Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Analysis

Soriana Reports Positive Sales and Profit Growth

Soriana navigated the third quarter with a 3.2% increase in sales, reaching MXN 42.9 billion. Cumulatively, sales are up by 4.9% for the year. Gross profit grew to MXN 9.6 billion, marking a 7.7% increase and expanding the gross margin by 90 basis points due to improved shrinkage management. Operating expenses increased by 9.1%, attributed to higher personnel costs and energy expenses, which increased by an average of 12%. EBITDA rose by 1.5%, amounting to MXN 2.7 billion. However, net income saw a modest rise of 1.7%. Facing stiff competition and a still noticeable gap with rivals, Soriana's strategy focuses on pricing competitiveness, supported by better supplier negotiations and internal efficiencies.

Maintaining Momentum Despite Competitive Pressures

As Organizacion Soriana discussed their third-quarter results for 2023, they highlighted a strategic pivot towards improving price perception amongst customers. They showcased an 18% implementation of a new offers strategy across sales floors and reported that sales of their private brands contributed 11% to overall company sales, amounting to MXN 40.7 million. The company's focus on competitive pricing, particularly in the basic food basket, has been acknowledged by the federal government and PROFECO, with awards for having the lowest average price, supporting an improved customer perception.

Growing Digital and Real Estate Footprints

Soriana's digital business exhibited remarkable growth, with the Soriana app sales increasing by 47% year-over-year and an average transaction size growth by 16% across all e-commerce platforms. The real estate business sector also reflected an 11.1% increase due to higher occupation levels in northern and Pacific regions, contributing to an overall occupation level of 87.4%, a rise of 460 basis points from the previous year.

Strong Sales Performance and Margin Improvement

The company's total sales reached MXN 42.9 billion, a 3.2% increase compared to the same period last year, with cumulative sales increasing by 4.9% to MXN 126.7 billion. They reported a gross profit of MXN 9.6 billion, which is 7.7% higher than the previous year, resulting in a margin expansion of 90 basis points due to better commercial terms and efficient shrinkage management.

Expanded Offerings and Market Challenges

Organizacion Soriana underscored the importance of expanding their product offerings, particularly in store formats aimed at low-income sectors such as Soriana Mercado and Soriana Express, which demonstrated strong sales performance. They noted the need to work on the perception and promotions for medium to high-class targeted formats like Soriana Hiper and Soriana Super to increase competitiveness. The upcoming Buen Fin and Christmas promotions were cited as opportunities to improve customer perception.

Price Strategy and Store Expansion Plans

The company provided insights into its price strategy, emphasizing the maintenance of competitive pricing against aggressive competitors in specific key product categories, and revealed plans for future store expansions. Soriana Express and Soriana Super, targeting quick shopping experiences for different income sectors, were recognized as having a potential for growth due to higher sales per square meter and return on invested capital, signaling focus on smaller, more efficient store formats for future development.

Financial Overview and Expansion Highlights

Soriana reported a net income of MXN 994 million for the quarter, a slight increase of 1.7% from the previous year. The company also updated on its expansion, having opened 5 new stores and with 11 under construction and over 20 being remodeled. The financial partnership with Falabella showed significant card usage with over 949,000 active cards and a credit portfolio nearing MXN 4 billion. Additionally, they noted that total income for Sodimac, their home improvement business, is growing at a double-digit rate.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, everyone. Welcome to Organizacion Soriana's Third Quarter 2023 Earnings Conference Call. With us today are Mr. Rodrigo Benet Cordova, CFO of Organizacion Soriana; and Ms. Claudia Gonzalez Romero, Head of Investor Relations for Organizacion Soriana. Together, they will be discussing the financial performance for the third quarter of 2023 and providing a summary of the latest news on the company. [Operator Instructions] Please note that the conference call may be recorded.I will now hand the conference over to Mr. Rodrigo Benet Cordova, CFO of Organizacion Soriana. Please go ahead.

