Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2023-Q1

[Unknown Executive]

Good afternoon. This is [indiscernible], Investor Relations Director for Walmex. Thank you for joining us today to review the results for the first quarter of 2023. Today with me is Guilherme Loureiro, President and Chief Executive Officer of Wal-Mart de México in Central America; and Paulo Garcia, Chief Financial Officer.

The date of this webcast is April 26, 2023. 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 the 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 is my pleasure to turn the call over to our CEO, Gui Loureiro.

[Guilherme Loureiro, executive]

Thanks, [ Álvaro ], and good afternoon, everyone. Thank you for joining us to hear about our first quarter 2023 results. I want to brief into [ Álvaro ], who many of you already know from his previous job. Álvaro joined Walmex a couple of weeks ago and now will be the Head of Investor Relations. I want to thank Pilar de la Garza for the 7 years in which he successfully headed the role. She will now have a different position in Walmex.

We started 2023 delivering double-digit total revenue despite still a typical consumer environment. We saw inflation trending down towards the end of the quarter, yet food inflation remained high. So customers continue to adopt their shopping habits to afford a full basket. Our core business is resilient and is allowing us to deliver low prices to help customers afford what they need, while we accelerate our new business to provide full solutions, diversifying our source of income and getting closer to our customers.

During the last couple of years, we have been working to expand our price gap. Last year, we shared with you that we have reached a historical high level of price gap. Now we will focus on price perception, which we increased by 110 basis points during the first quarter. We know price perception is a much more volatile metric. However, as a customer-centric company, this metric is a priority for us. We are helping customers save money and live better beyond our stores.

During the first quarter of the year, private brand sales penetration grew by 50-basis points versus last year. Active BAIT users more than doubled versus first quarter '22 and remittances transactions grew 16%. Yet we were not able to grow ahead of the Self-Service and clubs market measured by ANTAD onthefirstquarter'23, and we are not happy with the result. I will provide more details later on the presentation. We will continue to enhance our value proposition to win our customers' loyalty and resume our growth gap versus the market.

Now let's review our performance during the first quarter of 2023. Please consider that when I talk about results in Central America, I'm referring to figures on a constant currency basis. During the quarter, consolidated total revenue grew 9.7%. Mexico delivered a 10% growth and Central America a 13.5% growth. On a 2-year stacked basis, consolidated total revenue growth continued at high levels, reaching 20.7% in the first quarter of 2023.

Now let's review sales performance in Mexico. Same-store sales grew 8.7% in Mexico. Sam's Club delivered the highest growth. Our team is working on enhancing the value of the membership in an omnichannel way. Plus members have free deliveries in orders above MXN 1,000 and 2% gets back whether they are buying at our clubs or online. During the quarter, both online orders and members grew more than 20% versus last year. Omni members have a higher ticket and frequency versus brick members, 2.8x in sales, 2.3x in frequency, and they have a renewal rate above 90%.

Additionally, Plus member sales reached a penetration in March of 65%. The Members Mark is key to Sam's Club's success. It plays an important role in creating member loyalty while offering low price. So we launched the Member's Mark funds problem, where 5,000 members give us their direct feedback through focus groups for new product developments through month of February. During the first quarter '23, Members Mark penetration grew 220 basis points versus first quarter '22, reaching an all-time high of 21.6%B.

Bodega continues to deliver above average sales growth. On top of delivering the best price to our customers, we are working to drive price perception. During the quarter, we implemented a new install communication strategy, which led to a 50-basis point price perception increase and allowed us to grow the savings satisfaction of our customers measure for NPS versus the average of stores that have not implemented the new strategy. Our efforts are being appreciated.

During the quarter, [indiscernible] for having the lowest price of the basic basket national wide. And in January, Bodega was recognized as the third most valuable brand in Mexico according to Counter Brands. The trust our customers have on our brands is great advantage to continue to build our ecosystem. We appreciate their trust and work hard every day to further reinforce that trust.

Walmart and Walmart Express formats delivered softer growth given the general merchandise categories, which have a bigger way on sales in Walmart to present to the rest of the format is lowered down as customers are favoring basis needs with the high inflation environment. During the quarter, we implemented seasonal campaigns such as Valentine's Day event, where sales had a 50% growth at Walmart and Walmart Express. Our customers enjoy the assortment we are bringing for the seasonal campaign.

Going forward, thew will continue to be a focus for Walmart and Walmart Express. Our Walmart Pass users increased 20% versus last year, which are very relevant for us since they have a frequenc60% higher than non-users. We will continue to develop solutions that delight our customers and make their lives easier.

Now let's look at e-commerce performance. During the first quarter, e-commerce GMV grew 19% and sales grew 70%, representing 4.9% of total sales in Mexico and contributing 0.8% to total sales growth. On demand was the main growth driver. Through demand, we enhanced all seasonal events, offering more than 80,000 SKUs and 60 minute deliveries from more than 330 stores in Walmart and Walmart Express. Walmart Pass continues to gain relevance, reaching at 35% sales penetration in both formats. In Bodega, Despensa a tu Casa also had a strong performance, posting a triple digit growth versus first quarter '22.

