Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon and welcome to Organización Soriana's Second Quarter 2020 Earnings Conference Call. With us today is Mr. Rodrigo Benet, Chief Financial Officer; and Ms. Claudia González, Head of Investor Relations, who will be 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.

[Rodrigo Córdova, executive]

Good afternoon, everybody. Thank you for joining us in this conference call. As we already mentioned today with me is Claudia González, Head of Financial Planning and Investor Relations. And today we will be going through the company's quarterly results that we published just a few moments ago. And as always, at the end of [ presentation ], there will be a Q&A session.

As you already know, we have been living a completely atypical situation in this first half of the year, which has resulted with some ups and downs in the operation of our stores. However, we have been facing them in the best possible way, seeking, as always -- looking for the [indiscernible] expectations for our clients and for the company. In the second quarter of the year, we have continued operating our stores by following the sanitary measures established by the different authorities. We have reached a total revenues of MXN 39.6 billion, which represents a 1.4% increase and a 2.6% growth in same-store sales. Despite this moderate increase, in the Soriana stores that are mainly focused in basic products, such as groceries and perishables, we continue with a great performance. As an example is our Soriana Super Store format that has shown increases up to 20% in different cities where it has an important presence, managing to triple the company's same-store sales results and closing the second quarter with our same-store sales in high single digit, which is the result of the sales mix of its categories having a catalog made of 85% of items from Food divisions, where the average ticket has shown an increase of 40%.

Something similar happens with Express format, also with the same-store sales in high single digit. In both cases is due to minor dependence in the nonfood departments, such as clothing and general merchandise, where the bigger negative impact is showed during discontinued [indiscernible].

Of course, and regarding our hypermarket. Hypermarket store format that is the biggest one, the results of the integrated stores from Comercial has shown higher increases compared to the other stores, particularly in Central Mexico and Mexico City, which makes clearly evident that their incorporation to the Soriana supply and commercial platforms was correct and starts to positively recover the sales level that we were lost from past quarters.

On this matter, and as we informed early in the report provision, the growth of revenues and more particularly at an EBITDA level was considerably affected due to the support that we give to our lessors from our commercial premises, understanding the seriousness of the expectation to their operation, for which combination of up to 2 months of the rental obligation was made depending on the particular circumstance of each case.

Excluding this particular effect, the EBITDA line will have shown a low single digit increase in comparison with the same period of last year. In this sense, it's also important to point out that we are expecting a similar effect in the third quarter, since the impact of our results will also have to record in that period, particularly in July.

Following with the analysis of the elements that had a negative impact in our own income and in the other side, it is worth to point out the good performance shown by our e-commerce business unit where the home delivery service under the name Super en tu Casa had a triple-digit increase of 609% and an increase of 1,124% in the number of orders. Also, this service expanded its cover stores and it's currently offered in all of our stores across the country in order to support our customers in these moments of contingencies.

In the same line, the soriana.com platform that is mainly focused in high-ticket items, in e-commerce, also reached a triple-digit increase of 146% in sales in comparison with the last second quarter and a 208% increase in the number of orders. In addition, we continue to work in expanding the catalog products as well as strengthen our web page in order to make it more ideal, friendly and secure.

On the other hand, and as one of the most important elements of our commercial strategy for this quarter, and I'm talking about Julio Regalado campaign that started last month of June and has shown a positive performance, despite the complication that we experienced during this year implementation, such as the necessity to control and avoid big crowds at the stores to some preventive measures, such as assure sanitary filters in the store entrance, limiting customer capacity based on the store size and also enforcing social distancing in key waiting points that obviously have an impact in the promotion.

In addition of the aforementioned, it's necessary to understand that the important loss of jobs that our country is currently facing and the deterioration of the consumer confidence affected the promotion performance considering that its nature is a big volume offering through commercial strategies like 2x1 and 3x2, which have to be modified to direct discounts or other promotion schemes that will adjust better to the economic reality that we are facing, would mean a comparative disadvantage in comparison with the last year's strategy.

