Marisa Lojas SA

BOVESPA:AMAR3

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, good afternoon, and thank you very much for standing by. Welcome to the Conference Call of Marisa to release the earnings of the second quarter of 2019. We would like to inform that this conference call is being recorded and is available at Marisa's Investor Relations website. [Operator Instructions]

Before continuing, we'd like clarify that statements made during this conference call relative to Marisa's business prospects, projections and financial operation targets, and those are based on the company's assumptions and on information currently available. Forward-looking statements are not guarantees of performance because they involve risks and uncertainties and assumptions because they are based on future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that overall economic conditions, industry conditions and other operational factors may affect the future performance of Marisa and may lead to results that will be materially different from those expressed in such forward-looking statements.

Now we would like to turn the conference over to Mr. Adalberto Pereira Dos Santos, Investor Relations Officer and Financial Administrative Vice President, who is going to start the presentation. Mr. Dos Santos, please, you may begin.

[Adalberto Dos Santos, executive]

Good afternoon to everyone. Welcome to the conference call of the second quarter 2019 for Marisa Lojas S.A. We're also here together with Marcelo Pimentel; Marco Muraro, our CEO, and Commercial Vice President, respectively, will be releasing the results of the company [indiscernible]. We want -- we are reporting improvement on almost all areas of our business, once again, confirming the gradual structure recovery of our company in spite of the very adverse macroeconomic scenario. We also confirm the strategies that have been defined for the implementation, and these strategies are: absolute focus on product improvement; offering more fashion, more trend and higher quality; always respecting pricing positioning; and the implementation of our digital initiative of multichannel, and the results have really been exceptional; recovery of efficiency of our financial targets; and finally, the implementation of our Rightsizing Project, which in addition to short-term results, which have already been presented, will definitely be an important lever for us to advance in our determination to have a low-cost operation.

Now going to our presentation. On Slide #2, you can see the evolution of net revenue at the top with a growth of almost 2% in all stores in spite of the closing of some stores with sales at 4.6% in same-store sales. So far it's 5.1%, the best ever, an important share of e-commerce with a growth of 56.7% and appeared with a month-to-month dynamic that was very important with growth every month and for month-on-month. So the highlight is non-winter products that have also grown significantly close to double digits and a higher customer traffic in stores, which was driven by more promotions that we offered, especially in the month of June.

Then on Slide #3, you can see gross profit and margin, which have suffered the pressure and decreased by almost 6 bps, considering our activities in May and June, especially considering that the winter was not so cold. So in combination with our marketing strategy served as an important lever to recover our traffic and to recover our customers along this period. Improvements in products and the higher FX rate affecting the products in some categories also had an impact in our COGS in this period.

On Slide #4, you can see the evolution of SG&A, a significant drop in -- of 6.3%, thereby confirming the continuing gains in our Rightsizing Project. We have finished the closing of 13 units in the first 6 months of the year, significant reduction of our commercial expenses, augmented by our gains in G&A, especially in our head office where we have optimized our operations, automation, simplification, which eventually led to a drop of almost 6% in face value.

And then on Page 5, you can see adjusted EBITDA margins for the second quarter of 2019. Basically, a breakeven position because of the compression of the gross profit. We should highlight and cannot fail to mention the advantages in same-store sales and also SG&A with a reduction of 6.3%. And as a reminder, in this period, we had the asymmetry of comparable basis, and we would be at the same level as we were in last year when we had a significant tax recovery amounting to BRL 15.4 million.

And on the next page, Slide 6, you can see our contribution margin of financial products were flat almost, considering the lower share of Marisa Card as compared to previous periods and lower personal loans granted in the last period, a growth of 8.5% year-on-year on personal loans, which will impact the building of our portfolio and the result of the area in future quarters.

On Page 7, you can see our EBITDA, a growth of 16.2% year-on-year, although the contribution margin was flat with significant reductions in expenses amounting to 10.7%. Also within the context of the Rightsizing Project, we have contributed for our significant evolution in EBIT.

Then on Slide #8, you can see our private label portfolio, very healthy. Lower percentage of losses in terms of our historical series with 6.5% losses over the portfolio, also a lower perspective as an indicator at the low historical level, no deterioration, a very healthy portfolio.

