Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Analysis

Soriana Posts Solid Growth and Strategic Progress

Soriana reported a robust fourth quarter with total revenues climbing to MXN 49.407 billion, marking a 9% increase over the previous year, while annual revenues grew by 6% to MXN 176.120 billion. The company's real estate revenue also witnessed an 11% surge, boosting occupancy from 83.7% to 89%. Focused on improving competitiveness, Soriana saw the most significant sales performance in low-price formats such as Mercado and Mercado Express, catering to the lower income demographic. Furthermore, their e-business flourished, outlined by a 61% sales surge in the Soriana app and exceptional growth during key sales events. Gross profit for the quarter was MXN 11.435 billion, a 9.3% year-over-year increase. Despite challenges like higher energy costs, EBITDA for Q4 reached MXN 4.34 billion, a 4.6% rise. The quarter concluded with a net income of MXN 2.46 billion, up 17.2% from the previous year. The annual net income showed a 2.8% improvement at MXN 4.908 billion.

Operating in an Evolving Retail Landscape

Soriana, a prominent player in the retail sector, has identified 2023 as a transformative year. Grateful for their stakeholders' trust amid rapid industry changes, the company has focused on a strategy revolving around expansion, investment in competitiveness, growth in e-business, and the revamp of their own brand.

Expansion and Capital Investment

Soriana has been aggressive in their growth, directing a total of MXN 7.2 billion towards capital investments. This effort led to the opening of 11 new retail stores across various formats throughout 2023, with additional stores slated to commence operations in early 2024.

Commitment to Affordability

In line with aiding Mexican families financially, Soriana has collaborated with federal initiatives to offer basic foodstuffs at reasonable prices. This effort has earned them recognition as one of the country's most affordable stores, highlighting their commitment to price competitiveness.

Bolstering E-Commerce Growth

The Soriana app experienced a 61% surge in sales, benefiting from technological advancements and continuous improvements aimed at expanding the business. Their online platform, particularly during popular sales events such as Buen Fin and Hot Sale, saw significant increases in sales.

Steady Financial Performance

Soriana reported a 9% rise in total revenues for Q4 2023 at MXN 49.407 billion, culminating the year with MXN 176.120 billion, a 6% annual increase. Real estate revenue also showed an uptick, rising by 11%, with occupancy rates improving from 83.7% to 89%. The gross profit for the quarter grew by 9.3% to MXN 11.435 million, representing 23.1% of total sales. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for Q4 reached MXN 4.34 billion, an 8.6% margin despite contracting by 30 basis points, and annual EBITDA reached 7.3% of revenue. Net income for the quarter saw a respectable 17.2% growth to MXN 2.46 billion, amounting to a 2.8% annual increase.

Own Brand Initiatives and Market Strategy

Soriana's private brand performs differently across their formats, aspiring to reach 35-40% market share in City Club, 20-22% in Super and Mercado Express, and looking to hold approximately 20% in Price Club over the next few years.

2024 Outlook and Strategic Priorities

The company sets forth concrete ambitions for 2024, aiming for an in-store sales growth of 6%, margin expansion of 25 basis points, and breaking their CapEx record with an investment of MXN 8 billion. A significant portion of this investment will go towards opening 17 new stores, with a special emphasis on enhancing the digital platform, particularly their website and app.

In-House Financing of Capital Expenditure

Concerning debt management, Soriana intends not to increase their debt levels but rather to finance their CapEx plan mainly through internal cash flows. With strategic financial planning already in place, they aim to end the year with a robust safety net of cash reserves.

Extraordinary Revenues and Operational Adjustments

Soriana also benefited from extraordinary sources of revenue, such as the recovery of their real estate business and the strategic sale of surplus land. Additions to other income included the one-off recovery of insurance claims.

Addressing Labor Costs and North Region Challenges

Facing increasing labor costs due to the rise of minimum wage and labor law changes in Mexico, Soriana has counterbalanced these expenses by enhancing efficiencies and cost-saving measures, especially in areas such as energy management. Although labor costs pose challenges, particularly in the northern region of Mexico due to the local job market dynamics, Soriana sees these wage increases as potent drivers of in-store consumption, given that much of this additional income flows back into basic household expenses.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, good afternoon, everybody. Welcome to this conference call about the results for Q4 2023 and year-end figures. Today, we have Mr. Ricardo Martin Bringas, General Director of Soriana; and Mr. Rodrigo Benet Cordova, Director of Finance and Administration. Together, they will discuss the financial results of Q4 and end of year 2023. They will give you a summary of the last figures of the company.