[Rodrigo Córdova, executive]

Thank you. Good afternoon, everyone, and thank you for joining us in this conference call regarding the financial results of the third quarter of the year. As was already mentioned today, with me is also Claudia Gonzalez, Head of Financial Planning Department and Investor Relations. And together, we'll be going through the results and some important information of what has happened during this period.As you already know, throughout this year we are focused -- our focus has been to improve the price perception that our clients have regarding our offers, and therefore, improve our competitiveness. This being a trigger that what's driven us to improve our strategies. And one of them was the relaunching of the whole new offers within the categories of our own brands and private brands, offering a wide range of categories which offer a great price-quality balance, along with the benefit of a mix in the margin versus commercial brands.So at the end of this quarter, the implementation of this strategy at a national level had a progress of 18% on the sales floor, which we know there is still a long way to go, but we are sure that this will make a difference in a short period of time.Also regarding our private brands, during the quarter, the sales reached MXN 40.7 million and has a participation of 11% over the sales of the company. Also talking about the performance at a store format level, our stores directed to a low price strategy. In this case, Soriana Mercado and Soriana Express show the best sales performance due to the efforts we have made to invest, assuming the lowest price, particularly within the basic food basket, which also has helped us to improve clients' perception in this matter.Actually, I'm glad to share with you that we were awarded by the head of PROFECO and the president, Obrador, for having in the third quarter the lowest average price in the 24 basic produce basket among wholesale service sector of the country and also even against informal commerce.Regarding performance at a category level, groceries and prepared food outstand in this quarter, aligned to the commercial activity, strongly focused in these specific categories during Julio Regalado and the new promotional scheme called SorianaCheck. These initiatives and the other seasonal promotions carried on during August and September, increased the client traffic on the number of transactions in 2.6% versus last year. From a geographic perspective, sales performance stood out in the south part of the country, specifically in the states of Campeche, Oaxaca, Quintana Roo and Yucatan.Moving on the other business unit performance. Our digital business -- and as you already know, every day the market supply increases rapidly, and this has driven us to be more competitive and to put more focus in our product category, as well as to provide a more user friendly interface, working improving functionality, and most important, assuring the security in the transactions during all the process in our e-commerce.Right now, our Soriana app is still showing the best performance along all the channels that we have, and in this quarter particularly reflect a sales growth of 47% against 2022. And the average ticket, including all the platforms, have grown of 16%.Talking about our real estate business. The result in this quarter increasing 11.1% as a result of the recovery -- of a recovery in the tenancy of the occupation level.By region, the north and the Pacific parts of the country showed the greatest percentage in order to 89% to 100% of occupation level. Consolidated -- at the close of September this indicator reached 87.4%, that represents an incremental 460 basis points against last year. Also, the positive results come from increases in fixed income and temporary premises throughout the country and by a substantial improvement in the parking control income in which we have also made investment in favor of the safety of our clients.As a result of all of this, we closed the third quarter of the year with a total sale of MXN 42.9 billion, which represents an increase of 3.2% in comparison with the same period of last year. In cumulative terms, sales closed with a 4.9% increase and reached MXN 126.7 billion.Likewise, gross profit reached MXN 9.6 billion in this quarter, which represents a 22.4% margin with an increase of 7.7% against last year, with a positive impact due to better commercial terms and improvements in the shrinkage management that allow us to expand 90 basis points the gross margin. In cumulative terms, the gross profit reached MXN 28.7 billion, which represents an expansion of 90 basis points against the margin of last year.Talking about the operating expenses. This line reached MXN 6.9 billion, which represents 16.1% over the sales and an increase of 9.1% against last year. Particularly, this increase in the expenses is basically due to the cost of -- an increase in the cost of personnel due to a better vacancy coverage and also to a higher expense in advertising in order to promote commercial campaigns and due to higher energy costs, in which the average kilowatt cost in the quarter increased 12%. As a consequence of the variation just mentioned, the EBITDA of the quarter closed with an increase of 1.5%, reaching an amount of MXN 2.7 billion, which represents a margin of 6.2%.Going down in the P&L and regarding the financial items, net financial cost closed in MXN 618 million, showing an increase of 22% due to an increment basically in the debt interest rate, partially offset by an increase in the financial product, which mainly is related with the gain that we have in the equity swap.Finally, the net income for the quarter reached MXN 994 million, an increase of 1.7% that is equivalent to 2.3 points over the sales. As an update of the expansion plan of the year, in these past 12 months, we have inaugurated 5 stores in the states of Tamaulipas, Quintana Roo, Chiapas, Campeche and Chihuahua.In the same way, we will continue informing you the progress of the store openings and remodeling plan, which we have been focusing to continue providing comfort and security to all our customers. At this date, 11 stores are under construction and more than 20 stores are under a major update in the -- as part of the remodeling program.Moving on to talk about the progress with our partner, Falabella. This quarter, Sodimac have -- the business that we have for the home improvement showed an important increase of 14% in sales with 13 stores in operation, and we are expecting to open 2 stores more in the upcoming months.Finally, I'm talking about the financial business also with Falabella. During this quarter, more than 82,000 cards were used, reaching a total of 949,000 active cards and a credit portfolio that equals close to MXN 4 billion.Without furthermore, we hope that this information has been of your interest. And now we can go to the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] The first question is from Mr. Bob Ford from Bank of America.

