From over 30 online destinations — including the Bygghemma, Trademax, Chilli and Furniturebox websites — the company offers its customers the broadest product assortment — up to 500,000 references from 2,000 brands — at competitive prices with convenient home delivery and a full range of services from installation to warranties.
Bygghemma was founded in Sweden fifteen years ago as an online provider of DIY products from well-known third-party brands. In the following years, under private equity firm FSN Capital's oversight, significant investments were made to support its market and technological leadership in Scandinavia.
Valued at just over SEK 230bn, the market for home improvement products is the third largest retail category in the region after F&B and fashion. Albeit stagnant in absolute terms, it is characterized by a rapid shift from offline towards online sales, with compound annual growth rate of about 20% in digital vs. 0% in brick-and-mortar.
Yet online penetration remains low compared to other popular retail categories, for instance consumer electronics or apparel. As of today, it accounts for only 15% of the overall DIY and home furnishing markets — BHG's two operating segments — leaving significant leeway for growth to pure players.
In that respect, there is a clear opportunity to capture additional sales and market share for BHG, unlike industry rivals stuck with large brick-and-mortar footprints and punishing fixed costs structures. Besides, the home improvement categories typically yield higher average order values, attractive gross margins, low return rates and negligible risk of inventory obsolescence.
A cross benefit of better gross margins and order values is that the average customer acquisition cost (“CAC”) is typically recovered by BHG as soon as the first order gets recorded. This implies a high customer lifetime value, and an even higher value of returning customers.
In addition, while demand is expected to accelerate, significant barriers to entry exist in the home improvement category. Those are related to achieving scale — through logistics and purchasing power — in addition to developing a large customer base and a mighty IT infrastructure.
All these features justify a premium on the company's valuation versus its peers.
BHG still maintains 80 showrooms, even if sales are predominantly (>85%) made online, with most orders delivered directly from the supplier to the end customer. Thanks to this fulfillment model, plus the fact that the company only stocks popular products with high turnover rates, operations require limited levels of inventory and allow for a strong conversion of earnings to cash-flows.
Its pioneering positioning gave BHG an early edge against traditional brick-and-mortar competitors. Nowadays, the company sports a — still growing — 30% market share across the Nordic region. Last year, the latter translated into almost two million orders and net sales of about SEK 6.2bn. Online visits, mobile engagement and average order value all continued to develop well.
Sweden accounts for roughly 45% of consolidated revenue, Denmark for 20%, Finland and Norway for 15%. Sales in Eastern Europe — thus far the only foreign markets addressed — represent only 10% of revenue, but grew at 70% last year. Absent Ikea, obviously a formidable competitor in every respect, few rivals can match BHG's scale and offering.
The latter was built through an aggressive M&A strategy, with multiples takeovers to expand into new categories — for instance bathroom, flooring and garden machinery — and geographies. Stable margins and strong organic growth — typically comprised between 10% and 15% — are a testament to management's ability at successfully integrating acquired companies
Proprietary brands account for roughly 45% of sales. The pursuit of its M&A agenda should lead the company to increasing the share of sales from these brands. Of course, such transition carries significant risks if those owned-and-operated brands failed to win consumers. Higher marketing expenses may also be required to keep up with peers.
Earnings-wise, as written above, the direct fulfillment model enables an almost unlimited product assortment and negative net working capital — as the customer typically pays for the order at checkout, whereas BHG pays the supplier afterwards. The company’s warehouses are operated by third parties who primarily stock a limited number of high-volume products, while returns and guarantee issues are typically handled by suppliers.
Returns on M&A investments have been satisfactory, with free cash-flows — a better yardstick of true profitability since hefty amortization expenses depress IFRS earnings — growing fivefold between 2015 and 2019, from SEK 60mil to 300mil, out of SEK 1.3bn spent on acquisitions. Albeit it's hard to separate organic from acquisition-driven growth, results show and support management's strategy.
In 2018, private equity groups FSN Capital and EQT — which jointly own 49% of equity capital — initiated a partial IPO to deleverage the balance sheet. Further equity issues seem likely given the still weighty debt load, currently standing at about x3 adjusted EBITDA. For investors keen on investing in the company, watching at what price those new shares will sell should prove insightful.