Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2021-Q4

[Pilar de la Garza, executive]

Good afternoon. This is Pilar de la Garza, Head of Investor Relations for Walmex. Thank you for joining us today to review the results of the fourth quarter 2021.

Today, with is Guilherme Loureiro, President and Chief Executive Officer of Wal-Mart de México Central America; and Paulo Garcia, Chief Financial Officer. The date of this webcast is February 16, 2022. 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 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 estimate 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 that could materially impact the company's actual performance.

Now it's my pleasure to turn the call over to our CEO, Guilherme.

[Guilherme Loureiro, executive]

Good afternoon, everyone, and thanks for joining us. 2021 was undoubtedly another atypical year that required us to innovate and adapt fast to the environment and to our customers' changing needs, while keeping our associates safe. We are even more convinced that customers want us to bring our stores and e-commerce business together in a seamless way that makes shopping easier, and we believe we are uniquely positioned to deliver value for our physical and digital assets.

You can see examples across the business of how we've been delivering solutions that are increasing customer engagement. In Bodega, we offer same-day delivery from store to the most price-sensitive customers via Despensa a tu Casa at more than 220 stores, which during the quarter represented almost 10% of on-demand sales. We launched the Walmart Pass and we saw a 2x increase in shopping frequency versus nonusers. We converted 75 stores into Walmart Express. We rolled out Scan and Go to all clubs, and its penetration doubled since we first launched it.

We are going beyond retail to deliver our purpose to save people money and help them live better. Through Cashi and Bait, we are giving customers access to the digital economy and delighting them with new experiences. Our strong core business is fueling the ecosystem, and at the same time, the new business we are creating drive customer engagement that strengthen the core business to grow and to be more resilient.

I'm pleased about all that we accomplished last year, and I'm very excited about what is still to come. We have a lot of work to do as customers raise their expectations, and we are heading in the right direction. We have the talent, the culture and the assets to actively create the future of our company. We are a growth company, and we will continue to accelerate growth investing behind our strategic plans.

Now let's move on to highlights from the fourth quarter. Please consider that when I talk about Central America, I'm referring to figures on a constant currency basis. During the quarter, consolidated total revenues grew 9.5%: 9.1% in Mexico; and 11.8% in Central America. Top line growth accelerated quarter-on-quarter, reaching a consolidated two-year stacked growth of 15.5% on the fourth quarter. For the full year 2021, revenue in Mexico grew 6% and 8.1% in Central America, resulting in a 4.9% consolidated growth. On a constant currency basis, consolidated revenue growth was 6.3%.

Looking at sales performance in Mexico. Same-store sales growth accelerated to 7.8% during the quarter, reaching a double-digit two-year stack of 13.1%. Sam's Club delivered the highest same-store sales group on the back of positive new member sign-ups and renewal trends. The team is focusing on offering great products and on working in a more digital way to further improve members' experience. Omnichannel continues to show momentum at Sam's. On the Socio Fest event, online sales reached 10% penetration and contributed almost 80% of our growth. 1 out of every 5 members that shoed online were new to the platform.

Our strategy to win in discount is being well appreciated by customers. The combination of the lowest price and efficient assortment, together with a low-cost operation, is translating to strong growth and market share gains. In 2021, we expanded Bodega's price gap by 80 basis points, making a record high. I'm very proud of the team for this achievement. They are really making a difference to our most price-sensitive customers.

With the intention of further improving experience and driving traffic to the stores, we are adjusting the Fresh departments' layout and results are encouraging. Our customer experience index increased by 40 basis points, and sales growth in pilot stores is 340 basis points higher. Walmart delivered solid same-store sales growth. It's great to see how the team is executing omnichannel seasonal events seamlessly. During the El Fin Irresistible event, we reached record-high sales for the format. We leveraged our store fleet to launch delivering in hours, and we fulfilled more than 30% of general merchandise orders from stores in a matter of hours.

We also saw strong growth in Juguetilandia, our seasonal toys offering, which delivered double-digit sales growth in December, despite the restrictions that many locations had due to the pandemic. During the year, we converted 75 Superama stores into Walmart Express and opened 4 new stores under this format. The transition period was challenging. Shopping experience is not ideal when remodel works are undergoing, and this translated into softer sales.

It's good to see that customers are appreciating the change we made in pricing and shopping experience. We lowered prices on basic items and enabled features that allow customers to have a fast, convenient trip such as self-scanning stations and digital tools. Pickup has become even more popular than before the conversions, and we've seen an 11.6 percentage point increase in penetration.