On Slide #9, points of attention regarding the losses of our personal loans already being corrected and confirmed by a lower level of overdue in the portfolio, which have gone to -- from 27.9% to 24.9%. And everything here is within levels considered acceptable for this product.

On Page #10, you can see our consolidated adjusted EBITDA for both operations driven, of course, by the growth in our Financial Products and Services. This EBITDA is ex IFRS. If we eliminate the asymmetry in the comparable basis regarding tax recoveries in the retail, in Q2 '18, we would have had a growth of 17.4% in the consolidated EBITDA, basically, as a result of PFS (sic) [ FPS ], or rather Financial Products and Services growth.

Now you can see on Slide 11 our consolidated results for 6 months. If for 6 months, we take out the nonrecurring, we would have an improvement of BRL 44.5 million in the first 6 months regarding tax recoveries and the Financial Products and Services' results with 17.7% gain in the period.

On Slide #12, you can see our net income that although it's not yet negative, there was a significant improvement of about BRL 16.5 million, which added in eliminating tax recoveries in the past period, our evolution would be BRL 36.5 million, a significant number. Also considering 6 months, this recovery would be even greater. Eliminating nonrecurring from last year, we would have an improvement in our net income, although negative, an improvement of BRL 102 million.

Now the last slide, #13, our cash flow indicating a slightly stronger recovery of the working capital, especially considering our better sales and also the increase in our Financial Products and Services portfolio. The ratio, net debt over EBITDA, is 1.6, well below 3.5 in our -- according to our contract covenants.

These were my considerations, and now I am available to answer any questions you may have.

[Operator]

[Operator Instructions] The first question is from Mr. Tobias Stingelin from Citi Bank.

[Tobias Stingelin, analyst]

Congratulations on the results. I have two questions to ask. Number one, where are we in terms of the turnaround process? What do you still need to do? How long do we have to wait for the business to be as you would like it to be?

And secondly, of course, there is an -- there was an improvement, but gross margin is still very low. When we are going to see better sales and a more stable margin?

[Adalberto Dos Santos, executive]

Tobias, I will be very brief and I'll talk about SG&A in our financial products and also about the TransforMAR. In terms of turnaround, the main structural changes, we are at about 90% to 100% for most of the items. Structural adjustments at the Rightsizing Project have all been implemented, almost 100% here in our head office in our financial product, automation, outsourcing. At the level of our stores, there are some projects for the TransforMAR in terms of dividing in sections MAR OpEx, all these projects are related to the development of collections. All of them are very mature, and the objective is to generate results.

Now I'll turn it over to Pimentel to talk about sales evolution. What we see in terms of margin because in this period there's something quite significant because the margin is not compressed because of the sale of low-quality products, it's not compressed by the sale of end of season products. He's going to give you more details about the sales dynamic, and how he sees this in the future, and especially the margin in the second period.

[Marcelo Pimentel, executive]

Tobias, thank you very much for your question. I am going to divide the answer into 2 parts. The first one regards the strategic part that we took advantage that it was not cold in June to accelerate the attraction of traffic into our stores. Winning back lost customers is more difficult than winning new customers, and research indicates that we're advancing very fast in winning back those customers. Price and margin recovery depends on the reconstruction of the perception of our customer base, and this is a gradual process. A combination of commercial strategy and marketing, and also within this area, consistency is better -- or more important than speed. So in late May and throughout the month of June, we had the chance of displaying our new products to our customers, and our research has demonstrated very encouraging indications to us.

In terms of margin, Marisa has demonstrated that this level of margin is very timid as compared to other levels we had in the past, even more if we compare it to other players who in the past operated at the same margins as we did. So there's no reason for us not to believe that we'll recover the level of 50% in a short term, and we will overcome it in the mid- and long run. But our main focus is to win back customers to expose them to new products or more fashion, quality and trend so that they trust again our products and start coming back.

[Operator]

Our next question comes from Helena from Bradesco.

[Helena Villares, analyst]

I have two questions. First, I would like to understand more retail. The non-winter products are selling very well, you said that. So I would like to understand how did they sell before the promotions? How much have promotions had an impact on these sales? And now since we are talking about retail, you talked of gross margin, so for -- not only from the effect of promotions. Can we have some more detail on that, please?

