Marisa Lojas SA

BOVESPA:AMAR3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. Thanks for holding. Welcome to Marisa's conference call to discuss the earnings of Q1 2018. We would like to inform you that this event is being recorded and is available on Marisa's IR website. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Marisa's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Marisa and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Adalberto Pereira Dos Santos, CFO and IRO, who will start the presentation. Please, the floor is yours. You may begin.

[Adalberto Dos Santos, executive]

Good morning, everyone. Thank you to First Quarter 2018 Earnings Conference Call of Marisa. Marcelo Araujo is with us; Macio Luiz is also with us today; Marco Muraro, our VP of the Commercial Area; and Karina, our IR Manager. As you could see, in the first quarter this year, our results were affected by the low sales performance. We had a low flow in the shop, probably a consequence of Carnival in February and also due to operating issues as an excess of low cost or low price items. That, associated with the low sales performance, put some pressure on our growth profit, which affected the retail operations and the company as a whole. In all other pillars, and in our portfolio of products and cash generation, we remained with fortuitous results. We geared our efforts as mentioned here and it's directed to correct deficits in the commercial area.

Now I would like to show you the presentation with further details of information. On Page 2, the evolution of net revenue, there was a reduction, 4.5%, and same-store sales, a reduction of 3.9%. And as I said, the negative impact, as I had mentioned, due to Carnival. And it's always good to highlight the positive side. This is particular with positive performance throughout the quarter, indicating greater conversion. And in March, from the sales standpoint and conversion it was highly positive as well, vis-à-vis the first 2 months of the year.

Page 3. We can see gross profit and margin. Gross profit is impacted by sales performance. We could see from 51.3% to 48.5%. We had some difficulty recovering full price sales also in the months of February and we've started making some adjustments in our inventory. So gross profit and margin were affected in March.

Page 4. We can see the drop of 0.3%. Here we can see the nominal fall of 0.3%, reflecting the company's ongoing efforts to control expresses (sic) [ expenses ]. G&A increase of 2.6% due to the recomposition of the commercial and operations teams. Sales expenses decreased by 0.6%.

Page 5. We can see adjusted EBITDA and margin, from BRL 33.8 million to BRL 37.2 (sic) [ 32.7 ] million, because of the compression in gross margin and a drop in sales. In the first quarter, we had a balance of BRL 57.8 million in terms of taxes.

Page 6. You can see the contribution margin results impacted mainly due to the lower penetration of Marisa Card and the 0+8 product. And we can see the figures vis-à-vis the previous quarter. In terms of personal loans, there was a contribution margin increase of 12.5% and an increase of 22% in the portfolio. Co-branded operations grew by 4.2%, impacted mainly by the higher number of eligible accounts. Here we can see the EBITDA FPS. We can see a minor drop but it remained solid, impacted by the adoption of IFRS, new methodology for the provision of losses, including a provision for the portfolio to mature in addition to past-due portfolios. So you can see the differences between this year and last year. And again, positive impact of the personal loan operation and continuous efficiency gains in costs and expenses, and maintenance of the same levels of the first quarter of 2017.

On Slide #8, portfolio loss. So the broken line is considering the sales of past portfolios. And in both lines, both the dotted and the solid lines, you can see some effects because the portfolio was in decline. We can see an elevation here from 41.2% to 42.9%. And there was an impact of BRL 4 million in this quarter. And here, we can see the other indicator, EFICC PL, also practically stable.

Number 9, we can see portfolio loss, considering the effect of the sales of the portfolio. We can see the percentage of overdue receivables. We feel comfortable as a whole, indicating the assertiveness of the credit concession. The EFFICC, within expectations according to the current values of the product receivables portfolio.

Slide 10. Consolidated EBITDA, from BRL 111.3 million to BRL 40.6 million. Again, we had a fall impacted both by decrease in the gross margin of retail operation and by the lower reversal of tax credits.

Slide #11. We had BRL 14.7 million and negative to 41.1% (sic) [ BRL 41.1 million ] due to the poor result in the retail operation. And there was also asymmetry on the comparable basis, lesser extent in the reversal of tax credits of ICMS payment in PIS/Cofins calculation. BRL 47 million here in cash generation and the same level, despite the substantial drop in EBITDA. So despite the lower adjusted EBITDA, operating cash generation continued at healthy levels. You can see the figure. The EBITDA had a higher level of leverage due to the reduction of adjusted EBITDA and the exclusion of BRL 75 million in tax credits.

