Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2021-Q1

[Pilar de la Garza, executive]

Good afternoon. This is Pilar de la Garza, Head of Strategy and Investor Relations for Walmart. Thank you for joining us today to review the results for the first quarter 2021. Today with me is Guilherme Loureiro, President and Chief Executive Officer for Walmart de Mexico y Centroamerica; and Milton Brandt, Chief Financial Officer.

The date of this webcast is April 27, 2021. Today's webcast is being recorded and will be available at www.walmex.mx.

Before we start, let me remind you that the content of this webcast 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 investment community. It should not be reproduced in any way.

This webcast may contain certain references concerning Wal-Mart de México S.A.B de C.V. 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.

[Guilherme Loureiro, executive]

Thank you, Pilar, and good afternoon, everyone. Thank you for joining us today to review our results for the first quarter of 2021.

Before starting with the quarterly performance, let me give you a quick update on our operations and support actions in the face of the ongoing pandemic. Our hearts are with all of those affected by the pandemic. The beginning of the year was particularly difficult for the countries in which we operate as cases, hospitalizations and deaths increased after the holidays. Today, we are in a better situation, yet we can't let down our guard. Our priorities remain consistent.

The first one is to support our associates. We are very proud of each one of them, and we have tried to show them our respect and gratitude with our words and our actions. During February, we decided to increase the discount we granted to our associates to shop online or at the stores from 6% to 10%.

Besides keeping all the health and safety measures in place in our stores, DCs and offices, we are evolving our business model to serve our customers how they want to be served, by expanding our omnichannel capacity and developing new solutions beyond retail. I will talk about this in more detail later in the presentation.

We are also doing our best to help our communities, suppliers and business partners. We decided to turn the temporary financing program we implemented last year for micro and small suppliers into permanent program. We will continue to work hand-in-hand with all our suppliers and business partners to deliver our value proposition for our customers.

We continue to face challenging times. However, it's also a time that presents great opportunities. During our Walmex Day, we shared with you a new chapter of our strategy. 2020 accelerated many customer trends, and we have the talent, culture and assets to enter a new era of retail from a position of strength. We feel encouraged by the opportunity in front of us. We are building new capabilities and businesses and designed them to work together in a mutually reinforcing way.

The self-service business is the foundation of everything, and we will continue to invest in it to develop the leading retail ecosystem in Mexico.

Now let's look at our performance in the quarter. Please consider that when I talk about Central America, I'm making reference to figures on a constant currency basis. We had an atypical comparison base in first quarter '21 as we lapped the leap year and the panicky purchases triggered by the start of the pandemic in 2020.

We've managed to grow total revenues in Mexico by 0.5%. However, revenues decreased 2.7% in Central America, resulting in a 0.3% decrease in consolidated revenues. Despite a tough comparison, our underlying performance is strong. We reached a 12.6% 2-year stacked total revenue growth at a consolidated level.

Let's start by reviewing Mexico's results. During the quarter, same-store sales decreased 0.6%, which is a positive 10.2% on a 2-year stack. Sam's Club continues to show momentum. During the quarter, we hosted our open house event, where we allow the customers to shop without a membership and try out the great merchandising value in our clubs. We had an exclusive online sale, where we received 5 online orders every minute. And we hosted virtual concerts that our members enjoyed.

At Walmart, we run seasonal campaigns with different focus areas: from beauty to cleaning, or gardening to support our customers while they continue to stay at home.

During the quarter, we also changed the look of our Superama's website and app. We start to transition into the Walmart Express concept. Later in the year, we'll merge both apps and Walmart Express customers who have access to a broader general merchandise assortment. The NPS for Walmart Express online is one of the highest among our formats, which shows our customers appreciate this change.

In Bodega, we refreshed our iconic campaign Morralla and reinforced multi-savings, driving 30% sales growth. 6 out of 10 customers bought an item that participated in the campaign.

Regarding regions, the North and South posted the highest growth. Performance in the center and metro regions was softer as the operating restrictions imposed by the authorities were stricter in these regions at the beginning of the year and the macroeconomic conditions are less favorable than in the rest of the country. Looking at same-store sales by category, apparel and general merchandise showed improvement versus previous quarters, while core divisions, grocery and consumables, faced a much tougher base as panic purchase last year were focused on those divisions.

During the first quarter 2021, we were able to exceed the market's growth. We outpaced the self-services and club segment measured by ANTAD by 370 basis points.

Our Every Day Low Price proposition continues to gain strength. And our efforts to operate with discipline and continue to improve our service levels are allowing us to gain our customers' loyalty.

We continue to face a challenging environment in Central America, yet we have been implementing many initiatives to keep winning our customers' loyalty. We are reinforcing our price leadership through commercial campaigns such as Precios Rojos or Quetzales Campeones and providing quality products at the best prices through our private brands. Our customers responded in a positive way. And in the quarter, the private brands share of total sales increased 290 basis points.