And the second question regards financial services. I would like to understand if in the mid and long term and more towards the long run, what is the trend? Is the portfolio going to grow again? Or you're going to focus on -- more on profitability?

[Adalberto Dos Santos, executive]

Helena, this is Adalberto. I'll be answering your question briefly. Well, COGS is relatively simple. It's impossible to improve quality at the levels that we are improving without impact in their costs. And so Marisa products are very different from the ones we used to sell. All other retailers that have already published have indicated the effect of the dollar rate. The dollar, no matter how much hedge you do, it delays the impact, but in the end, down the road, there's always an impact after a while. The variation of the dollar at the levels that took place from last year until now are going to affect our cost of products. Also, there were some specific adjustments in some categories, B1, B2, minus B3 in some categories. So results in a combined ratio or -- would overall affect our COGS. And so this is adjustments that were made in previous periods, and from now on, it will be more in line with inflation. So here, we're talking about COGS. I don't know if I'm answering your question.

In terms of financial products, yes, there is a first movement of portfolio recovery. This is the main movement. Also because we mustn't forget that this is a service, and this product exists at Marisa. And most retailers -- fashion retailers offer that to support the main operation. Retail, it's not a product that has been designed specifically for margin. So it's when there is a structural drop in interest rates.

So at first, we have to recover our portfolio, and then we want to recover margins at a second moment, which in our case, never suffered significantly in that area.

Now regarding retail and the performance of products and collections that are non-winter, it's -- we are confident because Marisa has some pretty cold categories, for example, in accessories, underwear, young fashion, minus plus, our plus-sized line, work or business line. So the whole growth in every month of the quarter. And when we look at overall numbers, when you I out non-winter items, we had a growth of 16% of the categories, more than 16% in Q2 '19 in same stores. So we are sure and we are confident in these products with a margin that is considerably higher, if we take out or discount non-winter fashion. So within the scenario, if we didn't have the non-winter or temperatures at -- in late May and June, our results would have been even better with slightly better margins. But certainly, critical categories to us that are important for our strategy, are demonstrating double-digit growth in a consistent fashion.

[Helena Villares, analyst]

Very good. If you allow me, I have another question regarding financial services. And you mentioned in the release, the digitalization of the operation. Could you give us a bit more detail about what you've been doing?

[Unknown Executive]

Helena, there's a group studying what is happening in the market. There are many movements, players want to have banks and portfolios, but things are still very much unstable. There's a lot of movement. I don't want to say anything. Our operation exists to support our retail operations. In our understanding, we need to pay attention to everything that's going on in the market and what makes sense, whether it's a partnership. And then once we define, we will be implementing. The company is not -- still we are doing things. We want to recover the levels of efficiency that we used to have in the second half last year. It was slightly smaller, many actions were implemented, providing result in first 6 months of the year -- the first quarter with efficiency gains. And also, there is a movement going on in terms of prospecting everything that is going on in terms of the digital world, but always trying to avoid just a trend for the sake of trends.

[Operator]

Let us go to the next question from Thiago Macruz from Itaú ne Banco.

[Emerson Vieira;Itaú ne Banco;Analyst, analyst]

This is Emerson, actually, and I have three questions. First, we saw same-store sales with a quite healthy -- a quite sound performance because you suffered with temperatures in the quarter, but you were also helped by good growth. Can you quantify towards how much of the same-store sales was due to the online operation? And how much growth are you expecting for online sales from now on?

Second question. You mentioned that there's a fiercer competition that impacted the 3. How do you see this, the evolution in that front?

And last, there is also a positive evolution in inventory. I would like to know whether they're balanced out or are there still things to be done in terms of building your inventories?

[Marcelo Pimentel, executive]

This is Marcelo answering your question. I think the first you asked about online sales. In reality, online sales have turned into a very nice surprise, not in terms of growth but in terms of the volume of the growth that has exceeded all our expectations. We started in the middle of last year and we have been collecting the consequences. And most of that is that in the second quarter, we rolled out 115 stores through the click and takeout methods. And so this type of system of procurement is a determining sector for our success in the second quarter. And as I said, we have 115 stores. And within this scenario, we have more than 20% orders already placed according to this model and if we get the last months this is at a level in excess of 30%.

