Yoox Net A Porter Group YNAP
November 14, 2017 - 11:17am EST by
jls
2017 2018
Price: 28.68 EPS 0.47 0.86
Shares Out. (in M): 134 P/E 59.3 32.7
Market Cap (in $M): 3,751 P/FCF n/a 34
Net Debt (in $M): -43 EBIT 178 253
TEV ($): 3,708 TEV/EBIT 21 14.6

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Description

Recommendation

 

Yoox Net-a-Porter (YNAP) is a global online retailer of luxury goods with EUR 2Bn in sales and over 2.9MM active customers worldwide. The Company owns and operates a range of online luxury fashion stores, both full-price and discount, and also partners with several luxury brands to power the front and back end of their online stores. YNAP was formed ~2.5 years ago via the combination of Yoox Group (the #1 discount luxury retailer known for its best in class technology and logistics platform) and Net-a-Porter (#1 luxury online retail brand with most attractive customer base) and is now well positioned as the largest player in global digital luxury with 10% market share.

 

The luxury goods market trails the rest of the retail sector in terms of online penetration and just 7.1% of all luxury goods are sold online today (and just 3% of hard luxury). We expect that to increase to ~11% global penetration by 2021 and believe YNAP can grow revenues 20% annually through 2021E as it benefits from this secular trend. YNAP’s increased scale should drive significant operating leverage via reduced fulfillment costs per order and G&A leverage, driving adjusted EBITDA margins from ~8% today to ~14% in 2021. At 20x our 2021E EPS of EUR2.50 we are forecasting a target price of $50 at YE2020, 76% above today’s share price of EUR28 for a 20% annualized return.

 

Thesis

 

YNAP is the dominant presence in online luxury retail and we believe the global luxury goods market will continue to follow the rest of the retail sector and move online. We believe YNAP will maintain share as this market grows for a few reasons:

·    Online retail is hard and shoppers now demand robust customer service, same and next day delivery and free returns. This burden, combined with the need to fulfill orders globally from regional stock supplies, is often too difficult for luxury brands to do in-house (for perspective, YNAP fulfills one order every four seconds). Moreover, customers and brands both benefit from online wholesale retailers like YNAP (vs single brand channels). A customer does not have the wherewithal to individually search, let alone download the app, for its various favorite brands and styles. YNAP does this for them by curating their favorite selections along with the freshest inventory, driving customer loyalty and order frequency. Luxury brands then get access to a wider range of customers then they ever would on their own.

·    However, luxury brands are reticent to partner with other online retailers like Amazon because they are fiercely protective over their brand and their customers’ shopping experience. Amazon is largely price driven with limited customer trust in their curatorial power. In contrast, luxury brands speak very highly of YNAP properties like Net-A-Porter for their success in delivering a great customer experience and protecting the brands’ perception and pricing. Because of YNAP’s superior editorial context and trusted voice with their target customer they get preferential (often exclusive) merchandising from top brands (e.g. Chanel and Gucci) who know that YNAP has the greatest chance of turning the inventory fastest at the lowest average markdown out of all other online channels.  As a result of having the best and most comprehensive selection of merchandise they attract the best customers, creating a flywheel amongst an affluent and fiercely loyal customer base.  YNAP’s average customer orders an average of nearly $400 and 3 orders per year (and this skews much much higher for top cohorts).

·    On the discount side, brands are chiefly concerned with two things: how quickly they can liquidate inventory without it hurting their next season of wares, and the price at which that inventory is liquidated. Yoox therefore benefits from the same flywheel of having the most attractive customer set who orders the most frequently, allowing them to turn inventory more quickly and eliminate inventory risk for brands. By integrating these two functions via their merger, YNAP now has tremendous visibility into its ability to sell inventory through both full-price (“in season”) and discount (“off season”) channels, improving its ROIC.  No other online luxury retailer can match YNAP’s scale on both the full-price and discount side of the market

 

YNAP has a few very important levers to drive growth beyond the 15% annual growth in online luxury spending forecast by industry sources over the next 5 years.  Thanks to these factors and the superior competitive position outlined above, we forecast organic revenue growth of ~18.5% / yr through FY’21

 

1) Increased mobile penetration

a.     Mobile shoppers now drive 43% of sales and 62% of visits to YNAP properties (up from 17% and 20% in 2012) with mobile shoppers proving to be much more valuable than the traditional desktop customer:

  