[Operator Instructions] Keep in mind that the phone conference could be recorded. I now give the floor to Ricardo Martin Bringas.

[Ricardo Martin Bringas, executive]

Thank you very much. Good afternoon, everybody, and thank you for joining us in this conference call. Along with Rodrigo Benet, Director of Finance and Administration, we will discuss the financial results of Q4 2023 and year-end figures.

First of all, I would like to thank all of our stakeholders for trusting us every day since the sector has been undergoing important changes over the last few years, and 2023 has been no exception. These changes have led us to a constant evolution that will allow us to continue growing, such as we set out as an organization at the beginning of 2023, a year in which the strategic foundations of this organization were to resume expansion, investing in competitiveness, grow our e-business and relaunch our own brand.

Regarding expansion, I am pleased to confirm that throughout '23, we made capital investments totaling MXN 7.2 billion, among which we prioritized investing resources in 18 new stores in all formats throughout the country, with 11 units completed during 2023 and the rest opening in early 2024, making this the beginning of our expansion plan that will allow us to open over 50 stores per year in the medium term. We also invested in 45 remodeling projects, store format conversions, maintenance and equipment replacement in all of our formats, which allows us to provide operational improvement and convenience to our customers. We are also reinforcing our land portfolio, which is necessary to achieve the desired expansion. And we continue to invest in projects that will allow us to achieve the desired expansion in the medium term in both physical stores as well as in e -- digital e-business and strengthening our omnichannel approach.

As for competitiveness, we have supported the finance of Mexican families by joining the federal government initiatives with the [ classic ] program by offering the basic food basket at a low price and being recognized week after week as one of the most affordable stores in the different areas of the country.

Moving on to e-business. We are pleased to report that the Soriana app had a 61% growth in sales as a result of technological development and improvements that are continuously implemented to further grow the business. And this year, we achieved a sales growth of 74% during Buen Fin and 18% during Hot Sale.

Similarly, in March 2023, we launched our online City Club, which has been extraordinarily well received by our customers and is growing rapidly in terms of both number of orders as well as average tickets.

Going straight to the company's results. In the fourth quarter, total revenues amounted MXN 49.407 billion, which is a 9% increase over those of the same quarter of the previous year and an annual level of MXN 176.120 billion with a 6% increase in total revenues year-over-year.

Regarding real estate revenue, we ended the year at [ MXN 2.806 billion ], which is an 11% increase over the previous year as well as a significant improvement in occupancy going from 83.7% to 89% in the last 12 months.

Thanks to the amiable conditions we have developed for our tenants with exclusive programs to benefit their businesses as well as the support we have provided in contingency situations, which has increased their trust and preference when choosing where to locate their businesses.

As for the results by format, we had the best in-store sales performance in the low-price formats such as Mercado and Mercado Express, which are strongly targeting the lower income population, and that is exactly where competitiveness becomes more relevant. Competition is neck and neck with the segment leader, which is why at Soriana, we took actions to do better than our competitors, paying close attention not only to price, but also to the quality and variety of products, image, distribution. And we even invested in 35 stores to make it easier for customers to browse and significantly improve their shopping experience thus achieving ticket and traffic growth.

In 2024, we will continue with the same strategy. And in addition, we will seek to optimize our sales for staff to provide a more efficient service to our customers.

As for Hiper and Super formats, 2023 has been a year of great commercial activity focused on improving our competitiveness and the price perception of our customers. We pushed our own brand and exclusive brands as a differentiator, and we increased the supply of imported goods. We also supported the development of regional and artisanal vendors to complement our gourmet area with the highest quality domestic and imported products, thereby strengthening our relationships with countries such as Canada, where we have a large share of products in all categories.

And finally, our City Club format had 2 openings this year, 1 in the state of Jalisco and the other in the state of Campeche, and it continues to improve our growth in active new members and in this year with 1.2 billion members.

