Björn Borg (”Björn Borg” or ”the Company”) published its Q2 report for 2024 on the 16^th of August, 2024. The following are key events that we have chosen to highlight from the report:

• Impressive Net Sales Growth of 28,7 % Y-Y – Driven by the Footwear Category
• Continued Strong Momentum within Sports Apparel (43 % Growth Y-Y)
• The Wholesale Channel Reported Strong Growth Driven by Physical Wholesale
• Short Term Pressure on the Gross Margin
• Strong Cash Flow Generation

Footwear Showed an Impressive Growth of 199 % Y-Y

Björn Borgs net sales came in at SEK 213.2m (165.6) in the Company’s second quarter of fiscal 2024, marking a Y-Y increase of 28.7% when factoring in currency effects, and 28.3% when excluding these effects. The outcome exceeded our estimates by a wide margin (SEK 179.1m), where all product categories surprised positively in regards to growth. Examining the different product areas, the main growth driver was the footwear category, presenting an impressive growth of 199% Y-Y, a testament to Björn Borgs solid execution of integrating the footwear business in-house. Another major highlight in terms of product areas was the performance in Sports Apparel, which grew by 43% Y-Y, continuing the strong momentum from previous quarters. Additionally, the product category Bags presented a growth of 33% Y-Y, and Underwear, the largest contributor to sales, witnessed a growth of 6% compared to the same period last year.

Upon reviewing the channel mix for Q2-24, the Company’s largest channel, wholesale, grew by an impressive 50% Y-Y, where the main contribution within the channel stems from physical wholesale, which increased by 72% Y-Y. Additionally, external e-tailers witnessed a growth of 20% compared to the same quarter last year, contributing positively to the strong growth within wholesale. The Company’s Own E-commerce increased by 9% Y-Y, which is a slowdown in growth rate compared to the last few quarters, where the Y-Y growth has varied in the range of approx. 20-50%. The somewhat slower growth pace is attributed to the increased focus on full-price sales, thereby reducing the sale rate on the Company’s Own E-commerce platform. Analyst Group believes that the growth within Own E-com is robust in the light of the reduced discounts, which shows that customers are willing to pay full price for the high quality products and the strong brand.

The graph below illustrates the growth in Own E-commerce since the end of 2018. This strong growth, despite the challenges faced by the broader e-commerce sector in recent years, attests to Björn Borg’s resilience and strength, and serves as a testament to the success of the initiatives aimed at boosting brand awareness.

Concerning sales geography, all markets performed well during Q2-24, with some geographies showing remarkable growth. The net sales in the Netherlands witnessed an impressive growth of 53% Y-Y, followed by robust growth of 42% and 40% Y-Y in Belgium and Sweden, respectively. Other important markets such as Germany, Finland and Denmark demonstrated double digit growth, while other smaller markets remained on par with the same period last year.

Short Term Factors Hampers the Gross Margin

During Q2-24, the Company achieved a gross margin of 51.8% (when including FX-effects) and 52.3% when excluding currency effects, which was lower than estimated (56.1%). The gross margin exhibited a decrease from 55.6% in Q2-23 and a decrease from the previous quarter (Q1-23), when the gross margin amounted to 53.3%. The lower gross margin mainly stems from currency effects, increased freight costs as well as one-off discounts linked to the integration of the footwear business, as the Company took over an orderbook of footwear late in the season. Analyst Group perceives the declining gross margin as a temporary issue, and that the Company has great potential to increase the profitability level going forward, for instance as Own E-com grows and thereby constitutes a larger fraction of the total sales.

Looking further down the P&L, Björn Borg reported an operating result (EBIT) of SEK 9.5m (8.1) for the second quarter, corresponding to an EBIT margin of 4.5%. Adjusting for currency headwinds in the quarter, the operating result amounted to SEK 10.3 (7.8), corresponding to a currency-neutral EBIT margin of 4.8%. This outcome fell short of our estimates (SEK 13.1m), where the largest deviation to our estimates, apart from the net sales and COGS, was attributed to the increased marketing spend, as reported in the other external costs (SEK 58.2m compared to estimated SEK 43.7m).

Strong Cash Flow Generation and Solid Financial Position

Björn Borg generated SEK 117.3m (74.9) in free cash flow (FCFF) during the second quarter, primarily due to a reduction in working capital, which amounted to approx. SEK 112m. The FCFF generated during Q2-24 aligns with the typical seasonal pattern observed in the industry, where Björn Borg tends to free up a substantial portion of working capital in Q2 and Q4, and, conversely, working capital generally gets tied up during Q1 and Q3. The FCFF LTM of SEK 74.6m, which provides a more representative illustration of the underlying cash flow generation, shows a substantial increase compared to the same period last year where the FCFF amounted to SEK 48.3m, a consequence of the stronger operating performance as well as efficient working capital management.

