Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, and welcome to Organizacion Soriana First Quarter 2022 Earnings Conference Call. With us today is Mr. Rodrigo Benet, CFO of the company; and Ms. Claudia Gonzalez, Head of Investor Relations, who will be together discussing the financial performance of the quarter, along with a summary of the latest news of the company.

[Operator Instructions] Now I will pass the call to Mr. Benet. Go ahead, Mr. Benet. You can begin.

[Rodrigo Córdova, executive]

Thank you very much. Good afternoon, everybody. Thank you for joining us in this conference call. Today with me is also Claudia Gonzalez, Head of Financial Planning Department and Investor Relations. And together, we'll be going through the company's first quarter results of the period.

I would like to begin by sharing the progress that we have had at the company during this quarter, in which I'm really pleased to inform that we continue showing a positive trend in our results even though the economic environment remains very complicated and the challenges that we have created in -- regarding logistics and production costs and imported domestic goods to have ultimately, we continue with this positive trend.

On this matter, we have managed to consult them, thanks to the commitment of the commercial and operational team in benefit to all of our customers by offering them high-quality products at a very competitive rate. These actions, among other initiatives, have results which as such increased for the third quarter in a row, confirming that we are going in the right path. In this way, we closed the first quarter of the year with a 7.2% increasing the same-store sales and a 7.7% increasing the total store sales.

Likewise, at a pro forma level, Soriana Hiper and Soriana Super achieved a very good performance by working with a very aggressive commercial plan, a higher promotional investment and assortment improvements with a regional focus. By this, Soriana Hiper showed a double-digit increase in sales in more than 40% of the state in which has [indiscernible], especially in the [ Vacio ] region of the country and also in the northeast part of Mexico.

Also, Soriana Super delivered a double-digit increase at a total performance, particularly boosted by the perishables and prepared food division, which have a very, very good performance. Regarding Soriana Mercado and Express store format, we continue strengthening in its 4-pillar strategy.

The first one, basic products at the best price. Second, increase the participation of the private label. Third, increase the participation of the loyalty program. And fourth be the winner in all the seasonal promotions. These actions have been strengthening each quarter, resulting in traffic recovery and the client's active participation in our promotion at a regional level.

Likewise, Soriana Express format also reached a double-digit increase in 20% of the states in which we have stores. Regarding City Club, this format maintained a constant growth and continue achieving increases of double-digit in sales in the last 18 months, particularly stores located in 2 states like in Tanaro and Baja California Sur has shown the higher increases of more than 30% in same-store sales, mainly driven by the division of groceries and perishables.

On the other hand and also as one of the strategic pillars of the company, I would like to spend a couple of minutes in private brands that particularly has been playing a very important role in all our store format, gaining participation in the categories where they participate. And even now, 3 of our store formats also show a double-digit participation in those categories. So we are practically sure that the private ranking will be one of the strategic pillars of the future growth of the company.

All these efforts have been very well-received and recognized by our customers. And also we are seeing the first positive consequence of all of our efforts that we have made in the last months. Particularly, we continue and we will continue to focus our low price strategy in Mercado Express that also we believe it will be one of the higher stores, the most important cause of increase in our bids.

Going to the digital part of Soriana and particularly talking about soriana.com and also our new app, I'm pleased also to announce that we reached a double-digit increase in sales compared with the first quarter of 2021, which keeps going as one of our most important strategy. The fundamental part that explain this growth is having a wide and a constant growing product catalog, especially in categories like pharmacy, food, exports, pet items, babies and home division.

Also, we have a special microsite released in our webpage soriana.com that guide our clients through key categories. Also improvements in the first engine was made in order to warranty a faster and a complete and friendly experience. Additionally, we strengthen the platform in order to customize our clients, their shopping experience by suggesting them by artificial intelligence products based on interest, search history and shopping patterns.

In the same way, we know the shopping experience is one of the most important -- sorry, we know that the shopping experience is as important as the delivery time. That is why our personal and the store logistics are an important key for us to implement this efficiency. In this matter, we have developed an applications that allow us to manage delivery service by monitoring and analyzing the delivery times of each order.