Similarly, as part of our commercial strategy, we reinforced our alliance with dunnhumby, thus strengthening our commercial strategies not only for better interaction with our business partners, but also to pursue the greatest benefit for our customers.

As a result, the total company gross profit for the quarter reached to MXN 11. 435 million, which represents 23.1% of total sales and a 9.3% increase on a year-over basis. Gross profit reached [ MXN 40.134 billion ], accounting for 22.8% of sales, an expansion of 60 bps and a 9% increase compared to the previous year as previously mentioned.

Moving on to the expenses. And to mention the most relevant items, the cost of personnel with an 8.5% nominal increase as a result of the 7 new stores and a better coverage of vacancies across the country. On the other hand, the cost of energy had a 9% increase due to a disruption in the generation of energy that we had in a wind farm, which lasted 4 months with a 170 million-kilowatt impact at higher rates during that period with a MXN 100 million impact to the company as a whole.

Similarly, equipment and building maintenance had a 7% annual increase due to the acceleration of remodeling and corrective works to have our stores in the best operating and structural conditions.

As a result, EBITDA for Q4 2023 reached [ MXN 4.34 billion ], which represents an 8.6% margin with a contraction of 30 bps and a 4.6% increase. On an annual basis, EBITDA reached [ MXN 12.905 billion ], which represents 7.3% of revenue. Net financial cost reached MXN 737 million in the quarter, indicating a 89.6% increase, mainly due to the closing of the equity swap in the month of October, which generated a MXN 170 million reduction in the financial product compared to the same quarter of the previous year. Financial expenses showed 36% increase mainly due to the increase in the reference rate or benchmark rate.

Finally, the quarter ended with a net income of MXN 2.46 billion, which equals 5.8% of sales and is a 17.2% increase compared to the same quarter of the previous year. On an annual basis, net income was MXN 4.908 billion, which equals a 2.8% increase.

In the case of Sodimac, our home improvement format, we now have 13 stores nationwide with 115,000 square meters of sales floor, a 31,000 SKU catalog and 1 opening in 2023, which performed very positively and had an excellent customer acceptance, significantly boosting our digital business with a focus on delivery times nationwide.

Furthermore, the financial business with Falabella has physical and digital modules to cater to customers in 485 locations with 669,000 active cards. And it closed the year with a loan portfolio of MXN 4.7 billion. This is one of our most important alliances that has positioned itself quickly in seasonal events such as Buen Fin 2023, where it ranked first in sales with interest-free promotions, beating some of the most important banks in the country by more than double.

Without further ado, we would like to end our presentation by thanking you for your participation, and we will now open the floor for questions, where we will gladly address all of your concerns. Thank you.

[Operator]

[Operator Instructions] The first question is from [indiscernible] from Santander.

[Unknown Analyst]

I would like to know -- you mentioned the private brand. If you can shed some more light on how much sales are represented? And how much you're expecting from here and out on this matter?

[Unknown Executive]

Of course. As a company, we're looking at 12% per format. And it also has different purposes, of course, or different goals. Example [indiscernible] is to take it to 35% to 40% in the next 3 years in terms of market share. In the case of Mercado and Super, we're looking at 20%, 22%. And in the case of Price Club, we want to make it to about 20% as well.

[Unknown Analyst]

If I may -- you mentioned expansion plan. What formats are you focusing mostly on?

[Unknown Executive]

We are mainly focusing on the supermarket format and Hiper, Mercado also. In terms of investment, that is -- both volumes in all formats, which imply less investments such as Express is a bit higher.

Now your question, I believe, has to do with my comment on the expansion program in upcoming years. We want to reach 50 stores, yes, exactly. So in what format are we expecting to see more source? Well that would be Super Mercado, Express, Mercado and Hiper, in that order.

And supermarkets investment is less rather than Mercado's. Now in terms of money investment, I would say they will be balanced out considering the number of stores and supermarkets.

[Operator]

[Operator Instructions] Our next question is from Miguel Ulloa from BBVA.

[Miguel Ulloa Suárez, analyst]

As to 2024 expectations, what do you expect in terms of results?

[Rodrigo Córdova, executive]

Miguel. Yes. Items we're following -- summarizes in 4 main items, we expect a sales growth in store, which is 6%. We want to expand 25 margin points. We want to break the CapEx investment record. We're looking at MXN 8 billion on CapEx, as Ricardo mentioned, with a strong market share in new stores. .