During the quarter, Björn Borg reduced the Company’s debt position from SEK 175m at the end of Q1-24 to SEK 145m at the end of June, primarily due to repayment of the overdraft facility. Taking into account the cash position of SEK 9.4m at the end of Q2-24, the net debt stands at 135m, and SEK 51m when excluding leases and deferred tax liabilities. With the current EBITDA LTM of SEK 136.5m, the net debt/EBITDA ratio equals 0.99x (including leasing liabilities and deferred tax liabilities) and approx. 0.38x when excluding the abovementioned, indicating a continued healthy financial position moving forward.

Concluding Remarks About the Report

In conclusion, Björn Borg’s Q2 report demonstrates the successful integration of the footwear category, evident by the remarkable 199% Y-Y growth within the footwear segment and 29 % Y-Y growth for the Company as a whole. The Sport Apparel category also maintained its strong momentum during the quarter, with a solid increase of 43% Y-Y. While the gross margin faced pressure due to currency headwinds, elevated transportation costs, and one-off discounts tied to the footwear business, Analyst Group assesses that the factors contributing to the hampered gross margin are of transitory nature. The Q2 results highlight Björn Borg’s agility in adapting to market conditions and underscore the effectiveness of the Company’s brand-enhancement initiatives. Additionally, the substantial growth potential within the footwear segment could further help to change the perception of Björn Borg as a sports fashion brand, serving as an important growth driver ahead.

We will return with an updated equity research report of Björn Borg.

Björn Borg (”Björn Borg” or ”the Company”) published its Q1 report for 2024 on the 16^th of May, 2024. The following are key events that we have chosen to highlight from the report:

• Revenues in line with our estimates (SEK 256.8m vs. 255.4)
• E-commerce shows continued strong momentum, representing a 21% Y-Y growth
• Integrates footwear In-House
• Profitability fell short of our estimates
• Footwear integration puts pressure on the FCFF

Revenues Grew 10% Y-Y when Excluding Footwear Sales

Björn Borgs net sales came in at SEK 256.8m (246.9) in the Company’s first quarter of fiscal 2024, marking a Y-Y increase of 4.0% when factoring in currency effects, and 3.7% when excluding these effects. The outcome exceeded our estimates by a slight margin (SEK 255.4m or 0.5%). Looking at the product areas, sales from Sports Apparel witnessed a strong growth of 24% compared to the same period previous year, constituting 27% of total sales during the quarter. During Q1-23, the aforementioned share equaled 23%, showcasing that Björn Borg’s strategic shift in strengthening the perception as a sports fashion brand is bearing fruit. The Underwear area grew 9% Y-Y, where the solid development was attributed to both women’s and men’s underwear. During Q1-24, Björn Borg’s licensing partner for the footwear category went bankrupt, which had a significantly negative impact on the footwear sales, as evident by the sharp decline of 46% in sales. The decline mainly stemmed from disruptions in the supply chain and was further impacted by weak sales from the former partner. Worth highlighting is that sales increased by 10% when excluding footwear, which illustrates that Björn Borg has started the year of 2024 on a strong note, albeit the Company is facing short term headwinds with regards to the footwear area.

Reviewing the channel mix for the current quarter, it is notable that the Company’s Own E-commerce is continuing its strong momentum and gaining notable traction in the overall channel strategy. Sales from the Company’s E-commerce platform amounted to SEK 40.6m (33.4) in the first quarter, reflecting a solid 21% increase Y-Y. The performance of online sales maintained strong momentum, comprising 40% of total sales in Q1-24 and 42% LTM.

The graph below demonstrates the robust growth in own E-commerce since the end of year 2018, which, according to Analyst Group, indicates that activities to bolster brand awareness have yielded significant results throughout the years, thereby directing a growing inflow of traffic to the Company’s own homepage. The robust growth, despite the challenges faced by the general e-commerce sector in recent years, is a testament to Björn Borg’s strength.

In regards to the sales geography, the Netherlands, Germany and Denmark showed good progression, with growth of 10%, 14% and 6%, respectively. However, other Nordic markets exhibited contrary performances, with sales in Sweden and Finland declining Y-Y, entirely attributed to the weak development in the footwear area.