All of these efforts require more staff in order to meet the demand. And for this reason, we have increased the staff just for e-commerce in 160%. These actions resulted in a 40% increase in the number of purchase orders in comparison with the first quarter of 2022. All this digital transformation in the online shopping experience will continue through 2022, where all company strength has a loyalty program and also the Falabella card will be available to our clients in and out our physical stores taking these 2 important tools to the website and also to the app.

Going to other income also, the real estate business continued positive, showing an increase of 21.2% in revenues, thanks to a recovery in the traffic in our stores and the most occupancy. Therefore, in this quarter, the company's total income reached MXN 37.4 billion, which represents a 7.7% increase in comparison with the same quarter of last year as we reported in the form that we released today.

This increase is mainly supported by the opening of first unit and also the recovery in the real estate revenues. Talking about the gross profit, this one reached MXN 8.3 billion, which represents a 22.2% margin with an increase of 7.3% in pesos against the same quarter of last year. This positive impact is due to the increase in real estate revenues and also very important improvements in the [indiscernible] management.

Regarding the operating expenses line, it showed a contraction of 20 basis points, reaching MXN 5.5 billion that represent an increase of 6.4%. This increase was mainly due to personnel costs and also an increase in the average cost of the energy mix of the company and a higher investment in the advertising campaign. No matter that we believe that the investment in cost of personnel due to the integration of new personnel to our stores and also the investment in advertising is part of the strategy that is giving results and is driving us to increase also sales.

So more than expense, we believe that it's a very good investment. As a result of all of this, the first quarter EBITDA reached MXN 2.8 billion, equal to a 7.7% margin and an increase of 1.9%. In the financial part, particularly talking about the net financial cost, we closed that item in MXN 520 million that represent an important increase of 8.3%. Going into the future, we will expect to continue making more refinancing of our debt in order to continue achieve more efficiency in the net financial cost of the company.

Talking about debt and basically this quarter we closed the total debt in MXN 15.3 billion, that represents a decrease of 30.5% in comparison with the third quarter last year.

Moving on to discuss about our Falabella business and Sodimac business, let me share with you that particularly in Sodimac, we continue showing a positive performance and a greater acceptance from our clients. For this first quarter, we reached a 40% increase in the total revenues, basically supported for the improvement in the digital business and also in the same-store sales of our physical stores. Likewise, I would like to tell you that right now we are in the process of opening 2 more units in the northeast part of the country with an investment of around MXN 400 million. [indiscernible] will be announced in the following months, and I'm pretty sure that director will continue delivering greater value to our business.

Talking about the financial business in the credit card Falabella Soriana, we also are pretty happy seeing continuous growth in the business. During this quarter, more than 500,000 cards were used. We are right now operating 155 models around the -- all the Soriana Hiper stores. And right now we have 357,000 clients that Soriana have enjoyed in and having access to special promotions in Soriana stores.

At the end of this first quarter, the credit portfolio is equal to MXN 1.9 billion. Finally, let me give you some update about our expansion plan for the year in which we are expecting that in the second quarter, we will open in 2 stores in a combo of City Club and hypermarket. We are also making 2 important remodeling stores. We will optimize also 6 sales flows of 6 hypermarkets that basically with the optimization of that sales floor, we are seeing an opportunity to increase our GLA, taking advantage that the real estate business is start to respond very positive due to the end of the COVID restrictions. And also, even we are analyzing if we can increase in another 4 units the total plan of openings for this year. So I think that all of this is really positive news and basically start to show a change in our trend compared with the last years.

So you can expect that Soriana will start to progressively accelerate the organic growth plan going into the following years.

Basically with this I end our presentation and we can continue to the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] Your first question comes from the line of Bernardo Malpica from Compass Group.

[Bernardo Malpica;Investment Analyst, analyst]

My first question is regarding guidance. Could we have an update on your guidance for 2022 or does it remain unchanged? I mean the 6% same-store sales growth, the aging stores MXN 4 billion in CapEx and 10 basis points EBITDA margin expansion? And my second question is regarding market share. I mean, you continue to lose market share against competitors, but when could we see this tendency turning around? And what are your strategies to change this tendency?

[Rodrigo Córdova, executive]

Sure. Well, regarding the first question, basically no, we are not making any change in the guidance. So it's basically the same that we're releasing at the end of last year. And also regarding the second question, I'm really sure that probably April will be the first month in which we can be obtaining same-store sales higher than the major part of our competitors, particularly in this quarter, as you can see we make shorter the distance against the main competitors that we have all around the country.