2) Increasing customer base with over-indexed growth of high net worth individuals

a.     YNAP is a bit different than most ecommerce businesses as 2% of customers (EIPs) contribute 40% of net revenues

b.     EIPs  order 12x as often as non-EIPs with 3x the average order value driving average spend of EUR10K annually vs. the EUR650 company average

c.     YNAP global scale allows them to invest in regional footprints (like recent office openings in the Middle East and China) to cater to these customers both online and offline. This required high level of customer service reduces churn which drives >95% retention for this customer set.  While the EUR 10K annual spending seems high, considering the well above average wealth of this segment, YNAP’s wallet share amongst these shoppers remains <40% penetrated

d.     YNAP plans to drive growth in the Middle East by targeting this underrepresented customer base (EIPs represent 3x the population in the Middle East relative to other regions) with difficult, but solvable logistics challenges (sensitive marketing regulations, right-to-left Arabic writing, extensive cash pay, difficult addressing system and multiple currencies) that fall right into YNAP’s wheelhouse

 

3) Increased product set – primarily fine jewelry and watches

a.     Hard luxury is a EUR54Bn market with 3.4% online penetration

b.     YNAP can sell this on a consignment model (zero inventory) and branded jewelers like Tiffany and Zenith have made this a high priority

 

We believe YNAP can eventually earn margins higher than that of existing online retailers as the gross profit per order, or per unit of weight, of luxury retail is so much higher than that of every day consumables like diapers, groceries or even normal apparel and fulfillment costs represent a much lower share of revenues (see Exhibit below). Likewise because of this dynamic, YNAP’s scale disadvantages in fulfillment costs versus a much larger would be competitor like Amazon are less relevant.  Moreover, we believe YNAP will benefit from integration both Yoox and Net-a-Porter onto a single technology and logistics platform, reducing costs. We expect nearly 600 bps of adjusted EBITDA margin improvement from the following:

 

1) Gross margin improvement (200bps)

a.     Omni-stock program (single source inventory for in-season and off-season) enables lower average markdown and higher sell-through from multibrand.

b.     Improved buying terms across multibrand in-season and off-season upon volume increase

c.     Growing share of higher-margin private label and further pricing sophistication

2) Operating margin improvement (350 bps)

a.     Fulfilment costs as a share of net revenues down 200 bps via lower handling costs as a result of greater stock allocation in Italy. YNAP currently spend EUR22 per gross order (ie inclusive of returns) on fulfillment and we expect this to drop to EUR20 by 2021 further juiced by increased AOV

i. Net-a-Porter relied on geographic specific inventory held in different regions with threshold-based stock levels to guarantee same day and next day. This impacted efforts to optimize supply and demand

ii. The primary focus of Yoox’s integration efforts with NAP was to move the new Company onto its logistics platform which includes a more centralized globally available inventory (“omni stock program”) with just in time flows connecting hub and spoke (ie order flows optimized for speed and delivery costs)

iii. This global visibility and reach should help weather regional slowdowns and allow for lower inventory levels to support the same amount of revenue

iv. The capacity utilization across the Company’s warehouses remains <40% such that there should be a good deal of fixed cost leverage as the business continues to scale

b.     G&A savings of 1%-1.5% of revenues given operating leverage on fixed costs. We remain conservative in assuming G&A doubles over the next 5 years but is outpaced by continued topline growth

c.     We forecast flattish customer acquisition costs as efficiencies in personnel costs and vendor terms are reinvested into marketing spend to drive growth

 

This topline growth and margin improvement should drive attractive free cash flow growth further aided by capex and net working capital savings. YNAP is completing the majority of their technology and integration investments related to the merger in 2017 and expect modest growth on that line item moving forward dropping from 7% of sales today to 4-5% by FY’21. Moreover, net working capital should fall from roughly 7% of sales to 5-6% by 2020 as better sell through on the omni-stock program leads to a reduced inventory burden.

 

Valuation

From a valuation perspective, we have online penetration of luxury goods at ~11% in 2021, below that of where the US is today and YNAP’s share of overall luxury ecommerce at just 10.8%, implying significant growth runway that should arguably support a valuation multiple higher than 20x EPS.