Björn Borg Integrates Footwear In-House

In February, Björn Borg announced that its distribution partner for footwear, Serve&Volley, has entered into restructuring. Shortly thereafter, on March 11^th, Björn Borg announced plans to fully integrate the footwear product category into its own operations. This integration means that the Company will handle the design, product development, and distribution of footwear in all markets. Apart from enabling Björn Borg to enhance control over quality, innovation and design, the integration will create synergies with other product categories in distribution. Since the distribution of footwear is already integrated in Sweden, Finland, and Denmark, and considering Björn Borg’s extensive experience in developing and manufacturing high-performance products in underwear, sportswear, and bags, Analyst Group believes that the Company possesses all the necessary prerequisites to leverage the strong brand and achieve significant growth within the footwear segment. The risk of the Company’s former licensee adversely affecting Björn Borg’s sales and delivery opportunities is evident, and Björn Borg’s assessment is that this could negatively impact EBIT for 2024E by up to SEK 5m where we estimate a result of SEK 126m for the full year. Although the first quarter demonstrates that transitioning from a licensing model to in-house integration can negatively impact operating results in the short term, Analyst Group believes that the long-term net effect will be positive, and that the footwear business could serve as a solid growth engine in the coming years.

Lower Profitability Development than Expected

During Q1-24, the Company achieved a gross margin of 53.3% (when including FX-effects) and 53.1% when excluding currency effects, which was lower than estimated (55.8%). The gross margin increased from 52.2% in Q1-23 but exhibited a decline from the previous quarter (Q4-23), when the gross margin amounted to 56.8%. The improvement Y-Y was primarily attributed to greater profitability within the wholesale business, as well as reduced discounts within the direct sales to consumer. Analyst Group estimated a stronger gross margin development in the first quarter, expecting a more significant impact from the robust performance of Own E-Commerce, which has a higher profitability profile compared to other sales channels.

Moving forward, the Company is expected to further strengthen its online presence through continued investments in marketing and other activities that enhance brand visibility, particularly via Own E-commerce. Analyst Group forecasts a sustained rise in online sales, which is projected to set the stage for a gross margin within the range of 55-57% range in the coming years.

Björn Borg reported an operating result (EBIT) of SEK 33.5m (31.4) for the first quarter, corresponding to an EBIT margin of 13%. Adjusting for currency tailwinds in the quarter, the operating result amounted to SEK 32.7 (33.6), corresponding to a currency-neutral EBIT margin of 12.7%. This outcome fell short of our expectations (SEK 46.7m), and the worse-than-expected result was primarily attributed to higher other external costs (SEK 60m compared to SEK 54m) than estimated, as well as higher personnel costs (SEK 37m compared to SEK 34m).

The Integration of the Footwear Business Increased the Capital Tie-up During Q1-24

The Company tends to tie up a significant portion of its working capital in the first quarter, which was also evident in Q1-24, but the quarter was heavily impacted by the integration of the footwear business in-house. Björn Borg generated SEK -107.7m (-29.8) in free cash flow (FCFF) during Q1-24, primarily due to an increase in working capital, which amounted to approximately SEK 129.9m. Thus, cash flow from operating activities in Q1 amounted to SEK -103.2m (-27.1). Given the nature of the industry, Björn Borg normally experiences fluctuations in working capital, with the most significant change in accounts receivable and accounts payable during the first and third quarters. However, the significant deterioration compared to the previous year is explained by a higher capital tie-up, attributed to the short-term headwinds following the integration of the footwear business, as the distribution partner went bankrupt. Analyst Group had not anticipated such a large impact from the integration of the footwear business. At the same time, we emphasize that this is a short-term effect, which, as previously mentioned, we expect to result in a positive net effect in the longer term.

Looking at FCFF for the last twelve months (LTM), which usually provides a more representative view of the underlying cash flow generation as it smooths out the seasonal variations and sharp quarterly swings, Björn Borg generated SEK 58.8m in FCFF LTM, representing a decrease of 28% compared to the same period last year, where the decrease is also attributed to the negative impact from the integration of the footwear business.

Given the current EBITDA LTM of SEK 135.1m and a net debt position of SEK 175.4m at the end of March, the net debt/EBITDA ratio stands at 1.25x (including leasing liabilities), and 0.95x when excluding leases. Consequently, Björn Borg increased the Company’s debt position in Q1, primarily due to short-term interest-bearing liabilities, as a result of the negative FCFF created by the high capital tie-up in the quarter.

Despite the high capital tie-up, Analyst Group considers that Björn Borg has built up a solid and healthy financial position, where the Company’s debt position increased to SEK 175m (146) and SEK 136m (98) excluding leasing liabilities, which is an increase both Y-Y and Q-Q.