As I mentioned in the -- in my first integration in the last 4 quarters, the trend that the company have is really positive, going closer to the performance of the market and to the top performance even of the market. Right now I can say that probably April, we will be surpassing our competitors. So I think that I'm pretty sure that in the second half of the year, you will see Soriana recovering market share from the competitors.

[Operator]

Your next question comes from the line of Rodrigo Alcantara from UBS.

[Rodrigo Alcantara, analyst]

I have 2 quick ones. The first one, if you can repeat, please, at the same-store sales that you reported in City Club and the high performance, also you can comment a bit about the same-store breakdown by region. We have center on Mexico City and all. And that will be my first question. And the second one would be on the comment that you said on the private label.

Just curious if you can share some figures on a consolidated basis like penetration levels, sales growth or perhaps any category that you may say its outstanding regarding private level, consumer packages, any category that you must say its standing within the private level? That would be my 2 questions.

[Rodrigo Córdova, executive]

Sure. Well, first of all, if I understand right, because we have some problems with the audio. Regarding the performance by format and by region, I can say that particularly Soriana Super, that is our format that is focused into the daily consumption products, mainly for re-sales and very basic groceries is the one that is having the best performance, double-digit for the whole quarter.

Also City Club, we are really, really happy about City Club, not only because they show also almost double-digit increase, but also because City Club have basically 3 years in a continued growth all month-by-month in so many of that month growing higher than the market competitors talking about the membership clubs. And actually, right now we are -- this is an important data that probably all of you guys just a note book City Club, at the end of last year, we surpassed the 1 million of members.

And the rate of growth that we have in City Club is double-digit. So -- and obviously for this business, first of all, you have to have more members and then the sales comp. So we are also really proud about the performance of City Club in the last 3 years. Talking about regions, particularly central parts and south part of Mexico, we are having a very, very good performance. Basically all the country, we are seeing a recovery in the trend of our same-store sales.

Probably, we have to say one region that is a little behind the other, it will be the north part of Mexico, which we are particularly increasing our price strategy and the promotional strategy in order to take the north part of Mexico to the same level of central and south part of Mexico. But in general, all the states of the country is showing a good performance. And basically in all the states of the country, we are making closer the distance against our competitors.

I'm going to the second question about private label, part of the strategic initiatives of the company. So you will hear our private label in the next 5, 8 years. It's something -- it's one of the most important bets for the company. Right now, we are also pretty proud about the performance. For this first quarter, the increase is double-digit and is higher than teens. So we are having a very, very important reach in private label.

But if we can maintain this in the long term, we will also not only give us more sales, will also give us more margin and more loyalty. The important thing about private label is particularly that, that the clients only can't find that product in your stores, in the Soriana stores. So it's a way in which also you create loyalty. So private label fit really, really well in the strategy of loyalty of Soriana.

So it's something that you will continue to hear about our strategy that we are increasing private label, that we are making changes -- strategic changes in private label, that we are increasing our department of private label. I mean, it's something that we believe it would be really important going into the future. Right now what I can share is basically the growth that we are having that is -- that will be talking about a bit higher than teens numbers.

If we talk about participation, right now we have a higher single-digit participation of -- as a percentage of the total sales of the company. If we consider this against countries like Europe, you have some stages that the private label represents 20% to 30%. We believe that Mexico has an important opportunity on that.

[Rodrigo Alcantara, analyst]

Interesting. Just to clarify on the same-store that you mentioned in the metro in Mexico City, let's focus that region, traditionally the most competitive one. Just curious I mean, is there -- is it possible to grow there like above inflation or inflation or can you comment about the specific type or metro region, I mean, if you want to like metropolitan region?

[Rodrigo Córdova, executive]

Well, particularly in Mexico City is one of the cities in which we are having one of the best recovery, particularly in Mercado and Soriana Express stores in Mexico City is going really well, also Super Mercado. So no, I can say that Mexico City basically have the same condition that the other parts of the region. And again, if you ask me which is right now the toughest region for Soriana in terms of growth, it is not Mexico City, it's not Mexico.

[Operator]

Your next question comes from the line of Ulises Argote from JPMorgan.

