Organizacion Soriana SAB de CV
BMV:SORIANAB
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Organizacion Soriana SAB de CV
Earnings Call Analysis
Q2-2024 Analysis
Organizacion Soriana SAB de CV
Organización Soriana reported a moderate revenue increase of 1.5% year-over-year, reaching MXN 45 billion. This growth primarily came from an increase in same-store sales of 0.8%, alongside the net effect of 10 new store openings and 3 closures. Despite these changes, the overall performance emphasizes a strategic pivot towards customer attraction amid competitive pressures.
The company's newly launched summer campaign, Julio Regalado, introduced an innovative 4x2 promotion across various product categories such as wine and cosmetics. This aggressive marketing tactic aims to reposition Soriana in the market and address increasing competition, especially as competitors have rapidly responded with similar offerings.
Investments in digital channels are yielding positive results, with the Soriana App experiencing a 21% increase in sales and a staggering 34% growth in the number of orders. This growth reinforces the importance of digital strategies in enhancing customer engagement and sales performance.
The gross profit for the quarter stood at MXN 10.4 billion, equating to a gross margin of 23.3%, an increase of 7.9% compared to the prior year. This growth is largely attributed to improved supplier negotiations during the Julio Regalado campaign. However, operating expenses surged by 9.7%, primarily due to personnel cost increases and higher advertising expenditures.
The real estate sector flourished, achieving a 90% occupancy rate, which contributed significantly to overall EBITDA. Simultaneously, partnerships such as that with Nubank have enhanced financial services, amassing over 750,000 active cardholders and growing the financial portfolio by 25% year-over-year. This diversification strategy is poised to bolster future revenue streams.
Looking forward, the company anticipates fierce competition continuing through the latter half of the year. Despite these challenges, Soriana aims to maintain a healthy gross margin and build brand perception without sacrificing quality or service levels. The expansion in store formats and continued investment in promotions should provide the impetus for reversing the recent trend of slower same-store sales growth.
In the first half of the year, a significant CapEx investment of MXN 3.6 billion was made for store openings and renovations. This commitment underscores Soriana's strategic focus on long-term growth rather than short-term results. Continued manpower investments and operational improvements are expected to enhance service levels, critical for gaining back customer loyalty.
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Good afternoon, everyone. Welcome to Organización Soriana's Second Quarter 2024 Earnings Conference Call.
With us today are Mr. Rodrigo Benet Cordova, CFO of Organización Soriana; and Ms. Claudia González Romero, Head of Investor Relations for Organización Soriana. Together, they will be discussing the financial performance for the second quarter of 2024 and providing you a summary of the latest news on the company. [Operator Instructions]
Please note that the conference call may be recorded.
I will now turn the conference over to Mr. Rodrigo Benet Cordova, CFO of Organización Soriana. Please go ahead.
Thank you very much. Good afternoon, everyone, and thank you for joining us in this conference call regarding the financial results of the second quarter.
Starting with the top line of our income statement. The company's total revenues increased 1.5% versus the same period from last year, reaching MXN 45 billion, basically derived from a same-store sales of 0.8%, a 1.6% increase in total sales, as well as the net effect of 10 store openings and 3 closures. Those closures were stores in the end of the leasing period, but it's worth to mention there are other Soriana stores in the surrounding area that can cover the sales perfectly. Also by 2 store conversions that were executed in the states of Campeche and Veracruz. All of this in the last 12 months.
As you already know, during the last week of May, we started our emblematic summer campaign of Julio Regalado. This year particularly, we offer new innovative promotion where I can highlight the promotion of 4x2 in several categories, such as wine, personal care, pharmacy, cosmetics, cereals, among others. This aggressive promotion was a response for the aggressive reaction that the market has had to our promotions in the last couple of years.
Also, as a part of the main strategy of the company and moving along on our private label renovation process, I'm glad to share with you that we are moving forward in this strategy where to this day, we have fully renovated hundreds of SKUs and displays in our shelves with a new image design and quality for all the divisions. Regarding the performance of the private label of our membership club, City Club, also it continued showing double-digit increase in sales.