Concluding Remarks About the Report

In conclusion, Björn Borg delivered a Q1 report that came in line with our estimates regarding top-line but fell short of our estimates in terms of profitability. However, the development during the quarter further demonstrates the Company’s strong momentum within Own E-Commerce, which exhibited strong growth. Furthermore, Analyst Group is pleased to see the solid progress within the Sports Apparel area, illustrating that the strategy to transition consumer perception from an underwear brand to a sports fashion brand has yielded notable results.

While the footwear business put short term pressure on the sales, Analyst Group believes that the product area carries substantial potential in the long term, and that the Company’s previous experience in developing and manufacturing high-performance products in underwear, sportswear, and bags, will pave the wave for a promising performance within footwear sales.

We will return with an updated equity research report of Björn Borg.

Björn Borg (” Björn Borg” or ”the Company”) published its Year-End report for 2023 on February 23, 2024. The following are key events that we have chosen to highlight from the report:

• Revenues amounted to SEK 197.6m (-3.4% lower than estimates) – Currency-neutral, net sales fell -3% Y-Y
• Own E-commerce amounted to SEK 45.8m, representing a 46% Y-Y growth
• Footwear Partner Enters into Restructuring
• Enhanced Channel Mix Boosted Higher-Than-Expected Margins
• Strong Cash Flow Generation Resulted in a Reduced Net Debt Position.

Own E-Commerce Grew 46% Y-Y

Björn Borg reported net sales of SEK 197.6m in the Company’s fourth quarter of fiscal 2023, marking a Y-Y decrease of 0.4% when factoring currency effects, and -3% when excluding these effects. The outcome fell short of our estimates (SEK 204.6m or -3.4%), primarily driven by lower-than-expected sales from the Sport Apparel (-5.4%) and Underwear business (-3.8%). Conversely, the development in the product category “Other”, exceeded our expectations (SEK 43m vs SEK 35m), where Analyst Group had estimated a carryover of the negative growth from the third quarter into the fourth quarter, but the actual development proved otherwise.

Given prevailing challenges such as high inflation and reduced purchasing power, the recorded negative growth in Q4 is not alarming, but rather viewed as a temporary setback by Analyst Group.

Examining the current quarter’s channel mix, it’s noteworthy that the Company’s Own E-commerce is gaining significant traction in the overall channel strategy. Sales from the Company’s E-commerce platform amounted to SEK 45.8m in the fourth quarter, reflecting a robust 46% Y-Y increase and surpassing our forecasts by a substantial margin (SEK 34.6m).

The online sales performance concluded 2023 on a more robust note than anticipated, with online sales comprising 47% of total sales in the fourth quarter and 41% for the full fiscal year 2023, surpassing our projections of 39% for both Q4-23 and the entire fiscal 2023. This indicates potential for upward adjustments in the updated research report, as Björn Borg’s significant marketing investments have yielded even greater brand strength and online market penetration than initially predicted.

In the graph below, we can clearly see how consistent the growth in own E-commerce has been since the end of Q4-18, despite previous and current challenges, indicating that made investments on marketing has spurred increased activity within Björn Borg own homepage and strengthened the brand, according to Analyst Group.

On the other hand, the Q4 report underscores the ongoing challenges faced by Björn Borg’s distributors, characterized by elevated inventory levels and diminishing household consumption. We anticipate sustained weakness in this sales channel in the forthcoming quarter.

In terms of sales geography, the Netherlands and Belgium outperformed expectations, partially attributable to the stronger performance in Own E-commerce. Meanwhile, the Swedish market maintained its positive momentum, registering a Y-Y growth of 7% in the fourth quarter and 8% for the full fiscal year 2023. However, other Nordic markets displayed a mixed performance, with Finland experiencing a 6% decline compared to the previous year, while Denmark witnessed a noteworthy 24% Y-Y increase.

Björn Borg’s Footwear Partner Enters into Restructuring

Shortly before the Q4-report, Björn Borg announced that its partner for the footwear business, Serve&Volley, has entered restructuring. For Björn Borg, the financial effect in the short term is limited, as orders placed for the spring collection are currently in Europe, ready to be delivered to customers. In the press release, Björn Borg revealed that the Company had, before this event, initiated a strategic review regarding overtaking the footwear operations under own authority. As the distribution of footwear is already an integrated part in the Nordic business (Sweden, Finland, and Denmark), Analyst Group believes that the probability for Björn Borg to overtake the footwear business is high. The financial impact of this transition would, according to Analyst Group, all else equal, result in a higher working capital need, in terms of increasing inventory and account receivables, for the end of 2024 and onwards. At the same time, the Company would get re-access to the markets that previously were omitted to Serve&Volley, resulting in higher footwear sales volumes in its own authority. However, it’s worth noting that Björn Borg previously received royalties on sold footwear, yielding 100% margins. Therefore, while the net effect on a percentage basis may appear negative, the move to bring the footwear business under its own authority has resulted in a positive absolute impact.