We see that stores that were converting into Walmart Express during the first half of last year are showing a positive trend and even surpassing the level of sales they had before the conversion, which is encouraging. We are monitoring very closely customer feedback to the new format and adopting as needed. We saw broad-based growth across all regions and merchandise divisions. The South and Northern regions continue to lead in same-store sales growth, followed by the Central and Metro regions.

Among merchandise divisions, Apparel, Food and Consumables delivered the highest growth. We hosted our annual El Fin Irresistible event with an omnichannel scope and Home, Apparel and Fresh Grocery categories stood out for their strong growth. During the 2021 event, customers gave us a higher Net Promoter Score, which is a great achievement given the large volumes we handled during the event. We continue to make significant progress on driving price gap leadership, and we're helping customers afford basic basket items by offering the lowest prices.

During 2021, we widened our price gap by 50 basis points, despite the high level of inflation we are experiencing. Our Private Brand sales grew 13.5% and their sales penetration increased 90 basis points. It is in these moments when Every Day Low Prices philosophy becomes even more relevant for our customers, and they can rest assure that we will be here for them. We will continue to work together with our suppliers to offer the lowest prices and help them save money and live better.

Now looking at our performance versus the market. During the quarter, we were able to surpass ANTAD's self-service and club's segment same-store sales growth by 80 basis points. For the full year, our gap versus the market's growth was 200 basis points. If we see performance on a 2-year stack basis, our quarterly gap versus ANTAD was 260 basis points and for the year, it was 360 basis points. With this result, we've have been growing ahead of the market on every quarter for the last 7 years, with the exception of first quarter 2020 that we grew in line with ANTAD. We are moving fast and innovation to transform the shopping experience, and our customers are rewarding us with their preference.

In Central America, all countries delivered same-store sales growth. Honduras was the country with the highest growth and Guatemala the lowest, yet, with still strong growth. I'm very pleased to see the sales turnaround we saw in the region from 2020 to 2021.

The biformato strategy is delivering good results. The changes we have made commercial offering in terms of catalog, opening price points and price gaps are being well received by customers, and we are seeing a positive trend in market share gains. Private brands are a very important element of strategy. We were able to increase sales penetration by 200 basis points this year. We finished the rollout of the new e-commerce platform to all countries, and for the year, e-commerce sales represented 1.7% of Walmart and Supermarket sales.

Last month, we announced that in line with our strategy and with the support of our Board of Directors, we are considering strategic alternatives for our operations in El Salvador, Honduras and Nicaragua. While these operations are healthy businesses with consistent, profitable performance, we are undertaking this process with the goal of finding ways to further support and accelerate our strategy and position both Walmex and our business in El Salvador, Honduras and Nicaragua for long-term success. The alternatives we are exploring could include, among others, possible joint ventures, strategic partnerships or alliances, a sale or other possible transactions. There is also a possibility that no operation is done. This process is just beginning, and we will share more details as we are able.

Now looking at new store growth. Despite the challenges to perform construction works during the pandemic, last year, we increased our sales area by 140,000 square meters. This is the largest expansion since 2014, which represents a 20% increase versus the last 6 years' average. In Mexico, we opened 51 new stores in fourth quarter and 122 stores on the full year, almost twice the number of stores we opened in 2020. Contributing from new stores to consolidated sales growth was 1.3 percentage for the year, in line with the guidance we provided. New stores are performing better than and we have maintained a high sales to square meter ratio compared to the industry. It's worth mentioning that all our new protos consider innovations on energy consumption and a specific design for associates and customers with disabilities and for our omnichannel strategy.

Let's talk about omnichannel. 2021 was tough to predict in every aspect, even more on the e-commerce front, as we didn't know how customers will behave after the strong growth we saw in 2020. We are very pleased with our results for the fourth quarter and for the year. The team did a great job of implementing our long-term strategy, while executing amid a challenging environment. During the quarter, e-commerce sales grew 24% and GMV 29%, which resulted in 235% and 233% 2-year stacked growth, respectively.

E-commerce contribution to sales growth was 1.2% and it represented 5.7% of Mexico sales. For the full year 2021, e-commerce sales grew 36% and GMV 40%. E-commerce now represents almost 5% of Mexico sales, which compares to 1.5% in 2019. We are tailoring the omnichannel experience to the different customers we serve. According to Euromonitor 2021 data, we were able to win a 190 basis points of market share on the e-commerce space. This result indicates our customers are appreciating what we are doing.