Likewise, we have seen an important change in the consumption trends of our customers. But despite of being in one of the most defensive sectors of the economy, they also start to suffer the effects of the economic slowdown, of sudden important changes in the sales mix participation among the divisions such as clothing and general merchandise, which are highly affected and with a double-digit increase in the division in groceries, fresh produce and pharmacy, which also implies a change in the sales margin of our typical basket.

This effect, together with the affectation in the income coming from our commercial premises, had a negative impact in the gross margin of the quarter. Basically, these 2 reasons explain 100% of the decrease in the gross margin.

Going to the operating expenses line, and as we have discussed in the previous quarter and even since last year, we have been consistently working in the expense control in all the areas of the company, optimizing spaces, resources and services that allow us to reduce the economic slowdown. And even to -- we have invested in extraordinary expenses. Due to the contingency, we were able to compensate them with important savings and better negotiation conditions. In this way, the operating expenses of the quarter reached MXN 5.5 billion, which represent an increase of only 1.1% in comparison with the same period of last year. As a result of this variation, the EBITDA of the second quarter of the year closed at MXN 2.8 billion, which represent a 5.2% decrease in comparison with last year. During this quarter, also we continue making process in the adoption of the working process and methodology regarding our strategy alliance with dunnhumby, which have -- will allow us to be a more client-centric company.

To mention just a few, in this quarter, we have obtained tangible results through 2 main activities. The first one consisted in modifying the assortment of our products in order to adjust to the changes and needs of our customers based on the sanitary contingency situation and the economy. This allowed us to remove the products with minor sales that have a product substitute. So even though we have more reduced catalog, our sales are not being affected by this matter.

The second activity consisted -- significantly improved the collaboration that we are having with the suppliers that are already participating with dunnhumby, which has allowed us to have a better focus and create synergies that mean to impact in a positive way, the categories that we have already worked with them.

In addition to those activities, we have been data mining the Programa Recompensas, our loyalty program with PAYBACK with the purpose of identifying the clients that have reduced their visit to the stores during this period, so we can motivate them with special promotions and encourage them to come back to the stores. This initiative provoked in the month of June a sales record growth in pesos and [indiscernible] specific segment of clients represent from the total sales. We truly believe that this alliance with PAYBACK and with dunnhumby will be delivering very good results in the short term.

Another important initiative launched in the past month of April, this matter was the [indiscernible] Mexico program, which runs through the Recompensas loyalty card, and its objective is to reward with additional promotion and discounts to the health care professionals that tirelessly work for all the community. These clients raised their shopping ticket in 42% during the quarter in comparison with the same period of last year.

In addition to all of these efforts, it's also worth to point out the progress that we have with the inventory reduction at the close of the quarter, when even with the high levels of inventory that is required for the Julio Regalado season, we could make a solid commercial and operational strategy of inventory management, not only in our stores but also in the supply chain, where a MXN 3.3 billion reduction was achieved in this matter during the quarter.

At this rate, we feel that soon we will achieve a positive benefit in the working capital coming from the reduction of the inventory level. Likewise, during the quarter, we limited the cash flow designated to the CapEx of the company by postponing the organic expansion or investments that are not a priority for this moment and limited to only those expenses related to the right of operation -- to the right operation of our stores and the distribution centers. With these measures, we estimate to close the year spending only 50% of the amount that was initially projected, and that resources we'll use it in the accelerated payment of the debt.

Finally, regarding the number of stores in operation. The quarter closed with 801 units, mainly as a result of 5 stores transferred and sold to Chedraui as part of the group of units from the COFECE disinvestment process.

Basically, with this, I end with my [ presentation ], and we can go to the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] Your first question comes from the line of Antonio Hernández.

[Antonio Hernández Vélez Leija, analyst]

My question was regarding gross profit. You mentioned the effect of company lessors and the support that you've been providing and also the effect of sales mix. Could you maybe give a little bit of a breakdown on where could we see more of an impact?

[Rodrigo Córdova, executive]

Yes. Basically, the decrease in the gross margin that you see in the quarter, we could say that 90% is coming from the support that we give to our small premises that we make the decision of the payment of rent for 2 months, and 10% of the decrease is coming from the change in the sales mix. But to be honest, particularly the big impact in this quarter is coming from the real estate business. That just to make an important reminder the real estate business for Soriana represent like 1.8% of the sales, both like 17% of the EBITDA of the company. So it's really relevant.

