A novel concept

Its business model is quite original as it resembles a private shopping club with theme-based sales renewed on a daily basis. The company is expected to generate close to € 440m of revenue in 2020 and it has a market capitalisation of € 540m and a net cash position of approximately € 100m in the balance sheet.

The company's 1.3 million active clients receive offers comprising of a selection of articles each day by email and on the application. These articles are presented as part of a specific sale focused on a given theme. For instance, we have seen sales offering Flemish-style decorations, Berber rugs, dinner tables, autumn-style kitchens and Baroque revival objects. Each selection is usually available for a few days. The company supplements its theme-based sales by carrying out private sales promoting specific brands.

The product mix is quite diverse and focused on accessories; 10% kitchen, 23% home linen, 20% decoration, 23% large furniture, 7% small furniture, 10% lighting. The company generates half of its revenue in German-speaking regions (Germany, Austria, Switzerland) and the rest in other parts of Europe (Belgium, Czech Republic, France, Italy, Netherlands, Poland, Spain, Slovakia).

Unlike conventional online stores, Westwing's model includes a very prominent aspirational dimension with carefully designed editorial content. The ultimate aim is to digitise the experience offered by an interior decor catalogue or magazine. Co-founder Delia Fischer actually launched her career as an editor at Elle Décoration. We can assume therefore that the client base is predominantly female (90%!). The attach rate for this concept is very high: 80% of revenues are generated with clients who visit the website over 100 times a year.

Westwing and Amiral Gestion, a relationship in three stages:

1. Discovery pre-IPO. As shareholders in Rocket Internet (a business incubator), we indirectly tracked Westwing's development as it was in the portfolio. However, we held back from participating in the IPO in late 2018 for valuation reasons and because we were not convinced that the company would repeat the success it had achieved in German-speaking regions in other parts of Europe.

2. A series of disappointments post-IPO. The company issued three profit warnings due to growth proving slower than expected, particularly outside German-speaking regions. Management had to restructure its non-German business scope, especially in Italy where the brand needed to be completely repositioned. The market was sorely disappointed and the share price fell below € 2, less than a year after having listed at € 26!

3. First share purchases in September 2019. We then began building up a portfolio line. At the time the company was trading more or less in line with its net cash. The company could be bought for the equivalent of the liquidity it held at the bank! The market assigned no value at all to the underlying business following the many disappointments. However, while acknowledging the company's temporary problems, we would point out that its cash burn remained very low and its fixed cost base had stabilised. At this price, we can comfortably sit back and wait for growth to gradually resume now that the business has been repositioned.

Demand stemming from the Covid situation has activated the company's operating leverage on a significant scale.

The social distancing measures introduced when the first wave of the virus hit Europe meant that people had to spend more time at home. E-commerce firms clearly benefited when most bricks-and-mortar shops shut down. Westwing emerged victorious from the situation thanks to its positioning in the home furnishings sector.

Whereas Westwing had found it hard to acquire new clients during the first 5 quarters between its IPO and the start of Covid-19 (its new client base grew by just +6% during this period), the company managed to expand its client base by 30% and generate more than 90% revenue growth in the second quarter. It achieved two-thirds of its Q2 sales with clients who had been active last year and who increased their buying frequency.

So the company that had struggled to deliver an EBITDA margin of 0% turned in 13.5% in the second quarter! While its gross margin came out almost flat, we were able to see the effects of significant operating leverage on its fixed costs (primarily overheads and the fixed share of logistical costs). Having traded in line with its net cash position, the company's share price then skyrocketed quite suddenly, increasing 10-fold since the end of March.

Above all, the particular circumstances created by the Covid crisis have shown that the company's EBITDA margin target of 10% at maturity is perfectly feasible with enough scale, thus easing most of the market's concerns about the long-term viability of its business model. Despite the rally, the stock's valuation of 0.9x next year's revenues is still below its IPO multiple of 1.5x. So Westwing may have got off on the wrong foot when it first listed, but business has since caught up substantially and continues to do so as the year draws to an end, so the company is ultimately able to resurrect the forecasts it had issued at the time of its IPO. westwingnow