And within this CapEx, we have the 17 stores that we are planning to open. And not forgetting stores, we are planning to open 4 Sodimac along with our Falabella partners. Obviously, we will continue investing strongly in our technological platform, especially with the latest versions of our website and our app. As we have mentioned, this is also a very relevant part of our strategy for the future of this organization. Basically, that's the guidance in a nutshell.

[Miguel Ulloa Suárez, analyst]

I have a couple of more questions with regards to growth in the digital aspect -- shed some light on what you are expecting for this year. And the second question is regarding competition in this [ component ], is there any concern or any action you will carry out?

[Rodrigo Córdova, executive]

Yes. As we mentioned, we are very pleased with our channels. Specifically, the app is leading growth, which is well aligned with the market. Let us remember, if we look at nationwide statistics, I think it's about 70% of -- I think there's 70% Internet access in the world for mobile devices. So it's not important for -- not only is it important for Soriana, but also for all the departments. So it makes sense that our app is leading growth in all of our channels. Let us remember that currently, the company has 5 channels within the digital world or e-commerce, if you will. We have the website. Now we have a City Club website. We also have the app. We have 2 third-party channels. Let us remember, we're still operating with Rappi and Uber, previously Cornershop and we also have our own channel, but that one is increasingly being unused.

And the app has grown a lot in fact. Its growth on a yearly basis surpassed 61%, which is where we are focusing most of our tech releases, the latest versions. We have taken a swift approach to develop new features for our customers, which has been giving those really good results. And we're also adding personalized offers. As Ricardo mentioned in his initial statement, which has to do with all of our work with [indiscernible] which focuses on customer knowledge, and it gives them a direct way to contact them.

Honestly, app downloads have been increasing, and we can now personalize offers or customize offers. That's for your first part of the question.

Now as for the second part, it is no surprise that there's a competitor that all of our competitors are taking seriously, which recently presented an initial offer in U.S. markets. But of course, it's one more competitor. I'm sure it is more relevant for you because of this, but for us it is a competitor that we have been looking at for the last few years. We have mapped them out, and we compete with them out in the streets. And just with -- as with all of our other competitors, we have to monitor them every day, especially when in regards to competitive advanced supply than grade. This only goes to show that the Mexican market still has great potential. And there's room for several players. So one more competitor -- we had to continue final -- but this is not news. This competitor has been around us for years, but for our market, it became more relevant due to its offer. But it's nothing new for us.

[Operator]

[Operator Instructions] At the moment, there are no questions in English channel. However, we have 1 more question in the Spanish channel from [indiscernible] from MetLife.

[Unknown Analyst]

What do you expect with regards to debt for this year? I want know if your CapEx plan is to be financed with internal resources? Or do you need any additional debt for that?

[Rodrigo Córdova, executive]

This is Rodrigo. And no, as we mentioned, basically, the organization planned all of its debt management so that we didn't have any over debt this year because it's an election year. We try to be very conservative and all of the planning took place a while back. So from here out, we want to decrease our debt. We will continue with that plan. This year, following the same strategy, we don't have any exploration in that for 2024. It will actually expire in 2025. However, we are getting ahead to have all of the refinancing ready. So really, throughout the year, we will simply take some of our work capital lines because we have bilateral loans with several financial institutions or work capital, really. But no, we do not expect any increase in debt and in fact the flow generated by the company will be targeted at CapEx.

We also expect to end the year with a relevant [indiscernible], which is part of our piggy bank, if you will, for 2025, where -- when we will start paying our debt. But in conclusion, we will not increase our debt. And we want to finance all of our CapEx with the flow of the same organization, and it's all pretty much set in that regard.

[Operator]

Our next question is from Alejandro Fuchs from Itau BBA.

[Alejandro Fuchs, analyst]

I have a couple of questions. First one is, you mentioned extraordinary revenue in terms of gross revenue throughout the fourth quarter, we would like to know a little more about it.

And secondly, I want to understand, what should we expect for 2024 in the future in terms of salaries and covering the vacancies you mentioned? From minimum wage pressures and some constitutional changes for the Labor Week in Mexico. How is the company planning to mitigate these potential impacts?

