Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon, and welcome to Organizacion Soriana Third 2020 Earnings Conference Call. With us today is Mr. Rodrigo Benet, Chief Financial Officer; and Ms. Claudia Gonzalez, 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. At the end of the presentation, there will be a Q&A session in order to answer any questions you might have. [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. Today with me is Claudia Gonzalez, Head of Financial Planning Department and Investor Relations. And together, we will be going through the company's quarterly results that we posted a few moments ago. At the end of this [ intevention ], there will be a Q&A session in order to answer anything that -- doubts you can have.

[ As you already see ] the third quarter of the year, the total revenues of the company reached [ MXN 37.7 billion ], which represents a 3.3% decrease in the same-store sales. The decrease in the total revenues is mainly a consequence of different things, such as the closure of 17 stores in the last 12 months, in which 2 of them were temporary and because of the decrease in the income from our real estate business due to the rent benefits granted to our tenants by showing solidarity after the drop in their sales that affected their operations, mostly in the second quarter and lasted until this quarter, the third quarter. This impact negatively affected revenues by 150 basis points.

Additionally, during the quarter, our most important promotional campaign, Julio Regalado, took place, in which important adjustments were made in promotions in order to adapt them to the current situation that the country is going through [ to live ] from the pandemic and the effects of the economic situation. Also ensuring prevention measures, such as continuing with the security features [indiscernible] of the stores, controlling and trying to avoid crowds in the stores, reinforcing social distance in [ key entry points ], focusing on offering attractive promotion on basic products and produce our [indiscernible] products and personal hygiene, [ following ] the family [indiscernible]. Also, the sales [indiscernible] remained without significant changes compared to 2019 campaign, the profitability growing by more than 4% points in this year. By managing to [ operate ] and maintain optimal levels of inventory, bringing as a result a very favorable impact on the company's working capital.

It's important to highlight the process we had at the close of the quarter regarding the reduction of inventory, where despite the high levels of inventories necessary for a promotion that's as important as Julio Regalado, we were able, with the support of our procurement system, to achieve a decrease of [ MXN 3.3 billion ] in the inventory compared with the same period of 2019, resulting in a benefit in working capital, and we expect to continue with this approach in the next month.

Despite having a same-store sale decrease, as a total company versus last year, we can highlight that the store format around [indiscernible] focused in offering products in divisions of groceries and [ provisions ] like Soriana Super and Soriana Express continue with very good performance along this year, even reaching a double-digit result in some cities.

In this way, Soriana Super, like example, obtained this quarter a same-store sales of 2% and a cumulative term [ at ] 7.3%. On the other hand, Soriana Express reached a 3% increase in same-store sales during the quarter and [ at ] 7.3% for the first 9 months of the year. In addition, we continue to see an average ticket increase of [ 33% ] in Soriana Super and 24.5% in Soriana Express.

As we have mentioned before, this store format have the positive side of not being affected by a [ affectation ] in sales in the clothing and general merchandise divisions. And we have clearly seen in the hypermarket and [ Mercado ] portfolio.

In response to all of these situations, we have improved the sales and promotion of our product brands in all the store formats with our very positive results, showing a 16 points increase in the quarter in comparison with the last year, specifically in the result of the product brands.

On the other hand, in the hypermarket format, and those stores belonging to the ones that come from Comercial Mexicana, we continue seeing a [indiscernible] performance than the rest of the hypermarket stores, highlighting the hard work that has been done in the last year in order to recover the customers that we have lost.

Additionally, I'm pleased to share with you that our e-commerce business unit has constantly grown for both soriana.com, a platform for big ticket merchandise and also the home delivery service called Super en tu Casa, in which for the quarter, we obtained a growth of 1009% in sales and 2091% in number of orders. These important increments are the result of a series of initiatives focused on promoting an omnichannel experience that is mainly influenced by the shopping needs of our clients during this pandemic and in which now is part of the new normal.

In fact, currently, the average ticket in Super en tu Casa is 2.7x higher than the rest [ speaking ] of the physical stores. And for this reason, it's why we know -- we now have the service in all our stores in the country, improving the order process, delivering on customer service while continue working on developing better solution, aiming to satisfy and exceed customer expectations.

Regarding the e-commerce unit to soriana.com, this platform achieved a [ 76% ] growth in sales and 81% growth in number of orders. As a result also of constant work done in order to improve the platform and make it [ faster ] to our clients for transactions and looking for a more attractive catalog that covers current consumer trends.

As a result of the [ formation ] results. Gross profit in this business the total reached at [ MXN 7.9 million ], a difference of [ MXN 376 million ] versus the same quarter of the previous year mainly affected by the bonuses granted to the tenant of our [indiscernible]. Despite this [ affectation ], we were able to maintain the same gross margin of 21.2% from last year, thanks to [indiscernible] of the commercial strategy and from a [indiscernible] and operational level.