We are now offering more than 60,000 SKUs from 527 stores in 245 cities, adding more than 80 stores and 50 seats in the quarter. Now we can reach 55% of the homes we serve in Bodega with on demand. We also began the proof of concept of our 60 minutes delivery in 5 Bodega Aurrera Express to offer fast and convenient deliveries to our customers. Regarding extended assortment, we continue to leverage technology and initiatives implemented in the Walmart markets. During the quarter, we launched initiatives to improve our sellers' experience, such as international carrier optimization. With this implementation, the international packages tracking will be updated automatically, and allowing us to provide a more accurate delivery time enhancing improving our customers' experience.

Another example of technology leverage from Walmart is the implementation of goods to person, an automated process in which a robot brings the items needed for the order to the pickup. This technology was implemented in the fulfillment center of Mexico City. We now have 11 robots and 109 shelves, which will allow us to improve our productivity by 30% for small items. We continue accelerating in our marketplace. During the quarter, the number of SKUs increased more than 50% versus December 2022 and grew 30% in sales versus first quarter '22.

Now let's talk about our new businesses. I will start with Financial Services. On March 7, we announced the authorization from the CNBV to acquire the Mexican Fintech. Mr. [indiscernible] Eletronica, EFB called Trafalgar, and a couple of weeks ago, we announced the closing of the acquisition. We are very excited about this milestone as it will allow us to take Cashi to the next level. Besides making digital payments at Bodega Aurrera, Sam's Club, Walmart Express, Walmart Supercenter and its e-commerce sites, bill payments and mobile phone top ups and applying for credit, very soon, our customers will be able to send and receive money through the pay-payment network, make us draw both at the case from company stores and clubs and the ATMs, make payments everywhere. And in the near future, it will outstanding in receiving remittances among other services.

These functionalities will make Cashi more attractive and more importantly, we'll provide our customers a safe, friendly, convenient and seamless solution to handle their finance. Through acquisition, we are unlocking Cashi's potential. Now we can fully deploy the robust financial solutions platform, we wanted to create as part of our ecosystem. As always, we will keep you posted on our progress, continuing with our new business.

BAIT reached 6.2 million active users, 2.6x the number of active users we had in first quarter '22. We are accelerating these acquisitions through third-party channels. We work with more than 30 distributors in order to reach more new users. During first quarter '23, new users coming from 3P channels grew 9x versus last year. This allows BAIT not only to offer compelling price, but also a seamless experience for our users. Walmart Connect delivered strong performance during the quarter, posting a 6%, 4% growth and implementing 70% more campaigns versus first quarter '22. We're helping advertisers to connect meaningfully with customers by leveraging omnichannel data. Nescafé 75th anniversary campaign is a great example. We implemented an extensive campaign in 100 stores with more than 300 modules, toting and corridor arts at both Walmart Supercenter and Bodega Aurrera. This campaign push sales in the participating items growing 45% versus the same period of last year.

Now let's look at our performance compared to the market. During the quarter, the Self-Service and clubs market measured by ANTAD grew 30 bps ahead of us. We are listening to our customers and working hard to enhance our customer value proposition, fine-tuning our commercial offering to resume our growth gap versus the market. We know inflation impact our customers' budgets, and we will continue to offer the best price to help our customers for the full basket. This may have a short-term impact on sales growth versus the market. However, when we see growth in terms of volume, our growth is in line with the extended market measured by Nielsen in the first 2 months of the year.

As I mentioned before, inflation has impacted the growth of discretionary categories like general merchandise. This impacted our growth versus the market since we have a larger penetration of these categories. As inflation normalizes, the consumption will also normalize, allowing us to accelerate growth. As I mentioned before, we will continue working towards expanding our growth gap versus the market, both in sales and volume.

Moving to Central America. Same-store sales grew ahead of the market. The momentum continued with a 12.4% increase during the first quarter. Guatemala and Nicaragua delivered the highest growth rates followed by Honduras, Costa Rica and El Salvador. The Bodega discount formats are our focus in the region. We implemented price point campaigns such as Tu Menudo Campeón and Precio Pali Verano with good response from our customers, leading to a 22% and 70% growth, respectively.

Our brands are a key element of our strategy. We had 385 new product launch for the summer, back to school, organization and cleaning and health and beauty campaigns. Our brands grew more than 20% in the quarter and increased the penetration by 170 bps. Now let's talk about new stores growth. During the quarter, we opened 12 new stores, 9 in Mexico and 3 in Central America. New stores contribution to consolidated sales growth was 1.4% for the quarter. We celebrated the opening of Bodega Aurrera #2300 in Santa Anita Cadereyta, reinforcing our commitment to bring low prices to more customers in Mexico.