 

At this multiple, with the company still growing topline 15-20% per year, we are forecasting a target price of $50, which works out to a 20% IRR from today’s share price.  If you were to also give credit for ~ €4 / share of expected excess cash on the balance sheet at YE 2020, the implied share price would be €54 and the IRR would increase to 23%.   At an EPS multiple of 30x, the share price would be €75, which works out to an IRR of 36%

 

Key Risks

·       Amazon or others can invest heavily in their own curatorial and brand building efforts to successfully court the EIPs that have made YNAP successful to date

·       Increased competition may also force the Company to reinvest more into their business which would limit their ability to meet the margin expansion targets outlined above

·       Integration hiccups leak into 2018, limiting margin improvement and sapping management focus on topline growth

·       Luxury retailers eventually scale enough on the internet that they in-source their ecommerce operations hurting YNAP’s monobrand business (~10% of total revenue today)

 

Exhibit – Superior Unit Economics of Luxury E-Commerce Retail

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

 

  • Omni-stock program improves sell through accelerating topline growth

  • Introduction of private label drives earlier than expected gross margin improvement

  • Lapping of recent headwinds like shutting down subscale web properties, fx headwinds, and the most disruptive integration efforts reduces noise in financials and lead to an improving multiple going forward

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    Description

    Recommendation

     

    Yoox Net-a-Porter (YNAP) is a global online retailer of luxury goods with EUR 2Bn in sales and over 2.9MM active customers worldwide. The Company owns and operates a range of online luxury fashion stores, both full-price and discount, and also partners with several luxury brands to power the front and back end of their online stores. YNAP was formed ~2.5 years ago via the combination of Yoox Group (the #1 discount luxury retailer known for its best in class technology and logistics platform) and Net-a-Porter (#1 luxury online retail brand with most attractive customer base) and is now well positioned as the largest player in global digital luxury with 10% market share.

     

    The luxury goods market trails the rest of the retail sector in terms of online penetration and just 7.1% of all luxury goods are sold online today (and just 3% of hard luxury). We expect that to increase to ~11% global penetration by 2021 and believe YNAP can grow revenues 20% annually through 2021E as it benefits from this secular trend. YNAP’s increased scale should drive significant operating leverage via reduced fulfillment costs per order and G&A leverage, driving adjusted EBITDA margins from ~8% today to ~14% in 2021. At 20x our 2021E EPS of EUR2.50 we are forecasting a target price of $50 at YE2020, 76% above today’s share price of EUR28 for a 20% annualized return.

     

    Thesis

     

    YNAP is the dominant presence in online luxury retail and we believe the global luxury goods market will continue to follow the rest of the retail sector and move online. We believe YNAP will maintain share as this market grows for a few reasons:

    ·    Online retail is hard and shoppers now demand robust customer service, same and next day delivery and free returns. This burden, combined with the need to fulfill orders globally from regional stock supplies, is often too difficult for luxury brands to do in-house (for perspective, YNAP fulfills one order every four seconds). Moreover, customers and brands both benefit from online wholesale retailers like YNAP (vs single brand channels). A customer does not have the wherewithal to individually search, let alone download the app, for its various favorite brands and styles. YNAP does this for them by curating their favorite selections along with the freshest inventory, driving customer loyalty and order frequency. Luxury brands then get access to a wider range of customers then they ever would on their own.

    ·    However, luxury brands are reticent to partner with other online retailers like Amazon because they are fiercely protective over their brand and their customers’ shopping experience. Amazon is largely price driven with limited customer trust in their curatorial power. In contrast, luxury brands speak very highly of YNAP properties like Net-A-Porter for their success in delivering a great customer experience and protecting the brands’ perception and pricing. Because of YNAP’s superior editorial context and trusted voice with their target customer they get preferential (often exclusive) merchandising from top brands (e.g. Chanel and Gucci) who know that YNAP has the greatest chance of turning the inventory fastest at the lowest average markdown out of all other online channels.  As a result of having the best and most comprehensive selection of merchandise they attract the best customers, creating a flywheel amongst an affluent and fiercely loyal customer base.  YNAP’s average customer orders an average of nearly $400 and 3 orders per year (and this skews much much higher for top cohorts).

    ·    On the discount side, brands are chiefly concerned with two things: how quickly they can liquidate inventory without it hurting their next season of wares, and the price at which that inventory is liquidated. Yoox therefore benefits from the same flywheel of having the most attractive customer set who orders the most frequently, allowing them to turn inventory more quickly and eliminate inventory risk for brands. By integrating these two functions via their merger, YNAP now has tremendous visibility into its ability to sell inventory through both full-price (“in season”) and discount (“off season”) channels, improving its ROIC.  No other online luxury retailer can match YNAP’s scale on both the full-price and discount side of the market

     

    YNAP has a few very important levers to drive growth beyond the 15% annual growth in online luxury spending forecast by industry sources over the next 5 years.  Thanks to these factors and the superior competitive position outlined above, we forecast organic revenue growth of ~18.5% / yr through FY’21

     

