22 October 2012 LA REPUBBLICA - Affari & Finanza (Italy)

22 October 2012 LA REPUBBLICA - Affari & Finanza (Italy)

22 October 2012 LA REPUBBLICA - Affari & Finanza (Italy) YOOX, margins in recovery with strong growth in revenues

“To expand our international business, bolster our full-price range, constantly innovate to ensure the highest-

quality service, convert forecasted strong growth into greater profitability, and generate cash flow.” These,

according to Federico Marchetti, founder and CEO of YOOX Group, are the group’s strategic priorities.

More specifically, he continues, “Italy will continue to be a strategic market and we will remain the market

leader there, but we wish to continue the international expansion that has enabled foreign markets to account

for 85% of our sales, focusing on the US and China – the latter being a market we entered in 2010”.

The Chinese market, adds the CEO, “has great potential and we are currently present there with our entire

range: alongside nine online stores, in 2011 we launched thecorner.com, the multi-brand luxury boutique, and

several days ago we launched yoox.com, which will become fully operational in 2013”. Thanks to these

initiatives, China is expected to become one of the group’s three largest markets in the world by 2016, although

the US will continue to be the largest. Several new projects are planned for the US , “which in 2011 became our

biggest market, with a share of 21.6%. We want to expand our activities in this market and are therefore

planning to invest in new talent in order to strengthen our team after appointing a new Country Director”.

In the meantime we are working “on expanding our full-price range, which should represent around half of net

revenues by 2015”. The target is an ambitious one, but is compatible and is “aided by initiatives such as

shoescribe.com, the multi-brand online store launched in March 2012 that is wholly dedicated to the latest

collections of ladies’ footwear, and thecorner.com, the multi-brand website offering up-to-the-minute men’s and

ladies’ collections from avant-garde luxury brands and designers. A significant contribution will come from the

mono-brand business, which has huge potential and is expected to expand from 32 to 50 online stores in the

next five years. We are also developing a joint venture with PPR for the management of the French group’s

many brands”.

The third strategic objective is represented by the consolidation of the innovative skill which “has allowed us to

guarantee innovative and immaculate services to clients and partners.” It is a project to which YOOX has

destined about 25 million euro per year during the years 2011 and 2012, and a similar quantity is projected for

2013, when there should be a decreasing trend after the peaks of that period. Moreover, this should be added

to the 24 million destined to the implementation of the automatized technological platform in Bologna which has

allowed us to deliver 99% of the orders on time since 2011.

These commitments will be supported by the group’s cash flow generation, which should, as of the second half

of 2012, be sufficient to fully finance the investment plan, generating enough cash to boost cash on hand.

Thanks to these initiatives, it will also be possible to achieve a gradual improvement in profitability and cash

flow generation. According to Mr. Marchetti, the group “expects to convert strong revenue growth in the coming

years into improved margins and cash flow, also taking advantage of economies of scale resulting from a

growing critical mass concerning a scalable business model in which all online stores use the same platform”.

Another contribution will come from “better absorption of costs made possible by the increase in the average

sale price, which rose to €203 in the first half of 2012 from €173 a year earlier”. The group is also expecting “to

maximize the existing synergies between the two business lines, multi-brand and mono-brand, as well as a

further reduction in logistics costs, which fell from 11% of net revenues in the first half of 2011 to 9.4% in the

first six months of 2012 thanks to the new logistics platform”. Another issue is that of keeping working capital

down, which will be helped by the growth in the mono-brand business and a strong focus on stock and payment

times.

The effects of these measures will be felt in full in the coming years, but can already be seen in the current

financial statements. YOOX closed the first half of this year with turnover up by 31.75% to €173 million and

EBITDA up by more than 15% to €11.6 million, although its margins narrowed due to the impact of the

expenses resulting from the aforementioned investments. This contraction should be absorbed in the second

half, however, and by the end of the year the margins should return to around 10%. The group should therefore

return to generating considerable free cash flow and this trend should be consolidated in the near future, partly

because the level of investment should be reduced. Furthermore, assuming there are no surprises in store,

2012 should close with net cash on hand totalling more than the €12.9 million recorded at the end of 2011.

These results are linked to the development of a business which, in the first six months of 2012, saw its

average unique visitors per month increase to 12.5 million (from 9.2 million as of June 30th, 2011), with order

numbers up to 1,073 million (from 961 thousand last year), while the average sale price rose from €173 to

€203.

If confirmed in the coming months, this trend gives us an indication of the group’s performance for the end of

the year, although we do not yet know what consumption trends will be like over the Christmas period. Unless

any extraordinary factors arise, YOOX should close 2012 having generated further growth in its average sale

price and estimated turnover of around €375 million, up by 30% despite the difficult economic conditions in

some European countries, not to mention Italy, thanks to the group’s main international markets, such as

Japan, Russia, the Asia Pacific and the US, where it continues to post strong growth.

22 October 2012 LA REPUBBLICA - Affari & Finanza (Italy) There is also good news on the profitability front, since the group’s margins should return to around 10%, with

EBITDA (adjusted for incentive costs) expected to top €37 million. This trend is partly attributable to the first

effects of the new focus on working capital and profitability, as well as those of the gradual entry into service of

the Bologna logistics centre. The trend should continue next year, with revenues for 2013 forecasted at €470

million (+25%) and margins set to grow again, although the full benefits of the group’s investments will not be

felt until 2015, when all the new initiatives introduced will become fully operational.

YOOX’s share consolidates the race and overperforms luxury and e-commerce

YOOX consolidated the recovery it began in early August, with its shares crossing the threshold of €11 on

Tuesday October 16th, climbing by more than 46% from their lowest level of 2012 (€7.32), which was recorded

on Friday January 6th at the end of a share weakness that began on October 13th last year. During these three

months, the company’s share price lost 40% of its value. The group recovered from this weakness in 57 trading

days, at the end of which, on March 26th, the share price reached its highest level of the year: €12.58, up 72%.

This peak was quickly followed by a decrease of around 21%, before changing course and climbing again to

€12.34 on June 21st. YOOX’s shares have continued to experience ups and downs to this day, sliding to €9.05

on September 5th only to tick up to the above mentioned €11 on Tuesday. This price is considerably higher than

the €4.3 at which YOOX’s shares were initially offered on the Stock Exchange on December 3rd, 2009.

Since the IPO, YOOX has put in a stronger performance than the market as a whole, outperforming the FTSE

Italia Star Index and the FTSE MIB Index by 122 and 149 percentage points respectively. It has also performed

well relating to its sectors, outperforming the luxury goods sector by 35 percentage points with an increase in

value of 118%, against just 83% for the sector, and outperforming the e-commerce sector, which grew by 93%,

by 25 percentage points. This performance was sustained by strong revenue growth and good margins, which

should improve as the group’s investments fully come to fruition. Perhaps that is also the reason why of the 11

analysts that follow YOOX’s shares, six have maintained a ‘buy’ recommendation, although four suggest selling

the stock.