[Antonio Hernández Vélez Leija, analyst]

Perfect. And just a follow-up, you also mentioned, just to make sure that you expect same -- a similar impact for the third quarter, right, in terms of your real estate?

[Rodrigo Córdova, executive]

Yes. Basically, we can say that half of the impact was registered in the month of June, and the other half of the impact will be registered in the month of July.

[Operator]

Your next question comes from the line of Irma from Goldman Sachs.

[Irma Sgarz, analyst]

Was just curious if you could dig more -- 2 questions a little bit more. When you think about the environment that you're facing into the second half of the year, how should we think about how you sort of think about not just sales mix then playing out from here, but also the promotional strategy that you have to adopt? I think you alluded a little bit to it when you mentioned, for example, that how purchases [indiscernible] paying attention to what's happening in terms of purchasing power at the [indiscernible] level. But just curious to hear a little bit how are you thinking about planning for the next -- for the current quarter as well as [indiscernible] important year and [indiscernible] difficult environment lasting through year-end.

And second question, just if you just can shed a little bit more light on when your -- when you talk about the home delivery, how many stores do you now have enabled from -- to fulfill home delivery orders from the stores? Can you give us an update there? And how are you running the logistics at the moment and if you -- have you run into any bottlenecks? I'm sorry if I missed any comments that you had in the very 3 minutes of the call because I missed it.

[Rodrigo Córdova, executive]

Sure, Irma. I will try to answer your question because we have some noise in the line. But if I understand right about your first question, talking about the Q2 performance of the company, in the second half, particularly since we believe that June and July will be probably the most complicated for the company in the comparative base against last year, mainly because of 2 reasons.

First of all, because they are the 2 months in which we will be registering the impact of the support that we give to our local small premises in the business. That is an important hit. And second one, because we have a completely unfair comparison with Julio Regalado. We have to understand that basically Julio Regalado campaign is a campaign that works very well in a economic environment that have to be positive, mainly because, as I mentioned, it's nature of Julio Regalado is a volume campaign. It's a campaign that gives very good promotions to the clients, who are required to buy 2 articles, 3 articles. That obviously, that has a very positive impact in the number of articles and in the sales in pesos that we have.

So when you compare this Julio Regalado situation in which, first of all, the people doesn't want to go to the stores in order to avoid the crowd and Julio Regalado, by its nature, you have seen the focus in the last 3 years. I mean it's a promotion that create a lot of crowds inside the stores. So operate Julio Regalado in the middle of the contingency was really, really difficult because in several states even we have to be limited by law the number of people that have to be inside the store. In some other municipalities, we have to limit the number of people that are entering by hours. So what's not -- obviously, the best environment to develop a campaign that, again, it's a volume campaign and a crowds of people campaign in the middle of the contingency.

And on the other hand, obviously, because at least at the end of June, the country officially lost more than 1 million of employees and probably unofficially is the double. So it's difficult to develop a campaign of volume in the middle of this economical situation. Obviously, we made changes -- important changes in the commercial strategy. We changed a lot of the promotions of 3x2 and 2x1 for the web discounts. But for sure, we have an important impact. And again, the comparison base is really difficult. Actually, what we are seeing -- when we see the weekly performance in Julio Regalado of 2019 versus 2020 is that when you see 2019 was like a very normal-sized line, just a flat line every week. And in 2020, we see important ups and downs, depending if it's a week of payment. And particularly, if it's a week of payment in Saturday, the performance is really good, and the promotion of Julio Regalado in a nonpayment week is very low and have decreased against last year.

So making a resume or a consolidation in my comments. Basically, I think that June and July because of 2 reasons, the comparative with Julio Regalado and the impact from the real estate business were probably the most difficult of the year. We are seeing positive trends. Again, we are seeing that all the food business that represents 68% of the business of Soriana, our mix of sales is basically 68% food and the rest is nonfood, we are seeing increases of 7%, 8%, actually, again, the supermarket business had an increase of 9%, Express format had an increase of 7%. And the hypermarket business, particularly in the part of food departments, have a high single-digit increase, from we have a terrible performance we see in nonfood, basically in general merchandise and clothes. So what we believe is that the following months, one that we end with July, it will be a little more easy and the comparison basis will not be so hard.