Thank you. The floor is now open for questions.

[Operator]

[Operator Instructions] We have a question from Mr. Richard.

[Unknown Analyst]

I just would like to ask a question on the collection because you mentioned that January and February were hard months and March was better. So I just would like to better understand your vision regarding the collection session, price structure, if you are pleased with it, and if -- or if there's something that still needs some improving.

[Marcelo de Araújo, executive]

This is Marcelo Araujo. Richard, and all of you listening to us, thank you for your question. I don't know if you have had the opportunity to be with us in our latest conference call. Towards the end of 2017, we had a lack of assertiveness in the collection that we had, which gave rise to some imbalance. Our expectation was that it could have been adjusted faster, but we had some slow adjustments in February that hindered that. So we still have imbalance because of inventory. But the -- some products had better acceptance in March. So March as a whole was much better than January and February, basically because of the introduction of the new collection and the extensions of the new sectors in our shops and our new communications strategy launched in International Women's Day as we have done traditionally on March 8, featuring singer Claudia Leite. And more than that, it's about the new positioning of the brand. We still have several challenges ahead of us, and the new collections will gradually migrate the positioning of the brand. That's why we say this is a transitional process that should gain more momentum in the second half of the year. Once it's fully developed, all based on the new processes that we are reviewing. And also with the renewal of the team. This team is already developing a new collection and with different prices. But -- to give you a straight answer, Richard, the sales of the collection launched in March were very exciting. Yes, we are pleased with the new collection, but we still have a challenge ahead of us because of the volume of available items in our shop.

[Operator]

Felipe would like to ask a question.

[Unknown Analyst]

Firstly, I understand what Marcio said. I want to know whether we can expect an improvement in the performance in April as well. And the second question is regarding the mobile operations. I can still see that we have few shops, but what were your first impressions? And I would like to know why the rollout is only for 55 stores. Does that have anything to do with the size of the shops or the regions? I would like to understand the rationale behind that. And also, what were the first actions taken by Marcio? And what has changed vis-à-vis the latest management?

[Marcelo de Araújo, executive]

Okay, Felipe. So let me begin with the first question, and how we can see the market right now. And then we're going to have some remarks on the mobile project. Marco is spearheading this project. So I'm going to ask him to introduce himself and share a few words with you regarding his position. Yes, regarding the sales, the collection is selling well in April as well. I believe you can see what the -- how the market is doing. We had some temperature changes this month, vis-à-vis the same months of last year. And winter products have a great weight in terms of the average ticket. But we can expect some recovery. Towards the end of April, we had a new strategy for Mother's Day and we're having some positive outcomes. If everything goes well, weather-wise, we can expect to have the second half of the year still in line, and we are having a substantial transition right now. I don't know whether it was clear or not, but we have changed our distribution in -- the distribution of our -- the sectors in our shops. We changed all the shops of the company throughout Brazil in the first quarter due to the lower demand in the first quarter. And we had some clearance in January and February. And when you conduct an intervention like this and you change the layout, well depending on the size of the shop, you impact the conversion flow of that shop for a few days. So it's all part of this context. So now, gradually, we are considering these shops. But an important remark to make when we talk about this scenario in our growth expectations, is that we're still dealing with the macroeconomic scenario that is rather frustrating. We expected things to be a little bit better, especially in terms of unemployment rate, because it is the variable that is most correlated with our sales. But we still have record in terms of unemployment rate which impacts our shop. So there is this imbalance. And this effect was very clear in 2017 and it remains in the first quarter. We can see a major gap in terms of performance between shops at our end markets that are better protected versus shops that are more in -- they are in more vulnerable areas. So these effects remain present. We are not witnessing a very fast recovery. So we can expect that to still put some pressure on our results in the upcoming months. And before I hand it over to Célio and Marco, because I believe it would be interesting to hear what they have to say about their initiatives and the rollout in terms of mobile, I would like to say a few words about the project M2020. It's a new shop model that we started checking in November last year in some shops that we have. The 19 top shops that we have proven to be very effective, very positive for this model. These shops are already positive against the same period last year, and we are beginning a new wave of another 20 shops to receive this project. So this is a model that is substantial based on a rigorous assessment that we have conducted. We're going to begin doing the rollout of this new methodology in terms of architecture and layout and different service. In sum, everything that we presented to you in the Marisa Day. And so, also, we have to consider the effects of these shops. We have conducted some changes in the pilot test. We have expanded the number of shops, the model of top shops. And in the next 6 days, we're going to conduct more tests in order to better adjust this model. We are highly focused on our transformation program and this is a 3-year project. It started February last year. We are very pleased to see the progress of this program. We were frustrated in terms of the sales returns that we had in terms of retail, but we can have a more sustainable competitiveness and very soon, we'll be a -- we'll be in a new cycle of growth. I will hand it over to Célio now.