We are also making progress with our productivity and innovation agenda, increasing the number of retail ready packaging items. We continue to optimize our assortment and the percentage of transactions done through our self-scan and self-checkout solutions increased 1,000 basis points in first quarter '21 versus last year.

Moving to other topics. As all of you know, our goal is to build an omni-driven ecosystem, and we are moving fast in this direction. In the quarter, we expanded our on-demand service in Bodega to 34 additional stores. We now have the service available to 135 Bodega stores in 23 states. Even in this early stage, Despensa a tu Casa has a double-digit share of total e-commerce sales of the format. We also enabled 60 additional Walmart and Superama stores with the on-demand service, reinforcing our coverage in key cities such as Queretaro, Puebla, Yucatan, Guanajuato and Tamaulipas.

We expanded the crowd sourcing model to 55 stores with encouraging EPS and on-time results. This model allows us to serve customers faster and to handle the variable demand.

Using our stores as fulfillment centers to leverage our proximity to our customers is a key strength that we continue to develop. We are testing a hub model for the on-demand business, where we consolidate orders in our high-density and demand areas to provide a consistent and faster service and improve our customers' experience overall. We launched a new technology to close the gap between what we offer in-store and online, especially in the apparel and toys categories. We also enabled merchandise from Prichos, our dollar store type department on on-demand.

I'd like to highlight that during the quarter, we reached another record NPS for on-demand, and we'll continue to evolve our business and invest to provide the best shopping experience for our customers.

To lead in omni, we need to accelerate extended assortment, and we have good news to share with you about this. During the quarter, we launched a virtual store also bring brands that our customers love to our marketplace in Walmart and Bodega Aurrera. We now have 30 virtual stores complementing our assortment with a compelling apparel, home, lifestyle, electronics and outdoors offer.

We are just starting, but the opportunity is very encouraging, and I want to congratulate the team for this achievement.

E-commerce contribution to total sales growth continues to accelerate. During the quarter, contribution increased 190 basis points versus first quarter '20, reaching 2.6%. GMV growth was 155%, and net sales grew by 164%, representing 4.2% of Mexico's sales, 2.6x the penetration we had in first quarter 2020.

I'd like to highlight that in 2020, we were able to expand our market share on e-commerce by 280 basis points, as measured by Euromonitor. We can't be prouder of how our associates are adapting to change and accelerating our strategy.

Customers welcome us serving them in new ways. Our strength and assets position us uniquely to serve them, and they're being monetized in ways we haven't tapped into before.

We are making progress with Cashi. This quarter, we launched a 2% cash back to reward our customers' loyalty. Key use cases like online payments and card on file, which means customers will be able to link their cards to their cash accounts, will be launched later in the year.

During first quarter '21, 215,000 new users joined BAIT, resulting in a 385,000 users base. We launched BAIT in Sam's Club and a pilot for home broadband Internet to continue to reinforce our connectivity ecosystem.

Our advertising business is growing very fast, increasing the number of advertisers by more than 100% during the quarter, and sales grew over 80%. We launched a campaign in collaboration with Nestle and Procter and Gamble to help those who need it the most. Each time a customer buys a participating item, we donate an essential every day item. We are excited about the revenue-generating potential of our advertising business, Walmart Connect, which we expect to grow mid-double digits this year.

Logistics is one of the key areas of our strategy. Our network has been characterized as a competitive advantage, and we'll continue to invest in it to further reinforce our position.

We are currently doing 2 new DCs that will be ready to operate soon: one in Villahermosa for fresh merchandise that will open 2022; and one in Mexicali for dry goods that is about to start operations. These DCs will generate a circa of 3,200 direct and indirect jobs, serving 10 states and more than 500 stores.

Besides new DCs, our investment is also dedicated to the automation of our existing facilities. During the quarter, automated sorters and conveyors started operations in our Estado de Mexico DCs.

We are resuming new store growth at a faster pace. Following authorities' guidelines for construction and making sure conditions are safe, we opened 24 stores in the first quarter of 2021, which is the largest number of openings in a first quarter for the last 5 years.

In February, we opened Sam's Club Santin in Toluca, Estado de Mexico. It's a very special club that reflects how we are adapting our prototypes for our customers' evolving needs. Besides being fully omnichannel and inclusive for people with disabilities, it's our first lean club as we implemented a new infrastructure that empowers our associates even more. During the opening week, we reached record member affiliation and sales with almost 3,000 new memberships. I'm very proud of our associates for this achievement. For the quarter, new stores contribution to total sales growth was 1.1%.