Also, we are seeing very positive for this happening, and I enter to the second question in the e-commerce. And I want to talk about e-commerce in 2 different ways. First of all, talking about just the home delivery service. And I'm talking with this, only the sales of food and very basic things delivered to the home. On that -- with that said, the increase is incredible. I mean, it's more than 1,000% increase that we have. We passed to offer in the second quarter of 2019, Irma. We used to have the service in 84 stores in the company. Right now, we have the service in practically all the stores, 756 stores. And something that is really, really amazing is that even the Soriana Express format is growing huge in home delivery. Obviously, the ticket is not the same level. In the past, the normal ticket in servicio a domicilio, home delivery, used to be like MXN 1,200. The ticket in home delivery in the Express and Mercado format is like MXN 500. That is the half but is 4x the ticket in the store, that is around MXN 160, MXN 170. So we feel really, really positive with this. We grow very fast our capacities. Again, all the stores are practically offering the service. We also incorporate the pickup service in all the stores of the company. We signed an agreement with Rappi, we do the [ lead ] with Cornershop. So basically, we are in all the platforms offering the service.

We also growth in more than 600% our call center. Also, all the stores have a cellular, a mobile phone that received directly from the local clients, that are purchasing their orders. Also, we have the service by WhatsApp. So I mean we are facing a change that is happening really, really fast, but we are happy with that.

And the second avenue in the e-commerce business is soriana.com, that is focused not in the home delivery of basic products, it's more focusing in the sales of TVs, the sales of watches, even perfumes. I mean the soriana.com platform offer very high-ticket items that actually -- the catalog product that we have in soriana.com is just for soriana.com. It's something that we doesn't have in the stores by obvious efficiency in the inventory levels that are not growing at the same pace that the servicio a domicilio, the home delivery, what is growing really, really good. I mean at levels of BBB is more than 150% and have a very important performance in the ticket in soriana.com. The average ticket is close to MXN 3,000.

So we feel also really, really comfortable with that. And like an example, in the quarterly results, we have an increase of 200% to 208% in the number of orders in soriana.com. So it's very obvious that all the electronic business is growing really, really healthy. Probably in this quarter, we grow more than what we expect in the 3 years -- in the next 3 years. So we are adapting to this new reality.

[Operator]

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

[Ulises Argote Bolio, analyst]

Two quick questions from my side. One, can you talk a little bit about performance of your stores kind of on a regional basis, maybe contrast what you're seeing in the north of Mexico versus the center of Mexico? And then the second one, just a clarification on data point that you provided earlier. The income from the leases and rental of the stores is you said 2% of the top line and 17%, 1 7%, of EBITDA?

[Rodrigo Córdova, executive]

Yes. Well, the second question is mall leases. Yes, it's like 1.8% of the sales and 1 7, 17%, around 17% of the EBITDA. It's a business that is really, really profitable with margins of 80%, more or less 80%. And regarding the first question about the performance by region. We could say there are 2 important things to point out on that. Basically, we can say -- or 3. We have 3 different performance: The standalone stores; the tourist and beach stores, let me say it in that way; and the stores that are inside our commercial shopping center, a big commercial shopping center that is not a Soriana mall.

The standalone stores and the ones that are surrounded by a Soriana shopping mall that is basic, are not fashion malls, are just basic malls, the performance is really good, basically all around the country. The stores that are particularly located in the -- next to the beach or tourist places, the performance is really weak. And finally, the stores that are inside a very big shopping mall is like in the middle, are the ones that in the past used to have the benefit of the traffic generated by the other commercial premises, and right now, only have the organic traffic, let me put it on that way.