[Célio Lopes, executive]

Hello, this is Célio right now. Thank you for the questions. I hope everything is well in Mexico. So we first implemented the mobile and pilot shops so that we can learn from this operation. But now, for 6 months, it's still a short period of time for us to have an intense rollout of this operation. We are still having an important learning curve. We still have some lessons to learn so that we can intensify this curve. And given our moment now, we are focused more on improving the sales in our session. We are not including this rollout now. An important lesson to learn is in terms of the portfolio, both in terms of the size of the portfolio and the size, the price, we have learned greatly in terms of credit for this sector, that seems to be a distinguishing feature, for our target public. And ultimately, the operation of mobile, both in terms of supply in the entire chain and also the influence of mobile in the shops in terms of flow and sales, not only considering mobile alone, but we still have to evolve so that we can have a more intense rollout. We believe that with 55 shops this year, this curve will be mature enough. But you'll have to consolidate the growth in terms of revenues to better understand this business.

[Marco Muraro, executive]

This is Marco. Regarding the changes in the commercial area, we have restructured the team and made investments in terms of planning and supply, aiming to ensure that we have a more balanced collection. So the work right now is focused on changing the collection. April, May and June, we are still waiting to see what the weather will be like, but we're working strongly on planning things better in terms of the type of shop and its mix. And also, with this major investment, the team is restructuring itself. We are considering the learning curve. But as of the second and third quarters, these efforts will show, will be reflected.

[Operator]

[Operator Instructions] Andres from Brasil Plural, he would like to post a question. Andres from Brasil Plural has a question.

[Andres Estevez, analyst]

It's just a follow-up on your inventory. I would like to know whether you still have some business from previous collections and how you can eliminate the previous collections. And I would also like to understand a bit more in terms of mobile, the M2020 that you have. I understand you're still in the stages of rollout, but I would like to understand more about cost, and how you are planning to fit it into your revenues as well.

[Marcelo de Araújo, executive]

Hello, Andres, this is Marcelo again. Yes, just to give you a brief overview on the inventory. As I said, at the turn of the year, we had a minor imbalance in our inventory. We had planned to have bigger inventory levels. But still, it was a bit higher because of the collection of an important sector in the fourth quarter last year, high summer collection. Since then, we have been doing some work to eliminate this stock. Unfortunately, we couldn't have the speed that we expected. We still have some adjustments. But we intend to conclude them by the clearance, or the winter clearance, by June or July. So until then, we'll be conducting some adjustments, gradual adjustments. As for your question about mobile, we haven't consolidated them into the revenues of the company. We are still -- we are using a partner of ours to do this consolidation. And it's likely to be done just as of next year, once we conclude the stage of the pilot mentioned by Sergio (sic) [ Célio ]. But we are excited. We believe that it is a category that is very expressive in terms of flow generation, especially with mobile services such as financial. Likewise, cosmetics can also add value. So both categories were prioritized based on some surveys conducted with our customers in the end of last year. We started with some pilot tests. And all this transformation, also that we are conducting in terms of the M2020 project, we are still considering the mix of projects so that we are -- so that we can have a broader rollout. But at this point, the costs are marginal, not very material. I don't know if Adalberto would like to say a few words, but it's not very material yet.

[Adalberto Dos Santos, executive]

Yes, Marcelo put this very well. In our internal structures, we have some teams focused on products and shops and changing processes and training. So the costs associated with these initiatives are still marginal. Yes, thank you.

[Operator]

Felipe from HSBC.

[Unknown Analyst]

Yes, just a quick follow-up on closing stores. I want to know if you are going to close other shops throughout the year.