This also provides us a new flow for stores. So omni is also helping us, not just in terms of digital sales but also our brick-and-mortar stores because 30% of all omni purchases are by new customers or reactivated customers, customers that have not bought from Marisa for more than 12 months. Another factor for repurchase in stores is that 15%. So we have managed to reverse in new sales also in our brick-and-mortar units.

As to the future, in the future, we hope that we will remain at levels that -- levels of growth that prove similar to those that we saw in the first 6 months. So we have quite aggressive growth in our digital sales.

As to the third quarter, although the market is very competitive, what I can see is that we started June very well with positive sales, with an acceptance of the preview of our convention, which started in June, very good, very positive for us. Also, in August, started in the same way with very good sales for us.

As to our inventory composition. As you saw, our inventories are the best historically. The work conducted by the commercial team was very good in terms of cleansing our old inventory, as you saw earlier this year. So we have our inventory above 360 days at the lowest levels in the past 5 years. So our stores, have the right products, new products, trend products at the right timing for our customers to come to our stores and be surprised with quality, fashion and trend.

[Operator]

Your next question comes from Vinicius Strano from Bank of America.

[Vinicius Strano, analyst]

Could you please tell us a little bit about the receptiveness of the new collections? And could you quantify the percentage of sales, the -- in markdown in 2Q '19? And what you expect from now on? Have you noted any gain in market share? And do you see all the Marisa consumers going back to stores?

[Marcelo Pimentel, executive]

Vinicius, I'm going to tell you a little bit about the research, and then I'll turn it over to Marco Muraro to talk about the new collection. There are very important indications regarding the research. Comparing year-on-year, we are already seeing a very positive migration of the customer profile that Marisa wants to serve. Our concern is not to lose our existing customers in this process. And what we are seeing through our research is that we are getting things right within this scenario. Well, something we should mention with regards to that is that the utilization of our shopping mall stores is a lot more intense. In more recent periods, we see the results in terms of shopping mall stores performance already consistently better. And we still have work to do for our store -- street stores, which are performing better, too, already positive. But definitely the shopping mall stores are showing that we are getting it right for this audience.

Secondly, Marisa has become top of mind again when we ask where to buy, and the name Marisa in the research comes up as brands where customers decide to buy. We also have a share of our new customers that are younger customers, single, with fewer children and higher income, which, in fact, has everything to do. And as Adalberto mentioned initially, we used to have a customer profile that was very much focused on the safer kind of fashion, stay-home clothes. And now we see our customers behaving in a way that Marisa is a place where they will shop to go to school, to college, universities, to party, work and so -- which really expands the area of customers that Marisa is serving. What we have been seeing too is the use of shared visits. So customers go to the competition and come to our stores and decide to buy. So this increase of impulse shopping at Marisa has been another determining factor that has provided a lot of results and confidence that we are on the right track.

Now I'll turn it over to Marco Muraro to talk about our new collection.

[Marco Muraro, executive]

So talking a little bit about our collection, just confirming what Pimentel said, we launched the new collection preview in July. So our markdown strategy is very good that inventory will not stand still there because there was no winter, and then we were changing the collection in July with preview. And now we are changing the collection -- the full change of collection, and the numbers indicate that the new collections are being very well accepted, the non-winter products that were very well accepted.

And what happened is that we didn't have any cold weather. So our healthy inventory level, the historical series, our number of markdowns as compared to the past was not higher. It was just the adjustment of our winter inventory, so that our stores are light and ready to receive the new collections as planned, so much so that we have advanced the inventory that was received in late June, early July so that stores were well supplied from half July onwards. And now towards the end of the -- of July, we were launching the new collections. So we're really confident on our strategy. Our product positioning and research, as we saw -- said have been demonstrating that our customers are coming back. The customers that we lost are coming back strongly. And impulse shopping, as said before, used to be 30% and the profit would grow without planning and would end up buying, now we have more than 50% customers end up shopping, which demonstrates the -- how accurate and how right we are and how our customers are enjoying our collections now.

[Operator]

Our next question comes from Felipe Cassimiro from HSBC.