Talking about the performance by region. We can outstand the performance in the states of Mexico: Oaxaca, Veracruz and Yucatan for the hypermarket store. For the supermarket format, we can highlight the results that we observed in the states of Nayarit, Baja California and Colin. On the other hand, we have very important opportunities in the states of Durango and Chihuahua that are part of the states that are showing the less attractive performance.
Also, as a part of the main strategies of the company, I'm talking about the future, I want to share with you a couple of things about the digital business, about what I'm very glad to share with you that we continue serving positive performance and client gaining through the Soriana App since important investments have been made to this channel. As a consequence of these improvements and preference of the client, this quarter, we can highlight the increase of the channel in 21% in sales and 34% growth in number of orders.
Also, I'm trying to cover all the business of the company. Talking about the real estate business, we can say that this quarter, this business showed a gain of 4.9 percentage points in the occupancy rate, basically taking the company to occupancy rate of 90%.
Continue with the gross profit. This quarter, we reached MXN 10.4 billion, which represents a gross margin of 23.3% as an increase of 7.9% against last year as a result of better negotiation with the supply chain regarding the Julio Regalado campaign.
Going in the P&L, the operating expense line show an increase of 9.7% versus last year, reaching MXN 7.3 billion, which represent a 16.3% over the sales. Basically, this increase in the operational expense is attributable mostly to the cost of personnel derived from improving the coverage of vacancy and salary increment, and then the net effect of the new stores and the closures as well as a higher expenditure in the net cost of advertising campaign.
As a consequence of the above just mentioned, the company's EBITDA for the quarter reached MXN 3.1 billion, which represents a 7% margin and an increase of 1.5% compared to the second quarter of last year.
Going down in the P&L and regarding the financial items, the net financial cost reached MXN 785 million, showing a 12% growth due to a net effect basically obtained by the increase of the financial projects and also by an increase in the financial expenses. Basically, the debt increase is caused principally to finance the CapEx and the growth for the whole year. Finally, the net income for the quarter reached MXN 725 billion, which equals to 1.6% of the sales.
Moving on to talk about the progress made with our partner, Falabella, this quarter, Sodimac, our home improvement format, opened 1 store here in Monterrey, reaching 14 stores in operation in 8 states of the country. On the other hand, the financial business with Falabella keeps growing. At the close of this quarter, more than 750,000 active cardholders are part of our portfolio that operates more than 100 models in our stores and reaching a portfolio, a great portfolio higher than MXN 4.4 billion. That basically represents an increase of 25% compared to the same quarter of last year.
Finally, as an update of our expansion plan and investment in the CapEx, we have made an investment of MXN 3.6 billion in this first semester of the year, mainly in store remodeling, maintenance and the opening of 5 stores in the state of Baja California Norte, Coahuila, Chihuahua and Nuevo León, which contribute expanding the sales floor of the company in more than 23,000 square meters.
Furthermore, we hope that this information has been of your interest, and now we can continue to the Q&A session. Thank you very much.
[Operator Instructions] The first question is from Mr. Alejandro Fuchs from Itau BBA.
Very quick one from my side. I also wanted to talk about semester sales. I wanted to see if you saw maybe a more competitive environment this quarter and what your expectations are for the second half of the year? Any color that you can give us is appreciated.
Alejandro, it's nice to hear you. Well, yes, as I mentioned in this introduction of the call, basically as a matter of fact, we have to make important changes in Julio Regalado campaign like the new Relocos products, los precios Relocos, and also the 4x2 promotion, mainly because the aggressiveness of the competitors is really high. And actually, I mean, you, as a client, for sure you see in other competitors basically copy exactly the same promotion of 3x2.