[Marcelo de Araújo, executive]

This is Marcelo again. Marcelo Pimentel is not with us today, but -- because he's traveling because of Mother's Day, but I'm -- I can answer on his behalf. The judicious analysis on the ROI for each shop of our network is an ongoing obligation of a company that aims to expand and grow profitability. So regardless of the level of results, we always have in our radar the shops that have the lower rate of return. We monitor the shops. And once they fall into this group of shops, they receive some special attention. We develop a new plan, and we conduct further investigations regarding the potential of the region and the team, and we assess customer satisfaction. We work in all levels. It's an ongoing process for us. We don't have any plans to close shops in the short term. But we do have, as always, from 3% to 5% of the shops of the network being analyzed and tested. That shop that we closed in the past was part of the first group. We just had to do some negotiations with the mall in Rio, the shop that you mentioned that we closed since then. But yes, we are constantly assessing the profitability. But we don't have a short-term plan to close shops in the upcoming months. If there is a recovery of this scenario, we cannot expect that to happen yet.

[Operator]

[Operator Instructions] Kenya from Banco do Brasil would like to ask a question.

[Unknown Analyst]

My name is Kenya Mor (sic) [ Moreira ], Banco do Brasil. I would like to know more about the presentation, Slide #6. On the penetration of Marisa Card, there was a reduction. And given the bigger number of accounts, I would like to know what is the strategy to be adopted in terms of receivables for the upcoming years?

[Adalberto Dos Santos, executive]

Kenya, this is Adalberto, I'm going to hand it over to Célio.

[Célio Lopes, executive]

I don't really understand how you connected the first part of your question, which has to do with the card. If you can repeat it, please?

[Unknown Analyst]

In terms of the strategy for receivables, Célio.

[Célio Lopes, executive]

Thanks for your questions. The credit card, well, they are a key portion of our strategy regarding financial services. We have this substantial increase in terms of the number of active accounts. And we can see a substantial increase in the base for over a year. So the relationship with our customers via credit card has been improving over time. In terms of revenues, there was an impact as of last year because of some regulatory changes in 2017, and a minor one now in 2018. But we have to consider default. It's being -- helping with the results. And there's also conversion of customers, who already have our card, to using the credit card. So it's been increasing our revenues as well. So these are the main pillars responsible for our result. Now could you repeat your question, please, about the portfolio, I don't understand that very well.

[Unknown Analyst]

In terms of the strategy with receivables, you adopted some strategies, such as Marisa Card, and co-branded as an operation for your revenues. Are you going to prioritize more co-branded? Or are you going to continue working with the penetration of Marisa Card?

[Célio Lopes, executive]

This is Célio. We're going to continue developing our shop card. Our customers have a relevant need for credit. And using the card -- by using the card, they can get closer to our products and services at Marisa. In terms of the credit card, it's going to complement the strategy because it provides the same credit conditions but more involved, but it also opens grounds for more market penetration. But we are still developing further all the financial services that are part of our portfolio.

[Operator]

[Operator Instructions] Andres from Brasil Plural would like to ask a question.

[Andres Estevez, analyst]

Yes, just another follow-up in terms of the TOP shops that you're always mentioning a lot in the calls. I just want to understand, do you have a target in terms of the percentage of the base that are POP and the percentage that is TOP from -- I think the TOP shops are overperforming, right? Do you have a -- what is the ideal composition of shops?

[Marcelo de Araújo, executive]

Andres, thanks for the question. Yes, I am sure it is the same question that other people may have. Let me explain what is the difference between TOP and POP. It's just for us to see the way we manage this shop. So basically, what is the difference between TOP and POP? The competitive context, the setting, most TOP shops are in malls, competing against other domestic players and the public, the group of customers, has a higher purchasing power and they're more sophisticated than in our popular shops. They are -- those are on streets, sometimes in the outskirts of large cities. And the competition is made up of local retailers or regional retailers. The public -- the customers have different habits, different sessions, purchasing experiences, therefore, they have different expectations as to how we present our collections and the service that is provided by this shop, and what they would like to see more in doing those. So it's more a way for us to be closer to our customers in order to meet their expectations better, so that we can convey our positioning more clearly and to show the value perception in terms of what the customers can expect from Marisa. It's rather than a strategy to grow more one group, not the other. The expansion model is based on identifying opportunity and the profitability of both POP and TOP are similar. We don't have different expectations in terms of return, rather it's more about our go-to-market strategy in order to meet the expectations of our customers. And historically speaking, the performance of these 2 groups is not different. But when we have a demand contraction pressuring the C bracket of -- lower income bracket of society. It's the whole region, where the shops are present, is more affected. Therefore, their performance is different, different from the performance of the TOP group of shops. I don't know if it's clear, but we don't have a target for that. It's just about having 2 different clusters, TOP and POP. But the public of Marisa is the same, it's from 25 to 45 years of age and income brackets of society C and B. So it's the same in both groups. But it's more about the step change, the environment of these groups of shops that changes. Therefore, the shopping habit also change. That's why we adopt our strategy to that effect. I don't know if I made myself clear. But again, I don't have a straightforward answer. We don't have a target for that.