Regarding the operating expenses line, as you already know, we have worked through [indiscernible] and since 2019, we have been constantly working in controlling all the expenses across all the areas of the company by taking the [indiscernible] resources and services that allow us to mitigate economic slowdown that we are facing. And even though 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 5.4 billion ], which represents an important decrease of 4.8%, which we believe is very positive, and we believe that we can continue with this savings program in the following months.

As a result of these variations, EBITDA this third quarter of the year closed at [ MXN 2.6 billion ], which represents a 3.9% decrease in comparison with last year mainly affected, again, by the support given to our lessors.

Regarding investments and the CapEx, we continue with only those investments that are strictly essential for the company, postponing expansion investments and limiting the resources to only those priorities and [ stores ] that are related to the correct operation of our stores and the distribution centers. We estimate, as we said in the last quarter, to close the year spending only 50% of the amount that we initially projected for the whole year. And we will focus in using [indiscernible] [ in the debt side ].

Also, as we have discussed before, one important operating strategy was to reduce inventory, which will allow us to [indiscernible] delivering the strategy and improving working capital.

On the other hand and regarding debt, and even after the close of the quarter, we would like to share with you that we achieved a short-term debt refinancing for a total of [ MXN 8.2 billion ], with an improvement in the cost of 42 basis points which represents a great achievement by removing pressure in the short term and reduce the financial cost.

Going to other topics. We continue making progress with our alliance with dunnhumby, where we are consolidating a collaborative model based on our customers' knowledge, which allow us to continue working in our loyalty program, Recompensas Soriana, along with a [indiscernible] of dunnhumby. This way, we have been working in projects that will be launched in the last quarter of the year, such as [ People Like Me ], which is a segmentation [indiscernible] that make custom-made promotions. [indiscernible] that is basically a promotion that we have already implemented and is focused on increasing the [ average ] ticket of our customers. And finally, the project loyalty drivers which is a qualitative and [ transformative ] story of transactional analysis in order to recall the most important elements of the Mexican consumer in order to generate loyalty to Soriana.

And finally, we finished the benchmarking story made up among all loyalty programs in Mexico in order to understand the positioning of Soriana among the Mexican consumers. This last year's story will be key to understand the changes in the purchase scenarios of our clients after the pandemic.

Finally, regarding the number of stores in operation, the quarter closed with [ 797 ] units after the close [ after June ]. One thing to add, these closures correspond to the [ limited ] stores platform after the acquisition of Gigante and Comercial Mexicana as well as the unification of the supermarkets that have contributed to increased sales profitability since the start of the strategy back in 2018.

Also, we have been opening 2 stores during the quarter, one in the state of Quintana Roo and the other one in the state of Veracruz that was reviewed after an accident occurred in the first quarter of the year, and we opened it to the public in the 1st day of September, showing an important response from our clients by [ attending ] an increase of 55% in that one compared with September of 2019. Basically, these kind of increases are the ones that we see more and more in our stores. And that is only a reason why we are completely sure that we have to continue focusing the CapEx in our modeling in the stores at a more efficient way than invested CapEx, not only new stores. Basically, with this, I end my presentation, and we can move to the Q&A session. Thank you very much for joining us.

[Operator]

[Operator Instructions] Your first question is from Antonio Hernández from Barclays.

[Antonio Hernández Vélez Leija, analyst]

Well, actually a couple of questions. I'm sorry if I missed this because I have some troubles with my line. But could you give more light on the same-store sales performance? And I know you provided some of the performance regarding a couple of your formats but I mean in terms of regions -- of a regional perspective and also which format is lagging the most and maybe why? And second question would be regarding the bonuses that you granted in there for your lessors. This is not going to be in place for this fourth quarter?

[Rodrigo Córdova, executive]

Sure. Regarding the first question about the same-store sales by format, basically, but we are seeing more than that difference by format is by type of product. And what happened is that, basically, Soriana Super, like an example, is like 85% food -- 15% on food, and the categories of food, we have seen continuous in the first month of the year, very good results. What happened is like an example in hypermarket, that percentage is completely different. It's like 64%, 65% food and 35% nonfood, particularly in the category is nonfood, and I'm talking about clothes and general merchandise. Since the start of the pandemic around April of this year, we have seen a very, very important increase, in some cases, in double digits in that category. So basically that is what is affecting the total performance by format. Obviously, the hypermarket is one of the most affected because we have the [indiscernible] and Soriana Mercado are the ones that have the immediate participation in nonfood products. Both of them for the quarter are negative. And the other formats that have lower weight in the total portfolio of the company, that is Soriana Express, Soriana Super and City Club are very positive.

In the case of City Club, it's more related with the socioeconomic level which is focused. That we have seen that we have a much better performance mainly because [indiscernible] is focused in medium to high classes and all the years have showed them have a very good performance. But basically, again, we have to say the performance by format. We have Soriana Hiper and Soriana Mercado negative in the quarter, particularly for the -- except for the nonfood items. And obviously, they're important in all the formats because the comparison of Julio Regalado have been very difficult.