So it's a matter of the fact that we have to be more creative and more innovative. And we have to have a new value proposition for Julio Regalado. It's part of the things that we try with this new Relocos prices and the 4x2 promotion. That is the first time that we launched that promotion, not only Soriana, but basically in the country. The 4x2 was something completely new that give good results.
But yes, we are having troubles facing the competition is really, really aggressive. That is the reason why we are also changing the typical strategies of Julio Regalado. And for the following months, we believe that this will continue. For sure, the sensitiveness of the client for the price is really high. So we have to maintain the competitiveness at the top of the priorities of the company. Still, we have important seasons to -- in the coming months. Right now, we are really preparing a strong back-to-school campaign, and then we will have the Buen Fin and the December campaign, the Christmas season. So there are still very important seasons to face up in the following months, and we have to increase our competitiveness.
Maybe if I could just follow up very quickly with another one. I wanted to see if you can walk us through how the partnership with Nubank is going this quarter. If there's any relevant news that you can share or any color will also be very helpful.
Sure. Well, basically, obviously, Nubank is a very important name mainly because the growth that it's having in Mexico, and we are really, really happy to have this partnership with them. In general, not only with Nubank, Soriana, as part of the strategy, wants to be a store and a point of solution for the client. So if you go to our stores, you will find that the portfolio of services that right now we can offer to the client is probably the biggest in the self-service format, in the servicio.
We perfectly know that right now, for the client, it's important to save time. We want to make very efficient every time that they go to the stores. That is why we are making this kind of partnership that we can say that right now, we have more than 500 different services or banking services that you can do in our cashier lines, particularly with Nubank, obviously because the amount of credit holders and debit holders that have Nubank is really, really important. We are really happy with them. Right now, we believe that we are giving a very important service to all the clients of Soriana and Nubank clients with the 2 services that we are offering right now. And the idea is that in the following months, we will continue increasing the portfolio of service with Nubank but also with other strategic partners.
Our next question is from Ms. Irma Sgarz from Goldman Sachs.
One question I had, just as a follow-up, very helpful what you said about the competitive environment in Mexico and how you're reacting to it. But I was also curious if sort of from a consumer standpoint, you made a comment that the consumer is sort of -- is showing elasticity to prices. Would you also, when you sort of think into the back half of the year, do you foresee a potentially more difficult demand environment, given that we're coming sort of off the election cycle? Or you're not necessarily seeing this? I was just curious sort of how you're planning when you think about promotions, et cetera. And maybe even what you've seen along the second quarter, whether that gives you reason to believe that we have a potential slowdown in consumer demand ahead or not?
And then the second question was on the gross margin. You had a pretty nice expansion, if I'm not mistaken. And I was curious if you could just break down sort of what the main drivers were if there was a contribution also from the real estate division where you had higher occupancy rates and how much of that was commercial margin? And maybe also paint the picture for us how we should think about that gross margin in the coming quarters as you also step up the aggressiveness on the competitive side.
Sure, Irma. I will try to answer the 2 questions. First of all, talking about the competition and the environment and the client perspective for the following months, we are not seeing something that we are really worried about. I mean talking about a decrease in the purchasing power of the client to an important decrease in the confidence of the consumption.
But as a matter of fact, we also have to consider, and this is public information. If you analyze the amount of money and the federal programs that were going into the market, that money flow into the market mainly before the elections because that is how the regulation works. You will see thousands of millions of pesos that flow previous in the first 4 months of the year, that actually was an advance of the programs of the following months, again, because that is the way the regulation works.
So for sure, it will be a disadvantage if you compare first quarter -- sorry, first semester to second semester about the money that it will be outstanding out there, Irma. Just talking about the millions of pesos the federal program that for sure, an important part of that money goes to the supermarket format because, again, are basically focused -- low-income sector and low-income families, that basically for them, a very important percentage of that money goes to buy basic products.
So yes, we are expecting that the second half of the year, it will be more complex. But I'm not seeing any [indiscernible] in the purchasing power of the client. We are not seeing a shift in, again, to expensive protein to cheap proteins or a very important increase in the purchasing of products that can -- we can say that it's a reflect of a loss of purchasing power in the clients.