[Operator]

Pedro from Macquarie has a question.

[Unknown Analyst]

I just would like to understand what happened with cost, because usually they are very well controlled. In terms of revenues, I could clearly understand, unemployment and the calendar, the holidays. But I wonder if there was a lack of control or something that you failed to control in terms of cost, or too many promotions and the price charged was lower. And then I also have a question regarding working capital.

[Adalberto Dos Santos, executive]

Pedro, in terms of cost, it has to do with the margin, as mentioned, because we had to consider the stock and there were some promotions that put some pressure on the margin. Is your question about SG&A or cost? SG&A is controlled, yes. And we conducted a credit proceed that based on squared meters. There was a drop in the last 5 years of 30% in actual value, following the strategy mentioned by Marcelo, aiming to preserve the network. So we could have had a drastic earnings and network so that we could be positive. But the strategy was to preserve the network or the chain because we addressed supply for all this unallocation, and with that, the impact of sales in the EBITDA would have been violent. So again, there was an increase in cost when there was an essential -- more assertiveness in terms of promotion. But in financial products and retail, we can see a performance that is exceptional. So the question was around cost, the SG&A is very clear and also the retail operations. But that's fine. So again, it's more regarding the promotion that gave rise to the margin, yes, the gross margin.

[Unknown Analyst]

Okay. My other question is in terms of working capital, you had an improvement in the term for receiving from the customers, right? Is it also because of the promotions that customers had to pay outright? Or any other reasons behind that improvement in working capital?

[Adalberto Dos Santos, executive]

It was a combination of factors. You have the impact of the inventory. As you eliminate inventory, you have a return. And we should expect to see this positive result. You also have the receivables. We migrated the operation for good banking partners. And when you migrate from internal financing with the banks, you have this improvement also. But the trend is for us to continue having positive effect.

[Operator]

[Operator Instructions] As there are no questions, I would like to turn the floor over to Mr. Adalberto Pereira Dos Santos for his final remarks.

[Adalberto Dos Santos, executive]

Thank you all for joining us today. Some questions are coming in via webcast, they're more technical ones. So Karina Lozano and myself would be at your disposal to discuss the technical questions with you later on. So thank you so much, and see you again in the next conference. And I'll hand it over to Marcelo for his final remarks.

[Marcelo de Araújo, executive]

Thank you very much for joining us today. Thank you for the questions. They're always very important for us so that we can share our vision on our program and our development. It's a very challenging moment right now. We are aware of all the volatility in all organizations, consequently in the results. And we had that in the first quarter, also with the macro scenario that is not helping. But as we have mentioned, we are confident in what we are building in the fundamental pillars. Now consolidating all the changes in the commercial area, it was the last chapter for us to tackle in the TransforMAR program, and also consolidating the development processes and supply that started in the end of last year.

So we are confident. We are positive regarding our future. And our priority in this transition will be to control the level of costs and expenses and controlling working flow that will enable us to weather this seamlessly so that we can continue making the required investment with our project M2020, that encompasses all dimensions, in our customers, our shops and new categories with mobile and cosmetics and our digital transformation.

So in other words, we are still building the future despite this period of transition right now. But we're still highly confident that our customers will continue giving us the honor of their preference, they continue visiting our shops and they are still pleased with the products that we offer. Now we have Mother's Day and we can see that happening strongly. Our strategy for Mother's Day started 2.5 weeks ago and it's doing very well. Today and tomorrow are key days for retail as a whole in Brazil. Mother's Day is the second Christmas for us, if you will. So it's very important for all of us.

And with that, I would like to say goodbye and thank you, once again, for joining us. Have a fantastic Mother's Day. May you spend Mother's Day with your families. And our shops will have the pleasure to welcome you to buy your mother a gift, and also our website. Thank you very much. Have a nice day.

[Operator]

Thank you. Marisa's conference call is now concluded. Thank you for joining us, and have a nice day.