It was a year of consolidation for on-demand. We are now offering this service in about 126 to more than 760 stores, covering almost 70% of our big box formats. One of the key strengths of on-demand operation is being able to deliver perishable items in just hours, maintaining their freshness and quality. This is made possible by our footprint. We have stores 10 minutes away of 88% of the population in top cities. To further improve customer experience, we started a program called Picker del Campo in 160 stores to train our associates and equip them with the necessary tools to make better selection of fresh items. So far, we've seen an increase in shopping frequency of 50 basis points as a result of the program.

We extended our crowdsourcing model to 170 stores, and it's now available all our formats, including Sam's, where we are running a pilot test in 12 clubs. During the quarter, crowdsourcing represented 10% of Supercenter's and Walmart Express' on-demand sales. Walmart pass is progressing. Daily subscriptions doubled quarter-on-quarter, and we continue to see an uplift in frequency and ticket in users when compared to nonusers.

We are investing in technology to improve customers' experience. Last quarter, we merged Bodega's on-demand and external assortment platforms into one app, and customers are liking the initiative. The app's user rating increased 40 basis points.

Our focus remains on accelerating extended assortment. We more than doubled the number of sellers and tripled the number of SKUs versus last year. We enabled almost 90 virtual stores with exclusive brands and items, and we moved forward with the cross-border trade operations, adding almost 1 million SKUs. We have seen the benefits of our investments on e-commerce. We delivered orders faster and increased the NPS during the holiday season, despite the high volumes we handled and the complexity given the pandemic. You can expect us to continue to make investments in this area to further improve customer experience and drive sales.

Our ambition is to earn customer loyalty by offering the leading omni-driven ecosystem that creates sustainable profit growth. Last year, we made great progress on 3 of the verticals: Cashi; Bait; and Walmart Connect. We are building products and services with the customer at the center that connect to our core business in a mutually reinforcing way.

Last December, we launched a pilot together with a third party to disburse credit via Cashi in almost 30 Walmart and Bodega stores. We are granting up to MXN 60,000 credits so customers can shop for their favorite items and pay for them later. We're just getting started and results are very encouraging. We continue to test and learn from customers' response to fine-tune the product.

Through Bair, we are providing low-cost connectivity services, including prepaid mobile and home Internet to unlock access to the digital economy. We added over 900,000 new users during the fourth quarter, reaching 2.3 million users. We launched an out-of-store distribution channel to expand our reach, and we will continue to focus on user acquisition going forward.

Walmart Connect grew the number of advertisers by about 50% and the number of campaigns by almost 80% during the year. We want to become a leading media platform in Mexico by helping brands connect to our customers more often and more meaningfully, and we are uniquely positioned to achieve this goal.

We are innovating to provide new solutions for customers. As some of you might remember, we started in Mexico pilot test of 6 gas stations operated by third parties with our own branding in Bodega, Walmart and Sam's Club some years ago as part of our customer value proposition extension. Given the good results in terms of traffic and customer satisfaction we got, we decided to expand the station through a partnership with Gazpro through which third-party operator will invest and operate co-branded gas stations on the restrict standards of operation and price.

We are currently testing a complement for the project with small stores attached to the gas stations to make it even more convenient for customers. So far, we have opened 3 gas station stores. One of them was built used containers and is 90% powered by solar energy, showing our commitment to the goal of becoming a regenerative company. Gazpro is in the process of obtaining the permits required to operate. We expect to enable more stations towards the end of 2022.

We are strengthening our logistic capabilities to reach customers faster and to increase productivity and efficiency. In December, we opened the Santo Niño distribution center in Mexicali, which will reinforce our supply chain operations in the Northern region. The new distribution center has capacity to process over 5 million boxes per month and will supply 50 Walmart Bodega stores. With this new distribution center, we expanded our capacity to serve customers in omnichannel way by 17%. We also started the construction of a new omnichannel distribution center, Tlaxcala, which is expected to start operations in 2024. We are making a MXN 3 billion investment on the DC, of which 20% will be allocated to technology and innovation. The new DC will create more than 1,200 active jobs and 700 indirect jobs. Our supply chain is a key enabler of the long-term strategy and serves as a great competitive advantage. You can expect us to continue investing aggressively on it as we grow our omnichannel business.