So I think that basically in the second half of the year will occur 2 things. For sure, the competitiveness and the competition will continue really, really aggressive. And yes, in the second half of the year, we will not have that extra money going from the government to the population that we have in the first half. Basically that.
And talking about the second question, Irma, about the increase that we have in the gross margin. We have several factors that help us to increase the gross margin. For sure, one of them is better negotiations in Julio Regalado that we are really happy to obtain that.
Secondly, we have another important combination. The real estate, as I mentioned in my introduction, is growing, is recovering in a very important and continuous way since the COVID crisis. And that business is important to the company. Remember that it's less than 2% of the total income, but it's around 16%, 17% of the EBITDA. So it's a business that really have an important impact when you talk about income, not sales.
And also, we have other factors like the question that Alejandro from Itau was asking to me. The other businesses, the other income is also growing because of all the financial services that we have, like the partnership and the JV or the alliance with Nubank. This is just an example. We have a lot of alliance like that with several very important partners that also represent a direct income for the P&L that goes directly to the EBITDA or to the net income.
And finally, it's something that probably I have a couple of quarters mentioning. Every quarter, we are having an improvement in the management of the shrink of the company that, to be honest, still we have a plenty of room to continue improving the performance of the managing of the shrink. But it is something that every quarter, we are obtaining a couple of [ bonds ] coming from that. So as you basically can see, Irma, it's a combination of several factors.
Super helpful, Rodrigo. Could you just also maybe comment how we should think about this margin to the back half?
Sorry, I can't hear you. If I can comment about what, Irma?
Yes, the gross margin because there's obviously something that is maybe...
Yes. I mean I think that we will continue with a very healthy gross margin. I cannot -- I don't want to say that we will have, again, in the third and the fourth quarter an increase of close to 200 basis points, but I think that we will maintain a very healthy gross margin.
[Operator Instructions] Our next question is from Mr. Miguel Ulloa from BBVA.
The first one would be regarding top line growth, specifically same-store sales growth for the quarter. And do you think you will be able to revert the position you are in, in coming quarters? Or how long will it take for the market to recognize your price aggressiveness? Have you budget that? What should we expect going forward?
Well, I think that is something that I mentioned in previous conference call. Soriana lost competitiveness in the last couple of years and it's something that we know and it's something that we are addressing with very important investment in prices and in publicity campaigns. But we also have to be clear, changing the perception of the client is not something that you achieve in 1 year. We have competitors that invest for several years to have the perception that they have right now.
So we have that perfectly clear, build a perception of cheap prices is something for the long term. So no matter if we see a reaction or not in one quarter, we will continue investing in that. If you remember when we started all the campaign with the [indiscernible] prices and all the initiatives that we started a couple of years ago and also the increase in the participation of the private brand, the increase in the participation of entry-level products. All of those things that are basically targeting to create perception, and we have to continue with that. And we will not surrender just because 1 quarter or 1 year, we still doesn't have the reaction from the client. This is for the long term and we will continue investing in creating that perception, not only in prices, but also in creating a perception because sometimes for the client, perception is more important than reality. So we will continue investing in both.
We believe that it is the right strategy to recover the perception of competitiveness in the market. We also believe that this is a very good strategy to continue building our private brand and to convert it into one of the main differentiation and competitive advantage against competitors.
So I think that the following quarters, for sure, as I mentioned, we will have a very fierce competition. Probably we cannot achieve the same-store sales that our competitors will have for the whole year right now. We have an important difference against the ANTAD and against the competitors, and we know about that. But that fact only push Soriana to be more aggressive and more aggressive and to continue strengthen the strategy that we already have. And again, it's something that is not just for the next quarter. It's something that probably will take a longer period of time. And we are willing to continue investing on that.