To be completely honest, Julio Regalado that since the beginning of the promotion, we focus Julio Regalado particularly in being efficient in the [indiscernible] and not in the sales because, practically, it will be impossible to achieve better sales than the Julio Regalado of 2019, basically because the family, the economy of the family in Mexico doesn't make any sense to go very aggressive in promotion of 3x2, 4x3 that are volume promotion because the people doesn't have money, in some cases, doesn't have even [ employee ] to buy 4 articles of the same kind.

And the second important reason is because physically speaking, we were not able to receive crowds of people in the stores. Actually, in some parts of Julio Regalado, we have an incident in which the people doesn't respect all the rules that the federal and the state government told us how to [ operate ] the stores, a lot of people go into the stores and after 3 hours, the authorities had known about this and closed the stores. So it's very difficult to [indiscernible] Julio Regalado in the middle of a pandemic, in which you have to maintain spaces, distance in so many municipalities, even with our top -- maximum of number of people that can be inside in the store at the same time. So we prefer to focus this Julio Regalado to obtain better [indiscernible], and actually, we achieved it. I understand that obviously it's not something positive to have a decrease in the same-store sales in Julio Regalado. But on the other hand, we have an increase of double-digit in the [indiscernible] growth because basically, we can achieve a very similar number in Julio Regalado with 20% less inventory. So basically, that will be my comments about the performance by format. I'm sorry, your second question was...

[Antonio Hernández Vélez Leija, analyst]

Sure. So second question is regarding the bonuses, granting rent to your lessors. Are these not going to be in place for this fourth quarter?

[Rodrigo Córdova, executive]

Well, to the tenants, basically, the impact was [ registered ], as I mentioned in the second quarter conference call, in the second and third quarter. With that, we end with the process of [indiscernible] all the bonuses that we give to our tenants. What I want to be completely clear is that right now, in several states, like an example what it would happen this weekend in Jalisco, we are seeing, again, some state government launching new initiatives or new [ work ] and [ alarms ] and probably that we could go again, that some of our tenants have to close [ over the week ]. So we cannot say that going into the future, if the government again decides to close all the stores that are not basic businesses, I mean, our partners, our tenants probably will have again problem. And probably also, we have to give some support in the future.

What we -- again, in order to be completely clear, in the second and third quarter, we are [indiscernible] all the bonuses that we already give to our tenant, but I mean it's something that could happen again in Q2.

[Operator]

[Operator Instructions] Your next question is from Rodrigo Alcantara from UBS.

[Rodrigo Alcantara, analyst]

So I was wondering if you can comment a bit on the competitive landscape you perceive in your markets, right, perhaps the impact that you see probably from informality or even hard discounters and now relating this to price investments and your gross margin. Well, as we know, your gross margin are in a pretty decent high level. So was wondering if you think that it would make sense for the company to increase perhaps investments on pricing or increase the promotional intensity. That would be my question.

[Rodrigo Córdova, executive]

Sure. Well, basically, yes, you are right. We believe that to all the efficiencies that we achieved at level of gross margin, mainly the ones that are coming from the very good operation of the shrinkage in our stores, we have a couple of [ tons ] that we can invest. And yes, basically, you will see that in the fourth quarter, we will be investing gross margin into promotions. We will be really, really aggressive for this Christmas season on this one thing. So yes.

[Rodrigo Alcantara, analyst]

Sure. And about the competitive landscape, perhaps, that you perceive from it from high or hard discounters, do you have any comment about this?

[Rodrigo Córdova, executive]

No, basically, I mean, obviously, hard discounters, particularly in Mexico, there is one player that have an important growth in the last 5 years, but it is not something new, and obviously informality is something that we are used to deal with them. We are not seeing a more aggressive competition coming from them, obviously, taking in consideration that our sector is always really, really aggressive.

But right now, we cannot say that we are seeing something crazy or something very aggressive or one particular player being more aggressive. Now basically, the same promotional activity that we have seen in previous years. And on that, I want to be completely clear on that. What we see, particularly in this third quarter, the decrease in the sales is very related with Julio Regalado. And on that sense, it's something that, internally, we know that, that will happen since the beginning of June -- I mean since the beginning of March, we were very worried of how we will perform, our volume and crowd promotion into the stores in an environment in which we cannot put crowds into the stores.

So I mean sometimes Julio Regalado, for many years, have been very positive. This time Julio Regalado was a campaign not very suitable to implement in the middle of a pandemic. I mean it's part of the business, and we have to deal with that. But we are not seeing something particularly crazy in the price strategy of our competitors. But what we believe is that makes sense that all the efficiencies that we capture from other parts of the business makes a whole sense to invest it in price when we are releasing market share against our competitors.

[Operator]

[Operator Instructions] There are no questions over the phone. Please continue.

[Rodrigo Córdova, executive]

Okay. Well, there are no more questions. Again, thank you very much for joining us on this conference call. And anyway, if you have any doubts, you can e-mail to Claudia, and we will be really glad to [ talk ] with you as soon as possible. Have a good week. Thank you.

[Operator]

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