Enhanced Channel Mix Supported a Strong Gross Margin…

During Q4-23, the Company achieved a gross margin of 56.8% (when including FX-effects) and 56.2 % when excluding currency effects, which was higher than estimated (54.1%). This strong performance can be attributed to ongoing efforts to reduce discounts and optimize the channel mix, with a notable contribution from the expanding share of Own E-commerce.

Looking ahead, continued investments in marketing and other brand-enhancing activities are expected to further bolster the company’s online presence, particularly through Own E-commerce. Analyst Group forecasts a continued increase in online sales, laying the groundwork for sustaining a gross margin in the range of 55-57%. This outlook remains resilient even as the Sport Apparel segment, which typically carries lower margins, is projected to account for a larger share of revenues in the future.

… as well as the Operating Result

For the fourth quarter, Björn Borg reported an operating result (EBIT) of SEK 20.2m, corresponding to an EBIT margin of 10.2%. Adjusting for currency tailwinds in the quarter, the operating result amounted to SEK 19m, corresponding to a currency-neutral EBIT margin of 9.6%. This outcome exceeded our expectations (SEK 11.5m) by 64%. Apart from the factors that positively influenced the gross margin, such as the aforementioned factors, the better-than-expected result was mainly attributed to lower other external costs (SEK 53m compared to SEK 57m) than estimated, as well as somewhat lower personnel costs (SEK 34m compared to SEK 35m). The quarter’s channel mix played a role in this deviation from our estimates, alongside with reduced reserves for doubtful accounts receivables.

The quarter’s profitability thus came as a positive surprise, indicating that Björn Borg has gained stronger momentum within its Own E-commerce than previously anticipated as of the end of 2023. Moving forward, we are inclined to adjust our estimates regarding the channel mix, which is likely to support a stronger operating result than previously forecasted.

Strong Cash Conversion during the Quarter

In the fourth quarter, Björn Borg tends to free up a significant portion of its working capital, which also was the case for Q4-23. The company generated SEK 126.5m in free cash flow (FCFF) during Q4-23, with a substantial portion attributed to a reduction in working capital amounting to approximately SEK 106m. Although inventory increased by SEK 34m, reaching 21.1% of net sales for the quarter, this aligns with the Company’s established business cycle and was largely consistent with our estimates. It’s typical for Björn Borg’s inventory levels to peak in the second and fourth quarters, while reaching their lowest points in the first and third quarters.

The cash flows generated in the fourth quarter surpassed projections, underscoring a high level of efficiency in working capital management. This bodes well for the upcoming quarters, particularly amidst an increasingly uncertain macroeconomic environment.

Moreover, the Company significantly reduced its debt position in Q4, primarily driven by robust cash conversion during the quarter. This enabled Björn Borg to repay its overdraft facility of SEK 104m. Consequently, the net debt position (including leasing liabilities) stood at SEK 56m at the end of Q4-23, down from SEK 180m in the previous quarter. This implies a solid and healthy financial position moving forward.

Another favorable aspect highlighted in the report, particularly from a shareholders’ perspective, was the Board’s proposal to increase dividends to SEK 3.00 for fiscal year 2024. This marks a significant 50% increase from 2023, amounting to a total of SEK 75.4m. This move underscores the Company’s confidence in its balance sheet and its commitment to returning value to shareholders.

Notably, the proposed dividend for the next fiscal year exceeded our forecasts, which initially was estimated toSEK 2.30. Originally, a distribution of SEK 3.00 was expected to occur in 2025, making this announcement a positive surprise for investors.

Concluding remarks about the report

In conclusion, Björn Borg’s performance in Q4-23 underscores its continued robust growth trajectory within Own E-commerce, signaling that investments in marketing and brand enhancement initiatives have yielded tangible results. Despite prevalent macroeconomic challenges such as inflation, increased interest rates, and geopolitical uncertainties, Analyst Group believes that Björn Borg has effectively navigated these obstacles, as evidenced by the stronger-than-expected operating result.

Moving forward, monitoring the performance of the Company’s distributors, and tracking organic growth will be crucial factors. While sales growth may have fallen short of estimates, Analyst Group was impressed by the notable improvement in operating results during the quarter. As a result, upward adjustments tied to profitability are anticipated in the upcoming Equity Research Report.

We will return with an updated equity research report of Björn Borg.