And the final question if I may. Considering your exposure in the north side of Mexico, I want to know if you have trouble finding staff or personnel. So if you can shed any light on this, I would greatly appreciate it.

[Rodrigo Córdova, executive]

Of course, my pleasure, Alejandro. So going to your first part of the question is to other income of the company. Let's go from the most to the least important. What gives us most increase is the recovery in the real estate business. We are very pleased. We have practically reached pre-pandemic levels in 2024. In fact, concerning our trend, we will surpass pre-pandemic levels in terms of average competency of the organization. And in fact, we had a lot of recovery in all real estate items.

Our parking lot business is doing quite well. And we are very happy, our tenant base is showing that we have pretty good diversification. Honestly, we have about 50% of our business -- of our real estate business with institutional customers, maybe a little more. And the rest are more regional businesses, if you will, which has given us a really good blend of long-term contracts to increase income. So this pleases us very much. The main -- that's the first part that helps us with income.

Now secondly, we have some sales in this expansion plan, we are resuming efficiently, as Ricardo mentioned. And this has led us to check our land portfolio. And in that review, we are using many of these lands to open new units. But on the other hand it's helping us investing in exceeding lands. For example, we have some parking lots that are next to our stores that we will no longer develop and we will sell them, and that will be part of additional income that are helping us.

And that's not a continuous thing. I mean, it is continuous because we always have any additional pieces of land that we can sell, but these are different units at the end of the day. And lastly, in Q4, we have the recovery of insurance, which is also a very specific case given the incidents in Acapulco. So in that order of priority, basically, this is what's going on in terms of other income now.

As to your second question, concerning worker cost, indeed, as you mentioned -- or labor costs. Labor cost is one of the most important expenses for this organization without the latest increase in minimum wage. But let us remember, a couple of years in the company, we didn't have any a minimum wage collaborator. So we're increasing minimum wage significantly, even if we didn't have any collaborators with minimum wage, it is, of course, puts in some pressure. However, I think the organization has been able to absorb -- by reducing all other expenses.

Let us remember that throughout last year -- towards the end and early this year, we mentioned sometimes some efficiency and optimization plans, specifically during our second most important expense of the company, which is energy. We can proudly say today that all of our stores are, first of all, connected to sustainable energies that provide us with a significant savings. And now we have also switched all of the lighting of the organization, and we are in the process of changing all of the cooling equipments all across the organization. This has presented very significant savings that allow us to make up for the pressure in the labor item because you mentioned this is the second most significant expense in the company.

Now savings and compensation could have been greater. We can have the events that Ricardo mentioned because due to incidents, such as that in our wind farms. One of our wind farms was out of service for over a quarter, which represented an important amount. But well, we are figuring out how to make up for this. Honestly, we can't do nothing else. At the end of the day, minimum wage is a legal government matter which we have to follow. Of course, this pressures us, but on the other hand, let's consider the positive of this. When there's an increase in the minimum wage in the country, Alejandro, we're looking at a part of the population who have basic needs. So we look at this as a positive thing because a lot of this increase will be returned in household finances that will represent expenses in our store. It's not that the increase will make them book a holiday in Europe. They're still covering their very basic needs, and part of this increase will be reflected in consumption or in-store purchases.

So it's really not any bad news. We have to face it. I think the organization is handling it quite well. And of course, there has been some sort of pressure.

And lastly, you mentioned our northern location when it comes to hiring. First one, the company is a lot more diversified. Currently, the central part is more important now by 3 points rather than the northern part of the country. And the south part is still a great area of opportunity. But yes, we do have very important conditions in the north side of the country. And there's more pressure in terms of hiring. We also have nearshoring issue and we also have a lot of overseas companies in terms of manufacturing and motive have changed. And we would like -- we said in addition to an increase in minimum wage, we have to have some increases to be more competitive as bosses or contractors. Yes, we need to continue doing this. Yes, we are a varied company. We're a very intense company in terms of human capital, but there's also a positive in terms of expenditure and consumption.

[Operator]

[Operator Instructions]

[Unknown Executive]

Very well. Thank you very much, everybody. We hope to have answered all of your questions. And see you next time. Thank you.

[Operator]

Soriana Organization would like to thank you for participating in this phone conference. You can now log off.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]