[Ulises Argote Bolio, analyst]

A couple of ones here from my side. So first, obviously there has been a lot of news floating around the last couple of days on the government's plan to kind of start taking actions against high inflation, et cetera. So anything you can comment here around any expectations you have and maybe how you guys can be involved in the program?

[Rodrigo Córdova, executive]

No, I mean it's a matter of the fact that we have an inflation issue in the country. Basically, what I can comment about that is that Soriana is we are planning an important program to maintain the product of the basic growth really low in order to support the Mexican family. So it's something that you will see about in the following weeks, a particular program in order to support to the Mexican economy, talking about that.

And naturally, the private label role in this, it's part of the strategy. One of the ways in which we can give support to maintain a basic grow basket in a very attractive price is used in private label. So again, that is one of the reasons why I mentioned that you will hear a lot about our private label strategy.

Also because we believe that the inflation program will continue, not only this year probably will continue more than 2022, not only in Mexico but globally speaking. So the use of these tools like private label, we can partake it in order to maintain competitiveness and low prices.

[Ulises Argote Bolio, analyst]

Okay. That's very helpful. And then the other question that I had is maybe if you can comment a little bit on how online sales are doing, where are you guys kind of right now in terms of penetration? And if there's kind of any regional difference there where you see one region outperforming or underperforming versus the mean or the rest of the regions?

[Rodrigo Córdova, executive]

Again, also talking about the performance by region, exactly the same happening in the online business. Central and south part of Mexico is having a much better performance than north part of Mexico. Obviously north part of Mexico is growing. The whole business is growing at a double-digit rate. Both central and south part of Mexico is delivering much better results than north part of Mexico.

It's something that we are analyzing very deep why is this happening because we doesn't see any economic reason or market reason to that. So the first conclusion as it's related with something with the operational part of Soriana or the commercial strategy of Soriana, so we are working on that. But the whole business is growing at a double-digit rate. The penetration is still really low. It continue around 2%.

Remember that our short-term goal is taken to the double of that, being more close to 4% in the following years. So still we have a lot of work to do on that. We just released the new version. I mean we have a couple of months a new version of the webpage and also the new version of the product up. Right now we have a couple of weeks that we launched a very aggressive promotional and publicity campaign about selling to the clients that we invite them to download the new app.

And we just start and a strategy to send personalized promotions through e-mail and through the app. So we are expecting that we can accelerate the growth, particularly in the clients that are using the app. The business is going well, but this is still really far away from the levels of penetration that we are looking for, basically that.

[Operator]

[Operator Instructions] Your next question is from Marisol Andrade from Credit Suisse.

[Marisol Andrade, analyst]

I was wondering if you could give us some color on the wage increases that you mentioned, especially in staff increases for home delivery?

[Rodrigo Córdova, executive]

Sorry, Marisol, some color about what? Home delivery?

[Marisol Andrade, analyst]

On wage increases that you mentioned?

[Rodrigo Córdova, executive]

Ah, wage increases. Yes.

[Marisol Andrade, analyst]

Especially, and staff increases for home delivery? Yes.

[Rodrigo Córdova, executive]

Sure. Basically the major part of our increasing the cost of personnel is due to the [ reinforcer ] of the number of personnel that we have in the stores. And also, we have to take in consideration that during the pandemic crisis, particularly last year, we have some problems to have full the personal account in the stores. So we are seeing an opportunity to increase the service that we give to our clients because the lack of personnel.

So it's something that we are really taking care to have the enough amount of people in our stores in order to deliver a better service. Obviously we have some pressure going to the -- going in the personnel cost basically because of the incorporation of the [indiscernible] and the [ reform allowal ] in both the major parts of the increases because we are increased the number of people in the stores, particularly to the e-commerce business, we have a program in which we have dedicated and exclusive personnel just to make the picking to take the orders.

Right now we have around 120 stores that we call specially targeted stores. That are the ones that serve bigger coverage area in order to make the home delivery and particularly direct stores have an increase in the personnel that is exclusive for the home delivery business. So basically that added to the main reasons why we're having an increase in the cost of personnel.

[Operator]

There are no questions over the phone. Presenters, please continue.

[Rodrigo Córdova, executive]

Okay. Well, if we don't have any more questions, just again, thank you very much for joining us on this conference call. And obviously if you have any other question, any other comment, feel free to contact Claudia or to contact directly to me. And again, thank you very much, and have a good week.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.