[Felipe Cassimiro de Freitas, analyst]

Just a follow-up based on Marcelo's previous comment. So it's very clear that shopping mall stores are performing better than street stores. So is the difference in terms of same-store sales still very significant comparing the 2 types of stores?

[Unknown Executive]

Felipe, I think that differently from what we used to report in the past, so the store as a whole has been successful, both groups of stores have been very successful. The highlight is the acceleration that is more marked in shopping mall stores. So today, we are in a scenario where shopping mall stores are growing consistently in excess of 5%, and this makes us very confident that both for continuing the model and then a potential expansion, the store model and location is something that we want to continue to do.

As to street stores, street stores also have a positive growth, not at the same level. But now what we are doing, we have a work group working specifically to make the adjustment for street stores, but now they are very fine adjustments. One of the things that we do not want to do is to have 2 different groups of stores. One of the things that we learned last year is that we should not have street stores performing at lower levels as compared to shopping mall stores. We want street stores to have the same quality, same product mix for street store customers, understanding the unique features and what we can work on streets, especially partnership with the financial services where there is an even larger demand for best product. And undoubtedly, it can be -- it can leverage our actions for this audience. But now this is the final part of a fine-tuning work, and we are really confident that the shopping mall model is certainly ready and we just need to address street stores.

[Felipe Cassimiro de Freitas, analyst]

I'm sorry. So looking into the future, even if shopping mall stores have a smaller share as compared to your main competitors, we can imagine that you will be opening stores again in 2020, 2021? Or do you think you are not going to focus so much on shopping malls?

[Unknown Executive]

We have 3 levers that we are considering with regards to expansion. I can tell you that with regards to the expansion of new stores or addition would be to open them in shopping malls, that is for sure. And I think that Marisa of the future would be -- will be much more within the portfolio of environment rather than on the streets.

That being said, we have a huge opportunity of our 358 stores. We have 69 stores, which, today, have the highest productivity per square meter. And even before, expand new store, we have the opportunity of growing and gaining productivity for existing square meter, meaning, we have about 130 square meters per store. We can include new categories, we can expand space to display all the assortment available. And then once we add that, we would have about 9,000 square meters in existing stores that will be financially more feasible for us at first in terms of investments. That being said, we have already mapped, and there is a workgroup working together with external consultants. So we have the support of e-market together with our internal expansion area in a shopping mall, a specific monitor, which has mapped for us where to go, defining priorities, which cities and which shopping malls that we know that are good places for us to open a Marisa store so that they would be successful. So now it's a matter of schedule, of investment, feasibility. But we are confident of these 3 processes, the recovery, our profitability of existing square meters, the possibility of expansion in 69 stores and new stores to be opened.

[Operator]

Our next question comes from Andres Estevez from Brasil Plural.

[Andres Estevez, analyst]

I would like to have an update on the Rightsizing Project. Are you still going to go on closing the same number of stores? You closed 13 stores in the first half of the year. Do you see any potential for closing any other stores? And would you tell us, of the 13 stores that you closed, how many were in shopping malls and how many were in the streets?

Second question, what is the impact on reduction of sales in this quarter? And how will this impact you in the future? We know that there is a delay between purchase and sale.

[Adalberto Dos Santos, executive]

Andres, this is Adalberto. There are 2 phases, 2 groups of initiatives that are important. One is related to our head office modernization, and this is 99% already implemented. And the other one is our complex of stores, and it's already fully implemented. There are 3 stores being analyzed, and we are tracking the possibility of some levers to avoid the closing of these 3 stores. But the work with the stores has now ended, it's complete, except for these 3 stores that we had initially decided to close but now we are now reconsidering that. So all that said, the Rightsizing Project in terms of implementation is almost fully implemented, complete.

In terms of structure, there are some internal actions that we need to implement, and we'll continue to seek that. And it is clear to us that an operation with our futures needs to be a cost in terms of square meters of sales, we have to consider all the other players, and I'm going to continue the work.

As to our Financial Products and Services, so there is a delay, of course, yes. So first, we feel that the portfolio -- with more portfolio, we have larger portfolios, but the effective financial results of that in the area of financial products is different, so as receiving installments, we report or enter the results. So I hope that this will appear or show in the future quarters, but for the losses, absolutely under control.