[Robert Ford, analyst]

If you could talk a little bit about how you're thinking about the asymmetry in your buying terms versus some of the bigger players in the industry? I guess you're the second biggest. So I'm talking about one other player, right? And in the current COFECE investigation -- and any implications you think could come from this?

[Rodrigo Córdova, executive]

Sure, Bob. Well, basically -- I mean, we don't have like a lot of information about the antitrust investigation against Walmart. I am assuming that this is -- that is the [Technical Difficulty] of your question. But I mean, basically, as you know, Bob, we have a long relationship with COFECE due to the acquisition of Commercial Mexicana.I think that the authority perfectly know the position of Soriana about several important subjects about the commerce here in Mexico and our position and the relationship with the suppliers. So the only thing that I can say is that I feel really comfortable in my relationship that the company have with the suppliers. And -- I mean I don't have much more to comment about an investigation, Bob, sincerely.

[Robert Ford, analyst]

No, it's perfectly understandable. And then how you -- you referenced the canasta basica, right, of 24 items. And how are you thinking about your price competitiveness in a wider basket in the most important markets right now in Mexico?

[Rodrigo Córdova, executive]

Well, I think that particularly this was a strategy that give a very positive result for the federal government. If we remember, Bob at the beginning of the program about the canasta basica, the basic basket product, the intention of the federal government was that this basket have a price around MXN 1,200, MXN 1,100. And right now, if you see all the analysis -- because all of this is public information and you can see it in the PROFECO website all the weeks -- basically, we are fighting with our competitors in prices about MXN 800, MXN 900. So for sure have an important effect. For sure the federal government achieved the results, because we have to put pressure in this basket. But for us, it has been a very good thing also, Bob, because it's helping us to improve the perception. At the end of the day, basically, all the weeks we have the federal government saying that Soriana in basically all the regions along the country have the best price in the basket product. And obviously, that helps us to take perception.Right now, Bob, I feel really comfortable that mathematically speaking we have a very competitive basic product basket. But the important thing is not only mathematically speaking, it's also perception. So when you have the federal government and the PROFECO and the newspaper talking about that -- like an example, 3 weeks ago -- I mentioned in the speech the federal government give us the price because we have the best price in all the country, is helping us in the perception.So at the end of the day, I feel really comfortable with that. But it's not enough. We have to maintain this price strategy. Also, we have to start to win all the seasonal promotions, not only the summer campaign like Julio Regalado. In the following weeks, we will have Buen Fin and Cyber Monday and then Christmas. So, we have also to be very aggressive in promotion and not only in the regular prices or in the basket, in the basic basket product.But no matter. Still we have a long way to go. We are very, very comfortable with these steps that we have made. It is very important for us to see the reaction even of the government giving us an award, because we are really taking down the prices.

[Robert Ford, analyst]

It's super encouraging, Rodrigo. And one last question, if I may. And this is, Sodimac and CMR, how are you thinking about that business over the intermediate to longer term given the challenges that are being faced by Falabella and Falabella's openness in saying they're looking at divestitures throughout the region?

