Verkkokauppa.com - Tough times ahead before market recovery

Topline came in above expectations, but EBIT was modest
Due to the challenging market, Verkkokauppa.com’s Q3 result came in modest. Net sales declined by 2.3% y/y to EUR 137.8m. The decline was mostly driven by the consumer segment and core categories. Sales grew in the Export and B2B segments. B2B growth pace slowed down to 5% with reduced activity of SMB clients and Export growth was mostly supported by new customers gained. Evolving categories performed well in a challenging market and managed to grow by 3.1% y/y. Unfavorable sales mix and increased price competition showed in a weaker gross margin of 14.6%. The profitability was further harmed by increased cost pressures through investments in personnel and elevated logistics costs. Q3 adj. EBIT amounted to EUR 2.1m (1.5% margin).

2023 going to be challenging as well
The company guides for 2022: net sales of EUR 530-560m and adj. EBIT of EUR 5-9m. Lots of tasks must be done to reach the guidance since the weak market doesn’t provide much support. At this moment, large inventory burns cash, and the company has pressures to release capital from expanded inventories. A side effect of inventory clearance, namely margin investments possibly hurt profitability. We expect the inventory clearance to continue also in 2023. With low sales volumes and existing cost pressures, we expect the profitability to lag also in H1’23.

Negative view with elevated valuation
We decreased our estimates after the Q3 result. We see the upcoming year as challenging and our previous 2023 estimates seemed quite optimistic. With decreased topline estimates our 23 EBIT estimate saw a ~50% drop. We see it challenging for the company to stay profitable in H1’23, but EBIT to notably improve in H2’23. However, we find the current market as too uncertain. With our revised estimates, uncertain market environment and high valuation, we downgrade our rating to SELL (HOLD) and adjust TP to EUR 2.2 (3.5).