    1) Increased mobile penetration

    a.     Mobile shoppers now drive 43% of sales and 62% of visits to YNAP properties (up from 17% and 20% in 2012) with mobile shoppers proving to be much more valuable than the traditional desktop customer:

      

    2) Increasing customer base with over-indexed growth of high net worth individuals

    a.     YNAP is a bit different than most ecommerce businesses as 2% of customers (EIPs) contribute 40% of net revenues

    b.     EIPs  order 12x as often as non-EIPs with 3x the average order value driving average spend of EUR10K annually vs. the EUR650 company average

    c.     YNAP global scale allows them to invest in regional footprints (like recent office openings in the Middle East and China) to cater to these customers both online and offline. This required high level of customer service reduces churn which drives >95% retention for this customer set.  While the EUR 10K annual spending seems high, considering the well above average wealth of this segment, YNAP’s wallet share amongst these shoppers remains <40% penetrated

    d.     YNAP plans to drive growth in the Middle East by targeting this underrepresented customer base (EIPs represent 3x the population in the Middle East relative to other regions) with difficult, but solvable logistics challenges (sensitive marketing regulations, right-to-left Arabic writing, extensive cash pay, difficult addressing system and multiple currencies) that fall right into YNAP’s wheelhouse

     

    3) Increased product set – primarily fine jewelry and watches

    a.     Hard luxury is a EUR54Bn market with 3.4% online penetration

    b.     YNAP can sell this on a consignment model (zero inventory) and branded jewelers like Tiffany and Zenith have made this a high priority

     

    We believe YNAP can eventually earn margins higher than that of existing online retailers as the gross profit per order, or per unit of weight, of luxury retail is so much higher than that of every day consumables like diapers, groceries or even normal apparel and fulfillment costs represent a much lower share of revenues (see Exhibit below). Likewise because of this dynamic, YNAP’s scale disadvantages in fulfillment costs versus a much larger would be competitor like Amazon are less relevant.  Moreover, we believe YNAP will benefit from integration both Yoox and Net-a-Porter onto a single technology and logistics platform, reducing costs. We expect nearly 600 bps of adjusted EBITDA margin improvement from the following:

     

    1) Gross margin improvement (200bps)

    a.     Omni-stock program (single source inventory for in-season and off-season) enables lower average markdown and higher sell-through from multibrand.

    b.     Improved buying terms across multibrand in-season and off-season upon volume increase

    c.     Growing share of higher-margin private label and further pricing sophistication

    2) Operating margin improvement (350 bps)

    a.     Fulfilment costs as a share of net revenues down 200 bps via lower handling costs as a result of greater stock allocation in Italy. YNAP currently spend EUR22 per gross order (ie inclusive of returns) on fulfillment and we expect this to drop to EUR20 by 2021 further juiced by increased AOV

    i. Net-a-Porter relied on geographic specific inventory held in different regions with threshold-based stock levels to guarantee same day and next day. This impacted efforts to optimize supply and demand

    ii. The primary focus of Yoox’s integration efforts with NAP was to move the new Company onto its logistics platform which includes a more centralized globally available inventory (“omni stock program”) with just in time flows connecting hub and spoke (ie order flows optimized for speed and delivery costs)

    iii. This global visibility and reach should help weather regional slowdowns and allow for lower inventory levels to support the same amount of revenue

    iv. The capacity utilization across the Company’s warehouses remains <40% such that there should be a good deal of fixed cost leverage as the business continues to scale

    b.     G&A savings of 1%-1.5% of revenues given operating leverage on fixed costs. We remain conservative in assuming G&A doubles over the next 5 years but is outpaced by continued topline growth

    c.     We forecast flattish customer acquisition costs as efficiencies in personnel costs and vendor terms are reinvested into marketing spend to drive growth

     

    This topline growth and margin improvement should drive attractive free cash flow growth further aided by capex and net working capital savings. YNAP is completing the majority of their technology and integration investments related to the merger in 2017 and expect modest growth on that line item moving forward dropping from 7% of sales today to 4-5% by FY’21. Moreover, net working capital should fall from roughly 7% of sales to 5-6% by 2020 as better sell through on the omni-stock program leads to a reduced inventory burden.

     

    Valuation

    From a valuation perspective, we have online penetration of luxury goods at ~11% in 2021, below that of where the US is today and YNAP’s share of overall luxury ecommerce at just 10.8%, implying significant growth runway that should arguably support a valuation multiple higher than 20x EPS.

