Sales for the period were EUR15.9m. This result fell short of our estimated figure of EUR23.7m. Gross profit was EUR5.1m, corresponding to a gross margin of 32.1%. This was above estimates of 30%. Operating profit was EUR-0.53m, corresponding to a margin of -3.3%. This was below our estimates of EUR-0.50m or -2.1% operating profit margin.

Sales in Distribution were weaker than we expected and came in at EUR9.2m vs. our estimate of EUR14m with an EBIT of EUR0.2m, i.e., a margin of 3%. This result beat our estimated figure of EUR-0.5m.

Own Brands was weaker than expected, with sales of EUR6.6m and an EBIT of EUR-0.5m.

Sales fell short of our estimated figure of EUR9m, but Ebit came in better than our estimate of EUR-1m. Accessories decreased by 37% Y/Y, while Audio dropped 17%.

The prevailing pessimistic sentiment among retail consumers continues to exert downward pressure on the demand for Strax's core products. While we had anticipated improved sales figures consecutively for Own Brands, unfortunately, both the Accessories and Audio segments have experienced a decline quarter over quarter, with a decrease of 1% for Accessories and a substantial drop of 23% for Audio.

According to Strax's CEO, the anticipated pick-up in sales will be shifted slightly, with a notable increase expected from late 2023 extending into early 2024.

We've previously covered Strax's ongoing restructuring endeavours, and the company is clearly making headway and carrying out its action plan. Earlier in the year, management expected to finalize the divestment of Telecom Lifestyle Fashion in and Health & Wellness, in Q2 2023, but this will likely be deferred to Q3 or Q4 2023. Management is aiming for the two deals to be done before the end of the year.

Moreover, the divestment of 25-33% of Clckr that management has been communicating is still on the table.

Following its strategic plan, Strax secured an investment of EUR10m from ZEBRA Invest GmbH, a German investment firm during the quarter. In exchange, in this deal, ZEBRA will get 50.1% ownership of Strax's European distribution business, valued at MEUR 32.

This transaction will decrease Strax's debt by MEUR 12. After the transaction, ZEBRA will own 50.1% of StraxGmbH, with the remaining 49.9% still owned by STRAX AB. The deal will take effect from 1 July 2023. The investment of MEUR 10 will significantly improve the liquidity of the distribution business, provided all customary closing conditions are met. According to the press release, the European distribution business will continue distributing all STRAX brands in Europe, such as Urbanista, Clckr, and Planet Buddies.

Although this deal will reduce STRAX’s consolidated annual sales and EBIT, it will also reduce its Full-Time Equivalent (FTE) workforce by 105 and operational expenses (OPEX) by 50%. During 2022, Strax’s personnel cost was EUR15.2m (2022 annual report note 3.8). End of June, the number of personnel was evenly split between Distribution and Own Brand, in total 180 people.

Going forward, there will probably be a reduction with c20% from 95 FTE to around 75-80 in Own Bands.

By adjusting the personnel cost and OPEX, the margins will improve and a scaling effect will come into play ramping up profit margins because the cost base will no increase at the same pace as sales.

Although the upcoming massive restructuring of Strax will make financial estimates more challenging, we have revised our projections after the divestment of the Distribution segment.

As we wrote above, we are still waiting for the Health & Wellness segment to be divested. According to our conversation with the management, the divestment will most likely bring in a positive cash inflow to boost Strax's liquidity and working capital.

Our adjustments are taking into account Distribution divestment.

We adjusted our growth projections downward for Own Brands due to sales coming in slower than our estimations this quarter and a weak outlook. We are surprised that the negative sentiment still affects Strax accessories and audio products, but the whole industry is experiencing weak demand.

Our projections for net sales is EUR30m for the full year 2023, including Accessories, Audio, and Health and Wellness.

While the report points to a decrease in demand, the management team has communicated their anticipation of more robust sales pushed forward from the latter half of 2023 until the end of 2023 into 2024.

Using R12m to smooth out fluctuations between quarters, Accessories R12m is down 18.5% compared to Q1 2023 and Audio decreased with 4.2%.

Despite prevailing conditions, the management remains optimistic for the end of 2023, primarily fueled by the execution of novel initiatives and the anticipated launce of new Urbanista products in combination with an increased point of sales for Clckr. The expected key catalysts for growth are with these products in North America. The new Urbanista Malibu speaker will be released before Christmas, adding to sales development in the last quarter of the year. If sales volume increases, the operational margin stands to gain from due to scaling effect.

Our estimated run rate for the coming quarters can be seen above for accessories and audio (R12m). In we anticipate Y/Y growth of 50% to EUR10.6m for Accessories and 56% to EUR12m in Audio next quarter (Q3 2023E)

Own Brand’s gross margin in Q1 2023 was 46.2% and in this quarter 49%. It is clear that if sales take off, Strax can scale the business well. However, the high gross margins in the latest quarter are an effect of currency, better purchasing and lower freight costs. Our projected gross margin in the future is slightly under 40%.

For the remaining Health and Wellness segment, we anticipate FY net sales of EUR3.6m.

With the new estimations, we derive a valuation range of SEK1 (0.6) to SEK5 (6), with a base case of SEK2.50 (2.8) using DCF valuation with a WACC of 13.5%.

Based on our 2023e estimations, Strax trades at an EV/Sales multiple of 1.1, in line with the average of peers.

Sales CAGR 2024e–2027e: 4.5%

Sales CAGR 2028e–2032e: 5.5%

Avg. EBIT margin 2023e–2027e: 5%

Terminal growth: 2%

Terminal EBIT margin: 2%

WACC: 13.5%

Sales CAGR 2024e–2027e: 7%

Sales CAGR 2028e–2032e: 7%

Avg. EBIT margin 2023e–2027e: 4%

Terminal growth: 2%

Terminal EBIT margin: 5%

WACC: 13.5%

Sales CAGR 2024e–2027e: 10%

Sales CAGR 2028e–2032e: 8%

Terminal EBIT margin: 6%

Terminal growth: 2%

Avg. EBIT margin 2028e–2032e: 6%

WACC: 13.5%