[Rodrigo Córdova, executive]

Well, we know that our partners have some challenges in the homeland in South America. But to be honest, we feel really, really comfortable with the operation in Mexico. Falabella is a great operator. And at least the operation in Mexico in both business is going great. We are achieving the plans that -- the original plans that we set 5 years ago. The financial business is going great.Actually, I mean -- and it's something that I said in past conference. Right now, Falabella credit cards is the one with the most important participation in the credit card payments in Soriana. And the clients that have the credit cards of Falabella have much more higher ticket, much more higher frequency, much more higher loyalty to the stores. So we are really happy.And talking about Sodimac, every time that we open a Sodimac, we see how the direct competition -- Home Depot is taking down prices, it's worried, it's investing.So we are seeing that we are really having an impact in the community and in the prices and in the market. So we feel comfortable. Actually, the financial business basically this year will achieve the breakeven. Sodimac -- it will be only a matter of time, because we continue with the opening of stores. We already achieved enough leverage to support the overhead, because it's an important overhead, the one that we have here in Mexico.So I feel really [ hopeful ] about that, and we are completely sure that our partners will surpass the challenges that they have in South America. But at least in Mexico everything is going really well.

[Operator]

Our next question is from Ms. Irma Sgarz from Goldman Sachs.

[Irma Sgarz, analyst]

I was just wondering if you could maybe comment a little bit about the outlook for same-store sales that you're seeing into year-end. And maybe also comment a little bit about the progression of same-store sales along the third quarter. I understand that this was a bit of a shortfall against ANTAD. And it does sound from your earlier comments about transaction -- number of transactions growing 2.6%, if I understood it correctly, that ultimately your average prices maybe were down or not fully passing through inflation.So perhaps you could comment like -- again, like on what you saw in this third quarter and break it down a little bit month-by-month and sort of what type of consumer behavior you've been seeing along the quarter. And with that then, talk about the set-up for -- into year-end and what's been the important promotion that you highlighted there?

[Rodrigo Córdova, executive]

Sure, Irma. Well, basically, you are right. We have still an important gap against the ANTAD and against our competitors. Basically, the positive thing, Irma, is that we are seeing an -- and is that an obvious reaction or an expected reaction is that Soriana Mercado and Soriana Express is having a very, very important increase. And that makes sense, because actually the first thing, as I mentioned, that we say is that we reduced the price of the very basic products.And these formats that are focused in the low-income sector are the ones that have the biggest -- or receive the biggest benefit of the reduction in the price strategy. Soriana Hiper and Soriana Super that are focused also in medium class and high classes. And actually, their strategy is high/low. It will take a little more to start to gain this perception that I'm talking about.I believe that this decrease in the basket product and in the regular prices is helping us to recover the client in the formats targeting the low-income sector. And we are already seeing the response. But we have to maintain this for an important period of time and we have to increase also the promotional campaigns in order to start to see this same effect in Soriana Hiper and Soriana Super in the other formats and in the medium and high classes.So again, Irma, I think that this is just the first step. We perfectly know that in the past months and also I think that in the past years we lose competitiveness against our competitors. And right now, we have a very good strategy that is recovering. We are achieving the negotiation with the suppliers in order to be more competitive. We have the support of them.We also -- we achieved important efficiencies internally speaking like the management of the shrinkage in order also to obtain margin points to invest in price. So, I think that the conclusion is that we are in the right way, but there still a long way to go, and we have to maintain it. I mean, at the end of the day, changed perception is not a matter of 1 quarter or 2 quarter. It's something for the long-term. But we are completely focused on that and we 100% believe that it is something that we have to maintain in the long-term in order to see the results.So -- and also to complement the answer, Soriana Mercado, Soriana Express with very good performance, more close to high single-digit than the whole company. Soriana Hiper and Soriana Super basically are the ones that decreased the number. And remember that Soriana Hiper is the biggest format of the company.And finally, City Club continued with -- I mean, City Club already have more than 2 years, almost 3 years with a very good performance year-by-year in basically the major part of the months, even surpassing the competitors. So I think that the biggest challenge right now is Soriana Hiper and Soriana Super.And talking about regions, as I already mentioned, we have [ big ] regions also in the central south part of Mexico. That is related with the fact that Soriana Mercado and Soriana Express have a higher concentration of stores in that region.

[Irma Sgarz, analyst]

Very useful. And maybe if you can sort of talk a little bit about what you're expecting into the fourth quarter? And maybe, actually, if I could please add to your comment about Hiper. How is the performance of sort of the more discretionary categories that you sell in those hypermarkets compared to your sort of core food consumables?