     

    At this multiple, with the company still growing topline 15-20% per year, we are forecasting a target price of $50, which works out to a 20% IRR from today’s share price.  If you were to also give credit for ~ €4 / share of expected excess cash on the balance sheet at YE 2020, the implied share price would be €54 and the IRR would increase to 23%.   At an EPS multiple of 30x, the share price would be €75, which works out to an IRR of 36%

     

    Key Risks

    ·       Amazon or others can invest heavily in their own curatorial and brand building efforts to successfully court the EIPs that have made YNAP successful to date

    ·       Increased competition may also force the Company to reinvest more into their business which would limit their ability to meet the margin expansion targets outlined above

    ·       Integration hiccups leak into 2018, limiting margin improvement and sapping management focus on topline growth

    ·       Luxury retailers eventually scale enough on the internet that they in-source their ecommerce operations hurting YNAP’s monobrand business (~10% of total revenue today)

     

    Exhibit – Superior Unit Economics of Luxury E-Commerce Retail

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

     

    Messages


    SubjectRe: Re: Questions
    Entry11/16/2017 08:57 AM
    Memberjls

    Hi Mike,

    These are very good questions.  Unfortunately, I don't know how satisfied you'll be with my answers because some stuff they just don't disclose.

    1) They split their market budget about 50/50 between their in-season (full price) and off season (discount) businesses.  The large majority of the off season portion is SEM driven (e.g. bidding on particular keywords with google).  In-season is much less scientific and alot of brand advertising in print media and select billboards in top malls, airports, etc.  They also probably spend greater than half of the in-season budget on their editorial and promotional activity.  The promotional activity includes various party and event sponsorship and pop-up store activations that are aimed towards their EIP high end shoppers.  Admittedly, customer acquisition does not seem to be a core competency of theirs and they do not approach it with the rigor of other ecommerce retailers, but I think this is something management recognizes as a key area for improvement.  Also, while not necessarily as sophisticated as their public markets peers, they're well more sophsticated / heavily resourced than their monobrand competitors in this area.  As for CAC they spend about $80 / customer versus single digits for Zalando and Asos, but they can match their returns becuase their net contribution margin is ~6x greater.

    2) Frustratingly unclear especially given all the noise around the merger integration.  The most conservative way to look at it would be to assume that 100% of marketing and fulfillment are variable such that only G&A is fixed.  In that case, you'd say ~30% of costs are fixed.  In reality, I think a pretty big chunk of the in-season marketing is fixed (so let's say 75% of the 50%).  Also, there are some fixed fulfillment costs for managing the warehouses, etc.  I don't know how that splits between the actual shipping costs, but whatever these costs are there should be considerable operating leverage on them given the 40% capacity utilization in their warehouses.  Maybe we say 25% of the fulfillment costs are fixed because I don't have a better guess.  Putting those together would suggest a ~50/50 overall split between fixed and variable opex

    3) Return rates are ~50% for Zalando, ~40% for Asos, and ~33% for YNAP

    4) The logistics costs associated with returns are included in fulfillment expense on the income statement, although the customer service component would probably be in G&A.  My take is actually the opposite of what you're saying.  Because YNAP order values are so high they spend ~1/4 of their gross profit per order on fulfillment versus around 50% for Asos and Zalando.  So even though they they can 2x the nominal spend of those brands they're doing so at better relative unit economics.  Said another way, YNAP has significantly more dollars per order to spend on high quality fulfillment and packaging.  Given the return frequency is actually lower for these guys (I think part of this is because a $500 dress is a bigger purchases that is more heavily considered by the time the buy button gets pressed than it is for $45 jeans), I don't that would be a reason for them to have lower than expected margins.

    Hope these are helpful.  Feel free to ask any follow ups


    SubjectRe: Re: Re: Questions
    Entry12/27/2017 11:46 AM
    Memberbdon99

    jls, thanks for the great writeup. Not sure if they're readily answerable but i have a few q's. (1) do you know the split between 1P and 3P / marketplace type business? (2) how much inventory is sourced via direct brand collaboration vs. YNAP buying from distributors or wholesalers? (3) seems like last q was weak in Asia (perhaps China?)... any sense for why? (4) curious here - have you come across Secoo - the China pureplay? it may be prohibitively small but an interesting comp that i'm also looking at... faster growth, much lower gross margin, but much more efficient op-ex structure which is interesting given it seems you may think YNAP is bloated there. thanks again - thoughts on any of the above are appreciated.


    Subjectnice job, any event path worth discussing?
    Entry01/22/2018 03:21 PM
    Memberyellowhouse

    nice job here. although it would have been nice to let this compound away, this isn't the worst outcome. any thoughts on the potential for a higher price?

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