Wal Mart de Mexico SAB de CV
BMV:WALMEX

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Wal Mart de Mexico SAB de CV
BMV:WALMEX
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Price: 53.49 MXN 3.08% Market Closed
Market Cap: 933.2B MXN
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Earnings Call Transcript

Earnings Call Transcript
2019-Q1

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Operator

Good afternoon, ladies and gentlemen. Welcome to Walmart de México y Centroamérica's First Quarter 2019 Earnings Conference Call.

P
Pilar de la Garza
executive

Good afternoon. This is Pilar de la Garza, Investor Relations Senior Director for Walmex. Thank you for joining us today to review the results for the first quarter 2019.

On today's call, with me are Guilherme Loureiro, President and Chief Executive Officer for Walmart de México y Centroamérica; and Olga González, Chief Financial Officer. The date of this call is April 25, 2019. Today's call is being recorded and will remain available at www.walmex.mx.

Before we start, let me remind you that the content of this call is property of Wal-Mart de México S.A.B. de C.V. and is intended for the use of the company's shareholders and the investment community. It should not be reproduced in any way.

This call may contain certain references concerning Wal-Mart de México S.A.B. de C.V.'s future performance that should be considered as good faith estimates made by the company. These references only reflect management's expectations and are based upon currently available data. Actual results are always subject to future events, risks and uncertainties, which could materially impact the company's actual performance.

Now it's my pleasure to introduce our CEO, Gui Loureiro.

G
Guilherme Loureiro
executive

Thank you, Pilar, and good afternoon, everyone. Thank you for joining us to review Walmex' first quarter 2019 results.

I would like to start this call by thanking everyone who attended our Annual Analysts' Meeting last month. As we shared with you, the retail environment is undoubtedly evolving, and we recognize that what got us here won't necessarily get us to where we need to go in the future. That's why we have been proactively taking thoughtful and deliberate actions to transform our company and position it for future success.

For 2019, we defined 5 strategic priorities. The first priority is to maintain market-leading growth; second, to continue to build and implement a winning omnichannel strategy; third, to drive a strong EDLC mentality, focusing on productivity to reinvest in our business; fourth, to evolve our way of working, innovating faster and with data analytics capabilities; and the last one is to inspire and satisfy our associates, developing an enterprise agile culture.

Now I would like to begin by discussing our sales performance, and then Olga will cover the financial results for the quarter. Please consider that when I talk about Central America, I'm making reference to figures on a constant currency basis.

On the first quarter, we delivered total revenue growth of 4.6%. Mexico grew 5.8% and Central America 2%. The beginning of the year was challenging. We faced fuel shortages in January that impacted traffic and the Easter week shift from March to April. And we were able to keep our growth momentum and, more importantly, to maintain our customers' preference.

Our growth continues to be driven primarily by same-store sales. During the quarter, same-store sales in Mexico grew 4.7% and decreased 1.1% in Central America. The 2-year stack for same-store sales in the first quarter was 14.7% in Mexico and 6% in Central America.

We drove consistent growth across all regions in Mexico. The Northern region of the country had the highest growth, followed by the Center, Metro and Southern regions.

Regarding formats, Superama posted the highest growth. Unlike the rest of the formats, the Easter week flip had a positive effect in Superama. We are transforming our Fresh department with a 360 program that's allowing us to serve our customers better and to drive traffic to the stores.

In Sam's, we had the second edition of the Member Fest with great results. The connection we have developed with our members has translated into a deeper knowledge of their shopping habits and a more personalized attention. This has been key to maintaining their preference.

Walmart also posted strong growth. The successful implementation of seasonal programs, such as the Three Kings Day or the Cleaning and Organization event, together with a fast integration of omnichannel capabilities, is boosting the format's growth.

In Bodega, we implemented the Morralla campaign and another program to drive basic product sales called Canasta Bodega, with good results. We also launched the first 2 self-scanning stations in Bodega with the goal of delivering a seamless shopping experience to our customers.