[Rodrigo Córdova, executive]

Sure. Well, basically, we know that the Buen Fin it will be an important percentage in the weight of the performance of the whole quarter. And obviously, together with the Christmas promotion. So again, we have to be -- as we are gaining perception in regular prices and in basket product, we also have to gain perception in the seasonal promotions. It's still a challenge. It will be really, really complex.I mean it's a matter of a fact that Buen Fin it will -- the competition in Buen Fin it will be really, really high. Particularly, as you mentioned, Irma, it will be in discretionary items, in big ticket items. For sure, it will be related with amount without interest and the purchases of high-ticket products. We are preparing, obviously, a very important campaign focused on this kind of merchandising.Obviously, I cannot give you right now more information or detailed information about the promotions. But I mean -- I think that we will make some steps forward to continue gaining this perception in the client. But if you ask me particularly about a number for the whole quarter same-store sales, I think that this will have an improvement against this third quarter, but still we will have a gap against our competitors. Again, perception and recovery of a client is not something of short term.

[Operator]

Our next question is from Mr. Rodrigo Alcantara from UBS.

[Rodrigo Alcantara, analyst]

Just 2 quick questions, if I may, first one on the price discussion. Maybe if you can share some metrics regarding the price gap that you have versus your competitors? How it has improved over time as you keep investing in prices? And the second one would be as your balance sheet is getting more solid, right, lower debt, when can we see some acceleration here on store openings, particularly on the Express format? Those would be 2 questions.

[Rodrigo Córdova, executive]

Sure. Well, about the price strategy, the thing that I can comment is basically, if we take the whole catalog product that we have in the stores -- basically, what we have -- did as part of this strategy is that we segmented the whole catalog product in different buckets, 1 to 10. Obviously, the #1 is the products that have much more impact in the perception of price and in the participation of the expense of Mexican family. And we have prioritized in these 10 different buckets.Basically, what we can say is that the format -- and this -- obviously, we are talking basically store-by-store against the direct competition. Particularly, in the buckets 1 to 3, we will not allow any difference against a more aggressive competitor in the specific area of all of -- each one of our stores. So in that 3 buckets, we have to assure -- at the least have exactly the same price that the most aggressive competitor.And obviously, in the other 7 buckets, we will be playing with the perception. And sometimes depending on the season, we can be more cheaper, then we can go up the prices, or we can reduce the price of a specific brand. And then the other is the -- the other buckets are the ones in which we maintain, obviously, competitiveness, but also the margin and the profitable of the business.But we are completely sure that at least in the first 3 buckets we have to be at least same aggressive as the most aggressive competitor in a store-by-store basis. I don't know if that help. And talking about the second thing about the opening program. Right now, if we -- if you ask me going into the future which is the format that I see with the higher potential, for sure it's Soriana Express and Soriana Super mainly because both of them are small formats targeting a more quick and easy shopping experience for the client, both completely different targets.One is focused more in the high-density cities serving medium class to high economic classes. And the other format is also basically a very quick shopping experience, focusing in just basically fill the refrigerator food and perishables, groceries, basic groceries, but focus in the low-income sector. I think that it's very clear that the trend, not only in Mexico, I can say that in the whole world is the use of a small format that is having higher sales per square meter and higher ROIC. And exactly the same happened in Mexico.The only thing is that this particular -- this year and probably we can say 50% of the openings of next year, it will be more variable talking about the formats. Why? Because right now we have a bank of land that we have historically growing that bank of land in the last 10 years, that right now that we are recovering very aggressive and starting again aggressively the organic growth.First of all, for obvious reasons, we will use the land bank that we already have. And then at the same time, we will start to buy new land. That new land that we are buying is focused more in these kinds of formats that I'm talking about.

[Rodrigo Alcantara, analyst]

That was clear. And just very quickly -- apologies if you said that at the beginning of the call. Same-store sales in Sodimac, any features you can share would be great?

[Rodrigo Córdova, executive]

Sorry, I don't understand the question. I see what you called out. You talk about the same-store sales on Sodimac, if I hear correctly?

[Rodrigo Alcantara, analyst]

Yes. That's correct.

[Rodrigo Córdova, executive]

So nothing -- basically, as you know, also Falabella is a public company. So basically, we don't disclose a lot of information or detailed information about Sodimac. So basically, the information that I already mentioned that the total income is growing at double-digit base is the only one that I can share with you right now, guys.

[Operator]

That was the last question. This concludes the Q&A session for today. Organizacion Soriana would like to thank you for participating in today's conference call. You may now disconnect. All conference hosts have hung up. This conference is over. Thank you.