[Operator]

Our next question comes from [ Victor ] from Prumo Capital.

[Unknown Analyst]

I would like to congratulate you on your results. And two things that I would like to ask. I see a trend of improvement in the company in terms of the initiatives that have been implemented, the rollout of the pick and collect for some stores, better costs and e-commerce. Do you have any strategy for the long term that might affect the company's results structurally, apart from the ones that I have mentioned?

And I have another question. So the slow improvement in retail indicators in a macroeconomic scenario and it did not come around. How can this affect the results of the company?

[Adalberto Dos Santos, executive]

So in answering your first question -- this is Adalberto, then I'll turn it over to Pimentel to talk about the macroeconomic scenario. The company is working with this possibility the macroeconomic term might not contribute. And they might contribute or not, we don't know, but we are prepared for that.

As to our long-term strategies, I think the main strategy of the company is to gain consistency. It is very clear for us, and I mentioned in the beginning 4 pillars of our strategy, recovery of products without giving up quality, no way whatsoever. The recovery of our FPS. So we believe we still have a lot of efficiency to recover in our FPS operations. And as a reminder, it already is one of the best ones in the market, multichannel, omnichannel strategy that is doing very well. And we have a model, unbeatable low-cost model. I think that in the long term, we want to keep absolutely focused on delivering these 4 pillars. And so this is a business of consistency, and this consistency is what we will be seeking in the mid and long term.

[Marcelo Pimentel, executive]

I think that Adalberto has summarized it very well. And now we're understanding, we have the opportunity to look into this future very optimistically in terms of growth. Either, as we mentioned before, in terms of recovery or winning back old customers and winning new customers, we have an opportunity with our store complex of displaying quality fashion to our customers cost effectively at which Marisa is unbeatable in terms of the money that they pay. And so we can look into the future. And even with our store complex and we want to improve our productivity in square meter and expense. So the macroeconomic scenario undoubtedly is challenging and it depends a lot on what happens in the country as a whole, but I think that Marisa is very well positioned to make the most of its store chain and its connection with customers and bringing back our old customers so that the future is seen as very promising.

[Operator]

Now we have a question that was sent through the webcast. Mr. Adalberto, please.

[Adalberto Dos Santos, executive]

I'm going to combine two questions [indiscernible] and Thiago about e-commerce and total revenue in the target.

[Marcelo Pimentel, executive]

Our e-commerce has been growing at a fast pace, and 4 years ago, we -- it accounted for 1.7% of our revenues. And in last quarter, it's more than 5%. I can't tell you, we don't give any guidance, but if you project the dynamic that has been going on over the past few quarters, and you can easily get to a number. And the share of this business in retail in countries that are more advanced in this operation, it may be as high as 20%. And there is no reason for us not to believe that at some point, we will get to 20%, our job is just to make it faster.

The other thing is regarding sales in July. So they are at excellent pace, excellent acceptance by what the advance of new collections that Muraro has made. And in the future, again, we won't give you guidance. We can't give you guidance. What we may reaffirm is that with sound inventory as you have seen and with proactive strategies that we had in June, we see a benefit of July results both in terms of sales and profitability and also starting August in a very solid way in terms of our numbers. So as Adalberto said, our focus now is to grow with consistency. It's very important that we never go back so that we are consistently moving forward. And this is what numbers have been demonstrating to us and also in the beginning of this quarter.

[Operator]

We are now closing our questions-and-answer session. I would like to give the floor back to Mr. Marcelo Pimentel for his closing remarks.

[Marcelo Pimentel, executive]

Thank you all very much. I would like to thank everyone for your interest and your participation in our conference call. I cannot fail to invite you to come and visit our stores and our website to see and buy our new collection that will be launched this coming Sunday, supported by a beautiful advertising campaign in a fantastical TV show.

I would like to greet all fathers for a happy Father's Day on Sunday. And finally, I would like to be able to see you in the investor relations event that we are planning for the next few days where we'll be able to give you more details about our strategy, indicators and to show that we're really on the right track. Thank you all very much.

[Operator]

Marisa Lojas conference call has now ended. We thank very much for your participation. Have a nice day. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]