18 months to fully clear.
As a result, SSU expects sales in the current fiscal year to decline in the range of 9 percent to 11 percent and adjusted EBITDA margin to be in the range of negative 18 percent to negative 16 percent.
In the fiscal second quarter ended March 31, sales slumped 23.5 percent to €195 million ($213 mm) from €255 million a year ago. Gross margins eroded to 22.5 percent from 36.1 percent a year ago. Adjusted EBITDA was a loss of €59 million against a loss of €15 in the year-ago quarter.
In the six months, sales were down 1.7 percent to €441 million ($483 mm) from €449 million. Gross margins decreased to 26.4 percent from 36.3 percent a year ago. Adjusted EBITDA widened to a loss of €97 million from a loss of €26 million.
Given the challenging market conditions, Zoll said Signa Sports has rolled out three actionable initiatives aimed at returning the business to profitability and cash flow positivity.
The first is repositioning the business to prioritize core markets. Zoll said, “Our business has a dominant position across the DACH region, Southern Europe, parts of Scandinavia, the UK, and a growing presence in the American market. However, while we aim to serve our customers across the globe, our focus will be placed on markets where we have established infrastructure that allow us to serve customers with favorable unit economics. Across our core markets, we see a meaningful advantage in profit contribution and driving orders from these geographies will best position us for return to profitability.”
Second, Signa Sports is reducing its employee base to better align to demand and “operate with a leaner structure,” as well as looking to drive efficiencies across the organization. Measures include emphasizing a much tighter inventory management program to reduce its dependency on pre-orders, improving its inbound flexibility, and tweaking commercial offerings by optimizing assortment and maximizing margin.
Lastly, the company is making progress on delivering sizeable synergies from its recent Wiggle and US Tennis acquisitions with further gains anticipated around procurement synergies
In total, the initiatives are expected to deliver €100 million of adjusted EBITDA savings in FY25 when Signa Sports anticipates the business will be free cash flow breakeven. For FY24, Signa Sports anticipates the market to further consolidate and for the company to return to 12 percent to 15 percent top-line growth.
For FY26 and beyond, the full benefits of recent acquisitions, as well as the benefits of operating leverage, are expected to allow the business to be cash generative for FY26 with Signa Sports approaching its target financial profile of 7 percent to 10 percent adjusted EBITDA margins.
“Despite the turbulence we have experienced in the first half of the year, we are optimistic that we are now through the worst of this dislocation and are focused on delivering a stronger second half of the year,” said Zoll. “Although the near-term picture remains uncertain as the market still navigates to this period of disruption, we are focused on delivering a more resilient business that is poised to benefit from the lasting consumer megatrends that would drive the attractiveness of the sports specialist retail industry and our position within for decades to come.”
Photo courtesy Campz