It's great to see we are being recognized for the work we are doing to promote shareholder value. For the second consecutive year, we were included in the Dow Jones Sustainability MILA Pacific Index and we were recognized as one of the best places to work for our LGTBQ+ equality efforts by the Human Rights Campaign. Our small supplier support program, Pequeño Productor, turned 10 years in 2021. We have trained more than 20,000 small enterprises and commercialized 59,000 tons of products.

In closing, I want to thank all our associates for the progress we made as a company this past year. I'm encouraged by the way they are leading and embracing change.

Thank you. Now I'll turn it over to Paulo.

[Paulo Garcia, executive]

Good afternoon, everyone. Thank you for joining us today to review our results for the fourth quarter of 2021.

This has been a challenging yet exciting year, marked by the resilience and innovation. It is good to see we continue to win our customers' trust, which is translating into share gains. We have made strategic decisions around our customers that will position our company to deliver strong, sustainable growth and to win long term. We are transforming Walmex into a leading omni-driven ecosystem and our financial strength serves as a great competitive advantage.

Let's look at Mexico's results first. During the quarter, total revenue grew 9.1%, driven by a 7.8% same-store sales growth. Gross profit margin expanded by 30 bps, reaching 23.2% as we build new sources of income. Rental income, Walmart Connect and improved margin mix offset supply cost pressures and price investments. SG&A grew 13.1% as we continue to invest to position our company for the future.

I'll go through our main OpEx investments on the next slide. Operating income increased 7.5% and EBITDA margin remained at a healthy 11.5%. So let's look now at the SG&A breakdown. We leveraged base expenses and invested to drive growth and talent. During the quarter, we drove efficiencies and implemented productivity projects in order to reduce our base operating expenses. I'll talk in more detail about some of our main savings initiatives on the next chart.

Expenses related to remodels increased 4 basis points as we caught up with some of the pending works from 2020 when we have limitations for construction due to the pandemic. In 2021, the number of stores remodeled almost double 2020. Strategic investments related to growth initiatives represented 44 basis points of the increase. Our focus is on driving omnichannel. We increased our advertising effort for El Fin Irresistible and other holiday events as towards the end of the year, competitive dynamic is intensified.

We invested in tech modernization, launching Bodega One App and migrating Superama app into Walmart Express. We also continue to invest to build an omnichannel structure at stores, DCs and home office. It is encouraging to see that our investments are paying off.

GMV grew 20% during the quarter on top of 158% in Q4 2020. Another focus is talent. We are implementing our associates value proposition. More than 5 million customers visit us every day at our stores, and they expect to be served in a seamless way. By training and equipping our associates with the right tools investing in compensation and benefits and empowering them to be more creative, we are improving customer experience, and these virtual circles allows us to accelerate growth.

We are also accelerating new store growth. As Gui mentioned, we opened 122 new stores in 2021, and more than 40% of them opened during the last quarter. New stores are performing much better than our internal plans and above their historical performance, which is remarkable. Additionally, we had a one-time effect related to a creation of a provision for a doubtful account that represented 13 bps.

We know our strategy requires investment. So in parallel, we are stepping up our efforts in expense management and productivity. An example is how we are using technology to help our associates to be more productive and to serve customers better. In 2021, we implemented self-checkout in 286 self-service stores. We finalized the rollout of Scan and Go to all 165 Sam's Clubs, and we enabled the first self-checkout station in Mi Bodega Cholula with great adoption. As of today, we have self-checkouts available in more than 370 stores, which represent more than 30% of the transactions.

Another example is how we are transforming our costs with a process we call Smart Spending. It is all about reinforcing our Every Day Low Cost culture, now using technology and data analytics to move quicker and to be more effective. Given the scale of our company, sometimes small changes result in important savings. For example, a change in our logistics fleet scheduling resulted in annualized savings of MXN 150 million. Altogether, in Mexico, we identified about MXN 3.7 billion in savings, of which we executed MXN 1 billion in 2021. Between 2022 and 2023, we will execute the remaining savings.

Now let's review Central America's results. Please consider that when I talk about Central America, I will refer to figures on a constant currency basis. Total revenue growth reached 11.8% in the quarter. We saw an 80 bps gross profit margin reduction, given the continued execution of our biformato strategy in the region. We are making adjustments to the commercial offering: increasing private brand penetration; and investing in prices, which is translating into higher sales growth and market share gains.