Regarding Walmart Express, last year, we opened 2 new stores and converted 6 stores. Customer response has been positive, and results are encouraging. Currently, we are more than 15 stores that will be ready during April. Our plan is to finish all the conversions from Superamas to Walmart Express by the end of the year.

We take a multi-stakeholder view because we know that mindset and approach delivers the most valuable, sustainable business over time. By January of this year, we removed plastic bags from 100% of our stores, showing our commitment with sustainability. We were included in the Bloomberg Gender-Equality Index for the fourth consecutive year as the only self-service retailer in Mexico who is part of the Index. We ranked the first place on MERCO's survey as the company with the best response during the pandemic.

We will continue to focus on creating interest and share the value for our stakeholders using our strengths to help people live better and preserve the planet.

Before finalizing, I would like to mention that we have been preparing our company to fully comply with the recent amendments to the federal labor law and other labor, tax and social security laws. And we can confirm we'll be ready to adopt to them. The implementation of these amendments does not change our financial expectations for the year or our ability to deliver strategic plans.

Our associates are our greatest strength and a key enabler for our strategy. We want to Walmart to continue to be a place where they can be themselves, where they can learn, grow and have fun.

Thank you very much. Now I'll turn it over to Milton, who will cover the financial results of the quarter.

[Milton Brandt, executive]

Thank you, Gui, and good afternoon, everyone. Thank you for joining us today to review our results for the first quarter 2021.

Before I cover the quarterly results, let me remind you of our financial framework, which focus on 4 levels for value creation. The first one is quality growth. We will continue to drive broad-based, profitable and sustainable growth across the different formats, regions and categories, leveraging e-commerce momentum and previous investments. The second one is an EDLC mindset. We remain laser-focused on operating efficiency and delivering sustainable expenses leverage. The third is strategic capital management. We continue to optimize our working capital and to invest in high-return projects. The fourth is to deliver shareholder value.

Let's review the first quarter results. I will start with Mexico. During the first quarter, total revenues increased 0.5%. We continue to work with our suppliers to provide the lowest prices to our customers. We saw higher growth in margin driving categories, such as apparel and home, than in the rest of the business, which led to a 50 basis points gross profit margin expansion.

Expenses grew 2.9% as we paid a gratitude bonus to our stores, clubs and DCs associates to show them our appreciation for their hard work. And we invested in technology and in our e-commerce business. These investments are key to enable our omni-led ecosystem and to accelerate growth going forward.

As a result, operating income grew 80 basis points ahead of total revenues. And EBITDA margin expanded by 10 basis points to 11.7%.

Now I will talk about results in Central America. As Gui mentioned, top line growth continued to be softer in the region given the macroeconomic environment and the restrictions in place to contain the pandemic caused by COVID-19. The team did a great job launching campaigns and reinforcing our pricing positioning to drive sales. Despite the price investments, we worked together with our suppliers and reinforced our cost analytics program, so we were able to expand our gross margin by 70 basis points.

We will remain focused on price investments and in driving productivity by implementing technology and simplifying our business. Reducing price changes, optimizing assortment and implementation of self-scan are some of the projects that allowed us to leverage expenses during the quarter.

Operating income increased 8.8%. And EBITDA margin expanded by 100 basis points to 10.1%.

Looking at the consolidated figures. Total revenues decreased 0.3%. As Mexico and Central America delivered gross profit expansion, consolidated gross profit margin reached 23.3%. Operating income expanded by 20 basis points to 8.7%, and EBITDA margin was 11.4%, 30 basis points higher than in first quarter 2020. Net income expanded to 5.9% of sales, growing 100 basis points ahead of total revenues.

Now moving to the balance sheet. As we grow and reinvest in the business, our financial strength increases. We closed the quarter with a cash position of MXN 29.8 billion. Inventories increased 5.6% primarily due to a low base in 2020 as our inventory position was affected by the panic purchases. And accounts payable ended the quarter at MXN 79.2 billion.

In the last 12 months, we had a strong cash generation that enabled us to pay MXN 30.9 billion in dividends to our shareholders and invest MXN 16.7 billion to enhance our business, even with the limitations resulting from the measures imposed by the authorities in the various countries in which we operate.

Working capital required MXN 5.7 billion. We paid MXN 17.2 billion in taxes and finished the quarter with a cash position of MXN 29.8 billion.

Our company is resilient. By operating with discipline and becoming more productive, we will be able to offer the best prices to our customers and a better shopping experience while we deliver results and transform our business. We will continue to generate strong cash flows that will allow us to invest and to build a business that is even more prepared to face future challenges.

To finalize, I would like to say thank you to our associates. You had stepped up to the challenge, and you are making it possible for families to safely get what they need while delivering our strategy and positioning our company to win.

Thank you again for joining us today. As always, we'll make ourselves available to answer the questions you may have.