In terms of merchandise divisions, our core division, Food and Consumables, had the highest growth followed by General Merchandise and Apparel. The Apparel division was impacted by delays on the merchandise flow caused by non-tariff measures improperly imposed by the authorities. These measures has been recently corrected.

The Mexican Ministry of Economy is reviewing the guidelines on maximum percentages of sub-valuation to reference prices imposed by the authorities to import merchandise, which could pose further problems in this segment and/or higher prices to the end consumer. This issue, together with the warmer-than-expected weather in the winter season, had an impact on the division's sales and gross profit.

In Central America, we continued to outpace the market despite a challenging environment. Honduras posted the highest growth. The rest of the countries were impacted by a weak macroeconomic environment in the region that is pressuring customers' budgets and affecting economic conditions in general. It is also important to note that the Easter week flip and overall calendar effects typically have a greater impact in Central America than in Mexico.

During the quarter, we successfully implemented programs, such as Back to School and price point campaigns, with different themes in each country. The team is working very hard to drive sales in the region, but given the macroeconomic challenges we are facing, we expect growth to resume at a very slow pace.

We continue to make progress in our omnichannel business. On the first quarter 2019, we started online grocery operations in 41 additional Walmart stores. We are offering this service now in 236 stores from the Walmart and Superama formats. We also revamped and rebranded the Online Grocery App for a better customer experience.

We launched the first pickup tower in the country with the goal of creating a seamless and more enjoyable shopping experience. We are testing this omnichannel initiative to give our customers another convenient option to pick up the products they love.

We are proud to share with you that during the quarter, we refreshed the platform for extended catalog. This migration will enhance the overall customer experience and improve our business performance, too.

E-commerce is effectively contributing to our growth. During the quarter, e-commerce sales grew 49%, and GMV grew 56%. E-commerce represented 1.1% of total Mexico sales and contributed with 0.4% of our growth.

I would like to mention that starting this year, we will be reporting only online growth excluding call center operations to provide a better view of the trends and health of our business.

Looking at our performance versus the market. In the first quarter 2019, we outpaced ANTAD self-service by 180 basis points. With this result, we have now outperformed the market for 17 consecutive quarters, demonstrating the quality and consistency of our results.

I would like to give you an update on the progress we are making in the logistics network redesign. As you might recall, we announced a significant investment in our network to expand the capacity and enable growth, reduce costs and improve working capital. I'm proud to share with you that in the next 12 months, we'll be opening 4 distribution centers: 2 fulfillment centers, one in Guadalajara and one in Monterrey; and 2 distribution centers for dry goods, one in Merida and one in Chihuahua.

We are excited about building an omnichannel supply chain for the future, improving our level of service and our customers' shopping experience, opening up a new pipeline of new stores and setting us up for an accelerated e-commerce growth in Mexico.

Now moving to new store growth. During the quarter, we opened 12 new stores: 9 in Mexico and 3 in Central America. New stores contributed 1.7% to total growth, which, considering the normal sales ramp-up of a new store, positions us to reach the expected contribution for the year.

I want to highlight the opening of a very special store, Walmart Punto Guadiana in Durango. This store has special access features, accessible furniture, help buttons and tactile guides. These features improve accessibility for pregnant women, seniors and people with reduced mobility. Opening this store represents a great achievement for the company. Everyone at Walmart is transforming, and this transformation also implies adopting better and more inclusive practices, with the purpose of making it possible for our customers with disabilities to do their shopping trips independently.

In Walmart, we value and encourage diversity. We believe that unique styles, experiences, identities, ideas and opinions among our associates enrich our culture. And stores like Punto Guadiana, together with our diversity and inclusion strategy, will allow our associates with disabilities to develop their potential.

With that, I turn it over to Olga who will cover the financial results of the quarter.