SG&A represented 17.8% of the revenue. We had a one-time effect related to the payment of royalties that I will explain next. Despite incurring additional advertising expenses, given the dynamism in the markets as the economy on those countries recovers and the investments we are doing in associates' compensation and benefits, we were able to leverage base operating expenses, given our focus on saving and simplifying the business. The royalty payment agreement at our Central America business unit is with Walmart, Inc. for the use of trademarks, technical assistance, technology developments and other solutions, serves us as a competitive advantage in the market, and is based on sales and operating income performance. 2021 results were strong in the region, especially on the second half of the year, which led to an increase in the annual royalty payment of 44% versus 2020.

During the fourth quarter, we updated the amount with the annual results, which impacted SG&A by MXN 450 million. It's important to note that our existing agreement has not changed. For the full year 2021, consolidated royalties as a percentage of total revenue remained relatively stable at 1%. We may see volatility in the quarterly royalty payments, but on an annual basis, we don't foresee major changes.

Operating income margin stood at 5.8% and EBITDA margin was 8.6%. All-in, consolidated total revenue posted a 9.5% growth, while gross margin increased 10 bps to 23.2%. SG&A grew 13.2% due to investments in Mexico and the additional expenses recurred in Central America. As a result, operating income margin was 8.8% and EBITDA was 11%. Net income stood at 6.2% of revenue. Our full year 2021 results were solid. Consolidated total revenue grew 4.9% and 6.3% on a constant currency basis, and we were able to grow ahead of the market on both regions. We invested in prices in Mexico and in Central America, and gross margin expanded by 20 bps to 23.3%. SG&A grew 4.9%, driven primarily by strategic investments.

Operating income grew 9.5% and EBITDA grew 7.7%, reaching an 11% margin. The shape of P&L is evolving as we implement our strategy. New businesses like Walmart Connect are supporting gross profit dynamics, while we are seeing an increased cost of doing business in concepts such as salaries, in addition to the strategic investments we are making. As we go through this investment phase, we will be disciplined in capital allocation to maintain our best-in-class returns.

Talking about capital allocation. 2021 was a challenging year for investment, given the uncertainty and changing conditions the pandemic brought, yet we remained committed to investing in the region in order to accelerate growth and to create shared value for all our stakeholders. Throughout the year, we invested MXN 20.5 billion in high-return projects to strengthen our business. This represented a 22% increase versus 2020. Remodels represented 44%. We are enabling our stores with the omnichannel capabilities and keeping them in good shape to improve shopping experience and to ensure the safety of our associates and customers.

New stores represented 23%. As you already heard, we opened 131 new stores during the year. Investments in technology and e-commerce represented 16% of the total as we decided to accelerate strategic projects such as the rollout of antennas to improve their wireless network, the replacement of equipment and components to support new functionalities, back-office transformation and the new data platform. Nevertheless, overall CapEx exercise was 8% below the guidance because we decided to move the implementation of some logistics projects to 2022.

Now moving to the balance sheet. Our cash position increased 20%, reaching MXN 42.8 billion, driven by strong cash generation. Inventories increased 17.5% to MXN 80.3 billion, as we lapped lower inventories and traffic in 2020 due to COVID-related effects and to the opening of 55 new stores during the quarter. Additionally, we are still experiencing supply chain disruptions, given the worldwide limitation of containers. So we decided to increase the stock in key categories such as grocery, consumables and health and beauty to insure capacity.

During 2021, we are able to generate MXN 72.8 billion in cash, and our working capital required MXN 3.1 billion due to increase in inventory I just mentioned. We returned MXN 28.2 billion in dividends and invested MXN 20.5 billion in high-return projects aligned with our strategy. We paid MXN 14 billion in taxes and the ended the year with a cash position of MXN 42.8 billion, which represents a 20% increase versus 2020.

I am very proud of what we achieved in 2021. We are serving customers the way they want to be served: providing access to lower prices; going beyond retail to solve their pain points around the shopping experience; and granting access to the digital economy. We progressed with the implementation of the strategy while delivering solid results, which demonstrates customers are appreciating what we are doing.

In closing, I would like to highlight three key messages. One, our business is changing. We will continue to evolve to meet our customers' needs. Two, as we already had anticipated, we are going through an investment phase to accelerate growth, while maintaining our return on investment. Three, our financial strength gives us flexibility to balance short-term results and long-term plans.

To finalize, I would like to invite you to our Walmex Day event, which will be held virtually on March 15. You can register for the event with our Investor Relations team. Among our topics on that day, we'll announce our investment and shareholder distribution plans for 2022.

Thank you very much. And as always, we'll make ourselves available to receive your calls and answer any questions you may have.