It's the same that happened with expense, Miguel. If you see, we have a healthy gross margin. We have investment in price. But still, the expenses is really high. And we have investment in expenses, and we had investments and not expense because we are basically investing in more personnel and we need to increase the level of service and we need to increase the quality that the client receive every time that they go to our stores. So we have to have more personnel in that point and do their part. If you analyze the number of employees per square meter in the last probably 5, 6 years, we are one of the operators with a less concentration or separation of personnel per square meter. And obviously, that had an impact in the service to the client.
So again, they have an impact in the P&L, yes. But this is something that we have to invest. And right now is that part of the time we choose only to see the investment, not the results, but we have to do it.
Our next question is from Ms. Irma Sgarz from Goldman Sachs.
Thanks for allowing me to come back for another question. I was just making sure. You partly answered it, Rodrigo, but I was hoping to just get your view on how you're thinking about potential labor cost pressures into 2025 in terms of sort of the minimum wage increase that you're expecting. And maybe also if you could highlight anything that you're able to do in terms of, I don't know, whether it's automation or in terms of labor scheduling? It sounds like you still have to invest a little bit more. But any sort of efficiency gains or productivity gains that you can highlight on the horizon for either later this year or for 2025 would be helpful.
For sure. Well, I think we have to say probably 3 important things. It's a matter of a fact, Irma, that the pressure in the salaries will continue. I think that is something that all the Mexican companies already have discounted in their future P&L and in their projects. That will continue.
So once that we understand that, we have to create a strategy to take advantage of that environment. So one of the first things that right now we are doing is, how we can optimize all the personnel that is in the stores, doing activities that are not relating to serving the client. So like an example, a couple of the activities that we have changed and implemented in the last couple of months, Irma. For sure, something that you can see really clear is the self-checkout. It's something that the clients really want, they prefer, they have a psychological effect that creates more satisfaction when they go to the self-checkout. Obviously, gives an optimization in the personnel and increase the productiveness. So right now, we have a little more than 170 stores with self-checkout. And every time that we are opening a store, it's something that have a tremendous success.
Another process that probably you don't see because it's in the backstage of the store. But right now, we are changing completely the way in which we deliver the product to our stores in order to make all the controls before -- I mean, merchandise controls before they arrive to the store in order that in the store, they don't have to spend a lot of people and a lot of time verifying that they are receiving complete or the whole products from the distribution center, from the direct from the suppliers, and make very easy and very quick. Just take the product and take it to the shelf. We don't want that the people spend a lot of time in the backstage of the stores and spend the major part of their time serving the client.
But also, we have to consider, and it's something that I already say, Irma, that we have to increase the personnel. In a lot of stores, we have a lack of personnel that promote and not the best service. We have to continue investment on that, probably in this moment, just like an expense. But we believe that this is an investment that in the following months have to be paid by an increase in the sales. And again, we cannot continue to be the company with less intensive service, saying that as the number of personnel per square meter in the market. I mean, we cannot aspire to be a better player in the supermarket segment in Mexico if we continue with important less of personnel in the sales floor, Irma.
So we have to continue investment on that. Obviously, we will want to make it more efficient. We have implemented technology in the backstage of the store, in the front part of the store, like the self-checkout, in here in the headquarters. Obviously, several areas of the company right now are operating with bot, with artificial intelligence. But at the end of the day, we have also to say it. We are a company that, by nature, is intensive in the use of personnel. And that will not change. So we have to also be focused in to be more productive in the use of that personnel.
I don't know if I'm clear with the explanation.
Absolutely. Very clear, very clear. Thank you so much, Rodrigo and good luck.
That was the last question. This concludes the Q&A session for today. I will now hand over to Mr. Rodrigo Benet Cordova for final comments. Please go ahead.
Well, again, thank you very much for joining us in this conference call. And as I always say, Claudia and I, we're pleased with you. We are to serve you if you have any other questions, just send us an e-mail or a call, and we will be really glad to respond. Have a good weekend. Thank you.
Organización Soriana would like to thank you for participating in today's conference call. You may now disconnect.