O
Olga González
executive

Thanks, Gui, and good afternoon to all of you.

I will start by reminding you of the framework that we presented last month at our analysts' meeting as it will continue to guide the way we manage our business going forward. We're focused on delivering broad-based, sustainable and profitable growth, driving productivity to reinvest in the business and refining our capital allocation and efficiency.

Now I will cover the financial results. Please keep in mind that starting this year, the results reflect the adoption of the International Financial Reporting Standards, IFRS 16, related to leases.

We delivered another solid performance in the first quarter. Total revenues grew 5.8%. Gross profit increased 4.6%, and gross profit margin decreased 20 basis points to 22.5% as a result of a higher level of markdowns to keep healthy inventories and additional costs that stemmed from the issues we experienced with the Apparel merchandise imports.

SG&A grew 1.6%, and we achieved 60 basis points of leverage. By focusing on Every Day Low Cost and productivity, we were able to grow expenses at a lower pace than revenues.

Operating income grew 9.2%, and EBITDA grew 14.6%. EBITDA margin expanded by 80 basis points to 11%.

Now shifting to Central America. Total revenues grew 2.0% on a constant currency basis. Gross profit margin remained at 24% of sales. In order to reinforce our price leadership, we included more categories and competitors in the price gap measurement, which represented a deeper investment.

General expenses increased 0.6% as a result of a greater focus on productivity. We are improving inventory management with the implementation of auto replenishment tools and the product Ninja at the stores, which has translated into higher productivity and better shopping experience.

Operating income and EBITDA grew 9.3% and 16.8%, respectively.

Overall, consolidated results were positive among a challenging environment and a tough comparison base. Total revenue grew 4.6%. Gross profit increased 3.7% to 22.7% of sales. Expenses grew 0.9%, 370 basis points below total revenue growth. EBITDA increased 14.5%, and EBITDA margin increased 90 basis points to 10.8%. Net income grew 3.8%.

Regarding SG&A, we're focusing on productivity to reinvest in our business. We were able to reduce our operating expenses by 42 basis points and expenditures related to store remodeling and maintenance by 5 basis points.

I am proud of the team. This is a great accomplishment considering the Easter week flip. We also invested 21 basis points in new stores and e-commerce to continue to position our business for the future.

The adoption of the IFRS 16 and other accounting reclassifications represented 28 basis points. Excluding the adoption of IFRS 16, EBITDA margin would have expanded, we would have leveraged expenses, and net income growth would have outpaced EBITDA growth.

Now moving to the balance sheet. We continue to increase our financial strength. Our cash position decreased by 13% as we continue to distribute to shareholders the excess cash that we're not using to fund strategic projects. We were able to maintain a healthy financing level. Accounts payable grew 5.8%, and inventories grew 8.4%. This increase was driven by the Easter week shift as we built up inventory to prepare for the spring season.

We are focused on delivering shareholder value. Cash generation increased by 10%, reaching MXN 61.8 billion. Over the last 12 months, we returned MXN 28.5 billion in the form of dividend to our shareholders and invested MXN 19.3 billion in our business. Today, we paid the first installment of 2019's dividend. The total dividend we paid added up to MXN 0.63 per share composed of an ordinary dividend of MXN 0.28 per share and an extraordinary dividend of MXN 0.35 per share. This year, we reduced the number of payments to accelerate the distribution of cash to our shareholders.

In closing, I would like to summarize the key highlights of the quarter. The resilient nature of the business is allowing us to keep a positive trend, and we are making adjustments to grow faster. Our indisputable price leadership and operational excellence are allowing us to grow ahead of the market. We are positioned to continue delivering strong results, and we are investing in our business to maintain our competitive advantages in the long term.

Thank you very much, and as always, we will make ourselves available to receive your calls to answer any questions you might have.

Operator

With this, we conclude Walmart de México y Centroamérica's First Quarter 2019 Earnings Conference Call. You may now disconnect.