To finalize, let me tell you about our main efforts on environmental, social and governance matters. We want to be the best place where associates can be, grow and belong. To achieve it, we have been enhancing our associate value proposition. It is great to see our efforts are paying off. For example, during the quarter, we celebrated more than 170 associates who we tender high school certificates through the EDU Edwalmart [indiscernible] program. We were included in the Bloomberg Gender Equality Index for the sixth consecutive year, and the state of Mexico awarded us with the Orange recipient for business equality.

During the quarter, we installed 27 collection points, so our customers could properly dispose their Christmas tress this year. We collected 4,000 Christmas trees that were composted. And now talking about communities, we will continue to focus on providing access to the best pricing products and services. We have the lowest price for the base basket. We provide the lowest cost for connectivity, and we'll continue to develop solutions to help people save money and live better.

To close, I would like to thank our associates for their efforts and hard work. Once again, we managed to navigate through the short-term challenges with agility and innovation while implementing our long-term strategy and building the Walmex of the future.

Thank you again for joining us today, and I'll leave you Paulo, who will cover the financial results of the quarter.

[Paulo Garcia, executive]

Thanks, Gui, and good afternoon, everyone. Thank you for joining us today to review the results for the first quarter 2023. I'll start by covering Mexico results, and then I will cover Central America. Please consider that when I talk about results in Central America, I'm referring to figures on a constant currency basis.

Let's look at Mexico results first. As we heard from Guy, total revenue grew 10%, driven by 8.7% same-store sales growth and e-commerce contribution to total growth of 0.8%. Gross margin expanded by 30 basis points, driven by efficiency in logistics, lower import costs and new sources of revenue. SG&A grew 13.8% and represented 14.9% of the revenues. We will review the SG&A breakdown in just a moment. Considering these results, operating income grew 7.4% and EBITDA margin contracted by 30 basis points to 11%, yet maintaining best-in-class levels.

Now let's review SG&A. Our strategy is a growth strategy. And we are going through an investment phase to further accelerate growth. By managing expenses with discipline, improving our units per labor hour indicator and fostering an everyday low-cost mindset, we were able to partly offset the increase in labor costs, resulting in a deleverage in operating expenses of 10 basis points. In parallel, we invested behind strategic priorities and enablers such as talent that impacted expenses by 40 basis points. During the quarter, we launched the super functionalis initiative in more than 400 stores of Bodega and Walmart Supercenter, where we reached 50% of multifunctionality and capture savings. We are implementing an initiative in Sam's clubs as well in order to improve productivity at our clubs.

Now let's review Central America results. Please consider that when I talk about Central America, I will refer to the figures on a constant currency basis. Total revenues increased 13.5%, driven by a 12.4% same-store sales growth. It is encouraging to see all countries delivering strong same-store sales growth, aligned to our strategy, we are doing strong price investments to drive sales, which resulted in a 20-basis point contraction of our gross margin. We also focus on simplifying our business and driving productivity. As a result, expenses only grew 7.2%, leading to 90 basis point expenses leverage. The expense leverage was driven by productivity initiatives at the stores that positively impacted labor cost and operational leverage of other fixed expenses.

With the above-mentioned results, operating income grew 24%, 150 basis points ahead of revenues and EBITDA margin expanded 20 bps to 10.1%. At the consolidated level, total revenue increased 9.7%, with new stores contributing 1.4% to total growth. Gross margin expanded by 20 basis points to 23.6% and SG&A grew 11.5%. Operating income grew 8.8%, and with 8.4% operating income margin and EBITDA margin decreased 20 basis points to 10.8%.

Consolidated net income grew 3.7% as during the quarter, we recorded a provision of $70 million due to the changes in the taxable base of previous periods in one of the countries in Central America. This had an impact on our effective tax rate, which we expect to return to our previous quarter's levels going forward. Excluding this impact, net income would have grown 15.6%.

And now moving to the balance sheet. Cash grew 32.9% versus first quarter 2022. As a result of cash generation and in preparation for the first installment of the dividend payment we have scheduled for this year. Inventories grew 12.4%, driven by better in-stock levels versus last year, especially in products of the basic basket. Going forward, we expect inventory levels to normalize versus 2022. And finally, accounts payable grew 8.5%. In the last 12 months, we generated MXN 78.5 billion in cash and MXN 3.8 billion through working capital. We returned MXN 29.6 billion to our shareholders as dividends and invested MXN 21.5 billion in high return process. We paid [ MXN 17.7 billion ] in taxes in our plan fund required MXN 2 billion. All in all, our cash position finished the first quarter at MXN 46.6 billion.

In closing, I'd like to emphasize the 3 key messages of the quarter. Double-digit top line growth in both markets, in line with our accelerated growth strategy, we will continue to enhance our customer value proposition to gain our customers' loyalty and resume our growth gap versus the market in Mexico. The number two, EDLC is in our DNA. We will continue with strict expense control in both markets whilst investing behind our growth strategy.

And lastly, we remain committed to deliver best-in-class capital returns, ROIC. Thanks again for your interest in our company. As always, we'll make ourselves available to answer the questions you may have and see you in a couple of months.