So we can say that we have that 3 different kind of performance talking about different geographics because basically we compare North to Central Mexico, the performance is practically the same, is very similar. Probably the south part of Mexico has not a solid, strong performance, but is the region of -- in our portfolio that have the small weight in our mix of sales. And in general, it's not going -- but I see more difference when I analyze stores that are located in a tourist place than by any kind of region. And obviously, the main difference when -- that we see when we make assume in our sales performance, more than a regional difference is a category difference in which basically all the stores no matter the geographic, like an example, in the super format, no matter the supermarket that we have in Mérida that is an important city for supermarket for Soriana, all the Peninsula of Yucatan or the Peninsula of Baja of California, that we also have Tijuana that we have also an important concentration of Soriana Super in both regions, that is north and south, the performance is really, really good, it's high single digit. But again because it's a format focus in food items.

[Operator]

[Operator Instructions] Your next question comes from the line of Andrés Ortiz of Crédit Suisse.

[Andrés Ortiz, analyst]

I have 2 questions actually. The first one is could you help us quantify how much revenues were lost due to these rent waivers that you gave to -- in your shopping malls? And the second one, if you could comment on how consumption -- how was the consumption evolution throughout the quarter? It appears that well, you ended the first quarter with roughly 11% in terms of sales and ended now just about 2%. So if you could just give us a sense of how you experienced this deceleration in consumption? And how does it impact -- was it impacted by the Julio Regalado campaign?

[Rodrigo Córdova, executive]

Sure. Let me try to give you more visibility on this about the performance, talking about your last question. Basically, you're right. We were coming from very good same-store sales trend. May and April was really good. And basically, June is the one that made the downside in the quarter. And again, basically, this is happening because the comparison with last year with Julio Regalado. And particularly because we already start to see in June an important decrease in the sales in clothes and general merchandise. Just to give you a little more of color on this.

We see -- we can say that the company is divided in 4 important categories: General, clothes merchandise, groceries and fresh products. Fresh and groceries is like 68% of the company and clothes and general merchandise is the rest of the company. In groceries, the growth in the company is like 9%. In fresh product, it's higher than that. In the other side, the decrease in clothes and general merchandise is a double-digit decrease. So that is what is happening right now, and that is the problem that we are facing up. I think that once that we pass the very different comparison of Julio Regalado, the important increase that we are seeing in the 68% of the company that represent groceries and fresh products and some specific commercial strategy that we are planning to -- and we are developing for promote clothes and general merchandise and something that we are doing with the Falabella credit card in order to promote the sales, et cetera. I think that we can, in the following month, once that we pass Julio Regalado comparison, we can come back again to same-store sales of mid-single-digit because, again, we are seeing very good performance in the 70% of the company. And the other important thing, again, is regarding

[Audio Gap]

question is that June and July are the months that we will basically have the impact in the EBITDA. And the impact is substantially not in the top line because, again, the real estate business represents a little in the top line, but a lot and more important percentage in [indiscernible]. Just to give you a sense, if I exclude the effect, just the effect of the real estate impact in this quarter, probably the growth of the EBITDA of the company, it will be low single digit. So the impact is relevant.

[Andrés Ortiz, analyst]

Understood. And just...

[Rodrigo Córdova, executive]

Sorry, just to -- the positive thing about this is that it's just an impact in June and July. And what we are seeing is that a difference against other shopping malls or fashion malls that belongs to other companies or is shopping with our partners that uses mall premises inside our malls is that the recovery of their business have been much more quicker than the recovery of just, let me say, haircut boutique in a fashion mall. Why? Because the traffic in the big malls, the power centers, the fashion malls, the recovery of traffic on that kind of malls is very low. And the recovery of the traffic in our malls is very high because 70%, 80% of the traffic is provoked by the supermarket that we never close and is a natural generator of traffic.

So we believe and we take this decision to support our partners in the real estate business, mainly because makes more sense, give a support of 2 months and avoid that these guys have to go to bankruptcy or close their business and right now continues. So what is happening is that, first of all, the relationship with these guys is stronger. These guys are really, really glad with Soriana, and we -- and appreciate a lot. Obviously, we avoid the loss of massive jobs in the country. And right now, we are seeing a recovery in the traffic, and these guys, again, are -- continue opening. Actually, if we see, which is the rate of occupancy of our real estate business, right now, at the end of the quarter is 92% in the middle of a crisis. So it's really high and obviously, have a cost, but we are completely sure that was the right decision, give support to these guys.

[Andrés Ortiz, analyst]

Understood. Just a quick follow-up. You said that in July, we should see another impact regarding the real estate business. Should we expect something similar to this quarter? Or should be for lower -- see the account for lower -- for fewer months?

[Rodrigo Córdova, executive]

No, no, no. Actually, just to be clear on that, when I say that we will see the same impact is that the -- particularly the impact of the real estate business that we register in June, will be also registered in July. But the third quarter, we will have better performance because the third quarter is July, August and September, and we expect to have a much easy comparison and better performance in all sense in the other 2 months.

[Operator]

Your next question comes from the line of Valentín Mendoza of Banorte.

[Valentín III Mendoza Balderas, analyst]

I have a couple of them. The first one is a follow-up on the color you just provided us on the performance based on the format of the story. Whether there's standalone or [indiscernible] inside a shopping mall. However, I was wondering if you just could provide us a little bit more ease, perhaps, a breakdown of how much is your exposure in the concentration of your stores by different formats, so we can assess how much of the impact came from this performance. And the second one is regarding Julio Regalado's campaign. I was wondering if you could give us a sense of how this campaign underperforming vis-à-vis the previous year.

[Rodrigo Córdova, executive]

Sure. Just give me a second. Well, first of all, talking about the weight of each of the formats. Particularly, and as you already know, hypermarket is the most important format for the company. It's a format that have the biggest impact because hypermarket is the one that have the biggest percentage of clothes and general merchandise. Hypermarket, if I remember, only is like 60% of the company, following by Mercado, then Soriana Super, and finally, Express and City Club that have a very similar participation. That actually, although I don't talk a lot about City Club, but City Club probably the last 20 months continue with an important performance, a positive performance. But again, basically, City Club is more focusing in high-income families that doesn't suffer the crisis in the same way than the general of the population.

And talking about the performance, particularly of Julio Regalado that you asked, was really difficult. Actually, let me give you some color. If we divide the sales of, like an example, June, that is the first month of the Julio Regalado campaign between the sales coming from the promotional activity and the sales of the categories that are not part of the promotional activity. Let me give you this inside information.

If we take like an example of hypermarket, we can say that the promotions of Julio Regalado campaign have a decrease of more or less in some cases high single digits to double digits in the performance of the Julio Regalado's promotions. That, again, basically, this is related because when you are going against a positive economy environment, in promotion at 3x2, the performance is really different. But in the same hypermarket, if we see the performance in June of the categories or the articles that are not under the promotion of Julio Regalado, had a growth of 19%. So what I want to say is that the people is coming back again to Soriana. Actually, the stores of Comercial Mexicana have an important recovery that we have talked about this that Comercial Mexicana had a lack in performance against the Soriana stores. Right now, the stores of Comercial Mexicana in Central Mexico are the ones with the best performance, and the increases in the basic categories are really positive. But obviously, the people right now is more difficult to buy 3 shampoos because a lot of that people lose their jobs or doesn't have a clear vision about the future. So it's a promotion that is difficult to operate in an economical situation like the one that we are living.

And the same figure again, also in the supermarket format that the supermarket formats have a same-store sales again -- that we already mentioned of 9%. No matter that's had a huge performance where we see the promotions of Julio Regalado specific articles have a decrease of double digit, a teen double-digit decrease. But when we see the performance of the non-Julio Regalado articles that doesn't require a 3x2 promotion, it's an increase of 22%. So in this case, and obviously, it's not something that we feel comfortable with that, but it's a reality, is that the comparison is really difficult. Because, again, Julio Regalado is a volume campaign, and it's difficult to implement a volume campaign in the middle of an economical and as an entire crisis because also even in some stores, if we have a crowd of people, just the authority closed the store. So we cannot perform of Julio Regalado.

[Operator]

There are no further questions from the phone line. Presenters, you may continue.

[Rodrigo Córdova, executive]

Okay. If there is no more questions, I really appreciate, like every quarter, your time to be with us. Have a great weekend, and take care of your families. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.